Excerpts

The IBM-Intel-Microsoft saga provides a rich set of lessons from the fruit flies: When designing your supply chain, whatever your industry, beware of the phenomenon of “Intel Inside.” Furthermore, understand that make vs. buy decisions should not be made primarily on which supply option is a little bit cheaper or a little bit faster to market. Rather, supply chain designs need to be recognized as a strategic activity that can determine the fates of companies and industries — and of profits and power. Finally, we observe that the element of the supply chain that controls the chain can shift over time. In computers, it was first the original equipment manufacturer (OEM) and later the component makers who wielded the most clout in the chain.

Another set of insights from the computer indsutry helps us to understand the patterns of evolution in supply chain structures. In the 1970s and the early 1980s the computer industry’s structure was decidedly vertical. The three lagrest companies, IBM, Digital Equipment Corporation (DEC), and Hewlett-Packward, were highly integrated, as were the second tier of computer makers. Companies tended to provide most of the key elements of their computer systems, from the operating system and applications software to the peripherals and electronic hardware, rather than sourcing bundles of subsystem modules acquired from third parties.

In the late 1970s, IBM faced a challenge from upstart Apple Computer. IBM’s competitive response, the PC, catalyzed a dramatic change throughout the industry, which quickly moved from a vertical to a horizontal struture. The dominant product was no longer the IBM computer, but the IBM-compatible computer. The modular architecture encourages companies large and small to enter the fray and supply subsystems for the industry: semiconductors, circuit boards, applications software, peripherals, network services, and PC design and assembly.

The computer industry of the 1980s and 1990s therefore illustrates an entire cycle of supply chain evolution (Figure 1). Consider the dynamic forces at work: When the industry structure is vertical and the product architecture is integral, the forces of disintegration push toward a horizontal and modular configuration. These forces include:

1. The relentless entry of niche competitors hoping to pick off discrete industry segments.
2. The chalenge of keeping ahead of the competition across many dimensions of technology and markets required by an integral system.
3. The bureaucratic and organizational rigidities that often settle upon large, established companies.

On the other hand, when an industry supply chain has a horizontal/modular structure, another set of forces push toward more vertical integration and integral product architecutres.

There forces include:

1. Technical advantages in one subsystem can make that the scarce commodity in the chain, giving market power to its owner.
2. Market power in one subsystem encourages bundling with other subsystems to increase control and add more value.
3. Market power in one subsystem encourages engineering integration with other subsystems to develop proprietary integral solutions.

Study of clockspeeds in the fruit fly industries has led me to posit what I call clockspeed amplification — “the second law of supply chain dynamics.” This hypothesis states that the industry clockspeed a company faces increases the farthest downstream it is located in the supply chain. Thus, personal computer manufacturers experience faster clockspeeds (e.g., shorter product life cycles) than semiconductor manufacturers, who, in turn, experience faster clockspeeds than the semiconductor equipment suppliers.