Transforming Enterprise: Information Technology in the PC Industry

1. Transforming Enterprise: Information Technology in the PC Industry Kenneth L. Kraemer Center for Research on Information Technology and Organizations (CRITO) University of California, Irvine Presented at the First International Conference on the Economic and Social Impacts of Information Technology January 27-28, 2003 U.S. Department of Commerce Based on research by Kenneth L. Kraemer and Jason Dedrick supported by the National Science Foundation and Sloan Foundation CRITO, UC Irvine

2. The PC Industry: Trends and Characteristics • Shift from indirect to direct sales in U.S. market, led by Dell Computer • Shift from supply-driven to demand-driven production • Outsourcing and global production networks • Flexible supply chains CRITO, UC Irvine

3. From Indirect to Direct Sales Indirect sales model Final Customer Reseller Suppliers PC maker Distributor Direct sales model Final Customer Suppliers PC maker CRITO, UC Irvine

4. From Supply-Driven to Demand-Driven • Assemble PCs to order, not to forecast • Tailors products to customer demand • Reduces inventory and improves cash flow CRITO, UC Irvine

5. Outsourcing and Global Production Networks • PC industry has always been horizontally specialized, with global production • Increasingly outsourcing design, assembly, logistics, service and support • Many activities moving to low-cost locations such as China, India and Eastern Europe CRITO, UC Irvine

6. Flexible Supply Chains • Different supply chains for different products and markets • Compaq Europe (prior to merger) • BTO products sold direct, assembled in Compaq plant in Scotland. • Standard desktops sold through resellers, with production outsourced to FIC and Hon Hai in Czech Republic. • Notebooks sold through both channels, with design and production by Arima. CRITO, UC Irvine

7. IT and Direct Sales • Direct sales model uses IT for sales and marketing, order management, customer service • Internal systems used to coordinate and share information among sales, production, logistics, tech support • Interfirm systems such as Internet, EDI, extranets and call centers used for sales and customer service • Close customer relationship supported by IT is a key competitive advantage for Dell in U.S. corporate market. CRITO, UC Irvine

8. IT and Demand-Driven Production • Demand-driven production requires speed and flexibility. • Outsourcing requires effective coordination • Internal IT systems of PC makers and CMs enable effective order management • Interfirm IT systems enable coordination of supply chain to respond to demand • Increases efficiency of the whole supply chain CRITO, UC Irvine

9. IT and Flexible Value Chains • Standardization of information and compatibility of systems allow flexibility • Investments are not specific to one partner. They are shared and thus can achieve higher ROI with less risk • Easy to switch from one partner to another with minimal new IT investments CRITO, UC Irvine

10. IT and Global Production Networks • IT enables PC makers to produce or outsource globally in order to cut costs and serve markets. • Standardized internal IT systems improve coordination among company units. • Internet-based systems enable suppliers in distant locations to be linked electronically. CRITO, UC Irvine

11. Summary • PC industry is being transformed by competitive pressure and success of new business models. • IT plays a key role as enabler, and sometimes driver, of these changes. • But, companies must improve business processes within the firm and across the supply chain--along with IT. • Implementing IT and changing processes is slow and difficult. • Hard to get members of the supply chain to agree on standards and to coordinate processes. • Who makes the investment, who reaps the rewards? CRITO, UC Irvine

12. PC Industry Issues • Profits • PC makers “killing themselves to make money for Microsoft and Intel.” • Dell profits as most efficient producer, but can it sustain that lead? • Others are losing money: Can they catch up? • Globalization • US and European markets are mature. Direct model not working in most of the world. • Can PC makers use IT/Internet to penetrate growth markets in Asia and elsewhere? CRITO, UC Irvine

13. Implications • Other industries • PC industry is unique in some ways, e.g., dominance of suppliers (MS, Intel), standardization of products. • But use of IT as competitive tool is relevant for others, especially high clockspeed industries • Policy • Ability to sustain national competitiveness in PCs depends on creating a good environment for IT-enabled business processes. • Production activities will continue to move offshore. • Movement of knowledge activities is new and may become a policy issue, e.g., Business Week. CRITO, UC Irvine