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1. How and why did the personal computer industry come to have such low average profitability?
The personal computer industry has been one of the most competitive industries in the world. The industry is typically characteristed by rapid innovations, low costs, and in general, the demand for better performance systems has kept the market very attractive. If we look at the main players, firstly IBM, which within two years of launching its first PC in 1981 occupied 42% market share set the industry standards. In launching its PC, IBM commissioned Microsoft to write the operating system for the PC and adopted Intel's microprocessor. The computers were sold via its huge sales force, retailers and resellers. By publishing its PC specifications, IBM established an "open architecture" encouraging software developers to write programs for its PC.This largely became the framework of the PC industry. As the demand grew, companies offering IBM clowns at lower prices came into picture. Companies like Compaq, Dell, and HP emerged as a result. Overtime companies started heavily relying on resellers to reach the customer.
IBM realised that in setting the standards, it had firstly conceded the rights to the most valuable component of the PC-the microprocessor (constituting upto 67-75% of the PC cost) and operating system to Intel and Microsoft respectively and secondly it spawned a set of imitators. To act to this fact it tried to make its PC more proprietary by declining to adopt Intel's microprocessor into its PC in 1986. However, IBM lost its market share from 37% in 1985 to 16.9% in 1989.
The only way companies could be profitable under the set framework was to be operationally efficient. ...