Managing Imitation Strategies by Steven P. Schnaars

Author:Steven P. Schnaars
Language: eng
Format: epub
Publisher: The Free Press
Published: 1994-01-03T05:00:00+00:00

In addition, suppliers from Asia mass-produced interchangeable parts, made with less expensive materials, and sold them at much lower prices to the clones. In the end, the cloners held the price advantage.

IBM’s second layer of defense was its patented ROM-BIOS, which sent instructions between the computer and applications software. IBM’s BIOS was hard-wired into its personal computers and could not be copied directly. Or so it seemed. Software engineers at Compaq, a small startup, quickly reverse-engineered IBM’s BIOS with software, placed it on a disk, and created a compatible clone of IBM’s personal computer that was portable as well as less expensive. The cloner was so successful that Compaq became one of the fastest-growing companies in American history.

Copycats came from everywhere. Small shoestring operations in the United States were able to exist on incredibly slim margins. Michael Dell started selling IBM clones out of his dorm room in 1984. His move into mail order kept selling costs low. Whereas a few years earlier business customers were unwilling to risk a mail order purchase, the market had changed. IBM had, in effect, created a generic personal computer, which buyers soon felt secure enough to buy through the mail.

Asian copycats, such as Korea’s Leading Edge, assembled by Daewoo, relied on components that were reverse-engineered and produced more cheaply. It was able to sell a personal computer for $1,500 that was similar to one sold by IBM for $2,100.

IBM faced a number of poor strategic choices. It could match the lower prices charged by the copycats, but that strategy would wreak havoc with profit margins. IBM could cede the low end of the personal computer market to the clones, but at the risk of future attacks on higher-end products. IBM could rely on innovation, which it did. It introduced new models, such as the XT and the AT, but the cloners always followed quickly with much lower prices. Finally, IBM could introduce a new proprietary standard, which could not be copied. But that move would alienate current users and would render their favorite software obsolete. With that strategy, IBM faced the risk that loyal users would not follow its move to the new incompatible standard.

According to Business Week, the clones as a group surpassed IBM for good in 1986.129Since that time, they have increased their share of the personal computer market. Early cloners, such as Dell, have lost share to even later mail order entrants, such as Gateway, which was founded in 1985. Gateway’s strategy?—“to continue undercutting the competition [with price] and low costs.”130

In sum, the case of personal computers is a story of incumbent inertia and the success of imitative later entrants. Although the market was pioneered by entrepreneurial startups, which were allowed to prosper because the industry leaders did not recognize the magnitude of the opportunity, once the market became larger and more attractive, those startups were pushed out of way by IBM, which earned the greatest rewards. Then, as the market matured, price became the most important ingredient in the competitive battle.

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