Chapter One: Introduction: Concepts and Approach

Consider the title.”The Electronic Century” is the twenty-first century. The “inventing” refers to the creation of the technological and institutional foundations — the “infrastructure” — during the latter decades of the twentieth century, which was the Industrial Century.

Inventing the infrastructure for the Electronic Century became an epic story because some national industries died while others conquered. By the end of the twentieth century, no European-owned and -operated enterprise had the capabilities of commercializing — that is, bringing into widespread public use — major new products of either consumer electronics or computer hardware with their essential software technologies. In the United States, no enterprise had the capability to commercialize new consumer electronics technologies. On the other hand, in Japan, the four leading enterprises in consumer electronics had conquered world markets. And the five leading Japanese computer companies were seriously challenging the U.S. computer industry worldwide.

This epic story of the consumer electronics and computer industries has its tragic aspects. By the time the infrastructure of the Electronic Century was completed, Europe had lost both its computer and consumer electronics industries, and the United States no longer had its consumer electronics industry, with all that this meant in terms of employment and the growth of ancillary and supporting industries. In addition, RCA’s Princeton Laboratories had been dismantled, and only remnants of Philips’s once great electronics laboratories at Eindhoven remained. Of the three primary builders of the technological foundations of the consumer electronics industry, only Sony remained.

The epic story also has its heroic achievements. The worldwide triumph of the Japanese consumer electronics industry took place in a period of less than a decade, 1975 to 1985, largely on the basis of technologies developed by the Sony Corporation. In this same astonishingly brief period, Japan’s computer makers had become Europe’s dominant suppliers of large computer systems and had captured the U.S. market in memory chips.

International Business Machines (IBM) provides another epic in terms of defining the computer industry’s products. In large computer systems its most successful competitors were those enterprises that produced and sold IBM-designed “plug-compatible” hardware and “unbundled” software. In personal computers they were those that made and sold IBM clones.

The concepts and approach I use to understand and explain the evolving historical story follow.

Basic Concepts

In market economies the competitive strengths of industrial firms rest on learned organizational capabilities. That is my basic premise — a premise that is based on the findings of this historical study. The capabilities are product-specific in terms of technologies used and markets served. These product-specific capabilities are learned and embodied in an organizational setting. Individuals come and go, but the organization remains. Thus, in modern industrial economies the large firm performs its critical role in the evolution of industries not merely as a unit carrying out transactions on the basis of information flows, but, more importantly, as a creator and repository of product-specific embedded organizational knowledge.

The process of organizational learning in industrial enterprises begins with the building of a viable profit-making enterprise, and this is done through the creation of organizational capabilities based on three types of knowledge — technical, functional, and managerial.

1. Technical capabilities are those learned by applying existing and new scientific and engineering knowledge. Such capabilities include those in well-defined scientific and engineering disciplines, professional organizations, and the like. Technical capabilities are knowledge related. They involve the knowledge used in basic and applied research to create new products and processes. They are the capabilities required for the R in R&D.

2. Functional knowledge, on the other hand, is product-specific. It results in organizational capabilities of the following kinds:

Development capabilities. These are created by learning the product-specific know-how required to transform an innovation into a commercial product to be sold in national and international markets. These capabilities are the D of R&D.

Production capabilities. These come from learning how to build and operate large-volume production facilities for the new product and to recruit and train the labor force essential to operating these facilities efficiently. A somewhat similar but less important set of capabilities is that of purchasing in volume the necessary materials for production.

Marketing capabilities. These are acquired in learning the nature of the product’s markets and building extensive distribution systems to reach them.

The evolving relationship between technical and functional capabilities is a basic theme of this study. In addition to those two major types, there is one more:

3. Managerial capabilities. This third set of organizational capabilities, based on management knowledge and experience, is essential to the creation and continued existence of a viable profit-making enterprise. These capabilities are learned in order to administer the activities of the functional operating units, to integrate their activities, and to coordinate the flow of goods from the suppliers of raw materials through the processes of production and distribution to the retailers and final customers. Most essential to the successful maintenance of the long-term health and growth of the enterprise are the learned capabilities of top management. These managers make the critical decisions in allocating personnel and financial resources that determine the fate of an enterprise and often of the entire industry of the country in which it operates.

As important as managerial capabilities are, they are not a central focus of my two books that go under the blanket title Paths of Learning. One reason is the difficulty in generalizing about managerial capabilities. They are affected by different types of operating structures, national educational systems, and broader cultural patterns in which they have been learned and in which their enterprises have evolved. So capabilities differ from nation to nation, industry to industry, and often from company to company in the same industry. For example, the broader environment in which Japanese managers learn and work is quite unlike that in the United States and Europe.

The first enterprises whose managers learn to develop, produce, and sell in national and then world markets — that is to commercialize, to bring to market, a product of new technical learning — become the initial builders of the high-technology industries whose evolution is the subject of both volumes. I term such enterprises first-movers. They were not necessarily the first to produce and sell the new product. They were the first to develop an integrated set of functional capabilities essential to commercialize the new product in volume for worldwide markets.

Once the new enterprise’s competitive power has been tested, its set of integrated organizational capabilities becomes a learning base for improving existing products and processes and for developing new ones in response to changes in technical knowledge and markets, and in response to macroeconomic developments, including wars and depressions.

Besides having the learning base, these firms as first-movers have available their retained earnings (one of the cheapest sources of long-term capital) for investment to expand and improve their facilities and personnel.

The creation of such an integrated learning base in a technologically new industry, together with the resulting continuing flow of funds, creates a powerful barrier to entry. Start-up firms have to begin to develop their basic set of capabilities while competing with first-movers who are enhancing their operations through continuing learning and through income from the sale of their initial products. Within each national economy only a small number of challengers succeed in building comparable learning bases. The first-movers and their successful challengers become what I term an industry’s core companies.

Once these core companies establish a viable national industry, entrepreneurial start-ups are rarely able to enter. Instead, the core companies’ competitors are either foreign core companies or domestic core companies in other industries — that is, industries with comparable technical knowledge and/or processes of production, distribution, or product development.

First-movers, of course, cannot create an industry by themselves. They have to develop close relationships with supporting enterprises — with suppliers both of capital equipment and materials to be processed, with research specialists, distributors, advertisers, and providers of financial, technical, and other services. Thus the needs of the core firms lead to the creation of a supporting nexus — interconnected and complementary (rather than competitive). The nexus may contain small, medium, and even large firms in supporting lines of products and services. It soon becomes a source for the creation of numerous “niche” firms, but only rarely do core companies emerge from the nexus.

In this way the competitive strength of national industries depends on the abilities of the core firms to function effectively and to maintain and enhance their integrated learning bases. If those bases begin to deteriorate, so too does the industry’s supporting nexus and its competitive strength versus that of other countries.

Once an industry is established, however, learning continues with powerful momentum. The integrated learning bases of the first-movers become the primary engines for the continuing evolution of their industry through the commercializing of new technical knowledge. The integrated learning base embodies within the enterprise the procedures to integrate the enterprises’ technical and functional organizational capabilities — to integrate and to coordinate those of applied research, product development, production, and marketing. The development of such integrating and coordinating procedures becomes a basic function of top management if the enterprise is to benefit from the internal economies of scale and scope and continuing advances in proprietary knowledge. Such integrated learning bases thus define an industry’s continuing path of organizational learning. They set the direction in which an industry evolves.

The learning base not only sets the direction, but also, because of barriers to entry, defines the boundaries of the path. The concentrated power of technical and functional knowledge embedded in the first-movers’ integrated learning bases is such that only a small number of enterprises defines the evolving paths of learning in which the products of new technical knowledge are commercialized for widespread public use.

The Approach — The Paths of Learning

My basic purpose in this volume is to carry out the fundamental task of the historian: to record where, when, how, and by whom technical knowledge was commercialized into the new products that laid the foundation for the Electronic Century and, in so doing, transformed life and work in the second half of the twentieth century. I chronicle the evolution of the new high-tech industries from their beginnings by the first-movers until the end of the twentieth century. I do this by focusing on the competitive success and failure of the national industries in Europe, the United States, and Japan. The continuing evolution of both consumer electronics and computers resulted from continuous learning in the commercializing of new technologies and enhancing of existing ones. To repeat: The initial first-movers who created their learning bases had competitive advantages by being first in developing their technical and functional capabilities that provided barriers to entry.

The Evolving Paths in Consumer Electronics

In consumer electronics, the commercializing of a new technology was based on the learning that created the previous innovation. The first-movers in radio were the Radio Corporation of America (RCA), a joint venture of the three leading United States producers of electrical and telecommunications equipment, and the German company Telefunken, a joint venture of the two foremost producers in Europe. They led the way in commercializing radio in the 1920s. The same two companies began the process of commercializing television in the 1930s. Telefunken, housed in Berlin, lost its learning base during World War II. So in the 1940s RCA took the lead in commercializing black-and-white television. In the 1950s it became solely responsible for the introduction of color television. Then in the late 1960s and early 1970s, the two Japanese first-movers, Matsushita and Sony, and the Dutch company Philips, all of which had created strong learning bases after World War II, began to move into global markets. Philips’s home market was small, but its impressive learning base defined the evolution of consumer electronics in Europe.

In the late 1960s the remaining four of these first-movers (RCA, Matsushita, Sony, Philips) began a race to commercialize the videocassette recorder (VCR), a market that television had created. Matsushita’s Video Home System (VHS) captured the world market on the strength of that firm’s functional capabilities. The failure of RCA’s videodisk contributed to the company’s collapse and with it the collapse of the U.S. national industry whose path it had defined. Although Sony and Philips had lost to Matsushita in the VCR battle, they, because of their technical capabilities, defined the evolving path of learning based on a disk technology. Together they commercialized the audio compact disk (CD) and the compact disk-read only memory (CD-ROM) and, again with Philips, the digital videodisk (DVD).

By the 1990s Philips’s functional capabilities were unable to meet the Japanese competition. Its technical capabilities had been weakened by the failure of its attempt to commercialize a new video product on its own, the CD-interactive (CDi). So by the late 1990s Philips could no longer commercialize major new consumer electronics products. By then the Japanese first-movers and followers and their strong supporting nexus completely dominated markets worldwide. By then only Japanese companies had the integrated technical and functional capabilities required to commercialize products of new technologies.

The Evolving Paths of Learning in Computers

The evolution of the digital data-processing computer industry differed sharply from that of the consumer electronics industry. In consumer electronics, the managers of five enterprises — Telefunken, RCA, Philips, Matsushita, and Sony — determined the direction in which the industry’s paths of learning evolved from its beginnings in the 1920s until the 1990s. But in computers, the managers of a single firm, IBM, played a determining role from the industry’s beginning in the 1950s to the 1990s.

When the computer was invented, IBM was already the world’s largest producer of punched-card tabulators, the most advanced data-processing device prior to computers. The company became the new electronic computer industry’s first-mover in commercial markets when in 1954 it applied an electronic device to its previously electrically driven punched-card data processors. Within less than a decade, its long-established punched-card functional capabilities in product development, production, and marketing, learned over three decades, permitted its new product, the mainframe computer, to capture close to 80 percent of the world’s markets.

On the basis of the continuing learning and high financial returns, IBM developed its System 360, which in terms of prices charged and performance expected was a full line of compatible mainframe computers, primarily for commercial and business markets. The commercializing of the System 360 required half a decade, at the cost of nearly $7 billion. That extraordinary learning experience immediately defined the computer industry worldwide. By the 1970s, with its System 360 and its successor, the System 370, IBM was competing at home and abroad with companies that primarily produced “plug-compatible” products based on IBM-licensed hardware and IBM-licensed software. By the end of the decade the European computer makers were buying their IBM imitations from Japan.

In the mid-1960s, when IBM was concentrating on developing the System 360, Kenneth Olsen’s Digital Equipment Corporation created a second path of computer learning by commercializing an inexpensive, stripped-down “minicomputer” for more specialized and smaller engineering and scientific markets. Within a brief period a small number of followers entered the new path.

Then in the 1980s the microprocessor transformed the industry with the introduction of computers for use by individuals rather than corporations or other large institutions. Here again, IBM defined the recast industry by being the first to mass-produce and mass-market its personal computer (PC). By the end of the 1980s IBM’s PC, its clones, and their two primary suppliers, Intel (microprocessors) and Microsoft (operating system software), had defined the computer industry as effectively as the IBM 360/370 and its plug-compatibles had done in the 1970s. Soon IBM was only one of a sizable number of personal computer makers. But because every IBM PC and its clones had to use an Intel processor and a Microsoft operating system, those two companies became the path definers in personal computers in the 1980s.

The inability of the British, French, Italian, and then German companies to compete with IBM’s mainframes and the plug-compatibles in the 1970s and IBM and its PC clones in the 1980s brought the death of the European industries. On the other hand, the ability of the Japanese to produce and improve competitive IBM plug-compatible mainframes in the 1970s permitted them to take over their own domestic market and then that of Europe for large systems. Although the Japanese industry lost out in personal computers, their strength in large systems permitted them to meet the greatly increased demand for computing power called for in the 1990s. This demand for more power grew out of the coming of private networking systems for corporations and other institutions and the coming of the public Internet. Those developments enabled the Japanese to become and remain effective challengers to the U.S. industry.

Chart 1:1 indicates the evolutionary paths of learning within the consumer electronics and the computer industries. The chart’s classifications are comparable (but not identical, because they are my classifications) to the Standard Industrial Classification (SIC) of the U.S. Office of Management and Budget, in which a product sector is defined by four numbers. The first two indicate the large industrial category in which it belongs. The third number indicates an industry within that category, and the fourth, the product sector within that industry.

In the consumer electronics industry, radio and television (including color television) were still the leading sectors in 1970. By then RCA and the two Japanese leaders had already entered the recording industry, the one long-existing preelectronic sector, based on the vinyl disk. By 1990 the VCR, the CD (and CD-ROM), and the DVD had become major product sectors.

In computers, the mainframe and minicomputer were the primary product sectors in 1970. By then the growing activities to which the new computer could be applied and the complexities of its operation led to the beginning of a third, nonmanufacturing sector, services.

In the early 1980s the coming of the microprocessor and IBM’s mass production and mass marketing of the personal computer opened up a huge new market for commercial purposes as well as a new one for the home. The resulting massive expansion of the industry led to the formation of new product sectors — personal computers, peripherals, and operating system and application software. At the same time, the producers of minicomputers used the microprocessor to develop the workstation for its engineering and scientific customers. The new array of product sectors that existed in the 1990s is shown as the bottom row in the chart.

Within a sector, therefore, the learning base of a successful profit-making enterprise, either as a division within a multisector corporation or as an independent company, tied a specific technology to a broad national and international market. The enterprise had embedded within it the technical capabilities needed to commercialize products of new technology. Embedded, too, were the basic functional capabilities — product development, production, and distribution and marketing — that were needed in order to continue to improve existing products and processes and to maintain the company’s long-term share of its markets.

A Unique Epic in Industrial and Business History

The evolution of the consumer electronics and computer industries has been historically unique. It differs from the evolution of the capital-intensive and technologically advanced industries that during the last two decades of the nineteenth century and into the twentieth century had laid the foundations for the Industrial Century. Those earlier industries were based on a number of basic technological innovations: the electricity-producing dynamo, which brought the electric lighting that transformed urban life, and electric power, which so transformed industrial production techniques; the telephone, which brought the first voice transmission over distances; the internal combustion engine, which produced the automobile and the airplane; the new chemical technologies that permitted the production of man-made dyes and, of more significance, a wide range of man-made therapeutic drugs; and other man-made materials ranging from silicon and aluminum to a wide variety of plastics.

In these industries a small number of core companies — first-movers and their followers — created national industries that competed for worldwide markets. In electric light and power equipment, the U.S. and German first-movers led the way. Others soon followed in other European nations and Japan. In metals, the Aluminum Company of America built a monopoly in the United States; but it had effective competition from European counterparts. In motor vehicles, Ford was the initial path definer, but General Motors replaced it in the 1920s and was in turn replaced by the Japanese leaders in the 1970s. Nevertheless, the U.S. motor vehicle industry revived as a strong competitor and the European producers lived on. In electrical and telecommunications equipment, the U.S. and German first-movers continue to dominate, but followers appeared in other European nations, including Sweden and Switzerland, and continue to do so today. In chemicals and pharmaceuticals, the initial German and Swiss leaders were shortly challenged by American companies and those of other European nations.

In none of these industries did a single enterprise become the definer of its national industry’s evolving paths of learning in the manner of RCA and IBM in consumer electronics and computers. Nor did a single national industry conquer the world as Japan did in consumer electronics through the elimination of the competing national industries. Nor did two national industries dominate world markets in the manner of the U.S. and Japanese computer industries. The point is that the national industries that invented the infrastructure for the Industrial Century did not compete, conquer, or die in the manner of the national industries that created the infrastructure of the Electronic Century.

The underlying reason for these differences is clear. The creation of the infrastructure for the Industrial Century rested on a broad variety of technological innovations. The unique epic story of the consumer electronics and computer industries was based on the invention of four small, closely related electronic devices — the vacuum tube, the transistor, the integrated circuit, and the microprocessor.

Copyright © 2001 by Alfred D. Chandler, Jr.