Chapter 3The Perfect Commodity

By Rick Christoph

What does it mean to be a Commodity

• Standardized product• Compete on cost basis• High customer awareness of

product• Which life cycle stage?

'I've had a perfectly wonderful evening. But this wasn't it.' -- Groucho Marx

The Lifecycle

Commodity & Impact on 5 Competitive Forces

• Rivalry?

• Buyer Power?

• Supplier Power?

• Entrants?

• Substitutes?

Early IT Hardware• Emerging technology

•No Standards•Rapid change

•Unit Record, Punch Card, Disk

'Some cause happiness wherever they go; others, whenever they go.‘ -- Oscar Wilde

Some firms fail

•GE, Univac, RCA•Buyers seek power at lower cost

http://en.wikipedia.org/wiki/UNIVAC

Introduction Issues• Early PCs

•Several different approaches

•Strong push to standardize

•Customer base grows as costs drop

• Venders make products similar to lower switching costs

Growth issues

• The PC market of the late 90’s• High adoption rates

• PC Technology moves toward an infrastructure base

• Knowledge is rapidly disseminated• MANY entrants

Overshooting

• Technology develops past the point needed by users•Users can be satisfied with lower

end units

•Do not need to upgrade as rapidly

•Consider Windows 3.1 to Win 95

•Now look at Windows XP to VISTA

Semiconductor Technology• The transistor was invented at Bell

Labs in 1947 by John Bardeen, Walter Brattain, and William Shockley

• http://www.pbs.org/transistor/ • Advances in process have allowed

system designers to pack more performance into more devices at decreased cost

Moore’s Law

http://www.intel.com/technology/mooreslaw/index.htm

Semiconductor Performance• Electricity (electrons) moves at speeds

close to the speed of light (186k miles/sec)• As switching elements of a semiconductor get

smaller, they can be placed physically closer together

• Since the absolute distance between elements shrinks, device speed increases

• Semiconductor manufacturing cost is related to number of chips produced rather than number of devices per chip

Semiconductor Performance• As device size shrinks, performance

improves and capability increases (more logic elements in the same size package and those elements operate faster)

• During the period from 1960 to 1990 density grew by 7 orders of magnitude• 3 circuits to 3 million• By 2020, chips will hold between 1 to 10

billion circuits

Example: Semiconductors• Semiconductors are produced in

processing plants called fabs• Fabs produce semiconductors on silicon

wafers• The wafers are sliced from extremely pure

silicon ingots and polished• These wafers can range in size from 6 to 12

inches (150 to 300 mm) in diameter• http://www.infras.com/Tutorial/sld001.htm

“I never forget a face, but in your case I'll be glad to make an exception.” -- Groucho Marx

Semiconductor Processes

• Current state of the art fabs process 300 mm wafers, but moving to 450 mm.

• It costs $1.7 billion dollars and takes 30 months to construct and equip a fab

• Fabs are completely obsolete, on average, in seven years

Semiconductor Processes

• Each wafer holds many identical copies of the semiconductor• The wafer moves from process to

process across the fab, slowly being built up to create the final product

• The last step in the process slices the wafer up into the individual chips which are tested and packaged

Semiconductor Processes

• From early in the design of a fab, the number of wafers the plant can process per month is determined• To maximize return on capital investment,

the process engineers attempt to produce the greatest number of the highest value chips

• Decreasing device size increases both the number of chips per wafer and the speed of the devices produced

Semiconductor Processes

• The drive to use larger wafers stems from the economies of scale – why 450 mm is key.• 2.5 times as many chips can be cut

from a 300 mm wafer as compared to a 200 mm wafer

• 300 mm fabs cost 1.7 times as much as 200 mm ones

Device Geometries

• Device geometry is defined by minimum feature size• This is the smallest individual feature

created on the device (line, transistor gate, etc.)

• Current feature size in leading edge fabs is 0.10 microns

• Human hairs are 80 microns in diameter

Roadblocks to Device Shrinkage

• Most common chips are made using the Complementary Metal Oxide Semiconductor (CMOS) process• Chips using CMOS only consume power

when logic states change from 1 to 0 or 0 to 1

• As clock speeds increase the number of logical operations increases

• http://www.research.ibm.com/journal/rd/462/nowak.html

Recording Technologies

• Progress in recording technologies is even more rapid

• http://www.duxcw.com/digest/guides/hd/hd2.htm

• http://www.columbia.edu/acis/history/1301.html

• Disk-based magnetic storage grew at a compounded rate of 25% through the 1980s but then accelerated to 60% in the early 1990s and further increased to in excess of 100% by the turn of the century

Exploding Demand• As personal computers have grown in

computing power, storage demands have also accelerated• Operating systems and common

application suites consume several gigabytes of storage to start with• The World Wide Web requires vast amounts

of online storage of information

• Disk storage is being integrated into consumer electronics

Recording Economics

• At current rates of growth, disk capacities are doubling every six months• Growth rates are exceeding Moore’s Law

kinetics by a factor of three

• Price per megabyte has declined from $10,000 in 1956 (IBM RAMAC) to 0.01 cent now.

• http://en.wikipedia.org/wiki/Computer_storage_density

Bit Density• Data density for disk drives is

measured in bits per square inch called areal density

• 2001 areal density was about 70 gigabits per square inch and climbed to some 100 gigabits per square inch by the end of 2003

• Areal densities are now near 1000 gigabits per square inch

• http://www.pcmag.com/encyclopedia_term/

0,2542,t=areal+density&i=37970,00.asp

Baseball is 90% mental, the other half is physical – Yogi Berra

Life Cycle: Maturity

• Overshooting becomes common•Becomes difficult to get

customers to buy new product as old product satisfies

• How can firms compete?•COST!

The ultimate commodity

• Carr suggests the possibility of one huge hardware network where you buy only the computing power you need. • You would no longer buy “software” –

only service• Think of the electric system

What about software?

• Early software was very costly and hard to write

• A completely proprietary asset• Groups have developed to build

software and sell to firms• Firms have bought the software even

though they are no longer different as all competitors use it.

ERP software

• Possibly the ultimate expression in company management systems

• If competing firms operate SAP, how can they build a competitive advantage?

Life Cycle: Decline

• Technology is total commodity• Seek to re-define the system• May happen in a complete

network environment

I like pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals. – Sir Winston Churchill