Open your eyes
Actually my friend told me to read a good article about microeconomic thinking on big computer companies nowadays. It is surprising me when I read that article, it so truly happen. The thinking of microeconomic makes all entrepreneurs considering about their strategy how to be more than one side when they produce a product. The key is on demand characteristic, we must know about our product what is the substitute and what is the complement. Joel spolsky told that every product in the marketplace has substitutes and complements. A substitute is another product you might buy if the first product is too expensive. Chicken is a substitute for beef. If you’re a chicken farmer and the price of beef goes up, the people will want more chicken, and you will sell more. A complement is a product that you usually buy together with another product. For example Gas and cars are complements; computer hardware complement of computer operating system.
So, the most important thing of demand characteristic is demand for a product increases when the prices of its complements decrease. For example, when computer become cheaper, more people buy them, and they all need operating systems, so demand for operating systems goes up, which means the price of operating systems can go up. At this point, the slogan that saying, “aha! But linux is FREE!”. OK. First at all , when an economist considers price, they consider the total price, including some intangible things like the time it takes to set up, reeducate everyone, and convert existing processes. All the things that we like to call “total cost of ownership“.
In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest theoretically sustainable price would be the “commodity price” — the price that arises when you have a bunch of competitors offering indistinguishable goods. So Smart companies try to commoditize their products’ complements. We will see how big computer companies commoditize their products’ complements.
1. IBM- add-in market
When IBM designed the PC architecture, they used off-the-shelf parts instead of custom parts, and they carefully documented the interfaces between the parts in the (revolutionary) IBM-PC Technical Reference Manual. So that other manufacturers could join the party. IBM’s goal was to commoditize the add-in market, which is a complement of the PC market, and they did this quite successfully. Within a short time scrillions of companies sprung up offering memory cards, hard drives, graphics cards, printers, etc. Cheap add-ins meant more demand for PCs.
2. IBM–Microsoft
When IBM licensed the operating system PC-DOS from Microsoft, Microsoft was very careful not to sell an exclusive license. This made it possible for Microsoft to license the same thing to Compaq and the other hundreds of OEMs who had legally cloned the IBM PC using IBM’s own documentation. Microsoft’s goal was to commoditize the PC-market. Very soon the PC itself was basically a commodity, with ever decreasing prices, consistently increasing power, and fierce margins that make it extremely hard to make a profit. The low prices, of course, increase demand. Increased demand for PCs meant increased demand for their complement, MS-DOS.
Summerized from leter V
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