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Software Called Key to US Competitiveness

IN the late 1970s, hardware was prince and software was pauper.Hobbyists flocked to the best-built machines. They struggled to make them work with limited software called Basic. Today, those roles are reversed. Software has grabbed the preeminent position in the computer world. And manufacturers of hardware have fallen on hard times. That shift of market power has profound implications for the United States and its competitors around the world. In the near term, the US stands to gain a strategic advantage because of its strength in software engineering and design of high-value hardware. In the long term, however, these American industries likely will face intense foreign competition - the kind of struggle that older US companies have already fought and often lost. "The future belongs to the computerless computer company," consultants Andrew Rappaport and Shmuel Halevi wrote in the July/August edition of the Harvard Business Review. "The strategic goal of US companies should not be to build computers. It should be to create persistent value in computing." "In most cases ... software is what wins," says Shearson Lehman Brothers vice president David Nelson. "It generates the profits." The most dramatic example of this shift is Microsoft Corporation. In 10 years this small, little-known upstart in Redmond, Wash., has become arguably the most powerful computer company in the US. Its secret? Microsoft was chosen to create the operating system that powered IBM's original personal computer. Sales of that computer soared, causing other domestic and foreign companies to start building clones. IBM lost sales as the competition intensified. But Microsoft profited because all the clones ran on its software. The company has made further advances with a new operating system, called Windows, that threatens another key computermaker, Apple Computer Inc. Interestingly, IBM and Apple joined forces earlier this summer to build the next generation of computer - presumably with an operating system not made by Microsoft. The shift to software permeates the entire industry. Even manufacturers of computer parts are increasingly relying on software rather than hardware to control their systems. For example, most personal computers use magnetic hard disks to store data. In 1986, a company called Conner Peripherals Inc. decided to make hard disks that relied more heavily on software. In one instance, Conner used a software program to determine the speed and direction of its spinning disk rather than the magnetic sensor that other manufacturers used. Conner became a leader in disk-drive technologies. The same trends hold true in semiconductors. "There's a strong correlation between the financial s uccess of semiconductor companies and the software content of their product," says Wes Patterson, chief operating officer of Xilinx Inc., a San Jose, Calif., supplier of software-intensive integrated circuits. The shift from hardware to software suggests that the US stands to gain an important advantage in the technology race. After years of favoring high-volume manufacturing societies such as Japan, market forces are swinging to those nations that create the best software. At the moment, the US is the uncontested leader in that field. When the Council on Competitiveness asked executives of top American high-tech companies to rate the nation's position in critical technologies, they gave a split response. In non-software technologies, the US has slipped badly, the executives admitted. In 33 of 69 categories, the US was rated as weak or losing badly. But in all 36 categories of software and information technologies, the executives rated the US strong or competitive. Some analysts, such as Messrs. Rappaport and Halevi, argue that US companies should more or less abandon actual manufacturing operations to concentrate on software and the design of hardware components. They write: "Investing to regain lost strength in hardware technologies is risky. ... Investing to capitalize on applications strength and to leverage the investments of other countries in enabling technologies is more likely to allow the United States to extend its leadership." Other high-tech specialists are leery of that option. "In various guises that's an argument we've heard for decades now," says Daniel Burton, executive vicepresident of the Council on Competitiveness, a private-sector advocacy group. "And we've let one industry after another go." "We shouldn't throw the baby out with the bath water just because software and services are more important," says Marshall Phelps, director of governmental programs at IBM. If Japan is moving into software without giving up o n manufacturing, then the US shouldn't give up on manufacturing either, he adds. Even US companies that manufacture most of their products abroad want to retain control over the manufacturing process. Otherwise, quality and on-time delivery suffer, says Bill Schroeder, vice chairman of Conner, which produces most of its disk drives in Malaysia and Singapore. "There's no such thing as design separate from manufacturing. You can't design something and somehow throw it over the wall to someone in China and say: 'Make this.' "

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