Patterns of competition in the computer industry are changing as the market matures. Players are responding to the new conditions in a variety of ways.

During the past five years, one computer manufacturer focused on innovation in the effort to differentiate its products and achieve higher margins and sales. The company applied this strategy both to its traditional proprietary systems and to a new product line based on the open Unix operating system. Meanwhile, another also committed itself to innovation, but followed a different path, continually reducing product cost and improving manufacturing operations. Its ambitious productivity initiatives reached through the entire organization—and beyond to distribution channels and suppliers.

As the rate of growth in industry sales declined, the first manufacturer redoubled its efforts to develop a new star product, zeroing in on the market niche of high-end network servers. Unfortunately, it was joined by all sorts of competitors—makers of PCs and workstations as well as minicomputers. As price wars broke out, it repeatedly cut its head count. But these reactive measures were not enough to keep pace with competitors or to maintain profits.

Both companies used techniques such as TQM,...