As today's electronics industry becomes more competitive, the essential link between productivity improvement and strong economic performance grows increasingly clear. It is not enough to suggest, as some writers have done recently, that "computer" companies should only design things, not build them. Most electronics manufacturers cannot simply abandon manufacturing. But they can become more productive.

The companies that most successfully pursue continuous productivity improvement can still earn good profits, grow, and remain innovative

They will have to. Even though, between 1986 and 1992, the top 200 electronics companies worldwide improved productivity (based on revenue per employee) at a compound rate of 10 percent per year, sales rose only 6 percent, and massive layoffs occurred. However, even as many industry segments mature—with average annual growth in sales slowing by 30 to 50 percent, pretax profits shrinking by up to 80 percent, and players competing harder for share—the companies that most successfully pursue continuous productivity improvement can still earn good profits, grow, and remain innovative.

The turnaround of Hewlett-Packard's personal computer business provides a good example of what it takes to survive, let alone thrive, in such an environment. In 1991, HP,...