March-April 1998 v76 n2 p72(13)
The power of virtual integration: an interview with Dell Computer’s Michael Dell.
by Joan Magretta
Dell Computer founder Michael Dell is responsible for the success of the $12 billion company. Through an innovative business model called the ’direct model’, the firm was able to streamline the distribution chainsignificantly. He is further refining the model through ’virtual integration’ which relies on information technology to improve the value chain of manufacturers, suppliers, and customers. © COPYRIGHT 1998 Harvard Business School Publishing HOW DO YOU CREATE A $12 BILLION COMPANY IN JUST 13 YEARS? Michael Dell began in 1984 with a simple business insight: he could bypass the dealer channel through whichpersonal computers were then being sold. Instead, he would sell directly to customers and build products to order. In one swoop, Dell eliminated the reseller’s markup and the costs and risks associated with carrying large inventories of finished goods. The formula became known as the direct business model, and it gave Dell Computer Corporation a substantial cost advantage. The direct model turned out tohave other benefits that even Michael Dell couldn’t have anticipated when he founded his company. "You actually get to have a relationship with the customer," he explains. "And that creates valuable information, which, in turn, allows us to leverage our relationships with both suppliers and customers. Couple that information with technology, and you have the infrastructure to revolutionize thefundamental business models of major global companies. In this interview with HBR editor-at-large Joan Magretta, Michael Dell describes how his company is using technology and information to blur the traditional boundaries in the value chain among suppliers, manufacturers, and end users. In so doing, Dell Computer is evolving in a direction that Michael Dell calls virtual integration. The individualpieces of the strategy-customer focus, supplier partnerships, mass customization, just-in-time manufacturing -- may all be familiar. But Michael Dell’s insight into how to combine them is highly innovative: technology is enabling coordination across company boundaries to achieve new levels of efficiency and productivity, as well as extraordinary returns to investors. Virtual integration harnessesthe economic benefits of two very different business models. It offers the advantages of a tightly coordinated supply chain that have traditionally come through vertical integration. At the same time, it benefits from the focus and specialization that drive virtual corporations. Virtual integration, as Michael Dell envisions it, has the potential to achieve both coordination and focus. If itdelivers on that promise, it may well become a new organizational model for the information age. How has Dell pioneered a new business model within the computer industry? If you look back to the industry’s inception, the founding companies essentially had to create all the components themselves. They had to manufacture disk drives and memory chips and application software; all the various pieces of theindustry had to be vertically integrated within one firm. So the companies that were the stars ten years ago, the Digital Equipments of this world, had to build massive structures to produce everything a computer needed. They had no choice but to become expert in a wide array of components, some of which had nothing to do with creating value for the customer. As the industry grew, morespecialized companies developed to produce specific components. That opened up the opportunity to create a business that was far more focused and efficient. As a small start-up, Dell couldn’t afford to create every piece of the value chain. But more to the point, why should we want to? We concluded we’d be better off leveraging the investments others have made and focusing on delivering solutions and...