Essay About Dell Computerõs Michael Dell And Power Of Virtual Integration

The Power of Virtual Integration: An Interview with Dell Computerõs Michael Dell by Joan Magretta
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ow 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 which personal computers were then being
sold. Instead, he would sell directly to customers and build products to order.
In one swoop, Dell eliminated the resellerÕs 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 to have other benefits that even Michael Dell
couldnÕt have anticipated when he founded his company. ÒYou actually get to
have a relationship with the customer,Ó he explains. ÒAnd that creates valuable
information, which, in turn, allows us to leverage our relationships with both
ARTWORK BY NATALIE ASCENCIOS Copyright © 1998 by the President and Fellows of Harvard College. All rights reserved.
The Power of
Virtual Integration:
An Interview with
Dell ComputerÕs
Michael Dell
by Joan Magretta
suppliers and customers. Couple that information
with technology, and you have the infrastructure
to revolutionize the fundamental business models
of major global companies.Ó
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 individual
pieces of the strategy Ð customer focus, supplier
partnerships, mass customization, just-in-time
manufacturing Ð may all be familiar. But Michael
DellÕs 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 harnesses
the 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 it delivers
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 industryÕs 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 the industry 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, more specialized
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
couldnÕt afford to create every piece of the value
chain. But more to the point, why should we want
to? We concluded weÕd be better off leveraging the
investments others have made and focusing on delivering
solutions and systems to customers.
Consider a component like a graphics chip. Five
or ten years ago, a whole bunch of companies in the
personal computer industry were trying to create
their own graphics chips. Now, if youÕve got a race
with 20 players that are all vying to produce the
fastest graphics chip in the world, do you want to be
the twenty-first horse, or do you want to evaluate