The Power of Virtual Integration:

An Interview with Dell Computers Michael Dell

Required reading: Joan Magretta
Harvard Business Review,
march-april, 1998, pp.73-78
Agenda
How Michael Dell pinoneered a new business
model, and built Dell Computer Co. without any
money?
Building up Outsourcing Supplier networks
Direct Sales model
Earning trust and real time cooperation from
suppliers
Challenges of leading virtually integrated SC
3
Dells Business Model
Building $12 Billion company in 13 years;
$61.5 billion in 2011; $31 billion in 2002
Selling directly to customers and build products
to order bypassing the dealer channel
Eliminating the resellers markup and the costs and
risks associated with inventories.
More benefits of the Direct Business Model?


4
Global Supply Chain
Dell Computer
5
Dells evolution:
Virtual Integration
Combining pieces of the strategy
Customer focus, supplier partnership, mass customization,
just-in-time manufacturing.
Technology is enabling coordination across company
boundaries to achieve new levels of efficiency and
productivity.
Virtual Integration offers
Advantages of tightly coordinated supply chain
The focus and specialization
6
How has Dell pioneered a new
business model?
As a small start-up, Dell couldnt afford to create every
piece of the value chain.
But, why should we want to?
Dell leveraged the investments others have made
and focusing on delivering solutions and systems to
customers.
The model has allowed Dell to leverage their
relationships with both suppliers and customers to such
an extent that they believe as being virtually integrated.
7
Dells strategy and Outsourcing 1/3
Dell is focusing on how it can coordinate its activities
to create the most value for customers.
Dell is working to build data linkage to see in real time
With sharing demand information, the supplier
effectively becomes a partner.
They assign their engineers to Dells design team, and they
start to treat themselves as if they were part of the company.
8
Dells strategy and Outsourcing 2/3
Figuring out how many partners we need?
To have as few as possible.
They will last as long as they maintain their leadership in
technology and quality.
But regardless of how long these relationships last,
virtual integration means youre basically stitching
together a business with partners that are treated as if
theyre inside the company.
Youre sharing information in a real-time fashion

9
Dells strategy and Outsourcing 3/3
The technology available today really boosts the
value of information sharing.

This speeds up the time to market drastically
and creates a lot of value that can be shared
between buyer and supplier.
So technology enhances the economic incentives
to collaborate.
10
Key challenges involved in
establishing collaborations
The biggest change from business as usual is
changing the focus
from how much inventory there is
To how fast its moving
Inventory can actually be a pretty massive risk.
If you have a 90-day lag between the point of
demand and the point of supply, youre going to
have a lot of inefficiency in the process (compared
with about 11-day for Dell)

11
How does the direct model
benefit Dells suppliers?
The distance between the demand and the
supply is totally shrunk.
Less variability, less inventory, lower costs, and
less risk.
The mix of customers Dell serve is kept stable.

12
Customer strategies:
Evolution of customer segmentation
Over time, Dell cut the market into finer and
finer segments.
Reasons
To identify unique opportunities and economics
Purely managerial issue for better attention and
focus
Segment specific issues: For instance, education
segment
13
Customer strategies:
Evolution of customer segmentation
In 1994
In 1996
In 1997
Large customers
Small customers
(business and consumer)
Large
companies
Midsize
companies
Government
& Education
Small
customers
Global
enterprise
accounts
Large
companies
Midsize
companies
Federal
State &
Local
Education
Small
companies
Consumers
14
Demand forecasting
Forecasting as a critical sales skill
Sales-account managers lead large customers
through a discussion of their future PC needs
With smaller customers, Dell has real-time
information what theyre buying.
So that Dell can steer them in real time to fine-tune
the balance between supply and demand.
15
Virtual integration with
customers
Many information links between Dell and its customers
Close customer relationships have allowed Dell to
dramatically extend the value Dell delivers to
customers. For instance,
Customized software loading for corporate customers
Recording customer information for after-sales
Developing customized intranet sites
Assigning dedicated on-site team
Setting up forums to ensure the free flow of information with
the customers on a constant basis
16
The evolution of a faster business model
suppliers manufacturer
distribution
channels
suppliers manufacturer customers
customers
suppliers manufacturer customers
The dominant model in the PC industry
Dells direct model
Virtual integration works even faster by blurring the traditional boundaries and roles in the value chain
17
Challenges of leadership in a
virtually integrated organization
The whole idea behind virtual integration is that
It lets you meet customers needs faster and more
efficiently than any other model
With traditional vertical integration, a firm can be
an efficient producer as long as the world isnt
changing very much.
But virtual integration lets you be efficient AND to
changes at the same time.
18
Challenges of leadership in a
virtually integrated organization
To lead in that kind of business environment, we
should be on the lookout for shifts in value.
Dells goal is to be one or two steps ahead of the
change, and to be creating or shaping the change.
What happens is that we get a series of seemingly
small innovations that over time add up to a huge
innovations.
Looking out for value shifts is probably the most
important dimension of leadership.

Question?

9-19