The Power of Virtual Integration: An Interview with Dell Computerõs Michael Dell by Joan Magretta

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

H

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

the