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 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 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 to have 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 the fundamental 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 individual pieces 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 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.