The Power of Virtual
Integration: An Interview
with Dell Computer’s
by Joan Magretta
Harvard Business Review
The Power of
V i r t ua l I n t e g r at i o n :
A n I n t e rv i e w w i t h
D e l l C o m p u t e r’ s
b y J oa n M ag r e t ta
ow do you create a $12 billion company in just 1 3 years?
Michael Dell began in 1984 with a simple business insight: he could by-
pass 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 ...view middle of the document...
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.
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 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
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 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 you’ve 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 field of 20 and pick the best one?
It’s a pretty simple strategy, but at the time it
went against the dominant, “engineering-centric”
view of the industry. The IBMs and Compaqs and
HPs subscribed to a “we-have-to-develop-everything” view of the world. If you weren’t doing component assembly, you weren’t a real computer
company. It was like a rite of passage. You somehow proved your manhood by placing small semiconductor chips on printed circuit boards.
And Dell Computer came along and said, “Now
wait a second. If I understand this correctly, the
companies that do nothing but put chips on motherboards don’t actually earn tremendous profit doing it. If we want to earn higher returns, shouldn’t