Summary by Linda Bragdon
Master of Accountancy Program
University of South Florida, 2001
Michael Dell founded Dell Computer Corporation in 1984 with a plan for selling custom-built PCs directly to the customer. By using this simple concept, Dell can best understand their customers needs, and efficiently provide the most effective computing solutions to meet those needs. The concept became known as the direct business model.
The direct business model had a valuable benefit that Michael Dell didn’t anticipate. It enables the company to have an actual relationship with customers. This provides essential information that is used to leverage relationships with the suppliers as well as customers.
Dell uses this information along with technology to eliminate the boundaries in the value chain among its suppliers, manufactures, and customers. Michael Dell describes this process as virtual integration. Technology has allowed coordination between the company’s individual segments such as strategy-customer focus, supplier partnerships, mass customization, and just-in-time manufacturing. This helps to achieve new levels of efficiency, productivity, and remarkable returns to investors.
The benefit of a tightly coordinated supply chain is offered through vertical integration. A virtual corporation offers the benefit of focus and specialization. Virtual integration combines the benefits derived from both vertical integration and a virtual corporation. Therefore, virtual integration provides the ability to attain both coordination and focus.
Dell is continually refining the direct business model through virtual integration, which relies on information technology to improve the value chain of suppliers and customers.
Traditional computer companies had to be vertically integrated. They developed the many components of the computer themselves. When Dell started, they could not afford this traditional process. Instead, Dell leveraged investments made by others and focused on the delivery of solutions and systems to customers. This is the heart of the direct business model. It has allowed Dell the leverage their relationships with both suppliers and customers.
The few suppliers of Dell are the equivalent of partners. They are treated as if they were actually part of Dell. The partnership will last as long as the partner maintains their leadership in technology and quality.
The suppliers of Dell are told exactly what the company’s daily requirements will be. This is made possible from the free flow of information that is shared between Dell and the supplier. Technology enhances the economic incentives of this type of collaboration because it speeds time to market and creates value that is shared between buyer and seller.
This type of collaboration posses the challenge of change of focus from how much inventory there is to how fast it’s moving. This is measured by inventory velocity, which has Dell working with suppliers to continually reduce inventory and increase speed.
Dell serves a wide variety of customers. They range from governmental institutions to individual buyers. To handle this complex market, Dell benefits from segmenting its customers. Dell is better able to understand their customer needs in a more intimate way. This type of relationship allows Dell to obtain access to information that is critical to their direct model strategy. Without this information, Dell could not successfully forecast what their customers need and when they are going to need it.
There are a vast array of information links between Dell and their customers. The ability to sell directly allows Dell to keep track of a company or individuals total PC purchase, country by country. This is information that can ultimately be feed back to them. For example, when a computer isn’t working properly for a company, the IT people don’t have to waste time figuring out the type of configuration of hardware and software the computer has.
The close relationships that Dell has formed with its customers have allowed them to extend the value they deliver to those customers. This value can be seen through the ability of Dell to routinely load the customer’s software in the factory.
Dell has also set up Platinum Councils to ensure the free flow of information with their customers on a continual basis. At these forums, Dell’s senior technologists share their views on where technology is headed and provide an overview of product plans over the next two years. Groups are then set up to focus on specific product areas and discuss solutions to problems that may not necessarily have anything to do with the commercial relationship with Dell. The ratio of Dell people to customers at the forums is 1:1. The council allows Dell to demand forecast.
Dell believes that its customers are in control, and that Dell’s job is to combine all the technology available and apply it in a useful way to meet the needs of their customers. Dell has to stay on top of what the customers’ need, as well as monitor and understand the innovations in the material science world.
Virtual integration lets Dell meet customers’ needs faster and more efficiently than any other model.
The direct business model is a unique concept that separates Dell from others in the industry. Virtual integration relies on information technology to improve the value chain of manufactures, suppliers, and customers. The benefits it produces are coordination and focus. These attributes make virtual integration an organizational model on the horizon for the information age.
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