VI4
How are the challenges of leadership in a virtually integrated organization different from those you would encounter running a corporation with more traditional boundaries?
The whole idea behind virtual integration is that it lets you meet customers' needs faster and more efficiently than any other model. With vertical integration, you can be an efficient producer--as long as the world isn't changing very much. But virtual integration lets you be efficient and responsive to change at the same time--at lease, that's what we're trying to do. We think about Internet commerce as a logical extension of our direct model--and within our first year, we reached a run rate of $2 million a day. It's now about $3 million a day, and during the peak of the Christmas buying season we saw several $6 million days. I'm only half joking when I say that the only thing better than the Internet would be mental telepathy. Because what we're all about is shrinking the time and the resources it takes to meet customers' needs. And we're trying to do that in a world where those needs are changing.
to lead in that kind of environment, you have to be on the lookout for shifts in value, and if the customer decides, "Hey, I don't care about that anymore, now I care about this," we may have to develop new capabilities rather quickly. One of the biggest challenges we face today is finding manager who can sense and respond to rapid shifts, people who can process new information very quickly and make decision in real time. It's a problem for the computer industry as a whole--and not just for Dell-that the industry's growth has outpaced its ability to create managers. we tell prospective hires, "If you want an environment that is never going to change, don't come here. This is not the place for you."
Our goal is to be one or two steps ahead of the change, and in fact to be creating or shaping it, to some extent. That's why we spend so much time with our customers. It's why I personally spend about 40% of my time with cutsttomres. Often is'a a lead customer that says, "Hey, can you put an asset tag on my PC?" And the first reaction is, "Gee, we've never done that before, but why not? Let's give it a try." And then you do it for one customer, then for ten, then for a hundred, and eventually it becaomes a standard offering. Putting asset tags on computers isn't by itself a mjor value shift, but what happens is that we get a series of seemingly small innovations that over time add up to a huge improvement. That's not a bad description of the way we get into businesses. We don't come at the other way around, with a consulting study that says, "That's an attractive business. Let's go." Nor do we sit around and say, "What do we suppose oour customers would like? If we were customers, what would we be thinking?"
So looking for value shifts is probably the most important dimension of leadership. Then there's the question of managing such a tightly coordinated value chain--and there it's all about execution. If you look at Dell's P&L structure, I think you'd be hard-pressed to find companies that deliver the kind of value-added we do with such a small markup. My theory is that if we can continue to keep our markup as low as it is today, we're going to be able to capture most of the opportunities available to us. But that means we cannot get complacent about our growth and get careless about execution.
Sometimes, I'm taken aback when I talk to people who've been in the company for six months or a year and who talk about "the model' as if it were an all-powerful being that will take care of everything. It's scary because I know that nothing is ever 100% constant, and the last thing we should do is assume that we're always going to be doing well. But for now, it's working. The direct system really delivers value to the customer all the way from distribution back through manufacturing and design. If you tried to divide Dell up into a manufacturer and a channel, you'd destroy the company's unique value. It's something completely new that nobody in our industry has ever done before.
Note: This is the end of the Harvard Business Review Article on Interview with Michael Dell, Mar -Apr 1998 Issue, pages 73-84. The following is an insert by Kevin Rollins, Vice Chairman of Dell Computer Corporation, copied from page 81 of the same issue, Harvard Business Review.
Using Information to Speed Execution, by Kevin Rollins
Most of the managerial challenges at Dell Computer have to do with what we call velocity--speeding the pace of every element of our business. Life cycles in our business are measured in months, not years, and if you don't move fast, you're out of the gam. Managing velocity is about managing information--using a constant flow of information to drive operating practices, from the performance measures we track to how we work with our suppliers.
Performance Metrics. At Dell, we use the balance sheet and the fundamental of the P&L on a monthly basis as tools to manage operations. From the balance sheet, we track three cash flow measures very closely. We look at weekly updates of how many days of inventory we have, broken out by product component. We can then work closely with our suppliers so we end up with the right inventory. When it's not quite right, we can use our direct-sales model to steer customers toward comparable products that we do have. So we use inventory information to work both the front and back ends at the same time.
We also track and manage receivables and payables very tightly. This is basic blocking and tackling, but we give it a high priority. The payoff is that we have a negative cash-conversion cycle of five days--that is, we get paid before we have to pay our suppliers. Since our competitors usually have to support their resellers by offering them credit, the direct model gives us an inherent cost advantage. And the more we can shorten our cash-collection cycle, the greater our advantage.
The real-time performance measure in the P&L that we regards as the best indicators of the company's health are our margins, our average selling price, and the overhead associated with selling. We split the P&L into these cost elements by customer segment, by product , and by country. These metrics can alert us instantly to problems, for example, with the mix of products being sold in any particular country.
Working with Suppliers. the greatest challenge in working with suppliers is getting them in sync with the fast pace we have to maintain. The key to making it work is information. The right information flows allow us to work with our partners in ways that enhance speed, either directly by improving logistics or indirectly by improving quality.
Take our service strategy, for example. Customers pay us for service and support , and we contract with third -party maintainers (TPMs) to make the service calls. Customers call us when they have problems, and that initial call will trigger two electronic dispatches--one to ship the needed parts directly from Dell to the customers' sites and one to dispatch the TPMs to the customers. Our role as information broker facilitates the TPMs' work by making sure the necessary parts will be on site when they arrive.
But our role doesn't stop there. Because poor quality creates friction in the system, which slows us down, we want to capture information that can be used to fix problems so they won't happen again. So we take back the bad part to diagnose what went wrong, and we feed that information back to our suppliers so they can redesign the component. Clearly, we couldn't operate that way if we were dealing with hundreds of suppliers. So for us, working with a handful of partners is one of the keys to improving quality--and therefore speed--in our system. |
