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When the personal computer industry first began to take shape in the early 1980s, the founding companies manufactured many of the components themselves—disk drives, memory chips, graphics chips, microprocessors, motherboards, and software. Subscribing to a philosophy of "We have to develop key components in-house," they built expertise in a variety of PC-related technologies and created organizational units to produce components as well as to handle final assembly. While certain "noncritical" items were typically outsourced, if a computer maker was not at least partially vertically integrated and an assembler of some components, then it was not taken seriously as a manufacturer.
But as the industry grew, technology advanced quickly in so many directions on so many parts and components that the early personal computer manufacturers could not keep pace as experts on all fronts. There were too many technological innovations in components to pursue and too many manufacturing intricacies to master for a vertically integrated manufacturer to keep its products on the cutting edge. As a consequence, companies emerged that specialized in making particular components. Specialists could marshal enough R&D capability and resources to either lead the technological developments in their area of specialization or else quickly match the advances made by their competitors. Moreover, specialist firms could mass-produce a component and supply it to several computer manufacturers far cheaper than any one manufacturer could fund the needed component R&D and then make only whatever smaller volume of components it needed for assembling its own brand of PCs.
Thus, in recent years, computer makers had begun to abandon vertical integration in favor of a strategy of outsourcing most all components from specialists and concentrating on efficient assembly and marketing their brand of computers. Exhibit 7 shows the value chain model that such manufacturers as Compaq Computer, IBM, Hewlett- Packard, and others used in the 1990s. (see Exhibit 7) It featured arm’s-length transactions between specialist suppliers, manufacturer/assemblers, distributors and retailers, and end users. However, Dell, Gateway, and Micron Electronics employed a shorter value chain model, selling direct to customers and eliminating the time and costs associated with distributing through independent resellers. Building to order avoided (1) having to keep many differently equipped models on retailers’ shelves to fill buyer requests for one or another configuration of options and components and (2) having to clear out slow-selling models at a discount before introducing new generations of PCs. Selling direct eliminated retailer costs and markups. (Retail dealer margins were typically in the 4 to 10 percent range.) Dell Computer was far and away the world’s largest direct seller to large companies and government institutions, while Gateway was the largest direct seller to individuals and small businesses. Micron Electronics was the only other PC maker that relied on the direct-sales, build-to-order approach for the big majority of its sales.
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Value
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