Virtual Vizio
By Dave Holloman
November 25, 2009
If you have shopped in a Costco store any time in the last few years, you have no doubt seen the flat screen televisions sold by Vizio. You can’t help but see them, positioned at the front of the store after immediately walking through the door. Multitudes have walked through those doors looking for bulk bananas and left with a large screen Vizio TV. Indeed, Vizio’s televisions have taken the market by storm the last few years, powered by the Costco channel. Some quick facts about the company; over $2 billion dollars in annual sales, market leader in LCD televisions, 87% year-on-year growth in unit shipments, founded in 2002 (7 years old). In the third quarter of this year, market share increased to approximately 16%. Catapulting from non-existence to number one has given the established category leaders like Sony and Panasonic fits. Vizio entered the category, took on established players, and is winning.
Ok. Now, guess how many employees Vizio has? About 200. That’s right. About 200 employees. In 2007, they obtained 13% market share with 7 employees. By contrast, Panasonic’s US division has 13,000 employees. Despite Panasonic’s larger footprint, the difference is striking…..almost mind boggling. Much has been written about Vizio and its success, but a significant point bears more emphasis – that a variable cost, virtual model was a key to success and growth.
You can probably guess where this is going. Vizio outsources and uses partner companies for practically every activity under its roof. Well, virtual roof. Design and marketing leadership are in-house. Everything else lies outside, with core functions executed by long-term, closely held partnerships. Vizio doesn’t even really do the design. They specify product performance specifications and engineers for other companies do the rest. The company’s primary contract manufacturer, AmTran, is also an equity investor, linking success of the two companies together. They truly leverage a network of third parties that gives them significant advantage.
Vizio’s founder and current CEO is William Wang. In 2002, Mr. Wang combined two ideas in the formation of the company. First, components for making LCD TVs were becoming widely available through Taiwan-based contract manufacturers, and second, that bringing the price down for these products would significantly increase their demand and move them into the mainstream. He was, of course, right on the money. By using existing contacts through contract manufacturers, company founders designed their first LCD TV that sold at a retail price about half of current market offerings. With that, the company was born.
As the company grows, it is resisting the temptation of making large capital investments today that will become tomorrow’s legacy, stranded assets. Such assets and legacy costs slowed Vizio’s competitors in the market transition to digital. That’s the way the market works these days. In the old mindset, hard assets were nurtured into advantage. Today, in a horizontal, “flat” world, these same assets can become weights that slow speed to market and obscure market-based realities.
A related example are developments in the cell phone industry. Back a few years ago, Nokia dominated and simply seemed unbeatable. Their core strength was their supply chain. They offered pretty good phones that consumers wanted, all built on standard platforms. Using their supply chain as a cost weapon, Nokia attained profit margins the envy of the industry and beat everyone to market through line extensions of their platforms. Two events occurred that turned this strength on its head. First, new companies emerged that became private label houses for cell phone design. Everyone then had access to the building blocks of cell phone design. With that step, the commodity side of the market was lost. The second big event was Steve Jobs. Led by great design and innovation, a partner configured supply chain became the machine that supplied the market. Nokia’s strength in supply chain and standardization quickly turned from strength to liability. Today’s mobile phone market is dramatically different in structure. Motorola is betting its future not on in-house designed software, but instead on Google’s Android platform, as one example.
In 1999, John Hagel and Marc Singer published a groundbreaking and widely acclaimed HBR article Unbundling the Corporation. In it, the authors outlined a new framework for how companies would be structured in the new realities of the internet and outsourcing. With communication costs plummeting, it just makes less and less sense to put everything under one roof. That ground has now been broken repeatedly. I’m not sure Hagel and Singer imagined at the time the degree by which their concept would be applied, with a group of 200 beating an army of 13,000. With the recent economic downtown, these concepts are picking up speed. Companies that remain vertically integrated are being left behind.
