The Drucker Difference

Vizio's Outsourcing Hits a Profitable Note


Peter Drucker loved to equate managers with symphony conductors. He first used the analogy in the 1954 landmark The Practice of Management and was still making the same comparison in his last major work, Management Challenges for the 21st Century, published almost a half-century later.

Running an organization effectively, Drucker wrote in the earlier book, "requires that the manager in every one of his acts consider simultaneously the performance and results of the enterprise as a whole and the diverse activities needed to achieve synchronized performance." It is no different, Drucker explained, than the way "a conductor must always hear the whole orchestra and the second oboe."

With this image in mind, it is fitting that William Wang, the chief executive of the flat-screen television maker Vizio, has given each member of his senior team a symbolic reminder of how he’d like them to manage: a conductor’s baton.

The wrinkle is that Vizio must achieve synchronized performance among not only its workforce but also the network of subcontractors and partners that help produce its products. In fact, the company, which last year brought in nearly $3 billion in revenue, has only about 300 people on its own payroll. (Yes, you read that right: That’s roughly $10 million in sales per employee.) But another 50,000 workers are employed by other (mostly Taiwanese) companies who manufacture Vizio’s TVs, which retailers then sell at bargain prices.

"JUST ANOTHER SCREEN"

The company’s ascent has been remarkable. In less than a decade, Vizio has turned into the largest seller of liquid-crystal display sets in North America, surpassing such well-regarded brands as Samsung, Sony (SNE), and Philips (PHG). Along the way, it has been steadily profitable.

Last week Vizio pushed its extraordinary business model—one that embodies a number of Drucker principles—in a new direction, as it began shipping its first-ever tablet computers. Wang, a serial entrepreneur who founded Vizio in 2002, views the tablet as simply a way to transmit entertainment options to customers. "It’s just another screen," he says, adding that smartphones (a market Vizio plans to enter later this year) "are even smaller TVs that you happen to be able to talk into."

Like its televisions, Vizio’s tablet was designed at company headquarters in Irvine, Calif., with Wang fully engaged. Indeed, his favorite part of the day is the time he faithfully carves out to visit the small lab where he can put his personal stamp on the look and feel of every Vizio product. In addition to scrutinizing his competitors’ TVs and computers, Wang hones his creative sensibility by studying cars, furniture, and other goods.

Drucker would have admired this approach. The best executives, he wrote, actively seek "information on how other people, with other jobs, other backgrounds, other knowledges, other values, and other points of view, see the world."

CUSTOMER COMPLAINTS

The other piece of the operation that Vizio keeps strictly in house is customer support. In this way, Wang ensures that quality remains high and that the company stays close to the pulse of the marketplace. It is no coincidence that Wang began his career, after graduating in 1986 from the University of Southern California with a degree in electrical engineering, as a one-man call center for a computer display maker called Tatung. "I learned all about business from listening to customers complain," he says.

But practically every other task at Vizio is outsourced, a great example of one of "management’s new paradigms," which Drucker believed were starting to emerge at the end of the 20th century.

"Increasingly," Drucker wrote, "the economic chain brings together genuine partners, that is, institutions in which there is equality of power. … What is needed, therefore, is a redefinition of the scope of management. Management has to encompass the entire process."

This is precisely the challenge Vizio faces, as its "symphony conductors" work side by side with its subcontractors to find new efficiencies and control inventory. In other words, Vizio doesn’t squeeze its suppliers; rather, it assists them in squeezing excess costs out of their own systems.

EQUITY STAKES

"Trust and transparency [are] the most significant part of our supply chain," Wang says. This notion comes alive when you realize that about 20 percent of those sitting at desks in Vizio’s offices are non-Vizio personnel. Early on, some of Vizio’s suppliers took an equity stake in the privately held company, further aligning everyone’s interests.

The big advantage of all this is that it doesn’t directly saddle Vizio with a lot of the costs—such as giant manufacturing facilities or pension benefits for an army of factory hands—that its rivals must bear. In turn, Vizio pushes prices as low as it can. "The key message," says Wang, "is value."

This is another development that Drucker foresaw. For businesses of the future, "the foundations have to be customer values and customer decisions on the distribution of their disposable income," he wrote. "It is with those that management policy and management strategy increasingly will have to start."

Whether Vizio’s strategy will translate successfully in an ever more crowded field of tablets—where its 8-inch computer goes for as little as $329, vs. $499 for Apple’s (AAPL) iPad 2—isn’t yet clear.

But this much is certain: Whatever happens, Vizio has already done wonders by redrawing a variety of management concepts on a blank slate.

Wartzman
Rick Wartzman is the executive director of the Drucker Institute at Claremont Graduate University.

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