CS2250 Tutorial 1

CS2250 Tutorial 1

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CS2250 Tutorial 1 1. Differentiate between direct business model and virtual integration. Is IT necessary for direct business model? Is IT necessary for virtual integration? Justify your answers. The virtual integration model uses information systems to form a business with partners (suppliers and customers who are separate companies) that are treated as part of the company itself. The model for virtual integration would be Dell computers as its founder, Michael Dell, had visualized as well realized this concept into a successful business. However to distinguish between Dell and the model itself, the following is an example for virtual integration: One example of virtual integration is The Northwest Physician Alliance, comprised of Blue Cross/Blue Shield of Oregon, Legacy Health Systems and three large physician practices that have grouped together to act as a single integrated delivery system, yet remaining self-owned organizations. They have created a governing board that will steer the direction of the joint venture and have begun creating the information systems infrastructure that will allow rapid access to patient care records and managed care data. The risks and rewards of this venture are divided among the member organizations. (Source: “Vertical versus virtual integration” By David M. Zimba Published January 1998 Features of this model are: • Customer focus in that technical help available to Dell are also available ...

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CS2250 Tutorial 1
1. Differentiate between direct business model and virtual integration. Is IT
necessary for direct business model? Is IT necessary for virtual integration?
Justify your answers.
The virtual integration model uses information systems to form a business with
partners (suppliers and customers who are separate companies) that are treated as part
of the company itself. The model for virtual integration would be Dell computers as
its founder, Michael Dell, had visualized as well realized this concept into a
successful business. However to distinguish between Dell and the model itself, the
following is an example for virtual integration:
One example of virtual integration is The Northwest Physician Alliance, comprised of Blue Cross/Blue
Shield of Oregon, Legacy Health Systems and three large physician practices that have grouped together to
act as a single integrated delivery system, yet remaining self-owned organizations. They have created a
governing board that will steer the direction of the joint venture and have begun creating the information
systems infrastructure that will allow rapid access to patient care records and managed care data. The risks
and rewards of this venture are divided among the member organizations.
(Source: “
Vertical versus virtual integration” By David M. Zimba Published January 1998
Features of this model are:
Customer focus in that technical help available to Dell are also available to
them, thus maintenance is easy
Supplier partnerships
Mass customization
Just in time manufacturing
Combination of IS to coordinate the above-mentioned efforts efficiently
Tightly coordinated supply chain that have traditionally come through vertical
integration
Focus and specialization of virtual corporations (organizations that uses
networks, people, ideas and resources to create products and services without
being limited by traditional organizational boundaries or physical location)
Forecasting by guiding large accounts through the company
Accounting Information Systems are tightly coordinated e.g. accounts
receivable, cash flow, P & L (Kevin Rollins, vice chairman of Dell Computer
Corporation)
(Source: “The Power of Virtual Integration: An Interview with Michael Dell.” Harvard
Business Review, March-April 1998, pp. 74,79,81)
Less workers because of sub contracted human resource which is shared
between firms
Coordination between suppliers and customers so that demand is almost
equivalent to supply; no excess is produced, in which case as computer
technology is obsolete quickly, leads to huge losses for the supplier
Installation and maintenance for the customers are covered by this virtual
corporation
Disadvantages for this model:
The time taken to for an order to arrive when an order is placed is
substantially longer than the direct business model.
Direct business model:
Features of this model -
Selling directly to consumers
Build to order system removes the need of inventory, thus reducing the prices
In Dell’s case, customization of computers for customers needs can be done
easily
No need to reimburse retailers due to price protection
(Source: “Middleman as Manufacturer: Is this the Factory of the Future?” The Sunday
Times, August 9, 1998)
Elimination of the middleman by use of ecommerce
(Source: “Dell Shakes Up Computer Industry” by David E. Kalish AP Business Writer)
Although Dell has implemented both models along side one another, they can coexist
without each other; for example, virtual integration can occur even when selling through
retail stores set up by Dell because the services provided in virtual integration does not
involve the selling process itself. On the other hand, there can be a direct sales model
without the virtual integration where a traditional vertical integrated company like
Compaq can use this model to sell their computers through the Internet, without
providing the supply of information of from the customers to the suppliers.
Legend
Information lines as part of virtual integration
Movement of products
Dell
Customers
Retail
stores
Direct business model
Suppliers
Fig 1. Model showing virtual integration and the direct business models
Thus the differences are:
Virtual integration is a larger business model which encompasses several
activities at once:
o
The control of the supply and demand by utilizing the just in time
manufacturing concept
o
The service provided to both customers and suppliers, such that
information can flow between the two parties, via Dell, quickly and
efficiently so that demand can meet supply and vice versa.
Whereas the direct business model only involves the bypassing of retail stores
to sell to customers directly
o
Virtual integration involves the suppliers and the customers and the customers
can consist of large companies, such as UPS, as well as consumers whereas
direct sales model only applies to consumers only.
IT is not necessary for the direct business model as customers can place their orders to
the manufacturer by telephone instead of the Internet and the coordination of the orders
can be done by a manual IS system especially the quantity involved is low. It will be
greatly facilitated by IT for inventory control as well as to be able to use the vertical
integration business model at the same time.
IT is essential for virtual integration as it involves fast and efficient of information to and
from the suppliers to and from the customers as well as the internal flow of information
needed to control the speed.
2)
Vertical integration occurs when a firm participates in more than 1 successive stage of the
production or distribution of a product or service. Vertical integration occurs in two
directions: a) backward integration where a firm takes control of its inputs or b) forward
integration where it takes control of its customers like Coca Cola over local bottling
companies. There are also two kinds of integrations that occurs, full integration and
tapered integration. Full integration occurs between 2 stages of production, A and B,
when production is sold internally whereas tapered integration occurs when one stage of
production is not entirely self-sufficient i.e. some of the supplies have to supplemented
from external sources.
The effect on the needs on Dell would be more plants and equipment to manufacture the
different components, more labour to run the plants, and thus more capital is needed to
maintain and buy these plants and equipment and hire the labour. Dell would not be
subject to market forces when it looks for supply for production; however in this industry
currently, there are enough manufacturers and so prices are not high, and it would not be
profitable to maintain such a line.
Assuming that Dell is a fully integrated company at every stage,
Silicon chip
production
Monitor manufacturing
company
Motherboard
production
Assembly plant
Plastics Manufacturing Plant
Monitor glass
production
Casings for peripherals and
etc production plant
Warehouse
Customers
Sources of
distribution
(direct business
model or retail)