CS2250 Tutorial 1

Clement Tan

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• Publié par: Nepher
• Nombre de lectures: 36
• Langue: English

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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)