OAM 331 Vertical Integration vs. Virtual Integration PDF

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This is a summary of the consulting case discussing vertical vs. virtual integration....

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OAM 331: Vertical Integration vs. Virtual Integration (10/23) 1) What is vertical integration? -

Vertical Integration: merging together of two businesses that are at different stages of production. - Goal is to be the most efficient producer, lowering costs or increasing differentiation..

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Forward Vertical Integration: Integrating a company that is at the downstream of your process (user, distributor, or seller) Backward Vertical Integration: Integrating a company that is at the upstream of your process (supplier, manufacturer)

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2) What are the pro / con of vertical integration? PROS -

Provides firm greater capacity and gives organizations access to inputs Allows firm to have greater control of cost, quality, and delivery times. Traditionally, firms vertically integrated to control access to scarce physical resources. Nowadays, firms are a lot more complicated and often participate in other alliances/joint ventures, so the activities to vertically integrate and reasonings behind vertically integrating greatly differ. Firm won’t have to be reliant on suppliers. Firms have greater access to their customer Firms will have greater incentives to specialize

CONS - Expensive and hard to reverse (reduces flexibility) - Upstream producers usually integrate with downstream (the process after) to secure market for their output. - But, when firms experience a decrease in demand, they cut downstream producers’ prices to maintain level of utilization. - There may be different scales of operations along the vertically integrated supply chain.

3) What was Dell’s approach to supply chain? -

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Combined the traditional vertical integration of the supply chain with the special characteristics of the virtual organization to create “virtual integration.” Virtual Integration - Has relationships with external source providers (not necessarily owning them through vertical integration) that are not binding yet still gets the job done - Allows you to have partners that you don’t necessarily own through vertical integration - Allows you to build a business with partners that are treated as if they’re in your firm - Relies on a lot of trust and relationship building among partners (different parts of the supply chain) - Great information links between firm and customer. - Selling DTC allows firm to keep track of purchases and understand customer operations. - Allows you to be an efficient producer and responsive to change. Dell’s Strategy: bypass dealer channel and sell computers DTC and built-to-order. - Created the direct business model and gave Dell a cost advantage - Create a relationship with the customer, which creates valuable information that allows Dell to leverage relationships with both customers and suppliers. - Customer information + technology = infrastructure to revolutionize the fundamental business model - They developed a strategy that focused on delivering solutions and systems to customers.

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- Went against the traditional “engineering-centric” view of the industry. Dell’s Direct Model (suppliers → manufacturer → customers)

- Virtual Integration blurs the boundaries and roles in the value chain. Dell differentiated themselves in what value they were delivering. - Value: Dell decided that “building and assembling the actual parts” weren’t creating value for the customer… they focused on coordinating activities that deliver added value to customers.

4) How differentiated is the Dell approach today? -

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Going Direct to Consumer is a very common approach today. Dell continues to differentiate themselves due to their scalable business -- segmentation. - Segmentation allows Dell to get closer to the customer - Segmentation allows Dell to have a deeper understanding of their customers’ needs. - Segmentation gives Dell access to critical information that helps forecast demand. Dell has become more than just a PC Vendor … they have become your IT apartment for PC’s. - Dell loads software onto your computer for you… saves you money and shifts your perception of Dell. - Dell becomes intimately involved in planning customer’s PC needs and configuration of their network. Although CRM is managed primarily through technology, human contact “boots on the ground” is still critical. - Dell enables companies to use technology to free people up to solve the more complicated problems. Remain relevant in staying close to their customers. - Developed many forums to ensure the free flow of information. Brand and Strategy: - To be the most efficient and effective way for customers to buy Intel or Microsoft technologies. - To evolve into a technology sector - or technology navigator. - Help the customer sort out the technology relevant to today’s needs from the noise. - Primary Purpose: Take all the technology out there and apply it in a useful way to meet customer’s needs....