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Critically analyse the virtual network structure of a business

Paper Type: Free Essay Subject: Information Technology
Wordcount: 3540 words Published: 1st Jan 2015

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The intention of this essay is to discuss and critically analysis the virtual network structure and to find why it is a good structural alternative for some firms. This essay also seeks to look deeply into the effect of virtual network structure on Dell computer’s performance and how Dell computer carry outsourcing to the extreme and create virtual network structure. And furthermore benefits and limitations of virtual network structure for Dell computer are also summarized in this essay. In broad expressions, a virtual network structure is a more contemporary organization design. This structure means that the business subcontracts most of its key functions to some other different businesses, and coordinate their activities from its headquarter to gain competency in the competitive market. According to Wang (2000) various network organizational forms have been materialize from the formalization of relationship between, such as, suppliers, competitors and other vertical or horizontal partners. A virtual network structure facilitates the introduction of intelligent agents that can at the same time implement numerous orientations for network engagement with the market and its customers. And also virtual network structured organizations may be viewed as a focal point or hub surrounded by a network of outside specialists. Furthermore, one of the main objectives of the virtual network organization is to shorten the business process life cycle with the objective of generating and delivering enhanced worth to business clients and their customers in real time. Kapur et al. (2002) explains that the general purpose of virtual network organizations is to take complete benefit of the different core competencies of members within the network, operating as a single organization across partner organizations to deal with ever-changing demand. To answer the fundamental motive of virtual network, if at all possible, network information is processed and distributed in real time throughout the entire network, which set aside network management to make decisions and bring together actions quickly in their drive to bring value and put up customer satisfaction. Beaumont & Sohal (2004) states that in forming networks the most important point of partners are to achieve the flexibility to serve the rapidly changing and competitive marketplace, to share and expand the understanding and skills needed to complete, to accomplish operating best practice and create further value or benefits for their customers. They further added that in particular, virtual network organizations have the infrastructure through which they capture, and interview customer and market data proficiently and competently, providing organization with real-time alternative to move on the customer’s value proposal.

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This paragraph helps to seek, why structural alternative is a good option for some organizations. Chou et al. (2004) says that in general, it is found that in today’s competitive era it is hard to find a appropriate profitable market and keep competitive advantages over other companies without producing low cost goods with outperforming after sales services. That’s why this is the basic reason of creation of virtual network structural organizations and outsourcing its some of the activities to the other companies. Ardichvili et al. (2003) propose that in organize to accomplish high levels of customer fulfillment, maintain customers over time and build market share, an organization must deliver ever-improving value to its customers with low cost. It is also found that need of virtual network organization is emerged because customer demands more specialized and particular products, which automatically leads organizations to a broader product variety and the result of individualization of products to consumer specification is that the complexity across all organizational functions increases. This difficulty can only be handled competently and successfully by advanced information and communication expertise that therefore, both straightforwardly and indirectly, viewed as an enabler and driving force towards the virtual organization. And also coordination, collaboration and production are still facilitated by the companies or network broker and are achieved by means of virtual organizing in the virtual network. For example, according to Martinez & Chernatony (2004) Nike, Inc. is the leading trader of athletic shoes in the world. However it outsource 100% of its shoe production and manufacturers only key technical components of its Nike Air system. To sustain its competitiveness the critical success factor with the Nike is its sports research laboratory (NSRL), which is located on the Nike campus in Portland. The NSRL directly works with the Nike’s design team and has established virtual network structure with major universities throughout Asia, Europe and North America. According to Bass (2004) Nike subcontracts (outsourced) the production process of its footwear to 900 contract factories which is its virtual network structured partners in Korea, Taiwan, China, Indonesia and Thailand, because it offers lowest costs to Nike. However, Nike does employs teams of four expatriates in China, Indonesia and Vietnam that focused on quality of product and quality of working conditions and develop the code of conduct for the sub-contractors. It also acknowledged that maintaining a core group of these contractors (long term partners) was not a low cost strategy, but Nike gained speed of delivery, quality and the ability to manufacture innovative products. He further added that because of its outsourcing operational strategic decision, Nike took ownership of the product only when it left the factory. This meant the Nike could focus on design, marketing and distribution of its products to sustain competitive advantage.

Another important advantage that can be obtained with the virtual network organization is that it tends to generate networks of customers, suppliers and partners that facilitate the creation of information resources so importantly in the new information economy (Jiang et al., 2006). He further added that virtual network organizations are therefore not considered to be stand-alone entities but consist of a virtual network of self-regulating firms that contribute as partners, suppliers and customers in the virtual value chain. It also judged that the success of the companies at virtual organizing is depend on how effectively and efficiently the virtual network performs which can be measured by how its various parts or members work together. It is also pronounced that the structural perspective of the virtual organization relates to the shared relationship that exist between a set of independent organizations that enables them to function as a single organization to reach their common goal. Currie (2000) explains that virtual organization consists of elements such as activities, resources including core competencies, organizations and individuals that are interrelated with control structures, interdependencies and exchange relations. And the concept of the virtual network structure organization supports the idea that various organizations contribute core competencies to the success of the specific organization. Winch et al. (1997) explains that virtual network structure helps to create core competencies, which can be explained as the bundling of specific capabilities, and technologies that can provide as the source for the development and prerequisite of several products. The value of core competencies to develop the competitive advantages of net organizations using virtual network structure is an important consideration for the companies when constructing a value chain. The virtual network structure for that reason is considered to consist of a collection of strategic business entities and competencies. Virtual network successful at allocating resources that integrate core competencies needed in the value creation process that can improve its competitiveness in the global marketplace. The strategic potential of individual companies participating in the virtual network in a sense depends on their unique set of core competencies and must be considered to be an integrated part of all processes of the virtual value chain (Leavy, 2004).

This paragraph seeks to explain how virtual network structure works for Dell Inc. to gain competitive advantage in the computer industry. Zhu (2001) says that the overall goal of Dell Computer’s is to improve their flexibility to meet the fast changing market conditions. The core competency strategy enables and supports the decrease in complexity and increase flexibility in business. Since core competencies by themselves do not create value, Dell need to develop value chains in order to integrate their core competencies. That’s why the implementation of virtual network organizations is important to the Dell who wants to compete in the global marketplace. Because the virtual network of partners is a logical outgrowth of the change in dominant logic in the operations of current markets in the information age. Rebernik & Bradac (2006) explains that many advantages can be attained for the Dell that participates in the e-marketplace by implementing a virtual network structure. They note how virtual network structure of partnership with different business partners contribute to boundary-less, lateral and computer-medicated organizational structures. It is further added that virtual networks are very different from the command and control based hierarchical structures and force company management to establish different lines of action or approach in order to reach its strategic objectives of the virtual network. Fink (2007) says that Dell’s virtual network structure helps to create its build-to-order and mass customization strategy to gain competitive advantage as online seller and distributor. He further added that Dell’s supplier personnel are located on the plant floor calling for materials form the warehouse using information from Dell’s extranet, such physical integration not only reduce Dells’ inventory holding cost but also creates personnel efficiency for its suppliers. By its Internet ordering strategy customer could take them through the configuration process and price as many configurations as they like. It gives the Dell the competitive advantage over its competitors. Hamann et al., (2007) pronounce that locations decisions for the virtual network structured organizations are closely tied to an organization strategy and have significant impact in its competitive advantage. However, Dell organizes manufacturing by region, operating one or more assembly plants to serve its major markets, Dell’s decision about where to locate are driven by the need to minimize cost and quality service by it virtual network structure partners. Gottfredson & Phillips (2005) explains that the need to have production and support capabilities in the major markets, Dell selects specific locations based on the combination of factors including labour cost, transportation and information infrastructure, and market access. Dell’s location in Central Texas, having half of its US work force which is relatively low cost compare to other US locations, Brazil’s location avoid tariff, which is about 30% of the price, Dell’s Xiamen, China manufacturing facility provides with the base of suppliers and other supporting activities. Spring (2007) says that unlike other PC makers, Dell has avoided out sourcing final assembly of its products. But in general, Dell prefers to keep control to the key final assembly and configuration process for the bulk of its products to sustain its competitive advantage. He further added that to create strong virtual network structure Dell co-ordinates a global production network with its suppliers, e.g. Intel for micro processors; Seagate, Quantum and IBM for hard drives; Samsung, Toshiba and Micron for DRAM; Sony, Philips , Nokia, Samsung and Acer for monitors and a variety of Taiwanese original equipment manufacturers for other components and contract manufacturing. These key suppliers helps Dell in build- to- order production, which saves to Dell carry inventory cost and loss value before it can be sold and new products can be introduced without having to clear out old inventory in the channel. It helps to sustain and position the competency because Dell invests more in R&D on software designed to make the installation and configuration of its PCs fast and simple, instead of investing in developing computer parts (like many competitors).

Also Dell’s direct approach appealed to MIS departments in large organizations because they generally needs customized products as compare to individual users. According to Kremer et al., (2000) Dell’s virtual network structure importantly depends upon the virtual partner’s locations. Because it helps to cover the market with low cost supplies of components, including other factors such as proximity to market and government incentives. Dell’s Brazil’s operation unit helps to save tariff of 30% of the price, and its Limerick, Ireland location gives low cost and high quality of labour. And also Dell generally avoids existing clusters, preferring to locate production where labour markets are not so tight. Kaplan (2000) says broadly speaking market potential is the driving force behind Dell’s general location decisions, while costs and capabilities are the driving forces behind the specific location of Dell’s activities. In other words, Dell target market that appear receptive to its business model and to serve those markets, Dell sources from locations that have the production capabilities and cost structure it needs to be competitive in the targeted markets. Dell’s success are solely because its headquarter offices, assembly production and call centers are centralized within each region, whereas sales, service and support are decentralized to individual countries with different virtual network organization which helps to make its business operation successful and sustainable.

The intention of this paragraph is to critically analysis and discusses the key benefits and limitations of virtual network structure for Dell computers. Foogooa (2008) argues that the key benefit of virtual network is that it can be obtained from implementing virtual organizing include risk sharing, increased organizational competencies, access to new markets and the possibility of inter-organizational learning. He further added that virtual network structure helps to reduce current operating costs by 10-50 percent and these saved resources can be reinvested in more competitive processes. And also by having proficiency and/or up-to-date software and hardware Dell may be able to put together, keep up absolute product more cheaply than can be done in-house. It also noted that by purchasing services and product at a fixed cost per transaction, a client can stay away from financial ambiguity and also outsourcing by virtual network structure moreover minimize the possibility of interference to product/services and/or the likelihood of being exposed to lawful action to Dell. Furthermore Dell can keep more concentration on research & development and apply their skill and knowledge to core competencies and outsource activities in which they are not as much of competent and can benefit from their virtual network structure partner’s expertise. Daft (2007, pg. 117) argues that outsourcing by virtual network structure is advantageous for Dell because it helps to minimize operating cost and also helps to cope up with any unexpected changes in the market. He further added that responses to increased demand generally lag demand as new capacity is acquired or new staff are recruited and trained, on the other hand, diminished demand may necessitate dismissing loyal staff in whom training and experience had been invested. He further added that some organizations were started to find that their internal process were far more costly than those of outsourcers while there partners in virtual network structure is more proficient in producing some specific product as per there expertise. Roy (2001) find that virtual network structural organization can provide Dell with greater flexibility, especially in the acquisition of quickly developing new technologies or the numerous components of complex system. It also reduces Dell’s design-cycle times as multiple best-in-class suppliers work at the same time on individual components of a system. Because each supplier can both have additional personnel strength and sophisticated technological knowledge about its particular area and maintain more specialized facilities for quality than Dell could possibly achieve alone. And also virtual network structure strategically spread the Dell’s risk for component and technology developments across a number of suppliers. Further, Dell is not limited to its own innovative capabilities, while it can tap into a stream of new product and process ideas and quality improvement potentials it could not possibly generate itself.

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Virtual network structural organization had some limitations because according to Persona et al. (2004) outsourcing the intellectual or other skills underlying a unique competency may be awful strategy because it creates reliance. In a virtual network structure it is not possible to keep some commercial secrets from a service provider intimately involved in core activities. He further added that Dell might become reliant on the vendor to sustain and/or change the function outsourced, and by outsourcing Dell loses information about the essential costs of the outsourced operation and may be disadvantaged in negotiations. It also argued that outsourcing through virtual network structure creates change problems because if an in-house system is replaced by a virtual organization there is a chance of disruption caused by misunderstanding or failure to transfer data properly. And also virtual network structure may cause entail dismissal or redeployment of employees or changes in the work they do. In some cases, by outsourcing a key component, companies lost their own strategic flexibility to introduce new designs when they wanted, rather than when vendors permitted a change. Walsh et al. (2004) argues that virtual network structure also having expertise limitations because outsourced expertise at many different locations make close cross-functional teamwork more difficult. He further added that contractual prearrangements are typically essential to make sure that critical personnel from the outsource partner are available when needed. But the buying company must be close enough to its partner to assess and name the particular people it wants; other provision may be worthless when it is considered necessary. Zurewich (2008) argues that virtual network structure become real problems for Dell when the supplier’s priorities do not match the Dell’s. For this reason, as an example, Dell both has full-time production expatriates on its suppliers’ premises or at production units and frequently brings the suppliers’ top people to its headquarters to switch over details about potential capabilities and prospects. Furthermore, it is argued that serious difficulties can take place if the buyer does not have adequate market power comparative to the seller.

It is concluded from the above discussion and analysis that virtual network structure is more demanded in the today’s cut throat competitive marketplace for the long run profitability and cost cutting but it also necessary to keep in mind that virtual organizing must be done by keep in mind about all its benefits and limitations. It also found that virtual network structured organizations are short-term or permanent assortment of geographically discrete individuals, groups, organizational units which do or do not belong to the identical organization or entire organization that depend on electronic linking in order to complete the production process. And it also keep in mind for successful virtual network structure that nevertheless, unless the buyer’s core competency is a true block to the marketplace, some suppliers, after building up their expertise with the buyer’s support, will attempt to bypass the buyer directly in the marketplace. As it is discussed in the Case of Dell Computer’s that its critical success factor is its virtual network structure with different suppliers’ but it can also be viewed in the essay how the mass customization strategy used by the Dell Computers, proved to be successful for the operations of the organizations in gaining and maintaining a leader’s position in the market. At last, virtual network structure has to adapt to different ways to working, to negotiation and co-operations with many partners.

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