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Permanent virtual corporation. Advantages, potential drawbacks and organisational requirements

Diploma Thesis 1998 84 Pages

Business economics - Miscellaneous

Excerpt

TABLE OF CONTENTS

List of Figures.

List of Tables

List of Abbreviations

1. Introduction
1.1. Definition of the problem and aim of the study
1.2. Literature Review
1.3. Methodology

2. The new economics of information.
2.1. A revolution started by information technology
2.2. Information technology is leading businesses into a new era
2.3. Knowledge as the critical factor in the new era
2.4. Examples for the impact of information age on the economic environment
2.4.1. Transformation of markets
2.4.2. New status of the customer
2.4.3. Expansion of the traditional boundaries of an organisation
2.5. Necessity of new approaches to corporate strategy and organisation

3. The virtual corporation - a strategy for information age ?.
3.1. Defining the virtual corporation
3.1.1. Focus on virtual reality
3.1.2. Focus on core competencies
3.1.2.1. Case study: Agile Web Inc. as an example for a virtual corporation
3.2. Advantages of the virtual corporation
3.2.1. Increased flexibility
3.2.2. Quality and timely provision of goods and services
3.2.3. Decreased levels of cost and risk
3.2.4. Improved knowledge management
3.3. Capabilities needed when creating a virtual corporation
3.3.1. Complementary skill base
3.3.2. Appropriate information and communication infrastructure
3.3.3. Leadership
3.3.4. Trust, joint values and a common goal
3.3.5. Empowered and informed workforce
3.4. Potential drawbacks
3.4.1. Legal difficulties
3.4.2. Internal control and strategy formation
3.4.3. Size
3.5. Related concepts - What is not a virtual corporation
3.5.1. Outsourcing
3.5.2. Strategic alliances
3.5.3. Intra-organisational networks
3.6. Putting theory into practice

4. The converging I.C.E. sector - shaping the framework of information age.
4.1. Possible classification of the I.C.E. sector
4.2. Why the I.C.E. is converging
4.2.1. Digital technology
4.2.2. The Internet
4.3. Characteristics of convergence
4.3.1. The Internet as a platform for convergence
4.3.2. Resulting convergence of industries
4.4. Channelling Change
4.4.1. Importance of strategic alliances, acquisitions and product diversification
4.4.2. Convergence and the virtual corporation

5. When is virtual virtuous? - development of a decision making framework.
5.1. The framework explained
5.1.1. The strategy - organisation - environment nexus
5.1.2. Extended fit between virtual partners
5.2. Industry environment
5.2.1. Level of risk and uncertainty
5.2.1.1. Influence of industry standards on market risk
5.2.2. Product characteristics
5.3. Strategy
5.3.1. Strategic objectives
5.3.2. Strategic postures and strategic moves
5.4. Need for corresponding organisational capabilities
5.5. Summary of theoretical findings

6. Validation of the framework through selected case studies..
6.1. Laser Scan Plc
6.2. Advanced Rendering Technology
6.3. APM Ltd
6.4. Discussion of overall findings

7. Conclusion.

Appendices

List of References

SUMMARY

In a virtual organisation, connected by information technology, independent firms join their complementary core competencies to achieve a common goal. If those firms incorporate into a legal entity the virtual organisation, which is a temporary concept, transforms into a permanent virtual corporation. Advantages, potential drawbacks and organisational requirements of the virtual corporation are illustrated in the first part of this study.

However, the virtual corporation is not just another chapter in the book of organisational theory, but a strategic tool for companies to succeed in a particular market. The industry which this study examines is the information, communication and entertainment sector. The sector is converging and industry structures change accordingly. Therefore companies operating in it need to cope with the effects of a rapidly changing market environment. As the virtual corporation promises to make firms more flexible, it may hence provide a viable solution for those firms.

To asses if this assumption is true, this study proposes that a firm must look at its industry environment, its strategic objectives and its organisational capabilities. Only if there is a corresponding fit between those three factors, a firm is suited to become part of a virtual partnership.

A number interviews attempt to validate the above framework. The result: even though a final prove would have to be delivered through a more extensive survey or questionnaires, the outcome of the interviews in principle corresponds to the theoretical findings. These findings were, that the virtual corporation will be a useful tool for a firm, which operates in a market with a moderate level of risk and stable industry standards. The firm adapts to the market and wants to seize business opportunities by placing selective bets to defend or extend its current competitive position. Moreover, the company has the general organisational capabilities needed for a virtual working environment and a specific core competence that adds value to the joint venture.

As these requirements, especially the moderate level of market risk, do not necessarily apply to the majority of firms from the information, communication and entertainment sector, one must conclude that the virtual corporation will not be a panacea. The model, however, can be useful for service providers or for firms, which operate in a relatively protected, well defined niche market of the sector.

ACKNOWLEDGEMENTS

I would like to thank all persons who contributed to the successful completion of this study: Bruce Thompson, senior lecturer at Middlesex University, for his guidance as a tutor; Ramona Liberoff and Christian Long from KPMG Management Consulting for constructive talks and their assistance with putting together the questionnaire for the interviews. I also want to thank my interview partners, for their time and their willingness to discuss the concept of the virtual corporation and its suitability for their companies.

London, 20 April 1998

Christoph Schülner

LIST OF FIGURES

Figure 2.1 I.T. has led businesses into an new era in which the opportunities offered by I.T. exceed traditional expectations

Figure 3.1. Possible classification of virtual organisations

Figure 3.2. In a virtual organisation participating partners pool their core competencies to form a best-of-everything organisation

Figure 3.3. Agile Web Inc. comprises firms with a variety of competencies

Figure 3.4. Reduced project cycle time through simultaneous working practices in a virtual corporation

Figure 4.1. Possible classification of the information, communication and entertainment sector

Figure 4.2. The impact of digital technology on I.C.E. services

Figure 4.3. The Internet as a joint channel of content distribution

Figure 4.4. The virtual corporation as an additional feature in I.C.E. companies’ strategic toolkit

Figure 5.1. The suitability of the V.C. depends on corresponding organisational, strategic and environmental variables

Figure 5.2. Judging the level of market risk before going virtual

Figure 5.3. Matching organisation to innovation

Figure 5.4. Strategic goals which can lead to the formation of a virtual corporation

Figure 5.5. Firms which adapt to the market and place selective bets are the best candidates for the virtual corporation.

LIST OF TABLES

Table 2.1. Development of telecommunication and computing costs 1950 to

Table 3.1. Fitting the virtual corporation into a matrix of strategic alliances

Table 3.2. Fitting the virtual corporation into a classification of organisational networks

Table 6.1. Summary of interview findings

LIST OF ABBREVIATIONS

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1. Introduction

World economy is undergoing fundamental transformation. Rapid technological change, driven by advances in telecommunication and information technology, promotes globalisation and gradually creates a new environment. Former assets like a physically established distribution channel can quickly transform into a liability, as an exploding number of customers and organisations become directly connected through networking technology.[1]

Companies from the information, communication and entertainment (I.C.E.) sector are amongst the main proponents of this development, but are at the same time very much affected. The sector is converging.

1.1. Definition of the problem and aim of the study

Driven by its convergence, firms in the I.C.E. sector have to rethink their strategic position in an industry environment, which was formerly separated through regulation and technical boundaries. As these boundaries are crumbling, firms must develop a strategic approach that allows them to exploit fast arising opportunities within a short period of time. One of the most recent business models, which seems to fulfill such requirements is the virtual corporation (V.C). The V.C. is a model that promises to increase flexibility and effectiveness of business entities. It is, however, also a concept that encompasses many definitions.

Price Waterhouse, for instance, defines it as ‘an organisation which co-ordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organisation’.[2] John Byrne sees it as a flexible partnership of independent companies with different core competencies, linked by information technology. Partners pool their skills in temporary joint ventures, in order to reduce business risk and gain ‘virtual’ size to compete with bigger, more resourceful competitors.[3]

The main purpose of this study is to examine in which circumstances the virtual corporation would present a viable tool for companies in the I.C.E. sector. More specifically it aims to answer the question if the V.C. can help to cope with the effects of convergence and to exploit

new opportunities arising. The findings of this study intend to support both academic theory and companies operating in the sector through a concise definition of what a V.C. should be, and by developing a decision making framework, which can help to evaluate the V.C. as an option .

1.2. Literature review

The V.C. is a very recent concept and there are a wide range of views of what exactly a V.C. should be. The first major work announcing the dawn of the concept was ‘The Virtual Corporation’ by Davidof and Malone (1992), where the authors encompass in their definition a whole variety of management concepts. In their book ‘Going Virtual - Moving your Organisation in the 21st century’, Grenier and Metes (1995) describe the operational steps necessary for a SME, if it wants to market its competencies in a virtual partnership. In ‘Strategische Organisation’ Scholz (1997) provides a somewhat more scientific explanation how V.C.s have developed and proposes a framework to classify the model. In their book ‘The brand net company’ Momberger and Schwarz explain how virtual networks can be used to maximise core competencies or brands of large corporations. The thoughts of Birchall and Lyons (1995) on ‘Creating Tomorrow’s Organisation’ have been helpful to answer the question of what were the main drivers that led to the development of the virtual concept.

There are also a number of relevant articles in newspapers and journals. In ‘The virtual corporation’ Byrne (1993) provides the aforementioned definition. In ‘Trust and the Virtual Organisation’ Handy (1996) examines personnel management in a virtual environment, whereas Chesbrough and Teece (1996) ask ‘When is virtual virtuous?’. Here they examine which kind of products can be developed through a virtual approach.

It was no surprise that there is no model, which gives some overall guidance to firms when a V.C. could be a viable solution. Useful sources to develop a framework to do this were Egan’s (1997) book ‘Creating Organisational Advantage’, Prahald and Hamel’s (1990) article ‘The core competence of the corporation’ and Lorange and Ross’s work ‘Strategic Alliances’. Concerning the characteristics of the I.C.E. sector, its companies and its convergence the major sources of information were articles from a monthly IT review published in the Financial Times. Further details on the content of the stated sources and other useful pieces of information will be stated during the course of this study.

1.3. Methodology

In the process of developing an answer to the stated problem chapter 2 starts with an analysis of the new economic environment created by information technology and the related consequences for markets, customers and companies. The resulting necessity of a new approach towards corporate strategy and organisation is underlined.

Subsequently, chapter 3 introduces the concept of the V.C. as a model which could provide a possible answer to the requirements of the new economic setting described beforehand. Advantages, drawbacks and required organisational capabilities of the V.C. will be discussed and the chapter concludes with an explanation of related concepts.

After outlining a possible classification of the converging I.C.E sector, chapter 4 will continue by describing the main drivers of convergence. It will then explain the consequences for firms and which alternative tools, as opposed to the V.C., they use to adapt their businesses to the new market environment.

Now the V.C. can be evaluated as an alternative remedy. Hence, chapter 5 will aim to develop a hypothetical framework which defines a set of parameters including a firm’s industry environment, its strategy and its organisational capabilities which have to be met, if the V.C. should present a useful tool. Finally, three case studies based on interviews with companies from the Silicon Fen in Cambridge will compare the developed framework to corporate reality. The study concludes with a discussion of the findings and a final outlook (Chapter 6 and 7).

2. The new economics of information

2.1. A revolution started by information technology

To develop a valid strategy any firm must consider relevant internal and external sources of information. They are a basis for the business decisions of a firm, which must match the organisational resources to the requirements of a particular industry environment. To achieve this goal, firms employ information technology (I.T.) to compile, analyse and internally distribute these pieces of information.[4] However, recently, leveraged by the erosion of transaction costs and the development of new and efficient communication tools, I.T. has been taking on a new role:

illustration not visible in this excerpt

* Based on US Department of Commerce Computer Price Deflator (1990=1000)

Abstracted from Govindarajan and Gupta, 1997, p. 4

Table 2.1.: Development of telecommunication and computing costs 1950 to 1990

In 1971 James Moore, cofounder of America’s Intel corporation, predicted that processing capacity of microprocessors would double every 18 months.[5] Table 2 proves that he was right in principle, and shows a rapid decline in the cost of computing power from 1950 to 1990. It also shows that the information processed can now be communicated much cheaper than before: in 1990 a phone call from New York to London cost only 6% of the price from 1950.

Due to this decline in the cost of computing power, internal reporting system have become more elaborate, as the information which ultimately aims to facilitate corporate decision making has become more easily available.

In addition, the flow of information in a firm is leveraged by the development of communication systems like e-mail or Intranets, which link corporate entities at different locations. Mutually accepted software standards like Microsoft Office help to package this data and efficiently exchange it within and beyond a firm’s boundaries.[6] Everybody can communicate in the same data language.

Woodall argues, that those new abilities of I.T. do not just present another step towards making organisational processes more efficient. On the contrary she states that I.T. was the originator of a new revolution. She thinks that it represent the latest step in a chain of Schumpeterian waves[7], which have shaped capitalism since the 19th century, and that therefore I.T. succeeds steam power, railways, electric power and the availability of cheap oil.[8]

2.2. Information technology is leading businesses into a new era

Birchall and Lyons support Woodall’s view and have developed a theory to explain how exactly I.T. will impact on corporate entities.

illustration not visible in this excerpt

Abstracted from Birchall and Lyons, 1997, p. 9

Figure 2.1: I.T. has led businesses into an new era in which the opportunities

offered by I.T. exceed traditional expectations

Figure 2.1. illustrates their thinking. Driven by rapid technological development I.T. has outgrown its traditional function to just process information and efficiently distribute it within a firm. Since the middle of the 80s, where a ‘trigger point’ paved the path to a new era, I.T. is capable to add more value to a business than firms perceived they could initially get from it as a mere auxiliary function of internal control. They comment:

‘...(I.T.) has moved from being a tool of incremental operational improvement to being a means of achieving fundamental competitive advantage.’[9]

I.T. can now create business opportunities on its own. It is leading companies into a new era, titled ‘era of the negative gap’. One may also call it information age.

The predominant role of I.T. is being supported by the emergence of common standards like the Personal Computer (PC) and software packages open to a wide range of users. Moreover, with an increasing I.T. literacy of the individual, a critical mass of understanding has grown up to provide a management context in which I.T. has taken root and is now flourishing.[10]

2.3. Knowledge as the critical factor in the new era

According to classic economical theory, to create value, a firm needs land, labour and capital resources.[11]

I.T. has changed this theorem.[12] As opposed to traditional mass manufacturing, where the use of skills and managerial resources were limited to a firm’s premises, in information age networking technology enables the modern worker to apply and share his knowledge independently from his physical location.[13] An engineer, for instance, can send his sketch of a new part by electronic mail to his colleagues, who will review it and post it on an electronic bulletin board for further suggestions. As the importance of land and capital decrease, it becomes more important for a firm to enhance the quality of its knowledge resources.

In a study conducted by the University of Göttingen companies stated, that their internal knowledge adds 60 to 80% to the value of products manufactured.[14] In 1991 the Swedish insurance company Skandia established a ‘Corporate Director Intellectual Capital’, with a responsibility to exploit the internal sources of knowledge. The European Union reckons in its 1993 White Paper, that competitive advantage is no longer confined to physical resources. Instead knowledge based resources of a firm and their implementation into strategy become the new key components for success.[15]

Knowledge is paramount, but the same also applies to its free flow within an organisation. Employees must be able to access relevant data to develop and expand their individual skills in order to devise the best possible product or service.[16] A knowledgeable and competent workforce is a key asset for every organisation.

Accordingly, Naisbitt notes:

‘We now mass produce information the way we used to mass produce cars - with knowledge having become the new driving force of economy’.[17]

2.4. Examples for the impact of information age on the economic environment

2.4.1. Transformation of markets

The impacts of the advances in communications and information technology on the marketplace are twofold.

Primarily they are a major force in driving rapid globalisation of businesses. Customers in each country can access the same corporate information on the WorldWideWeb which helps to create a global corporate image. Equally important, the low cost and ease of communication enhance the development of international financial markets, which support multinational enterprises to finance their global expansion. Between 1984, the beginning of the era of the negative gap (Figure 2.1.), and 1995, international bank lending increased tenfold.[18]

In addition, events like the deregulation of international markets through the GATT trade agreement or the formation of the Single European Market in 1992 have multiplied the achievements of information age. Ohmae proclaims the dawn of a ‘borderless world’, where multinational corporations exploit the new possibilities created by I.T. and international trade agreements. They service a well-informed customer range and develop, produce and market their products all around the world.[19]

Secondly, I.T. not only changes the scope, but also the characteristics of the marketplace. Nowadays businesses compete both in a physical world and in a world made of information: market place and market space. In this context I.T. plays a crucial role as it enables managers to gather a wide range of information at each step of a firm’s physical value chain. This information can help to deliver additional value. For example at Federal Express, each customer can access the firm’s home page to locate a package in transit or to identify the name of the person who signed for it. Thus, information that was initially gathered for shipment control

represents an additional step in customer service. Federal Express has exploited some of the opportunities created by I.T. in the era of the negative gap.[20]

Another important change, which was initiated by information age, is the reduced importance of physical distribution channels: Leveraged through networking technology smaller companies can more easily compete against bigger competitors. They are able to directly sell to and communicate with their customers through their home page on the Internet.

Amazon.Com[21], for example, offers the world’s broadest selection of books through the Internet with a minimised effort to maintain physical premises or storage facilities.

2.4.2. New status of the customer

Advances in information and communication technology benefit both private and corporate customers. The Internet and other sources electronic information make information on products and service easily available. Hence, consumers can become more selective in their choice of supplier as they are able to scan electronic markets for superior quality at the lowest price.

As consumers are better informed, they are quickly aware of product innovations introduced. They will ask for the latest technology and suppliers must adapt quickly to keep up with competition and to retain their existing customer base. Influence from the demand side may even become the major driver for product specifications: in virtual communities[22] consumers discuss the products of a firm. In this case companies may even find themselves in a so-called ‘reverse market’, where specifications discussed in the virtual community influence the next generation of products.[23] As a consequence, Rayport and Sviokla acknowledge the importance of a shift from a supply side perspective towards demand side thinking. It is their conclusion that firms must ‘sense and respond to the customers` desires rather than simply make and sell products’.[24]

2.4.3. Expansion of the traditional boundaries of an organisation

As the characteristics of markets change and customers take on a new role, firms have to adapt the way they organise, work and plan if they want to achieve long-term success. In a networked world it is not enough to perceive a company as an isolated entity, but one must alternatively consider all relevant stakeholders electronically connected to a corporation .

Moore, for example, thinks that companies have to consider themselves as parts of a business ‘ecosystem’, which spawns across a variety of industries. In this 'eco-system' firms have to attract resources and partners to create co-operative networks, in order to promote their business objectives.[25]

Birchall and Lyons continue to argue that in information age boundaries of the traditional organisation crumble, as companies are reorganising their distribution channels to get closer to the customer. It is also because they outsource whole functions of their organisation. Today, modern employees, just equipped with a laptop and a modem, can work for a firm independent from their physical location. As a consequence, they say, it is necessary to define a new set of boundaries to describe the ways in which organisations work. These boundaries must acknowledge how modern markets operate. They have to consider a changing legislative context and must help to implement the new logic of future work.[26]

2.5. Necessity of new approaches for corporate strategy and organisation

As markets move at tremendous speed, especially smaller companies have to constantly refine their core competencies to distinguish their position in the market. However, managers complain that established tools of strategic planning like Porter’s five forces or portfolio planning become too slow and static.[27] Hierarchical structures, which separate organisations into divisions or functions, do also not make it easier to overcome these obstacles.[28] This is because in hierarchies, information, decision making power and funds are channelled to the top and not to the bottom of an organisation. Thus decision makers with operational responsibility have not the means to quickly adapt to changes in the marketplace.[29]

Jack Welch, CEO of General Electric, states that traditional hierarchical structures were ‘...right for the 1970s, a growing handicap in the 80s, and ... a ticket to the boneyard in the 90s’.[30]

To help companies in finding a response a variety of managerial techniques have emerged. Total Quality Management, for instance, aims at improving quality across organisational units to maximise added value for the customer. Business re-engineering tries to integrate functionally separated tasks into horizontally unified work processes.

The V.C. emerged in the early 90s as a business model to help firms to cope with the aforementioned difficulties. Some hail it as a miracle cure, which makes it possible to ‘harness the power of market forces to develop, manufacture, market, distribute, and support offerings that fully integrated companies can’t duplicate’.[31] Others disagree. Intel’s Andrew Grove states: ‘I think it’s a business buzz. It’s appetising, but you get nothing out of it.’[32]

Before the V.C. is considered as a concept for companies in the I.C.E. sector, Chapter 3 will attempt to establish a valid definition, which will be useful as a basis for further recommendations.

3. The virtual corporation - a strategy for information age ?

The V.C. is certainly not a standard element of organisational science.[33] The concept was explicitly mentioned only in 1992 by Davidow and Malone, who heralded it as the logical conclusion of the aforementioned achievements of information age.[34] Birchall and Lyons call it ‘the ultimate networked corporation’ and think of it as a solution that - as opposed to traditional organisational structures like the functional, divisional, or matrix organisation - will enable firms to respond to challenges of information age.[35] Keith Burgess from Andersen Consulting, refers to the virtual corporation as ‘a bridge between strategy and technology’.[36]

3.1. Defining the virtual corporation

The word virtual derives from Latin ‘virtus’, which expresses the capability of somebody to perform a specific task. Correspondingly Birchall and Lyons note, that if something is virtual ‘...it is said to have the effect but not the form’. If one combines this term with the typical aims of a profit oriented organisation a virtual organisation would suggest, that objectives or ‘effects’ of a business like profitability, long term growth and sustained competitive advantage are accomplished through a specific type of organisation which does not correspond to usual models. But what are the attributes, a virtual organisation (V.O.) has as opposed to a normal one?

Scholz[37] identifies four attributes of a virtual object. Firstly it must have the same constituting characteristics as the real object (the ‘effect’), secondly the physical attributes are missing, thirdly there are some auxiliary techniques which help to realise a virtual solution and fourthly there must be additional benefits generated through the virtual character of the object.

Based on this definition he identifies two basic options a company can focus on, to mirror the features or effects of its ordinary business (Figure 3.1.).

illustration not visible in this excerpt

* The analysis of a viability of the V.C. for firms in the I.C.E. sector will focus on Option 2

Source: Own graphical presentation

Figure 3.1.: Possible classification of virtual organisations

In the first option (focus on virtual reality) the characteristics imitated through the V.O. are functions from the organisational value chain, which are executed on a virtual plane. For example, if a firm sells its products over the Internet, it imitates its sales function and achieves the same effect as if it sold its goods over a physical distribution network.

The second option (focus on core competencies) for a firm is to create a whole new type of organisation, to achieve its long term goals and to ensure corporate survival. Firms with different core competencies are being linked through I.T. to achieve a common goal. They appear as a single, ‘virtual’ entity in the market place. Both options rely on information technology for proper implementation and shall now be described in greater detail.

3.1.1. Focus on virtual reality

Focus on virtual reality means that a company aims to recreate certain aspects of its operations, or even its entire organisation, in a virtual reality rebuilt in the computer.[38] Electronic commerce puts this theory into practice. For example, if a virtual department store offers its products over its web page on the Internet, a customer gets a visual expression of the product on sale. He may even experience a reproduction of the real life premises of the warehouse. This makes him feel as if he were physically present, but he is not - hence virtual reality. Thus a firm can achieve exactly the same ‘effect’ as if it used physical sales outlets and benefits from a reduced level of fixed costs for maintenance and storage.

Amazon.com, for instance, is a V.O., as it recreates all aspects of a physical bookstore on the Internet. Founded just in July 1995, with 2.5 million titles on sale and a customer base in over 160 countries it is 14 times bigger than the biggest physical chain super store. It is the world’s biggest book shop. The customer can purchase books just by stating his credit card number over the Internet. Amazon.com guarantees the security of the credit card transaction and if accepted, it sends out the merchandise to its customers.[39]

3.1.2. Focus on core competencies

As opposed to reproducing its existing structure in a virtual reality, a firm can also try to attain its goals through creating an entirely new type of organisation that operates in the real world. It achieves ‘virtually’ the same effect as if operating as an independent entity. This interpretation of a virtual organisation is also called the ‘American model’, as it was first identified and put into practice in the United States. One of the first articles to mention the model was by John Byrnes. He comments on the virtual organisation:

‘ It is a network of companies which come together quickly to exploit fast-changing opportunities. In a virtual corporation (organisation) , companies can share costs, skills, and access to global markets, with each partner contributing what it is best at. ’[40]

illustration not visible in this excerpt

Abstracted from Achenbach, 1996, p. 28

Figure 3.2.: In a virtual organisation participating partners pool their core competencies to

form a best-of-everything organisation

Figure 3.2. explains the model. In a virtual organisation independent firms employ their complementary core competencies to combine their skills either horizontally or vertically along the value chain. Electronically connected through information and communication technology, they are united to achieve a common goal which no one could reach on its own.

In this way the V.O. works somewhat like a project organisation: people come together to exploit a short lived opportunity to maximise individual revenue and profit. However, especially for SMEs the process of finding the right partner with the right core competence may be a time consuming task and opportunities may slip away. A solution to this problem is the incorporation of a number of partners with a complementary skill base. The virtual organisation transforms into a virtual corporation (V.C), where participants work together permanently and can thus acquire an intimate knowledge of each others’ abilities. From this incorporated pool of skills, firms can choose complementary partners to create a V.O. for a specific project and can quickly exploit arising opportunities. The advantage will be that these firms stay together, even though they disband after the completion of each project.[41] Opportunities may arise either from within the partner firms or from outside customers, who address the V.C. as a whole.

Therefore the V.C. must appear as a single company or brand in the marketplace and customers are not necessarily aware of the network of companies, which stand behind it.[42] Customers will deal with a single function or person, which represents the V.C.. If an order comes in, this central function selects the companies according to their specific skills or general abilities like timeliness, speedy delivery, cost efficiency, reliability or accuracy.[43]

Thereafter, in a temporary virtual organisation, a team made up of employees from the partnering companies pools a variety of abilities to devise a custom tailored solution. Team members are connected by I.T..

When a firm looses its core competence or its skill base is not relevant anymore, it must leave the partnership. Accordingly, new partners may join, but firms will constantly aim to refine their skills to keep themselves part of and enjoy the benefits of this ‘best of everything organisation’. Partnering firms, however, do not fully depend on the V.C.. Each of them simultaneously pursues its own core business, which might be in turn structured in functions, division or matrixes. Considering this, it becomes clear that one must not only regard to the V.C. as a part of organisational theory, but as a strategic tool for a firm to adapt to market demand. The rest of this study will concentrate to evaluate this tool: the V.C. with a focus on core competencies.

3.1.2.1. Case Study: Agile Web Inc. as an example for a virtual corporation

illustration not visible in this excerpt

Source: Own graphical presentation

Figure 3.3.: Agile Web Inc. comprises firms with a variety of competencies

Agile Web Inc.[44] was founded in 1995 as part of a state funded program at Lehig University, Pennsylvania. Initially an academical attempt to validate the V.O. concept, in its incorporated form the V.C. Agile Web comprises 19 SMEs from the electronics and electromechanical manufacturing industry. It is a joint attempt to respond to large manufacturers reducing their numbers of single task suppliers. Through Agile Web Inc. participants are able to pool their skills to create a totally integrated, highly flexible supplier chain and can virtually achieve the same size as bigger competitors (Figure 3.2.). Ted Nickel, CEO of Agile Web Inc., comments:

‘We are able to assemble a team from the web within 24 hours...I would challenge any other group to get together with the customer as quickly as we do. We think we are cutting-edge there.’

Core competencies cover a wide range from product development and design to manufacturing electronic components. When a large manufacturer places an order, companies can quickly team up their skills on a particular business venture and disband upon completion of the project.

They do, however, keep members of the collaborative network. Profits generated in a project flow back to the participating companies, minus a fee to cover the operating expenses of Agile Web.

3.2. Advantages of the virtual corporation

In order to properly evaluate the V.C. as an option, advantages, drawbacks and organisational requirements of the concept must be clarified. In the end these factors have to match the situation and the requirements of companies from the I.C.E. sector.[45]

3.2.1. Increased flexibility

As aforementioned (section 2.5.1. and 2.5.2.), in an increasingly competitive and fast moving market environment it is essential to exploit opportunities as they present themselves. This is primarily a problem for smaller companies, which often cannot take on orders, which would require them to develop additional competencies. This would be an effort too great for their existing financial and human resources, as the use of outside funding and the related risk of default payment could pose a potential threat to corporate survival.

The V.C. helps to overcome this problem. This is particularly true for the manufacturing sector where big financial investments are required, to acquire physical assets for specialised production processes. If an opportunity arises that exceeds the capabilities of the single firm, it can be addressed by a combination of partners, which have the ideal mix of skills and resources to do the job. There is no need for the single company to employ funds for competencies which are not exactly part of its core business. Moreover, most of the funds generated through a virtual project flow back directly to the participants and are used to refine existing skill bases.

Scholz compares the V.C. to a puzzle with pieces, which constantly change their form and can be put together as a custom tailored solution for each client.[46] Hence, the V.C. makes its participants more flexible, as opposed to competing on their own. In addition, flexibility can be increased even further by integrating the customer into the electronic network that connects

the V.C.. The customer can become part of the virtual team and can constantly deliver his input, to adjust the solution, which is being developed.[47]

3.2.2. Quality and timely provision of products and services

As the V.C. is a ‘best-of-everything organisation’[48], every participant is at the leading edge in its area of competence and so is the quality of products and services delivered. Companies with a mediocre or irrelevant skill base would be automatically expelled from the partnership and be replaced by a superior substitute. Moreover, the free flow of information and open communication between team members enhances product quality. As everybody participates in a project from start on, flaws in early stages of product development can be spotted and corrected. In addition, quality benchmarks can be effectively communicated.

illustration not visible in this excerpt

Abstracted from Grenier and Metes, 1995, p. 204

Figure 3.4.: Reduced project cycle time through simultaneous working practices in a

virtual corporation

Scale economies which result from this free flow of information and communication can in turn help to reduce project cycle time (Figure 3.2.). In a V.C. major tasks are broken down into sub-tasks, which are then simultaneously performed by members of the virtual team. Results

are continuously exchanged between team members.[49] This time advantage may then result in a faster time-to-market, if a new product is being developed.

3.2.3. Decreased levels of cost and risk

Another distinct advantage of the V.C. is a decreased level of project related costs for participating companies. As members of the virtual team share the costs for general management functions like project supervision and co-ordination, synergy effects can be achieved. In addition, cost for internal project control can be kept comparatively low, as partners operate in a climate of mutual trust and interdependence.[50]

Synergies, however, are not limited to a single project. Depending on the level of integration, participating firms may in addition choose to join their efforts to execute functions like research and development, apart from their virtual projects. Doing this stakeholders are able to spread irreversible costs amongst themselves and create mutual benefit. Later on, the case of APM Ltd will provide an example for such a ‘virtual’ research program.[51] In addition to those direct cost savings, firms do also avoid the aforementioned indirect cost of investing in non core activities.

Accordingly, a lowered financial burden leads to a decrease in company specific risk, as financial leverage can be kept at a lower level.

However the exact amount of money saved seems difficult to quantify. During one of the presentations of Andersen’s Da Vinci consortium, which aims to promote the virtual corporation, the audience criticised an inability to specify how much money exactly can be saved.[52]

3.2.4. Improved knowledge management

Section 2.3. has shown that in information age knowledge is a critical factor to create organisational value. With its intense reliance on connectivity and the free flow of information between partners, the V.C. very much adheres to this principle.

Highly skilled employees, who participate in virtual teams can simultaneously access project data, combine it with their knowledge and findings and communicate their own results to the rest of the team. Decision making becomes easier, as project leaders are continuously kept informed.[53] If there is a problem, the joint effort of the team will help to solve it quickly.

As the very structure of the V.C. strives to translate and combine specific knowledge into a tangible product or service, the model seems a strategy very much capable to respond to the requirements of the era of the negative gap.

3.3. Capabilities needed when creating a virtual corporation

To put an innovative concept like the V.C. into practice and reap the described benefits, a number of operational prerequisites must be fulfilled.

3.3.1. Complementary set of core competencies

Core competencies can be defined as a distinctive group of skills and technologies that enable an organisation to provide particular benefits to customers and deliver competitive advantage’.[54] Prahald and Hamel identify a core competence, when it is capable to provide access to a variety of markets, creates a real benefit for the customer and is difficult to copy by competitors.[55]

The right combination of core competencies is crucial to the success of the V.C., which, as a ‘best-of-everything organisation’, can only be as good as its parts. The example of Agile Web helps to illustrate the importance of this point:

Before Agile Web was incorporated an independent body interviewed potential members, and evaluated them in terms of their skills and knowledge base, technical capabilities, managerial systems and finally in terms of their organisational values. After the appropriate candidates were selected, the competencies were stored in an electronic database. This database now serves as a tool for the Web President to assemble the teams with those complementary set of skills which exactly correspond to the requirements of the customer.

Interestingly, in this whole process the organisational values of the participants were identified as the most important part adding to a firm’s individual core competence. Their subtle influence had the greatest impact on product quality and overall working practices. In the end, Agile Web understands that its own core competence grows out of the quality of its members’ skills: to jointly perform demanding production tasks which would exceed the abilities of any single supplier.[56]

3.3.2. Appropriate information and communication infrastructure

As illustrated above, the organisational functionality of the V.C. depends very much on the ability of the participating firms to efficiently communicate with each other. This intense communication is achieved through tools like e-mail or video-conferencing, which replace the need for a common physical location and create a sense of co-operation and organisational togetherness[57]. They also promote the free flow of information and help to develop an internal base of knowledge.

Once connections are made, information must flow to all stakeholders to whom that information is relevant. However, in a V.C. stakeholders are often connected to different internal networks. Therefore it is a critical success factor, to achieve interoperability between those networks and software packages employed.[58] Metes and Grenier identify three basic options how this can be achieved: develop a new integrated system, integrate existing systems or engage into a virtual relationship with integrated system providers, which may also offer services like training, maintenance or support.[59]

Nagel reckons that a virtual network architecture (VNA) could prove a solution to the problem. VNA allows virtual teams to interact through multimedia applications which are embedded into existing networking and software solutions.[60] The products of Telemedia Systems Ltd in Cambridge, are a good example for such applications. They help to implement features like video conferencing or the recording and distribution of messages into corporate networks and are compatible to prevailing computing standards.[61]

Again Agile Web can help to give a practical example. After its corporation, the firm has made significant efforts to revamp the information mechanisms between member companies. Preliminary steps included installation of PCs for EDI and e-mail. Subsequent goals focused on the installation of project management software, to allow for real time collaboration of project teams and instant updates on project status for web management and interested customers.[62]

3.3.3. Leadership

As an independent corporate entity, the V.C. can only operate within a limited set of predefined benchmarks. This a necessary feature to avoid red tape, organisational slack and to maintain the flexibility which is needed to quickly assemble a team tailored to customers’ preferences. However, this lack of prescriptive rules requires outstanding leadership skills:

Klein argues that managing a V.C. is not an easy task, as one must ‘find, plan with and ultimately trust parties not under one’s direct control’. He notes that leadership skills are required, which put a greater emphasis on negotiation and co-ordination than on control and direction.[63] Grenier and Metes think that leaders in a V.C. must define a set of boundaries and common definitions for a constantly changing organisational structure, and that this applies for leaders both on a team and on a corporate level.

On a team level, tasks of a leader include to maintain the working relationships in and between virtual teams, to guide workers and physical resources in the value creation process and to define tangible team goals. He must also schedule team members’ work and co-ordinate their virtual tasks with their remaining responsibilities. On a corporate level, leaders of a V.C. must select the proper competencies from the pool of complementary skills, sustain the stability of the

virtual relationship, support the virtual teams, and present the V.C. as a channel for direct contact with the customer.[64]

Kunkle, program manager of the Agility Forum at Agile Web does also underline the specific responsibility of the CEO of each participating company. He must focus on the customer and ‘adapt, modify and restructure his company accordingly.’ Kunkle thinks that it is crucial for those leaders to ensure that their ‘personnel recognise the validity and salience of ‘competition through co-operation’’.[65]

Another example for the importance of leadership in a virtual entity is a network of textile companies from the Prato region in Italy. This network is interconnected by so-called ‘impannatores’, who act as an outward link to the customer. They also generate opportunities on their own, which are then exploited by a combination of core competencies from this network.[66]

3.3.4. Trust, joint values and a common goal

Virtual partners may have complementary core competencies and great leaders, but the corporations which stand behind these skills are different in many aspects. With partners coming and going, and entities being dispersed between different locations or even countries, the people working for the firms who make up the V.C. have a diversity of skills, and have been shaped by different corporate cultures. For example in the EXmas project, a V.C. formed by Microsoft to promote electronic commerce in Europe, even the method how to structure a business meeting differed substantially between participating companies. There was also the perceived danger that participating employees would not know anymore to which company they ultimately belong to, and that this can become an issue especially if bigger firms participate.[67]

To overcome this obstacle, partners must be unified through a common purpose or vision. This means, that there has to be mutual agreement what exactly should be achieved in the V.C., how this can be done and what should happen when problems occur. In this context, a mission statement may serve as an expression for a common culture of thought merged from the inputs of participating firms.

Section 1 of the appendix depicts the Ethics Statement of Agile Web, which represents such an agreement. Although not legally binding, the Ethics Statement symbolises the commitment of all participants to be ‘impeccable honest’, ‘to commit to continuous improvement’ or to respect confidence of other members ‘by not disclosing or utilising trade secrets or other sensitive information’. Such a mission statement is an essential step to inspire participating employees at all levels and to act as a common denominator, whenever a new partners joins or an old one leaves the V.C..

However this statement may be not enough. Scholz argues that it is also essential that the employees involved enter the business relationship with a certain set of mind: they must trust in each others skills, be honest about their achievements and goals, be tolerant if somebody has a different set of personal priorities and they must accept each other as team members pulling the same string.[68]

Considering the mission statement and the personal mindset of the employee as essential features, one realises that trust is the prevailing virtue necessary at all levels of the V.C.. Whereas critical details like the distribution of profits and the allocation of expenses may rely on a initial partnership contract, trust is necessary to maintain the main strength of the V.C.: to provide a quick, versatile solution without the level of control executed in the ordinary firm.

3.3.5. Empowered and informed workforce

In a V.C. employees must stop thinking in functions and hierarchies. As they have to work as parts of interdisciplinary teams, it is rather necessary for them to acquire additional skills, which go beyond their traditional functions.[69] They have to built relationships with people they never met[70] and be able to clearly communicate and apply their personal knowledge.[71]

Team members are lead by managers who realise that power comes from knowledge and not from position.[72] Those managers aim to support this entrepreneurial attitude in their project teams, which is so crucial for identifying new opportunities to be jointly exploited at a later stage.

Grenier and Metes think that an employee in a V.C. must constantly apply his set of knowledge to create organisational value. To achieve this goal he has to understand the common targets and definitions, constantly develop his personal skills and actively use the communications network to combine his knowledge with the skills of the rest of the team. He is eager to learn, acts proactively and copes in a highly pressurised, constantly changing working environment. He is focused and keeps his commitments.[73]

3.4. Potential drawbacks

To deliver a valid assessment of the suitability of the V.C. for the I.C.E. sector, it is important to consider potential obstacles and drawbacks of the model.

3.4.1. Legal difficulties

Scholz highlights a number of legal difficulties for a V.C.. The first problem can occur at the very beginning, if subsidiaries of major corporations that already maintain a dominant position in a specific market, join together. In this case, regulatory bodies are likely to intervene, as the companies that back the partnership would unduly exploit their already dominant positions. Equally important one must solve the question, which legal form of incorporation the V.C. should adopt.

When a V.C. is up and running the question arises, which of the partners are liable for default products or services. If such liability is not clearly stated, customers will be reluctant to establish a business relationship with the V.C.. Another issue that Scholz identifies, is the status of the employment contracts of virtual team members, who will spend only a friction of their time working on their initial, functional tasks.[74]

Another area that must be highlighted is the protection of members’ intellectual property rights. As virtual teams often share a common database, partners might gain access to confidential information, which is not essentially part of the project. Such open communication structures could prove a future liability when a firm leaves the V.C. and uses insider knowledge to gain a competitive advantage against its former partners.

Agile Web has faced many of these problems, but dealt with them in a quite innovative way. In the first place the aforementioned Ethics Statement helped to establish an atmosphere of mutual trust, which reduced the need for a detailed legal framework between the partners. As a complementary tool Agile Web adopted a so-called virtual organisation agreement, which is shown in appendix 2. This virtual organisation agreement does not resolve all possible legal difficulties, but it outlines a basic framework, that solves elementary question like for instance the distribution of project related revenues and profits. It promotes a new attitude of ‘doing business with a handshake’.[75]

[...]


[1] see Woodall, 1996, pp. 1-10

[2] see Manchester, 1997, p. V

[3] see Byrne, 1993, pp. 37-41

[4] see Peppard, 1993, p.13

[5] see Rayport and Sviokla, 1995, p. 85

[6] see De Feo, 1995, p. 3

[7] Joseph Schumpeter postulated that capitalism is moving along in waves. Every 50 years a (technical) revolution reforms old industry structures and thus opens the door to a new era.

[8] see Woodall, 1996, pp. 1-10

[9] Cecil and Hall, 1997, p. 2-26?

[10] Birchall and Lyons, 1997, p. 11

[11] see Rittenbruch, 1993, p. 271

[12] see Woodall, 1996, p.

[13] see Drucker, 1997, p. 22

[14] see Dagmar Beckstein, 1997 - The study bases on a sample of 90 German companies of different size and from different industries

[15] see European Commission, 1994, p. 76

[16] see Charan, 1991, p. 112

[17] see Barnatt, 1997, p. 36

[18] see Knight, 1997, p. 2

[19] see Ohmae, 1989, p. .X-Xi

[20] see Rayport and Sviokla, 1995, p.75

[21] For further information on Amazon.com see Section 3.1.1.

[22] Virtual communities are groups of people with common interests and need who come together on-line

[23] see Hagel and Armstrong, 1997, p. 143

[24] see Rayport and Sviokla, 1995, p. 84

[25] see Moore, 1993, pp. 75-76

[26] see Birchall and Lyons, 1997, p. 36; 50-53

[27] see Collis and Montgomery, 1995, p. 118

[28] see Birchall and Lyons, 1995, p. 70

[29] see Evans and Wurster, 1997, p. 75

[30] see Goshal and Bartlett, 1995, p. 88

[31] see Chesbrough and Teece, 1996, p. 65

[32] see Byrne, 1993, p. 39

[33] see Scholz, 1997, p. 320

[34] see Davidow and Malone, 1992

[35] see Birchall and Lyons, 1995, p. 74

[36] see Bird, 1996, p. 62

[37] see Scholz, 1997, p. 332

[38] Scholz, 1997, p. 353

[39] for further company information see http://www.amazon.com/

[40] see Byrnes, 1993, pp. 36-40

[41] see http;//www.lehig.edu/-inbft/incorp.html

[42] see Klein, 1994, p. 92

[43] see Klein. 1994, p. 93

[44] see Sheridan, 1996, p. 31 and http://www.lehig.edu/-inbft/qajun95.html

[45] For a definition of the requirements see Chapter 4 and for a definition how these requirements of the sector match the V.C. see Chapter 5

[46] see Scholz, 1997, p. 368

[47] see Davidof and Malone, 1992, p. 89

[48] see Byrnes, 1993, p. 37

[49] see Grenier and Metes, 1995, p. 204

[50] see Scholz, 1997, p. 342

[51] for further information on APM Ltd and its ANSA project see Section 6.3.

[52] see Bird, 1996, p. 62

[53] see Duffy, 1994, p. 28

[54] see Lynch, 1997, p. 804

[55] see Prahald and Hamel, 1990, pp. 83-84

[56] see http://www.lehig.edu/-inbft/corecomp.html

[57] see Scholz, 1997, p. 336

[58] see Bird, 1996, p. 62

[59] see Grenier and Metes, 1995, p. 116

[60] see Nagel, 1996, p. 1

[61] see http://www.telemedia.co.uk

[62] see http://www.lehig.edu/-inbft/busprac.html

[63] see Klein, 1994 p. 93

[64] see Grenier and Metes, 1995, p. 80

[65] see http://www.lehig.edu/-inbft/busprac.html

[66] see Voss, 1996, p.12

[67] based on information from personal interview with Ramona Liberoff , KPMG

[68] see Scholz, 1997, p. 335

[69] see Scholz, 1997, p. 346

[70] see Nagel, 1993, p. 64

[71] see Duffy, 1994, p. 28

[72] see Donlon, 1997, pp. 413-420

[73] see Grenier and Metes, 1995, p. 87

[74] see Scholz, 1997, p. 368

[75] see http://www.lehig.edu/­-inbft/busprac.html

Details

Pages
84
Year
1998
ISBN (eBook)
9783656982869
File size
998 KB
Language
English
Catalog Number
v185190
Institution / College
Middlesex University in London
Grade
1.6
Tags
permanent advantages

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Title: Permanent virtual corporation. Advantages, potential drawbacks and organisational requirements