Virtual Organisations. Problem setting and research agenda
(Le organizzazioni virtuali. Un primo approccio per l’attività di ricerca)
di Alistair Campbell e Patrizio Di Nicola
There is now strong evidence that we are in the midst of an information revolution that will parallel the agricultural and industrial revolutions that preceded it. The reasons behind this are many, but include rapid technological advances coupled with profound political, social and economic change. Throughout the world, production systems, methods of organising work and consumption patterns are undergoing major change. History illustrates that there is often a time gap between the introduction of new technologies and their effective use. Information Technology (IT) has previously been used to automate existing working practices. Business organisations now realise that the real gains from deploying technology are not using it do existing things better, but using it to do things the way they should be done. Technologies such as groupware, EDI, e-mail and communication networks are completely altering the way that business organisations behave and interact with each other.
Possibly the most exciting of these new technologies is the development of global information networks. These offer the potential of virtual organisations which might be the ultimate expression of IT within the business context. The Internet has to date been of little commercial use, primarily being the preserve of academics and IT experts. This will change as business organisations appreciate the value of using global information networks to communicate internally, and externally with suppliers, partners and customers. Global information networks will fundamentally alter the way that business is practised in the future.
The ongoing information revolution and development of global information networks offer an unparalleled opportunity for entrepreneurs to develop businesses for the 21st century. Global communication makes redundant the concept of geographical location and time barriers in business development. The virtual organisation offers the potential of developing new commercial ventures that have a lower entry cost and as a result, less risk for the entrepreneur. The virtual organisation model may attract more people to establish businesses that otherwise might be deterred by a relatively high initial capital investment.
1. Background to the Virtual Organisation
It was the realisation in the early 1990s that global information networks will fundamentally alter the way that business is practised in the future, that prompted many commentators to discuss the concept of the virtual organisation. According to its proponents, the virtual organisation does not exist in the physical sense, in that there is no production line or head office that can be easily identified. The virtual organisation exists on an electronic communication network, and represents a partnership of different businesses and individuals to provide a specific product or service. At is broadest level, the virtual organisation could be viewed as a nebulous form of business organisation that only exists to serve a particular purpose. Whenever that need disappears, the virtual organisation will disband and reform for the next project.
There have been a variety of terms used to describe the ‘virtual organisation’; the Virtual Corporation (Davidow and Malone, 1992), the Network Organisation (Miles and Snow, 1986), the Modular Corporation (Tully, 1993) and the Virtual Organisation (Mowshowitz, 1994). These titles were more generic descriptions of commercial activity, rather than specific definitions of a new organisational model. In February 1993, Business Week magazine contained a cover story feature titled "The Virtual Corporation" (Byrne, 1993) which defined the virtual organisation as,
"A temporary network of companies that come together quickly to exploit fast changing opportunities.....companies share costs, skills and access to global markets with each partner contributing what it’s best at..."
The article proposed that the virtual organisation contains a number of factors that distinguished it from other organisational models.
Each partner bring its core competence so that each function or process is world class, something that no single company could achieve
Partnerships will be informal, less permanent and more opportunistic. Companies will band together for specific market opportunities and then disband once the need evaporates
Information networks will help companies and entrepreneurs to link up and work together
Partners will become more reliant on each other. Success will depend on mutual co-operation
It will be difficult to tell where one organisation ends and another begins
On examining the elements of the virtual organisation, it becomes clear that the model describes the existing activities of many successful business organisations. Many world-class companies already focus on core value adding processes, working with external commercial partners to jointly bring forward a service to the marketplace. These companies believe that a more flexible organisation built around a series of alliances and business relationships, is the most effective way to respond quickly and creatively to constantly changing market conditions. The conventional, vertically integrated corporation may be too slow, or have too much retained infrastructure to allow it to compete with companies who can quickly put together a customised response to the market.
The extent to which business organisations are already practising varying degrees of virtual business activity, can be illustrated through the models of network organisations proposed by Miles and Snow (Miles and Snow, 1986; Snow et al, 1992). Network structures illustrate how conventional organisational structures can evolve to provide organisations with the necessary flexibility and utilisation of resources to remain competitive in the new environment. The Internal Network allows an organisation to be entrepreneurial and responsive to market demands, without engaging in external relationships. The Internal structure comprises a number of independent business units, the managers of which are either encouraged or expected to operate independently of the parent organisation. The Internal structure retains the apparent advantages of vertical integration in certain situations, but in others can use the specific resources to tailor responses to customer demands. The Stable Network works with external partners to provide flexibility in the market place. In the Stable structure, a number of business units owned by external firms are dedicated to a host organisation. The Stable structure allows the host organisation to concentrate on delivering its core activities, and provides it with confidence in the supply, distribution and quality of services and goods within the total enterprise. The Dynamic Network exists in faster paced or discontinuous competitive environments, where companies concentrate on core competencies, and introduce external partners extensively throughout the organisation’s operations. In the Dynamic structure, relationships are more opportunistic and based on immediate opportunities, rather than on longer term trust. The Dynamic structure provides both flexibility and specialisation, as each partners’ expertise allows the company to direct its resources effectively and achieve maximum market responsiveness.
The Internal, Network and Dynamic forms of the virtual organisation are in effect transformations of conventional business structures, aiming to make these organisations more competitive in the current commercial environment. The early vision of the virtual organisation proposed a new form of enterprise, represented by a temporary network of companies, rapidly forming to exploit new opportunities through the mutual exchange of skills and resources. The virtual organisation was not seen as a variation of an existing organisational structure.
A fourth form of virtual organisation could be the enterprise Web (Lorenzi and Baden-Fuller, 1995; Hagel, 1996). Whereas the virtual organisation as such does not represent anything fundamentally new, the argument could be that the enterprise Web, represents a new concept through the degree and intensity of cooperation amongst partners. The Web structure has a different perspective toward partnerships, and customer and supplier relationships. The Internal, Stable and Dynamic forms of virtual organisation arose through conventional organisations structures being reconfigured to handle the complexity of delivering services to individual customers and therefore are more applicable to existing medium-large size existing firms. The enterprise Web is different, as it sees that the most effective way to develop new services is to ensure that the complexities of the Web are realised from the start. Competitive advantage will therefore come to those companies who are not just able to manage, but leverage the relationships. Conventional economic theory dictates that the more successful an organisation becomes, the more difficult it is to continue, as at the very least competitors will be drawn to the apparent success, and ultimately reduce the returns to the original organisation. Increasing returns on the other hand dictates that the more that is sold, the easier it becomes. In essence, all the rewards migrate towards one winner at the expense of everyone else. Enterprise Webs are subject to the benefits of increasing returns as the mutual dependence of the partners strengthens the Web by attracting more partners, suppliers and customers. The Web becomes stronger, with the more partners who are actively involved (Quinn and Hilmer, 1995; Lorenzi and Baden-Fuller, 1995).
The proposition therefore is that in many ways there is nothing fundamentally new about the virtual organisation model, as the concept of focusing on core competencies and introducing other commercial partners to deliver a service to the marketplace is common practice for many existing business organisations. Apart from the examples of virtual organisations that can be cited through the literature, anecdotal evidence suggests that this is likely to be a model of business enterprise that will become more dominant in the future.
Of the four forms of virtual organisation discussed, the Internal and Stable network forms might appear of the least interest in research terms. There are however important because through adopting them, existing firms can achieve better profitability, be more responsive to market changes, and offer superior quality of service. The remaining two forms of virtual organisation, the Dynamic network and Enterprise Web do require special research effort. The Dynamic network is probably the most closely related model to the original concept of the virtual organisation, whilst the Web offers a model of enterprise that is significantly different from existing conventions.
2. Relevance to Europe
Recent articles in both Fortune and Business Week have highlighted the apparent growing gap between US and European companies in their use of advanced Information Technologies. Industry commentators such as Bill Gates and Andy Grove, have warned that Europe competitiveness is being placed at risk if the continent fails to keep up with current technology advances. Although they clearly have a vested interest in selling more technology to European business, there is certainly evidence to support their concerns. Current figures suggest that for investment in IT, US companies outspend their European counterparts by an average of 2:1. Europe apparently also falls behind the US when comparing the number of PCs per employee, the number of Intranets installed and the use of e-mail for business communication. In the US, more than 90% of white-collar workers use a PC, whereas in Europe the figure is 55%. Moreover, since technology adoption is growing more slowly in Europe than in either the US or Asia, the danger is that Europe continues to fall behind.
Despite this bleak picture, there are some bright spots from the European perspective. Deregulation and restructuring of domestic economies has allowed countries such as the UK, the Netherlands, Sweden and Finland to be comparable to the US in terms of technology utilisation. In specific areas such as digital cellular telephony and electronic smart cards, Europe is probably ahead of the US. These however are only a few examples of success. The overriding opinion is that European business must do more now to catch up with some of their global competitors, and continue to innovate in their use of existing and emerging Information Technologies to provide the wealth creating businesses of the next century.
It is in relation to this particular background that the virtual organisation project will exist. The challenge is to demonstrate practical examples of how the theories and technologies of the virtual organisation can directly improve the competitiveness of European business organsiations.
Geographical or temporal barriers to world markets will not restrict businesses that exploit global communication networks as an integral part of their business activities. The virtual organisation model offers European entrepreneurs and business organisations access to a global marketplace, not just in terms of reaching new customers, but also in terms of locating new sources of supply, partners and access to knowledge which they previously could not reach. Coopers & Lybrand's 1996 technology survey explored high tech companies’ attitudes in the three key trading regions of Europe, the Americas and Asia/Pacific to such practical issues as changes in manufacturing mix, organisational structure, business controls, and the economics of using distributors. Data from the survey was obtained world-wide from 420 executives from computers and peripherals to communications, aerospace and software companies. According to the study, European high tech companies are still confidently projecting global expansion, however they may not be changing rapidly and radically enough to maintain an adequate stake in the world market. The survey suggests that European technology companies need to reduce dependency on wholly owned manufacturing and a direct sales force. The survey also argues that competitors in Asia and the Americas generally trade from a lower cost base and are better able to react and change more quickly.
The concern is whether European companies are sufficiently alert to the changes that contribute to success, and the speed at which those changes are taking place in their respective markets. The virtual organisation model has direct relevance to the problems and issues facing European technology companies, and any research programme involving elements of the European technology sector, could have a direct impact on market performance and position.
The promise of global communication networks is that they offer a new model of both enterprise and economic development. Although focused on the individual organisation, the virtual model of focusing on core competencies and drawing in other partners is also relevant to national economic development, particularly in the context of the European Union. In the United States there is a definite model of creating ‘hot spots’ or clusters of activity, which represent the competencies that drive individual cities, regions or states forward. All the US hot spots display the same elements of top class teaching and research centres, the presence of both major corporations and local innovative business enterprises, and a pool of highly qualified workers and managers who are drawn to the geographical area. All these elements are interrelated and feed of each other. The catalyst for these factors, demands a forward looking consensus between business, higher education, local and national governments. Introducing a similar consensus in a European context and adopting a wide range of initiatives not just restricted to a business and technological focus, leads to a greater chance that the outcomes of any initiatives will be to develop ‘hot spots’ in Europe, creating the competencies that the European Union will offer in the information age.
If knowledge management is the core competence of the Information Age, then the economic vitality of regions and areas will only result from attracting and retaining knowledge workers and managing intellectual capital. The conventional business model dictates that people and organisations have to physically locate nearer to markets, sources of distribution and expertise. In contrast, the virtual organisation model offers the realistic potential for effective, long-term rural economic development. By removing the temporal and geographic barriers to business activity, the virtual organisation model allows the prospect of entrepreneurs and business organisations being physically located in areas, where conventional business organisations would previously not locate because of the geographical distance from markets, or the lack of resources and infrastructure. This has major implications for employment and wealth generation in rural or under-developed regions of the European Community. Not only can the virtual organisation model make existing businesses and regions more competitive, it can also encourage investment and opportunities in regions which are presently cut-off from world markets.
Any discussion on the potential of the virtual organisation to affect European economic development is closely related to the potential to generate new business ventures, encouraging more Europeans to act as entrepreneurs and seize opportunities. It is clear that the virtual organisation model has major implications for entrepreneurship and business start-ups. The promise is that the virtual model provides entrepreneurs with a relatively low-cost, low risk business model. Communication networks allow the entrepreneur to effectively market test the concept, and even find customers for the service, before the business is effectively operational. The conventional model for business start-up is that the entrepreneur has a particular competence or skill which prospective clients need. The entrepreneur then has to take this particular skill and add to it, the skills of business management, financial management, human resource management, marketing, etc. The conventional model also dictates that the business will normally have some physical presence, and in many cases physical assets; plant, stock, machinery, etc.
The virtual organisation model removes many of these complications for the entrepreneur. The entrepreneur can concentrate on the competence which the customer values, and use communication networks to access those other resources (marketing, distribution, manufacturing, etc.) which they do not possess or have any competence in. In addition, the virtual model reduces the financial cost of establishing the enterprise, by negating the need for the physical assets (office, workshop, stock, etc) that the conventional business start-up demands.
By reducing the financial cost of the business start-up, the virtual model offers the prospect that in a European context, more people will be persuaded to make the transition to become entrepreneurs, as the costs if not the risks of business failure, are substantially reduced. It is often assumed that Europeans are inherently less entrepreneurial than their American or Asian peers. Although at first sight the evidence may support this proposition, the reality may in fact be more complex. Anecdotal evidence suggests that potential entrepreneurs in the United States have a number of significant advantages over their European counterparts. It is accepted that the potential entrepreneur in the US has greater access to resources and support than Europeans. The perception of the individual entrepreneur is also quite different in the US. In US corporations, senior managers would almost ask line managers "Why haven’t you started a business?" rather than "Why did you start a business?" If an enterprise fails, there is no real stigma attached to the individual, providing he or she can offer a reasonable perspective on why their business failed. Employers are likely to view the entrepreneur has having learned from the experience, with the result that they will be a better manager within the organisation. Even if at a later date, the employee makes another attempt to start a venture, the organisation will see that it has gained a number of years good value from the employee, rather than consider the apparent loss of investment in training, and subsequent costs of recruiting the person in the first place.
The contrast with the European entrepreneur could not be more stark. On top of all the financial, business and family pressures that will result from starting a business, the European entrepreneur will also be faced with the sure knowledge that if everything goes completely wrong and the business closes within months, their career path is also likely to be destroyed. It will be very difficult for the European entrepreneur to return to full employment in a similar role to the one they left. The most likely event that they will be eventually start working again in much less responsible and less well rewarded position. Yet despite all these barriers, there are still European entrepreneurs who are willing to face these risks and establish new ventures. The question is who faces the greatest personal risk - the US or the European entrepreneur? It could be reasonably argued that the European entrepreneur is the greater risk taker, because they have more to lose if the venture fails.
The virtual organisation model can help, but not resolve the problems of relatively low European entrepreneurial activity. Many of the advantages that the US and Asian systems possess, have to do with attitude and perspective rather than simply resources, and are issues that are too deeply ingrained to be changed or improved by short to medium term projects. The virtual organisation model can however offer some positive, immediate impact on entrepreneurial activities. It offers a way of bypassing some of the previous obstacles to new business start-ups, and may offer Europeans more encouragement in making the transformation from paid employee, to entrepreneur and business owner.
The virtual organisation model also offers another intriguing aspect of entrepreneurship which addresses Europe’s weakness in building the truly successful, world class organisations that produce local and national wealth. The concept of interfacing European entrepreneurs with US venture capital money, follows the virtual model by recognising Europe’s competence in areas of technological development, and its weakness in providing the entrepreneurial support system to allow these businesses to develop. Following the virtual business model, the US and primarily Silicon Valley institutions best provide the competence of entrepreneurial support. Although there are major political issues involved in seeking US investment for European business organisations, it should be recognised that although the initial investment and support may come from outside the European Union, the intellectual capital and knowledge that the venture capital is supporting, remains firmly based in Europe.
3. Establishing a Special Interest Group
One of the original concepts was that virtual organisations might evolve over a period of time by being introduced at the outset, to relatively low level applications of communication technologies. As the benefits to the organisation and the potential for developing new services or markets was realised, companies might be more ready to fundamentally alter their current mode of operations to adopt virtual business practices. The research to date suggests that this would be the wrong approach for two reasons. Firstly, pure virtual organisations will not evolve in the traditional meaning of the term, but will come about through deliberate action to transform the operational activities of the enterprise. Secondly, establishing a programme of virtual organisation development in isolation from any supporting activities will probably result in failure. One of the major lessons from the US is that initiatives to support online commerce, are just one element of a broad range of business, educational and social programmes.
The US experience emphasises the importance of not treating the development of virtual organisations as an isolated activity. Whilst the US projects are anxious to exploit the potential that online commerce will bring, the initiatives they are undertaking are part of a much larger picture. The same environmental factors that are resulting in the move towards virtual work practices will also affect other aspects of society. By including programmes to encourage online commerce with other initiatives covering education, healthcare and welfare, the US is ensuring that the development of commercial ventures are not introduced in isolation. These other initiatives will provide the resources that will ultimately feed into the new forms of enterprise.
The virtual organisation is a multi-disciplinary issue, involving many facets of separate but inter-related activity. The virtual organisation model incorporates disciplines such as strategic management, business operations and reengineering, human resource management, marketing, and advanced communication and information technologies. For this reason, any single project would be unable to provide answers to the different problems facing the creation, management and exploitation of virtual organisations.
Funding should be directed towards the creation of a series of clearly focused, but complementary work packages. These work packages will individually address specific issues facing the virtual organisation, but will combine together to provide an overall understanding and focus on creating and supporting virtual organisation development in Europe.
The first step will be the creation of a small core group that will focus on the key issues surrounding the creation of virtual organisations. This group will identify these key research areas and then draw in other business, academic and government resources as necessary to establish a co-ordinated series of work packages. The secondary purpose of the core group will be to act as the coordinator and manager of these activities to ensure open communication between the different teams in charge of the work packages, the transferral and exchange of results, and the creation of a set of deliverables.
4. Research Areas
The following topics display the diversity of areas that come under the heading of ‘Virtual Organisations’. They serve both as a starting point for generating ideas for suitably funded research areas, and also to act as a reminder that an isolated project will not have the complexity or depth of detail to resolve many of the important issues.
Creating virtual organisations
Questions to be addressed:
Assuming that virtual organisations will form networks or relationships with other enterprises, how are networks created? Do they occur organically or is there a centre providing the initial impetus?
How do organisations identify those networks they should be members of, and then how do organisations join?
Does the network have a leader who provides the strategic direction, or will the network be an organic system, where the needs (or strategy) of the overall system dominates over the needs of one particular organisation?
Identification of existing virtual firms, and analysis of business strategies, operations and technologies. Creation of European virtual organisation networks in key market sectors. Establishment of business development programme to aid virtual business activity.
Managing virtual organisations
Questions to be addressed:
How is the network managed?
How are new members recruited and retained?
What are the key information management issues affecting the exchange and sharing of information between network members?
What are the constraints on networks?, e.g. technological, cultural, national, market
Design of manager’s education and training modules.
Existing business organisations
Questions to be addressed:
How can existing European business organisations use information networks to explore new markets, and develop closer relationships with customers and suppliers?
What will be the effect on corporate structures and corporate governments?
Tools and recommendations on creating and/or adopting virtual practices in existing European companies. Research projects in existing firms (e.g., partners of the project).
New business ventures
Questions to be addressed:
Does the virtual organisation offer new opportunities for entrepreneurs?
How can new enterprises be formed on the information networks?
Web site to support the creation of virtual firms in Europe (eg: competencies data bank, financing, partners data bank).
Recommendations to European Commission on new forms of welfare specially suited to virtual organisations.
Questions to be addressed:
What could be the effects of competitive virtual organisations on Europe’s existing businesses?
Socio-Economic mathematics model of development.
Questions to be addressed:
How will companies receive payment for services delivered over the network and how will they protect their property rights?
Recommendations to European Commission on the legal status of virtual organisations.
Questions to be addressed:
How is the European education sector responding to provide tomorrow's entrepreneurs and managers with the necessary skills?
Recommendations to European Commission on possible establishment of a European business school on virtual organisations management.
Patrizio Di Nicola
11 April 1997
Department of Computing and Information Systems
University of Paisley
Paisley PA1 2BE
Tel: +44 141 848 3881
Fax: +44 141 848 3542
Patrizio Di Nicola
Italian Co-ordinator ETD
Via Donna Olimpia 185
Tel: +39 335 8193687
Byrne, J A (1993) The Virtual Corporation Business Week, 8 February, p36-41
Davidow, W H and Malone, M S (1992) The Virtual Corporation: Structuring and Revitalizing the Corporation for the 21st Century HarperBusiness, New York
Hagel, J III (1996) Spider versus Spider The McKinsey Quarterly 1 p5-18
Lorenzi, G and Baden-Fuller, C (1995) Creating a Strategic Center to Manage a Web of Partners California Management Review 37 (3) p146-163
Miles, R E and Snow, C C (1986) Organisations: New Concepts for New Forms California Management Review 28 (3) p62-73
Mowshowitz, A (1994) Virtual Organization: A Vision of Management in the Information Age The Information Society 10, p267-288
Quinn, J B and Hilmer, F G (1995) Strategic Outsourcing The McKinsey Quarterly 1 p48-70
Snow, C C and Miles, R E and Coleman, H J Jnr (1992) Managing 21st Century Network Organizations Organizational Dynamics, Winter p5-20
Tully, S (1993) The Modular Corporation FORTUNE, 8 February, p52-p56