Virtual Enterprise Networks in Europe

Contents

Abstract

1 Introduction

2 Virtual Enterprise defined

3 Drivers of virtuality
3.1 Meeting global challenges
3.2 Changing market demand

4 Obstacles to virtual enterprising
4.1 The market entry point
4.2 The issue of trust
4.3 Accounting for opportunistic behaviour
4.4 Information Infrastructure
4.5 Open legal questions

5 Models of liability
5.1 The problem
5.2 The analytical model’s setup
5.3 Liability of the Virtual Enterprise only
5.4 Liability of the leading company only
5.5 Liability of all network companies

6 Proposal of a hybrid liability model

7 Conclusion

References

Abstract

Virtual enterprises (VEs) are a result of e-business which emerged as a reaction to fast evolving market trends. We discuss organizational as well as legal implications. These are of importance for a proper functioning of this new form of business partnership.

This paper will show the needs for virtual enterprising and obstacles to the future development of which the issue of trust is one of the most important. Especially consumers’ trust could be enhanced by a clear regulation of VE’s liability which has so far not been covered in the literature. We will therefore present several models on possible liability rules and a concept which meets the requirements of providing adequate economic incentives for the participating companies and being easy to handle by consumers as a policy recommendation for future harmonization of Member States’ National Law.

1 Introduction

E-commerce has become an indispensable means of doing business. The most often spoken about opportunities E-business offers are cost reductions as well as gains in accuracy and speed. Therefore it is not astounding that not only the EU in its previous conformation placed emphasis on building a functioning basis for the E-economy but that also the new Member States have to catch up in this respect. As Vittet-Philippe (2002) put it, the “e-business revolution is not merely about technology. […] It is about radical structural changes in the economy – changes within companies and in the relationships between companies.”

One of these new forms of inter-company relationship is the formation of virtual enterprise networks. Virtual enterprises (VEs) are part of the offspring of doing e-business (Lefebvre/Lefebvre 2002). The paradigm of VE emerged as a reaction to fast evolving market trends, shaped by the globalization of the economy and the formation of large economic blocks (Camarinha-Matos et.al. 1999).

In this contribution we deal with organizational as well as legal implications of this form of networking. Interestingly it has already been noted that virtual enterprises despite their ability to provide benefits for the collaborating firms and consumers as well are hampered in Europe due to greater regulatory uncertainties (Vittet-Philippe 2002) whereas, for example, there existed some 250 000 cyberbusinesses in the USA as early as 1997 (Lefebvre/Lefebvre 2002).

Addressing such issues that hinder the full potential of networking agile collaborations is of importance not only for previous EU Member States but for the new Member States in particular since virtual enterprising would offer many chances to get involved in the Common Market faster. Although we cannot cover the full repertoire of open questions going from rules of establishment over sharing of intellectual property rights to dissolution of partnerships (cf. Mikhailov 2002, Mo/Zhou 2003, Ip et.al. 2004), we will at least have a closer look at the question of the partner firms’ liabilities as clear cut liability rules can deliver right incentives for the producing firms and strengthen customers’ trust in this new form of business.

The paper is established as follows. Section 2 gives a definition of a VE. In section 3 and 4 the main driving factors and impediments to virtual enterprising are covered. Then we will comment on different models of VE liability towards the customer on an economic basis providing policy implications as well.

2 Virtual Enterprise defined

The literature is quite unanimous on the definition of VEs. A VE can be described as an opportunistic temporary alliance of separate, independent pre-existing enterprises that come together in a tight, integrated ad hoc network to share skills or core competencies and resources in order to better respond to business opportunities, and whose cooperation is supported by computer networks (Meade et.al. 1997, Camarinha-Matos et.al. 1999, Pitt et.al. 2001). Such a VE is intended to be an organizational form which gives the best of everything by a synergetic combination of core competencies of single partners in order to perform a given project to a maximum degree of customer satisfaction. Independent companies form a production network appearing as a single unit to the customer (Tuma 1998, Kasper-Fuehrer/Ashkanasy 2001).

Of course, project oriented networking between firms is nothing completely new as it is observed in the building or film-making industries, for example. Obviously the possibility to achieve substantial outcomes using accessible resources of independent partners has already been proven successful in the off-line world (Beckett 2003). So there must be a special ingredient which differs a VE from such kinds of networks. We can find the missing defining component in the necessary backing up of a VE with an adequate technical infrastructure to facilitate communication and coordination between members who might never see each other from face to face (Coronado et.al. 2002, Xu et.al. 2002).

The ideal type of VEs only exists for a certain project. For each project there will be another combination of participating partner companies (Beckett 2003). And the most interesting feature is the required lack of hierarchies. In an ideal VE none of the system elements should dominate the other elements in order to maintain a maximum degree of flexibility (Tuma 1998). Insofar as there is a leading company, it is a coordinating partner in a network of peers (Fariselli et.al. 1999), a kind of “primus inter pares”. The VE itself possesses almost no employees or inventories. Only a small headquarter staff is required to deal with the administrative and management details (Presley et.al. 2001).

The core element of virtuality can thus be defined as the ability of an enterprise to offer customers a complete product with the enterprise itself having only a few proprietary competencies while remaining competencies are achieved through cooperation. Joining through networking allows all participating companies to produce more complex but still more customized goods and services (Bremer et.al. 2001).

In a VE manufacturers no longer produce complete products in isolated facilities. They operate as nodes in a network. The general objective for companies to engage in such a network is obviously to increase market share and benefits. Participating in a VE project may help because it maximizes flexibility and adaptability to environmental changes through the development of a pool of competencies and resources (Martinez et.al. 2001).

As a vision for the future a global virtual business environment would consist of three parts according to Molina/Flores (1999). The virtual industry cluster would be an aggregation of companies from diverse industries with well defined and focused competencies. A VE broker would be responsible to search for opportunities in the global environment and enable the creation of VEs. Such a broker would select and configure the partners in a VE for a certain project. The broker’s responsibility is to market the network an retail the competencies of potential virtual factories. This person is an entrepreneur working predominantly an the early phase of a VE (Katzy/Dissel 2001). Last but not least, the VE itself would be a temporary network of independent companies linked by information technology to fulfil a specific market requirement.

3 Drivers of virtuality

3.1 Meeting global challenges

Globalization is a source of both opportunities and threats. Specific advantages of the global market seem to be exploitable only by large organizations. Especially small and medium enterprises (SME) have to find organizational solutions to cope with global business opportunities without suffering from the effects of their limited resources. The VE is a form of cooperation network that can be seen as a suitable alternative to overcome these deficiencies (Bremer et.al. 2001). If SMEs are to be more than just marginal players in the economics of the future, they need to cooperate in particular forms of production networks.

The main strategic benefits that lead SMEs to cooperate in VEs are the sharing of costs, infrastructure, risks and research. Furthermore through the aggregation of complementary competencies the conception time and the flexibility are increased (Bremer et.al. 2001). In multi-enterprise manufacturing individual companies take care of production tasks jointly often working more economically than the companies could by operating individually (Sandholm 2000).

3.2 Changing market demand

Today firms face a dynamic environment, changing at an increasingly rapid pace. Market opportunities can arise and disappear within a short timeframe. The ability of traditional enterprises to adapt to these changes is limited (Katzy/Dissel 2001). As customers demand newer, lower cost and higher quality products in always shorter concept-to-market intervals, manufacturers are forced to shorter cycle times for product development, more customization and higher quality. New forms of organizations are needed. Agile manufacturing tries to cope with this changes (Wu et.al. 1999). The agile enterprise, of which the VE is an example, offers the ability to respond quickly to frequent and unpredictable changes (Meade et.al. 1997).

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