Virtual Organisations - The Creation of Value Networks

Table of Contents

Introduction

1 The Virtual Organisation

2 The Characteristics of Virtual Organisations

3 Virtual vs. Vertical Organisations

4 Example: Dell Inc

Concluding Comments

References

Virtual Organisations - The Creation of Value Networks

Introduction

This paper examines a modern business model referred to as the virtual organisation. Its emergence had a strong impact on the way companies organise in today’s dynamic consumer markets by changing both internal and external structures of businesses. Key aspects that initiated the advent of the virtual organisation were changes in customer demand and recent advances in information and communication technologies.

In the first section of this paper the virtual organisation is defined and its constituents are explained. It is followed by the description of its main characteristics. In the third part, a comparison between the virtual and the vertical organisation is made outlining major differences and key advantages of both models. Finally, a prominent example of a virtual organisation is given: the Dell Corporation.

1 The Virtual Organisation

Today business organisations operate in an increasingly dynamic and complex environment posing new challenges. Over the past two decades, changes in the structure of demand and supply in markets comprising numerous stakeholders initiated the emergence of the ‘New Economy’. Business models based upon interorganisational interdependencies developed to be flexible and rapidly responding to increased and frequently changing customer demand. (Walters/Buchanan, 2001)

In this context, the model of the virtual or holonic organisation is given much attention and is finding favour among businesses in many different product-markets. McHugh et al. (1995) define the holonic organisation or network as . .a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business opportunity a customer presents. Each company in the network provides a different process capability and is called a holon.”

Four roles within the virtual organisation can be identified. The combination of core capabilities (e.g. production, logistics) of specialists occupying operational roles along the value chain ensures that products are manufactured and delivered in the most efficient way creating maximum value for the end consumer. A support role includes processes such as customer service or facility management. A third role is taken by providers of inputs. Resources required by the operational role members of the network comprise extensive sets of data and information, which is of major importance in virtual organisations, or skilled employees. Finally, an integrator role encompassing the coordination and synchronisation of activities of network members and the development of a ‘vision’ around which the virtual organisation is structured completes the complex network of interorganisational collaboration known as the virtual organisation. (Walters/Rainbird, 2007)

2 The Characteristics of Virtual Organisations

In the absence of a classic or universally accepted definition, the virtual organisation is often described by its key characteristics (Gruber/Noester, 2004). The following characteristics of virtual networks are often emphasised:

- No Borders: The most striking attribute of the virtual organisation concerning its structure is that of the corporate boundaries of its members or rather the non-existence of corporate boundaries. As companies within the value network encompassing suppliers, customers, and even competitors cooperate closely, it is difficult to determine where one company ends and another begins. (Byrne/Brandt, 1992)
- Organisational Interdependencies ^ Relationship Management: As companies along the value chain are dependent on the provision of inputs by their suppliers and their customers are dependent on their outputs, the establishment of close relationships between members of the network is essential. Thus, relationships have to be managed properly, which is not an easy task, considering the great number of linkages in many value networks. Building trust among the members is a main objective of relationship management efforts and vital for every network of companies to function and to reach its common goal.
- Communication / Coordination ^ Information Management: The described structural settings of virtual organisations entail the need of an extensive data and information exchange between the network members. As the different entities of a value network are often operating geographically dispersed, linkages between members of a virtual organisation frequently exist merely electronically. The rise of modern information and communication technologies (ICT), primarily the internet, made the virtual business model first practical. These modern communication platforms enabled a comprehensive exchange of information between network members required to coordinate and integrate activities within the chain in order to operate the organisation effectively.
DeSanctis and Monge (1999) note: “The virtual organization provides a metaphor for considering an organization design that is held together, literally, by communication.” This comment illustrates the importance of effective information processes and channels to enable communication throughout the network.
- Asset Leverage: The decline of investments in fixed tangible assets and the increase of intangible assets such as relationships with partners and customers and thus the acquisition of valuable knowledge are a major contribution to the growth of virtual organisations. Due to partnership arrangements many assets are shared between network members and are therefore often only managed rather than owned by a single entity in the network. Hence, in virtual organisations the ownership of assets is not a critical factor. It is the access to assets via networks and partnerships that is important. (Walters/Rainbird, 2007)
- Specialisation / Outsourcing: Closely related to asset leverage is the trend of outsourcing functions to increase flexibility in providing services (Beech, 1998). In virtual networks, each member focuses on his core competencies and contributes these special capabilities to the common effort. As a result, resources are acquired and products are produced and delivered in the most efficient and effective way to meet or even exceed customer expectations and thereby establish long term competitive advantages in profitable markets.

3 Virtual vs. Vertical Organisations

The virtual network has changed both internal and external structures of organisations. Before its emergence the concept of the vertical organisation was and still is in many industries a favoured form of organisation. The term of the vertical organisation refers to a “hierarchically structured organisation where all management activities are controlled by a centralised management staff. This traditional type of organisation often develops strong bureaucratic control over all organisational activities.” (AllBusiness, 2007)

The definition emphasises the hierarchical structure which in fact is a key characteristic of vertical organisations. As opposed to the virtual network with its frequently loose and often re-configured inter-organisational relationships of equal network members, the hierarchical structure of vertical organisations determines the roles of its members within defined organisational boundaries.

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