Chapter 9 Virtual Organization

1. Chapter 9Virtual Organization

2. Scope of Chapter 9 • What is a virtual organization [VO]? • Forms of VO • Potential benefits of VO • Drivers for VO • Conditions for viability of VO • Limitations of VO • Deciding between VO and conventional organization • Managing the VO • Virtual team working • Questions arising with VO

3. What is a Virtual Organization? Varying definitions: • A vertically disintegrated (flattened) organization [idea of ‘minimalism’ in organization] • Group of firms bound by market contracts and operating through shared information systems • A virtually integrated organization • An ‘imaginary organization’ whose processes and resources do not coincide with the legal boundaries of an enterprise (Bo Hedberg & Mikael Holmqvist 1997) • A (temporary) organization formed by a network of companies

4. A Useful Definition Warner and Witzel (2003:18) state that virtual organizations ‘use mental and technological constructs to represent certain aspects of organization that, in more conventional organizations, have a physical existence.’

5. Common Features of Virtual Organizations See Box 9.1., Chapter 9

6. Forms of Virtual Organization • There can be different degrees and different forms of virtual organization • Assets and/or management systems may be virtual or conventional • Some activities may therefore be organized on a virtual basis, while others remain organized in a conventional manner. • E.g. Supermarkets: Virtual: links to suppliers via automated reordering systems Conventional: operations within stores

7. Potential Benefits of a Virtual Organization • Efficient co-ordination across boundaries of time and space • Cost reduction by eliminating mediated transactions • More flexible combination of activities • Simplified management

8. Drivers for Virtual Organization • Pressure for fast response to changes as a competitive advantage (efficiency) • Pressure for increased value with lower costs (value adding or creation) • Trend of radical outsourcing strategies adopted by firms • ICT as an enabler esp. in the area of co-ordination

9. Michael Dell “The whole idea behind virtual integration is that it lets you meet customers’ needs faster and more efficiently than any other model…..virtual integration lets you be efficient and responsive to change at the same time.” Michael Dell, Harvard Business Review, March-April 1998

10. Conditions for Viability of Virtual Organization For a viable virtual organization, it is not sufficient to be able to put together a set of competent value-chain performers, able to deliver required output on time to specification. It is also necessary to have : • a brand name accepted as a mark of quality • a brain and nervous system • a center giving direction and making difficult choices according to a consistent vision • a nervous system that provides communication and quality assurance systems A virtual organization is thus likely to be dominated by one brand-name company at its centre

11. Limitations of Virtual Organization • Difficulty of developing systemic innovation involving commitment of large R&D funds • May give away core competencies - e.g. IBM when developing its PC in partnership with Intel and Microsoft in a virtual fashion. It could have developed both the microprocessor and software itself • VO has limited ability to communicate tacit knowledge; problem of learning through arms-length relationships, especially where there is a need for high-tech interdependence

12. Deciding between VO and Conventional Organization Factors to consider: • Economic • Relations with customers • Relations with suppliers • Technological • Kind of work carried out within the firm – e.g. creative vs. routine • Organizational • Degree of personal interaction required • Motivational needs • Control requirements

13. Managing the Virtual Organization • People management • Relationship management • Work management • Knowledge management • Technology management

14. Virtual Team Working • VO releases team working from restrictions of: • Time & space • Numbers of people contributing • Barriers between insiders and outsiders • Conditions for success of virtual teams: • ICT-based mechanisms for coordination and transparency • Fit between form of interaction and nature of communication required • Trust between team members

15. Questions Arising with Virtual Organization (1) • A common information standard is vital. Who designs and maintains it? • still require a central commander (cannot eliminate hierarchy) • this central commander largely determines the success or failure of the overall system • Limited flexibility? • investment/commitment to the partnership • doubtful availability of qualified suppliers on demand • risks of uncertainty and less control

16. Questions Arising with Virtual Organization (2) • Situations where control and coordination is too important for virtuality? e.g. national security • How far can we extend the VO approach?  to all networks? • The time constraint • how long can we afford to wait for all partners to adapt?

17. Case studies: Dell, Nike & Skandia Insurance

18. Dell Computer See final section of Chapter 9: ‘An exemplar of virtual organization: Dell Computer Corporation.’

19. Nike: Flexibility and Control • Network of production in place of vertical integration • Started as Blue Ribbon Sports as distributor for the Japanese sports shoe Tiger • Massive upheavals in athletic footwear market began in late 60s • An opportunity to enter the market to reap profits

20. Competitive Market • Short product cycle for fashion instead of sports • Pace of new products entering and leaving market was unprecedented • The need to highly differentiate products from those of competitors • The need to respond quickly to rivals’ innovations

21. Responsive Strategy • Nike responded by large scale disintegration of production functions. • Three production networks contingent upon specific styles and general styles • Developed partners (consortium), volume producers and developing sources

22. Multiple Networking • Nike used mix of long-term and short-term production partnership to handle market volatility and technological progress • Nike promoted stability and trust in its relationship with its long-term partners • expatriate program for R&D development and quality control • joint product development activities to connote shared responsibility

23. Multiple Networks (cont‘d) • Control over network of subcontractors: • Investment in machinery • Assists its sources to develop to the next level of production capability

24. Nike’s Competitive Advantages • Nike owned brand name, conception of design and role of coordinator • Networks of capacity subcontracting and cyclical subcontracting meet the demands in fluctuating market • Promotion of developing sources as a control mechanism • Disassociate substandard performers

25. Skandia: A Federation • A global savings organization • Partners are insurance companies, fund managers and financial advisors • Links savings from global markets to fund managers • 91,000 partners in 24 countries • 1,300,000 customers with 2,700 employees

26. Different Core Competencies • Insurance companies own customers; • Fund managers’ expertise in investment of savings • Skandia: • Experience and expertise in provision of focal processes • Provision and development of infrastructure • Administrative backbone

27. IT as an Enabler of VO in Skandia • IT-infrastructure as common platform of coordination between partners • GAN (Global Area Network) in addition to local networks and intranets to interconnect and coordinate • ASSESS system to explain different savings programs and tax consequences

28. IT as an Enabler (cont‘d) • Both GAN and ASSESS are tools for Skandia to manage & integrate its partners • Skandia’s Case illustrates the conditions for forming a “federation” • the pooling of financial resources and competencies, the sharing of infrastructure, the building of relationships and identity