BY
*Kevin R. Coulson, Ph.D.
coulsonk@emporia.edu
S. Prasad Kantamneni, Ph.D.
kantamnp@emporia.edu

*Please address all correspondence to the first author at: Department of Marketing, School of Business, Emporia State University, 1200 Commercial Dr., Emporia, KS 66801

ABSTRACT

While the idea of virtual corporation as a strategy has been given a lot of attention to date, very little work has been done to address the concept from the academic viewpoint. This paper formally addresses the Virtual Corporation with regard to how it promises to meet the needs of consumers who are evermore becoming the “economic man” yet also imperils the corporation in the implementation process. To this end, we review the literature and provide a series of viewpoints on the benefits and difficulties encountered.

INTRODUCTION

Consumers are finally becoming the economists’ concept of the Economic Man as the marketing information flow continually increases. For this reason the markets have recently demanded and are likely to demand for the foreseeable future that products readily adapt to their needs (Tsuchiya & Tsuchiya, 1999) in “real time.” This leads us to consider the recently postulated Virtual Corporation (VC) as an extension to the firm and its economic functions (Kotorov, 1999). Despite the obvious ability of the VC to quickly adapt to the all-seeing, all-knowing consumers’ needs, it is fraught with peril for the implementing firm(s).

The future of business may well be the Virtual Corporation (Davidow & Malone, 1993). This relatively unexplored concept in strategic alliances allows businesses to compete more efficiently in the global market place (Kantamneni and Coulson, 1995). The VC is a partnership of companies that team up quickly to exploit fast changing opportunities. The partnership however is temporary so once the objectives of the VC are achieved, the relationship is changed or dissolved (Byrne, 1993). VCs will have fewer layers of management, workers with greater decision making powers, high technology in the form of electronic informational networks, short-term tenures and no physical location. These VCs are enabled by recent developments in computer networking, which have brought about changes in the work environment comparable to the power mechanization achieved during the industrial revolution (Kotorov, 1999). VCs thrive by developing closer relationships with suppliers, regulators, customers and sometimes, as Engleman (1993) observed, even with competitors.

There is compelling evidence for this postmodern business revolution as seen in the outsourcing that a company uses in, for example, customer services, telemarketing, billing and collection, purchasing, employee training, accounting, publishing, and legal administration (King, 1994). Companies no longer fear to enter into multimillion and occasionally multibillion dollar outsourcing accords which bring disparate organizations together to accomplish things that neither could achieve alone (Caldwell, 1998)

While authors and researchers have offered explanations, justifications and “evidence” (mostly examples) with regard to the VCs, there is not yet an attempt to formally address the concept in terms of the scope of such organizations. What type of organization can benefit from this strategy? What products can such an organization offer? Is such an organization limited to only the U.S. market? Should the virtual organization be well known to the market (i.e., at least one of its partners) to be successful or can newer businesses also benefit? Clearly, any attempt to address these issues will prove to be beneficial to the business community.

The objective of this paper then is to (1) Briefly define and describe the VC, (2) identify the key attributes of VCs for success and (3) evaluate the scope of VCs at country, industry and corporate levels, product and service industry levels, small and large company levels, new and established company levels, and profit, nonprofit and governmental levels.

THEORY OF VC

The theory behind VCs may not necessarily be new. Mintzberg (1979) describes the “adhocracy” with which organizations need to adapt to changing environments. Based more or less on the same premise, only recently has this philosophy, in the form of VC, is being taken seriously. Formally, a VC is a temporary network of companies that come together uickly to exploit fast-changing opportunities.

The partner companies share their skills, costs, and help each other access both local and global markets. Each of the companies involved contribute what it does best whether it is design, manufacturing, engineering, marketing or some other specialty. Each concentrates on a few strategic processes, then relies on online partners for everything else. Once the goals are met, the structure of the VC either dissolves or changes according to new demands. A VC has no written contract between its members so there has to be a high level of trust. The main focus of the VC is whatever is best for the entire network and not to any single partner. The partnership is less formal, for example compared to a Joint Venture arrangement (Kantamneni & Coulson, 1995), and is very opportunistic. As Duffy (1994) correctly observed, “The boundaries between corporations, publics, and stakeholders will become hazy as organizations develop close relationships with suppliers, regulators, customers and even competitors.” Since the organization is “borderless” both internally and externally, VCs can be created with any able company.

The term temporary could range from 2‑3 months to 2‑3 years depending on the mission of the group. Since there is no written contract or formal agreement amongst its members, the use of information networks makes it possible for companies to link up and work together. This also enables the various companies to locate suppliers, manufactures, designers and customers quickly. This can be used for small organizations and large ones. It can be for profit organizations and non‑profit organizations. Some of the critical characteristics of a virtual organization are its flexibility, flatter structure, virtual products, and virtual personnel.

KEY ATTRIBUTES FOR SUCCESS

Several attributes including networking (Davidow & Malone, 1993), excellence (Davidow & Malone, 1993; Byrne, 1993) opportunism (Byrne 1993) or entrepreneurial orientation (Miles & Arnold, 1991), trust (Byrne, 1993), and borderlessness (Davidow & Malone, 1993), characterize the VC. The key attributes however come from the ability: to create and offer “virtual products” and to sustain being a “virtual company.”

Virtual Products

Mass marketing, advertising and public relations were used at the beginning of this century to convert a populace used to custom manufacturing to the benefits of standardization. As these tasks were accomplished by the middle of the century, marketers used the same strategies to locate and prospect new customer populations. As competitors and their offerings proliferate the markets, there will not be any new populations except the young. Several businesses have begun targeting this untapped market. So in the economy of the virtual corporations, marketing will focus instead on the existing customer base. This focus will lead to the creation of the virtual product.

Virtual signifies an entity or experience that continuously and for ever adapts to changes. Virtual products are characterized by high information content and heavy customer participation in their creation. Such products can be created by a company at a central site or they can be created on spot at the retail level. Creating these products proceeds from gathering information from the user to modifying the product functions. As such, virtual products can also be referred to as “mass-customized” products and are capable of being “manufactured” instantaneously.

Virtual Company

The most obvious difference between a VC and its predecessor, the typical organization, is that the former is flatter-the top management sans the middle management. With the numerous layers of middle management removed the top management maintains control through the aid of technology. On the line, the task will become equally arduous. Employees need to be continually trained and capable of decision making. They may need to go to work every day not knowing what their job will be. Pfeffer (1994) correctly observes how competitive advantage can be sustained through employees also. Companies will find it necessary to establish teaching centers in-house to train their employees (Motorola and BMW are already doing this). In fact, finding, recognizing, and attracting a quality staff may well be the most daunting task facing the VC. As VCs are temporary arrangements, the continual recasting of workgroups requires that companies identify, choose and retain potential employees with intellectual flexibility and problem-solving skills. If this task is somehow not achievable, as in the case of small organizations, outsourcing will allow some leverage.

SCOPE OF VIRTUAL CORPORATIONS

Most companies can not build new plants and increase their engineering abilities fast enough to take advantage of transitory market opportunities. By the time they have built and increased their man power, opportunities will have changed to something larger or different. On the other hand, VCs will be able to produce virtual products faster, meet changing demand, and take advantage of the briefest of opportunities. It would be best for an organization to focus on its specialties and temporarily link up with other companies who can bring different specialties to create a new force. If each company implemented their special abilities they would have a “best of everything” in such an organization. The VC sounds good in concept but are there limitations to applying this concept in terms of markets (countries), industries and the nature of companies? The following discussion will show the VC concept to be applicable across the board.

The Japanese “Keiretsu” organizations are very competitive. They are good enough that several companies around the world would like to belong to one. Unfortunately, the legal structure in several countries precludes businesses from forming such an alliance. Similarly, it is important to have an understanding about countries best suited for a VC organization. Considering the U.S., Japan and the European markets, the U.S. market probably has the better conditions for the VC to be successful. Japan by virtue of its organization and discipline has a lead in the virtual economy but its problems with xenophobia and racism undermine the trust factor required for a successful VC. The European markets may also pose problems with their hierarchical and anti-entrepreneurial nature. As long as a market has the requisite fluid social structure, individualism, and inclusiveness, like the U.S., the VC will be a successful strategy.

While the U.S. has the necessary ingredients for success not all industries are capable of utilizing the VC concept. For example, the movie industry uses the VC philosophy by assembling independent talents together for a certain project only to separate after it is finished. People who specialize in sound, lighting, directing and production come together to create a movie and then move on to other projects. It is possible for some of these independents to work together again but it will be under different situations.

At the company level, Lenscrafters, Levis Strauss, and Kodak are good examples of the VC in reality. In one form or another, each of these companies has elements of outsourcing and technology that sets them apart from their competition. The new advances in technology allow companies like Levi Strauss and Kodak to meet customer demands through inventory control and fast manufacturing. Linking various elements of production and ordering through networks from plant to plant has made it possible to cut production times, delivery times and levels of management in half (Davidow, 1992).

While the above serve as examples of companies using the VC theory, this does not imply that only large companies would benefit from such an arrangement. Small organizations through the use of Internet systems and computers, seem to benefit too. An example of how effective this can be is a magazine company called Educom Review. They have an art director in Arizona, editors in Florida, Georgia, Michigan, and the District of Columbia, and many free‑lancers all over the U.S. Use of internet systems and personal computers allow them to do business as if they were in the same building (Verity, 1994).

Obviously this can apply to non‑profit organizations such as United Way and Big Brothers/Big Sisters, which team up with local profit and non-profit organizations to raise funds for a specific cause. Different musicians have pooled together for a concert to raise funds for different charitable causes. Local and state governments (disaster relief) and nations (aid to the third world, embargoes and sanctions) can also band together for specific but temporary causes. This goes to show that almost any company or organization, no matter what the size, can utilize the VC concept.

LIMITATIONS

While, as a strategy VC arrangements provide many benefits to companies, they are not without limits and questions. VCs provide us with an intangible environment. Questions about where tax revenue is being generated and who has the import duties when doing business with partners overseas are being asked. (King, 1994). Other issues that will need to be addressed are the loss of unilateral control and personnel changes that independent companies will experience. Organizations exist to serve customer needs through the completion of their mission. The changes necessary to enter into VCs will require concomitant changes in corporate mission statements to enable appropriate strategy development (Coates, 2001). Each company has to look over their personnel and choose the people that are best candidates for a VC. Many companies that have done otherwise for years will have problems implementing the new concepts. Without detailed and dedicated managerial changes and endorsement, these VCs will have extreme difficulty in coordinating managerial tasks across firm bounderies (Christensen, 2000). These may even extend to within firm difficulties when native tasks overlap VC duties.

A greater concern for companies is with regard to protecting secrets and proprietary information. Companies that were once enemies are the companies which are now coming together to jointly take advantage of certain market opportunities (Engleman, 1993). An efficient VC requires trust and mutual sharing of information including strategic information.

Several authors have mentioned the opportunistic nature of the concept. Hitting a narrow window of opportunity is superb but VCs are ripe for opportunistic behavior (self interest seeking with guile) for several reasons (Williamson, 1981). First, there is no leader to monitor the organization. Second, there is no way to check the validity of the inter-organizational pricing structure which makes it ripe for gouging. Last, since members only contribute their “best,” how are other members going to gauge who is truly putting out the best and who is slacking off? In other words, when GM asks someone to make bumpers or glass or door panels for them, GM has the capacity to verify the quality of the product since they have experience with it (and pricing data too) but if a firm’s forte is in shipping, how do they judge someone’s software production ability? This may lead to problems of flexibility as well. How flexible can a VC be, if everyone does their own specialty? Part of the advantage of having everything under one roof (Williamson, 1981) is that you can force change rapidly if necessary because you have the power and the resources locally.

Jones and Bowie (1998) offer one hypothesis for addressing the trust problematic: “if virtual corporations fluorish, it is because their (corporate) components have made an ethical commitment to trust and thus have a trusting corporate character.”

Some form of information security has to be developed. Every company has to play fair and the opportunities have to benefit everyone. This is why choosing the right partners is important and difficult (Byrne, 1993). Brown (1993) notes that American corporations, grounded in a multi-ethnic society with a more trusting and open culture, have a leg up in the playing fair aspects necessary to implement VCs.

As with any new endeavor there are a number of potential difficulties that may be encountered by those considering participation in a VC. One of the most important problems that will crop up is the problem of control. The contract is going to be crucial to VCs. Contracts must be enforceable. Two problems occur with regard to this: 1) VCs may be used for market entry across international boundaries hence international law will apply in contractual matters. 2) Because the electronic medium is the enabling mechanism, proving that the contract exists may be difficult. The second problem can be addressed somewhat by the use of “electronic signatures” i.e. digital signatures that are the product of large prime numbers and some coding techniques a la the PGP (pretty good privacy) coding which is similar to what the international banks use when transferring large funds. Contracts signed in this fashion can be verified.

Other areas of concern stem from the flat organizational structure of the VC. This “flat org” structure assumes no lost motion! It is likely that there will be at least some duplication of effort in a VC. The corporations that employ Just-In-Time reduce this with really tough standards and high quality control. Avoidance of duplication also implies total individual self regulation at each function, i.e. if firm A makes it, they test it and guarantee it to work to standard. This, typically can be enforced by penalties for non-performance. This structure also requires the “best of everything” from the VC partners. This can lead to the problems of sub-optimization wherein everything is overtuned and the end product runs worse in the end, costs too much, comes to market too late, etc. This must be addressed by the firm initiating the VC.

Because the VC will be used for entry into third world countries, precautions must be taken to minimize the effects of communications breakdowns. In less developed nations, unreliable electrical grids and communications networks are a regular occurrence. Back-up generators and satellite communications will be the obvious solution to these problems but the increased expenses (and the lack of capability for some potential partners) may eliminate some potential VCs.

Government regulation will impact VCs in at least two areas, taxation, and in the United States, in the arena of antitrust. VCs present a huge tax problem for the governments. We will see government involvement here, possibly in the form of VAT (value added tax). Additionally, there are only so many possible partners within any particular industry. Government in the United States is likely to attempt regulating those aspects of the VC within its borders that tend to reduce competition because of the anti-trust concerns unless the VC concept is sold as an international way of competing.

There are also real limits on the possible number of VCs in an industry. There are both good and bad aspects to this. The pioneers who are first to market do very well if the concept is executed properly and the partners are chosen with care but, the potential for loss is somewhat magnified if errors occur. This is one explanation for Porter’s observation that “you can count on your fingers the companies that appear willing or capable of pursuing this trend to its virtual extreme (Porter, 2000). Other explanations include the previously noted difficulties with trust, taxation, human resource management tasks, contracts, etc.

CONCLUSION

A very topical example of the concept in action is for knowledge-ware products, somewhat analogous to co-authored academic articles. Academic articles are often developed over the internet in more-or-less real time in response to rapidly nearing deadlines. Given the present economic situation, the time is ripe for the VC (Joachim, 1998). Those who have tried this modus operandi have managed to be more successful by maintaining a greater level of productivity than would otherwise be the case (Gilbert, 2001). The VC concept works very well in one-on-one situations because the mutual trust is a function of personally established relationships. It increases in difficulty as the number of entities involved goes up. The process would be eased with strong individual company leadership, particularly if previously beneficial transactions have occurred. The whole concept would initially appear to be anathema to another current topic “relationship marketing.” The suggested mode of operation of a VC to use them and lose them in a quick ad hoc relationship runs counter to the tenets of relationship marketing. Perhaps the key to successful VCs is to mold the rapid response features with improved interfirm relations. By doing so firms may remove at least some of the problems of opportunism. One suggested way around the coordination problems is to establish a Vice Presidency of external interactions. This, however begs the question of does every contributing firm have one or if not, who gets to play the leader.

VCs can be very effective in addressing rapid changes in consumers’ needs. The VC should be viewed as a customer-driven company of the future that has the capability of producing value added products. However, firms which fail to properly develop their relationships with their VC partners imperil several publics including their customers and stockholders.

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Documentation, Glossary, Web information systems
SCOPE OF VIRTUAL CORPORATIONS, THEORY OF VC, Virtual Company, virtual corporation, Virtual Products