*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.

*Kevin R. Coulson, Ph.D.

coulsonk@emporia.edu

S. Prasad Kantamneni, Ph.D.

kantamnp@emporia.edu

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Document management, Research
collection, customer services, Economic Man, employee training, postmodern business, power mechanization, purchasing, virtual corporation