The virtual organization


In structural terms, the virtual organization is highly centralized with little or no departmentalization. Why own when you can rent? That question captures the essence of the virtual organization (also sometimes called the network or modular organization), typically a small, core organization that out sources major business functions.

The prototype of the virtual structure is today’s movie-making organization. In Hollywood’s golden era, movies were made by huge, vertically integrated corporations. Studios such as MGM, Warner Brothers, and 20th Century Fox owned large movie lots and employed thousands of fulltime specialists—set designers, camera people, film editors, directors, and even actors.

Nowadays, most movies are made by a collection of individuals and such companies who come together and make films project by project. This structural form allows each project to be staffed with the talent most suited to its demands, rather than having to choose just from the people employed by the studio. It minimizes bureaucratic overhead because there is no lasting organization to maintain. And it lessens long-term risks and their costs because there is no long term—a team is assembled for a finite period and then disbanded.

Ancle Hsu and David Ji run a virtual organization. Their firm, California-based Apex Digital, is one of the world’s largest producers of DVD players, yet the company neither owns a factory nor employs an engineer. They contract everything out to firms in China. With minimal investment, Apex has grown from nothing to annual sales of over $500 million in just three years.

Newman’s food products company sells about $190 million in food every year yet employs only 18 people. This is because it out sources almost everything—manufacturing, procurement, shipping, and quality control.

When large organizations use the virtual structure they frequently use it to outsource manufacturing. Companies like Nike, Reebok, LL Bean, and Cisco Systems are just a few of the thousands of companies that have found that they can do hundreds of millions of dollars in business without owning manufacturing facilities. Cisco, for instance, is essentially a research and development company that uses outside suppliers and independent manufacturers to assemble the Internet routers that its engineers design. National Steel Corp. contracts out its mail-room operations; Procter & Gamble out sources its information technology operation to Hewlett Packard; and Exxon Mobil has turned over maintenance of its oil refineries to another firm.

A quest for maximum flexibility, these virtual organizations have created networks of relationships that allow them to contract out manufacturing, distribution, marketing, or any other business function for which management feels that others can do it better or more cheaply

The virtual organization stands in sharp in sharp contrast to the typical bureaucracy that has many vertical levels of management and where control is sought through ownership. In such organizations, research and development are done in-house, production occurs in company-owned plants, and sales and marketing are performed by the company’s own employees. To support all this management has to employ extra staff, including accountants, human resources specialists, and lawyers.

The virtual organization, however, out sources many of these function and concentrates on what it does best. For most US firms, that means focusing on design or marketing. The core of the organization is a small group of executives whose job is to oversee directly any activities that are done in-house and to coordinate relationships with the other organizations that manufacture, distribute, and perform other crucial functions for the virtual organization.

The major advantage to the virtual organization is its flexibility. For instance, it allowed individuals with an innovative idea and little money, such as Ancle Hsu and David Ji, to successfully compete against the likes of Sony, Hitachi, and Sharp Electronics. The primary drawback to this structure is that it reduces management’s control over key parts of its business.