In the early 1990s, the virtual organization was a relatively new concept and certainly had yet to benefit from the Internet, which didn’t affect the business sector in any significant way until 1885. The term virtual organization was borrowed from the science of virtual reality, which enables a person to become an integral part of a computer-generated, three-dimensional world.
In business, a “virtual enterprise” has much the same purpose. The entrepreneur builds a company that to the rest of the world looks like any other company, but it is a business without walls where the entrepreneur does not incur the risk of acquiring employee, cost equipment, and enormous overhead.
A virtual company makes it possible to operate the business from practically anywhere – a home, car, or vacation cabin. The goal of the virtual enterprise is to deliver to the customer the highest-quality product at the lowest possible cost in a timely manner. To do this requires the participation and management of the entire distribution channel, from producer to customer, through a series of strategic alliances.
Traditionally, this was accomplished by building the business to the point where it could afford to buy out its suppliers and/or distributors, thereby giving the company more control over quality and delivery. This strategy is known as Vertical Integration. For example, Verifone, a leader in point-of-sale (POS) solutions, was one of the first companies to employ the virtual organization in the US. When the company launched its first credit authorization box in 1982, it had five people in different locations, few resources, and huge competitors such as AT&T and GTE. Verifone quickly discovered that the very bigness and centralization of these companies worked in its favour because Verifone was agile and flexible and could make changes quickly. That virtual strategy turned out to be the secret of its success as Verifone garnered 70% of its market.
Outsourcing In a Virtual World
Today, it has become more difficult for a new venture to achieve total in-house control of its value chain. The global marketplace is more complex, time-to-market has decreased, and it is difficult for any company to have the broad expertise necessary to master all the functions of the distribution channel.
A growing company is more likely to increase its flexibility by choosing one function to concentrate on – and subcontracting functions it does not want to handle. The general rule is that if the resources to the manufacture, assemble, and distribute the product already exist efficiently in the market in which the entrepreneur wishes to do business, the process should be outsourced.
Often a business whose competitive advantage lies in proprietary rights to its product will choose to maintain control of its strategic functions and outsource such things as warehousing, transportation, and some aspects of marketing. A retailer may outsource administrative functions such as payroll, accounting, and inventory management and may even lease its employees from and employee-leasing company while operating the company in the virtual world of the Internet.
Becoming a virtual company lets the new venture be more innovative, stay closer to the customer, and respond more rapidly to the market. Today many companies outsource aspects of their business processes, but virtual organizations outsource everything except their core management functions. To their customers, they look like any other company, but behind the public image lies a very different kind of organization – one where the entrepreneur is basically a ringmaster in a three-ring circus.