The Virtual
Organization
This term was coined by
Peter Drucker.
It is meant to provide an alternative organizational approach to the
“Vertical Organization.”
Vertical Organization – a company tries to handle all aspects of producing
a product, potentially from mining the ore, to smelting it, to producing the
product, to selling it to consumers. Historically,
the only company that came close was Standard Oil, which drilled the wells,
refined the oil, shipped it to gas stations, and sold it to consumers.
General Motors also comes
close since it owns many of its suppliers (Fischer Body, AC Delco), and also
owns a limited number of auto dealerships.
Why vertical
organization? The company can capture
profit at each point in the production process.
Why not vertical
organization? Few companies are good at
running all stages of production. For
instance, if AC Delco produces expensive parts, GM now has a cost disadvantage
in relation to
Virtual Organization – a company picks one piece of the production chain
and does it well. It sources all other
pieces of the chain, selecting the best suppliers and distributors. For example, KC bids out the parts of its
diapers, and uses WalMart and others as distributors
of the finished product. KCs only job is the assembly of the actual diaper.
Another example is Oshkosh B’Gosh which designs bib overalls, but has others do the
manufacturing and most of the selling.
Exercise –
list all the businesses involved in creating and selling a pair of Oshkosh B’Gosh bibs. What
parts should be owned by OBG? Why?
Control
A company that owns large
segments of the production process, also has control
over those segments. The company can
fire managers, invest in equipment, change processes, adjust
the nature of the product.
Companies that don’t own
much of the production process (virtually organized),
need to control parts of the process owned by others. How can they do that? The usual approach is through negotiated
contracts. We agree to produce the
product or ship the product or advertise the product for such and such a fee
for such and such a time period at such and such a performance level.
IT and control: The
assumption is that managers of the leading firm can control the rest of the
production chain through IT. Managers
can view supplier databases to note when production will be completed, or when
a product will be shipped, or how often shipments are going out to retailers.
What is required for this to
actually happen?