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 Toyota.


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?



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?

  • Compatible systems
  • Regular data communication
  • Secure systems
  • Real-time systems
  • Flexible production processes
  • Real-time logistics