Virtual organizations have played critical roles in medical societies, .... As a result, transnational firms treat their assets, resources, and capabilities differently depending .... more globally competitive, more sensitive and responsive to national.
2008 EABR & TLC Conferences Proceedings
Salzburg, Austria
A Virtual Organization: An Alternative Competitive Advantages of Transnational Organizations Kittinoot Chulikavit, Maejo University, Thailand Jim McCullough, University of Puget Sound, Washington
ABSTRACT The purpose of this paper is to find the fit between the concept of a virtual organization and a transnational organization. After reviewing previous related literature, we generate propositions that show positive relationships between the characteristics of a virtual organization and the strategic approaches of a transnational organization. Ending discussion and implication add more knowledge about the two concepts, and further research trends are recommended at the end.
INTRODUCTION There have been many terms and concepts emerging in the business world during the last few decades. Some of them have gone within a short period of time. Among the existing terms and concepts, there are two concepts to which both business practitioners and researchers have paid a lot of their attention. Virtual organizations and transnational organizations are those concepts that will be the focus of this paper. These concepts have many things in common. For example, they are, especially transnational organizations, created for international purposes, and provide significant competitive advantages to global business firms. The main purpose of this paper is, therefore, to find the fit between the two useful concepts and the possibility to combine them and gain maximum desirable synergy. In other words, this paper should provide the answer for the question of whether the concept of a virtual organization can help a transnational organization gain more global competitiveness over their competitors. The paper provides the definitions and reviews of related literature for both concepts in the first section. Then, as a result of literature reviews, important propositions are generated. Discussion and implication are provided, and some directions for further research are recommended, respectively at the end part of this paper.
VIRTUAL ORGANIZATIONS Even though virtual organizations have been accepted as part of the business world for a few decades, most researchers and practitioners recently have started paying more attention to the impacts of virtual organizations on their lives. Virtual organizations have played critical roles in medical societies, environmental management, aerospace conglomerates, global telecommunications alliances and business practices such as interbank financial transactions, business meetings, and information transferring. As defined by DeSanctis and Monge (1999), a virtual organization is “a collection of geographically distributed, functionally and/or culturally diverse entities that are linked by electronic forms of communication and rely on lateral, dynamic relationships for coordination” (p. 693). It has been agreed among many researchers that most virtual organizations are adopted to gain two significant competitive advantages: benefits of obtaining some specific assets from other members whose assets have higher quality; and opportunities to conduct business activities via computer and telecommunications networks with very low transaction costs comparing to the same activities conducted just a decade ago (Kraut, et al, 1999). The virtual organization, by its nature, is difficult to operate because it is intangible. Researchers have been studying different aspects of managing virtual organizations more effectively. Communication processing is one of the interesting research areas that many researchers, such as DeSanctis and Monge (1999), Jarvenpaa and Leidner 1
2008 EABR & TLC Conferences Proceedings Salzburg, Austria (1999), Wiesenfeld, Raghuram and Garud (1999), and Ahuja and Carley (1999), have been studying. Since virtual organizations are usually operated via electronic media without face-to-face communication, there have been some management information systems research conducted in this area. For example, Staples, Hulland and Higgins (1999) use self-efficacy theory to explain employees’ behavior in virtual organizations. Moreover, Hoogeweegen, et al. (1999) explain how to use Information and Communication Technology (ICT) to support a virtual organization, and to reduce its operating costs and time. By using ICT, the organization can automate information storage, processing, and exchange, and redesign internal processes and the chain of external processes in order to create virtual connections. Some researchers, such as Jarvenpaa and Leidner (1999) and Grabowski and Roberts (1999), have studied processes in a virtual organization, such as the degree of trust, which is related to coordinating among members within the virtual organization. Other researchers have studied even further the structures, roles, and behaviors of virtual teams that might be formed temporarily on an as-needed basis within any virtual organizations to complete some specific tasks (Jarvenpaa, Knoll and Leidner, 1998). For example, Townsend, DeMarie and Hendrickson (1998) provide useful suggestions on technology and organization factors to be considered when forming a virtual team. In the international perspective, how to increate the effectiveness of communication and trust in global virtual teams has been studied by Jarvenpaa and Leidner (1999), and Jarvenpaa, Knoll and Leidner (1998). Many other researchers discussed the international aspect of a virtual organization as part of their literature since a virtual organization is international by nature. In the next section, we will examine this aspect thoroughly.
International Virtual Organization Since a virtual organization can be seen as a “collaborative network of people” (DeSanctis and Monge, 1999, p. 693) that has no exact size, the organization may include only a few business partners working together from a few different locations within one culture or it may involve a lot of business people coordinating together from different cultures around the world. Many international firms have realized the benefits of virtual organizations and made the best possible use of it to achieve their own goals. In this section, we will examine how international firms apply the concept of a virtual organization to obtain global competitive advantages. Boudreau, et al. (1998) describe three characteristics of virtual organization. These characteristics can help improve global competitiveness for business firms: dependence on a federation of alliances and partnerships with other organizations, relative spatial and temporal independence, and flexibility. Dependence on a federation of alliances and partnerships with other organizations The first characteristic of a virtual organization involves partnership dependence, which is the degree to which an individual firm in its business network connects to the other firms in the same network for some specific business purposes (Boudreau, et al., 1998). Partner firms coordinate with each other on a global basis via some contractual forms such as joint ventures, strategic alliances, minority investments, consortia, coalitions, outsourcing, and franchises (Boudreau, et al., 1998). Examples of virtual organizations with this characteristic include: in the textile industry, Lectra Systemes SA, its two members, Computer Designs Inc. (whose 1,700 customers include Hugo Boss, Calvin Klein, Fruit of the Loom, and OshKosh B'Gosh), and Prima Design Systems (a Hong Kongbased fashion and textile company whose 1,300 customers include Adidas, Polo Ralph Lauren, Reebok and Macy's), and its partner, Stork of the Netherlands, have established their own virtual system connecting all business sections from design to stores. This virtual organization is an example of the coordination of the entire supply chain (Conrad, 1999). Furthermore, in the airline industry, code sharing and one-stop shopping arrangements are two among many activities of the virtual organizations for US Air/British Airways and Northwest Airlines/KLM Royal Dutch Airlines (Christie & Levary, 1998).
Relative spatial and temporal independence Relative spatial and temporal independence or geographic dispersion of a virtual organization is the extent to which the organization’s individual employees can perform their work from different locations (Boudreau, et al., 1998). The virtual organization’s characteristic of being able to operate between different geographic locations and different time zones has helped international firms to connect and transfer some specific resources to partners from 2
2008 EABR & TLC Conferences Proceedings Salzburg, Austria other parts of the world whenever they need (Boudreau, et al., 1998). Boeing provides a good example of this characteristic. During its 777 project, Boeing created a virtual network of 1,700 workstations from more than a dozen countries for the design work (Kezsbom, 1999).
Flexibility Flexibility helps international firms to easily form, discontinue, and reform a virtual organization to respond to their needs (Boudreau, et al., 1998). For example, in the telecommunications industry, EDS, Sprint, and Sun Microsystems together established a mobile virtual organization for the purpose of managing the security, press, administration, and public information systems for the World Cup. The organization was terminated after the World Cup games ended (Christie & Levary, 1998). Because of the characteristics of virtual organizations, they have been used actively in international business activities. There is a new research stream toward how to use virtual organizations effectively in businesses across cultures and/or countries. Boudreau, et al. (1998) suggest how to adapt this new organizational approach to the new international business concept called transnational approach. Therefore, in the next section, we will investigate the concept of the transnational approach before presenting some suggestions related to the two concepts: virtual organizations and the transnational approach.
TRANSNATIONAL ORGANIZATIONS A concept of transnationality has emerged since the late 1980’s, and become a new challenge for international business practices ever since. Since firms doing business internationally have encountered severe competition in the global environment, the firms must adapt their strategies to fit into the change. Bartlett and Ghoshal (1987) suggest that international firms, which had once succeeded in the global market with their effective one-dimensional strategies of efficiency, responsiveness, or ability to exploit learning, need to integrate all three dimensions and exercise them simultaneously. To be successful in the world business today, firms have to possess the competitiveness of global efficiency, local responsiveness, and worldwide learning at the same time (Bartlett and Ghoshal, 1987). Global Efficiency Global efficiency is the extent to which cost advantages occur “through centralized global-scaled operations” and “the treatment of the world market as an integrated whole appeared most suitable” (Leong and Tan, 1993, p. 451). The concept of global efficiency in the new environmental challenges, by Bartlett and Ghoshal (1992), involves “develop[ing] the infrastructures and capabilities for managing both costs and revenues simultaneously” (p. 275). A multinational firm focuses on efficient and specialized facilities for research, production, logistics, and sourcing in order to decrease costs, and focuses on strong brands, distribution facilities, access to key markets, and local resources in order to increase revenues (Bartlett and Ghoshal, 1992; Bartlett and Ghoshal, 1998). As a result, transnational firms treat their assets, resources, and capabilities differently depending on the degree of importance. They will centralize or operate their key assets, resources, and capabilities in the home country in order to realize the economies of scale, to protect important competencies, and to give some necessary management support. On the other hand, the firms can excentralize or decentralize in other countries to gain some competitive advantages such as R&D resources and cost reduction, and then distribute the products to their other national production locations (Bartlett and Ghoshal, 1992). In conclusion, transnational firms maintain global efficiency by performing each of their activities in a location where it can be best accomplished (Boudreau, et al., 1998). Taking the characteristics of a virtual organization, especially the dependence on a federation of alliances and partnerships with other organizations and the relative spatial and temporal independence, into consideration, transnational firms can pursue global efficiency challenge by locating each of their assets, resources, and capabilities in the most suitable nations, and can still communicate and exchange their services, information or even some types of products virtually with lower costs and less time. Hence, assuming that a transnational firm has also been operated virtually to some extent, 3
2008 EABR & TLC Conferences Proceedings Salzburg, Austria Proposition 1a: The partnership dependence of a virtual organization is a moderator of the relationship between costs and time expended by the transnational firm and its global efficiency. Proposition 1b: The spatial and temporal independence of a virtual organization is a moderator of the relationship between costs and time expended by the transnational firm and its global efficiency.
Local Responsiveness According to Harzing (2000), local responsiveness is “the extent to which subsidiaries respond to local differences in customer preferences” (p. 108). Therefore, one of the major roles a subsidiary manager has to play is a good marketer who can adapt or modify his/her products to the local market. Moreover, Harzing (2000) also argues that even though local responsiveness is critical to transnational firms, local production and local R&D are usually not the primary alternative because transnational firms usually take economies of scale strategy to become costeffectiveness. However, with the benefits of a virtual organization, transnational firms are not required to set their production and/or R&D location close to their local customers but, instead, may place their production and/or R&D facilities in only the most appropriate location anywhere in the world. The information related to customer preferences can be transferred accurately and in a timely manner from subsidiaries to production and/or R&D sites with almost no costs. Therefore, Proposition 2: The spatial and temporal independence of a virtual organization is a moderator of the relationship between costs and time expended by the transnational firm and its local responsiveness.
Worldwide Learning The third competitive strategy of transnational organizations is worldwide learning, which is “the extent to which the creation, adoption, and diffusion of knowledge and expertise occurs within and across the nodes of the multinational's network of international operations” (Kim and Mauborgne, 1993, p. 425). Bartlett and Ghoshal (1987) explain that to be able to compete with its competitors worldwide, an international firm has to realize the benefits of not only competing in global scale economies and using local responsive strategies but also of acquiring knowledge and skills on a global basis. Global competitive strategies enable firms to capture and interpret information, and to use those global knowledge and skills as much as possible with local resources, capabilities, and innovativeness. Bartlett and Ghoshal (1987) also point out that knowledge about competitors, and skills that firms apply to their activities in one market can be vital for other firm units in other markets around the world. Moreover, more sophisticated world markets, rapidly changing technology, shorter product life cycles, are all factors that encourage innovative, knowledgeable, skillful firms to gain global competitive advantages over their competitors (Bartlett and Ghoshal, 1987). Based on one characteristic of a virtual organization described by Boudreau, et al. (1998), dependence on a federation of alliances and partnerships with other entities, transnational firms can gain global knowledge and skills more effectively than ever by means of virtual networks. The technological capabilities of a virtual organization allow their entities to transfer or exchange almost all types of information with each other between different time and places (Koch, 2000). Accordingly, Proposition 3a: The partnership dependence of a virtual organization is a moderator of the relationship between costs and time expended by the transnational firm and its worldwide learning. Proposition 3b: The spatial and temporal independence of a virtual organization is a moderator of the relationship between costs and time expended by the transnational firm and its worldwide learning. The figure below depicts the effects, which are expected to be positive, of two moderators, the partnership dependence and the spatial and temporal independence, on the developed relationships between costs and time expended by the transnational firm and its three competitive strategies: global efficiency, local responsiveness and worldwide learning. 4
2008 EABR & TLC Conferences Proceedings FIGURE
Salzburg, Austria
Conceptual Model for Applying the Characteristics of a Virtual Organization to a Transnational Firm
Partnership Dependence
Transnational Firms P1a Global Efficiency P1b
P2
Costs and Time
Local Responsiveness
P3a Worldwide Learning P3b
Spatial and Temporal Independence
Based on the description of a multinational firm as a network of subsidiaries that has high-coordination organizational structure, and involves conducting global business activities with their product diversity and a global distribution system (King and Sethi, 1999), a transnational firm, which is a multinational firm, should recognize the benefits of utilizing advanced communications network as part of its business network in order to survive in the rapidly changing and severely competing environment.
DISCUSSION AND IMPLICATION In general, transnational firms can be seen as an integrated and interdependent network of the headquarters and its subsidiaries that have a large flow of products, people, and information globally (Harzing, 2000). However, the uniqueness of this type of firms is that they consider each of the three approaches: global efficiency, local responsiveness, and worldwide learning, as an incomplete approach, and are encouraged to combine and exercise all three approaches together simultaneously (Bartlett and Ghoshal, 1992). Because of the rapidly increasing global competitiveness, the need for global integration and the need for national responsiveness have been realized, and more international firms have become more globally competitive, more sensitive and responsive to national differences, and more innovative simultaneously (Bartlett and Ghoshal, 1998). Obviously, exercising the transnational strategy is complex, and needs a highly experienced management team. To reduce the complexity of transnational activities, which are due, in part, to the geographical dispersion of entities, transnational firms may consider creating their own virtual organizations. Because of increased global competition and recent advances in computer and telecommunications technologies, many international firms have moved their organizational concepts toward virtualization. As soon as firms have made the decision to operate their businesses virtually, they need to form the infrastructure of virtual operations. To be globally flexible, a transnational firm has to pursue a mix of global and local strategies. In this case, an open and active exchange of information is critical for one entity to learn about and benefit from others (King and Sethi, 1999). Doz, Prahalad and Hamel (1990) propose that the exchange of information can provide an international firm some critical capabilities of: efficiency in controlling subsidiary actions; ability to adjust headquarters-
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2008 EABR & TLC Conferences Proceedings Salzburg, Austria subsidiary and subsidiary-subsidiary relationships when the strategic direction has to be changed; and flexibility to allow subsidiaries to coordinate their competitive activities. In conclusion, it is recommended that a transnational firm must pay a lot more attention on applying advanced technology concepts to increase, or at least maintain, its capabilities to pursuing the transnational strategy and become successful in the business world.
RECOMMENDATIONS FOR FURTHER RESEARCH Only little research has been conducted toward how to fit the concept of a virtual organization into a transnational organization. Some of the studies provided the guidelines on types of information technology that a transnational firm might consider when designing its virtual system (Boudreau, et al., 1998; King and Sethi, 1999). It is obvious that there are many areas related to this phenomenon left unexplored. The natures of both a virtual organization and a transnational organization are inevitably complicated. How to combine these two concepts together and gain a maximum of synergy is one of the most challenging research streams. Some interesting topics in the research stream may include: trust and dependency between the headquarters and subsidiaries, or between one subsidiary and other subsidiaries; communication effectiveness between different cultures; and resistance and adaptation to the virtual working environment by employees. REFERENCES Ahuja, Manju K. & Kathleen M. Carley. 1999. Network structure in virtual organizations. Organization Science, 10(6): 741-757. Bartlett, Christopher A. & Sumantra Ghoshal. 1987. Managing across borders: New strategic requirements. Sloan Management Review, 28(4): 7-17. Bartlett, Christopher A. & Sumantra Ghoshal. 1992. Transnational management: Text, cases, and readings in crossborder management. Illinois: Irwin. Bartlett, Christopher A. & Sumantra Ghoshal. 1998. Managing across borders: The transnational solution. Massachusetts: Harvard Business School Press. Boudreau, Marie-Claude, Karen D. Loch, Daniel Robey & Detmar Straud. 1998. Going global: Using information technology to advance the competitiveness of the virtual transnational organization. Academy of Management Executive, 12(4): 120-128. Christie, P. Maria Joseph & Reuven R. Levary. 1998. Virtual corporations: Recipe for success. Industrial Management, 40(4): 7-11. Conrad, Andree. 1999. Designing for demand: SCM dream or reality?. Apparel Industry Magazine, 60(5): SCM6SCM11. DeSanctis, Gerardine & Peter Monge. 1999. Introduction to the special issue: Communication processes for virtual organizations. Organization Science, 10(6): 693-703. Doz, Y. L., C. K. Prahalad & G. Hamel. 1990. Managing the global firm. London: Routledge, Chapman, and Hall. Grabowski, Martha & Karlene H. Roberts. 1999. Risk mitigation in virtual organizations. Organization Science, 10(6): 704-721. Harzing, Anne-Wil. 2000. An empirical analysis and extension of the Bartlett and Ghoshal typology of multinational companies. Journal of International Business Studies, 31(1): 101-120. Hoogeweegen, Martijn R., Wim J. M. Teunissen, Peter H. M. Vervest, & Rene W. Wagenaar. 1999. Modular network design: Using information and communication technology to allocate production tasks in a virtual organization. Decision Sciences, 30(4): 1073-1103. Jarvenpaa, Sirkka L. & Dorothy E. Leidner. 1999. Communication and trust in global virtual teams. Organization Science, 10(6): 791-815. Jarvenpaa, Sirkka L., Kathleen Knoll & Dorothy E. Leidner. 1998. Is anybody out there? Antecedents of trust in global virtual teams. Journal of Management Information Systems, 14(4): 29-64. Kezsbom, Deborah S. 1999. Creating teamwork in virtual teams. Transactions of AACE International, PM11-PM14. Kim, W. Chan & Renee A. Mauborgne. 1993. Effectively conceiving and executing multinationals' worldwide strategies. Journal of International Business Studies, 24(3): 419-448. King, William R. & Vikram Sethi. 1999. An empirical assessment of the organization of transnational information systems. Journal of Management Information Systems, 15(4): 7-28. 6
2008 EABR & TLC Conferences Proceedings Salzburg, Austria Koch, Christian. 2000. Collective Influence on Information Technology in Virtual Organizations–Emancipatory Management of Technology?. Technology Analysis & Strategic Management, 12(3): 357-368. Kraut, Robert, Charles Steinfield, Alice P. Chan, Brian Butler & Anne Hoag. 1999. Coordination and virtualization: The role of electronic networks and personal relationships. Organization Science, 10(6): 722-740. Leong, Siew Meng & Chin Tiong Tan. 1993. Managing across borders: An empirical test of the Bartlett and Ghoshal [1989] organizational typology. Journal of International Business Studies, 24(3): 449-464. Staples, D. Sandy, John S. Hulland & Christopher A. Higgins. 1999. A self-efficacy theory explanation for the management of remote workers in virtual organizations. Organization Science, 10(6): 758-776. Townsend, Anthony M., Samuel M. DeMarie & Anthony R. Hendrickson. 1998. Virtual teams: Technology and the workplace of the future. Academy of Management Executive, 12(3): 17-29. Wiesenfeld, Batia M., Sumita Raghuram & Raghu Garud. 1999. Communication patterns as determinants of organizational identification in a virtual organization. Organization Science, 10(6): 777-790.
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