APICS—The Performance Advantage
September 2001
Volume 11 No. 9

Supply Chain Management

The Virtual Corporation
They’re here, there, and everywhere.
By Alan N. Miller, Ph.D.

The virtual corporation first came into vogue in the early 1990s. A virtual corporation, in the context of supply chain management, is a firm that relies on extensive outsourcing to meet a specific market opportunity. The firm forms an alliance with strategic suppliers to outsource one or more of its operations. Outsourcing allows the firm to focus on its core competencies. Companies that are selected for outsourcing have distinctive competencies the firm lacks. The combination of all core competencies in the network of companies results in synergy. Outsourced functions may include such areas as customer service, distribution, marketing, manufacturing, and research and development. When the goals of a virtual corporation have been accomplished, its network of members usually disbands.

It’s all about knowledge and trust
Member companies of a virtual corporation are generally geographically dispersed.  Virtual corporations rely on information technology to coordinate the sequencing of their partners’ activities and outputs. Information systems must, therefore, be designed to provide optimal communication between member companies. Indeed, information technology is a key factor in the success of a virtual corporation.

Trust between the partners is essential because they must often share proprietary information and knowledge, and they depend on each other to accomplish the corporation’s strategic objectives. This often leads to a sense of equality between them. Thus, information exchange and knowledge sharing replace hierarchical control in managing their relationship.

How it works
Firms that produce motion pictures are often virtual corporations. They typically outsource many of the functions necessary to make a film (e.g., editing, set design and construction, and special effects). Other examples of virtual corporations include Dell Computer and Nike. Dell focuses on its core competencies of marketing and distribution and merely assembles its PCs from outsourced parts. Nike outsources all manufacturing of its athletic shoes to its Asian partners while retaining its core competencies in product design and marketing. Employees at Nike’s headquarters in Beaverton, Oregon send their new designs for athletic shoes to the company’s suppliers in Southeast Asia who produce the shoe parts (e.g., soles and uppers). These suppliers then send the manufactured parts to other companies for assembly. Next, the finished products are shipped to distributors worldwide. Nike uses its marketing expertise to promote the sale of its shoes. If an outsourcing partner does not meet Nike’s stringent quality and cost standards, it is quickly replaced.

The virtues of the virtual
Outsourcing has several potential advantages. First, it allows a virtual corporation to reduce its costs and improve quality by outsourcing non-core activities to suppliers that are more efficient. Outsourcing may also reduce a virtual corporation’s administrative and payroll costs, and better differentiate the characteristics of its final product. Finally, because a virtual corporation has the flexibility to switch suppliers swiftly, it can be more responsive to changing market conditions, although proponents of supply chain management prefer to establish long-term relationships with strategic suppliers.

What to watch out for
One disadvantage of outsourcing is that a virtual corporation does not have complete control over its suppliers. This may result in delayed delivery or inferior quality of outsourced parts and services. Virtual corporations must, therefore, maintain tight control over performance parameters. A second disadvantage is that firms are unable to develop potentially valuable distinctive competencies in functions that they outsource. This may put them at a competitive disadvantage. A third disadvantage is that a firm may become too dependent on its suppliers. Suppliers may then charge the firm higher prices for their products and services. Another disadvantage is that a firm’s intellectual property may be revealed to its competitors. Finally, a firm may unintentionally outsource one or more of its core competencies, thus losing its competitive advantage.

The rapid advent of information technology has facilitated the growth of virtual corporations by enabling seamless integration and collaborative computing between a firm and its outsourcers. This is encouraging more firms than ever to explore extensive outsourcing in order to optimize their supply chains.

Alan N. Miller, Ph.D., is professor of management in the College of Business at the University of Nevada, Las Vegas. He can be reached at (702) 895-3814 or via e-mail at amiller@ccmail.nevada.edu.