INTRODUCTION
A new management trend of the global information technology (IT) application—virtualization—has appeared in contemporary management. Virtualization is a process of enterprise transformation (using IT) that allows breaking through various limitations of organizational constrains. Virtualization changes dramatically the image of business, especially of small and medium enterprises (SMEs); by adopting the concept of virtualization, they can become fully competitive and may effectively operate in the global market. Barriers of scale between SMEs and large organizations disappear. This new type of organization is often called in the literature a modern organization or virtual organization. Organizations of this type have an effective decision-making process and function based on economic criteria. Consequently, their opportunities to grow and compete in the global market are greater than for traditional SMEs. Hence, the thesis: virtualization allows individual organizations to enter strategic cooperative alliances with other similar businesses. Such virtual organizations have a competitive position in the global market.
In the literature, there are many terms used to define the virtual organization: “network organizations” (Drucker, 1988, p. 9); “organizations after re-engineering” (Hammmer &. Champy, 1993, pp. 77-79; Peters, 1994, pp. 5, 7); “intelligent enterprise” (Quinn, 1992, p. 3).
BACKGROUND
Virtualization, defined as a process of continuous transformation, is a herald of a new direction in the science of organization management. In the context of this analysis, this process may assume such form that will allow them to become competitive in the global market. The process of transformation consists of quick adjustments of the enterprise to new requirements (Hendberg, Dahlgren, Hansson, & Olive, 2000). This is done through changes in the organizational structure as well as in the portfolio of products and services. These changes are possible due to development in the IT sector, particularly Internet applications (Keeny & Marshall, 2000).
From the theoretical perspective, we can separate the following forms of virtualization:
1. Functional extension (i.e., a vertical development). This occurs when the enterprise either wishes to be closer to the customer and it does not have adequate resources, or when the establishment of a traditional branch is not profitable. The enterprise creates for this purpose virtual branches or kiosks. Sometimes it enables its customers to use its services via computer or mobile phone. Examples are Internet banks, bookshops (best-known is amazon.com), department stores, and travel agencies. Large companies also commonly extend their scope through such vertical development. It ensures increased competitiveness with a simultaneous control over the whole organization. SMEs apply such a strategy to a limited extent, most often for the purpose of marketing their presence in the Internet.
2. Creation of the virtual organization, or horizontal development. Such a development occurs through a virtual incorporation of other organizations. The literature lacks a unanimous definition of this concept (Hendberg, 2000; Kisielnicki, 1998; Quinn, 1992; Scholzch, 1996). For the purpose of this analysis, we assume that:
• A virtual organization is created when its members voluntarily enter in relations of various types to achieve their common goal. Every member who creates this organization defines the duration of the relation. The member who first admits that the existence of that relation is unfavorable makes the decision on its liquidation and withdraws. The virtual organization operates in cyberspace and requires the existence of the Internet and global IT infrastructure.
• Large-scale enterprises (LSEs) use IT to strengthen their competitive position in relation to other enterprises. As Hammer and Stanton (1999) rightfully notice, IT becomes—for a certain class of organizations—a “wall” that divides them from other enterprises. Large enterprises are described as “castles” (Hammer & Stanton). LSEs build these “castles” to protect themselves from competition. SMEs do not have such a sheath. They are more flexible than LSEs at a price: They are more prone to infiltration. In general however, the more experienced and knowledgeable the SMEs are, the more attractive they are to other enterprises seeking their share in the virtual enterprise.
Figure 1. Virtual organization based off traditional structure
MAIN THRUST OF THE ARTICLE
Virtualization in Traditional
Organizations
Virtualization allows for organizational development at a much lower cost than through the traditional process. Figure 1 presents a virtual organization based off a traditional structure and connected with its virtual elements. These elements are flexible, allowing for quick adjustment to the changing environment by the organization. The virtualization may be developed as follows:
• The organization creates virtual kiosks or shops. For example, an organization that sells furniture using the Internet may present its products on a computer screen. It may also receive orders from customers located outside its traditional market. Other organizations (tourist, real estate, bookshops, stock exchange, etc.) may operate in the same manner.
• The organization places information about its activity on the Internet (Porter, 2001). It is available to its clients 24/7 rather than being limited to office hours. Internet banking services are a good example. In addition, the expenses connected with the services of an organization are shifted to the client (the client pays for the terminal, access to the Internet, etc.).
The organization covers the cost of the development and maintenance of an application.
• The organization creates a possibility of working from home (called telework). It is a good way of increasing professional activity in those regions where it is difficult to find “traditional” employment. Also, through telework, a local organization may become a global one.
Virtualization allows traditional organizations to have a wider range of influence. Society is better informed of the organization’s activities both by the organization itself and by its clients. The restrictions on this development are varied. The most common include: available financial resources for IT infrastructure, language, and a necessity to have global, reliable computer networks. It should also be stressed that, unfortunately, virtualization enables organizations that are socially unacceptable (pornography, terrorism) to operate freely.
Based on the analysis of organizations that use virtualization, it is estimated that their operations require five times lower investment outlays. Generally, minimum savings obtained as a result of virtualization exceeded 60%. Only in a few cases was this proportion less favorable.
In the organizations using telework, the proportions are difficult to calculate. The analysis of organizations using telework for outsourcing their services to developing countries confirms the effectiveness of virtualization. A good example is software development. The companies from highly developed countries (USA, Great Britain, etc.) employ programmers from India, China, or Pakistan. This situation is beneficial for both the company and the countries providing resources.
Figure 2. Comparison of individual SMEs and LSEs (LSEs have a competitive advantage over individual SMEs)
A different situation occurs when telework is connected with professional activation of the disabled or unemployed. Direct costs are higher, as we deal with the poorer part of the society. Thus additional costs have to be incurred for training, hardware, and software. Unfortunately, there is no data available to make a precise estimate. In many countries, the cost of training and equipment is covered by special social programs. It is also difficult to estimate advantages. It may be said that social effect (i.e., decreased unemployment) and – in case of the disabled -the ability to live a normal life are the most important ones. This is possible only through virtualization.
Generally, telework reduces operating costs (parking space, office space) and provides timesaving (i.e., no travelling to work) to employees.
Virtual Organization as a Chance for SMEs
Virtualization allows more and more SMEs to leave local markets and become global enterprises. Thus, the global market, for many years available only for LSEs, opens up to a wide range of enterprises. As G. Yip (2004, p. 27) states, “the skill of defining and implementation a global strategy is a true test of leadership and management skills.” The contemporary global market most often exists as an e-market as well as an e-business (Turban, King, Lee, Warkentin, & Chung, 2002). The enterprise, irrespective of its size, that wants to make its existence in the global market should meet a number of conditions, such as:
1. Possessing a well-known and reputable brand
2. Built-up distribution and service network
3. Product or services that are unique and in demand
4. Management team able to support the global enterprise
To meet the conditions specified above, the enterprise must have at its disposal adequate funds as well as material and human resources. Comparing SMEs with LSEs, the former are in a very difficult situation. The enterprise, to make its appearance in the global market, must incur a definite outlay (a break-even point) to enter the global market. This break-even point is determined by:
1. Advertising and promotional campaign
2. Volume of production or services, allowing for selling price below the current market price
3. Quality of product or service meeting international standards, such as ISO
4. Access to the distribution channels
5. Formal barriers (legal, duties, taxation, etc.)
Operating in the global market is much more difficult than in local markets as it demands application of advanced IT solutions, access to the international data warehouses, etc. Only with the use of IT and access to information can a global company reduce the risk of failure.
Operational costs of the enterprise are still larger if it operates in the global e-market (Elstrom, 2001). The surveys (Reichheld & Schefter, 2000; Reichheld, 2001) have shown that the cost of gaining a customer in this market is significantly higher than in the traditional market.
For example, in the fashion industry, the cost of gaining a customer in the e-market is up to 40% higher. The profits in the following years, however, grow much faster. In the near future, organizations that cannot succeed in this market will not be able to succeed at all.
Identification of the break-even point requires empirical surveys. It depends on the industry and the degree of globalization of the enterprise (there are not many enterprises that have been operating on all continents). To identify the break-even point, we may apply the methods of strategic analysis and especially the analysis of Porter’s five forces. For example, the break-even point may be identified by the investment required to realize 2% of revenue from the global market. Sometimes, we can consider as an organization of such a type the one that has more than 50% of revenue from the global market. Because single SMEs do not have such resources to surpass the break-even point, they create strategic alliances in the form of the virtual enterprise.
Theoretically, development of the virtual organization may be significant. Practically, a degree of its development is connected with technical barriers and with the necessity to achieve the goals set up for the virtual SMEs. Modification of the goal causes a fast modification of the enterprise.
Figure 3. Comparison of a virtual organization and LSEs (virtual organization as a set of SMEs is more competitive than LSEs)
FUTURE TRENDS
My research suggests that a significant number of students feels the need to learn business administration (Kisielnicki, 2001). At the same time, learning should be as close to the reality as possible. Virtualization is the discipline of studies which may cause the distance between theory and practice to diminish. One may even risk a statement that it is the exact direction of virtualization which, in the nearest future, shall have the most significant impact on society. Virtualization increases the effectiveness of the teaching process in the widest possible sense by supporting traditional teaching methods. Virtualization may be applied in such areas as lowering cost and decreasing time of training jet pilots and also in improvement of military command, operating on the stock exchange, or cognitive analysis of genetic processes. In science, there are many examples of big discoveries which were first tried on computer-simulated models. It is virtualization which allows for business simulation of both the decision-making process and the analysis of complex technical or sociological processes. In virtualization of teaching, there are two basic directions.
The first one is the direction of common education where everybody can, using IT, gain a given knowledge. A classic example is a virtual stock exchange. In many countries, a lot of people want to learn how to operate on the stock exchange before they actually start using it to make money. They can get the necessary experience using appropriate software. They can acquire the necessary skills in the virtual world. There are also numerous games available through the Internet. These games not only provide a pleasant time spent on playing but also teach foreign languages or how to drive a car.
Another direction is dedicated teaching. There are the following activities where virtualization can help:
• Self-evaluation, using special software to assess the level of language knowledge.
• Learning assistance, includes, amongst others, enterprise laboratories, business games, and special simulators that teach how to use specific technical equipment, e.g., flying simulators.
• Distant learning; a student who has a proper terminal and software may participate in classes from a distance. This direction of virtualization is similar to the previously presented distance work.
CONCLUSION
The virtual organization operates as a transparent organization in the sense that all of its initiatives are known to the competition. This enforces responsibility. The image of a virtual organization is influenced by the activities of its individual participants. Virtual organizations do not have common administration, offices, and real estate. In addition, virtual organizations do not have a joint executive team, middle management, or coordinators. Since the influence of each individual virtual organization is limited, the key success factor is mutual trust.
Virtual organizations give new insight into business management. They may trigger increased entrepreneur-ship and competitiveness. They also introduce new management methods different than traditional ones. Virtual organizations are an interesting alternative for current organizations. They are especially attractive for developing countries that want to operate in the international environment. It is fascinating how virtual organizations— without a formal reporting structure and control—can achieve high operational performance and thus have a competitive advantage over their traditional counterparts.
Regardless of speculation on future solutions, we can now safely define the areas where virtual organizations can easily outperform traditional organizations. They are: trade, tourism, and services. In these areas, the benefits of virtual organizations are as follows:
1. Operational flexibility is much higher, especially when a quick reaction to the emerging market niche is required
2. A transaction life cycle is much shorter (especially the closure)
3. Use of cyberspace to close some transactions (despite legal and organizational barriers)
4. Lower operational costs
5. Lower start-up costs
6. Ability to cooperate with organizations which LSEs cannot accept (for political, geographical, racial, religious reasons)
Depending on each individual opportunity, virtual organizations can be successful in other industries as well. Very rarely, traditional organizations can outperform the virtual organizations.
The economic metrics supporting the benefits of virtual organizations are generally available for individual cases. However, for illustration purposes, I include the results of research recently carried out in Poland:
1. Virtual travel agencies achieved 20% higher profit per transaction that traditional organizations.
2. Transaction life cycle was 100% faster in the Internet bank than in a brick-and-mortar bank.
3. The average transaction cost on the Internet bank was $0.10-0.15 compared to $1.10 in the brick-and-mortar bank.
We can put forward a hypothesis that progress in IT will create a snowball of virtual organizations. Don Tapscott (1998), introducing the 12 rules of the new economic deal, writes that they lead towards “virtual reality.”
KEY TERMS
Cyberspace: An “online world of computer networks.” This definition can be augmented by the following characteristics: The network consists of various globally distributed computers that can send and receive information using common protocols. In addition, this network does not have physically defined measured boundaries. Examples of the network types are: electronic mail (e-mail), World Wide Web (WWW), electronic data interchange (EDI), business-to-business (B2B) applications, business-to-customer (B2C) applications, peer-to-peer (P2P) applications (Defined by the Merriam-Webster Online Dictionary).
Virtual Organization (defined by Kisielnicki, 2002. p. 12): A virtual organization is created voluntarily; its members create this organization to accomplish a certain goal. A virtual organization is created anytime a manager realizes that he or she needs the cooperation of other organizations to accomplish a goal. The duration of a virtual organization is defined by each of its members; a virtual organization operates in cyberspace, which means that its duration can be very short; so short, in fact, that it would be impossible to cooperate with other organizations using traditional methods. The decision to restructure or fold the organization can be made anytime by any of its members. A virtual organization does not have one president or general manager. The virtualization process is a process of transformation from traditional organization into virtual using informational technology. This process can result in two forms of virtual organization: traditional organization with virtual divisions or an association of many organizations, as depicted in Figure 3 (Kisielnicki, 2002, p. 102).
Virtual Organization (defined by Schozch): An artificial organizational structure where individual organizations provide base competencies. The integration and coordinations of these base competencies allow for effective execution of chain process to deliver a product and satisfy a customer. This integration and coordination does not incur additional costs and maintains the customer focus (Scholzch, 1996).
Virtual Organization: A temporary network of independent enterprises—suppliers, customers, ever former competitors—linked through IT and working together to share their knowledge and costs to enter a new market (Byrne & Brandt, 1993).
