BusinessWeek

You know the problems. They're the stuff of Management 101. If
you run a big, complex company, you battle every day to get things
done faster. If you're at the top of a small one, you often struggle
to find the resources to make a difference. 


In today's world of fast-moving global markets and fierce competition,
the windows of opportunity are often frustratingly brief. Few
companies boast the in-house expertise to quickly launch diverse
and complex products in different markets.


Ever hear of the virtual corporation? Before you roll your eyes,
think again. In the view of many leading business thinkers, what
sounds like just another bit of management-consultant cyberspeak
could well be the model for the American business organization
in the years ahead.


The virtual corporation is a temporary network of independent
companies--suppliers, customers, even erstwhile rivals--linked
by information technology to share skills, costs, and access
to one another's markets. It will have neither central office
nor organization chart. It will have no hierarchy, no vertical
integration.


Instead, proponents say this new, evolving corporate model will
be fluid and flexible--a group of collaborators that quickly
unite to exploit a specific opportunity. Once the opportunity
is met, the venture will, more often than not, disband. ''It's
not just a good idea,'' says Gerald Ross, co-founder of Change
Lab International, a consulting firm in Greenwich, Conn. ''It's
inevitable.''


TIME STRETCHER. In the concept's purest form, each company that
links up with others to create a virtual corporation will be
stripped to its essence. It will contribute only what it regards
as its ''core competencies,'' the buzz phrase for the key capabilities
of a company. It will mix and match what it does best with the
best of other companies and entrepreneurs.


A manufacturer will manufacture, while relying on a product-design
outfit to decide what to make and on a marketing company to sell
it. ''Most companies put undue emphasis on owning, managing,
and controlling every activity,'' says Richard C. Marcus, the
former chief executive of retailer Neiman Marcus, who is now
a partner in a consulting firm that models itself along virtual-corporation
lines. ''If something was worth doing, you did it yourself. But
there's just not enough time in the day to manage everything
anymore.''


For proof that many companies are starting to feel the same way,
look to the growing number of strategic alliances. American Telephone
& Telegraph Co. used Japan's Marubeni Trading Co. to link up
with Matsushita Electric Industrial Co. to jump-start the production
of its Safari notebook computer, designed by Henry Dreyfuss Associates.
MCI Communications Corp. uses partnerships with as many as 100
companies to win major contracts with large customers. IBM, Apple
Computer, and Motorola are using an interfirm alliance to develop
an operating system and microprocessor for a new generation of
computers.


EARLY GLIMPSE. Partnering--the key attribute of the virtual corporation--will
assume even greater importance, says James R. Houghton, chairman
of Corning Inc. Corning may be the most successful U. S. company
at putting together alliances. Its 19 partnerships, accounting
for nearly 13% of earnings last year, have let the company develop
and sell new products faster, providing size and power without
the bulk. ''More companies are waking up to the fact that alliances
are critical to the future,'' Houghton says. ''Technologies are
changing so fast that nobody can do it all alone anymore.''


But today's joint ventures are little more than an early glimpse
of the highly adaptable, opportunistic structure of the future.
''When we talk about virtual corporations today, we're mainly
talking about alliances and outsourcing agreements,'' says John
Sculley, chairman of Apple Computer Inc. ''Ten or 20 years from
now, you'll see an explosion of entrepreneurial industries and
companies that will essentially form the real virtual corporations.
Tens of thousands of virtual organizations may come out of this.''


The virtual corporation may now exist mainly in the imaginations
of a few business thinkers and theorists (page 41), but similar
structures have long characterized several industries. In businesses
as diverse as movie making and construction, companies have come
together for years for specific projects, only to dissolve once
the task is done. The leveraged-buyout firm of Kohlberg Kravis
Roberts & Co. forms virtual-style combinations when it assembles
lawyers, accountants, and investment bankers to do a specific
deal.


What's different now is that large corporations have begun using
elements of the virtual concept to gain access to new markets
or technologies. Apple Computer's long-standing strategy of partnering
is a key reason the company's revenues per employee, at $437,100,
are nearly four times those of competitor Digital Equipment Corp.
and more than twice those of IBM. Lacking the capacity to produce
its entire line of PowerBook notebooks, for example, Apple turned
to Sony Corp. in 1991 to manufacture the least-expensive version.
It was an obvious pairing, melding Apple's easy-to-use software
with Sony's manufacturing skills in miniaturization. A yearlater,
after selling more than 100,000Sony-made models, Apple ended
its agreement.


The linkage served its purpose: to get an entry-level product
out swiftly. Similarly, a small company, TelePad Corp. of Reston,
Va., is using collaborations with more than two dozen partners
and suppliers to bring its new pen-based computer to market.


If it becomes widespread, the virtual model could become the
most important organizational innovation since the 1920s. That
was when Pierre S. Du Pont and Alfred P. Sloan developed the
principle of decentralization to organize giant, complex corporations.
Even the spate of corporate downsizings in the past decade has
failed to break the vertical chains of command typical in most
large companies. Massive layoffs of middle managers have led
to fewer layers of management but have left essentially the same
organizational structures.


SUPERHIGHWAY. Already, though, joint ventures and strategic alliances
are blurring the traditional hierarchies and boundaries that
characterize this largely obsolete model. Customers are helping
to create and develop new products and services. Competitors
are embracing one another to enter new markets or make products
they can't produce on their own. ''It's a way to gain scale without
mass,'' says David Nadler, founder of New York-based Delta Consulting
Group Inc. Ultimately, these greater levels of cooperation among
competitors, suppliers, and customers will create so much overlap
that it will be tough to determine where any one company ends
and another begins.


Technology will play a central role in the development of the
virtual corporation. Roger N. Nagel, operations director for
Lehigh University's Iacocca Institute, envisions a world in which
technology could make the creation of virtual enterprises ''as
straightforward as connecting components for a home audio and
video system by different manufacturers.'' He foresees a national
information infrastructure linking computers and machine tools
across the U. S. This communications superhighway would permit
far-flung units of different companies to quickly locate suppliers,
designers, and manufacturers through an information clearinghouse.
Once connected, they would sign ''electronic contracts'' to speed
linkups without legal headaches.


Teams of people in different companies would routinely work together,
concurrently rather than sequentially, via computer networks
in real time. Artificial-intelligence systems and sensing devices
would connect engineers directly to facture, while relying on
a product-design outfit to decide what to make and on a marketing
company to sell it. ''Most companies put undue emphasis on owning,
managing, and controlling every activity,'' says Richard C. Marcus,
the former chief executive of retailer Neiman Marcus, who is
now a partner in a consulting firm that models itself along virtual-corporation
lines. ''If something was worth doing, you did it yourself. But
there's just not enough time in the day to manage everything
anymore.''


If power and flexibility are the obvious benefits of the virtual
corporation, the model has some real risks, too. For starters,
a company joining such a network loses control of the functions
it cedes to its partners--who may drop the ball. Proprietary
information or technology may escape. And the structure will
pose stiff new challenges for managers, who must learn to build
trust with outsiders and manage beyond their own walls.


Still others are wary of the concept because it conjures up the
idea of the hollow corporation, the term coined to describe companies
that have bolstered profits by abandoning manufacturing and outsourcing
production to plants in low-wage countries. Much of the thinking
about the virtual corporation, however, comes from experts at
the Iacocca Institute who have examined the decline of U. S.
manufacturing. They believe the idea--coupled with computer-aided
design and flexible manufacturing--could keep jobs in the U.
S. In their view, rapidly formed virtual corporations composed
of the best of everything will have the competitive advantage.


'ROBUST.' A growing number of company chiefs agree. One is James
C. Morgan, chief executive of Applied Materials Inc., which makes
the equipment to manufacture semiconductors. Applied's success
is based on a collaborative web of suppliers and customers. Each
partner specializes in doing part of a system very well, so Applied
doesn't have to do everything well. ''It's easier to manage a
bigger business if others are managing pieces for you,'' explains
Morgan.


Many large corporations are using the virtual concept to broaden
their offerings to customers or produce sophisticated products
less expensively. MCI, the long-distance telephone company, has
allied itself with an array of partners to offer customers ''one-stop
shopping'' for all their communications needs, including helping
customers finance their equipment purchases. ''Our partnerships
make us a more efficient competitor with a more robust set of
product offerings,'' says Daniel F. Akerson, MCI's president.


A central part of MCI's strategy is to match its core competencies
in network integration and software development with the strengths
of other companies making telecommunications equipment. The upshot:
MCI doesn't have to spend its own capital to fund research and
development for hardware, leaving more resources for what it
does best. MCI's alliances allow it to offer customers a package
of hardware and services based on the talents, skills, and resources
of as many as 100 other companies. ''If we had to do it on our
own, it would cost us at least $300 million to $500 million a
year in extra expenses,'' says Akerson.


The virtual concept is also providing muscle and reach for some
smaller companies and entrepreneurs. Among its most vocal advocates
is Ron Oklewicz, a veteran of Xerox Corp. and Apple Computer
who had an idea for a handheld, pen-based computer. Two years
ago, he launched TelePad, which has limited in-house design talent,
a handful of engineers, and no manufacturing plants. The computer
was designed and co-developed with GVO Inc., a prominent industrial-design
company in Palo Alto, Calif. An Intel Corp. swat team was brought
in to work out some engineering kinks.


Several other companies have developed software for the product.
A battery maker is collaborating with TelePad to develop the
portable power supply. And to manufacture the computer, the company
is using spare capacity at an IBM plant in Charlotte, N. C. The
paychecks for its 14 employees are issued by an outside firm,
Automatic Data Processing Inc. For his part, Oklewicz brings
his experience in selling computers to the government, a key
potential customer of the product.


His virtual organization avoids what Oklewicz calls the ''vertical
rat hole''--the inefficiencies and costs of vertical integration--and
seizes advantage of the best efforts of world-class partners
to bring his product to market faster. Through more than two
dozen collaborations, Oklewicz figures he is leveraging his puny
work force into more than a thousand highly trained staffers
in design, engineering, manufacturing, and distribution. That
Intel engineering team, for example, took only one week to solve
problems Oklewicz believes his company would have spent as long
as five months on. ''We couldn't hire this kind of talent,''
he says. ''The hiring alone would have killed us.''


Of course, since TelePad is dependent on so many partners, it
has ceded direct control of nearly all its operations. Does that
bother the founder? Not at all. ''I can go to sleep at night
confident that IBM knows how to make this product, rather than
worrying whether I made the right capital investments or hired
the right people,'' he says.


The idea has broad implications for service businesses, too.
Consider InterSolve Group Inc., a Dallas-based management-consulting
firm that consists largely of four partners. For any given assignment,
InterSolve assembles ''just-in-time'' talent to solve problems
or implement strategies for clients that range from IBM to First
Interstate Bancorp. Once a job is complete, the consulting team
disbands. ''One of the founding principles of our firm is that
we would assemble and disassemble teams for work,'' says Edward
R. McPherson. ''We can bring the right talent to fit the assignment
as opposed to using talent already in inventory. We don't have
to warehouse staff or specialists.''


InterSolve's recently completed assignment for First Interstate,
for example, saw the creation of four teams of 26 experts led
by McPherson, who had met only one of the team members before
the assignment. The group squeezed nearly $14 million in annual
savings out of First Interstate's back-room operations. ''The
advantage is you get specialists to work on your problems,''
says Hayden B. Watson, a senior vice-president at First Interstate.
''As long as you keep their activities coordinated, you're going
to get a lot more result for the money you spend.''


One of the big drawbacks to the virtual corporation is that it
spells the loss of control over some operations. A partnership
among Intel and Japanese companies NMB Semiconductor and Sharp
to make products called flash memory chips shows the potential
hazards. Worried that it couldn't make the sizable investments
to retain its lead in this important and growing market, Intel
signed up the two Japanese companies to make flash chips for
it. But NMB Semiconductor Co. had trouble getting its line up
and running last year just as the market was taking off.


As a result, Intel couldn't get all the chips it could sell,
and its share of the market dropped nearly 20 points in one year.
Although he still believes in collaboration, Intel Chairman Andrew
S. Grove is no fan of the virtual corpmration. ''I think it's
a business buzz phrase that's meaningless,'' he says. ''It's
appetizing, but you get nothing out of it.''


Critics also point to IBM's experience in creating its first
personal computer in 1981. To get into the market quickly, the
computer giant relied on a pair of outsiders for the key technologies:
Intel for microprocessors and Microsoft Corp. for the operating
software. At first, IBM won widespread praise for its unprecedented
decision to develop a major product by forming partnerships with
others outside its corporate walls. But the approach also meant
that IBM's system wasn't proprietary, and IBM soon found that
it had created a market it could not control. Hundreds of clone
makers emerged with lower prices and better products.


The more entangled companies become, the more chances there will
be for them to stumble. Besides the technological hurdles of
information highways and networks of partners that will make
the virtual corporation a reality, the concept poses new challenges
for management. Before companies can more routinely engage in
collaboration, they must build a high level of trust in each
other.


The current clutch of strategic alliances and joint ventures
could help here, too, since they give companies a track record
of cooperation. ''People who think they can screw each other
because we're going to terminate six months later are missing
the point, because what we're building is a web of trust and
shared understandings,'' says John Seely Brown. Brown heads Xerox'
Palo Alto Research Center, which recently developed new products
jointly with Sun Microsystems Inc.


WIN-WIN DEALS. The virtual corporation will demand a different
set of skills from all managers, proficiencies not unlike those
that distinguish the best venture capitalists. They'll have to
build relationships, negotiate ''win-win'' deals, find the right
partners with compatible goals and values, and provide the temporary
organization with the right balance of freedom and control. That
won't be easy. ''All of us are comfortable operating in a known
environment,'' says John Vaughan, a divisional vice-president
at M/A-Com, an electronic-components maker based in Burlington,
Mass., which is joining with AT&T and others to create new products.
''All the politics are local, and all the management is personal.
But this new model means you have to be more open in dealing
with outsiders. To some people, that sounds like fun. To others,
it will be hell.''


So common will collaborative work become that some gurus are
already advocating the creation of a new corporate position.
Lehigh's Nagel suggests that companies appoint a ''vice-president
for external interactions'' who would oversee the dozens or hundreds
of linkups that he believes will exemplify the organization of
tomorrow. Among other things, this corporate officer would monitor
the outflow of technology to make sure that the company doesn't
inadvertently lose the capability to compete.


A vice-president of virtuality? That would certainly be an irony--corporations
may respond to this idea, so antithetical to structure and hierarchy,
by creating a new slot for it in their hierarchical structures.


A HANDBOOK FOR
VIRTUAL MANAGERS
Today's alliances have taught managers a few key lessons that should help when 
the virtual corporation emerges:
MARRY WELL Choose the right partners for the right reasons--because they are 
dependable, can be trusted, and offer the best products or services
PLAY FAIR Every link must offer a win-win opportunity for everyone, even if the 
outcome isn't always successful. Partnerships must serve the interests of all 
parties
OFFER THE BEST AND BRIGHTEST Put your best people into these relationships. 
It's the easiest way to tell your partners your link with them is important
DEFINE OBJECTIVES When you ask the question, ''what's in it for me?'' you 
should have a quick and ready answer. Know what you and your partners will be 
getting out of the virtual enterprise 
BUILD A COMMON INFRASTRUCTURE Until networks and standards let corporations 
talk to each other across the street or across the ocean, information systems 
must at least communicate with current and potential partners
DATA: BOOZ ALLEN & HAMILTON INC.





Copyright 1993 McGraw-Hill, Inc. All rights reserved.