Virtual Enterprises
Ted Goranson

Advanced Virtual Enterprises
in the
Developing World


This document is an overview of the virtual enterprise business model, together with some history and examples of benefits. The positive political and economic effects of this type of organization are included, to indicate what makes it desirable at the macro level beyond the better, cheaper and faster products it enables. This paper is a quick introduction to why virtual enterprises stimulate business innovation, why they will be good for the developing world, how to make them happen and what a demonstration project will look like.

About Virtual Enterprises

A virtual enterprise is a collection of small and medium-sized companies that work together so effectively that, to the outside world, they appear to be a single corporation. They are “virtual” in the sense that they aren’t institutionalized members, like the suppliers to a giant car company. Instead, they are needs-based collaborators, like performers in a jazz pickup group. Members form specialized alliances, sometimes temporarily, so the key to their success lies in how they manage the alliance. In an established corporation, like Toyota, standardized practices, costs and schedules simply cannot keep up with evolving design. A government-sponsored study of enterprise models found that an innovative enterprise such as a virtual enterprise requires its own method of management.

Historically, the emergence of more agile business structures is the result of progression from the first generation firms of the industrial revolution. Ford, for instance, originally made its own paint and screws, while forming co-owned large companies for glass and rubber. Its operations had a high degree of vertical integration; everything was within one corporate envelope, with the market forces only acting between Ford and its customer. (In Ford’s case, even that was compromised, as Ford sold only to selected dealers who then dealt with the end users.)

We are now in the second generation of business enterprises. The illusion of a monolithic company still exists, but it is often not the case. People still think that Boeing for example makes the airplanes sold under the name Boeing, but Boeing is actually a family of thousands of companies, many of them small, integrated into a supply chain. Boeing still provides the oversight, but new internal corporate-to-corporate boundaries and associated market forces now exist. There are significant benefits from this: flexibility, explicit contractual responsibility, scalability (especially in terms of financing) and the ability to choose how much to avoid being involved in the detailed operations of the supplier.

However, these second generation enterprises have some significant disadvantages. They are profoundly costly to manage. In a typical aerospace product, 80% of the value comes from the suppliers but 80% of the final price paid by the customer goes for centralized management. That bloated cost funds administration, and mostly supports the alignment of processes and measurements — the “enterprise integration.” In other words, the Boeing brand exists not to primarily design and assembly of airplanes, but to coordinate the many elements that go into the design and assembly of the enterprise. The enterprise is the primary product with the aircraft an artifact.

The enterprise is maintained by management practices supported by and largely shaped by computerized tools. Unfortunately, these are notoriously bad and have been deemed a crisis for decades within industry. Because each large firm suffers under the same disadvantage, the usual check of competitive forces is no incentive to rectify the problem. No one other than the customer is alarmed. In the studies Sirius-Beta managed, the customer was the Pentagon, which was worried about the impossibility of getting effective products and their support systems in a realistic time and cost frame.

Second generation enterprises conceal other heavy costs. They harbor inefficiency; most of Boeing’s staff are employed to manage other managers. They are too slow to respond; Ford can add or subtract resources, making more or fewer cars depending on market demands, but finds it very difficult to adapt to changing market demands. Wang Laboratories was one of the biggest technical firms in the world, making word processors. It should have been easy for it to respond to the revolution in personal computing. Instead the company was too cumbersome. The very solidity and routines that allow them to stably coordinate large, complex supply chains keeps them from responding to changing markets, and made it redundant. Markets are now changing more quickly and radically than ever before.

Besides being costly and inflexible, there are other disadvantages of second generation enterprises:

• They are not innovative. Large companies now respond to consumer demand for innovation is by buying small companies that have developed a new process, product or market. Innovation comes from small firms; in fact, in the United States, every new job since World War II is the result of growth in small businesses.

• Their employees are not as happy, motivated or productive as those in healthy small firms. This stems from the top-down imperative; in order to keep its supply chain in line, a company needs a corporate culture and accompanying practices. These are famously uncomfortable for employees and can sometimes be illogical and frustrating. Workers are generally more fulfilled when their company thrives on their creativity and working methods.

• They perturb the market, reduce the efficiency of economies worldwide, and can even compromise political governance. This is obvious: the power of large companies often goes into restricting the market or changing the economy rather than making money the old fashioned way, by providing something valuable. The financial power of megafirms can literally derail the democratic process. Since the primary investment strategy for the developing world often involves investment by or for large corporations, the effects become neocolonial, with no path for developing economies to do much but provide cheap materials and labor. “Globalization” in this context means less about opportunity and more about exploitation.

Virtual Enterprises are the third generation. They can be seen as the evolution of the supply chain, so that all of the internal coordination can be handled by market forces. There are already instances of this in operation. Chinese manufacturing in Shenzhen was explicitly designed using agile virtual enterprise principles, with special legal and social provisions that supported it. The result in agility and profitability has been staggering. Here, a significant virtual enterprise can be formed in a matter of days, complete with process integration mature enough to produce prototypes.

There is a spectrum of virtual enterprise architectures; following is a brief overview.

Simple Virtual Enterprises

Simple virtual enterprises already exist in a range of forms. These small business teams tend to be physically collocated and known to each other. An example can be seen in Northern Italy, in the production of fashion shoes. The numerous, small companies have been in business for generations; they know what each manufacturer can make, how well, and how trustworthy they are. They can quickly put together a combination of firms to satisfy what is likely to be a large but temporary demand for a single product. They do it over and over, with different materials, companies, processes and designs.

The US and Indian movie businesses are well studied examples of the same phenomenon. In a matter of days, thousands of people in hundreds of small, specialized companies can be located, contracted, focused and put to work on a new film.

Simple virtual enterprises are usually formed from a pool of companies that have prepared themselves to be available in this way. They have advertised their abilities to each other and figured out logistics ahead of time. Their infrastructure will have been pre-harmonized, so their contractual, technical and business operations are easy to work with. They will have also devised trust and adjudication strategies so that when things go wrong or liabilities appear, the enterprise can recover easily. (There are a few such strategies.)

Finally, they will have figured out a way to present themselves to the outside world as a unified enterprise, the way a US film is branded as a unified product. While this simple form of virtual enterprise is easy to create, it does not exhibit the most radical benefits. For that, the advanced virtual enterprise is needed.

Advanced Virtual Enterprises

An advanced virtual enterprise will have some of the following qualities:

• The partners may never have met before and possibly be spread across the globe.

• Rather than harmonizing their technology, processes, culture and business practices, they may be radically different. These unique approaches are leveraged as competitive advantages in ways that are not possible in more consolidated organizations.

• They will be cheap to form and dissolve, allowing “promiscuous” experiments in new products, services and markets. Notwithstanding, if a project takes off, the enterprise can become permanent.

• They will not only be agile in how they form, they will also be dynamic in reforming. Once operational, they improve, either to optimize based on existing goals, or to adapt, refining the goals. Rather than have every partner jostling for a bigger role, partners are instead rewarded for improving the profitability of the enterprise, even if their direct role diminishes.

• They are capable of making something that has never been made before, or providing a service that has never been offered. They may use skills or equipment in ways that were not expected. During the adaptive operation of the enterprise, they might be aggressively learning or acquiring new skills and resources.

• A simple virtual enterprise often relies on a central agent to organize things; sometimes that agent also is the collective marketeer and trust adjudicator. An advanced virtual enterprise has these responsibilities distributed more among direct-value creating partners.

History of Virtual Enterprise Research

There is a significant history of research into advanced virtual enterprises.

In the 1990’s the US military became concerned with the extraordinary cost of its advanced systems. Key studies showed that emerging aircraft and missiles were taking longer to build and costing more than equivalent projects in the civil sector. The problem was identified as the limits of the enterprise integration technology; in other words, the problem lay primarily with the information systems used to coordinate operations its effects on management practices.

These were the same systems and methods used in the civil sector, but in the military sector, they were used more thoroughly so the problems were more acute. Additional studies showed an even more dangerous cost: many advanced technologies were not being included the military’s state of the art systems. We knew how to make them by themselves, but the integrating infrastructure simply couldn’t accommodate them in a complex system. Not only were advanced fighter aircraft taking twice as long to design and build, and costing at least twice what they should, but they were not as capable as they could be!

Additionally, the companies involved in military systems were so huge that in order to justify the effort expended on any one design, there had to be many items made and purchased — often more than the military actually needed. The Pentagon preferred many different designs in small numbers, but this was impossible. When the waste was identified at tens of billions of dollars per year, a substantial research effort was chartered and assigned to the Defense Advanced Research Projects Agency, DARPA. The Pentagon sponsors of the work believed that if DARPA can create the Internet, surely they could improve on current methods of manufacturing.

A range of projects was funded at several hundred million dollars each, so as to surround the problem. They identified blockages in both technical and non-technical areas: management, financial, legal and cultural. A central program eventually resulted in the development of technical infrastructure that was mature enough to use on a specific project. At this point, the major defense contractors lobbied Congress to close down the research.

By that time, a research partnership with the European Union had been established. Europe is as dependent on the health of its small and medium sized companies as the US. In the decade since DARPA dropped the ball, the EU has funded many projects aimed at incrementally improving the virtual enterprise infrastructure, starting with the simple case. As a result, today there is a significant overseas community to support the paradigm: university programs, standards bodies, professional associations and their conferences, consultants and products.

But no one has taken the next step, to demonstrate the capabilities of an advanced virtual enterprise. One of the problems has been a lack of supporting technology, and a simple lack of awareness that the alternative exists. All the necessary infrastructure is now available for some cases; only a demonstration is needed. A successful, thoroughly-monitored and well-reported example will offer more choice in business paradigms, along the way boosting investment strategies for the developing world.

Barriers to Advanced Virtual Enterprises [More].

Virtual Enterprises and Microlending [More].

Virtual Enterprises, the Developing World and Rwanda [More].

Virtual Enterprises and Ethnomathematics [More].

Example Demonstration [More].

Virtual Enterprises and IBM [More].

The EU Future Internet Enterprise Systems Program [More].

Sirius-Beta [More].


Download this white paper as a PDF [Here].