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Virtual Firms and Value Networks

 

The new economy is a world where journalists adulate the virtual firm — a company that
sits in the middle of a network of electronically linked alliances, but owns few physical
assets. It is an extremely opportunistic model, in which alliance partners change
frequently and rapidly. In this ideal world of virtuality, a concept company can sit in the
middle of a spider’s web of alliances, working its magic and its power over many smaller,
partner companies that are easily replaced .
Many value-adding tasks within a virtual firm’s value chain can be outsourced while still
maintaining overall control of the project. For example, a motion picture can be produced
for a media firm by contracting for the performance of most tasks.
Once the motion picture has been completed, the media firm may exploit its
film property through a variety of distribution outlets — including movie house
screenings, videotape rentals, and television airings, among others — that may be owned
by other firms.) In new economy parlance, the media firm’s partners in this exploitation
comprise members of its “value net” or “econet”. The media firm need not own its value
net’s assets to produce the motion picture (nor distribute it to audiences once the film is
produced).
From “hollow corporation” to virtual firm. When Business Week noticed the virtual firm
phenomenon in 1985, it called them “hollow corporations” and decried the loss of US
competitiveness. Fifteen years later, virtual firms are the popular press’s Net-centric
champions of wily value exploitation and they are making strategic flexibility choices
similar to old economy decision forks.
Opportunism in e-space. The new virtual firm is extremely good at making matches
between vertically related parties, finding logical dancing partners, forming temporary
teams of outsourcers, and being an effective systems integrator. To accomplish this,
necessarily, virtual firms use transactions that are very loosely coupled.
In order to do so, virtual firms have networks of non-binding relationships from
which they can choose partners for a particular transaction. For
example, hospitals have memberships in several different pharmaceutical-buying plans to
choose from, depending on which vendor offers the best prices for a specific product
during a bidding round. In such loose alliances, firms leverage the power of being part of
a team that uses its market power to get members a better price, but each firm remains an
individual, non-linked entity that can claim membership opportunistically to get desired
price breaks or other benefits. Participation is by mutual agreement and the virtual firm
that manages the buying group must keep membership attractive. Promiscuity within new
economy industries is condoned due to a prevalent “built-to-flip” mind set.
In the new economy industries, supported by new media start-ups, vast technology
options, and turnkey internet consulting firms, the virtual firm is the ideal business model.
A virtual firm enjoys the freedom and flexibility of a relationship of networked,
temporary alliances to implement its strategy. Although alliances and outsourcing existed
in the old economy, vertically integrated firms — large corporations that owned (or
controlled) all aspects of their operations — dominated the old economy business arena
and thinking about vertical strategies. The similarities
(and differences) among old and new economy firms may be observed in the speed with
which they implement changes in strategic intent.
Differences in the vertical and virtual business models are next described to suggest
how flexibility issues differ therein.
Competitive iterations.  De novo firms enter a market space served by
incumbent firms. Their entry is possible because of an innovation they have applied to
serve customers differently than incumbents. Perhaps they have syndicated valuable
content to customize product offerings for diverse users by leveraging an idea or platform)
across related settings. De novo firms may have disintermediated traditional supplier-
buyer relationships (replacing them with their own network of value-adding partners)
while they leveraged market power in one setting to gain entree into other value-net
constellations.
The de novo firms applying these innovations are assumed to use virtual strategic
postures and rely on virtual business models. Since their arrangements are informal (i.e.,
they own few assets that could become exit barriers), the de novo firms are assumed to
have the greatest ease when re-positioning themselves in the face of turbulent
competition.
In the race  to obtain resources that are critical to competitive
success, virtual firms are expected to use other firms’ resources while incumbent firms
may have to develop critical resources in-house (or through acquisition’. Similarly, the
race to learn and develop new organizational capabilities relies heavily on finding
complementors that can perform critical outsourced tasks so firms can locus their
energies on areas of activity where they are effective.
While incumbent firms work to reduce barriers to flexibility by dismantling strategic-
postures that have sewed them well in the past, de novo firms struggle to survive into the
next round of competition. Since few advantages provide de novo firms with Ricardian
rents (e.g., enforceable patents), it is assumed that they strive to reinvent themselves
through their own efforts or with the help of their network. Since product life cycles are
shorter in hypercompetition, strategic flexibility issues become germane faster because
strategic postures must be modified more frequently. Finally,   the old
economy assumption that asymmetrical strategic groups can coexist because incumbents
and de novo firms with differing time horizons will define success differently and invest
accordingly. (This assumption may arise from the presence of different types of owner-
ship groups with differing payback horizons.)

 

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