When is virtual virtuous harvard business review

Save to Library Save. Create Alert Alert. Share This Paper. Background Citations. Methods Citations. Results Citations. Supplemental Presentations. Presentation Slides. Organizing for innovation: When is virtual virtuous?

Citation Type. Has PDF. Publication Type. More Filters. Why Innovation and Why Now. For nearly 30 years, organisations have sought innovation from outsourcing their back office information technology IT , and latterly also their business processes. There are many reasons that … Expand. Not teaching at a university?

Register as a student Register as an individual. Overview Included Materials. Learning Objectives To learn how managers can identify and implement the right blend of virtual and integrated organizational structures to enhance their company's ability to innovate. Details Pub Date: Aug 1, Discipline: General Management. Subjects: Centralization Digital transformation Innovation Joint ventures Organizational structure and design Outsourcing Product development.

Source: Harvard Business Review. Length: 11 page s. X We use cookies to understand how you use our site and to improve your experience, including personalizing content. Learn more. Because such knowledge is deeply embedded in individuals or companies, it tends to diffuse slowly and only with effort and the transfer of people.

Established companies can protect the tacit knowledge they hold, sharing only codified information. They can be quite strategic about what they disclose and when they disclose it. The information needed to integrate an autonomous innovation with existing technologies is usually well understood and may even be codified in industry standards. Systemic innovations, on the other hand, pose a unique set of management challenges regarding information exchange.

By their very nature, systemic innovations require information sharing and coordinated adjustment throughout an entire product system. Here is where a market-based, virtual approach to innovation poses serious strategic hazards. Each company wants the other to do more, while each is also looking for ways to realize the most gain from the innovation. In most cases, the open exchange of information that fuels systemic innovation will be easier and safer within a company than across company boundaries.

Coordinating a systemic innovation is particularly difficult when industry standards do not exist and must be pioneered. In such instances, virtual organizations are likely to run into strategic problems.

Consider how technical standards emerge. Market participants weigh many competing technologies and eventually rally around one of them. There are winners and losers among the contestants, and potential losers can try to undermine the front-runner or to fragment the standard by promoting a rival.

Until a clear winner emerges, customers may sit on the sidelines rather than risk making the wrong choice. By virtue of its size and scope, an integrated company may be able to advance a new standard simply by choosing to adopt a particular technology. If a large company commits itself to one of a host of competing technologies, consumers as well as companies promoting rival technologies will probably be persuaded to follow suit.

Once a standard has been established, virtual organizations can manage further innovation quite well. But when an industry begins to advance technology to a new level, the cycle can begin anew. Again, technically feasible choices present new strategic trade-offs.

Suppliers, competitors, and customers may fail to agree on a common path. Unless a big player emerges to break the logjam among rival technologies, the existing standard will prevail long past its usefulness.

Today, computer floppy disks are frozen in an old standard because no single company has been able to establish a new one. IBM pioneered the 3. Within two years, the memory capacity of 3.

The technical capability to expand diskette capacity is available, but no company has the reputation and strength to set a new standard. Through the s, IBM was large enough to coordinate standards among the key participants in the industry: personal computer manufacturers, diskette makers, and software publishers.

If IBM told the industry it would use a particular capacity on its next generation of machines, others did the same.

A simple rule of thumb applies: When innovation depends on a series of interdependent innovations—that is, when innovation is systemic—independent companies will not usually be able to coordinate themselves to knit those innovations together.

Scale, integration, and market leadership may be required to establish and then to advance standards in an industry. When IBM launched its first PC in , the company elected to outsource all the major components from the marketplace. By tapping the capabilities of other companies, IBM was able to get its first product to market in only 15 months. The microprocessor the was purchased from Intel, and the operating system which became PC-DOS was licensed from a then-fledgling software company, Microsoft.

The high-powered incentives of the marketplace could coordinate the roles of component manufacturers and software vendors. IBM successfully promoted its open architecture to hundreds of third-party developers of software applications and hardware accessory products, knowing that those products would add to the appeal of the PC. IBM also relied on the market to distribute the product. Eventually, there were more than 2, retail outlets.

By using outside parties for hardware, software, and distribution, IBM greatly reduced its investment in bringing the PC to market. More important, those relationships allowed IBM to launch an attack against Apple Computer, which had pioneered the market and was growing quickly. The IBM PC was an early success, and it spawned what became the dominant architecture of the entire microcomputer industry. More than a few business analysts hailed the IBM PC development as a model for doing business in the future.

The early years of the IBM PC illustrate many of the benefits of using markets and outside companies to coordinate innovation: fast development of technology and tremendous technological improvements from a wide variety of sources. The company failed to anticipate that its virtual and open approach would prevent it from directing the PC architecture it had created. The open architecture and the autonomy of its vendors invited design mutinies and the entry of IBM-compatible PC manufacturers.

And once that happened, manufacturers could purchase the same CPU from Intel and the same operating system from Microsoft, run the same application software from Lotus, Microsoft, WordPerfect, and others , and sell through the same distribution channels such as ComputerLand, BusinessLand, and MicroAge.

IBM had little left on which to establish a competitive advantage. To do that, IBM needed to coordinate the many interrelated pieces of the architecture—a systemic technology coordination task. And third-party hardware and software companies made investments that extended the usefulness of the original PC architecture.

Today, its PC business is rumored to be modestly profitable at best. Most of the profits from the PC architecture have migrated upstream to the suppliers of the microprocessor Intel and the operating system Microsoft and to outside makers of application software. Virtual approaches encounter serious problems when companies seek to exploit systemic innovation.

Without directed coordination, the complementary innovations required to leverage a new technology may not be forthcoming. How have the most successful virtual companies accomplished the difficult task of coordination? The virtual companies that have demonstrated staying power are all at the center of a network that they use to leverage their own capabilities. Few virtual companies that have survived and prospered have outsourced everything.

Rather, the virtuous virtuals have carefully nurtured and guarded the internal capabilities that provide the essential underpinnings of competitive advantage. And they invest considerable resources to maintain and extend their core competencies internally. MIPS had a good technical design, but that was literally all it had, and this hollowness left the company at the mercy of its partners. The very reliance of virtual companies on partners, suppliers, and other outside companies exposes them to strategic hazards.

Put another way, there are plenty of small, dynamic companies that have not been able to outperform larger competitors. In particular, a hollow company like MIPS is ill equipped to coordinate a network of companies. Although Sun also worked with alliance partners, it had strong internal capabilities in systems design, manufacturing, marketing, sales, service, and support. Many companies with superior capabilities have prospered as the dominant player in a network.

Japanese keiretsu are structured that way. Consider Toyota, whose successful introduction of the lean production system—a truly systemic innovation—required tremendous coordination with its network of suppliers. Because Toyota was much larger than its suppliers, and because, until recently, it was the largest customer of practically all of them, it could compel those suppliers to make radical changes in their business practices.

In a more egalitarian network, suppliers can demand a large share of the economic benefits of innovations, using what economists call holdup strategies. Strong central players like Toyota are rarely vulnerable to such tactics and thus are in a better position to drive and coordinate systemic innovation.

The most successful virtual companies sit at the center of networks that are far from egalitarian. Nike may rely on Asian partners for manufacturing, but its capabilities in design and marketing allow it to call all the shots. Those companies control and coordinate the advance of technologies in their areas, and in this regard they function more like integrated companies than like market-based virtuals.

Today, few companies can afford to develop internally all the technologies that might provide an advantage in the future.