The Idea in Brief
Champions of virtual corporations praise outsourcing as the way to gain the flexibility essential to innovation. “Going virtual,” they claim, makes you exquisitely responsive to marketplace changes, enhancing your innovative prowess.
But virtual organization supports only certain types of innovations. Before deciding how to organize, know what kind of innovation you’re after:
- Autonomous innovations can be developed independently from other innovations. For example, you can create a car-engine turbocharger without redesigning the entire vehicle. Here, decentralized, virtual organization rules. Partner with smaller, competitive vendors to get the technologies you need—quickly.
- Systemic innovations generate value only with complementary innovations. For example, to profit from instant photography, Polaroid had to develop new film and camera technology. Here, you’ll need centralized, fully integrated organization to coordinate the interdependent innovations.
But don’t go entirely virtual or integrated. Mix the virtues of both. An either/or approach can prove counterproductive.
In 1985, IBM’s share of the PC market soared to 41%. Its virtual approach to innovation—outsourcing hardware, software, and distribution—let it quickly tap other companies’ technological capabilities and speed its first product to market in 15 months. But by 1995, IBM’s market share was just 7.3%. Why? By outsourcing so much to autonomous vendors, IBM lost control. Third parties mutinied, cranking out IBM-compatible PCs. Its internal capabilities neglected, IBM could only watch helplessly as its partners—Microsoft, Intel—began directing the PC architecture IBM had created.
The Idea in Practice
A Potent Blend
Successful innovators are virtual and integrated. For example, “virtuous virtuals” outsource selectively. They also strengthen the internal capabilities underpinning their competitive advantage. For instance, Nike relies on Asian partners for manufacturing, but its design and marketing muscle lets it call the shots.
And integrated firms act decidedly virtual sometimes. Few can afford to internally develop every high-potential technology. So, they may “purchase” technologies from other firms or acquire them through licenses, partnerships, or alliances.
How to Achieve the Right Mix
1. Ask the right questions. How do you organize to obtain the technologies needed to fuel your innovation? First ask:
- Is the innovation systemic now—or likely to become so in the future?
- What needed technologies exist in-house and among our suppliers?
- Should we buy technology from a supplier, or form alliances or joint ventures?
- When should we internally develop a technology?
2. Match organizational structure to needed technologies. Example:
Battery technology plays a critical role in Motorola’s handheld communications devices, determining how long devices function before recharging. Numerous technologies exist—from conventional nickel cadmium (Ni-Cd) to exotic, not-yet-viable technologies (e.g., fuel cells).
How should Motorola obtain the technologies it needs to deliver “untethered communication”—its long-term goal? With Ni-Cd, it should buy the technology. Competition among established suppliers will provide what Motorola needs—quickly and affordably.
But with exotic technologies, Motorola should proactively ally itself with the best suppliers. It can then control future systemic innovations and bring them to market at the right time. It should also use its internal capabilities to develop technologies itself. With this blended approach, Motorola can retain long-term market leadership—avoiding IBM’s plight.
Champions of virtual corporations are urging managers to subcontract anything and everything. All over the world, companies are jumping on the bandwagon—decentralizing, downsizing, and forging alliances to pursue innovation. Why is the idea of the virtual organization so tantalizing? Because we have come to believe that bureaucracy is bad and flexibility is good. And so it follows that a company that invests in as little as possible will be more responsive to a changing marketplace and more likely to attain global competitive advantage.
