Concept of Virtual Network Structure (VNS)

In today increasingly stiff competitive environment, organisational structure is becoming a very important role to a company in the market competition. The organisational structure is explained as the formal decision-making framework that will be done by dividing, grouping and coordinating job tasks. However, in order to design organisation structure managers need to address six key elements, those are work specialization, departmentalization, chain of command, span of control, decentralization and formalization. Secondly, for the face on the sharply environment change, HR managers should divide the tasks and then coordinate those, in essence balancing job-related specialization with group, inter group, and organisation-based integration as necessary. They also said that organisational structure defines the firm’s decision-making authority and serves as the connecting fibers between the company’s strategy, the actions and behaviors of members. For example, organization must design structure that facilitates close to coordination between the activities of manufacturing and those of research, and development it to ensure innovative products can be produced both reliably and cost effectively. To achieve gains from synergy between division, company must design mechanism that allow divisions to communicate and share their skills and knowledge. In pursuing a global strategy, company must create the right type of organisational structure for managing the flow of the resources and capabilities between domestic and foreign divisions.

In broad expressions, a Virtual Network Structure (VNS) is a more contemporary organization design. This structure means that the business subcontracts most of its key functions to some other different businesses, and coordinate their activities from its headquarter to gain competency in the competitive market. Various network organizational forms have been materialize from the formalization of relationship between, such as, suppliers, competitors and other vertical or horizontal partners. A virtual network structure facilitates the introduction of intelligent agents that can at the same time implement numerous orientations for network engagement with the market and its customers. And also virtual network structured organizations may be viewed as a focal point or hub surrounded by a network of outside specialists. Furthermore, one of the main objectives of the virtual network organization is to shorten the business process life cycle with the objective of generating and delivering enhanced worth to business clients and their customers in real time. The general purpose of virtual network organizations is to take complete benefit of the different core competencies of members within the network, operating as a single organization across partner organizations to deal with ever-changing demand. To answer the fundamental motive of virtual network, if at all possible, network information is processed and distributed in real time throughout the entire network, which set aside network management to make decisions and bring together actions quickly in their drive to bring value and put up customer satisfaction. In forming networks the most important point of partners are to achieve the flexibility to serve the rapidly changing and competitive marketplace, to share and expand the understanding and skills needed to complete, to accomplish operating best practice and create further value or benefits for their customers. They further added that in particular, virtual network organizations have the infrastructure through which they capture, and interview customer and market data proficiently and competently, providing organization with real-time alternative to move on the customer’s value proposal.

Another important advantage that can be obtained with the virtual network organization is that it tends to generate networks of customers, suppliers and partners that facilitate the creation of information resources so importantly in the new information economy. Virtual network organizations are therefore not considered to be stand-alone entities but consist of a virtual network of self-regulating firms that contribute as partners, suppliers and customers in the virtual value chain. It also judged that the success of the companies at virtual organizing is depend on how effectively and efficiently the virtual network performs which can be measured by how its various parts or members work together. It is also pronounced that the structural perspective of the virtual organization relates to the shared relationship that exist between a set of independent organizations that enables them to function as a single organization to reach their common goal. Virtual organization consists of elements such as activities, resources including core competencies, organizations and individuals that are interrelated with control structures, interdependencies and exchange relations. And the concept of the virtual network structure organization supports the idea that various organizations contribute core competencies to the success of the specific organization. Virtual network structure helps to create core competencies, which can be explained as the bundling of specific capabilities, and technologies that can provide as the source for the development and prerequisite of several products. The value of core competencies to develop the competitive advantages of net organizations using virtual network structure is an important consideration for the companies when constructing a value chain. The virtual network structure for that reason is considered to consist of a collection of strategic business entities and competencies. Virtual network successful at allocating resources that integrate core competencies needed in the value creation process that can improve its competitiveness in the global marketplace. The strategic potential of individual companies participating in the virtual network in a sense depends on their unique set of core competencies and must be considered to be an integrated part of all processes of the virtual value chain

It is found that in today’s competitive era it is hard to find a appropriate profitable market and keep competitive advantages over other companies without producing low cost goods with outperforming after sales services. That’s why this is the basic reason of creation of virtual network structural organizations and outsourcing its some of the activities to the other companies. In organize to accomplish high levels of customer fulfillment, maintain customers over time and build market share, an organization must deliver ever-improving value to its customers with low cost. It is also found that need of virtual network organization is emerged because customer demands more specialized and particular products, which automatically leads organizations to a broader product variety and the result of individualization of products to consumer specification is that the complexity across all organizational functions increases. This difficulty can only be handled competently and successfully by advanced information and communication expertise that therefore, both straightforwardly and indirectly, viewed as an enabler and driving force towards the virtual organization. And also coordination, collaboration and production are still facilitated by the companies or network broker and are achieved by means of virtual organizing in the virtual network.

The Virtual Network Structure is a continuous evolving organisational structure for optimizing its cost-benefits through taking the advantages of emerging technology. The organization use the VNS will keep the continuous innovation for new challenge. Technology is the major driving force for mostly organisations shifting their organisational design, for example, the high technology will keep the Apple inc always have new things to the people. Technology is one of the main determined driving forces which refer to how an organization ‘transfers its inputs into outputs in designing organization structure’. Technology has relative structure by converting the financial human and physical resource into products or services. Different organisation needs different technologies with different environment as well as the different structure to operate their business. On another hand, the new technology always requires huge initial investment (including time). By reviewing the history of development of technology, electricity took 40 years to penetrate 50% population in USA, computer took 30 years and the Internet took only 6 years. The key difference between the Internet and the electricity development is that the rapid growth of the Internet lies on synergy effects. Similarly, the VNS provide a great incentive for promoting synergy between modern organizations as the major attractiveness for them to form strategic partnership is due to the strong inter-dependency among them.

The Virtual Network Structure suitable for certain firms in changeable environment. The environment is the institution or force outside the organisation that potentially affect the organisation’s performance. Due to the shifting of industrial structure and the pressures creased by the globalization, MNCs are facing many external opportunities and threats. In particular in 1990s, the business environment becomes a so-called dynamic ‘white-water rapids’ world. Global competition and economic downturns have exposed a glaring weakness in the US organizations. Accordingly, different management will choose different organisational structures to deal with the same global environment (such as under the similar or same economic) due to their internal environments, which would be significantly different from one another. Obviously, the global economic recession would force management to review their previous choices. Many leading corporations including banks like Bear Steins, Lehman Brothers, Merrill Lynch, and AIG are suffering severely from the financial crisis. Actually, at the end of 2009, some of those banks are having been failed.

The Virtual Network Structure is an extension of horizontal coordination and collaboration by establishing strategic partnerships between the kernel of the organisation, and its strategic partners. Unlike conventional horizontal structure, those strategic partners have their own organisational structures that most suitable for their internal and external environment.

Virtual network structural organization had some limitations because outsourcing the intellectual or other skills underlying a unique competency may be awful strategy because it creates reliance. In a virtual network structure it is not possible to keep some commercial secrets from a service provider intimately involved in core activities. Outsourcing through virtual network structure creates change problems because if an in-house system is replaced by a virtual organization there is a chance of disruption caused by misunderstanding or failure to transfer data properly. And also virtual network structure may cause entail dismissal or redeployment of employees or changes in the work they do. In some cases, by outsourcing a key component, companies lost their own strategic flexibility to introduce new designs when they wanted, rather than when vendors permitted a change. Virtual network structure also having expertise limitations because outsourced expertise at many different locations make close cross-functional teamwork more difficult. Contractual prearrangements are typically essential to make sure that critical personnel from the outsource partner are available when needed. But the buying company must be close enough to its partner to assess and name the particular people it wants; other provision may be worthless when it is considered necessary.

Case Study: Virtual Network Structure of Nike

This study now shows how a Virtual Network Structure firm like Nike is able to adopt appropriate strategy to achieve the organisations goals. Nike has its internal strengths in strong brand management, creative design and superior marketing techniques. Accordingly, from the perspective of organisation structure, the design should reflect the way job tasks being formally divided in two different groups or among individuals according to their diverse knowledge levels. Nike’s current challenges are capturing advantages of international operations in a sustainable way.

Virtual Network Structure of Nike

First, Nike has the challenge for reducing unit costs. Virtual Network Structure would help the firm reducing unit costs. This occurs when Nike takes the advantages of the strategic partners cheap labor costs in the developing countries. This is one key area that Nike cannot achieve in the USA as the labor costs in the developed country are much higher than those low-cost production facilities owned by the strategic partners in the developing countries. The example effective demonstrates that the external social environment of the organisation is a key for deciding whether a Virtual Network Structure structure is suitable for that particular organisation. The designer should identify the external social environment of the organisation. For MNCs like Nike, it has to secure the production several months ahead of the peak sales period.

Second, Nike has the challenge for improving its economies of scale. International operations would help the firm improve its economies of scale. This occurs when Nike acts as the marketer for the design that Nike has invested as the initial investment regardless the quantity to be produced later (‘sunk-money’ in short). International operations would help the firm absorb excess capacity. This occurs when Nike acts as the marketer for the summation of production quantity of all the strategic partners capacity of productions. In the modern era, most organisations had focused on mass production for improving production costs per unit. The demand on operational efficiency encouraged vertical organisational design, which emphasis on efficiency and control. Traditional organisational structure had been characterized with tall hierarchy. Cost minimization need tight control, high formalization and high centralization of strategies to produce high ‘standardization products’ efficiently. Besides, since mass production involve less innovative ingredients, imitation strategy requires both tight as well as loose properties in order to ‘minimize risk and maximize opportunity for profit in the organization’.

On the selling side, International operations would help the firm spread risk over wider markets. Since Nike management cannot fully handle the cross-cultural aspects around the globe, Nike effectively has to rely on massive domestic retailers to distribute its products in the way that fulfill those consumers’ expectations in the particular cultural background.

Moreover, International operations would help the firm enjoy less intense competition, or lower taxes – the tax rate in the USA is relatively higher than that in the developing countries. The above examples effective demonstrate that certain firms like Nike would heavily depend on Virtual Network Structure as a tool for capitalizing its internal strengths for capturing those potential external opportunities that otherwise Nike finds difficult to capture.

The Virtual Network Structure is commercially viable when the organization manages to secure its sustainable competitive advantages. An enterprise has a competitive advantage if it is able to create more economic value than the marginal (breakeven) competitor in its products market. Sustainable competitive advantages are the sort of resources that are Valuable, Rare, Difficult to imitate or Implications. For example, the co-founder of Nike (Bill Bowerman) himself is a rare human asset for Nike. He used to be a well-known athlete teacher. It was Bowerman to design the first generation Nike shoes. Therefore, Bowerman would be equivalent to Walt Disney during his embryonic stage. The example effectively demonstrates the importance for the founder of a great business to be an expert, or to be competent in the field. Nevertheless, being competent along does not guarantee the rapid growth of the business. Appropriate product development and marketing would be essential. For example, Bowerman defined Nike as perusing destiny. Since Nike also protecting those designs, the strategic partners find difficult to imitate or Implications. Moreover, the ‘Nike’ brand is valuable. It was the marketing experts that Bowerman chose to partner recommended “Nike” as a word represents something which is extra ordinary. Today, Nike is a brand symbol in sports all over the world.

Taking Nike as an example, it is facing significant external threats such as the retail sector is becoming price competitive. Fortunately, the Virtual Network Structure often manages to overcome those short-term down falls with its superior flexibility. For example, in the case when the Virtual Network Structure became blind to changes in the market despite healthy profits, the designer may address those external threats by maintaining small size of core staff.

Besides, Virtual Network Structure effectively force Nike to respond those external threats by decentralizing authority and varying its product line. In that sense, new trend in contemporary organisational structure design makes chain of command lose its importance. For example, Nike’s network structure enables direct communication across unit and firm boundaries, which improve the responsiveness to the rapidly changing business environment through reducing the dependence on the chain of command.