Virtual Firms
Business Organization and Virtual Firms
When the World Wide Web first gained in popularity, many firms created
web pages and initiated direct contact with consumers. Increasingly,
however, web page development is contracted out to professionals, and
many Internet-based marketing activities are handled by intermediaries.
Even sales in electronic malls may be delegated to intermediary merchants,
with the firms having no direct contact with the buyers. Since physical
distance is not a barrier to business transactions, the electronic marketplace
may resemble the face-to-face business of the old tradition, making
such intermediaries unnecessary. On the other hand, market intermediaries
have traditionally played other functions designed to enhance efficiency.
The new electronic marketplace will necessitate new innovative models
of firm organization, production, delivery, and overall market institutions,
including a close examination of the role of intermediaries. Chapter
4 discusses this fundamental issue in detail. Other time-tested, basic
business assumptions can no longer be presumed to hold true in this
new world. In the electronic age, firms no longer are based in a single
location because all functions need not be operated in one locale. Going
beyond even decentralization, a firm on the Internet becomes a distributed
company, or a virtual firm, where any operation can be anywhere.
A company like First Virtual, for example, exists only on a network.
The critical difference between this and a multi-office corporation
is that a virtual firm's day-to-day operation is also conducted on a
network. The mundane aspects of managing a company—administrative tasks,
scheduling meetings, supervision of remotely located employees, and
so on—appear to be the greatest challenge of a virtual company because
coordinating such matters most often depends on traditional means of
communication.
A promising application of electronic commerce for a virtual firm is
to use the web technology for within-business and business-to-business
interactions. Suppliers and customers are given appropriate levels
of access to intranets so that employees, suppliers, and customers can
be integrated in the firm's production and sales functions in a network
rather than a physical locale. Another still unanswered question is
whether inter firm relationships of virtual firms will be different
in electronic commerce. Economists have argued that a firm is an organization
by which producers can internalize transaction costs, which are costs
incurred in transacting business such as writing, monitoring, and enforcing
contracts. For example, if the cost of contracting bookkeeping and accounting
with an outside CPA (Certified Public Accounting) firm is high, a firm
may reduce costs by establishing an accounting department of its own
to handle the tasks. In an extreme case, a firm may find it efficient
to handle all activities from production, marketing, and payment to
delivery. When transaction costs are low, on the other hand, many functions
done within a firm may be contracted out in a market. To the extent
that electronic commerce reduces transaction costs, firms will contract
out or delegate many of their functions to other agents in the market.