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.