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The New Organizational Structure and its Virtual Functioning.






"Virtuality" is initiating a change in organizations. It is necessary for companies to be managed flexibly and to respond to the changing needs of the environment. Some new concepts of understanding the organization, accompanied by current technological developments, may offer some opportunities and solutions to the various strategies. How does this new concept of organization with no presence, no physical attendance, and no material factors affect existing companies? This paper deals with questions such as: What is virtuality for companies? How does one manage a virtual company? What elements of virtuality need to be considered by traditional companies entering the new millennium? These questions will be reflected upon and analyzed from a theoretical framework. The framework will provide the basis for the design of an empirical study. The results of the study contribute to and give feedback on these initial questions. (JEL M10)


Western world economies and companies are searching for new ways to respond to the changing environment. However in many cases, both questions and answers tend to be topical but not necessarily manageable due to the great number of unknowns surrounding the current changes.

One of these great answers or challenges is the virtual organization. It is necessary to reflect upon and analyze this topic in more depth. First of all, there is a need to define the concept of virtuality and then see how it will be possible or convenient to manage companies using the opportunities or problems it may pose. Some authors have already been able to conceptualize and contribute with practical proposals for virtual organizations (for example, see Gil-Estallo and Rodriguez [1998]).

Regarding the first question, the concept of a virtual corporation was first put forth by Davidow and Malone [1993] and means an organization that is oriented to the market and can give immediate answers to the demands of its customers. Since then, there has been an influx of ideas by many authors who have contributed with their definitions. Eduardo Bueno-Campos [1996] considers that the virtual organization is made up of a set of value chains that relate and intertwine the organization, suppliers, clients, competitors, and other organizations, resulting in synergies and higher efficiency for the economic system.

This paper advances another definition for the virtual organization. For the purposes of this paper, a virtual organization is one to which different people contribute, from the strategic apex to the operational level, and do not necessarily coincide on time or space.

Essentials about the Virtual Organization

A key aspect about the virtual organization is information. Virtual organizations work around an efficient use of information and information systems. How does this work? There is no single and simple answer. It can be assumed that information will be made available to all or most members of the organization. This will cause changes in the organization's management of finance, marketing, and accounting, but above all, in the management of its human resources. [1] Therefore, reconsider the main value chains (as shown in Figure 1) of the organization:

1) The real value chain consists of the physical activities of purchasing, production, and the flow of materials and sales.

2) The virtual value chain consists of design, organization, selection, synthesis, distribution, and commercialization of internal or external information.

3) The financial value chain consists of acquisition, utilization, and distribution of monetary funds.

4) The human resources value chain consists of inflow, development, and exit.

The importance of this final value chain refers to knowledge, abilities, aptitudes, and attitudes: all valuable elements for the implementation of a management system with no physical presence. This is called virtual management.

Awareness of these value chains will be essential to analyze the functioning of virtual organizations and to consider the possibility of generating value in each diachronically separated moment: before, in the company, and afterward, for each chain. However, the adequate functioning of a virtual organization is sustained under a number of premises or pillars. According to Gil Estallo [1999], these are:

1) First pillar: Flexibility requires the capacity to generate or acquire knowledge, which is useful in each moment (knowledge management, intellectual capital), and the capacity to change rapidly (adaptation, evolution).

2) Second pillar: Fluid communication is needed both internally and with the environment, which requires the capacity for early detection of current and potential needs (vision) and the capacity to generate trust and confidence both internally and with the environment.

3) Third pillar: Virtuality is needed in all activities to enable and facilitate flexibility and communication.

These factors are mutually interrelated. It is only possible to consider them separately from a conceptual standpoint. They represent a whole.

An Initial Design for the Virtual Organization

In order to define an organizational model, it is first necessary to design a place of work or a job. In a model such as the one proposed, the description of this job will involve not only the various tasks to undertake, but also the responsibilities attached to them as well as the knowledge necessary to operate in this new medium. This will normally materialize in enriched jobs, normally including knowledge about telematic means and specific software.

This will be the starting point for the design of the operations of a virtual organization. The model can be defined from the various structural elements consisting of: a strategic apex, line management or strategic business units (SBUs), an operational level, its instruments, and activities that can be developed outside the organization such as subcontracting. In this model, technostructure and support staff become part of the various SBUs.

The role of the strategic apex is to establish the corporate mission, determine a vision for the business, define the organizational culture, the beliefs, and the value system, to be the link between the different SBU's, to solve conflict, to initiate and lead projects, to spread information and experiences of other SBUs, and to lead innovation processes [Gil Estallo and Luengo, 1996].

SBUs need to be designed, keeping in mind two basic processes: production and marketing. Process itself plays a fundamental role in the integration of the organization, insofar as it gives direction to the development of value-added products or services of the company from the client's point of view. Also, the implementation of a good process will serve as a basis for the organization of working teams. Processes, understood as the set of interrelated activities that aim to satisfy the specific needs of an internal or external client, involve and include various interdepartmental functions. Thus, we can appreciate all the activities of an SBU by focusing on production and marketing (considered from a wide perspective).

Service units, on their part, are the internal suppliers of the SBUs. Their role is that of functional units, providing specialists in human resources with consulting, process engineering, finances, computing, and logistics to the various teams and providing support to the SBUs that require them.

In such a model, information and communication are essential. Therefore, in order to be more efficient, it is necessary to use the most developed and widely implemented (in virtual organization) instruments or means: electronic mail, intranet, and internet, and with the previous definition of workflows, GroupWare, powerful databases, and document processors.

The operational level is made up of operatives who undertake various activities to secure inputs, transform these inputs into outputs, and distribute outputs. They also contribute with a direct support for these activities with tasks such as: carrying out inventories, maintenance of machinery and tools, preparing orders and receipts, packaging, and the like.

Finally, all other operations or tasks that have to do with the activity of the operational level but do not belong to the core processes of the organization can be subcontracted as outsourcing.

Figure 2 will shape and make understandable the model of the whole system. This is the model that will be tested and contrasted with the most recent experiences of organizations operating in different levels of virtuality.

An Observation of the Virtual Behavior of Spanish Companies

As a means of analyzing the degree of virtual functioning of organizations, and its most direct effects on their management, an empirical study of Spanish companies has been carried out. The study consists of an analysis of the organizational structure of a sample of companies in order to detect signs of virtual functioning in these organizations. In any case, the introduction of virtual elements in these organizations entails some degree of change. The main findings of the empirical study are now summarized.

The profile of companies where the questionnaire was administered is distributed among the manufacturing, construction, and service sectors. In this paper, the results will be considered aggregately, leaving the sector differences for further investigation.

First, it is necessary to operationalize the concept of virtual behavior. From the conceptual framework presented above, it is possible to identify some key indicators that may show virtual behaviors. These would be related to:

1) undertaking jobs without the need to coincide in time and space;

2) using new technologies for the development of business activities and its effects;

3) developing activities without the need of physical presence;

4) having a telematic relationship with clients and suppliers;

5) subcontracting activities which are not considered strategic for the company; and

6) the client as the center of the company's functioning.

Keeping these factors in mind, a first distribution was made among the companies according to their degree of virtual functioning. They were divided into three categories: fully virtual, partially virtual, and with no virtual activities. From the sample of 40 companies analyzed, the first finding indicates that 52.5 percent present some behaviors that allow for placing them into the partially virtual category. Another 10 percent of them can be considered fully virtual, and the remaining 37.5 percent do not carry out any activity in a virtual manner. This information provides a starting point in order to explain a change in trend regarding the way companies will work and organize themselves in the current and future environments.

In 75 percent of the fully virtual organizations, more than 50 percent of their employees carry out their jobs in a virtual manner. This includes distant decision making. However, in most partially virtual companies, less than 5 percent of the work is carried out virtually.

Regarding the main characteristics of the jobs, or basic organizational units, it can be observed, against the expected results, that there are no significant differences among the three categories of companies, particularly with regard to the degree of specialization and formalization of behaviors of jobs. However, there is a remarkable difference regarding the training and preparation of employees. Fifty percent of fully virtual companies ask for university education in order to access any job at the operational level, whereas university education is only required in 28.6 percent of partially virtual organizations and 14.3 percent of nonvirtual organizations.

In the same direction, 100 percent of fully virtual organizations provide their employees with internal training, with a much lesser proportion in the other categories. This may explain the fact that in 50 percent of the fully virtual organizations, the real decision-making power of the organization is spread at all levels, according to the responsibilities assigned to each place of work.

Regarding the grouping of units, the results of the questionnaire show that all fully virtual organizations group their activities around the distribution of their clients, whereas this is a common practice in only 28.6 percent of partially virtual organizations and in 26.7 percent of nonvirtual organizations. The grouping around SBUs also occurs differently depending on the category: 75 percent, 52.4 percent, and 13.3 percent of companies of each category, respectively.

Regarding the number of hierarchical levels of companies, no significant differences were found among the three categories, and it was considered quite high in all of them. However, virtual organizations are different from the other categories in their higher regard for the opinion of their clients and their personnel with regard to the definition of the products or services offered by the company.

Regarding information and communication systems, most fully virtual companies make a very heavy use of new information technologies: internet, e-mail, intranet, and the like. In fact, these technologies are at the core of their business activities and are key to the achievement of their objectives since they facilitate communications at all organizational levels. On the other hand, most nonvirtual organizations have a very limited use of technologies, concentrating more on traditional communication methods such as postal mail, telephone, and fax.

These data are consistent with the believe of 100 percent of fully virtual organizations which appreciate the high importance of efficient communication at all organizational levels. This explains their reliance on intranet systems. Only fully or partially virtual organizations use intranets or electronic data interchange to communicate with their clients and suppliers. No nonvirtual organizations were found to use these systems, and, at most, they would use electronic mail for some of their activities.

Carrying out company activities in a virtual manner was found to be associated with a greater use of subcontracting. The range of activities subcontracted was very wide in all categories. Virtual organizations also make the greatest use of part-time contracts.

In order to make a first insight into the degree of effectiveness of each category of companies, respondents were asked about their percentage of profit over sales. The response rate for this question is acceptable since it was answered by all fully virtual companies, 76 percent of partially virtual companies, and 73 percent of nonvirtual organizations.

The results were surprising. It was observed that 50 percent of fully virtual companies have a profit over sales above 20 percent. This behavior is not observed in any of the nonvirtual organizations, and only in 6.3 percent of partially virtual organization. Of the partially virtual organizations, 31.3 percent have their profit over sales situated between 11 and 20 percent. For 90.9 percent of nonvirtual organizations, this percentage is smaller than 10 percent.


When comparing the results obtained with the original proposed model, it is possible to test for and identify companies whose behavior is related to most of the characteristics making up the concept defined as a virtual organization. In the model, three basic pillars for sustaining virtual organizations were put forward, namely flexibility, fluid communications, and virtuality:

1) Flexibility is understood as the ability to generate or acquire useful knowledge at each moment, and the ability to change rapidly via adaptation and evolution. In this respect, it has been possible to observe the great importance of training and preparation of the people who work in virtual organizations, as well as the capacity to make decisions at all organizational levels, with both behaviors sustaining flexibility.

2) The need for fluid communication, both internally and with the environment, is reflected in the importance given by virtual organizations to communication at all organizational levels, with the related use of new information technologies both in their internal functioning and in their relationship with clients and suppliers.

3) Regarding virtuality in carrying out activities to facilitate flexibility and communication, it is highly relevant that in 75 percent of organizations considered fully virtual, more than 50 percent of their employees develop their everyday job in a virtual manner.

As a conclusion, it is possible to state that we are at the beginning of a new way to manage organizations in which virtual behaviors will be at its basis.

(*.) Universitat Pompeu Fabra--Spain;

(**.) Escola Universitaria del Maresme--Spain;

(***.) Universitat Oberta de Catalunya--Spain;

(+.) Universitat de Lleida--Spain.


(1.) This paper adds the value chain of human resources. This chain did not appear in the previous article where this model comes from. For more details, see Gil Estallo [1999].


Bueno-Campos, E. Organizacion de empresas: Estructura, procesos y modelos, Madrid, Spain: Piramide 1996.

Davidow, W. H.; Malone, M. S. The Virtual Corporation: Structuring and Revitalizing the Corporation for the 21st Century, New York, NY: Harper Collins, 1993.

Gil Estallo, M. A. Dirigir y organizar en la sociedad de lainformacion, Madrid, Spain: Piramide 1999.

Gil Estallo, M. A.; Luengo, L. M. "La adaptacion de la estructura organizativa a la necesidad de innovacion permanente (La Organizacion Creativa Eficaz)," Centro de Estudios Universitarios Ramon Areces, 1996.

Gil Estallo, M. A.; Rodriguez I. "La Televentanilla Virtual para la Creacion de Empresas Iniciativa emprendedora, 9, March-April, 1998, pp. 41-7.
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Comment:The New Organizational Structure and its Virtual Functioning.
Publication:International Advances in Economic Research
Geographic Code:1USA
Date:May 1, 2000
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