InformationWeek

March 20, 2000

Out Of The Box:
The Rise Of The Virtual Enterprise
As competition grows, companies are turning to virtual integration, which lets them concentrate on processes in which they can be world-class, and rely on someone else to perform the rest

By Michael Hammer

Michael Hammer hile Wall Street and the mainstream media have a boundless fascination with the Internet, they also seem unable to keep their attention focused on any aspect of it for more than a few weeks. Last year, business-to-consumer E-commerce was all the rage; now, business-to-business exchanges are a hot topic. Who can say what will come next?

All the while, one of the most important applications of the Internet is flying under the media's collective radar. The virtual enterprise (also known as virtual integration) is changing the entire concept of what it means to be a company.

In the early 20th century, Henry Ford's River Rouge plant achieved the height of vertical integration: in came iron ore and rubber, out came automobiles. Ford made his own steel, tires, and parts, then assembled them into cars. Although few other companies ever achieved this degree of self-sufficiency, the ideal of vertical integration underlay business strategy throughout the century. Companies wanted to control their own destiny and do everything for themselves; they only reluctantly used others as sources of parts or as a means of reaching their customers.

In today's hypercompetitive environment, however, companies can't afford to be second-rate at anything. Yet in an ever-more-complex world, it's impossible for any one company to be tops at everything. The solution in many cases is virtual integration-concentrate on processes at which you can be world-class, and rely on someone else to perform the rest.

Cisco Systems is one of the best-known virtual enterprises. Cisco concentrates on two essential processes-developing new products and selling products to customers-and leaves the rest to other companies. A contract manufacturer assembles the products from parts made by suppliers, and a materials-management company ensures the right amount of inventory is on hand, then delivers assembled products to customers. In most cases, Cisco never sees the products its customers receive.

In channel assembly, "manufacturers" don't actually make their products. The components are made by parts suppliers, and final assembly is done by distributors. The manufacturer designs the product and manages the distributor's parts inventory.

The major auto manufacturers are moving toward a model in which they will design the vehicle but not its individual parts; that will be left to parts suppliers. Some of the suppliers will also be responsible for assembling the vehicle's major subsystems (the interior, the chassis, and so on), which the manufacturer will combine at the end.

In all of these situations, it's difficult to determine where one company begins and another ends; the members of a virtual enterprise are tightly woven together. In a virtual enterprise, no single company can point to a final product and say, "We did that." Companies perform processes rather than produce complete products. When these processes all work together, the final product results.

Virtual integration goes far beyond outsourcing, in which a company lets others take care of nonessential functions. In a virtual enterprise, specialist firms perform critical processes-not because they're unimportant, but rather because they're so important that the original company can't afford to have them handled in a mediocre way.

The key to successful virtual integration is to enable all companies involved, each of which is performing only certain processes, to work together as smoothly as they would if they were all one enterprise. Enter the Internet. As a transport mechanism, the Net allows rapid, low-cost communication between businesses. Just as important, technologies that build on the Internet (such as the Extensible Markup Language) let the systems of all participants in a virtual enterprise mesh smoothly.

The implications of virtual integration dwarf those of E-commerce. As virtual integration spreads, companies will increasingly define themselves in terms of the processes they perform rather than the products or services they produce. The ability to integrate with others will become a vital core competence. New corporate cultures that value cooperation and sharing will emerge.

The virtual enterprise truly changes everything. The only question is: When will the mainstream media finally catch on?

Michael Hammer is president of Hammer and Co. in Cambridge, Mass. Find out about Hammer and Co.'s Virtual Enterprise Conference in Boston, May 23 to 24, at www.hammerandco.com.

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