VIRTUAL CHARACTERISTICS MEASUREMENT USING

FACTOR ANALYSIS

Ghazal Afroozi Milani

Department of Computer Science &Eng., Shiraz University, Shiraz, Iran

Koorush Ziarati

Department of Computer Science &Eng., Shiraz University, Shiraz, Iran

Alireza Tamaddoni-Nezhad

Department of Computing, Imperial College London,UK

Keywords: Virtual Enterprise, Gradual Virtualization, Degree of Virtual Characteristic, Factor Analysis.

Abstract: Increasing development of using Information and Communication Technology and globalization issue leads

to fundamental changes in classic principles of organizations. Hence, neglecting these changes can lead to

the organizations failure. Substitution of virtual organization is one of the most important of these changes

that many corporations claim. Of crucial necessity is the criterion for measuring the amount of their success

in getting virtual characteristics. In this paper, we measure the degree of virtual characteristics by using the

properties of an ideal virtual enterprise as a reference point and comparing each company with that point.

To assess the degree of virtual characteristics, factor analysis method is used. Our aim in this paper is to

perform an empirical research, besides improvement of previously used methods to measure the degree of

virtual characteristics. The proposed method has been used to assess the degree of virtual characteristics of

Iranian Petrochemical Corporations.

1 INTRODUCTION

In the early 1980s, business theorists found out that

many large companies lacked the flexibility and

agility needed to remain competitive in global

markets. After the Internet became involved in

commercial affairs in the late 1980s, many theorists

adopted it as the engine that would drive the

development of a new generation of business

models. One of these models was virtual

organization that Mowshowitz introduced to the

academia for the first time in 1986. However, the

academic world (Franke, 2001) paid little attention

to this new organizational network approach. Only

since Davidow and Malone's book in 1992 and

Byrne's article in 1993 were published about virtual

corporations, they became interested in this topic.

From that time on, many authors have created a

variety of different terms and definitions to describe

this new form of network organization and its

underlying organizational concept, such as virtual

factory, virtual corporation and virtual enterprise.

But such definitions have caused some confusion

about the concept of virtual contexts, because of the

different interpretations (Franke, 2001) of the term

'Virtual'. The fundamental idea of these definitions is

a partnership that is created when it is needed, by

using information technology. In fact, the

establishment of cooperation agreements between

enterprises (Comarinha-Matos and Afsarmanesh,

1999) is not a new phenomenon, rather belonging to

the very nature of the business world. The use of

information and communication technologies to

support agile cooperation brings this approach to a

new level of effectiveness.

Based on case studies, it is understood that most

of traditional organizations (Bauer and köszegi,

2003) exhibit some of the characteristics of

virtualness. In other words, the binary classification

of organizations to virtual and non-virtual should be

102

Afroozi Milani G., Ziarati K. and Tamaddoni-Nezhad A. (2005).

VIRTUAL CHARACTERISTICS MEASUREMENT USING FACTOR ANALYSIS.

In Proceedings of the Second International Conference on e-Business and Telecommunication Networks, pages 102-108

DOI: 10.5220/0001415801020108

 SciTePress

replaced by the gradual virtualization, which

specifies organizations according to their adoption

of virtual characteristics on a continuum. The

amount of the adoption indicates the degree of

virtual characteristics belonging to a firm.

Consequently, an important question might be

emerged: "how the degree of virtual characteristics

can be measured?" To evaluate the degree of

virtualization of companies, there are some models

that can be divided into two main groups.

The first group includes evolutionary-path

models to explain different stages of development

from a non-virtual to a virtual organization. Every

scholar who uses this kind of model, proposes

different stages for evolution of gradual virtualness.

For example, Arnold, Faisst et al. in 1995 (Bauer &

köszegi, 2003) proposed five evolutionary stages of

development from a non-virtual structure (stage0) to

a virtual corporation (stage4) in addition

Venkatraman and Henderson in 1997 (Bauer &

köszegi, 2003) distinguished three stages of virtual

organizing. The considerable point of this group is

that they can't explain why organizations should

follow exactly this path of development.

The second group is concerned with other

attempts for measuring the degree of virtualization

that use the characteristics of an “ideal” Virtual

Corporation (VC) as reference point. For example

Sieber and Suter in 1996 (Bauer & köszegi, 2003)

used nine characteristics of an ideal VC, and Bauer

and köszegi in 2003 proposed eight factors to

measure the gradual virtualization. However, these

measuring attempts are limited to case-studies and

empirically validated cases. We also follow the

second approach to measure the degree of virtual

characteristics.

In this paper, we applied a modified version of

measuring the degree of virtual characteristics,

which Bauer and Köszegi proposed, in Iranian

petrochemical industry. We modified it from three

aspects; the first modifications are in virtual

characteristics view, the second changes in items of

measuring instrument and the last one in calculating

the degree of virtual characteristics and its

underlying concepts.

The reminder of this paper is arranged as

follows. Section 2 discusses some definitions of

virtual concepts and their relationships as a

background to provide some criteria for assessment

of the degree of virtualization. Section 3 introduces

the extracted characteristics of an ideal virtual

enterprise, on the base of its definitions. Section 4 is

allocated to discuss assessment of degree of

virtualization. Finally, section 5 concludes this paper

and gives some directions for further research.

2 BASIC CONCEPTS

As in any other scientific branch, virtual

organizations require some standard definitions to

develop methods and tools for better evaluating of

its performance. However, there are not yet standard

definitions of virtual concepts; we select some of

them to extract not only their relationship but also

their common characteristics of virtualness.

Virtual Enterprise(VE) (Comarinha-Matos and

Afsarmanesh, 1999) is a temporary alliance of

enterprises that come together to share skills or core

competencies and resources in order to better

respond to business opportunities, and whose

cooperation is supported by computer networks. The

other concept that is very similar to virtual enterprise

is Virtual Corporation.

Virtual Corporation (VC) (Byrne, 1993) is a

temporary network of independent companies–

suppliers, customers, and even rivals–linked by

information technology to share skills, costs, and

access to one another’s markets. This corporate

model is fluid and flexible–a group of collaborators

that quickly unite to exploit a specific opportunity.

Once the market opportunity is met, the virtual

corporation will usually disband.

Virtual Organization (VO) (Comarinha-Matos

and Afsarmanesh, 2004) has a concept similar to a

virtual enterprise, comprising a set of (legally)

independent organizations that share resources and

skills to achieve its mission / goal, but not only

limited to an alliance for profit enterprises. Hence, a

virtual enterprise is a particular case of virtual

organization with economic goals.

All of these definitions indicate that to form a

VE/VO it is needed to establish a cooperation. As

well as, to reply market opportunities fast, the

members of this cooperation must be chosen from a

club like VBE. Virtual Breeding Environment

(VBE) (Comarinha-Matos and Afsarmanesh, 2004)

represents an association or pool of organizations

and their related supporting institutions that have

both potential and the will to cooperate with each

other through the establishment of a "base" long-

term cooperation agreement. When a business

opportunity is defined by one member, who acts as a

broker or virtual management, a subset of these

organizations can be selected. But, on the base of

what conditions the members are selected or the

effectiveness of an established VE can be evaluated.

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103

To answer these questions, we want to develop

some criteria to measure the degree of virtual

characteristics as companies' readiness to participate

in virtual cooperation. Hence, the next section is

allocated to discuss extracted characteristics of an

ideal VE/VC, on the base of their definitions.

3 CHARACTERISTICS OF AN

IDEAL VE

In the following, we discuss the characteristics of an

ideal VE from three aspects:

3.1 Intra-organizational Aspect

It refers to the intra-organizational strategies which

are performed in an ideal VE.

• Focused on core competence. On the base of

VE/VC definitions, each enterprise as a partner

of VE has to focus on core competencies. Core

competence (Hamel and Prahald, 1990) is

referred to an area of specialized expertise that is

the result of harmonizing complex streams of

technology and work activity. According to this

definition, the company which has the strategy of

focused on core competences can exploit from

some benefits, like providing potential access to

a wide variety of markets, increasing customer

benefits and hard for competitors to imitate.

• Customer-based. It (Larson and McInerney,

2002) refers to the ability to customize the

product or service to the customer.

3.2 Inter-organizational Aspect

This aspect is allocated to specify the characteristics

of an ideal virtual enterprise's inter-organizational

communications. In other words, the

communications of the companies in an ideal VE

have special characteristics that we identify them as

follows.

• Independence of cooperation partners It is

directly resulted from VE/VC (Byrne, 1993;

Comarinha-Matos and Afsarmanesh, 1999)

definitions.

• Temporary structure Virtual enterprises

(Franke, 2001) are as a response to market

opportunities. When such opportunities arise,

virtual enterprises are emerged to exploit them

and after that will be disband.

• Fast contract To reply market opportunities fast,

it is necessary to contract general agreements and

orally agree on details.

• Trust between the cooperating partners (Bauer &

köszegi, 2003) has a fundamental impact on the

success of virtual organizations. It is a

mechanism to coordinate networks and plays an

important role in virtual enterprises. For instance,

without having trust, it is impossible to contract

general agreements without written details. In

trust-based systems, behaviour is guided by

shared norms and values and control of output is

replaced by self-control.

• Observe other partners' rights causes to

provide an honesty atmosphere in VE and this

leads to make trust.

3.3 Information and

Communication Technology

Information and communication technology (ICT)

(Byrne, 1993; Comarinha-Matos and Afsarmanesh,

1999; Bosch-Sijtsem, 2002) plays central role in a

VE. The distributed nature of VE/VC (Bauer &

köszegi, 2003) requires integration both on a social

and on a technical level. ICT is also required to

guarantee the efficient coordination of activities in a

VE.

4 ASSESSMENT OF VIRTUAL

CHARACTERISTICS

As mentioned before, we measure the degree of

virtualization by using the characteristics of an ideal

VE as a reference point and comparing each

company with that point. Hence, on the basis of VE

characteristics – as described in the previous section

– we design a questionnaire (as shown in appendix

1) which will be used to assess virtual characteristics

of corporations. The questionnaire includes 39 items

which are measured on a 5-point Likert scale. The

scale ranged from 0 "never" to 4 "always". This

questionnaire has been used to assess the

corporations' virtual characteristics in a case study

which will be described in the next section.

4.1 Case Study

To measure the degree of virtualization,

petrochemical industry is selected as a typical

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industry of the country. The important reasons of

this selection can be identified as follows.

- The pioneered industry of the country for the

sake of existing oil and gas resources as the main

core competence.

- The considerable number of petrochemical

corporations in the country.

- The similarity between definitions of VE and

what happens in petrochemical corporations.

It is considerable that each petrochemical

corporation produces various products by using

natural gas. In addition, they cooperate with

companies from the whole of the world to provide

initial resources, catalysts, facilities, etc. Hence, it is

assumed that this industry exhibits a higher degree

of virtual characteristics than other industries in the

country.

Then, the managers of the active petrochemical

corporations of the country, which included 20

centres, were interviewed to respond the

questionnaire. Consequently, the necessary

information of corporations as questionnaires was

gathered.

We use factor analysis not only to analyze the

initial allocation of items to the dimensions that

Bauer and köszegi mentioned in 2003, but also to

assess the degree of virtual characteristics of

corporations. With regard to the importance of using

this method, we explain it in the next subsection.

4.2 Factor Analysis as a

measurement method

Factor analysis is a branch of statistical science that

is generally ascribed to Charles Spearman in 1904.

This method (Harman, 1962) came into being

specifically to provide mathematical models for the

explanation of psychological theories of human

ability and behaviour. In general, factor analysis

(Kline, 1994) consists of a number of statistical

techniques the aim of which is to simplify complex

sets of data which are called factors. In other words,

the object of factor analysis is to represent a variable

in terms of several underlying factor, or

hypothetical constructs. Two general types of factors

(Harman, 1962) were distinguished, common factors

which involved in more than one set of variables and

unique factor that involved in a single variable set.

The mathematical model for describing a

variable z

for a particular individual i ( i = 1,2,…,n )

in terms of m common factors F

, F

, …, F

and

unique factors U

might be written as follows.

= a

+ a

+…+ a

+ a

The basic problem of factor analysis is to

determine the coefficients, a

… a

of the common

factors, which are called factor loadings. In order to

perform this determination, we use principal

component extraction method.

The next step is to interpret the determined factor

loadings. Since, factor loadings are the correlations

of the variables with the factor, the interpretation of

variables- which are the items of our questionnaire-

with several large factor loadings are difficult. To

solve this problem, we use varimax rotation method.

As mentioned above, each factor loading is a

correlation which runs from -1 to +1 and these

variations between coefficient factors indicate the

different importance of variables in factors. Hence,

factor scores can not be measured by aggregating

into one final index.

If it can be assumed that the items of the

questionnaire are ideally complete and all of the

characteristics of virtual enterprise are included, i.e.

there are not any unique factors in factor analysis

model (Z = AF), factor scores (Harman, 1962;

Gorsuch, 1974) can be directly measured as follows.

F = (A´A)

-1

A´Z

Where A is the matrix of coefficient factors and

Z is the matrix of the standard variables. Although,

this solution is in terms of ideal variables, we

estimated factor scores- which indicate the amount

of virtual characteristics- by using regression

method with the help of SPSS (Statistical Package

for Social Science) software.

4.3 Results

We used factor analysis to analyze our questionnaire

from three aspects of virtual characteristics, as

follows:

Intra-organizational aspect In factor analysis of

the items of intra-organizational aspect, we extracted

three factors with the explanation of 72% of the total

variance as follows:

- Speciality (S) is the first factor that includes

items 16 and 17 from the questionnaire of

appendix 1.

- Customer-Based (CB) is the second factor which

consists of items 18, 19 and 14.

- Focus on Core Competence (FCC) is the last one

which includes items 15 and 13.

Inter-organizational aspect The next factor

analysis is to analyze the items of inter-

organizational aspect. Five factors were extracted

with the explanation of 60% of the total variance

which we named as follows:

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- Observe other Partner's Rights (OPR) which

consists of items 34, 35, 36, 37, 38, 39, 29 and

26 of the questionnaire.

- Agile Cooperation Contracts (ACC) which

includes items 28, 27, 23, 22 and 32 of the

questionnaire.

- Temprary Cooperation Experience (TCE) which

includes items 24, 25 and 30 of the

questionnaire.

- Trust in Independent Partners (TIP) which

consists of items 31, 33, 20 and 21 of the

questionnaire which have been shown in

appendix 1.

ICT aspect To analyze the items of this aspect, we

extracted three factors, with the explanation of 62%

of the total variance, as follows:

- Updating Technology (UP) which includes items

1, 2, 6 and 11 of the questionnaire.

- Information System (IS) that includes items 3, 7,

8 and 9 of the questionnaire.

- Internet and Intranet (II) which includes items 5,

10, 12 and 4 of the questionnaire.

Estimated factor scores, in order to compare

them with the reference point- as mentioned before-

we calculated the result of an ideal VE in terms of

factor score coefficient matrix. Consequently, factor

scores which are indicated the degree of virtual

characteristics of our case study companies as it has

been shown in table 1.

As it can be seen from the results, in general, the

corporations which have higher degree in three

factors of ICT aspects also have considerable degree

in other virtual characteristics. With regards to their

characteristics, the management of these

corporations are flexible and most of them are

smaller than other corporations of our case study.

A detailed analysis of the estimated factors

delivers some considerable insights. In figure 1, we

listed average degrees of virtual characteristics. As it

can be seen, which was also resulted in Bauer and

Köszegi findings, there is a dominantly high level of

OPR (Observe other partner's rights) factor (82.86%)

among the corporations of our case study that is in

general an important lubricant for economic

transactions.

In spite of the importance of Information and

communication technology (ICT), the Internet-

Intranet factor has the minimum average (43.13%)

of aforementioned industry and this in turn

necessitates a further degree of attention. Also, in

this industry, regarding the two factors ACC and CB

a noticeable flaw is observable. This implies a

reconsideration of the strategies taken so far.

5 CONCLUSION AND FURTHER

WORK

In this paper, we introduced the characteristics of an

ideal virtual enterprise on the base of some

considerable definitions. Then, with regards to the

characteristics of an ideal virtual enterprise as a

Table 1: the degree of virtual characteristics

Firm S CB FCC OPR ACC TCE TIP UP IS II

1 76.44% 67.91% 67.76% 93.44% 64.89% 52.65% 67.90% 72.69% 71.75% 38.77%

2 86.28% 42.71% 23.40% 95.13% 52.45% 60.24% 61.21% 68.75% 87.33% 47.26%

3 81.41% 05.93% 83.39% 86.52% 53.63% 59.84% 80.87% 62.44% 43.11% 60.61%

4 83.11% 60.00% 56.74% 86.75% 62.34% 36.06% 47.26% 52.78% 87.88% 27.84%

5 76.48% 70.23% 66.07% 89.92% 59.51% 52.41% 44.82% 50.18% 47.40% 25.78%

6 81.09% 36.76% 48.37% 90.53% 37.12% 53.28% 60.71% 82.64% 60.17% 28.41%

7 65.67% 57.55% 23.13% 92.36% 37.67% 48.36% 58.44% 54.35% 73.93% 56.46%

8 45.37% 60.58% 54.63% 81.40% 59.85% 51.29% 59.90% 75.15% 28.80% 52.18%

9 54.58% 32.13% 46.79% 68.05% 42.69% 78.91% 58.78% 63.39% 60.27% 69.67%

10 56.89% 45.43% 30.21% 90.27% 30.24% 63.06% 42.89% 72.88% 75.48% 50.02%

11 43.70% 65.67% 50.66% 71.46% 56.57% 50.47% 55.31% 45.93% 69.78% 48.97%

12 37.85% 54.71% 53.61% 80.38% 56.23% 60.92% 61.97% 46.51% 55.42% 34.15%

13 59.97% 62.40% 59.31% 73.25% 43.61% 54.91% 40.72% 31.64% 76.03% 26.49%

14 58.25% 35.01% 67.86% 69.26% 43.74% 49.46% 47.57% 58.39% 51.45% 62.82%

15 65.03% 38.98% 41.51% 92.64% 28.27% 46.94% 58.84% 68.27% 55.67% 16.64%

16 59.50% 44.90% 38.37% 80.13% 53.09% 41.91% 54.72% 25.98% 56.79% 58.11%

17 61.53% 29.59% 19.19% 86.58% 33.60% 48.83% 62.74% 20.17% 70.45% 64.47%

18 46.78% 36.64% 31.16% 79.53% 36.78% 51.80% 68.63% 33.75% 58.91% 35.83%

19 39.33% 40.78% 57.79% 84.13% 32.78% 39.79% 61.84% 33.34% 40.98% 25.42%

20 25.51% 32.98% 62.71% 65.42% 41.05% 34.26% 71.68% 38.55% 47.67% 32.65%

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Mean

60.24 46.04 49.13 82.86 46.3 51.77 58.79 52.89 60.96 43.13

S CB FCC OPR ACC TCE TIP UP IS II

reference point, we measured virtual characteristics

of our case study. To do this, a questionnaire as a

criterion to analyze virtualness was developed. After

that we used factor analysis as a measurement

method to estimate degree of virtual characteristics.

The considerable point in measuring factor scores is

different importance of variables which have

different factor loadings. Hence, factor scores or

degrees of virtual characteristics are not the

aggregation of items which are categorized in

factors. Moreover, since some factors have

correlation to each other, it can't be averaged as an

overall degree and we can compare each

characteristic separately.

On the basis of our case study, the characteristics

of intra-organizational aspect are categorized in

three factors, speciality, customer-based and focus

on core competence. Also, the characteristics of

inter-organizational aspect are divided to four

factors; observe other partners' rights, agile

cooperation contracts, temporary cooperation

experience and trust in independent partners. The

items of information and communication technology

are categorized in three factors, updating

technology, information system and Internet-

Intranet.

Moreover, on the base of our case study, the

degrees of virtual characteristics of corporations that

have flexible management are higher than others.

So, we suggest the flexible management as a

principal characteristic of virtual enterprise.

As mentioned previously, to measure more

precisely the degrees of virtual characteristics,

further research is needed in the characteristics of an

ideal virtual enterprise. In addition, identifying the

order of priorities between virtual characteristics is

another issue which can be used to determine the

overall degree of virtual characteristic.

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Figure 1: the average of virtual characteristics

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107

Market Conditions, Electronic Journal of

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Appendix 1

Information and Communication Technology

never

avg

1- If technological changes of ICT occur, our company has enough readiness to update its personnel

2- If technological changes of ICT occur, our personnel cope themselves with changes

3- There is an active computer section in our company

4- There is an intranet between our company and other cooperation partners

5- We communicate with other companies by means of Internet

6- We use an official automation package in our company

7- There is an active electronic filling system in our company

8- Our company's data keep in a database

9- In our company, we use electronic communication standards for cooperation with other companies

10- In our company, buying and selling are done by Internet

11- Our company's customer can use selling service electronically

12- In our company, the rate of Internet is acceptable

Intra-organizational aspect

13- The core competence of our company differentiates us from our cooperation companies

14- It is hard for our competitors to imitate our strengths

15- Our company is only active in its field of core competence

16- Internal units of our company sell their strengths on the external market

17- It is important to concentrate on our own strengths

18- The products of our company are designed on the base of customer needs

19- The customers can influence the composition of the cooperation partners

Inter-organizational aspect

20- Our cooperation partners can produce and sell their products without us

21- Our cooperation partners are legally independent from us

22- The cessation of one partner directly affected other partners

23-The cooperation with other partners is disband after task is done and probably it is used the other partners

24- It is possible for us to select from several companies as our cooperation partne

25- A central coordination unit exists, which coordinates the work within the cooperation

26- Our company has some experience about cooperating with other companies

27- We only finalize general agreements and orally agree on the details

28- We have verbal agreements with our cooperation partners

29- We finalize only detailed contracts

30- We trust our colleagues to keep up our agreements

31- Our company tries to improve sense of trust and cooperation among cooperation partners

32- There are trust and accuracy between our personnel

33- In our company, we control the quality of imported products

34- In our company's communications, a breach of trust is being sanctione

35- We keep up to verbal agreements, even if it brings us an economic disadvantage

36- Our company observes all the related rules

37- We keep up to written agreements, even if it brings us an economic disadvantage

38- We keep up to common market rules

39- We keep up to the other partners' rights

Error! Bookmark not defined. Items 14, 16, 17, 19, 21, 22, 25, 27, 29, 34, 35 and 37 are taken from Bauer (2003). All

other items have been developed for this questionnaire.

Error! Bookmark not defined. Items 22 and 29 are reversed items.

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