Sustainable Development In Industry 4.0 and the «Virtual

Corporation»: Similarities and Differences

S. Hering

and R. Faizullin

Kalashnikov Izhevsk State Technical University, Studentcheskaya street, 7, Izhevsk, 426000, Russia

Institute of Management Technologies, MIREA — Russian Technological University, 78, Vernadsky Avenue, Moscow,

119454, Russia

Keywords: Industry 4.0, Virtual Corporation, Organization Theory, Industrial Revolution.

Abstract: Examining the effects of the technological components of Industry 4.0 on the structure of companies, one is

reminded of an organizational concept that was popular at the turn of the Millennium: the Virtual Corporation

(VC). As early as 1993, the American authors William Davidoff and Michael Malone proclaimed the "virtual

revolution". For them, the decisive building block for the formation of a new economic system was the Virtual

Corporation. The literature attributed to this concept the ability to solve the problems of large companies (such

as inflexibility) and small enterprises (such as poor economies of scale) simultaneously and to combine the

best features of both extremes of company size. This article discusses, which prerequisites for the

implementation of VC, then mostly dreams of the future, are given today and how the concept of the VC can

complement Industry 4.0 for sustainable development of organizations and serve as a role model on an

organizational level.

1 INTRODUCTION

The literature on Industry 4.0 mainly deals with the

technological perspective and discusses trends in

modern technologies such as the Internet of Things,

Edge vs. Cloud Computing, Artificial Intelligence,

Augmented Reality, Additive Manufacturing,

Collaborative Robots, the Administrative Shell or the

Digital Twin. Looking at the effects of these

technological components on the organizational

structure of companies, one is reminded of a now lost

organizational concept that was popular at the turn of

the millennium: the Virtual Corporation.

As early as 1992, the American authors William

Davidoff and Michael Malone proclaimed the "virtual

revolution". For them, the decisive building block for

the formation of a new economic system was the

Virtual Corporation. They attributed to this concept

the ability to simultaneously solve the problems of

large companies (such as inflexibility) and small

enterprises (such as lack of economies of scale), thus

combining the best features of both concepts

(Schräder 1996). However, disillusionment began to

https://orcid.org/0000-0001-9141-0002

https://orcid.org/0000-0002-1179-3910

emerge in theory and practice at the end of the 1990s:

Above all, the inadequate conceptualization and the

lack of technological prerequisites entailed that the

success stories from practice remained isolated cases

and the concept slowly faded into the background.

The last publications regarding the Virtual

Corporation date from around 2006, and theoretical

research on organizational theory shifted to other

topics. Practice pounced on the new paradigm of

Industry 4.0. But in recent years, the organizational

structure and process organization of companies in

Industry 4.0 have moved significantly towards the

Virtual Corporation - curiously, without mentioning

this term. What are the reasons for this?

This article will work out that the technological

prerequisites for the formation of Virtual

Corporations are not only given today, but that the

ever-increasing challenges for companies force a

virtualization of the organizational structure. And that,

conversely, a more effective conceptualization of the

Virtual Corporation (VC) becomes possible through

the orientation towards practice. In order to classify

this organizational model, the second chapter briefly

328

Hering, S. and Faizullin, R.

Sustainable Development in Industry 4.0 and the «Virtual Corporation»: Similarities and Differences.

DOI: 10.5220/0010668000003223

In Proceedings of the 1st International Scientiﬁc Forum on Sustainable Development of Socio-economic Systems (WFSDS 2021), pages 328-335

ISBN: 978-989-758-597-5

introduces the concept of the Virtual Corporation

with its strengths and weaknesses and discusses the

reasons for its failure. In the next step, the article

highlights the challenges posed by the Fourth

Industrial Revolution and introduces the concept of

Industry 4.0. Afterwards, the similarities and

differences to the concept of the VC are worked out.

The article concludes that Industry 4.0 unconsciously

uses many of the characteristics of the Virtual

Corporation. It further explains that a more consistent

alignment of the organizational structure with the

concept of the VC can lead to significant competitive

advantages. For this reason, the article dares to

predict that a renaissance of this concept is imminent.

2 METHODOLOGY

Document analysis was used as the main research

method. The objects were scientific publications

(articles in journals and conference collections) not

only in English, but also in German and Russian.

Based on comparative analysis and comparisons, the

article identifies the differences and similarities

between the concept of Industry 4.0 and the Virtual

Corporation.

3 THEORETICAL FRAMEWORK

The concept of the Virtual Corporation (VC) began

with two groundbreaking publications in the early

nineties. Davidow and Malone set themselves apart in

1992 in their bestseller “The Virtual Corporation:

Structuring and Revitalizing the Corporation for the

21st Century”, in which they dealt with virtual

products and their manufacturers. They enriched their

argumentation with popular management trends and

thus arrived to the VC as the concept of the future

(Davidow and Malone 1992). A cover story in 1993

in the Business Week by Byrne, Brandt and Port

shaped the prevailing view of the VC as a temporary

coupling of highly specialized units. They based their

argumentation on an arbitrary collection of success

stories of already “virtualized” companies in order to

“prove” the attractiveness of their concept (Byrne,

Brandt and Port 1993). In many cases, the VC was

even seen as the decisive building block for the

emergence of a new economic system (Bleecker,

1994) and was able to take the lead in modern

organizational models for a while (Weibler and Deeg

1998).

In the absence of a definition by Davidow and

Malone, the definition by Byrne, Brandt and Port as

co-authors of the concept is presented:

“The virtual corporation is a temporary network

of independent companies, suppliers, customers, even

erstwhile rivals linked by information technology to

share skills, costs and access to another one's markets.

It will neither have central office nor organizational

chart. lt will have no hierarchy, no vertical integration

(...) In the concept's purest form, each company that

links up with others to create a virtual corporation will

be stripped to its essence. lt will contribute only what

it regards as its core competencies." (Byrne, Brandt

and Port 1993)

This revolution is already underway and is

providing new answers, leading to the Industry 4.0

paradigm. The term " Industry 4.0" originated in 2011

from a project of the German government's high-tech

strategy that promoted the computerization of

manufacturing (Ohno 1988) and was presented to the

public at the Hanover Fair in the same year (Hopp and

Spearman 2008). In October 2012, the German

government's Industry 4.0 working group presented a

series of implementation recommendations. The

members and partners of this working group are

recognized as the founding fathers and driving force

behind Industry 4.0 (Dombrowski and Mielke 2014),

which can be simply defined as the sum of all

technological and organizational approaches to meet

the challenges of the Fourth Industrial Revolution.

Some authors from Russia have also devoted their

works to this topic recently (Hering, S., & Fayzullin,

R. (2020), Zolkin, A. L., Faizullin, R. V., &

Dragulenko, (2020), V. V. Zuev A.S., Makushchenko

M.A., Ivanov M.E., Merkulov E.S. (2020)). However,

in the modern world, it is necessary to understand that

there is no single concept that could be tied to a single

country, for example Germany (one of the leaders of

Industry 4.0), Russia or another country. Modern

technologies require consolidation, globalization and

information exchange. «The evolution of global

networking concepts is reflected in the theories of

global manufacturing networks focused on the local

and global dimensions of institutionalization,

corporatization, and technologicalization and

digitization» (Dzwigol, H., Dzwigol-Barosz, M., &

Kwilinski, A. (2020)).

It is important to study the Industry 4.0 because of

the need for sustainable development of economic

systems. «The newest revolution in the era is termed

as Industry 4.0, controls the entire life cycle of the

product and has the potential to produce innovative

solutions for global issues faced in sustainable

development» (Sangwan (2020)). «The virtual

Sustainable Development in Industry 4.0 and the «Virtual Corporation»: Similarities and Differences

329

corporation can offer sustainable comparative

advantages for small and medium-sized enterprises»

(Rautenstrauch (2002)).

4 SIMILARITIES AND

DIFFERENCES BETWEEN

INDUSTRY 4.0 AND THE VC

The basic idea of Industry 4.0 is based on two

thoughts: the global networking of people, plants and

products as well as the independent and decentralized

self-organization and control of these production

units in real time. These two elements – the dynamic

networking of partners and the principle of self-

organization – are also at the heart of the concept of

the Virtual Corporation. This striking similarity

suggests the conclusion that there are many more

similarities. This chapter therefore examines the

similarities and differences between Industry 4.0 and

the VC concept.

4.1 Similarities

Another fundamental common feature is that both

concepts have an intra- and an inter-organizational

perspective. After all, Industry 4.0 can also be treated

from two poles: The intra-organizational perspective

looks at individual companies that optimize their part

of the value chain internally. From an inter-

organizational perspective, several companies –

suppliers, producers, customers – are interlinked by

Industry 4.0 along the entire value chain. Furthermore,

there are other commonalities, which are presented in

the following.

4.1.1 The Role of Globalization

Globalization represents both a threat and an

opportunity for VCs: On the one hand, the ongoing

deregulation of markets is leading to an increase in

the number of rival suppliers from other countries and

resulting in significantly increased competitive

pressure. On the other hand, a company can withstand

this pressure by making optimum use of the world's

best resources to provide its services. Globalization

also opens up opportunities for expansion into

previously closed markets. Not only do

manufacturers offer their products worldwide, but

they also use global sourcing to obtain the necessary

resources regardless of their geographical location

(Picot, Reichwald and Wigand 1998). Globalization

was seen as a driver for the formation of VCs: Global

competition blurs the identity of producers of goods

and services (Goldman, Nagel, Preiss and Warnecke

1996). The unlimited opportunities for cooperation

with companies all over the world made the formation

of VCs possible. Global alliances of legally

independent organizations became a reality.

Globalization is also one of the germ cells of

Industry 4.0, which, through the global division of

labor, covers not only production but all parts of the

value chain. Wildemann states: The intensification of

globalization also entails the market entry of

competitors from outside the original industry

(Wildemann 2018). The requirements in terms of

product quality, delivery capability, availability,

deadline flexibility and price elasticity are increasing

massively. He predicts: Because of globalization, too,

companies will no longer be able to precisely map all

processes at all times. They will find themselves in a

complex field that can no longer be described or

predicted. Companies would therefore have to

become more versatile, flexible and agile in order to

be able to adapt to changes quickly and economically.

They can only meet these challenges if they

completely change the way they create value. This

sounds not only like a plea for Industry 4.0, but also

for the formation of VCs.

4.1.2 Central Importance of ICT

As early as the 1990s, when the concept of the VC

was booming, it was found that technical progress had

accelerated more and more since industrialization. It

was difficult for an individual company to keep up

with this pace, because the extent and speed of

technological change had increased dramatically

(Hahn 1988). The main focus of this development

was the rapid development of ICT (Hahn 1988),

which was causing the most serious upheavals due to

its universal applicability in practically all functional

areas of companies.

The Internet as a "global infrastructure for the

exchange of information and data" (Picot, Reichwald

and Wigand 1998) played an important role in this

context. From a technological point of view, it

energetically drives the globalization of the

procurement and sales markets and enables the use of

the world's best input factors as well as sales on a

global scale. Full-bodies promises were made that the

vision of the "global village" would thus become

reality for many companies, because geographically

distant companies would move closer together in the

process of creating services in order to form powerful

Virtual Corporations. But at that time, the reality of

ICT and the Internet was still far removed from these

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bold ideas. The possibilities of the Internet in

particular were still limited at that time.

ICT and the Internet are just as crucial to the

success of Industry 4.0: Instead of steam engines or

assembly lines, this time ICT will be the key. This is

where a large part of the necessary innovations will

come from (Bauernhansl, ten Hompel and Vogel-

Heuser 2014). Although ICT puts companies under

great pressure to innovate, it also opens up completely

new possibilities for organizational design.

According to Wildemann (Wildemann 2018),

performance improvement and cost reduction in ICT

are therefore an essential basis of Industry 4.0,

because they make digitization possible in the first

place.

The merging of real and virtual worlds creates a

Smart Factory: the vision of a dynamic, real-time

optimized and independent production, which is

constantly reconfigured by self-organization. And

that sounds a lot like a Virtual Corporation.

4.1.3 Decisive Role of Networks

Another similarity lies in the central importance of

the network idea for both Industry 4.0 and Virtual

Corporations. With great agreement, network

structures are proclaimed in the literature as a

constituent element of VCs (Krystek, Redel and

Reppegather 1998). Reminder: VCs are cooperations

in dynamic networks. This is where a problem-related

linking of real resources takes place to cope with

specific tasks (Picot, Reichwald and Wigand 1998).

VCs are particularly useful when external core

competencies are to be harnessed. The entire value

chain can be optimized by restricting the company to

its own core competencies and combining them with

complementary core competencies from other

companies.

The network idea also forms the core of Industry

4.0., although it is much more technological and

concrete here: decentralized, autonomous units

communicate with each other omnipresently via the

Internet of Things, and thus form a CPS: smart

products, intelligent work pieces, machines, transport

units and other units work together in an automated

and synchronized manner and interact with humans

via interfaces to form an industrial network

(Wildemann 2018). Using real-time data, the network

permanently updates the virtual image of reality. This

enables the real world to merge with the virtual world

(Bauernhansl, ten Hompel and Vogel-Heuser 2014).

Virtualization therefore plays a decisive role in both

concepts.

In addition, the potential of Industry 4.0 is only

fully exploited if the sphere of action covers the entire

value chain: from development, production, logistics

to sales & after sales (Wildemann 2018). In this

respect it is similar to an inter-organizational VC,

which ideally also covers the entire value chain.

4.1.4 Self-organization as the Overriding

Principle

The role of the networks has already alluded to the

importance of self-organization for the VC and

Industry 4.0. For a VC, it is the most important

principle next to process orientation, which is

expressed in attributes such as "independent", "self-

optimizing" or "autonomous", which are used almost

inflationarily in the relevant literature.

The emphasis on the importance of self-

organization culminates in the statement that the

survivability of a VC is only given if self-

organization largely replaces the external

organization by granting the system members greater

autonomy. Of great importance for self-organization

is the rapid availability of information across

subsystems (Krystek, Redel and Reppegather 1998).

Self-organization increases flexibility considerably,

promotes the dissolution of rigid structures and

horizontal and vertical boundaries and thus creates a

VC. Self-organization also plays a central role in

Industry 4.0. Wildemann explains that it enables

decentralized, self-sufficient and self-optimizing

production processes and supports companies in

avoiding waste and reactive power, thus achieving

increased resource efficiency (Wildemann 2018).

A CPS builds up networks autonomously and

decentrally in order to optimize itself independently.

The individual elements communicate with each

other via the Internet of Things and network

themselves independently. Many machines and

systems are self-optimizing. This is made possible by

intelligent objects that communicate with each other

via standardized interfaces: These include smart

products, smart tools and smart machines that can be

easily combined with each other according to the

"Plug & Produce" principle. Self-organization even

goes so far that the machines independently inform

about their maintenance status in the sense of

"predictive maintenance" or initiate necessary

maintenance work themselves in order to minimize

waiting times and repair failures. All this was not yet

conceivable when the concept of the VC was devised.

Nevertheless, the intelligent objects apply the same

principles of self-organization as a VC.

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331

4.1.5 Consistent Process Orientation

A VU is also referred to as an „as-if“ organization

(Berkley and Nohria 1991), as it has the possibilities

and potential of a traditional organization without

being tied to a comparable institutional framework

(Klein 1994). Without the permanent implementation

of central functions or hierarchical structures (Wicher

1996), a dominance of the process over the

organizational structure is achieved (Schräder 1996),

which serves an efficient process orientation. If

external companies are involved in the creation of

core processes, it becomes increasingly unclear where

one company ends and the other begins as the level of

interlocking increases (Picot, Reichwald and Wigand

1998). This approach thus leads not only to the

flexibilization of capacity limits, but also to the

dissolution of boundaries between companies.

Without its own legal form, company headquarter and

employees (Byrne, Brandt and Port 1993), a VC can

adapt better to market dynamics and changing

customer needs (Wuethrich and Philipp 1998).

With Industry 4.0, companies retain their legal

form, headquarters and identity. However, these

companies still rely on the same principles of process

orientation. Online process controls continuously

monitor the value-added process so that, for example,

deviations are detected and automatically corrected

within the ongoing production process to reduce

waste. By networking all value creation processes in

real time, the original conflict of goals between

efficiency and flexibility is eliminated. Increased

flexibility in manufacturing, digitization and

automation enable significant savings. In this way,

great value creation potential can be realized with a

low input of resources. This even enables flexible and

efficient production in batch size 1 (Wildemann

2018). Even if the VC could not keep this promise at

the time: The resolution of the trade-off between

efficiency and flexibility also characterizes concept

of the VC.

And there is another parallel: Industry 4.0 affects

almost all areas of a company. Since the core

processes of the individual divisions are closely

interlinked, implementing the design principles of

dynamic allocation and self-organization brings

about fundamental changes in the overall

organization: Cross-divisional thinking also leads to

the fact that the indirect divisions, i.e. the supporting

functions, can be reduced or even eliminated

(Wildemann 2018) – just as with the VC.

4.2 Differences

The fundamental difference between the two

concepts is that Industry 4.0 follows a technological

approach and the VC follows an organizational theory

approach. For example, the companies in Industry 4.0

do not use a consistent organizational model, while

conversely, the observations on the VC as a whole

were significantly less technological. The differences

are most obvious, however, in the role that humans

play in both concepts.

4.2.1 The Role of the Human Being

At first glance, both concepts take the same approach:

At a VC, people are placed at the center of events

through a high degree of autonomy and the many

opportunities for participation through team

structures. In this way, a VC ensures that its

employees identify with it (Krystek, Redel and

Reppegather 1998). Their motivation is strengthened

by the distribution of decision-making powers

(Goldman, Nagel, Preiss and Warnecke 1996).

However, VCs also emphasize the extraordinarily

high demands on employees. In addition to profound

expertise, employees must be able to lead and

motivate themselves to a large extent, have good

communication and social skills and master the new

technologies (Drumm 1996). As explained for the

intra-organizational weaknesses of VCs, some

authors express doubts as to whether the extreme

speed of adjustment required of employees is realistic.

Ultimately, people were perceived as a limiting factor

in a VC.

In Industry 4.0, on the other hand, intelligent

technology such as smart products takes a large part

of the coordination burden off the shoulders of people

in the complex manufacturing process. In contrast to

the VC, Industry 4.0 provides concrete answers to this

challenge: For example, robots have been developed

for automobile production that are smaller, more

flexible and better adapted to working with humans

in order to combine mechanical and human strengths.

Humans are connected to the CPS via multimodal

interfaces and can control it, for example, by voice,

touch displays or gestures (Wildemann 2018).

Through innovative man-machine cooperation, such

as Cobotics, and the observance of the principles of

ergonomics in the workplace, it is even possible to

integrate older and more experienced employees as

active factors in the production process. Correctly

applied, Industry 4.0 fully exploits human and

technological potential and combines it in an ideal

way.

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332

Further problems for VCs arise from the lack of

employee loyalty: on the one hand, employee loyalty

is essential for the success of the company (Wicher

1996), but on the other hand, the high fluctuation of

the employees leads to a kind

of "mercenary

mentality" (Mertens, Griese and Ehrenberg 1998).

This area of conflict is almost impossible to resolve.

Most companies in Industry 4.0 do not have this

dilemma because they offer their employees long-

term and stable structures.

4.2.2 The Role of Globalization

Both concepts emphasize the importance of

globalization as a driver of constant change. The only

difference is that globalization has advanced

significantly since the 1990s. As a result, the

challenges posed by globalization have increased.

4.2.3 Central Importance of ICT

ICT plays a central role as an enabler in both concepts,

and naturally even more so in the more

technologically oriented approach of Industry 4.0.

While ICT was still a limiting factor for VCs at the

turn of the millennium – for example, the Internet was

not yet available globally at sufficient speed – modern

ICT is able to meet the requirements of both Industry

4.0 and the VC. The decisive difference to that time

is: technology serves people, but does not overwhelm

or control them.

4.2.4 Decisive Role of Networks

Both the VC and Industry 4.0 emphasize the

importance of flexible linking of autonomous units.

The network idea forms the core of both concepts.

However, while the limited lifetime is a constitutive

feature of VCs, the technologies of Industry 4.0 are

mainly applied in stable networks, such as within

existing company boundaries, which are geared

toward the long term.

Furthermore, the nodes of the network in Industry

4.0 are mainly technological components such as

smart products, work pieces or machines, whereas in

VCs these are legally independent units. However,

since Industry 4.0 companies can also link up with

suppliers, producers and customers along the entire

value chain – which also leads to

partnerships with a

limited lifespan – It can be argued that Industry 4.0

companies can also be VCs.

4.2.5 Self-organization as the Overriding

Principle

This element also makes it clear: Despite all the focus

on self-organization in the specific process of

production, an Industry 4.0 company still has a

headquarter where the strategic direction and long-

term goals of the company are formulated,

coordinated and where the fulfillment of goals is

monitored. In contrast, the pure form of a VC

proclaims a complete renunciation of the

institutionalization of central functions and the

extension of self-organization to all areas.

As mentioned, however, it is doubtful whether the

coordination and allocation of resources is really

more efficient through self-organization alone than

through targeted, central control. A pure self-

organization is overstrained with this complexity. In

this respect, it is questionable how viable a VC would

be in its pure form, whereas companies in Industry

4.0 prove their efficiency every day in practice.

Despite all this self-organization, central control is

essential for survival.

4.2.6 Consistent Process Orientation

The central importance of process orientation is

common to both concepts. The main difference here

is that processes at VU are viewed primarily from the

perspective of organizational theory – for example, in

the dominance of the process over the organizational

structure – while Industry 4.0 focuses on very specific

technological components.

5 RESULTS AND OUTLOOK

The bottom line of the article shows that the

similarities of the two concepts outweigh the

differences. This is most obvious in the role of

technology: much of what had to remain theory at the

turn of the millennium is now reality. In particular,

the virtualization of the world in real time has

advanced very far through modern technological

concepts such as the digital twin or the administrative

shell. Because the performance required at the time of

the origin of the VC is now available, ICT, which

breathes life into Industry 4.0, can also give new

impetus to the organizational theory concept of the

VC.

A renaissance of the VC could be imminent

because Industry 4.0 solves many of the practical

problems that were unsolvable for VCs in their

"founding days". Another key reason is the fact that

Sustainable Development in Industry 4.0 and the «Virtual Corporation»: Similarities and Differences

333

the challenges for companies back then were not as

extreme as today. In the 1990s it was proclaimed that

challenges threatening the existence of the company

would force a "virtual revolution" and the formation

of VCs. This revolution did not take place then

because the pressure was not yet great enough.

If one compares the global environment and

competitive environment of companies from twenty

years ago with today, one can see that complexity and

dynamics have literally exploded. Until well into the

1990s, companies were still stuck in the mechanisms

and concepts of Industry 3.0. But the Fourth

Industrial Revolution is changing everything in

society, politics and the economy. The best example

is digitization, the radicality of which could not be

imagined at the time and which only really took off

with the triumphant advance of the iPhone. Among

other things, digitization is leading to the disruption

of entire industries and the creation of completely

new business models such as "pay per use",

culminating in the concept of "XaaS" (Everything as

a Service).

6 CONCLUSIONS

In summary, it can be stated that the challenges now

exist which should have forced the formation of VCs

at the time and that at the same time, with the

approaches of Industry 4.0, concrete instruments and

technologies are available for implementation. So if

VCs are currently being forced and enabled at the

same time, it is surprising that the world does not

appear to be full of VCs.

First of all, there is a simple reason for this: the

concept of the VC is primarily concerned with

organizational structures, it is a revolutionary

organizational model for sustainable development of

organizations. Conversely, the Industry 4.0 concept

focuses primarily on revolutionary technologies, so

the approach is technology-driven and much more

rooted in practice. The originators of Industry 4.0

have perhaps not yet given enough attention to the

exclusively organization-theoretical implications of

their model – for if they had, they would already have

realized that this would bring them very close to the

concept of the VC. This is also due to the definitional

and conceptual imprecision identified in the article.

Furthermore, if one doesn´t know what a VC really

looks like, how should one set up one?

An important task for the future is therefore to

further develop the concept of VC and above all to

adapt it to today's conditions. After all, the more

important value creation through new digital business

models becomes, the more cross-company

collaborations are becoming part of daily practice and

the more questions such as the protection of

intellectual property are arising, the more one will

have to deal with the question of how companies or

groups of companies are actually set up in process and

organizational structure, in theory and practice. And

the more virtualization penetrates into everyday

business life, the more the concept of the VC offers

itself as an aid. If theory paves the way, there is a high

chance that the concept of the Virtual Corporation

will be revived – just as its founding fathers Davidow,

Malone, Byrne, Brandt and Port once dreamed of.

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