organization design - building a virtual organization

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Łódź 2011 UNIVERSITY OF LODZ FACULTY OF MANAGEMENT FIELD OF STUDY: BUSINESS MANAGEMENT Author: Tomasz Kłosiński Student №: 285856 BACHELOR THESIS Organization Design: Building a Virtual Organization Projektowanie Organizacji: Budowanie Wirtualnej Organizacji Thesis written in the Department of Knowledge Management under the supervision of Dr Jerzy S. Czarnecki

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Page 1: Organization Design - Building a Virtual Organization

Łódź 2011

UNIVERSITY OF LODZ FACULTY OF MANAGEMENT

FIELD OF STUDY: BUSINESS MANAGEMENT

Author: Tomasz Kłosiński Student №: 285856

BACHELOR THESIS

Organization Design: Building a Virtual Organization

Projektowanie Organizacji: Budowanie

Wirtualnej Organizacji

Thesis written in the Department

of Knowledge Management under

the supervision of

Dr Jerzy S. Czarnecki

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Table of Contents

Executive summary .................................................................................................................... 5

Introduction ................................................................................................................................ 6

Chapter I ..................................................................................................................................... 7

Organization ........................................................................................................................... 8

Definition of an organization .............................................................................................. 9

Organizational design ........................................................................................................... 11

Definition of an organizational design .............................................................................. 11

Dimensions of organizational design ................................................................................ 12

Virtual Organization .............................................................................................................. 13

Definition of virtual organization ...................................................................................... 13

Design of Virtual Organization .............................................................................................. 15

Formalization .................................................................................................................... 15

Specialization .................................................................................................................... 15

Hierarchy of authority ....................................................................................................... 16

Centralization .................................................................................................................... 16

Professionalism ................................................................................................................. 17

Organizational technology ................................................................................................ 17

Environment ...................................................................................................................... 18

Goals and strategy ............................................................................................................ 18

Culture ............................................................................................................................... 19

Conclusion ......................................................................................................................... 19

Chapter II .................................................................................................................................. 20

Introduction .......................................................................................................................... 21

Overview and history of Reuters .......................................................................................... 21

Organization Design of Reuters ............................................................................................ 22

The Challenge ....................................................................................................................... 27

Chapter III ................................................................................................................................. 28

General Management ........................................................................................................... 29

General Management in Virtual Organization ..................................................................... 30

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Conclusion ............................................................................................................................ 33

List of figures ............................................................................................................................ 35

Bibliography .............................................................................................................................. 36

Sources for Chapter II ............................................................................................................... 37

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Your future will rest

heavily on your

technical abilities, but

much more on your

managerial abilities.

– Henry Fayol

Page 5: Organization Design - Building a Virtual Organization

Executive summary

I know how to build a virtual organization. By the means of organizational design

methodology, I provide in this paper the guide through the process of development of it. At

the end of the paper, I present management method that responds to the challenge of

building a virtual organization.

However, this paper is not to give advices. The reader has to make a conscious choice

himself whether to implement virtual organization or not. I don’t give such advices because I

don’t have such competences – I’m not a management consultant. Nevertheless, if one is

interested in short, substantial and informative vade mecum on virtual organizations, then I

recommend the reader to read this paper.

The paper begins with description of what, than basing on it paper provides description of

how and finally it concludes on why. In other words, first you’ll get know the definitions and

background supporting comprehension of them. Then, paper will explain you the process of

building virtual organization in detail by means of organizational design dimensions. At last,

it summarizes the results you may expect from implementation of this model. Finally, I

provide the description of tool that could be the possible answer to the question put in the

title of this thesis.

Reader, the choice is yours.

Page 6: Organization Design - Building a Virtual Organization

Introduction

This thesis is based on two pillars: the virtual organization and organization design. These

two concepts from the field of management can be illustrated as two banks of the river – the

bridge in this case is the subject of the thesis: building a virtual organization by means of

organization design.

The paper is split into three parts. Firstly, it strives to define the theoretical fundamentals of

virtual organization. This part can be called the assumptions part. From assumptions,

another part is derived – the reasoning part. It analyzes the virtual organization in the

framework of organizational design. Lastly, it leads to tools that may support building virtual

organization – the conclusion part.

In the first chapter the concept of organization, organizational design and virtual

organization are introduced – it ends with the projection of virtual organization model on

the organizational design dimensions. Second chapter deals with analysis of Reuters – a real

organization possessing traits of virtuality – in the framework of organizational design. Last

chapter describes the managerial tool that may be used for the challenge of Reuters: how to

preserve and extend the organizational virtuality.

One of the goals of this paper was to give a recipe for the model of virtual organization by

providing its characteristics and discussing influence of its implementation on the ground of

the organizational design. However, this paper limits scope of the analysis to organizational

design and doesn’t discuss information technology (or other topics not related to

organization theory and design) even though it occurs in almost every definition of virtual

organization in literature. In opinion of author of this paper, this approach is fundamentally

wrong because virtual organization is a modal of organization, not a particular

implementation of such model. For example, Julius Reuter used homing-pigeons to establish

his virtual network. In literature authors often mention about electronical dependence as

one of the factors defining virtual organization. Therefore, my question is: how electronical

is homing-pigeon? What was the level of electronical dependence of Reuter’s organization?

In this paper, author decided to discuss communication technology dependence rather than

electronical one.

Another attempt of author was to keep lexical and substantive discipline. The overuse of

evaluative words that are not supported by reasoning but declared as if they were self-

evident is the common problem of the beginner management professionals. This paper

strives to meet the requirements of academic reliability rather than journalistic standards of

tabloids. Every word and every paragraph in this paper is to support the author’s reasoning.

If they are not, then they shouldn’t be here.

Page 7: Organization Design - Building a Virtual Organization

Chapter I

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Organization

Organizations surround our everyday life. They touch us every day from the very beginning

to the very end. We were born in hospitals, we are educated in schools and universities, we

work in companies, we buy goods and services from other companies, we get pension from

pension funds when we go for retirement, and finally we are buried by funeral homes after

our death. Organizations are necessary for the process of civilization progress and social

development. They are also indispensable to satisfy the needs of society, but they can also

be a force of destruction.

The word organization comes from

Greek word organum – meaning tool,

sense organ, musical instrument or

product of work. Organization,

according to dictionary, means “the

act or process of organizing or being

organized” and was first used in 15th

century.1 Therefore, the concept of

organization has existed for six

centuries. However, modern

organizations are relatively recent in

the history of humankind. They arose

during the Industrial Revolution. It

was a period from the 18th to 19th

century – an era of the development

of large organizations that

transformed society. Therefore,

modern organizations are at most one hundred and fifty years old.2

Early organizations had simple design. However, as they grew their structure became

sophisticated. Management at beginning was hierarchical and order-oriented. It evolved into

complex knowledge and skills set.3

Even though organizations are young beings, they serve society in many ways. Figure 1

indicates seven points underlying the importance of organizations for the society. In

conclusion, organizations are desirable for the society because they transform inputs into

outputs while adapting to changing environment.4

1 Merriam-Webster Dictionary, Merriam-Webster, Springfield, USA, 1994, p. 104 2 R. Daft, Organization Theory and Design, 8th edition, Thomson South Western, 2004, p. 12 3 A. Farazmand, Modern organizations: theory and practice, Greenwood Publishing Group, 2002, p. 14 4 R.Daft, op. cit., p. 12

Figure 1. Importance of organizations

Source: R. Daft, Organization Theory and Design, 8th edition, Thomson South Western, 2004, p. 12

Page 9: Organization Design - Building a Virtual Organization

Definition of an organization

“Organizations are social entities that are goal-directed, are designed as deliberately

structured and coordinated activity systems, and

are linked to the external environment”5. This

definition assumes that the organization is

informal being: it is not an office, set of

company’s policies and procedures, entry in the

state’s register of businesses, or company’s

uniforms. In light of this definition organization is

made up of people and their relationship with

one another. Organization is defined by the

human action and interaction of people to

perform functions leading to attaining a goal.6

Organization is a social system maintaining

internal order of material and immaterial

resources that aims at achieving goals. There are

number of factors creating organization. One of the core characteristics are shared values:

ethical code and information culture which are spread among organization’s members.

Organization implements its strategy that

entails specifying its mission, vision and

objectives. Every organization has its formal

structure and procedures (e.g. rewarding

system).7

These definitions talk of organization as having

goals, as if they were an individual person. It

creates an image of agreement amongst

members regarding the purpose of an

organization that might not exist. In defining

organization’s goals there exist a danger of

inadvertently prioritization of particular goals of

certain individuals or groups at the expense of

goals and aspirations of others who are involved

with the same organization.8

5 R. Daft, op. cit., p. 13 6 Ibid., p. 13 7 M. Pańkowska, Rozwój informatyzacji wirtualnej organizacji, Wydawnictwo Akademii Ekonomicznej w Katowicach, Katowice, 2007, p. 15 8 J. McAuley, J. Duberley, P. Johnson, Organization theory: challenges and perspectives, Pearson Education Limited, England, 2007, p. 13

Figure 2. Organization's charactersitics

Source: Own elaboration based on R. Daft, Organization Theory and Design, 8th edition, Thomson South Western, Ohio, 2004, p. 13

Figure 3. Organization as a network of its members

Source: Own elaboration based on J. McAuley, J. Duberley, P.

Johnson, Organization theory: challenges and perspectives,

Pearson Education Limited, England, 2007, p. 13

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Virtual organizations are temporary networks of individuals or groups, it implies that each

member of virtual organization has its own goals – what binds its members is business

opportunity. Characteristics of virtual organizations deform the previously listed definitions

of the organization. The application of the lens of contract leads naturally into the

reconceptualization of the organization to a governance structure. Members are described

in more veridical ways in both cognitive and self-interestedness respects.9

Newborn virtual organization is not “deliberately structured system”. Virtual organizations

are shaped by individuals, however they are born spontaneously: individuals or groups

simultaneously contribute efforts to the accomplishment of a common purpose.10 They

resemble spontaneous order – orderly structured system which is the product of the action

of many individuals or groups but is not the result of human design.11

9 O. Williamson, The Theory of the Firm as Governance Structure: From Choice to Contract, The Journal of Economic Perspectives, Vol. 16, No. 3, 2002, pp. 194 10 Ch. Barnard, The functions of the executive, Harvard University Press, USA, 1968, p. 102 11 Ch. Petsoulas, Hayek's liberalism and its origins: his idea of spontaneous order and the Scottish enlightenment, Routledge, 2001, p. 12

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Organizational design

Organizational design has stable conditions to grow and

develop in today’s environment full of organizational

challenges like: “global competitiveness, diversity,

ethical concerns, rapid advances in technology, the rise

of e-business, a shift to knowledge and information as

organizations’ most important form of capital, and the

growing expectations of workers for meaningful work

and opportunities for personal and professional

growth”12.

These changes also imply different approach to

organizational design. Managerial paradigm is shifting

from mechanics-oriented systems to biology-oriented

systems. Perceptions towards organizations are

changing and this change has an impact on the patterns

of behavior within organizations.13

Definition of an organizational design

There are two types of organization design definitions:

difference between them reflects two different approaches to the organization. First one is

structure-oriented and reflects the design as a construction of a machine – brings to mind an

engineer; whereas second definition puts the design in wider perspective than structure – it

resembles philosopher analyzing the nature of given need for an organization.

First definition states that organization design is a

system for measuring what has been

accomplished by the people, system for rewarding

them, and procedures for selecting and

developing them, and structure is central to these

aspects.14

Organization design – says another type of

definition – is an application of organization

theory. It is the overall set of structural

12 R. Daft, op. cit., p. 26 13 R. Daft, op. cit., p. 27 14 J. Child, op. cit., p. 3

Figure 4. Organization theory

Source: Own elaboration based on R. Daft, Organisation Theory and Design, 8th edition, Thomson South Western, Ohio, 2004, p. 26

Organization theory is way of thinking about organizations. It is analytical and critical thinking that investigates patterns and regularities in organizational design and behavior. These regularities are defined and measured by organization scholars by means of social research into insights of how organizations function.

Figure 5. Organization design

Source: W. Griffin, Management, Cengage Learning,

Boston, 2006, p. 319

As P. Drucker has put it, “structure is a

means for attaining the objectives and

goals of an institution”.

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elements and the relationships among those elements used to manage the total

organization.15

In this paper, second definition is preferred. Organization design is considered to be a

“philosophy of organization” that goal is to draft a general picture of organization. Even

today management consulting companies equate organization design with organization’s

structure.16 However, to design an organization more is needed than analysis of its structure.

Dimensions of organizational design

Dimensions of organizational design are

specific traits describing organizations, similar

to personality and physical traits describing

people or architectural traits describing a

building. There are two types of dimensions:

structural and contextual. In sum there are

eleven independent dimensions. Dimensions

are tool for measurement and analysis of

characteristics of an organization.17

The relations between contextual and

structural dimensions are shown in the

Figure 6. Internal traits of an organization

are defined by means of structural

dimensions. They constitute a basis for

measurement and comparison of

organizations. Contextual dimensions define

the organizational framework that shapes

the structural dimensions. These two

dimensions can be pictured as platform of

overlapping elements that form a base for

organization’s structure and work processes, which are described by structural dimensions.18

15 W. Griffin, Management, Cengage Learning, Boston, 2006, p. 319 16 J. Karren, Key principles of principles of organization design: diagnosing issues in a company’s structure, Point of view, January 2009, <http://www.pwc.com/en_us/us/people-management/assets/key-principles-organization-design.pdf, 2011-10-03> 17 R.L. Daft, op. cit., p. 17 18 R.L. Daft, op. cit., p. 18

Figure 6. Organization design

Source: Own elaboration based on R. Daft, Organization Theory and Design, 8th edition, Thomson South Western, Ohio, 2004, p. 17

Figure 7. List of organization design dimensions

Source: Own elaboration based on R. Daft, Organisation Theory and Design, 8th edition, Thomson South Western, Ohio, 2004, p. 17

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Virtual Organization

A concept of virtual organization was introduced as a form of cooperative network in late

80’. Since the concept is young, academics have introduced different concepts and terms to

define this form of organization. Scholars used terms like virtual company, virtual enterprise,

and virtual factory for last 30 years.19

Despite the lack of consensus on the theoretical description of this phenomenon, virtuality

in business is a fact. A study conducted by Gartner Group indicates that more than 60% of

professional employees work in teams characterized by virtuality.20

Definition of virtual organization

A Latin word virtus means proficiency,

manliness. It defines an attribute of an

object which does not exist but have the

possibility to exist. This term reflects the

nature of virtual organization.21

Virtual organization is a network of

partnerships enabled by information and

communication technology. As indicated

in the Figure 8, there are two types of

virtual organizations: intra-organizational

and inter-organizational, whereby the

first refers to organization with defined

boundaries, second pertain to exchange

of resources between organizations.

Inter-organizational virtual organization can be divided into virtual markets, which refers to

e-commerce market transactions using information and communication technology, and

virtual corporation, which is about partnership network of independent companies.22

In this paper virtual organization is limited to inter-organizational structure – i.e. as a

temporary network of independent companies-suppliers, customer, and even rivals – it is a

product of opportunity and once the opportunity has been met, the venture disbands. Its

19 U. Franke, The Competence-Based View on the Management of Virtual Web Organizations. In U. Franke, Managing Virtual Web Organizations in the 21st Century: Issues and Challenges, UK, 2001, p. 2 20 T. Stanko, C. Gibson, The role of cultural elements in virtual teams. In R. Bhagat, R. Steers (ed), Cambridge Handbook of Culture, Organizations, and Work, Cambridge University Press, Cambridge, 2009, p. 272 21 Merriam-Webster Dictionary, Merriam-Webster, Springfield, USA, 1994, p. 153 22 U. Franke, op. cit., p. 2

Figure 8. Virtual organization classification

Source: Own elaboration based on U. Franke, The Competence-

Based View on the Management of Virtual Web Organizations. In

U. Franke, Managing Virtual Web Organizations in the 21st

Century: Issues and Challenges, UK, 2001, p. 12

Page 14: Organization Design - Building a Virtual Organization

temporality implies flexibility and fluidness. Model also assumes that each member of virtual

organization tends to provide core competences.23

Virtual organization’s backbone, enabling the

communication, sharing skills and costs, and

access to one another’s market, is information

technology. Information technology services

providing virtuality are tools for remote

communication – in the Middle Ages it was

homing-pigeon, in the XIX century it was

telegraph, today these are computer

networks – which enable organization’s

members to work in real time.24

Among factors of virtuallity defining virtual

organization used in literature four are the

most common:

Structural dynamism – measuring

change among members, their roles,

and relationships to each other, occurs

frequently;

Geographic dispersion – indicating the

level of spread across more than one

location of the virtual organization members;

Electronic dependence – measuring communication and collaboration IT tools such as

e-mail or instant messaging;

National (or cultural) diversity – refers to refers to team which consists of members

with more than one national or cultural background.25

However, the only defining factor is dynamic structure – rest of them is commonly meet in

real virtual organizations but they are optional. Virtual team members can be separated by

many kilometers or even continents but they may also be situated in different buildings

across the city or adjacent offices in the same facility.26 Analogous situation is with

electronical dependence and national diversity – members can use Internet or messenger on

horseback to communicate remotely, they can be from different countries but they can be

also from the same.

23 U. Franke, op. cit., p. 2 24 D. Pauleen, Virtual teams: project, protocols and processes, Idea Group Publishing, London, UK, 2004, p. 12 25 T. Stanko, C. Gibson, op. cit., p. 272 26 D. Pauleen, op. cit., p. 13

Figure 9. Skills of virtual team

Source: D. Pauleen, Virtual teams: project, protocols and

processes, Idea Group Publishing, London, UK, 2004, p. 12

Page 15: Organization Design - Building a Virtual Organization

Design of Virtual Organization

Application of the design that provides the

organization attributes of virtuality must

be a conscious choice. It is a strategic

option for a company. Design should be

preceded by analysis of organization’s and

its customer’s needs. The level and model

of virtuality has to be applied also after

consideration of organization’s needs.27

One of the methods that can be used for

designing the organization is the

methodology of organizational design with

its structural and contextual dimensions.

The purpose of this analysis is to provide

the patterns enabling building virtual

organization. One has to be aware of

conditions in which virtual organization

has advantage over different models.

In this analysis, personnel ratios and size dimensions of organization design are omitted. The

model of virtual organization, as it was described in previous section of this chapter, is not

covering the matter of size and personnel of it. Thus they are assumed to be any.

Formalization

Coordination of internal processes requires high level of trust among its members. Internal

control is maintained through common norms and values, and self-control.28 Thus, the

written documentation in the organization should be rather replaced by trust, cooperation

and empowerment.

Specialization

Specialization of virtual organization members is heterogeneous – it represents various

differential profiles of range of its resources and competences.29 There are two different

divisions of labors: vertical and horizontal. First one, called “industrial division of labor”, can

be exemplified by a factory’s manager dividing the process of production into various partial

operations and assigning them to the workers. Horizontal division of labor, called by “social

27 M. Warner, M. Witzel, Zarządzanie organizacją wirtualną, Oficyna Ekonomiczna, Kraków, 2005, p. 16 28 M. Najda-Janoszka, Organizacja wirtualna: teoria i praktyka, Difin, Warszawa, 2010, p. 50 29 M. Najda-Janoszka, op. cit., p. 50

Figure 10. Organization design dimensions of virtual organization

Source: Own elaboration based on M. Warner, M. Witzel,

Zarządzanie organizacją wirtualną, Oficyna Ekonomiczna, Kraków,

2005, p. 16

Page 16: Organization Design - Building a Virtual Organization

division of labor”, is an interaction of independent units by the means of market mechanism

(e.g. exchange between factories to produce given good).30 The different operations are

here independent and are not submitted to the control of a central authority charged with

the coordination of the actions of each individual segment of the total system with all the

others. Virtual organization is shaped on basis of integrated client-oriented processes

consisting of relatively small but steerable units (modules). Those modules dispose

decentralized competences to make decisions and proportional range of responsibilities.

Therefore, organization to become virtual should strengthen horizontal and weaken vertical

division of labor.31

Work in should be less specialized and less function-oriented than work in non-virtual

environment. Employees, instead of focusing on one task, have to play role in many tasks or

even deal with whole project in all its dimensions.32 Employees should be trained in

entrepreneurship and self-management, and they are expected to possess wide range of

skills.

Hierarchy of authority

To achieve the virtuality, there should be no dominant positions and highly subordinated

relationships in organization.33 Members of organization should have an opportunity to

adapt to changing conditions of environment. Organizations cannot rely on direct control

and coordination, but need to bind the nodes through shared values and norms.34 Work in

virtual organization supposed to be done in teams.35

Centralization

To build virtuality, decisions should be made in collaboration of organization’s network

members.36 For this purpose there could be made decision-making meetings in which issues

would be discussed.37 Much of the responsibility for functional management has to be

transferred to employees on lower levels of the organizational hierarchy. In order to gain the

advantage of being virtual, hierarchization of decision-making process in organization should

be lowered.38

30 W. Röpke, Economics of The Free Society, Henry Regnery Company, Chicago, 1963, p. 44 31 M. Najda-Janoszka, op. cit., p. 50 32 M. Warner, M. Witzel, op. cit., p.73 33 M. Najda-Janoszka, op. cit., p. 50 34 L. Yan, op. cit., p. 35 M. Warner, M. Witzel, op. cit., p.73 36 M. Fongoman, E-collaborations and virtual organizations, Idea Group Inc (IGI), London, 2005, p. 130 37 D. Duarte, N. Snyder, Mastering virtual teams: strategies, tools, and techniques that succeed, John Wiley and Sons, San Francisco, 2006, p. 168 38 M. Warner, M. Witzel, op. cit., p. 175

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Professionalism

Work in virtual organization is more managerial-oriented than non-virtual work. Employee

has to become his own manager – he should coordinate his own tasks. Moreover,

employees, distant from each other, have to organize their time and workshop: they should

decide how and when to perform the task and they should set themselves achievement

standards and rules.39

Management of virtual organization should be less administrative and more leadership-

oriented way. Managers have to be able to think about organization and its goals in wider

categories. In virtual organization it is necessary to switch from functional management to

philosophical, more holistic point of view – general management. Management should be

treated as one indivisible object, and not as a set of functions: marketing, finance,

manufacturing, human resource, etc., whose mutual associations are not paying any

attention. It should be a greater use than hitherto of the achievements of disciplines outside

the traditional sphere of interests of management, psychology, sociology, philosophy,

history - in order to broaden the mental horizons of managers and in equip them with tools

to analyze problems and find solutions.40

Managers of virtual organizations should be educated in management of network-structured

company, human resource management in virtual environment, personal communication,

generating knowledge, knowledge management, and assessment and valuation. One of main

virtual skills for managers should be estimation of valuation of intangible assets like

organizational and human capital.41

Organizational technology

Organizational technology enabling

communication in virtual organization is a

supportive tool for the model – but it is not

an addition to the model, it is conditio sine

qua non, it is a necessary binding element

for the model. Nevertheless, virtual

organization may be defined without

information and communication

technologies. Virtual organization model

can be applied with Venkatraman’s and

Henderson’s strategic alignment model that

39 M. Warner, M. Witzel, op. cit., p. 73 40 M. Warner, M. Witzel, op. cit., p. 175 41 M. Warner, M. Witzel, op. cit., p. 177

Figure 11. Communication technology

Source: K. Lojeski, R. Reilly, Uniting the Virtual Workforce:

Transforming Leadership and Innovation in the Globally

Integrated Enterprise, John Wiley and Sons, 2008, p. 162

Page 18: Organization Design - Building a Virtual Organization

illustrates separateness of business and IT strategy but their relation implies a need of

adjustment of them to work together.42

To build a communication infrastructure that will provide features of virtuality, two factors

have to be analyzed: social presence and media richness. Social presence is the extent to

which a communication medium supports a feeling of presence and a sense that those

involved are jointly interacting. Richness of media is related to ability of using natural

language rather than symbolic information, number of paralinguistic cues such as voice,

facial expressions, and gestures, personalization of information, and rapidness of feedback.43

The level of subjection of communication technology depends on geographical dispersion.

However, to build the virtual organization it is necessary to adjust communication

infrastructure to the specific requirements of virtuality.

Environment

To achieve virtuality, organization has to minimize and weaken its internal and external

boundaries. This is required to provide the ease of reconfiguration and externalization of

functions. Such solution offers the chance to concentrate on the business core.44

Organization should strive to transform into a partnership network of autonomous entities

and pertain to exchange of resources between entities. Being open to environment is

defining characteristic of organizational virtuality.45

Goals and strategy

Market opportunity, as a source of virtual organization, defines its purpose and thus shapes

its goals and strategy. Opportunities are creating value stimulate processes of design and

implementation of specific organizational solutions in virtual space. Consequently,

organization to gain virtuality attributes has to stimulate building value processes.

Identification of appearing business opportunity is a challenge for the enterprise in aspect of

motivations and abilities to create particular value. There is no perfectly competitive

enterprise that has core competences in all areas of functioning. Every business organization

operates functions in a given network of cooperation and competition interrelations.

However, organization to become virtual should focus on core areas on its functioning. 46

42 A. Sankowska, Organizacja wirtualna, Wydawnictwa Akademickie i Profesjonalne, Warsaw, 2009, p. 72 43 K. Lojeski, R. Reilly, Uniting the Virtual Workforce: Transforming Leadership and Innovation in the Globally Integrated Enterprise, John Wiley and Sons, 2008, p. 162 44 M. Warner, M. Witzel, op. cit., 2004, p. 21 45 U. Franke, op. cit., p. 2 46 M.Najda-Janoszka, op. cit., p. 57

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Culture

Diversity and mobility of virtual organization members hinder building organizational

identity and development of organizational culture – common behaviors, values and norms.

Virtual organization’s temporality precludes creation of patterns of effective work because

organizational culture is a result of long-term learning of problems of environment and

internal coordination.47 Culture dimension of organizational design projected on virtual

organization raises challenges with national and cultural diversity48, organizational identity49,

trust and commitment50. As analysis of virtual organization shows main problem of designing

and managing the virtual organization is cultural congruence of its members.51 Therefore, to

apply the design of virtual organization, much attention has to be paid to organizational

culture.

Conclusion

As a result of application of virtual design, organization uses less written documentation and

its operation is less function-oriented than in other models. Hierarchy of virtual organization

is flat – there are no dominant positions and decision-making process depends on consensus

of its members. Virtual organization requires high level of professionalism; in particular,

employees adopt managerial and specific virtual skills. Organization technology enabling

communication is a necessary element of the model – however, it shouldn’t be confused

with information technology that is only one of possible implementations of communication

infrastructure. Virtual organization is characterized by fluid and flexible internal and external

boundaries. Goals and strategy of virtual organization is shaped by the business opportunity.

Culture of virtual organization is heavily trust-dependent and results in diverse environment.

47 M. Brzozowski, Organizacja wirtualna, Polskie Wydawnictwo Ekonomiczne, Warsaw, 1992, p. 161 48 Ibid., p. 274 49 L. Yan, op. cit., p. 43 50 T. Stanko, C. Gibson, op. cit., p. 276 51 Ibid., p. 275

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Chapter II

Page 21: Organization Design - Building a Virtual Organization

Introduction

Inter-organizational virtual organization is a network of companies. Set of

contracts between Reuters and its contractors, suppliers and customers

resembles a network that may be called a virtual organization. Model described

in previous chapter assumes that virtual organization is a network of

autonomous entities and traits of virtuality are supported by technology

enabling distanced communication.

Overview and history of Reuters

Reuters Group Limited (informally Reuters) is a global news agency. It

headquartered in London. Currently its owner is Thomson Reuters. Until its

merger with The Thomson Corporation

in 2008, Reuters constituted part of

Reuters Group PLC, which provided

financial market data, with news

reporting comprising less than 10% of

the company's income. All of Thomson

Reuters’s financial market data activities

have now been combined into a single

Markets Division, of which the Reuters

news agency forms a part.

In 40’s of XIX century telegraph was

dominant communication technology –

it enabled communication on distance

of whole Europe first and later through Atlantic Ocean as well. Thanks to this

great device communication process shortened from days to minutes.

In 1848 Paris-located publisher Charles Havas established an experimental news

agency that aimed in providing foreign newspapers detailed information about

revolution that broke in this year. Unfortunately Havas’s venture failed – he

wasn’t able to gain profits on it. Thus, he left it, but one of his employees,

Company

overview

Company

history

Figure 12. Reuters: Company Profile Source: http://thomsonreuters.com/about/

Page 22: Organization Design - Building a Virtual Organization

German emigrant Paul Julius Reuter, saw the possibility of earning money on

selling the collected and transmitted through telegraph financial market news.

Reuter started with opening small office in Aachen in Kingdom of Prussia, where

he achieved moderate success. In October 1851 he moved to London as soon as

the telegraph cable was routed under the English Channel and London was

connected to constantly developing continental telegraph network. First

Reuter’s client was London Stock Exchange – he was providing information from

other European stock exchanges to it. On the list of his clients soon appeared

many brokerage houses in London and continental Europe. In Reuter’s system

no one was privileged. Everyone used the same network managed from office in

London, to which information flowed from agents working around the Europe.

All clients got the same news at the same time. Rapid development of this

service entailed increase of Reuter’s offer to political news. Soon Reuter signed

contracts with “The Times” and other major London newspapers and later with

smaller British local newspapers, and finally the newspapers and magazines

around the continental Europe.

During the French-Austrian war of 1859 Reuter’s war correspondents provided

information straight from the battlefield. Within hours they were relating by

telegram to anywhere in Europe, and the next day information appeared in the

newspapers. Sensation that it caused is comparable to sensation that caused

live satellite television transmission from Gulf War in 1990-1991. The possibility

of rapid and accurate transmission of messages along and across the continent

has built a reputation of Reuter and has led to creation of an entirely new

industry.

Organization Design of Reuters

The operation of a communication network, which was invented by Reuter, was

the starting point for the development of contemporary global media empires.

Reuter has shown that it can broaden the scope of activities, using technology

by creating a virtual space.

Reuter’s agency wasn’t – and still is not – centralized organization. Firm has

character of network consisting of nodes and connections among them with a

center in headquarters in London. Subsequent news agencies used new

technologies – radio, television, and satellite communication, Internet – to

undermine position of Reuters as World leader in information providing. It

should be noted, however, that they use the same model that Paul Julius Reuter

developed: distributed actions to obtain information and then distributing them

to customers through a network.

Organization

design model

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Virtual organization requires high level of trust rather than formal written

documentation and Reuters’s virtual organization is not an exception. In 1941,

in the midst of World War II, Reuters set up Trust Principles in cooperation with

the Reuters shareholders and the Newspaper Publishers Association. Reuters

and its employees declared to act with integrity, independence and freedom

from bias in accomplishing the difficult and delicate tasks that they faced.

Reuters Directors and shareholders decided to preserve and maintain the Trust

Principles when Reuters became a publicly traded company on the London

Stock Exchange and Nasdaq. Reuters formed a new company named 'Reuters

Founders Share Company Limited' to achieve this. Thomson Reuters requires

from both directors and employees, in performing their duties, have due regard

to Trust Principles, by the proper exercise of their powers and in accordance

with their other duties.

In 1984 when Reuters became a public company, Thomson Reuters Founders

Share Company was funded. The Thomson Reuters Founders Share Company

ensures that the Trust Principles are observed. Thomson Reuters Founders

Share Company consists of experienced and eminent professionals in politics,

diplomacy, journalism, public service and business.

Reuters doesn’t base its internal and external communication on written

documentation. Level of trust between Reuters, its cooperators, suppliers and

customers is crucial element of Reuters’s business. Reuters’s method to

maintain relationships between actors of virtual organization is to establish

The Trust

Principles

Formalization

Figure 13. Reuters Trust Principles

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norms and values that will be shared among it. The self-control of its employees

is the main method of maintaining reliance of information that Reuters sells.

The company’s virtual organization members have heterogeneous specialization

– they represent various differential profiles of range of its resources and

competences. There exist various levels of horizontal division of labor among in

Reuters’s virtual organization. Between Reuters and its customers and suppliers

there is relation based on market transaction – which is the most horizontal

specialization and guarantees the biggest level of autonomy of the entities.

Despite of the Reuters’s market operation there are also relations with

Reuters’s outsourcing companies and inside Reuters – among its employees.

Work in Reuters is less specialized and less function-oriented than work in other

companies. Employees, instead of focusing on one task, play role in many tasks

or even deal with whole project in all its dimensions. On the other hand, each

core competence is maintained by particular organization or individual.

Reuters provides itself a tool to gain a competitive advantage by making use of

its intelligent information collected from the businesses and professionals

around the world. Intelligent information provides decision-makers with the

knowledge to act. It is a synthesis of human intelligence, industry expertise and

innovative technology. The company consists of 55,000 employees. It is

operating in more than 100 countries. Reuters delivers information about

financial, legal, tax and accounting, healthcare, science and media markets. The

company is organized into two divisions: Market Division including: Sales &

Trading, Enterprise, Investment & Advisory, Media and Professional Division

including: Legal, Healthcare & Science, Tax & Accounting.

Reuters’s traits of virtuality guarantee its adaptability to changing environment.

Its virtuality enables flexibility and fluidness of relationship with other entities.

However, its network can’t be controlled directly. The binding glue of Reuters

and its contractors is the business opportunity.

Coordination can be achieved only via shared norms and values, and via high

level of self-control. Reuters’s business is founded on integrity, independence

and freedom from bias. Values that are foundation of the Trust Principles and

Code of Business Conduct and Ethics, reflect Reuters way of doing business.

There exists an anonymous helpline for employees for reporting Code-related

issues. Every employee including management is obliged to get familiar with

these corporate documents.

Decision-making process of Reuters’s virtual organization is maintained in

collaboration with other members. Each step towards is discussed among

network nodes – depending which part of the network particular action will

Specialization

Hierarchy of

authority

Centralization

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involve. Functional management (such as HRM, Finance, IT, Marketing) is

maintained by employees on the level of teams.

Thomson Reuters’s adapts a group-wide perspective towards management.

However, it also seeks to enable the internal divisions’ fluidness and flexibility.

Combination of these two methods allows the company to serve their

customers effectively. Reuters's management concentrates on strategy and

capital allocation, technology and innovation, talent management and brand

management. Managers are also responsible for supervision of communications,

investor relations, tax, accounting, finance, treasury and legal, and take care of

human resources services, such as employee compensation, benefits

administration, share plans and training and development.

Reuters’s employees coordinate their own tasks. Most of employees are distant

from each other – thus, they have to organize their time and workshop. They

decide how and when to perform the task and they set themselves achievement

standards and rules.

Reuters employs 26,500 people in Professional division and 28,800 in Markets

division. Employees are highly trained in their areas of specialization and in

teamwork and management skills.

Reuters’s technology supports its model of strategy. Technology enables social

presence on high level – its communication medium supports a feeling of

presence and a sense that those involved are jointly interacting. It's necessary

for company operating across more than 100 countries having more than 55,000

employees doing their work in virtual teams. Technology in Reuters provides

richness of media that is ability of using natural language such as voice, facial

expressions, and gestures, personalization of information, and rapidness of

feedback.

Reuters has made significant investments in its technology. 89% of its total

expenses in 2010 are investments in technology capital. Reuters believes that

demand for its products and services will increase since the group of

professionals is growing. Its aim is to constantly improve the technology

infrastructure to satisfy this demand at a desirable cost.

Reuters combines its technology with its content resources to provide services

based on intelligent information for business and professional customers. The

company maximizes the value of its information resources by means of

technology. It continuously is improving its algorithms, search capabilities, user

interfaces, workflow, collaboration tools and data.

Professionalism

Organizational

technology

Environment

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Reuters is continuing to develop its platforms for information providing through

the use of technology. The company combines its web services content to

reduce product costs of delivery and to reduce time for development of

products and services. Reuters for most of its products and services uses

multiple software applications based on common database. This approach lets

Reuters to provide products fast into markets.

Reuters has got fluid internal – and to some extend external – boundaries. It can

be reconfigured quickly, while externalizing of many functions offers the chance

to concentrate on the business core.

In 2008, Thomson acquired Reuters for $16 billion. Various tactical acquisitions

were made by Reuters to complement portfolio of services and to strengthen its

business position. Number of acquisitions was made to broaden the range of

offerings. Acquisitions enabled Reuters to integrate Information resources and

services into its operations. They enabled also the company to enter new

markets, get new revenue streams and lower the costs.

Additionally, Reuters continuing strategy to optimize its portfolio of acquisitions

ensures that investments in its business provide opportunities of returns and

continual growth. If it is not the case, number of businesses is sold to pursue

flexibility.

Reuters provides their services to most of their customers with a unique

business model. Most of revenues come from providing content and services on

subscription basis to business and professionals across the world. This business

model is capital efficient, generates cash flow, and it has enabled Reuters to

achieve economy of scale in chosen markets. This enables Reuters to

understand its clients’ needs.

Reuters as a base of its virtual organization was able to build a stable

organizational identity and develop its organizational culture – common

behaviors, values and norms. Even though, Reuters is also subject of typical

challenges of virtuality that rises from national and cultural diversity,

organizational identity, trust and commitment.

All Reuters’s employees, directors and officers, including CEO, CFO and

Controller, are expected to adhere to the Code of Business Conduct and Ethics.

Reuters’s employees are required to acknowledge that they read the Code.

Employees are obliged to act with accordance to principles and policies of the

Code. Ethical business conduct is maintained by establishing culture promoting

values outlined in the Code. Reuters has established an online course in order to

Environment

Goals and

Strategy

Culture

Page 27: Organization Design - Building a Virtual Organization

train its employees in the Code. The General Counsel submits an annual report

on the Code to the Corporate Governance Committee.

The Challenge

Reuters constantly has moved from virtual organization to traditional

hierarchical and static organization while it grew. Organizational design

dimensions design analysis of Reuters shows that this company is moving away

from virtual organization model. It can be easily observed that Reuters was born

as inter-organizational virtual organization and constantly has shifted from

network-oriented structure to intra-organizational entity. This trend leads to

more formalized and centralized organization with stronger boundaries. It may

not affect organizational technology, strategy or culture but it will have a major

impact on specialization, professionalization and relationships with

environment. This transformation may lead to advantages but there is no doubt

that it will result also in problems.

Reuter’s

challenge

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Chapter III

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General Management

Firstly, to obey misunderstandings, the meaning of expression “general manager” has to be

clarified. “General manager” can be understood either as top-level manager or as

nonfunctional manager.52 In this paper, the second meaning is adopted.

In recent years, there can be

observed increased interest in

general management, which is

caused by the emergence of

indeterminate, decentralized

organizational forms, such as

virtual organization. These

forms are characterized by a

fluid structure, less numerous

boards and more dispersed

operating units. When the number of managers is reduced, the need of functional

specialization is minimized, and consequently the possibility of its practice reduced. In this

situation, managers should become general specialists – both in theory and in practice. They

ought to demonstrate the ability to constantly move from one job to another, and even

perform multiple tasks simultaneously. There is great demand for managers who are able to

holistically look at the organization and

analyze it with multi-function models.53

General management is to organizes, plans,

leads and coordinates interrelated

operations. Its aim is to achieve defined

objectives. Planning is the decision-making

process establishing organization’s goals and

means of achieving them. Planning requires

the measurement of changes and

constraints. Among its tools there are

forecasting, developing objectives, strategies

and policies, and forming action plans.

Organizing is the art of coordinating the

activities of individuals. It uses such methods

as managing activities and responsibilities,

providing means of communication,

52 BusinessDictionary.com, <http://www.businessdictionary.com/definition/general-manager.html, 2011-10-04> 53 W. Warner, op. cit., 127

Figure 14. General Management techniques

Source: Own elaboration based on M. Armstrong, A

Handbook of Management Techniques, Kogan Page

Limited, UK, 2001, p. 11

Figure 15. General Management as a result of application of Virtual Organization

Source: Own elaboration based on W. Warner, op. cit., 127

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supervision and coordination. Directing is supporting employees in their work activities by

means of leadership and team-work. Controlling is based on measurement and comparison

of results. It is also to monitor results with plans. Feedback is continuous process that

establishes the framework of general management. It is a necessary communication tool

allowing the coordination.54

General management is a set of managerial techniques that are aimed to assist in the

process of decision-making. However, they are to support, not supplant, the exercise of

business judgment.55

General management is a business function that differs from the other functions in the

sense that it does not exist as an independent department in the business. General manager

techniques are aimed at tasks of leading which are performed at all levels of management

and which consist of four basic management functions: planning, organizing, activating and

controlling, and six additional management functions: decision-making, communication,

motivation, co-ordination, delegation and disciplining.56

Regardless of the organizational structure implemented, the general manager at any level of

the organization must supervise the heads of functional departments he or she oversees and

manage and coordinate activates that require cross-functional cooperation. There is a

tendency for functional units to become isolated and parochial silos as they focus on

internal, departmental activities, goals, and measures. General Managers must encourage

and devise means for collaboration among the functional heads. Furthermore, general

managers must work to develop a culture in which functional managers do not lose sight of

finding the solutions and approaches that most benefit the organization as a whole rather

than those that promote their own functions at a cost.57

General Management in Virtual Organization

In comparison traits of virtual organization with traits of general management, it occurs that

there exist many parallels between them. In both models a holistic, wide perspective on

organization and its environment is taken. They prefer to determine strategy rather than ad

hoc task and process management. Both are focused on coordination rather than control –

which results from believe that success is rooted in human factor rather than hierarchy or

organizational structure. Coordination relies on communication in both models. Both,

54 M. Armstrong, A Handbook of Management Techniques, Kogan Page Limited, UK, 2001, p. 11 55 M. Armstrong, op. cit., p. 13 56 J. Kroon, General Management, Kagiso Tertiary, Cape Town, 1990, p. 4 57 J. Colley, Principles of general management: the art and science of getting results across organizational boundaries, Yale University Press, USA, 2007, p. 31

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general management and virtual organization, concentrate their attention on knowledge –

especially on process of gathering knowledge.58

General Manager in virtual

organization is responsible for

management above functional

divisions and for coordination of

variety of tasks for a specific

purpose. While in traditional

organization such managers are met

only on highest positions of

organizational hierarchy, in virtual

organization they are majority of

managers. ICT and finance

specialists are supportive for

General Managers. However only

General Managers are to plan,

organize, formulate goals and

manage virtual organization.59

Managers in virtual organization occupy the positions of having a wider scope of

responsibility. Responsibility in virtual organization is passed down. From personnel working

in virtual environment it is expected more responsibility for executed tasks – e.g. planning or

quality control. It leads to empowerment – employees have bigger freedom to achieve

organization’s goals. In virtual organization often they also contribute to determination

those goals. Task that used to be assigned to particular function, in virtual organization are

assigned to serial employee. This process gives managers an opportunity to focus on general

management.60

Virtual general managers also have smaller number of subordinates. It results from the fact

that general management is related to intangible capital that doesn’t need many employees.

Additionally, even in large headquarters employing big personnel, it is organized in teams

rather than in hierarchical departments. In opposition to formal hierarchy that multiplies the

number of subordinates in a manner typical of any bureaucracy; virtual organization has a

tendency to multiply the cooperation of employees with the same powers and competence.

The company that takes the form of a virtual organization, in order to maintain the current

level of human capital usually needs the same as before the number of managers. Moreover,

not working in isolated departments, managers represent the same general point of view on

58 M. Warner, M. Witzel, op. cit., p. 136 59 M. Warner, M. Witzel, op. cit., p. 169 60 M. Warner, M. Witzel, op. cit., p. 183

Figure 16. Common features of General Management and Virtual Organization

Source: Own elaboration based on M. Warner, M. Witzel, Zarządzanie

organizacją wirtualną, Oficyna Ekonomiczna, Kraków, 2005, p. 136

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management. If this state is reached, then the creation and transformation of project teams

do not cause major problems.61

Manager of the virtual organization, as well as general manager, is a leader. Role of the

manager is to lead its members to achieve the organization’s objectives. Leadership

encompasses the process of

motivating the workforce, and

establishing, improving and

maintaining a performance-

oriented, feedback-oriented,

supportive culture. General

manager in virtual organization

acts as a cheerleader – he praises

good efforts and motivate

employees to perform and

improve. Setting standards of

integrity is another significant role

of a leader in virtual organization.

An import role of general manager

in virtual organization in

leadership process is to build and

ensure positive, trusting

relationship among all teams,

layers and departments of the

organization, and moreover

beyond the organization

boundaries – that is even more

important because of network

structure and high level of

autonomy of elements of virtual

organization.62

Major difference between manager of virtual organization and other managers is that,

virtual manager focuses on organization objectives, not functional objectives. This shift of

paradigm covers with general management. General manager is expected to translate

functional goals into terms that bear directly on the organization’s goals. Figure 16

61 M. Warner, M. Witzel, op. cit., p. 184 62 J. Colley, op. cit., p. 43

Figure 17. General manager’s obligations

Source: R. Sloma, No-Nonsense Management: A General Manager's Primer,

Macmillian Publishing, New York, USA, 1997, p. 10

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summarizes the expectations of general manager’s attitude towards organization that

general management method requires.63

As Figure 17 demonstrates, need for general management results from analysis of virtual

organization by means of organizational design methodology. Virtual organization has fluid

internal and external boundaries. It can be reconfigured quickly and externalize many

functions. It concentrates on the business core. Therefore, general management is a

management method that directly responds to these demands because general manager is a

person who makes it his own business to get to know how business operates beyond

boundaries of team, division, department or even the organization itself.64

Conclusion

General management is a tool that – in opinion of author of this text – responds to Reuters’s

(and most of other virtual organizations’) challenges. Growth and evolution of Reuters leads

this company’s virtual organization, in particular its network of relationships, to

concentration into hierarchical and static organization. In other words, it loses its

characteristics of virtuality. Reuters since its spontaneous creation – even despite of its

virtual characteristics that it still poses – evolved and still evolves into functional

organization that is not focusing on business core anymore. This trend raises some problems

that could be obeyed if Reuters’s decision-makers would apply general management to

support the process of reimplementation of the model of virtual organization.

63 R. Sloma, No-Nonsense Management: A General Manager's Primer, Macmillian Publishing, New York, USA, 1997, p. 10 64 R. Waite, The Lost Art of General Management, Faye Klein, USA, 2004, p.3

Figure 18. Relationship of General Management with Organizational Design and Virtual Organization

Source: Own elaboration.

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However, this paper is not to give an advice whether to decide to switch to this model or not

– its aim is to be guide through the particular organization model by means of organization

theory; this paper’s assumptions, reasoning and conclusions are directed to practitioners

and theorists of organization design to outline the impact of application of the design of

virtual organization. This paper was written also to visualize this theoretical problem by

analysis of real organization. Finally, this paper is to show method that can answer questions

arisen by this problem – the challenge.

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List of figures

Figure 1. Importance of organizations ....................................................................................... 8

Figure 2. Organization's charactersitics ..................................................................................... 9

Figure 3. Organization as a network of its members ................................................................. 9

Figure 4. Organization theory .................................................................................................. 11

Figure 5. Organization design ................................................................................................... 11

Figure 6. Organization design ................................................................................................... 12

Figure 7. List of organization design dimensions ..................................................................... 12

Figure 8. Virtual organization classification ............................................................................. 13

Figure 9. Skills of virtual team .................................................................................................. 14

Figure 10. Organization design dimensions of virtual organization ........................................ 15

Figure 11. Communication technology .................................................................................... 17

Figure 12. Reuters: Company Profile........................................................................................ 21

Figure 13. Reuters Trust Principles........................................................................................... 23

Figure 14. General Management techniques........................................................................... 29

Figure 15. General Management as a result of application of Virtual Organization ............... 29

Figure 16. Common features of General Management and Virtual Organization .................. 31

Figure 17. General manager’s obligations ............................................................................... 32

Figure 18. Relationship of General Management with Organizational Design and Virtual

Organization ..................................................................................................................... 33

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