This organizational form, shown in Figure 1, was first developed in the United States in the late 19th century with the advent of mass production.

As the pyramid shape suggests, power is concentrated primarily among the handful of individuals at the top. Traditional organizations integrate work vertically that is, they delegate authority in a pyramidal, hierarchical structure. Likewise, when an organization assembles resources from a variety of firms, a virtual organization seems to have more capabilities than it actually possesses. When a computer appears to have more storage capacity than it really possesses it is referred to as virtual memory. The term virtual in this sense has its roots in the computer industry. The ultimate goal of the virtual organization is to provide innovative, high-quality products or services instantaneously in response to customer demands.

Virtual organization is often associated with such terms as virtual office, virtual teams, and virtual leadership. The term virtual organization is used to describe a network of independent firms that join together, often temporarily, to produce a service or product.