EXPLOITING THE VIRTUAL VALUE CHAIN to create one suitable version for the mastertape. Each activity is a stage in a virtual value chain that occurs through and with information and mirrors a Truly to exploit the virtual value chain, however, Geffen's managers might go further by applying the generic value-adding steps of the marketspace to the information the company collects at every stage of the physical chain, Companies must oversee a They might, for example, utilize the digital physical value chain, but they information captured during a bands must also build and exploit practice sessions by inviting fans to"sit in a virtual value chain the studio"on the Internet. They might also allow fans to listen as engineers edit the material, or let them electronically down load interviews with band members in advance of wider publication or distribution. In the physical value chain, information collected in the studio or during editing has value to the extent that it enables Geffen to produce and sell CDs more efficiently; by contrast in the virtual world, it is a potential source of new revenue. Moreover, that information presents opportunities to develop new relationships with customers at very low cost for instance, a customer who would not be interested in a new compact disc by the rolling Stones might nevertheless pay to sit in on a chat session with them in the internets voodoo lounge Like most companies, Geffen must play in both the place and the space. The company's managers must continue to oversee a physical value chain making and selling CDs- but they must also build and exploit a We have studied scores of companies from a variety of industries attempting to do business in both the place and the space and have found that organizations making money in the information realm successfully exploit both of their value chains. Instead of managing one series of value dding processes, they are actually managing two. The economic logic of the two chains is different: conventional understanding of the economies of Building the virtual value chain abound Physical value chain processes Marketing Information]capture Ahen companies integrate the information they underlay of the and marketing- they construct an information 24 THE McKINSEY QUARTERLY 1996 NUMBER Ito create one suitable version for the mastertape. Each activity is a stage in a virtual value chain that occurs through and with information and mirrors a stage in the physical world. Truly to exploit the virtual value chain, however, Geƒfen’s managers might go further by applying the generic value-adding steps of the marketspace to the information the company collects at every stage of the physical chain, thereby creating new value for customers. They might, for example, utilize the digital information captured during a band’s practice sessions by inviting fans to “sit in the studio” on the Internet. They might also allow fans to listen as engineers edit the material, or let them electronically down￾load interviews with band members in advance of wider publication or distribution. In the physical value chain, information collected in the studio or during editing has value to the extent that it enables Geƒfen to produce and sell CDs more eƒficiently; by contrast in the virtual world, it is a potential source of new revenue. Moreover, that information presents opportunities to develop new relationships with customers at very low cost: for instance, a customer who would not be interested in a new compact disc by the Rolling Stones might nevertheless pay to sit in on a chat session with them in the Internet’s Voodoo Lounge. Like most companies, Geƒfen must play in both the place and the space. The company’s managers must continue to oversee a physical value chain – making and selling CDs – but they must also build and exploit a virtual value chain. We have studied scores of companies from a variety of industries attempting to do business in both the place and the space and have found that organizations making money in the information realm successfully exploit both of their value chains. Instead of managing one series of value￾adding processes, they are actually managing two. The economic logic of the two chains is diƒferent: conventional understanding of the economies of EXPLOITING THE VIRTUAL VALUE CHAIN 24 THE McKINSEY QUARTERLY 1996 NUMBER 1 Companies must oversee a physical value chain, but they must also build and exploit a virtual value chain Building the virtual value chain Exhibit 1 Inbound logistics Production processes Outbound logistics Marketing Sales Physical value chain Virtual value chain Information capture When companies integrate the information they capture during stages of the value chain – from inbound logistics and production through sales and marketing – they construct an information underlay of the business. This integrated information provides managers with the ability to “see” their value chains from end to end