EXPLOITING THE VIRTUAL VALUE CHAIN revolution"initiative illustrates the necessary first steps companies mus take if they are to establish and then exploit their virtual value chains. Underlying the manufacture and distribution of a variety of Frito-brand snack foods is an efficient information system that gives managers the bility to visualize nearly every element of the company's value chain as part of an integrated whole. It acts as a central nervous system within the business that integrates marketing, sales, manufacturing, logistics, and finance; it also provides managers with information on suppliers, customers, and competitors Frito's employees in the field collect information on the sales of products daily, store by store across the United States, and feed it electronically to the company. They also collect information Companies begin to create about the sales and promotion of competing a virtual value chain that products, or about new products launched parallels but improves on by competitors in selected locations. By the physical value chain combining this field data with information from each stage of the value chain, Fritos managers can better determine levels of inbound supplies of raw materials, allocate manufacturing activity across available production capacity, and plan truck routing for the most efficient coverage of market areas. The company's ability to target local demand patterns with just the right sales promotion means that it can continuously optimise margin in the face of inventory risk In short, Frito can use information to see and react to activities along its physical value chain. The company executes actions in the marketplace while it monitors and coordinates these actions in the marketspace. Mirroring capability Once companies have established the necessary infrastructure for visibility, they can do more than just monitor value-adding steps. They can begin to manage operations or even to implement value-adding steps in the marketspace- more quickly, more effectively, with more flexibility, and at lower cost. In other words, managers can begin to ask: What are we doing now in the place, and what could we do more efficiently or more effectively in the space? What value-adding steps currently performed in the physical value chain might be shifted to the mirror world of the virtual value chain? When companies move activities from the place to the space, they begin to create a virtual value chain that parallels but improves on the physical value chain. Executives at Ford Motor Company engaged in such work during the past decade as the company aggressively adopted videoconferencing and 26 THE McKINSEY QUARTERLY 1996 NUMBER Irevolution” initiative illustrates the necessary first steps companies must take if they are to establish and then exploit their virtual value chains. Underlying the manufacture and distribution of a variety of Frito-brand snack foods is an eƒficient information system that gives managers the ability to visualize nearly every element of the company’s value chain as part of an integrated whole. It acts as a central nervous system within the business that integrates marketing, sales, manufacturing, logistics, and finance; it also provides managers with information on suppliers, customers, and competitors. Frito’s employees in the field collect information on the sales of products daily, store by store across the United States, and feed it electronically to the company. They also collect information about the sales and promotion of competing products, or about new products launched by competitors in selected locations. By combining this field data with information from each stage of the value chain, Frito’s managers can better determine levels of inbound supplies of raw materials, allocate manufacturing activity across available production capacity, and plan truck routing for the most eƒficient coverage of market areas. The company’s ability to target local demand patterns with just the right sales promotion means that it can continuously optimise margin in the face of inventory risk. In short, Frito can use information to see and react to activities along its physical value chain. The company executes actions in the marketplace while it monitors and coordinates these actions in the marketspace. Mirroring capability Once companies have established the necessary infrastructure for visibility, they can do more than just monitor value-adding steps. They can begin to manage operations or even to implement value-adding steps in the marketspace – more quickly, more eƒfectively, with more flexibility, and at lower cost. In other words, managers can begin to ask: What are we doing now in the place, and what could we do more eƒficiently or more eƒfectively in the space? What value-adding steps currently performed in the physical value chain might be shiƒted to the mirror world of the virtual value chain? When companies move activities from the place to the space, they begin to create a virtual value chain that parallels but improves on the physical value chain. Executives at Ford Motor Company engaged in such work during the past decade as the company aggressively adopted videoconferencing and EXPLOITING THE VIRTUAL VALUE CHAIN 26 THE McKINSEY QUARTERLY 1996 NUMBER 1 Companies begin to create a virtual value chain that parallels but improves on the physical value chain