EXPLOITING THE VIRTUAL VALUE CHAIN Executives must pay attention to the ways in which their companies create value in the physical and virtual worlds alike. But the processes for creating value are not the same in both. By understanding the differences and the interplay between the value-adding processes of the physical and informa- tion worlds, senior managers can see more clearly and comprehensively the strategic issues facing their organizations Managing two interacting alue-adding processes in the two mutually dependent realms poses new conceptual and tactical challenges. Those who understand how to master both can create and extract value in the most efficient and effective manner The value chain Academics, consultants, and managers have long described the stages in the process of creating value in the physical world as links in a"value chain. The value chain is a model that describes a series of value-adding activities connecting a company's supply side(raw materials, inbound logistics, and production processes)with its demand side(outbound logistics, marketing, and sales). By analyzing the stages of a value The value-adding processes chain, managers have been able to redesign that companies must employ r internal and external processes to are unique to the virtual improve efficiency and effectiveness world of information The value chain model treats information as a supporting element in the value-adding process, not as a source of value in itself. Managers often use information that they capture on inventory, production, or logistics to help monitor or control those processes, for instance, but they rarely use information itself to create new value for the customer. However, Federal Express recently did just that by allowing customers to track packages through the company World Wide Web site on the Internet. Now customers can locate a package in transit by connecting online to the Fed Ex site and entering the airbill number. After the package has been delivered, they can even find out who signed for it. Although FedEx provides this service for free, in doing so it has created added value for the customer-and thus increased loyalty -in a fiercely competitive market. To create value with information, managers must look to the marketspace Ithough the value chain of the space can mirror that of the place-buyers and sellers can transfer funds over electronic networks just as they might exchange cold, hard cash-the value-adding processes that companies must employ to turn raw information into new marketspace services and products are unique to the information world. In other words, the alue-adding steps are virtual in that they are performed through and with information 22 THE McKINSEY QUARTERLY 1996 NUMBER IExecutives must pay attention to the ways in which their companies create value in the physical and virtual worlds alike. But the processes for creating value are not the same in both. By understanding the diƒferences and the interplay between the value-adding processes of the physical and informa￾tion worlds, senior managers can see more clearly and comprehensively the strategic issues facing their organizations. Managing two interacting value-adding processes in the two mutually dependent realms poses new conceptual and tactical challenges. Those who understand how to master both can create and extract value in the most eƒficient and eƒfective manner. The value chain Academics, consultants, and managers have long described the stages in the process of creating value in the physical world as links in a “value chain.” The value chain is a model that describes a series of value-adding activities connecting a company’s supply side (raw materials, inbound logistics, and production processes) with its demand side (outbound logistics, marketing, and sales). By analyzing the stages of a value chain, managers have been able to redesign their internal and external processes to improve eƒficiency and eƒfectiveness. The value chain model treats information as a supporting element in the value-adding process, not as a source of value in itself. Managers oƒten use information that they capture on inventory, production, or logistics to help monitor or control those processes, for instance, but they rarely use information itself to create new value for the customer. However, Federal Express recently did just that by allowing customers to track packages through the company’s World Wide Web site on the Internet. Now customers can locate a package in transit by connecting online to the FedEx site and entering the airbill number. Aƒter the package has been delivered, they can even find out who signed for it. Although FedEx provides this service for free, in doing so it has created added value for the customer – and thus increased loyalty – in a fiercely competitive market. To create value with information, managers must look to the marketspace. Although the value chain of the space can mirror that of the place – buyers and sellers can transfer funds over electronic networks just as they might exchange cold, hard cash – the value-adding processes that companies must employ to turn raw information into new marketspace services and products are unique to the information world. In other words, the value-adding steps are virtual in that they are performed through and with information. EXPLOITING THE VIRTUAL VALUE CHAIN 22 THE McKINSEY QUARTERLY 1996 NUMBER 1 The value-adding processes that companies must employ are unique to the virtual world of information