EXPLOITING THE VIRTUAL VALUE CHAIN Creating value in any stage of a virtual value chain involves a sequence of five activities: gathering, organizing, selecting, synthesizing, and distributing information. Just as a company takes raw material and refines it into some thing useful -as in the sequence of tasks involved in assembling an auto- mobile on a production line- so a manager today collects raw information and adds value through these steps Adapting to a virtual world An examination of Geffen Records. a unit of MCAs music division shows how information can be used to create value. The traditional product of a record label is a package of prerecorded music captured on an audio- cassette or compact disc. The product is the culmination of a set of value adding processes that take place in the physical world. These processes include discovering new musicians, screening them for marketability, recording their work in a studio, editing and selecting their music, creating master tapes, producing CDs or cassettes, and finally packaging, promoting, and distributing the product. Increasingly, new competitors for Geffen's business are emerging in the marketspace. These entrants are viable because of the new economics of doing business in the world of information. Groups such as the Internet Underground Music Archive(IUMA), for example, are posting digital audio tracks from unknown artists on the network, potentially subverting the role that record labels play. Today's technology allows musicians to record and edit material inexpensively themselves, and to distribute and promote it over networks such as the world wide Web or commercial online services. It also allows them to test consumers reactions to their The Web page is also an music, build an audience for their recorded information mirror of an performances, and even distribute their activity that has traditionally products entirely in the marketspace. The occurred in the physical world point here is simple: bringing music to market can sometimes be done more quickly, more effectively, and less expensively in the marketspace. Hence the challenge for Geffen. The label has a site on the world wide Web devoted to its bands and uses it to distribute digital audio and video samples and to provide information about the bands' tours The Web page has become both Geffen's showroom in the marketspace and a potential new retail channel. It is also an information mirror of an activity that has traditionally occurred in the physical world-a stage in a virtual value chain that parallels a stage in a physical value chain. In addition to using its own Web page, Geffen could search for new talent IUMA's home site rather than audition bands in a studio, or edit and modify music on a computer rather than record take after take with a band THE McKINSEY QUARTERLY 1996 NUMBER 1 23Creating value in any stage of a virtual value chain involves a sequence of five activities: gathering, organizing, selecting, synthesizing, and distributing information. Just as a company takes raw material and refines it into some￾thing useful – as in the sequence of tasks involved in assembling an auto￾mobile on a production line – so a manager today collects raw information and adds value through these steps. Adapting to a virtual world An examination of Geƒfen Records, a unit of MCA’s music division, shows how information can be used to create value. The traditional product of a record label is a package of prerecorded music captured on an audio￾cassette or compact disc. The product is the culmination of a set of value￾adding processes that take place in the physical world. These processes include discovering new musicians, screening them for marketability, recording their work in a studio, editing and selecting their music, creating master tapes, producing CDs or cassettes, and finally packaging, promoting, and distributing the product. Increasingly, new competitors for Geƒfen’s business are emerging in the marketspace. These entrants are viable because of the new economics of doing business in the world of information. Groups such as the Internet Underground Music Archive (IUMA), for example, are posting digital audio tracks from unknown artists on the network, potentially subverting the role that record labels play. Today’s technology allows musicians to record and edit material inexpensively themselves, and to distribute and promote it over networks such as the World Wide Web or commercial online services. It also allows them to test consumers’ reactions to their music, build an audience for their recorded performances, and even distribute their products entirely in the marketspace. The point here is simple: bringing music to market can sometimes be done more quickly, more eƒfectively, and less expensively in the marketspace. Hence the challenge for Geƒfen. The label has a site on the World Wide Web devoted to its bands and uses it to distribute digital audio and video samples and to provide information about the bands’ tours. The Web page has become both Geƒfen’s showroom in the marketspace and a potential new retail channel. It is also an information mirror of an activity that has traditionally occurred in the physical world – a stage in a virtual value chain that parallels a stage in a physical value chain. In addition to using its own Web page, Geƒfen could search for new talent at IUMA’s home site rather than audition bands in a studio, or edit and modify music on a computer rather than record take aƒter take with a band EXPLOITING THE VIRTUAL VALUE CHAIN THE McKINSEY QUARTERLY 1996 NUMBER 1 23 The Web page is also an information mirror of an activity that has traditionally occurred in the physical world