EXPLOITING THE VIRTUAL VALUE CHAIN Exhiblt 2 Exploiting the virtual value chain Physical value chain Information capture Virtual value chain es from the e to the ma and with information In other words these information-based activities mirror steps in the create a new engine to improve the performance of its existing 737 airframe design, it turned not to wind tunnels but to a synthetic environment-a mirror world made of information. Boeing engineers developed the prototype as a virtual product that incorporated relevant laws of physics and materials sciences, enabling it to test an evolving computer-simulated model in a virtual wind tunnel As a result, engineers were able to test many more designs at dramatically lower costs and with much greater speed. The outcome was a teardrop shape for the engine housing that stunned the aerospace world. Only a process capable of endlessly testing different possibilities at near-zero incremental cost per synthetic prototype When scale economies do not could have given rise to a product concer apply, managers seeking better that so emphatically transcended conven- performance at lower cost tional thinking. By moving elements of the can tap the mirror world PVC-R&D, product design, prototyping, and product testing-to the mirror world of the VvC, Boeing succeeded battering dominant paradigm of engine design and delivered a product that easily outperformed the competition, a feat that had proved impossible in 20 years of wind-tunnel testing Every manager knows that staying competitive today depends on achieving higher levels of performance for customers while reducing costs in R&D and production. Traditionally, companies have gained more for less by exploiting vast economies of scale in production while focusing on raising levels of quality. Japanese automakers such as Toyota have successfully pursued this strategy, delivering highly differentiated products at the lowest possible cost. When scale economies do not apply, as in many service-sector businesses, managers seeking better performance at lower cost can tap the mirror world, in which the economics are altogether different. On the vvC, companies may find dramatic low-cost approaches to delivering extra ordinarily high-value results to customers. 28 THE McKINSEY QUARTERLY 1996NUMBERcreate a new engine to improve the performance of its existing 737 airframe design, it turned not to wind tunnels but to a synthetic environment – a mirror world made of information. Boeing engineers developed the prototype as a virtual product that incorporated relevant laws of physics and materials sciences, enabling it to test an evolving computer-simulated model in a virtual wind tunnel. As a result, engineers were able to test many more designs at dramatically lower costs and with much greater speed. The outcome was a teardrop shape for the engine housing that stunned the aerospace world. Only a process capable of endlessly testing diƒferent possibilities at near-zero incremental cost per synthetic prototype could have given rise to a product concept that so emphatically transcended conven￾tional thinking. By moving elements of the PVC – R&D, product design, prototyping, and product testing – to the mirror world of the VVC, Boeing succeeded in shattering a dominant paradigm of engine design and delivered a product that easily outperformed the competition, a feat that had proved impossible in 20 years of wind-tunnel testing. Every manager knows that staying competitive today depends on achieving higher levels of performance for customers while reducing costs in R&D and production. Traditionally, companies have gained more for less by exploiting vast economies of scale in production while focusing on raising levels of quality. Japanese automakers such as Toyota have successfully pursued this strategy, delivering highly diƒferentiated products at the lowest possible cost. When scale economies do not apply, as in many service-sector businesses, managers seeking better performance at lower cost can tap the mirror world, in which the economics are altogether diƒferent. On the VVC, companies may find dramatic low-cost approaches to delivering extra￾ordinarily high-value results to customers. EXPLOITING THE VIRTUAL VALUE CHAIN 28 THE McKINSEY QUARTERLY 1996 NUMBER 1 When scale economies do not apply, managers seeking better performance at lower cost can tap the mirror world Information capture Exploiting the virtual value chain Exhibit 2 Physical value chain Virtual value chain With an integrated information underlay in place, companies can begin to perform value-adding activities more efficiently and effectively through and with information. In other words, these information-based activities mirror steps in the physical value chain. When companies move a number of value-adding activities from the marketplace to the marketspace, they exploit a virtual value chain