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 I
revolution” 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
EXPLOITING THE VIRTUAL VALUE CHAIN CAD/CAM technologies. When Ford developed its"global car"(marketed in North America as the Contour sedan), it moved one key element of the physical value chain- product development -into the marketspace. Ford intended to create a car that would incorporate its best engineering, design and marketing talent worldwide, while also bringing to bear a vision of how a single car design could appeal to all major world What value-adding steps currently performed in the markets at once physical value chain might be shifted to the mirror world To gain leverage from its substantial invest ments in marketspace-enabling technology of the virtual value chain? stems, Ford brought together managerial talent from around the world in the marketspace. Rather than creating national product teams or convening elaborate design summits, Ford established a virtual work team to develop the car. In this way, it set to work the best talent and the broadest vision it could muster By moving product development from the place to the space, Fords managers did more than perform tasks in an information-defined world that were traditionally accomplished through physical actions. In the virtual world, the design team could transcend the limitations of time and space that characterize management in the physical world. They built and tested prototypes in a simulated computer environment and shared designs and data with colleagues around the world over a computer network 24 hours a day. In the virtual world of information, they established common global specifications for manufacturing, integrated component systems centrally, and even drew suppliers into the design process. Ford thus performed critical value-adding steps not on the Pvc but on the VvC-in other words, in a world that mirrored traditional In the virtual world. the team managerial realities could transcend the limitations of time and space that With such a complete information- characterize the physical world based representation of the product, everyone on the team could see the project holistically in the mirror world. The goal: a global car with global appeal. The virtual value chain made a much more integrated process possible. The marketing challenge of getting customers to buy the Contour remains Managers at the Boeing Company took their exploitation of the mirror world one step further. A few years ago, they redesigned the engine housing for a new model of the 737 airplane. Previously, airplane manufacturers designed airframes by developing physical prototypes, testing them in wind tunnels to gauge the flow of air over their contours, and then repeating the process through multiple iterations When Boeing was debating how to THE MeKINSEY QUARTERLY 1996 NUMBER
CAD/CAM technologies. When Ford developed its “global car” (marketed in North America as the Contour sedan), it moved one key element of the physical value chain – product development – into the marketspace. Ford intended to create a car that would incorporate its best engineering, design, and marketing talent worldwide, while also bringing to bear a vision of how a single car design could appeal to all major world markets at once. To gain leverage from its substantial investments in marketspace-enabling technology systems, Ford brought together managerial talent from around the world in the marketspace. Rather than creating national product teams or convening elaborate design summits, Ford established a virtual work team to develop the car. In this way, it set to work the best talent and the broadest vision it could muster. By moving product development from the place to the space, Ford’s managers did more than perform tasks in an information-defined world that were traditionally accomplished through physical actions. In the virtual world, the design team could transcend the limitations of time and space that characterize management in the physical world. They built and tested prototypes in a simulated computer environment and shared designs and data with colleagues around the world over a computer network 24 hours a day. In the virtual world of information, they established common global specifications for manufacturing, integrated component systems centrally, and even drew suppliers into the design process. Ford thus performed critical value-adding steps not on the PVC but on the VVC – in other words, in a world that mirrored traditional managerial realities. With such a complete informationbased representation of the product, everyone on the team could see the project holistically in the mirror world. The goal: a global car with global appeal. The virtual value chain made a much more integrated process possible. The marketing challenge of getting customers to buy the Contour remains. Managers at the Boeing Company took their exploitation of the mirror world one step further. A few years ago, they redesigned the engine housing for a new model of the 737 airplane. Previously, airplane manufacturers designed airframes by developing physical prototypes, testing them in wind tunnels to gauge the flow of air over their contours, and then repeating the process through multiple iterations. When Boeing was debating how to EXPLOITING THE VIRTUAL VALUE CHAIN THE McKINSEY QUARTERLY 1996 NUMBER 1 27 What value-adding steps currently performed in the physical value chain might be shiƒted to the mirror world of the virtual value chain? In the virtual world, the team could transcend the limitations of time and space that characterize the physical world