Porters

virtual world made of information. The latter has given rise to the world of electronic commerce, a new locus of value creation. We have referred to this new information world as the marketspace to distinguish it from the physical world of the marketplace. (See “Managing in the Marketspace,” HBR NovemberвЂ"December 1994.) A few examples illustrate the distinction. When consumers use answering machines to store their phone messages, they are using objects made and sold in the physical world, but when they purchase electronic answering services from their local phone companies, they are utilizing the marketspaceвЂ"a virtual realm where products and services exist as digital information and can be delivered through information-based channels. Banks provide services to customers at branch offices in the marketplace as well as electronic online services to customers in the marketspace; airlines sell passenger tickets in both the “place” and the “space”; and fast-food outlets take orders over the counter at restaurants and increasingly through touch screens connected to computers.

Executives must pay attention to how their companies create value in both the physical world and the virtual world. But the processes for creating value are not the same in the two worlds. By understanding the differences and the interplay between the value-adding processes of the physical world and those of the information world, 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 efficient and effective manner.

Academics, consultants, and managers have long described the process of creating value in the physical world,