Part 1: Value Creation and Value Capture: A Multilevel
Perspective – Lepak, Smith, Taylor.
Any discussion of value creation must clearly articulate both the target of the value and the party that
produces the value and is intended to benefit from it (the source).
What is Value Creation?
Two important economic conditions that may be necessary for value creation activities to endure:
(1) The monetary amount exchanged must exceed the producer’s costs (money, time, effort, joy, and the like) of creating
the value in question, at least when the exchange occurs.
(2) The monetary amount that a user will exchange is a function of the perceived performance difference between the
new value that is created and the target user’s closest alternative (current task, product, or service).
The level of new value creation will depend on a target user’s subjective evaluation of the creativity,
determined by novelty and appropriateness of the new task, product, or service. The greater these
two properties, the greater the potential use value and exchange value to the user.
Three important conditions of this definition relevant to value creation that highlight the subjective
and context-specific nature of the value creation process (different people may arrive at different
conclusions) => there will be competing views of what is valuable among different users of value =>
producer must know of the context in which the evaluation of novelty/appropriateness will take
place.
(1) In order to evaluate the novelty, users must possess specialized knowledge of both the focal entity and what
alternatives exist so that a comparison of novelty/appropriateness and, hence, value can be made.
(2) A user cannot evaluate appropriateness without an understanding of the meaning of the new task or product in a
specific context.
(3) The evaluation of novelty and appropriateness of a creative task or product cannot be done independently of the
social or cultural context in which it is introduced.
,How is Value Created? The process of value creation
Contingency perspective => answering the question of how value is created requires one to define
the source and targets of value creation and the level of analysis.
The individual as a source of value creation
Individuals create value by developing novel and appropriate tasks, services, jobs, products,
processes, or other contributions perceived to be of value by a target user relative to a target’s needs
and when the monetary amount realized for this service is greater than what might be derived from
an alternative source producing the same task, service, etc.
- The value created may be from any new task, service, or job that provides greater utility or
lower unit costs for the user over the closest alternative.
- Intrinsic motivation (e.g. joy) or alternative rewards as recognition, money, or status.
- Thus, we argue that individuals create value by acting creatively to make their job/service
more novel and appropriate in the eyes of their employer or some other end user in a
particular context.
- When the individual is the unit of analysis, the focal process is the creative acts displayed by
individuals and a select set of individual attributes, such as ability, motivation, and intelligence,
and their interactions with the environment.
The organization as a source of value creation
New value is created when firms develop/invent new ways of doing things using new methods, new
technologies, and/or new forms of raw material. Thus, when the organization is the unit of analysis,
innovation and invention activities (knowledge creation) impact the value creation process.
- (1th stream) Innovative organizations introduce new products or services or new management practices related to the
products or services that arise from the innovation process => which consists of an intentional effort to develop a novel
idea; regarding a commitment of collective effort and resources.
o Firms are more likely to innovate when they face uncertain environments, enjoy slack resources, are managed by
entrepreneurial managers, have large social networks, and have the organizational capacity to combine and
exchange knowledge into new knowledge.
- The value creation process includes any activity that provides a greater level of novel and appropriate benefits than
target users currently possess, and that they are willing to pay for.
- (2) Dynamic capabilities: organizations create value by focusing on how firms can create new advantages as existing
ones are worn away by environmental changes.
- (3) increased attention to the process through which new organizational knowledge is generated, and, hence, value
created => this knowledge can lead to greater value for target users.
o The social connections of individuals within the firm will provide greater information and knowledge that can be
used by organizational members to combine and exchange this information in a way that produces new
organizational knowledge.
o Social networks of organizational members (e.g. directed to detect the needs of customers) => knowledge
creation capability => firm innovation
- (4) Strategic HRM research => identified role of management in the process of value creation.
o Build employee skills and motivate them to work toward organizational value creation.
o Firm success rests on its ability to offer new and superior customer value, which, in turn, depends on its ability to
explore and exploit employee knowledge that can become the basis of innovations that create value for targeted
customers.
o Dependent on that they design HR systems that encourage entrepreneurial activity among employees resulting
in explanatory innovation, as well as cooperative employee activities that exploit and extend existing knowledge
for competing advantage.
- Many potential targets for value creation at organizational level (not just customer). By definition, various stakeholders
have different views as to what is valuable because of unique knowledge, goals, and context conditions that affect how
the novelty and appropriateness of the new value will be evaluated. Moreover, they may have competing interests and
viewpoints on what is valuable. A stakeholder approach requires that organizations take a broader and a longer-term
view regarding the targets of value creation.
,Society as a source of value creation
At a societal level, the process of value creation can be conceived in terms of programs and
incentives for entrepreneurship and innovation intended to encourage existing organizations and
new entrepreneurial ventures to innovate and expand their value to society and its members.
- The innovation of firms in pursuit of profits is the key source of market expansion and economic
growth => gives value. But society and government can also do things to inspire innovation and
entrepreneurship in a society.
- Goal of government policy towards the economy: deploy a nation’s resources with high and rising levels of productivity
=> increase standard of living.
- Government creates value through laws and regulations and through services that provide structure and stability and
assurances of quality, lawful behavior, and national support.
- By passing and enforcing liberal bankruptcy laws that facilitate the failure of relatively hopeless entrepreneurial firms
while enabling the survival of those with the potential for a strong future, governments create value for society as a
whole.
- At the societal level, value creation is a somewhat different process than at the individual or organizational level, since
sources may act intentionally or unintentionally to create value for society at the same time they are creating value for
themselves (e.g. more jobs, tax revenues, better products, high standard of living for society).
- At the societal level, the level of entrepreneurship and macro-economic conditions in the
external environment, including laws and regulations restricting or encouraging innovation and
entrepreneurship, come into play.
Summary:
- Value creation at the individual level involves creativity and job performance.
- Value creation at the organizational level involves innovation and knowledge creation.
- Value creation at the societal level involves firm-level innovation and entrepreneurship, as well
as policies and incentives for entrepreneurship.
- One must recognize the existence of multiple targets, whether intended as such or not, who exist
in concert, not in isolation. One must also consider the knowledge of potential users and the
context in which they make evaluations about the new value that has been created.
Value Appropriation: How is Value Captured?
Value slippage => when the party creating the value does not retain all the new value that is created
=> occurs when use value is high while exchange value is low. Slippage obviously provides little
incentive for a source to continue creating value in the long term.
We propose that two key concepts operate across all levels of analysis to determine which party
captures the new value that is created: competition and isolating mechanisms.
- Competition. The creation of appropriate and novel tasks, products, or services will often yield a
situation where there is limited supply and high demand. Competition will thus ensue, as other
suppliers of the task, product, or service seek to replicate the new value that was created and
participate in the profits. A consequence of competition (increased supply) is that exchange value
(price) will decline to the point where supply equals demand. At this point, the value that was
created must be shared with other competitors => lower exchange value.
o It is important to note that competition is not limited to the organizational level, can also be
supplier level or employee level.
o Circular co-dependent relationship between competition and value creation => competition will result from value
creation activities, but value creation will also be a consequence of competition. Creative destruction denotes a
process whereby higher levels of competition drive firms to become more innovative by introducing new
products (referred to as new combinations) that create value, only to lose the value to competitors who replicate
or imitate the products => stable base of employment, education, tax support, etc.
, - Isolating mechanism => any knowledge, physical, or legal barrier that may prevent replication of
the value-creating new task, product, or service by a competitor. In essence, isolating
mechanisms operate to limit value slippage, thus enabling the sources of value creation to
capture the majority of the value created. The existence of an isolating mechanism raises the
potential bargaining power of the creator of value to retain this value.
o E.g., an individual may create significant value for him/herself by developing a new way of performing a job.
Conceptually, this individual may extract or capture all the value in the form of high salary because there are no
substitutes or competitors.
Value Capture at the individual level of analysis
- At the individual level, many different attributes may serve as a basis for the development of
isolating mechanisms that enable the source of value creation to capture value, including
individuals' unique position in a social network, the nature of their relationship with selected
others in the organization, and their specialized expertise or knowledge, particularly tacit
knowledge obtained from the performance of the new task or creation of the new product.
Value Capture at the Organizational Level of Analysis
- Resource based view: e.g. resources may serve as isolating mechanisms and limit competition in
cases where they are rare, inimitable, non-substitutable, and valuable.
o Argument Schumpeter: if profits from an innovation (creative) are great enough, competitors will find a way to
replicate the innovation (destruction). Such replication may occur by stealing away key employees, pre-empting
key resources, reverse engineering, or leapfrogging technology. Subsequently, as competitors replicate, value
will slip away from the creating firm to competitors, consumers, and society.
- Critical mechanism through which value may be captured once created. Specifically, they
propose that organizations must take actions that (1) structure the resource portfolio, (2) bundle
resources to build capabilities, and (3) leverage capabilities to exploit market opportunities. By
doing so, they can simultaneously create and exploit value for customers as well as owners.
Value Capture at the Societal Level of Analysis
- Societies, states, or communities having specific resource advantages - for example, a unique
natural resource, healthy and growing markets that are supported by a thriving business
infrastructure, and competitive and innovative markets - will be able to capture more value for
their citizens than will those lacking these conditions.
o Thus, communities that are located near major research universities will benefit from having a large pool of
talented workers. Societies having highly competitive markets and strong rivalries will likely produce more
competitive firms than will those having low levels of competition. All in all, value creation activities (innovation
and entrepreneurship) in societies with these conditions will have clear advantages over others.
Summary:
- In the case of the individual, personal attributes such as specialized knowledge and abilities,
one's unique place within social networks, and one's specialized relationships with others in the
organization all may serve as isolating mechanisms enhancing bargaining power and enabling
one to capture the majority of the value one has created.
- At the organizational level, we propose that, in the long term, competitors also offer a serious
threat to the firm's ability to capture the value that it has created but that the manner in which
the firm structures its resource base and the characteristics of its resources themselves, in terms
of value in meeting challenges, inimitability, and rarity in the profiles of other firms, may all work
to enhance the firm's ability to capture value.
- At the societal level, nations, states, and communities also experience challenges from other
societies that may compete for the value they have created. Several factors may serve as
