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Managing Business StrategicallySession 1 : Value creation and Value capture
Article 1 : Lepak & Smith
The concept of value creation is still very vague – Why ?
1. Multidisciplinary nature of the field of management : Variance of parties and targets
for whom value means different things
2. Value creation can refer to both new value creation and current value creation which
can be a source of confusion
3. Value creation is often confused with value capture
Goal of this article : Propose a general definition for value creation, explain how value creation
can vary based on the unit of analysis, and discuss value capture.
So what is value creation ?
According to Bouwman and Ambrosini ( 2000 ), there are 2 types of value :
• Use value : Refers to the perceived quality of a job/task/product/service of the buyer (
subjective) à Willingness to pay
• Exchange value : Monetary amount realized when the buyer has to pay the seller for the
job/product/service/task à Price
Thus, value creation is when the buyer is willing to pay the seller a monetary amount for the
perceived quality of the product/service.
However, there are several conditions before we can say this transaction is creating value :
1) The monetary amount exchanged has to exceed to costs
2) The monetary amount will depend on the perceived quality of the user and the
alternatives that are present in the market.
The use value is something that will depend on the subjective evaluation of novelty and
appropriateness by the buyer ( Amabile, 1996 ).
,à The greater the perceived novelty and appropriateness, the greater the potential for a
higher use value and therefore, exchange value
Perceived novelty Exchange Value
Use value
and appropriatness value creation
There are also conditions for perceived novelty and appropriateness by the user :
1) User must possess specialized knowledge of the focal entity and existing alternatives to
be able to evaluate novelty and appropriateness
2) Evaluating appropriateness means the user has to understand the link between the
product/service and its particular context
3) Social and cultural context have to be taken into account to evaluate novelty and
appropriateness.
à The value creation process is highly subjective and context-specific : Different users might
value a product/service differently based on their knowledge and the context ( competing
views )
How is value created ?
How value is created depends on the source and the targets - There are 3 units of analysis :
a) Individuals
b) Organizations à All have different sources and targets
c) Society
a) Individuals
Individuals create value by developing new tasks/products/services based on their
creativity. Creating value for them means creating a greater utility compared to its
closest alternatives.
How ? Individual abilities, specialized knowledge, intelligence, flexibility
b) Organizations
Organizations create value when they develop new methods/technologies/materials.
Organizations highly depend on innovation and invention to create value.
The value creation process at organizations includes any activity that provides a greater
level of novelty and appropriateness compared to what their customers currently
possess and their willingness to pay for it.
, How ? Social networks, firm-specific knowledge, dynamic capabilities
!!!! Organizations usually count various stakeholders which all have different views on value
creation à Competing interests might affect the evaluation of novelty and appropriateness !!!!
c) Society
Societies depend on entrepreneurship and innovation/invention to create value. This
means societies depend on individuals and organizations to create a favorable economic
environment. They can however help both individuals and organizations through laws
and regulations.
Individuals and organizations might create value for society intentionally or
unintentionally.
To sum up,
Indivual level :
Relies on
creativity and
job
performance
Value
creation
Societal level : Organizational
involves firm-level level : Means
nnovation and innovation and
entrepreneurshop knowledge
How is value captured ?
Value creation and value retention are not the same thing !
Example : Organizations might create a lot of value but can only retain half of it because of
value slippage.
, Value slippage = Occurs when the party creating the value does not retain all the value à Use
value is high but exchange value is low ( KPN and 4G )
But value capture can be explained by two concepts : Competition & Isolation mechanisms
If novelty and appropriateness are high, then the use and exchange value will increase as well.
This means supply is low and demand high à Competition will want to participate to create
their own value as well but this leads to a higher supply ( supply = demand ) à Value must be
shared and is captured by different parties
However, the relationship between value creation and competition is circular :
Value
Competition
creation
Indeed, competition on the individual level increases the search for creative solutions. At the
organizational level, competition pushes for innovation and invention. Therefore, the market
advances and these relationship becomes interesting for the society.
But value slippage can be avoided in the short-term by isolating mechanisms : This is when
there is any knowledge, legal or physical barrier that may prevent replication by competition.
At the individual level we can talk about : personal attributes, specialized knowledge, abilities
and social networks.
For organizations : Specific resources ( VRIO ) can make the difference
Societal level : Resource advantage, strong demand, competitive market, supporting industry
infrastructure
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