Competitive strategy
Module 1 – business models: value creation and value capture
Readings session 1
1 - Value Creation and Value Capture: A Multilevel Perspective
Although all studies agree that value creation is of high importance, its definition varies
significantly. This is because;
1. The multidisciplinary nature of the field of management introduces significant
variance in the parties or targets for which new value is created and in the
potential sources or creators of value.
2. Value creation refers both to the content and process of new value creation.
a. Content side raises questions such as what value is, who values what,
and where value resides.
b. Process side raises questions to what the underlying process of creation
consists of, how value is generated, and the role (if any) of management
in this process.
3. The process of value creation is often confused or confounded with the process
of value capture or value retention.
Use value = the specific quality of a new job, task, product, or service as perceived by
users in relation to their needs, such as the speed or quality of performance on a new
task or the aesthetics or performance features of a new product or service.
➔ Subjective and individual specific
Exchange value = either the monetary amount realized at a certain point in time, when
the exchange of the new task, good, service, or product takes place, or the amount
paid by the user to the seller for the use value of the focal task, job, product, or service.
Value creation thus entails that the subjective use value is subjectively realized, and
that this at least translates into the user’s willingness-to-pay (WTP).
- Exchange value must exceed the producer’s costs of creating the value.
- WTP is a function of the perceived performance difference between the new
value that is created and the target user’s closest alternative.
The value creation process has an extremely subjective and context specific nature:
1. Users must possess specialized knowledge of both the focal entity and what
alternatives exist at a given time.
2. Users 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.
Due to this subjectivity, it is possible that there will be competing views of what is
valuable among different users of value.
There are (at least) 2 ways to conceptualize the process of value creation:
1. A single universal conceptualization.
2. A contingency perspective that explicates how value is created from the vantage
point or perspective of a particular source.
1
, Competitive strategy
a. This one is used in paper.
3 levels / sources of value creation:
1. The individual
a. 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.
2. The organization
a. The value creation process includes any activity that provides a greater
level of novel and appropriate benefits than target users of customers
currently possess, and that they are willing to pay for.
b. Dynamic capabilities are more commonplace and readily identifiable
processes and routines that pertain to how resources are acquired,
integrated and reconfigured. These are the activities that generate and
modify operating routines to create new advantages. Note from author of
this paper: DC literature on creating new advantages currently neglects
the importance of the target users, their perceptions, desires, and
alternatives as well as the context in which users are embedded.
c. It may be that social networks are externally directed to detect the needs
of customers and product / service users have greater potential for novel
and appropriate product / service innovations.
d. Strategic HRM: firm success rests on the firm’s 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 important
innovations that create value for targeted customers.
e. While all of the above implied that the target or user of value is almost
exclusively an internal or external customer of the organization, many
potential targets for value creation exist at the organizational level.
3. Societal level
a. The process of value creation is conceived in terms of programs and
incentives for entrepreneurship and innovation indented to encourage
existing organizations and new entrepreneurial ventures to innovate and
expand their value to society and its members.
b. At this level, value creation is a somewhat different process compared to
the individual and organizational level, since sources may act
intentionally or unintentionally to create value for society at the same time
they are creating value for themselves.
Thus, value creation requires more than simply understanding WTP. One must also
recognize the existence of multiple targets and consider the knowledge of potential
users and the context in which they make evaluations about the new value that has
been created.
2 key concepts operate across all levels of analyses to determine which party captures
the new value that is created:
1. Competition – can explain how value slips away from the creator to be shared
with other competitors and users.
2. Isolating mechanisms = any knowledge, physical, or legal barrier that may
prevent replication of the value-creating new task, product or service by a
2
, Competitive strategy
competitor. Limiting value slippage, thus enabling the sources of value creation
to capture the majority of the value created.
3 levels / sources of value capturing:
1. The individual level
a. Personal attributes are of high importance as they serve as isolating
mechanisms when individuals are the source of value creation and the
way in which these attributes allow individuals to enhance their
bargaining power to capture value from the employer, at least until the
point where new technology or other processes limit the individuals’
effectiveness.
2. The organizational level
a. Value chain, resource-based-view (RBV)
i. Resources: structure resource portfolio, bundle resources to build
capabilities, leverage capabilities to exploit market opportunities.
b. Resources may serve as isolating mechanisms and limit competition in
cases where they are VRIO (valuable, rare, inimitable, original / non-
substitutable).
3. The societal level
a. Nations will retain the value they create when they have unique factor or
resource advantages, strong demand conditions, related and supporting
industry infrastructure, and competitive markets (Porter).
Thus, the process of value capture varies according to the initiating source or level of
analysis, yet at each level of analysis, both competition and isolating mechanisms play
important roles in shaping value capture, even though the manner in which competition
and isolating mechanisms operate plays out differently across these levels of analysis.
Extra definitions:
- Value slippage = when the party creating the value does not retain all the new
value that is created. This occurs when use value is high while exchange value
is low.
Notes session 1
Strategy = the central, integrated, externally oriented concept of how we will achieve
our objectives
mission > objectives > strategy (derived from strategic analysis) > supporting
organisation arrangements.
Elements of strategy (strategic diamond):
1. arenas - where will we be active?
a. product categories
b. market segments
c. geographic areas
d. core technologies
e. ... (be specific!)
2. vehicles - how will we get there?
a. international development?
3
, Competitive strategy
b. JVs?
c. strategic alliances?
d. licensing?
e. franchising?
f. M&As?
3. differentiators - how will we win in the marketplace?
a. image
b. customisation
c. price
d. product styling
e. after-sale services
f. ...
4. staging - what will be our speed and sequence of moves?
a. scale up geographically?
b. scale up through diversification?
5. economic logic - how will we obtain our returns?
a. rooted in the firms' fundamental and relatively enduring
capabilities
b. how profits will be generated
note: strategy is the interaction of all these elements.
Sensitivity analysis - testing your strategy (see canvas for further, more in-depth
follow-up Qs):
6. does you strategy fit with what's going on in the environment?
7. does your strategy exploit your key resources?
8. will your envisioned differentiators be sustainable?
9. are the elements of your strategy internally consistent?
10. do you have enough resources to pursue this strategy?
11. is your strategy implementable?
The economic logic of business: value creation and value capture
economic logic: how to create returns?
1 - create value
value = how does a customer judge the extent to which an existing product / service
meets her needs, or whether a new product / service on the market would better meet
her needs
assessing value:
12. use value (willingness to pay WTP)= refers to the specific qualities of the
product perceived by customers in relation to their needs
13. exchange value = refers to price, monetary amount realised
14. consumer surplus = WTP - exchange value (objective is to maximise
this CS)
How to maximise CS?
15. differentiation strategies
a. increase WTP
4
