Measuring Value Creation and Appropriation in Firms: The VCA Model


Title of the Article : Measuring Value Creation and Appropriation in Firms: The VCA Model

Author Information : Natarajan Balasubramanian (Whitman School of Management, Syracuse University)
Marvin Lieberman (Anderson School of Management, UCLA)
Roberto Garcia (IESE Business School, University of Navarra)

Year of Publication : Strategic Management Journal (forthcoming)

Summary of Findings : The paper applies a technique the authors developed in another study to measure the differences in economic value creation and its appropriation in the U.S. airline and global automotive industries.

Research Questions : How much economic value does a firm create and who captures that value?

What we know : Businesses exist because they create economic value for their stakeholders, including customers, shareholders, employees and suppliers. So it is important to think about how much value they create and how that value is distributed among the various stakeholders. Surprisingly, most of the discussion in strategic management research on this fundamental issue has been at a conceptual level, with limited systematic empirical evidence. Two of the key reasons have been the lack of a consistent definition of what constitutes value creation and the lack of a general methodology to do so.

Novel Findings : We apply a fairly general and flexible productivity-based method (VCA Model for Value Creation and Appropriation Model) we developed in another study to provide quantitative estimates of one specific notion of value creation and appropriation in two industries, the U.S. airline industry and the global automotive industry, over recent decades.

In so doing, we offer what is perhaps the most detailed analysis to date of economic value creation and distribution by firms in the U.S. airline industry, an industry plagued by poor financial performance for decades. Our results explicitly show that this was not because airlines created no value but because most of the value created was captured by the other stakeholders of the firm, particularly customers. By contrast, the poor performance of GM compared to Toyota in the automotive industry appears to be attributable to GM’s lower levels of value creation than Toyota.

Implications for Practice : Stakeholders in a business can gain in two very different ways: when the business creates more value for all (the size of the "pie" increases) and they get a share of that gain or by appropriating more value from other stakeholders (dividing the pie differently). As a society, we are likely to benefit more if stakeholders focus on the former way of creating economic value rather than on the latter approach. We hope our study makes this crucial distinction between value creation and value transfer more explicit, and provides one way to measure it.

Implications on Research: This study is likely to motivate scholars to begin examining more detailed empirical questions about how strategy drives the creation of economic value by firms and its appropriation by the firm's stakeholders. More specifically, we expect deeper analysis of how economic value is distributed to various stakeholders in different contexts. For instance, who does the implementation of CSR practices benefit most---customers, employees or shareholders?

Full Citations : Measuring Value Creation and Appropriation in Firms: The VCA Model, Forthcoming, Strategic Management Journal

Abstract : This article addresses the fundamental issue of value creation and its appropriation among the various stakeholders of the firm. Using a productivity technique (VCA model), we estimate the economic value created by a firm and appropriated by its stakeholders in two specific empirical contexts. In the first application, we use publicly available data from the U.S. airline industry to illustrate how the VCA model can be used with multiple stakeholder groups. In the second application, we provide estimates for three global automobile companies (GM, Toyota and Nissan), showing how the model can be reformulated using value added. In both industries we find substantial heterogeneity among firms in the creation and distribution of value. We discuss some implications of the VCA model for strategic management research.

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The paper applies a technique to measure the differences in economic value creation and its appropriation in the U.S. airline and global automotive industries.

Natarajan Balasubramanian

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