Toward a Dynamic Notion of Value Creation and Appropriation

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

Year of Publication : Strategic Management Journal (forthcoming)

Summary of Findings : We develop and illustrate a mathematical framework to assess a broader notion of value creation ("economic gain") in businesses that goes beyond shareholders and includes value that is distributed to employees, suppliers and customers.

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

What we know : Most managers and the business press regard "value creation" as the increase in shareholder wealth represented by a rise in corporate profit or stock price. A broader conception of value creation goes beyond shareholders to include the value that is distributed to additional stakeholders of the firm, including employees, suppliers and customers. However, it has been challenging to quantitatively assess such a notion due to the lack of a generally applicable methodology.

Novel Findings : We provide a firm-level measurement framework to quantify economic gain and its distribution among stakeholders, including the firm’s shareholders, employees, suppliers and customers.

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 receive 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 : Toward a dynamic notion of value creation and appropriation in firms: The concept and measurement of economic gain. Strategic Management Journal, forthcoming.

Abstract : "Value creation" is central to strategy. Even so, confusion arises because it can be defined in different ways, e.g., as the sum of producer and consumer surplus in a given time period, or as the change in surplus over time. To formalize the latter notion we introduce the concept of economic gain, defined as the increase in total surplus. Economic gain can arise through innovation or when a superior firm displaces competitors. We provide a firm-level measurement framework to quantify economic gain and its distribution among stakeholders, including the firm’s shareholders, employees, suppliers and customers. As an empirical illustration, we compare the creation and distribution of economic gain by Southwest Airlines and American Airlines between 1980 and 2010.

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This research develops and illustrates a mathematical framework to assess a broader notion of value creation in businesses distributed to employees, suppliers and customers.