British Joumal of Management, Vol. 11, 1-15(2000)

Value Creation Versus Value Capture:Towards a Coherent Definition

of Value in Strategy^

Cliff Bowman and Veronique AmbrosiniCranfield School of Management, Cranfield University, Bedford MK43 OAL, UK

Resource-based theory has tended to focus on the development and protection ofvaluable resources. Wbat deteimincs a valuable resource has received less attention.This paper addresses three related issues concerning value and valuable resources:wbat is valne? how is it created? and who captures it? We bave tried bere to integratedifferent strands of tbe literature to address these questions. First, we urgue thai adistinction needs to be made between use value, wbich is subjectively assessed bycustomers, and excbange value, wbich is only realized at tbe point of sale. Second, weargue that the source of new use values is the labour performed by organizationalmembers, and tbat firm profits can be attributed to tbis labour. Profit differencesbetween competing firms derive from labour performing heterogeneously across firms.Finally, we urgue tbat value capture is determined by the perceived power relationshipsbetween buyers and sellers.

Introduction^

The resource-based theory of the firm (RBT)(Peteraf, 1993; Wernerfelt, 1984) argues that anorganization can be regarded as a bundle ofresources (Amit and Schoemaker. 1993; Rumelt,1984), and that resources that are valuable, rare,imperfectly imitable and imperfectly substitutable(Barney, 1991) are an organization's main sourceof sustainable competitive advantage. However,whilst most of the contributions to this view havefocused on the ease with which valuable resourcescan be imitated, less consideration has been paidto what makes particular resources valuable inthe first instance. Most contributors start froman assumption of a resource's value, and then

' The authors would like to thank the following fortheir comments: Dr Li'via Markoczy, Stephen Regan.Professor Gerard Hodgkinson, Dr Richard Whittingtonand two anonymous British Journal of Managementreviewers.' A glossary of the main terms used in the paper can befound in the Appendix on p. 15.

proceed to consider issues of imitability. As Millerand Shamsie (1996, p. 539) recently remarked"after years of interesting conceptual work, we arestill at an early stage in knowing what constitutesa valuable resource, why and when". This papersuggests that, in order to progress RBT, a moreprecise and rounded underpinning theory of valueis required to help us identify 'valuable resources'.

Accordingly, the paper addresses the followingquestions; what is 'value'? how is it created? andwho captures it? It opens with a review of 'value'in RBT, then, some reflections about the natureof value are proposed, which in turn leads into areconsideration of resource-based arguments aboutvalue creation. A theory of value generation is setout which concludes that the source of value andhence profits (as the proportion of value capturedby the firm) is the combination and deploymentof labour with other resources. The paper thenaddresses the distinction between value creationand value capture. Here it is argued that althoughvalue is created by organizational members, valuecapture is determined by the perceived powerrelationships between economic actors.

© 2000 British Academy of Management

C. Bowman and V. Ambrosini

What is 'value'?'Value' in resource-based theory

The major contribution of RBT has been the ex-ploration of heterogeneous resource endowmentsand how these can be the source of advantageif competing firms are unable to imitate theseresources (Amit and Schoemaker, 1993; Blackand Boal. 1994; Mahoney and Pandian, 1992). Inmost contributions to the perspective, resourcesare assumed to be valuable (one exception beingmaybe Wernerfelt (1984) who defines resourcesas anything which could be thought of as a strengthor a weakness of a given firm), and attention hasbeen focused on isolating mechanisms that pre-vent rival firms from replicating the desiredresource bundles (Rumelt, 1984). When the issueof valuing a resource is addressed, it tends to bediscussed in broad, general terms. The few authorsthat have attempted to define the term 'valuable'tend to argue that resources are valuable inrelation to a specific market environment (Amitand Schoemaker, 1993). To cite Barney (1991,p. 105) a resource is valuable if 'it exploitsopportunities and/or neutralises threats in a firm'senvironment'. A resource has also been definedas valuable if it either enables customer needs tobe better satisfied (Bogner and Thomas, 1994;Verdin and Williamson, 1994), or if it enables afirm to satisfy needs at lower costs than com-petitors (Barney, 1986a; Peteraf, 1993). Barney(1991, p. 106) also suggests that resources arevaluable 'when they enable a firm to conceive ofor implement strategies that improve its efficiencyand effectiveness'.

Conner (1991. p. 132) argues that, from aresource-based perspective 'obtaining [abovenormal] returns requires either that (a) the firm'sproduct be distinctive in the eyes of buyers (e.g.the firm's product must offer to consumers a dis-similar and attractive attribute/price relationshipin comparison to substitutes), or (b) that the firmselling an identical product in comparison tocompetitors must have a low cost position'.

The argument that resources have value in re-lation to their ability, inter alia, to meet customers'needs is consistent within RBT (see Aaker, 1989;Aharoni, 1993; Prahalad and Hamel, 1990, 1994;Williams, 1992). This then begs the question: howdo customers judge the extent to which an exist-ing product meets their needs, or whether a newproduct on the market would better meet their

needs? In other words, how do consumers makejudgements about the value, to them, of alter-native products?

Assessing value

Traditionally when looking at value and consumerbehaviour, economists tend to refer to utility theoryand to the notion of marginal utility. The theorystates, essentially, that consumers spend theirincome so as to maximize the satisfaction they getfrom products. Total utility refers to the satisfac-tion deriving from the possession of a commodityand marginal utility refers to the satisfaction thatpeople receive from possessing one extra unit ofa good or the satisfaction lost by giving up oneunit. Early neo-classical economists assumed thatpeople were rational (the economic man) and assuch assessed systematically and carefully thedifferent available options before purchasing.However this position has been softened and it isgenerally held that 'by and large, people spendtheir money on what they expect will give themmost satisfaction' (Bach et ai, 1987, p. 92).

One issue then, is how do people develop theirexpectations, how do they judge the utility theyare going to get, i.e. how do they judge the valueof a product? The potential purchasers have tojudge how the product's attributes will satisfytheir needs. Judgements are made in advance ofthe consumption of the product, so customershave to make inferences about the range of prod-ucts on offer based on a variety of cues. Customers"perceptions of the value of a good are based ontheir beliefs about the goods, their needs, uniqueexperiences, wants, wishes and expectations. Inother words, customers assess the overall value ofa product on the perceptions of what is given andwhat is received (Zeithaml. 1991).

At this point it is worth noting that there aredefinitional problems emerging here because ofatendency in the literature to use the term 'value'to refer to different phenomena. We suggest thatsome clarification can be achieved by employingthe distinction between use value and exchangevalue made by classical economists. Use valuerefers to the specific qualities of the product per-ceived by customers in relation to their needs; e.g.the acceleration and styling of the car, the tasteand texture of the apple, etc. So judgements aboutuse value are subjective, they pertain to theindividual consumer. In other words, use value is

Value Creation Versus Value Capture

perceived by the customer. Exchange value referslo price. It is the monetary amount realized at asingle point in time when the exchange of thegood takes place.

Use value perception applies to all purchases,not just those of final consumers. The same typeof judgement, a subjective judgement, is made by amanager when procuring inputs like machines,and components, as by an individual when buyinga fridge or a car. Tn a 'consumer' purchase, the needmay be fairly easy to define. In an organizationthe need for a purchase may not be that clear,indeed it could be argued that the 'need' that isto be met with the purchase is 'profit making"(Besanko et al., 1996). This seems rational andlogical, but it requires the purchaser to have greatinsight into the cause-effect hnkages between theuse value of the resource and the ultimate deliveryof profit. More reasonably, the procuring agenthas to have some belief that the procured resourcewill contribute to the profitability of the firm, andthis belief will be rooted in a wider set of beliefsabout how the firm competes, which may be fur-ther bounded by an industry recipe (Huff. 1983;Johnson. 1987; Spender. 1989).

Perceived use value can be translated intomonetary terms: it can be defined as the price thecustomer is prepared to pay for the product ifthere is a single source of supply (Collis, 1994).This judgement is based on the assessment of theproduct's value, coupled with the individual'swillingness to pay. These monetary judgements

cannot, therefore, be made in isolation from thewider needs and economic circumstances of thecustomer, or from the consumer's awareness ofcompeting offerings.

Only in the rare instance of a monopoly supplier,who is cognisant of the customers' valuation, andwho can price discriminate, will the price the cus-tomer is prepared to pay equate to the price thecustomer actually pays. We term this price totalmonetary value. In all other circumstances, theprice paid will be less than the total monetaryvalue perceived by the customer. The differencebetween the customer's valuation of the product,and the price paid is 'consumer surplus*. Expresseddifferently, the price the customer is prepared topay is price + consumer surplus. Consumer surplus(Bach et al., 1987; Whitehead, 1996) is what con-sumers colloquially refer to as 'value for money".

Customers choose the good that will confer onthem the largest consumer surplus (see Figure 1).The chosen product must therefore be differ-entiated in ways which are valued by the customer,it must deliver more consumer surplus than alter-natives. Consumer surplus (CS) can be increasedby enhancing the perceived use value of the good(and thereby increasing its total monetary value.,the amount the customer would be prepared topay for it), whilst keeping the price at the samelevel (product B in Figure 1), or by keepingthe total monetary value constant but reducingthe price (product C). or by doing both simultan-eously (product D). Product D would be selected

Total monetary value B

Total monetary value A

Consumersurplus A

Price A

Product A

Consumersurplus B

Price A

Total monetary value B

Total monetary value A

Consumersurplus C

Price C

Product B Product C

Figure h Total monetary value, price and consumer surplus

Consumersurplus D

•

Price C

Product D

C. Bowman and V. Amhrosini

by this consumer as it confers the most consumersurplus; (CSD > CSB > CSA).

The amount of consumer surplus that a cus-tomer can enjoy can only be assessed at the pointof sale; it is at this point that the customer knowsthe selling price and can evaluate the product inrelation to competing offerings, and decide thenwhether it is worth buying. Customers can onlyvalue what they perceive, this implies for instancethat they are unable to value most inputs to theproduction process. This means that customerscannot consciously 'reward' or compensate anyinputted resources, or any suppliers of thoseresources (we take up this point later). We couldnote here that this argument differs from otherapproaches, notably Hunt's (1995, p. 323), whostates that perceived value 'depends on (a) thetastes and preferences of consumers in the seg-ment and (b) the resources that produce the offer-ing' (emphasis added).

One consequence of this argument is that wehave to be careful when discussing how 'value'can be 'passed on' in the production process.Use value is perceived by the customer at a pointin time, it is assessed at the point of decision topurchase. The product at the time of sale has bothan exchange value and a perceived use value. Thisapplies to all types of purchases. For example, theexchange value of a computer controlled lathe, adesk, or a truck is realized at the point of sale.However, exchange value is not transferred intothe organization's production or distributionprocess, only use value is. It is an accounting con-venience to assume that the prices of inputs areaggregated in some way and passed on to cus-tomers. In reality many purchased resources donot 'add value' in ways that a customer can per-ceive. That is not to say that the purchased inputwas not valued. It was. It was assessed as a usevalue by the manager who decided to buy it onbehalf of the firm. But as soon as the machine wasbought, all the exchange value was realized by theseller of the machine. Once the machine entersinto the production process it is impossible to ap-portion elements of its purchase price to variousproducts produced with the machine. The sub-sequent exchange value of that machine wouldonly be realized if the machine was subsequentlyresold. /

Another implication here is that any firm thatis able to sell something, is, in the eyes of itscustomers at one particular time, supplying a

unique and superior package of value for money,i.e. customers at this point in time perceive thatthis firm's product allows them to enjoy thelargest amount of consumer surplus. From thecustomer's perspective the selected item offersmore consumer surplus than any other. For thesecustomers, the competitors are not supplying anequivalent product/price combination. In thisrestricted technical sense, each firm is a monopolysupplier to its customers at the time of the sale.Hence, it could be said that any firm that sellsanything has a temporary 'competitive advantage'.

Clearly, some customers will have found it quitedifficult to make a choice, there may be productson offer which offer very similar amounts of con-sumer surplus to the chosen product. Tliese sup-pliers of close substitutes would constitute thedirect competitors to the firm. However, productsoffering significantly lower consumer surplus couldnot be classed as close substitutes, and are there-fore not credible competitors. This view of 'value'helps us define competitors, and hence marketsand industries. This may lead to quite differentindustry definitions from those derived from con-ventional, product-based approaches. Marketsare never static. They exist at a moment in timewhen a transaction takes place. Indeed, it may beunhelpful to conceive of 'markets' at all as thiscan imply some permanence or stasis in what is adynamic, atomistic and continuing evolving set ofindividual transactions.

In what follows we shall concentrate on howorganizations create perceived use value and howthey capture exchange value, but let us summarizewhat we mean by these two terms. In short, valuehas two main components:

• Perceived use value, i.e. value is subjective, it isdefined by customers, based on their per-ceptions of the usefulness of the product onoffer. Total monetary value is the amount thecustomer is prepared to pay for the product.

• Exchange value is realized when the product issold. It is the amount paid by the buyer to theproducer for the perceived use value.

Exchange value is realized when a sale is made.̂Sales are achieved when customers view that a

' The exchanges of valuable goods that do not involvea monetary transaction are without the scope of mostforms of economic enquiry.

Value Creation Versus Value Capture

product confers more consumer surplus than otherfeasible alternatives. So firms create perceived usevalue, and through the sale of products, exchangevalue is realized.

How is value created?

We now turn our attention to the processes insidethe firm that create use value and subsequently,realize exchange value. Inanimate resourcespurchased as inputs to the production process,whether they he machines, buildings, steel, com-puters, or flour, are incapable of transformingthemselves into anything other than what theyare. They need to be activated, worked on beforethey can contribute to the production of new usevalues. The tangible inputs into the productionprocess, i.e. the use values acquired by an organ-ization, are inert. The intervention of people isnecessary to create new use values from theacquired resources. The same argument appliesto less tangible resources like information andbrands. Brands do not add value by themselves;they have to be associated with produced productsor services, and if they are not actively developedby creative marketing efforts, their use value willdecline. Similarly, a resource like a brand could hetraded, and in the hands of the acquiring firm itcould be used to create greater levels of perceiveduse value in the eyes of customers. So, new usevalue creation derives from the actions of peoplein the organization working on and with procureduse values {Lado and Wilson, 1994; Pfeffer, 1995;Wright el al.. 1994).

New use value is created by the actions of organ-izational members, who combine to transform theuse values that the organization has acquired.This, however, does not mean that organizationalmembers, when producing new use values, neces-sarily produce products that can realize addedexchange value (that is the realization of exchangevalue superior to the costs of the resource inputs,including wage costs). How much exchange valuehas heen added can only he determined when thenewly created use value is sold. At this later pointin time this use value will be compared by poten-tial customers with competing products, and onlywhere a customer perceives superior consumersurplus accruing will the customer buy thatparticular product {as in the case of Product Din Figure 1). So the amount of exchange value the

organization can capture is known only at thetime of sale, that is the organization will not knowwhat the newly created use value is worth until itis exchanged. So we cannot assert that, in the pro-cess of new use value creation, 'value' has beenadded. Different use value has been created whichmay or may not yield added exchange value.

Exchange value and profit

Profit is made if the amount of exchange valuerealized on sale is superior to the sum of the pricesof the inputted resources (including wage costs).This profit can only be attributed to the actionsof organizational members as their labour is theonly input into the production process that hasthe capacity to create new use values, which arethe source of the realized exchange value. So, tosummarize, labour performed by organizationalmembers is the source of the firm's profit.

Profit differentials between firmy

Both resource-based theory and theories of com-petitive strategy deriving from industrial organ-ization (IO) economics (Porter 1980, 1985) areconcerned to explain the nature and source ofsuper-normal profits. These are usually defined inrelation to some notion of a cost of capital, andthe view taken is that 'true' profits only exist whenthe firm achieves an overall profit performancein excess of its cost of capital. 'Strategy' can beconceived of as a search for long-lived rents, orcompetitive advantage, which are relative concepts.Therefore, we need to address this requirementfor comparisons between firms if our approach isto contribute to the strategy field. The importantpoint here is that both RBT and IO argumentationrequires the existence of benchmarks for com-parison, whether these be 'cost of capital' bench-marks, or competing firms in the same industry,or the opportunity costs of a resource. But webelieve that in many cases these benchmarks arearbitrarily defined, where like is often not beingcompared with like. Moreover, we do not sub-scribe to the accepted notion of a 'cost' of capitalas a concept or a benchmark (see the later sectionof value capture by suppliers of capital).

Using RBT arguments, if all inputted resourcesare homogeneous, and freely traded, competingfirms will produce identical products, incurringidentical costs of production. All firms in this

C. Bowman and V. Ambrosini

market would produce identical perceived usevalues and identical amounts of exchange value,and profit, would be realized. This equates withneo-classical perfect competition.

However, as argued above, in order for a firmto sell anything, there must be some buyers thatrate the firm's offering as providing superior con-sumer surplus than competing firms. So even ifthe prices are identical, in order to make a salethere must be some perceived differences in theproducts on offer (e.g. comparing Products A andB in Figure 1). This might have to do with theproduct surround rather than the product itself(i.e. the product is readily available locally, it ismarketed more attractively, etc.). Ahernatively,one can have more consumer surplus because of alower price (comparing Product C with ProductA), and to sustain lower prices the firm must beable to produce the same products as competitorsbut at lower cost.

This implies that the source of differentialprofits between firms is located somewherewithin the firm's transformation processes. If weassume factor markets are homogeneous, this canonly occur if certain resource inputs are capable ofperforming heterogeneously within the productionprocess, otherwise we have to relax our assump-tions of perfect factor markets. Proponents ofRBT argue that human or 'cultural' resources arethe sources of above normal returns, and not thepurchasable and tradable physical assets (Barney,1986a; Castanias and Helfat, 1991; Wernerfclt,1989). This suggests that when we explore whysome firms outperform others, we will discoverthat these differences derive from resources thatare capable of performing variably within thefirm. This rules out any inert resource inputs,which we have seen are incapable of displayingheterogeneous performance on their own. Theonly resource that is capable of performing hetero-geneously across competing firms is people. Eventhough labour may be traded assuming its homo-geneity, it is capable of performing heterogeneouslywhen put in motion.

However, not all labour is a source of addedexchange value and profits. Obviously all labouris not heterogeneous, idiosyncratic to the organ-ization. We can suggest three main categories oflabour, generic, differential and unproductive,which can only be defined in relation to labourperforming in a closely competing firm. We shallnow explore these three categories.

Generic labour

The output of the work of organizational mem-bers can be generic, i.e. homogeneous across com-peting firms. Some skills are generic, are easilyunderstandable, where the routines performed arecodifiable and can be imitated. Generic labour isnecessary to create new use values, but it cannotbe a source of profit differentials between com-peting firms, as ail firms employ the same per-forming labour. This labour is essential, it is anecessary requirement to be a player in theindustry, but it does not create superior profits.A subset of this category is supervisory labour.The role of this labour is to preserve the exchangevalues of purchased inputs, through the avoidanceof unnecessary costs, defined as costs that have notbeen incurred by equivalent competing firms.

I

Differential labour

Labour can be differential, i.e. heterogeneousacross competing firms. Il is the source of anorganization's uniqueness, and its superior profits.Examples could be the special talent of a designer,the unique way a particular salesman sells, orthe energy and enthusiasm of a dealing room. Asubset of heterogeneous labour is entrepreneuriallabour. This is the labour of organizational mem-bers who direct and deploy purchased inputs withhomogeneous and heterogeneous labour in uniqueways, that enable the firm to realize superiorprofits. Entrepreneurial labour is concerned withthe achievement of superior profits relative tocompeting firms. We will develop this concept ofentrepreneurial labour in what follows.

Unproductive labour

Labour can be unproductive, i.e. it destroys value.Where labour is performed which is not requiredin comparison to competing firms, it is unproduct-ive labour. Unproductive labour can be found atall levels ofthe hierarchy, where, in comparison tothe most competitive firm in the market, theorganization engages in unnecessary supervision,or pays salaries to management levels that addnothing to use value production (including cor-porate level staff). Other examples of unproduct-ive labour would be staff employed that producescrap, or that produce product features that arenot valued by customers, or that are engaged in

Value Creation Versus Value Capture

excessive re-working, or after sales repair work.Firms become less competitive as this category oflabour increases, and at some point the volume ofunproductive labour overwhelms the productivelabour and the firm ceases to exist.

Exploring heterogeneous andentrepreneurial labour

Now that we have established that it is labourperforming heterogeneously across organizationsthat creates superior profits, the problem we nowhave to deal with, is how we can judge whichsources of heterogeneity are valuable? There isample evidence of firms with strong cultures, withpowerful and idiosyncratic 'ways of doing things'that have failed (Peters, 1988). Indeed 'organ-izational inertia' (Collis, 1991) and most of theblockages to strategic change seem to stem fromthe embedded routines and culture that have, ineffect, become 'core rigidities' (Leonard-Barton,1992) of the organization. This may suggest thatwhat ultimately matters most in organizationsare the insights into knowing which use values toacquire, and how these should be deployed andcombined through the actions of labour.

This skill of knowing how to direct thetransformation of use value inputs, i.e. of knowinghow to deploy artfully resource inputs, is theessence of entrepreneurial labour. To use Millerand Shamsie's vocabulary (1996) it is a 'systemicknowledge-base resource" or to use Black andBoal's (1994) term, it is a 'system resource'.Entrepreneurial labour is involved in directinglabour with use value inputs to create new usevalues. It enables the organization to offer moreconsumer surplus than competing organizationsand/or to lower its relative costs. In many respectsthis is in the spirit of Penrose (1959), which has beenhighlighted recently by Tsoukas (1996) and byGrant (1996) who emphasized that what matteredwas coordination to achieve knowledge integration.Penrose explains that 'it is never the resourcesthemselves that are the inputs to the productionprocess, only the services that the resources canrender' (Penrose, 1959, p. 25), i.e. it is the usevalues of the resources that matter.

The deployment of use values with labour canbe carried out either explicitly or tacitly withinthe organization. An individual may have a clearunderstanding of a business opportunity, andknow how to exploit it. This could include for

instance the deployment of differential capabilitiesin resource procurement, which maybe enables thefirm to buy cheaper, or resource deployment (howthe resources are managed, how they are com-bined more efficiently, or effectively).

Alternatively, inputted use values and labourcan be deployed in effective and efficient ways,but this skilful performance may not be the resultof a consciously developed strategy, nor may itresult from a set of clearly understood organ-izational routines (Nonaka, 1991, 1994; Reed andDeFillipi, 1990). Here the firm just happens to bedoing the right things, no single individual has theinsight to know exactly what causes the firm's suc-cess. In other words the relation between its actionsand its performance is causally ambiguous even toinsiders (Lippman and Rumelt, 1982). This couldbe due to chance (Barney, 1986b), or to deeplyembedded cultural know-how that no-one is ableto explicitly recognize or articulate (Nelson andWinter, 1982; Spender, 1994). The entrepreneuriallabour is here tacit.

In all firms there are probably elements ofexplicit and tacit entrepreneurial behaviour. Inolder, well established firms, where the originalfounders have long since left the scene, the usevalue creation process may consist of somecultural momentum built up over the years (Fiol,1991). The more tacit the process the more securethe firm is in one sense: if the firm's managementthemselves do not understand what makes themsuccessful, then other firms are less able to imitatethem. As Lippman and Rumelt (1982, p. 420)argue causal ambiguity 'acts as a powerful blockon both imitation and factor mobility". However,the management of the firm becomes riskier. Ifthe senior management of an organization do notknow how they generate superior use values, itmay inadvertently change something that is critical,e.g. through delayering, downsizing, or the crudeimposition of business process reengineering. Simi-larly, if they are not knowledgeable of sources ofpast success, and of impediments to future success,it cannot know either what to change, or what tochange it to.

So, because of causal ambiguity, it could be thatthe demise of firms is more to do with not know-ing exactly what to change and what to change itto, than with any structural, or cultural rigidities.It takes a confident and knowledgeable executiveto challenge and change embedded routines.Executives developed through the firm's culture

8 C Bowman and V. Ambrosini

may not have the level of insight to do this withconfidence; it is difficuh for an insider to realizewhat they, or their firm as a whole, takes forgranted. For this reason, executives that emergefrom within are unlikely to be fully aware of thecauses of the firm's success, and hence may find itdifficult to manage its evolution. This may partlyexplain why, when faced with a downturn in per-formance, the typical 'knee-jerk' reaction is tocut costs (Bowman and Ambrosini, 1996). Costcutting is often a programmed response to a crisis,taken without accounting for the true sources ofthe firm's current and possible future profit.

Moreover, if tacit entrepreneurship is at theorigin of the firm's advantage then crude cost cut-ting runs the risk of destroying the very sourcesof future profitability. There are cases where theincumbent executives, 'managerially' competentbut lacking flair and insight, are incapable of makingthe difficult entrepreneurial decisions required,or other cases where quite the wrong understand-ing of the source of advantage prevailed, as whenCoca Cola launched their new formula Coke.

Before proceeding further and turning ourattention to the issue of who captures the ex-change value that is realized, let us summarize thevalue creation process (see Figure 2).

New perceived use values are created by theactions of organizational members. The use valueof the other inputs into the production processare incapable of transforming themselves into newperceived use values. New use value is producedby combining acquired use values with labour.Exchange value is realized at the time of sale.Added exchange value (profit) is only createdwhere the exchange values reahzed on sale of

the new use values sums to more than the cost ofinputs. We shall now turn our attention to thecapture of exchange value.

Who captures exchange value, and why?The resource-based perspective on value capture

Peteraf {1994, p. 156) distinguishes between theexistence of rents and economic profits: 'theexistence of Ricardian rents is not sufficient forthe firm to earn above average returns. . . . If theresource is not owned by the firm and the firmcannot appropriate some of the rents only theresource owner will benefit'. This neatly juxta-poses the difference between value creation andvalue capture. Resources may be capable of pro-ducing profits, but if the resource owner, not thefirm, is able to capture this exchange value, firmprofitability will suffer.

Despite this important distinction betweencreation and capture, most contributors to theresource-based school focus their attention onbarriers to imitation at the level of competingfirms, rather than on the problems of retainingvalue within the firm. Their main concern is withthe processes of capturing value from customers.Rumeh's isolating mechanisms (1984). Dierickxand Cool's (1989) time compression diseconomiesto imitation, and the increasing returns to thecumulative magnitude of the stock of the input,and Lippman and Rumelt's (1982) causal ambiguityare all addressing the problems of value capturefrom customers. But, as Peteraf (1994) pointsout, there is no benefit to the firm if the valuecaptured from customers is lost through resource

Organization A

Use valueis created

Use valueis

exchanged

Exchangevalue isrealized

Use value New useis transformed value

(by iabour) is created

New usevalue is

axcbanged

Exchangevalue isrealized

Use valueenters Csprocess

AandB Organization B BandC Organization C

Time

Figure 2. The process of value creation

Value Creation Versus Value Capture

suppliers bidding up the price of their resourcesto the point where they capture the differentialvalue won from customers.

Porter (1991. p. 108) addresses this issue:'successful firms are successful because theyhave unique resources. Tliey should nurture theseresources to be successful. But what is a uniqueresource? What makes it valuable? Why was afirm able to create or acquire it? Why does theoriginal owner or current holder of the resource notbid the value away?" Barney's {1986b) responseto this last question is to suggest that, in strategicfactor markets, firms competing for strategicresources have different expectations about aresource's value. As a result they will be preparedto pay different amounts for the resource. The'special insights into the future value of strategies'(Barney. 1986b, p. 1232) that the bidding firm has,enables it to acquire valuable resources at lowprices: or alternatively, through good fortune('luck"), the firm happily discovers that a resourcehas considerably more value than anticipatedwhen it was purchased.

Value capture and perceived power relationships

The amount of profit realized cannot be deter-mined solely from an examination of processeswithin the firm. Although the source of differ-ences in products produced (and their productioncosts) across firms is attributable to the particulardeployment of resources peculiar to that firm, theamount of profit realized on exchange of thoseproducts is determined by:

(1) comparisons customers make between thefirm's product, their needs, and feasible com-peting offerings from other firms:

(2) comparisons resource suppliers make be-tween the deal they have struck with this firm,and possible deals they could make withalternative buyers of their resource.

So in determining value capture, by the firmfrom customers, and by resource suppliers fromthe firm, comparisons are made with other sup-pliers and buyers. Profits will be determinedthrough the exchanges the firm makes with theseresource sellers (including sellers of labour) andcustomers. 'These exchanges are a function of theperceived bargaining relationships between buyersand sellers. So whereas RBT stresses the need to

explore the internal idiosyncrasies in the resourcebundles possessed by firms in order to explainsuperior profit performance, and. in contrast,whereas IO theorizing stresses the external re-lationships of the firm with suppliers and buyers,we can now see that each approach explains halfof the story of profit differences. RBT explainsthe source of the firm's ability to bargain withcustomers from a position of strength, whichderives from the firm's ability to offer superiorconsumer surplus. IO theorising explains how thisbargaining strength possessed by the firm influ-ences value capture.

So we argue that value capture, the realizationof exchange value, is determined by the bargain-ing relationships between buyers and sellers. Thecustomer's bargaining power is enhanced by thepresence of close viable substitutes, combined withlow switching costs (Porter, 1980). which reducesthe buyer's ability to capture exchange value in theform of high prices.

The availability of close substitutes reducesprices, and thereby increases consumer surplus.The ease with which other firms can compete, byoffering products conferring similar quantities ofconsumer surplus, will depend upon how easilythey can imitate and surpass the firm's temporarycompetitive advantage. And as we have arguedabove, these sources of advantage derive from theentrepreneurial deployment of labour.

How much of the exchange value capturedfrom the customer is retained by the firm in theform of profit? This depends upon the perceivedbargaining relationship between the resourcesupplier and the firm. If suppliers are cognisant ofthe firm's dependence on their supplied resource,and they can 'hold up' the firm, then they are ableto capture a larger share of value (Kotowitz, 1989;Williamson, 1975). Porter (1991, p. 108) argues asfollows: ' . . . valuable resources, in order to yieldprofits to the firm, have been acquired for lessthan their intrinsic value due to imperfections ininput markets'.

Some resource suppliers will find themselves ina powerful bargaining position which enablesthem to capture a large proportion of the exchangevalue won from the firm's customers, whereas otherresource suppliers will find themselves capturingfar less exchange value, because of their weakbargaining power. There is no relationship betweenthe nature of the use value supplied by the resourcesupplier, the role of this use value in the production

10 C Bowman and V Amhrosini

ResourceSupplier

A

ResourceSupplier

B

ResourceSupplier

C

\\

/

Firm Customer

Figure 3. Bargaining relationships and the capture ofI exchange value

process, and the amount of exchange value thatthe resource supplier captures. Even where aparticular employee or group of employees canbe seen to be critical to the creation of exchangevalue, or where a particular inert use value is avital element in the process, the sellers of theseresources may capture minuscule amounts of ex-change value, due to their weak bargaining power.The carving up of exchange value captured fromcustomers is purely a function of the perceivedbargaining relationship between resource sup-plier and resource buyer (see Figure 3). We shallnow examine relationships between the firm andtwo resource suppliers: suppliers of labour andsuppliers of capital.

Value capture: suppliers of labour

Although the actions of labour are the sole sourceof new use values, and hence profits (Pfeffer,1995), employees do not capture the full exchangevalue that they create. This is because of thenature of the market for most types of labour. Ifit is in abundant supply, i.e. there are many veryclose substitute suppliers, then the bargainingpower of the individual seller of labour isnegligible. However, although both the seller andbuyer of labour may perceive that the purchasedcontribution is homogeneous, as we have argued,the labour in action in the specific context of thefirm can become heterogeneous (Conner, 1991).This masks the true contribution of some em-ployees. It also explains why labour power is theresource that is sold by the employee; labour issold in a form which may disguise its unique,

heterogeneous contribution. The employer con-tracts to hire labour hours, a fixed amount thatcan be priced (per hour, day, week, month etc.).Once hired, the variable contribution of labour ismanifested. So what was in appearance a contractto supply a fixed amount of labour, becomes inessence an opportunity for the firm to extract avariable contribution to exchange value.

'Hold up" does not occur usually because thecontribution of specific labour is obscured.Tushman and Nelson (1990, p. 1) explain that'technological change operates to fragment work,deskill labour, and reinforce the power of theexisting bureaucracy". The division of labour andthe globalization of production render it almostimpossible to draw links between the actions ofthe individual seller of labour and a value gen-erating output. As Blaug (1985. p. 243) argues:'the employment contract under capitalism is infact "incomplete" in the sense that it stipulatesthe rate of pay for labour, and the hours of workof labour, but fails to lay down the intensity orquality of the labour that is to be performed.Given the character of productive processes, it isonly rarely that it is possible to attribute output toindividual workers: hence time wages are muchmore common than piece wages'. But the contractto supply labour power is necessarily incomplete.Leaving deliberately vague the contributions ofthe seller of labour power allows other inter-pretations of the essential relationships betweenthe employer and the employee.

There are circumstances where the seller of aparticular type of labour is aware of its unique-ness and is conscious of the lack of perceivedclose substitutes. Examples would be filmstars,key sales people, top foreign exchange dealersand soccer players. In these cases the seller oflabour is in a strong position to bargain up theprice of their labour.

However, in many cases the contribution ofsellers of labour is not easily visible. This isnotably the case for individuals that work as partof a team, where the combined result of indi-viduals' contributions is greater than the sum ofeach contribution. This means that use value iscreated by the team and not by the individuals assuch. It is difficult for individual organizationalmembers to see and show that their contributionis a differential ability.

So to summarize, it is the nature of the employ-ment relationship, the trading of employee's labour

Value Creation Versus Value Capture

power not labour output, and the appearance ofhomogeneity of labour power that enables thefirm owners to capture value created by employees.Maybe is it worth commenting that according toAoki (1990) in some Japanese corporations thevalue contribution of employees is seen in balancewith that of resource suppliers, which couldindicate that a shift from appearance to essence,i.e. to true relationships, may be possible. More-over, where extensive downsizing has occurredthe contribution to profits that particular groupsor individuals make becomes more transparent.This may alter the perceived bargaining power ofthese employees.

It is important to note here that we are notmaking any distinctions between different classesof labour output. Whether the labour power beingsold is unskilled, skilled, managerial, involvingphysical work or 'knowledge' work is not import-ant. The important relationship is between theseller of labour power and the purchaser of thatlabour power. The purchaser ultimately is the firmowner {or the shareholders), who may use hiredagents (managers) to recruit, direct and controlemployees.

Value capture: suppliers of capital

In mainstream economics texts the suppliers ofcapital capture a share of value either in the formof interest payments, or in the form of dividendsor growth on their equity shareholdings. Varioustheories have been advanced to explain how andwhy these suppliers of capital receive their shareof value. Samuelson and Nordhaus (1985, p. 660)neatly, though perhaps inadvertently, summarizethe confusion: 'to the economist, profits are ahodgepodge of different elements'.

Profits are viewed variously, as follows: theyare implicit returns (rents, rentals and wages dueto resources owned by the firm), a reward forrisk bearing (default risk, and pure statisticalrisk), a reward for innovation and enterprise ormonopoly returns (the excess return gained bysomeone who has market power) (Samuelsonand Nordhaus, 1985). Similar lists are profferedby other texts (e.g. Baumol and Blinder, 1985).McGuigan et al. (1996) add friction theory, 'theinability of our economic system to adjustinstantaneously to changes in market conditions'(McGuigan etal, 1996, p. 7) and they also add thatprofits are rewards to exceptional management

11

skills. Profits have also been explained in thepast as rewards for abstaining from currentconsumption.

In most mainstream texts there is no attempt toevaluate these competing theories of profit. Theyare typically dealt with in an additive way. Inother words, all these theories are deemed to becorrect in that they 'explain' different portions ofprofit. This projects a very confused picture.

A common theme in these theories is the needto explain profits as some sort of reward forsomething that is done for the good of economicsociety. Who consciously gives the reward isunclear, as the only source of cash to fund therewards flows from customers. Perhaps they arerewarding on behalf of 'society". None the less,even if we accepted the notion of profits as a'reward', and if we agreed that it was payingcustomers that conferred the reward, how can thiscome about? Customers can only reward whatthey perceive. They only usually perceive thefinished product, the resources that were com-bined to deliver it are usually invisible, so theycannot be consciously rewarded. Moreover, arewe rewarding the resource itself (the machine),the owner of the resource (the 'firm', or the share-holders?), the money capital that was loaned tobuy the machine (loan finance), or the person wholoaned the money? The notion of an inanimateobject being 'rewarded' does however seemabsurd.

Within resource-based theory the languageused takes the form of 'rents' rather than 'profits'(Rumelt, 1987). If we were hoping for someclarity in this stream of contributions we would bedisappointed because the meaning of 'rent' differsacross authors (Schoemaker, 1990) and forinstance, Peteraf (1994) lists ten different types ofrents: pure economic, quasi, appropriable quasi,Ricardian, land, inframarginal, efficiency, differ-ential, entrepreneurial and managerial.

Do we need to distinguish between capital thatis advanced as an equity stake from that advancedin the form of fixed interest earning debt? Bothsuppliers of capital can capture a share of ex-change value; the difference is the lenders of debtwho more or less know their share in advance. Forinstance, firm owners can borrow all their capitalfrom banks, which is why interest can be regardedas a deduction from the 'profits' of enterprise(Blaug, 1985). So the financing structure has animpact on value capture but not on value creation.

12 C Bowman and V. Ambrosini

Although the physical contribution of moneycapital is homogeneous. Its restricted supply givesits owners power to bargain and capture a shareof the value created by the firm.

Value capture: normal and super-normal profits

RBT focuses on economic profits. These areprofits that are in excess of those levels that aredeemed 'normal'. Normal profits include returnsto suppliers of capital (i.e. interest paymentsand the 'normal' cost of equity capital). Theserewards to suppliers of capital must be sufficientto persuade the owners not to take their capitalelsewhere. Super-normal profits are usually judgedin relation to competing firms, whereas economicprofits would be benchmarked against some riskadjusted 'cost of capita'. Clearly, super-normalprofits can only be defined relatively, whereasprofits could be defined absolutely, they are eitherrealized or they are not realized. Here we getanother source of confusion. Because super-normal profits are a relative concept, we need tohave some benchmark to assess them against. Theconcern initially amongst industrial economistswas to assure themselves that allocative efficiencyacross society was being achieved. This theorisingrelies on the neo-classical assertion that an efficientallocation of resources occurs where price isequated with marginal cost. Any market structureswhere this does not persist are ergo inefficient,hence to find these markets we need to define the

Exchange betweenfirm A and firm Cand firm B andfinnC.

Viftiere price ofproducts is afunction of therelative bargainingpower betweenfimn A and firm Cand firm B andnrmC.

Bolh exchangesmean costs for C.

boundaries of an industry. We also need to be ableto measure firm performance in a way that revealsexploitative levels of profit. Often the convenientindustry definitions chosen for these industrystudies are product driven, but they would notnecessarily make sense in the subjectively definedmarket environments we defined earlier in thispaper.

Thus, with regard to suppliers of capital, theessence of the relationship with the firm is thatthey supply a completely homogeneous resource,which is not capable of generating new use values.However, because the resource they provide is inscarce supply, they are able to bid up the price ofcapital and capture a proportion of the exchangevalue created by the employees. The appearanceis that supphers of money capital create value. Thisappearance is compounded by the notion of riskand 'rewards' for risk bearing, and the conceptof a "cost of capital'. But there are few personalrisks involved, even if the investments yield noth-ing. The money is risked, the person who loans orinvests it usually has other sources of income, anda varied portfolio of investments.

Summary

The contribution of this paper is an integration ofseveral extant bodies of theory into a coherentexplanation of value creation and value capture(see Figure 4). We have tried to clarify a theory of

Exchangebetweenfirm C and firm D

This exchangemeansrevenues for C

Price = f(perception ofrelative bargainingpower betweenC and D)

A and B Sale: realization A and B C

create use of exchange capture createsvalues value exchange use value

value

Sale: realizationof exchange

value

Ccapturesexchange

value

Dcreates

use value

Time

Figure 4. The process of value creation and value capture: summary

Value Creation Versus Value Capture 13

value, and by distinguishing between the creation ofvalue, and the capture of value we have developedfurther insights into the resource-based perspec-tive. We argued that 'value' takes the form of:

• perceived use value that is subjectively assessedby the customer who uses consumer surplusas the criterion in making purchase decisions;and

• exchange value, that is the price paid for theuse value created, which is realized when thesale takes place.

We have also argued that it is the idiosyncraticways of doing things in the organization andnotably entrepreneurial, labour that allows anorganization to offer more consumer surplus thanits competitors, and that may permit it to achieveabove average profits.

Markets are dynamic and unpredictable. Asinformation becomes more widely available, com-petitors can expand their domains at the expenseof the firm, through imitation, or by exploitingnew innovations. This implies that entrepreneuriallabour, a sub-set of our differential labour cat-egory, has to be dynamic in order to help the firmadapt to changing conditions. Where this labour istacit the firm is at risk of either unwittingly destroy-ing a source of value, or it is at risk because ofmanagements' inability to know what to change,and what to change it to.

Although labour is the source of value, bargain-ing relationships determine the capture of value.Profit is value captured by the firm. This includeseconomic profit (supernormal) profit, and interest.Although it is the employees who produce valuedproducts which are the source of profits, they onlycapture a proportion of the added exchange valuethey create.

Conclusion

The strength of the preceding arguments lies inthe fact that economic decisions are made on thebasis of knowledge which it is reasonable toassume each actor might possess. The use value ofproducts is assessed subjectively, based on thebuyers' perceptions of their needs and the extentto which alternative products might meet thoseneeds. Decisions about the procurement of inputsinto a production process are based on beliefs

about the usefulness of the resource in the usevalue creation process. And value capture is deter-mined by a subjective assessment of the relativebargaining powers of buyer and seller.

These propositions are in contrast to otherforms of theorizing. Neo-classical economicsrequires us to assume that entrepreneurs arecognisant of their firms' cost curves, and thedemand schedules of the customers in a marketplace. Transaction cost economics suggests thatdecision-makers are aware of the relative costsof performing activities within hierarchies, orto establish market-based contractual arrange-ments. Experience of managers and executivesoperating in the real world strongly suggests thatthese assumptions may not hold. We believethat the synthesis set out in this paper mightprovide an alternative theory-base for research-ing strategy.

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Appendix. Glossary of the terms used In this paper

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Term Definition

Resources in RBTTotal utilityMarginal utility

Use valueExchange valueTotal monetary valueConsumer surplusNew u.se valueAdded exchange value

Generic labourDifferential labourEntrepreneurial labour

Unproductive labour

Value capture

Super normal profit

Any inputs into the production processSatisfaction deriving from the possession of a commoditySatisfaction that people receive from possessing one extra unil of a good or the satisfaction lostby giving up one unitCustomers' perceptions of the usefulness of the product on offer, equivalent to 'lotal utilily'The amount paid by the buyer to the seller for the use valueThe price the customer is prepared to payThe difference between the total monetary value and the price paid (exchange value)It is the outcome of the actions of employees who combine and transform acquired use valuesThe amount by which the realization of exchange value is superior to the costs of the resourceinputs, including wage costs (equivalent to profit)Homogeneous labour across competing firmsHeterogeneous labour across competing firmsHeterogeneous labour which directs and deploys purchased inputs with homogeneous andheterogeneous labour in a unique way. that enables the firm to realize superior profitsLabour that is performed which, in comparison lo competing firms, is not required and whichincurs higher relative costsThe realization of exchange value by economic actors (firms, customers, resource suppliers.employees)Profits earned that are superior to equivalent competing firms