value creation and value capture: a multilevel...

INTRODUCTION TO SPECIAL TOPIC FORUM

VALUE CREATION AND VALUE CAPTURE: AMULTILEVEL PERSPECTIVE

DAVID P. LEPAKRutgers, The State University of New Jersey

KEN G. SMITHM. SUSAN TAYLOR

University of Maryland

As an introduction to the special issue topic of value creation, we define valuecreation in terms of use value and exchange value and discuss some of the key issuesrelated to its study, including the topic of value capture. Although the definition ofvalue creation is common across levels of analysis, the process of value creation willdiffer based on whether value is created by an individual, an organization, or society.We use the concepts of competition and isolating mechanisms to explain how valuecan be captured at different levels of analysis.

Value creation is a central concept in the man-agement and organization literature for both mi-crolevel (individual, group) and macrolevel (or-ganization theory, strategic management)research. Yet there is little consensus on whatvalue creation is or on how it can be achieved.Our experiences in serving as guest editors forthis Special Topic Forum on Value Creationtaught us a great deal, while simultaneouslyunderscoring how much more work is neededbefore we can fully understand this importantconcept. In the initial call for papers for this STF,we argued that the concept of value creationwas “not well understood.” We now see that ouropening statement, while accurate, also signifi-cantly underestimates many of the conceptualissues involved in studying value creation. Moredirectly, while one would be hard pressed tofind a management scholar who would disagreethat value creation is important, one also wouldfind it equally difficult to find agreement amongsuch scholars regarding (1) what value creationis, (2) the process by which value is created, and

(3) the mechanisms that allow the creator ofvalue to capture the value. With the luxury ofhindsight, we now view this lack of agreementabout value creation among organizationalscholars as one of the most important conclu-sions from this STF, and we briefly explore whatwe consider to be three of the most importantreasons for the confusion.

First, the multidisciplinary nature of the fieldof management introduces significant variancein the parties or targets for which new value iscreated and in the potential sources or creatorsof value. To illustrate, scholars in strategic man-agement, strategic human resource manage-ment (HRM), marketing, or entrepreneurship, forexample, may emphasize the creation of valuefor business owners (Porter, 1985; Sirmon, Hitt, &Ireland, this issue), stakeholders (Post, Preston,& Sachs, 2002), or customers (Kang, Morris, &Snell, this issue; Priem, this issue). Conversely,researchers emphasizing HRM or organizationalbehavior may emphasize value creation thattargets individual employees, employee groupsor teams, and organizations (March & Simon,1958). Scholars from sociological or economicdisciplines may focus on value creation in termsof society (Lee, Peng, & Barney, this issue) ornations (Porter, 1990). While not exhaustive, thislist does highlight the differences in targets orusers for whom value can be created.

We appreciate the helpful support of the reviewers andthe authors who contributed their time and insights into thisspecial topic form, as well as the tremendous support of ArtBrief, former editor, and Susan Pauli, former managing edi-tor. We also thank Qing Cao, Saba Colakoglu, Niclas Er-hardt, Mike Pfarrer, and Antoaneta Petkova for their com-ments on an earlier draft of this manuscript.

� Academy of Management Review2007, Vol. 32, No. 1, 180–194.

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Similarly, researchers’ formative disciplinecauses them to focus on different sources ofvalue creation. For example, psychology, orga-nizational behavior, and many HR scholars fo-cus on the behavior of individuals or groups. Incontrast, organizational theorists, strategicmanagement researchers, strategic HRM schol-ars, and entrepreneurship scholars often em-phasize the organization level; further, someeconomists, organizational theorists, and sociol-ogists examine the industry or societal level ofanalysis. Overall, the existence of this pluralityin both the targets and sources of value creationintroduces a host of challenges to scholars, in-cluding the development of a common definitionfor the term.

A second source of difficulty regarding valuecreation is that value creation refers both to thecontent and process of new value creation. Onthe content side, questions regarding what isvalue/valuable, who values what, and wherevalue resides highlight the complexity of under-standing value creation. The fact that value cre-ation is used just as frequently to refer to theunderlying process of creation, how value isgenerated, and the role, if any, of managementin this process underscores this confusion.

Finally, the process of value creation is oftenconfused or confounded with the process ofvalue capture or value retention. However, weargue that value creation and value captureshould be viewed as distinct processes, sincethe source that creates a value increment may ormay not be able to capture or retain the value inthe long run. Rather, value created by onesource or at one level of analysis may be cap-tured at another—a process we call, in this pa-per, “value slippage.” For example, although anindividual may create value by developing anew way to perform a particular task in theworkplace, other parties, such as organizationsor even societies, may benefit more from thevalue that is created than does the individualcreator. Similarly, value created by organiza-tions, possibly through the introduction of a newproduct or process, may not be wholly capturedby them but, instead, may spill over into societyas a whole. Thus, we argue that the tendency forscholars to combine value creation and captureinto discussions of value creation has, to someextent, also contributed to the level of disagree-ment and confusion surrounding the term valuecreation.

Addressing all the points of disagreement inresearchers’ understanding of value creationwould, we believe, require a book-size contribu-tion rather than an article. Thus, our purpose inthis introductory article is more limited: (1) topropose a general definition for the term valuecreation; (2) to illustrate how the process of valuecreation may vary when undertaken by differentsources (and levels of analysis), who tend to alsosingle out different targets of value creation;and (3) to discuss the concept and process ofvalue capture, distinguishing it from value cre-ation and showing how this process may varyfor the different sources of value creation andlevels of analysis.

Table 1 portrays the different dimensions ofvalue creation, including the different academicdisciplines that focus on this concept, the pri-mary sources and levels of analysis that createvalue, and the targets most commonly associ-ated with these sources. Further, Table 1 also isconcerned with the process of value capturesuch that the arrows within the table depict thepotential for value slippage whereby the valuecreation process undertaken by one source, atone level of analysis, produces value that maybe captured by a different source operating atanother level of analysis. We now examine thecolumns of our structuring matrix in greater de-tail, starting with value creation, and provide anillustration for each source or level of analysis.

WHAT IS VALUE CREATION?

To understand value creation, it is first impor-tant to define the concept. Bowman and Ambro-sini (2000) introduce and differentiate two typesof value at the organizational level of analysis:use value and exchange value. We broadentheir definitions to deal with multiple levels ofanalysis and to focus specifically on value cre-ation. Accordingly, use value refers to the spe-cific quality of a new job, task, product, or ser-vice as perceived by users in relation to theirneeds, such as the speed or quality of perfor-mance on a new task or the aesthetics or perfor-mance features of a new product or service. AsBowman and Ambrosini (2000) note, such judg-ments are subjective and individual specific.They label the second type of value exchangevalue, which we define as either the monetaryamount realized at a certain point in time, whenthe exchange of the new task, good, service, or

2007 181Lepak, Smith, and Taylor

product takes place, or the amount paid by theuser to the seller for the use value of the focaltask, job, product, or service.

Viewed together, these definitions suggestthat value creation depends on the relativeamount of value that is subjectively realized bya target user (or buyer) who is the focus of valuecreation—whether individual, organization, orsociety—and that this subjective value realiza-tion must at least translate into the user’s will-ingness to exchange a monetary amount for thevalue received. Here we state two important eco-nomic conditions that may be necessary forvalue creation activities to endure. First, themonetary amount exchanged must exceed theproducer’s costs (money, time, effort, joy, and thelike) of creating the value in question, at leastfor the single point in time when the exchangeoccurs. Second, the monetary amount that a userwill exchange is a function of the perceived per-formance difference between the new value thatis created (from the new focal task, product, orservice) and the target user’s closest alternative(current task, product, or service). In general,without these excesses, neither the user nor thecreator of value would be willing to repeatedlyengage in these activities over the long term.

Having defined value creation, we now ex-plain how use value and exchange value aredetermined by relying on the work of Amabile(1996), who employs the concepts of novelty andappropriateness to explain how creative actsare evaluated by judges. She notes, “A productor response will be judged as creative to theextent that it is both a novel and appropriate,useful, correct or valuable response to the taskat hand” (1996: 35). Thus, we suggest that thelevel of new value creation will depend on atarget user’s subjective evaluation of the noveltyand appropriateness of the new task, product, orservice under consideration. The greater theperceived novelty and appropriateness of thetask, product, or service under consideration, thegreater the potential use value and exchangevalue to the user.

Amabile (1996) highlights three important con-ditions of this definition that are also relevant tovalue creation. First, it is important to recognizethat, in order to evaluate the novelty of a newtask, product, or service, users must possessspecialized knowledge of both the focal entityand what alternatives exist at a given time sothat a comparison of novelty and appropriate-ness and, hence, value can be made. Second, a

Note: Dashed arrow ( ) indicates value slippage; solid arrow ( ) indicates value capture.

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user cannot evaluate appropriateness withoutan understanding of the meaning of the newtask or product in a specific context. Third, theevaluation of novelty and appropriateness of acreative task or product cannot be done inde-pendently of the social or cultural context inwhich it is introduced.

In combination, these three conditions high-light the subjective and context-specific natureof the value creation process. Different targets orusers may arrive at different conclusions aboutthe novelty and appropriateness of a new task,product, or service depending on their individ-ual knowledge levels and the context in whichthey are embedded. Note that one importantconsequence of this subjective and context-driven definition of novelty and appropriatenessis that there will be competing views of what isvaluable among different users of value. Thissuggests that the producer or source of valuecreation must understand the relative knowl-edge of potential users and the context in whichthe evaluation of novelty and appropriatenesswill take place.

We propose that the definition of value cre-ation, as well as how users will evaluate thenovelty and appropriateness of the new task,product, or service, will be consistent across dis-ciplines and levels of analysis. However, what“value” is created, how it is perceived as valu-able (use and exchange value), and the processthrough which that value is created are likely tovary considerably, depending on the source/level of analysis that produces the value and thetheoretical perspective advanced by the disci-pline that studies the focal source/level of anal-ysis. We begin our discussion of the process ofvalue creation by first looking at the individu-al’s role as value creator, and we then move toorganizational and societal levels of analysis.

HOW IS VALUE CREATED? THE PROCESS OFVALUE CREATION

There are at least two possible ways to con-ceptualize the process of value creation: (1) asingle universal conceptualization and (2) a con-tingency perspective that explicates how valueis created from the vantage point or perspectiveof a particular source. We endorse the contin-gency perspective by proposing that answeringthe question of how value is created requiresone to define the source and targets of value

creation and the level of analysis. We posit thatwhen the individual is the unit of analysis, thefocal process is the creative acts displayed byindividuals and a select set of individual at-tributes, such as ability, motivation, and intelli-gence, and their interactions with the environ-ment. When the organization is the source ofvalue creation, issues regarding innovation,knowledge creation, invention, and manage-ment gain prominence. Finally, at the societallevel, the level of entrepreneurship and macro-economic conditions in the external environ-ment, including laws and regulations restrictingor encouraging innovation and entrepreneur-ship, come into play. Later in this paper, we takea similar contingency perspective on the pro-cess of value capture.

The Individual As a Source of Value Creation

Individuals create value by developing noveland appropriate tasks, services, jobs, products,processes, or other contributions perceived to beof value by a target user (e.g., employer, client,customer) relative to the target’s needs andwhen the monetary amount realized for this ser-vice is greater than what might be derived froman alternative source producing the same task,service, job, and so forth. The value created maybe from any new task, service, or job that pro-vides greater utility or lower unit costs for theuser over the closest alternative. For example,an employee working for a manufacturer maydevelop a faster or more consistent method toproduce fabricated parts, thus lowering unitcosts, or may create a higher-quality part, whichsubsequently yields a higher unit price.

Only one paper in this STF, by Felin and Hes-terly, focuses on the individual level of analysis;the authors contend that our understanding ofthe value creation process must begin at theindividual level of analysis. Emphasizingknowledge creation as an aspect of value cre-ation, they argue that value creation must beunderstood by focusing on the initial knowledgeconditions of individuals in the value creationprocess.

It is interesting that none of the papers in thisvolume explore individual creativity as a sourceof value creation. Amabile (1996)— consistentwith Felin and Hesterley (this issue)—suggeststhat creation of something of value can be pre-dicted based on individuals’ characteristics and


on the interaction between individuals and theirenvironment. Similarly, Locke and Fitzpatrick(1995) argue that individuals must possess abil-ities such as knowledge, intelligence, and men-tal acuity or flexibility in order to create. In ad-dition, Amabile (1996) highlights the role ofintrinsic motivation that is produced from theindividuals’ enjoyment of the work itself, as op-posed to alternative rewards provided by oth-ers—for example, recognition, money, or status.She states, “The intrinsically motivated state isconducive to creativity, whereas the extrinsi-cally motivated state is detrimental” (1996: 107).Thus, we argue that individuals create value byacting creatively to make their job/service morenovel and appropriate in the eyes of their em-ployer or some other end user in a particularcontext.

The Organization As a Source of ValueCreation

Moving to the organizational level of analysis,in his book on competitive advantage, Porter(1985) contends that new value is created whenfirms develop/invent new ways of doing thingsusing new methods, new technologies, and/ornew forms of raw material. Thus, when the or-ganization is the unit of analysis, innovationand invention activities impact the value cre-ation process. Damanpour (1995) suggests thatinnovative organizations introduce new prod-ucts or services or new management practicesrelated to the products or services. The newproducts, services, or practices arise from theinnovation process, which Van de Ven, Polley,Garud, and Venkataraman (1999) argue consistsof an intentional effort to develop a novel idea,involving significant market, technical, and or-ganizational ambiguity; regarding a commit-ment of collective effort over an extended periodof time; and requiring more resources than arecurrently held by the parties involved. Further,the literature suggests that firms are more likelyto innovate when they face uncertain environ-ments (Brown & Eisenhardt, 1997), enjoy slackresources (Van de Ven, Venkataraman, Polley, &Garud, 1989), are managed by entrepreneurialmanagers (Brown & Eisenhardt, 1998), havelarge social networks (Smith, Collins, & Clark,2005), and have the organizational capacity tocombine and exchange knowledge into new

knowledge (Nahapiet & Ghoshal, 1998; Smith etal., 2005).

Here again, the focus is on how the target userbenefits from the new product or service. Fromthis perspective, Priem (this issue) suggests thatvalue creation involves innovation that estab-lishes or increases the consumer’s valuation onthe benefits of consumption (increases usevalue). Similarly, we argue that, at the organi-zation level, the value creation process includesany activity that provides a greater level ofnovel and appropriate benefits than target usersor customers currently possess, and that theyare willing to pay for.

A second body of literature in the field of stra-tegic management—dynamic capabilities—alsohas examined how organizations create valueby focusing on how firms can create new advan-tages as existing ones are worn away by envi-ronmental changes. For example, Teece, Pisano,and Shuen contend that firms build advantagesby distinctive organizational processes, assetpositions, and evolutionary paths that allowthem to “integrate, build, and reconfigure inter-nal and external competencies” (1997: 516). Con-versely, Eisenhardt and Martin (2000) argue thatdynamic capabilities are more commonplaceand readily identifiable processes and routinesthat pertain to how resources are acquired, in-tegrated, and reconfigured. Zollo and Winter(2002) and Winter (2003) further suggest that suchcapabilities are the activities that generate andmodify operating routines to create new advan-tages. Dynamic capability scholars have alsobegun to empirically identify the factors thatlead to the creation of new advantages, includ-ing product and process development (Helfat,1997), organizational evolution (Brown & Eisen-hardt, 1997; Rindova & Kotha, 2001), and mana-gerial capabilities and cognition (Adner & Hel-fat, 2003; Tripsas & Gavetti, 2000). Much of thisliterature is focused on factors internal to thefirm and emphasizes knowledge creation, learn-ing, and entrepreneurship in creating new ad-vantages. Yet, in our view, the dynamic capabil-ities literature on creating new advantagescurrently neglects the importance of the targetusers, their perceptions, desires, and alterna-tives, as well as the context in which users areembedded.

A third stream of organizational-level litera-ture has paid increased attention to the processthrough which new organizational knowledge is


generated and, hence, value created. Presum-ably, such new knowledge can lead to greatervalue for target users. In particular, Nahapietand Ghoshal (1998) suggest that the social con-nections of individuals within the firm will pro-vide greater information and knowledge thatcan be used by organizational members to com-bine and exchange this information in a waythat produces new organizational knowledge.Smith et al. (2005) found that social networks oforganizational members were positively relatedto the knowledge creation capability and thatthis capability itself was an organizational-level concept that was positively related to firminnovation. Thus, it may be that social networksthat are externally directed to detect the needsof customers and product/service users havegreater potential for novel and appropriateproduct/service innovations.

A final body of literature that is also relevantto the organization as a source of value creationis strategic HRM research. Strategic HRM re-searchers have examined the role of manage-ment in the process of value creation quite ex-tensively. Practices identified from this body ofresearch have been found to both build em-ployee skills and motivate them to work towardorganizational value creation (Wright & McMa-han, 1992). Strategic HRM research, for example,has demonstrated that use of high-investmentHRM systems that include practices that de-velop employee skills, enhance the motivationto work toward organizational objectives, andprovide the discretion needed to quickly takeappropriate actions to achieve organizationalgoals is related to a variety of important out-comes, such as employee turnover (Guthrie,2001; Huselid, 1995), organizational commitment(Whitener, 2001), operational performance(Youndt, Snell, Dean, & Lepak, 1996), and finan-cial performance (Delery & Doty, 1996; Huselid,1995).

Extending this logic to a knowledge-basedcontext, Kang et al. (this issue) suggest that firmsuccess rests on the firm’s ability to offer newand superior customer value, which, in turn, de-pends on its ability to explore and exploit em-ployee knowledge that can become the basis ofimportant innovations that create value for tar-geted customers. Kang et al. recognize, however,that firms’ ability to leverage employee knowl-edge requires that they design HR systems thatencourage entrepreneurial activity among em-

ployees resulting in exploratory innovation, aswell as cooperative employee activities that ex-ploit and extend existing knowledge for compet-itive advantage.

To this point, our discussion has implied thatthe target or user of value is almost exclusivelyan internal or external customer of the organi-zation. Yet we would be remiss if we allowed thereader to believe that the customer is the exclu-sive target or user of value creation. Rather,many potential targets for value creation existat the organizational level. For example, re-searchers focusing on corporate social respon-sibility examine the actions of organizationsthat are intended to further social good, beyondthe interests of the firm and what is required bylaw (McWilliams & Siegel, 2001). Similarly, intheir book on stakeholder analysis, Post et al.(2002) suggest that the purpose of the organiza-tion is to create value in many different ways formany different targets, including earnings forowners, pay for employees, benefits for custom-ers, and taxes for society. Further, these authorssend a strong message to organizations regard-ing their broad responsibilities in creatingvalue and wealth, and they note that “the cor-poration (organization) cannot—and shouldnot—survive if it does not take responsibility forthe welfare of all of its constituents and for thewell-being of the larger society within which itoperates” (2002: 16–17).

By definition, various stakeholders have dif-ferent views as to what is valuable because ofunique knowledge, goals, and context condi-tions that affect how the novelty and appropri-ateness of the new value will be evaluated.Moreover, they may have competing interestsand viewpoints on what is valuable. For exam-ple, investors may favor any value-creating ac-tivities that add to short-term profits, whereasenvironmentalists may prefer only those value-creating activities that preserve the environ-ment. Thus, a stakeholder approach requiresthat organizations take a broader and a longer-term view regarding the targets of value cre-ation. This perspective, in our opinion, is impor-tant because it suggests that there will bedifferent and perhaps competing viewpointsamong users on what is valuable and, thus, thatorganizations must direct time and effort towardrecognizing and, to some degree, reconcilingthese differences.


In summary, our discussion of the individualand the organization as sources of value cre-ation clearly shows that the process of valuecreation varies depending on the perspectivethat researchers adopt. Thus, any discussion ofvalue creation must clearly articulate both thetarget of the value and the party that producesthe value and is intended to benefit from it (thesource). We now broaden our discussion ofsources beyond the individual and the organi-zation by focusing attention on society, specifi-cally governments, which strive to create valuefor the overall benefit of society.

Society As a Source of Value Creation

At a societal level, the process of value cre-ation can be conceived in terms of programs andincentives for entrepreneurship and innovationintended to encourage existing organizationsand new entrepreneurial ventures to innovateand expand their value to society and its mem-bers. Joseph Schumpeter (1934) highlighted theinterdependent nature of the marketplace, argu-ing that it was the result of continuous innova-tion and technical progress. If firms fail to inno-vate, their positions are eroded by competitorswho offer new innovations that appeal to themarket. To avoid this erosion, firms must contin-ually strive to introduce new products, methods,and initiatives. Indeed, Schumpeter (1942) ar-gued that the innovation of firms in pursuit ofprofits is the key source of market expansionand economic growth.

In addition to receiving value from the inno-vation and entrepreneurship of private firms,Porter argues that society and government cando a number of things to inspire innovation andentrepreneurship in a society:

The central goal of government policy toward theeconomy is to deploy a nation’s resources (laborand capital) with high and rising levels of pro-ductivity . . . productivity is the root cause of anation’s standard of living. To achieve productiv-ity growth, an economy must be continually up-grading. This requires relentless improvementand innovation (1990: 617).

Porter details how state and federal macro-economic policy can affect factor and demandconditions, industry structure, and even relatedindustries that drive innovation and competitionin a society. Government creates value throughlaws and regulations and through services that

provide structure and stability and assurancesof quality, lawful behavior, and national sup-port. Indeed, Porter (1990) suggests that inven-tion and entrepreneurship are at the heart ofany nation’s advantage. To support this pro-posal, he describes how the U.S. government’screation of a favorable economic environmentfor the medical products industry, one includingstrong product demand conditions from a large,affluent, and progressive population, a support-ive infrastructure of medical schools and hospi-tals, and ongoing financial support for medicalinnovations, caused entrepreneurs to flock to theUnited States to start medical products busi-nesses. As a consequence, the medical productsindustry is very strong in the United States andcreates much value for society as a whole byproviding jobs, tax benefits, and infrastructurefor related businesses and services.

Similarly, Lee et al. (this issue) focus on thespecific role of government policy on bank-ruptcy law as a source of value creation forsociety. Taking a real options theory perspec-tive, they suggest that “entrepreneurialfriendly” bankruptcy laws will promote greaterentrepreneurial development. From a societalperspective, the researchers argue that onemight view each entrepreneurial firm as an op-tion that society must decide whether or not toexercise. By passing and enforcing liberal bank-ruptcy laws that facilitate the failure of rela-tively hopeless entrepreneurial firms while en-abling the survival of those with the potentialfor a strong future, governments create value forsociety as a whole.

At the societal level, value creation is a some-what different process than at the individual ororganizational level, since sources may act in-tentionally or unintentionally to create value forsociety at the same time they are creating valuefor themselves. For example, new and success-ful entrepreneurial ventures create value for so-ciety as well as for themselves by providingmore jobs, tax revenues, and potentially moreand better products and services for consumersand a higher standard of living for society (Leeet al., this issue). In combination, our discussionof the value creation process for individuals,organizations, and society shows that it is fairlyunique across the three sources and cannot bedescribed in general terms that ignore the na-ture of the source and the target users. Valuecreation at the individual level involves creativ-


ity and job performance, at the organizationallevel it may mean innovation and knowledgecreation, and at the societal level it may involvefirm-level innovation and entrepreneurship, aswell as policies and incentives for entrepreneur-ship.

Further, the issue of different stakeholdersand competing interests makes the issue ofvalue creation very complex and also points tothe importance of capturing value. For example,once an organization is fairly successful in cre-ating large amounts of value for its customers,and in return realizes exchange value from thissuccess, questions arise among stakeholdersand broader society about the appropriate lev-els of value that should be returned to the firm,as opposed to other stakeholders, particularlyemployees who often invest significant amountsof expertise, effort, commitment, and time underan exchange relationship initiated at a prevaluerealization state. Similarly, other stakeholders,such as suppliers and society in general, maytypically raise concerns about the fairness ofvalue distribution and try to gain a greatershare of the returned value. Consider the expe-rience of Wal-Mart, ranked as the number 1 For-tune 500 company in the world for two yearsrunning. It is not surprising that the firm hasincreasingly come under fire from stakeholderswho question the appropriateness of the firm’slevel of value capture—for example, union rela-tions, legal discrimination charges, charges ofmonopolistic practices from competitors, andcomplaints from employees about the level ofwages and benefits.

Thus, we argue that value creation requiresmore than simply understanding what the em-ployer, customer, or society is willing to pay for.Instead, one must recognize the existence ofmultiple targets—whether intended as such ornot—who exist in concert, not in isolation. Onemust also consider the knowledge of potentialusers and the context in which they make eval-uations about the new value that has been cre-ated. For these reasons, we turn now to a dis-cussion of the process of value capture.

VALUE APPROPRIATION: HOW IS VALUECAPTURED?

In the strategic management literature, schol-ars have made a distinction between value cre-ation and value appropriation, recognizing that,

in some cases, organizations that create newvalue will lose or have to share this value withother stakeholders, such as employees, compet-itors, or society (Coff, 1999; Makadok & Coff,2002). Recall the earlier distinction between ex-change value and use value (Bowman & Ambro-sini, 2000). Value slippage—that is, when theparty creating the value does not retain all thenew value that is created—occurs when usevalue is high while exchange value is low. Slip-page obviously provides little incentive for asource to continue creating value in the longterm. Thus, it is important to understand thenature of the value-capturing process.

We propose that two key concepts operateacross all levels of analysis to determine whichparty captures the new value that is created:competition and isolating mechanisms. As wehave noted, as increments in the novelty andappropriateness of a focal task, product, or ser-vice increase, the use value and the monetaryexchange value will also increase. The creationof appropriate and novel tasks, products, or ser-vices will often yield a situation where there islimited supply and high demand. Competitionwill thus ensue, as other suppliers of the task,product, or service seek to replicate the newvalue that was created and participate in theprofits. A consequence of competition (increasedsupply) is that exchange value (price) will de-cline to the point where supply equals demand.At this point, the value that was created must beshared with other competitors who will marketthe task, product, or service to other users. Asother competitors enter the market, they maycreate a situation of high use value but lowmonetary exchange value for the originalsource. Competitors may also be unable to re-tain value as end users benefit from the lowerprices brought by increased competition.

Further, it is important to note that competi-tion is not limited to the organizational level;rather, competition is likely to extend to all lev-els of analysis in determining how much newvalue is captured by the creator. For example,competitive and homogeneous labor marketswhere individual capabilities are virtually thesame and in large supply allow organizations tobenefit by keeping labor costs low. This limitsthe value that any one employee can capture byconstraining his or her bargaining power (Coff,1999).


Similarly, competition among firms allows so-ciety to benefit by keeping prices low. In fact,there is a circular or codependent relationshipbetween competition and value creation suchthat competition will result from value creationactivities, but value creation also will be a con-sequence of competition. At the individual level,there is evidence that competition increases thesearch for creative solutions to produce addi-tional value (Bloom & Sosniak, 1981). At the or-ganizational or societal level, Schumpeter’s(1942) concept of “creative destruction” comesinto play as an explanation for how firms suc-ceed and markets advance through the pro-cesses of innovation and competition. Basically,creative destruction denotes a process wherebyhigher levels of competition drive firms to be-come more innovative by introducing new prod-ucts (referred to as new combinations) that cre-ate value, only to lose the value to competitorswho replicate or imitate the products. As a re-sult, the heterogeneity of tasks, products, andservices that is created by continuing innova-tion provides a stable base of employment, ed-ucation, tax support, community service, and thelike that also stimulates growth and develop-ment at the societal level (Scherer & Ross, 1990;Schumpeter, 1942).

Thus, competition can explain how value slipsaway from the creator to be shared with othercompetitors and users. For example, an individ-ual may create significant value for him/herselfby developing a new way of performing a job foran employer or a service for a customer. Con-ceptually, this individual may extract or captureall the value in the form of high salary or otherbenefits because there are no substitutes orcompetitors. In short, the individual may enjoyhigh bargaining power because of the presenceof isolating mechanisms. This capture is indi-cated in Table 1 by the arrow denoting “valuecapture.”

Over time, however, it is unlikely that the em-ployer will, or can, allow an employee to captureall the value accrued from the process, product,or service (note the arrow going up to the secondrow, indicating “value slippage”), because theorganization typically also makes a significantinvestment in the value creation activity, eventhough the employee may have developed it. Forexample, the organization often allows the em-ployee to develop the new value during worktime, to use work tools and equipment in the

development, to receive manufacturing andmarketing assistance in developing a prototypefor the idea and effectively promoting the result-ing product or service to existing and formercustomers, and even to utilize existing distribu-tion channels to get it to the customer.

However, in some cases, competition is lim-ited and supply does not equal demand, result-ing in the potential for greater value capture bythe creator. As an explanation for how thesescenarios transpire, we introduce a second fac-tor originating in biology: isolating mecha-nisms. An isolating mechanism is any knowl-edge, physical, or legal barrier that may preventreplication of the value-creating new task, prod-uct, or service by a competitor. In essence, iso-lating mechanisms operate across levels ofanalysis to limit value slippage, thus enablingthe sources of value creation to capture the ma-jority of the value created. The existence of anisolating mechanism raises the potential bar-gaining power of the creator of value to retainthis value, although the nature of the isolatingmechanism may be quite different at differentlevels of analysis.

Value Capture at the Individual Level ofAnalysis

At the individual level, many different at-tributes may serve as a basis for the develop-ment of isolating mechanisms that enable thesource of value creation to capture value, in-cluding individuals’ unique position in a socialnetwork (Burt, 1992), the nature of their relation-ship with selected others in the organization,and their specialized expertise or knowledge,particularly tacit knowledge obtained from theperformance of the new task or creation of thenew product or service. Clearly, if others cannoteasily imitate the process used by the originat-ing source to create value, it is more likely thatthe source will be able to capture the resultingvalue.

As an example, the owner of a machine toolcompany tells the story of how all his “in pro-cess” inventory was backed up because oneclose tolerance finishing operation requiredunique craft “know-how” that was difficult if notimpossible to find in the open labor market. Thisowner hired many different machinists to per-form the job, only to learn that they could notperform the task and created scrap and high


costs. One day, the owner hired an older ma-chinist with much experience who created anew and unique way of completing the finishingtask with virtually no scrap creation and a highlevel of efficiency. The owner was happy, andthe machinist commanded a high salary. Thenew machinist single-handedly addressed thetool company’s long-term production problem,and the owner was able to expand his business.Before long, however, there was too much inven-tory for the experienced machinist to process.Thus, the owner asked the older machinist if hewould help train another machinist so that pro-duction could be increased. The machinist re-fused, stating, “If I help you train other employ-ees, you won’t need me.” He then asked for andreceived another raise. The stalemate betweenowner and mechanic continued, and, as mightbe expected, their personal relationship soured.At some point, and perhaps ironically becauseof the machinist’s own value-creating activities,the owner was able to buy a high-technologymachine that essentially performed the samehigh-quality work as the machinist at a lowercost in the long term. The owner of the machinetool company no longer needed the machinist.

This example illustrates the importance ofpersonal attributes that serve as isolating mech-anisms when individuals are the source of valuecreation and the way in which these attributesallow individuals to enhance their bargainingpower to capture value from the employer, atleast until the point where new technology orother processes limit the individuals’ effective-ness. Note that it was the struggle between themachinist and employer in our example overwho captured the value that motivated theowner to find a new source of value. As such, theexample also illustrates the competition be-tween the owner and the employee for the ex-change value of the machinist’s activities. With-out the new technology (also a new source ofvalue), the machinist would continue to capturethe value.

Value Capture at the Organizational Level ofAnalysis

At the organizational level of analysis, re-searchers have looked internally within organi-zations to better understand how value is cap-tured. The concepts of value chain and valuechain analysis, for example, directly focus on

the ways in which firms may configure theirprimary and support activities to maximize andsustain competitive advantage (Porter, 1985).Moreover, researchers adopting a resource-based view of the firm (Barney, 1991) have fo-cused attention on identifying the types of re-sources that can act as isolating mechanismsagainst potential competitors. Barney (1991) ar-gues that resources may serve as isolatingmechanisms and limit competition in caseswhere they are rare, inimitable, nonsubstitut-able, and valuable. Schumpeter (1942) also ad-dresses this issue, arguing that if profits from aninnovation (creative) are great enough, compet-itors will find a way to replicate the innovation(destruction). Such replication may occur bystealing away key employees, preempting keyresources, reverse engineering, or leapfroggingtechnology. Subsequently, as competitors repli-cate, value will slip away from the creating firmto competitors, consumers, and society (throughthe low prices emerging from competitive mar-kets).

Sirmon and colleagues (this issue) identify theprocess of resource management as a criticalmechanism through which value may be cap-tured once created. Specifically, they proposethat organizations must take actions that (1)structure the resource portfolio, (2) bundle re-sources to build capabilities, and (3) leveragecapabilities to exploit market opportunities. Bydoing so, they can simultaneously create andexploit value for customers as well as owners.Thus, at the organizational level of analysis,value may be captured by the use of resourceswith attributes that make them difficult to imi-tate, through the source’s own use of creativedestruction before competitors can use the inno-vation, and through methods of resource man-agement.

Value Capture at the Societal Level ofAnalysis

At the societal level, Porter (1990) identifiesisolating mechanisms that allow a nation tocapture value. He suggests that nations will re-tain the value they create (not lose it to othersocieties) when they have unique factor or re-source advantages, strong demand conditions,related and supporting industry infrastructure,and competitive markets. These serve as isolat-ing mechanisms for a particular society.


Extending this logic to other levels of society,we suggest that societies, states, or communi-ties having specific resource advantages—forexample, a unique natural resource, healthyand growing markets that are supported by athriving business infrastructure, and competi-tive and innovative markets—will be able tocapture more value for their citizens than willthose lacking these conditions. Thus, communi-ties that are located near major research univer-sities will benefit from having a large pool oftalented workers. Societies with large urbanpopulations will have greater demand condi-tions then will rural communities. Communitieswith a thriving business community will likelydevelop a more efficient business infrastructurethen will those where there is little businessgrowth. Finally, societies having highly compet-itive markets and strong rivalries will likely pro-duce more competitive firms than will thosehaving low levels of competition. All in all,value creation activities (innovation and entre-preneurship) in societies with these conditionswill have clear advantages over those in societ-ies without such conditions.

By focusing on competition and isolatingmechanisms, we can begin to see how value iscaptured at different levels and why it some-times slips away from the initial value source. Inthe case of the individual, we believe personalattributes such as specialized knowledge andabilities, one’s unique place within social net-works, and one’s specialized relationships withothers in the organization all may serve as iso-lating mechanisms enhancing bargainingpower and enabling one to capture the majorityof the value one has created. At the organiza-tional level, we propose that, in the long term,competitors also offer a serious threat to thefirm’s ability to capture the value that it hascreated but that the manner in which the firmstructures its resource base and the character-istics of its resources themselves, in terms ofvalue in meeting challenges, inimitability, andrarity in the profiles of other firms, may all workto enhance the firm’s ability to capture value.Finally, at the societal level, nations, states, andcommunities also experience challenges fromother societies that may compete for the valuethey have created. Several factors may serve asisolating mechanisms for these entities, includ-ing the presence of unique factor or resourceadvantages, strong demand conditions, related

and supporting industry infrastructure, andcompetitive markets. Thus, the process of valuecapture varies according to the initiating sourceor level of analysis, yet at each level of analysis,both competition and isolating mechanismsplay important roles in shaping value capture,even though the manner in which competitionand isolating mechanisms operate plays out dif-ferently across these levels of analysis.

We suspect that value slippage may moveboth up and down levels of analysis, dependingon the type of isolating mechanism and the levelat which it operates. Thus, value created by anindividual may be captured by the organizationor society; conversely, an enterprising entrepre-neur may be able to solely capture the valuecreated by a well-intentioned public initiativefor entrepreneurship initiated at the societallevel.

DISCUSSION

We began our discussion with a basic conclu-sion that gained considerable support from ourexperience as the guest editors for this STF—namely, that considerable disagreement andconfusion remain among scholars on the natureof value creation. In identifying reasons for thisdisagreement, we suggested that they result, inpart, from differences in the formative disci-plines of researchers, as well as confusion re-garding the specific sources and targets of thevalue creation being studied. Yet our own re-search and thinking about the topic of valuecreation led us to propose a fairly general defi-nition of value creation as the difference be-tween use and exchange value that can apply toall levels of analysis (Bowman & Ambrosini,2000). However, we also believe that the processof value creation itself is a contingency phenom-enon varying substantially with respect to theactivities undertaken, the target users focus onas “buyers” of use value, and the underlyingtheoretical foundation. Subsequently, we de-voted much of this article to exploring the natureof value creation as it operates, differentially weargue, at the level of individual, organizational,and societal sources.

In the course of our editorial decisions andthinking about value creation, however, wefound ourselves repeatedly facing the questionof whether a particular source or creator wouldbe able to capture the primary share of the re-


sulting value. For this reason, we also awardedsignificant attention to the process of value cap-ture. While in some cases the source is able tocapture the excess between exchange value anduse value, often there is value slippage suchthat the excess created between use value andexchange value is shared among multiple par-ties or stakeholders. Ultimately, we concludedthat, much like the value creation process, valuecapture varies considerably, depending on theparticular source that directs the process andthe level of competition and isolating mecha-nisms surrounding the value that is created.

Throughout this article, we discussed multiplelevels of analysis, targets, and theoretical per-spectives in order to develop and provide sup-port for our central argument that both the valuecreation and the value capture processes arecontingency phenomena that are highly depen-dent on the source that initiates the activity. Wealso referenced particular articles within theSTF that address issues of value creation orcapture. Clearly, our ideas require additionalconceptual thought and development in order todetermine their validity. We sincerely hope thatthey will stimulate the reader’s involvement inthis process. Toward this end, we devote theremainder of this article to identifying those re-search directions we believe to be most fruitfulfor the process of building greater agreementamong scholars on the topic of value creationand also enhancing our understanding of thephenomenon as both an outcome and a process.

To begin, given the importance of a multilevelperspective for both value creation and capture,we encourage research that examines howthese processes work across levels of analysis.As noted above, different stakeholders mayhave different views as to what is valuable be-cause of differing knowledge, goals, and contextconditions that affect how the novelty and ap-propriateness of the new value will be evalu-ated. Moreover, individuals, organizations, andsociety may have competing interests and view-points about what is valuable. An importantarea of focus for value creation research is toexamine how sources balance the potential ten-sions of different targets of value creation. Arecertain targets more or less important for valuecapture? Is there a certain threshold that mustbe balanced among all relevant constituents torealize value creation and capture? For exam-ple, investors may favor value-creating activi-

ties that add to short-term profits, employeesmay favor value-creating activities that lead tolong-term company stability, and environmen-talists may prefer only those value-creating ac-tivities that preserve the environment. Canvalue creation activities survive in the long termif only one target is satisfied, or do value cre-ators have to meet some minimum level of usevalue for all parties to maximize their exchangevalue?

Another direction for research rests on exam-ining value creation at a meso level of analysis.While our discussion has focused on the indi-vidual, organizational, and societal levels ofanalysis, it is important to recognize that thereare intermediate or meso levels of analysis thatexist as well. For example, many organizationsrely on teams as a mechanism for value cre-ation. Whether developing new tasks, products,processes, or services, teams are unique, beingdependent on the individuals that compose theteam for effectiveness, yet they may be viewedas a higher-order entity as well. And with afocus on teams, factors such as team composi-tion, members’ willingness to share knowledge,and social networks gain prominence (also seeCoff, 1999, for a focus on value capture in teams).Relatedly, an industry level of analysis also pre-sents unique attributes that are greater thanany one organization in the industry but nar-rower than society at large. Researchers need todetermine whether what is valuable, the pro-cess of value creation, and the process of valuecapture are similar for these meso levels. Wemay find that there are unique features of theselevels of analysis that substantially impactvalue creation and/or value capture.

Moving to a third area, recognizing that valuecreation and value capture are two distinct pro-cesses, research is needed that examines therelationship between these two concepts. In par-ticular, we encourage research that examines aparty’s willingness to engage in value creationactivities. At a basic level, a simple but impor-tant question is “Are value creation efforts de-pendent on a certain anticipated level of valuecapture?” As we noted above, value capture isnever guaranteed—the source that creates avalue increment from a given task, product, ser-vice, or activity may not necessarily succeed incapturing a majority of it in the long run. Yetbecause it is unlikely that most sources or cre-ators (individuals, companies, and society) are


completely altruistic, we anticipate a hope ordesire to capture all, or at least a considerableportion, of the value they create. But how muchanticipated value capture is required to engagein value creation in the first place? Recall ourearlier discussion of the machinist in the ma-chine tool company:

The owner asked the older machinist if he wouldhelp train another machinist so that productioncould be increased. The machinist refused, stat-ing, “If I help you train other employees, youwon’t need me.” He then asked for and receivedanother raise.

This situation illustrates a potential tension.The machinist certainly could help create valuefor the company by training other employees. Bydoing so, production could increase and thecompany as well as other employees could ben-efit. Yet the machinist would be jeopardizing hispotential value capture by reducing a criticalisolating mechanism— unique knowledge. Inshort, the ability to create value does not neces-sarily mean that parties will do so. Would thismachinist have acted differently had he hadsome other isolating mechanism in place toguarantee a continued return on his uniqueknowledge—or a way to ensure continued valuecapture (e.g., a long-term contract)? Would hehave acted differently if he recognized that anew replacement technology was on the hori-zon? We can imagine situations in which partiesat other levels of analysis have the potential forvalue creation but may not engage in doing sowithout some anticipated level of capture forthose efforts. Thus, research is needed to exam-ine the relationship between anticipated valuecapture and willingness to engage in activitiesthat create value, and especially the role of ex-trinsic motivation in value creation.

A related issue pertains to the role of learningin the value creation–value capture relation-ship. A key question is whether actors learnfrom past value creation efforts in terms of theamount of value they capture and use thisknowledge for decisions regarding future valuecreation activities. Recognizing that virtually allvalue creation activities face prospects of slip-page, it is conceivable that the value creationprocess evolves for creators of value based ontheir learning from past experiences in trying tocreate and capture value. In this regard, pastexperience capturing the benefits stemming

from creativity and/or innovation may influencehow actors structure their value-creating effortsin the future. One logical focus is to examinehow actors at different levels of analysis at-tempt to build isolating mechanisms into theactual process of value creation over time so asto ensure a greater level of capture.

It is interesting that some authors have sug-gested that it is only necessary to examinevalue capture. For example, Schumpeter (1942)and certain scholars in entrepreneurship are notinterested in the creator of ideas and/or the in-ventor of products but, rather, are interestedonly in those who seize opportunities throughaction or capture the value from such ideas andproducts. In contrast, March (1991) has sug-gested that there is a need for scholars to under-stand the relationship between the explorationof new ideas, which connects well with valuecreation, to the exploitation of ideas, which con-nects with value capture. He suggests a balanceis necessary. We believe that it is necessary tounderstand the antecedents and consequencesof both value creation and value capture. Asmanagement and organization scholars, this isnecessary if we are to assist individuals, orga-nizations, and societies in raising the quality oflife and enhancing economic development andwell-being.

In conclusion, the subject of value creation ismade complex by its subjective nature, multiplelevels of analysis, and the theoretical disciplinescholars use to study it. This introduction has nodoubt raised more questions than it has an-swered. Nonetheless, we are hopeful that thisintroduction and the articles that follow fuelmore debate and research on the subject ofvalue creation. A greater understanding ofvalue creation may help individuals, organiza-tions, and society advance and prosper in acompetitive world.

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David P. Lepak ([email protected]) is an associate professor of human resourcemanagement in the School of Management and Labor Relations at Rutgers University.He received his Ph.D. from The Pennsylvania State University. His research focuses onthe strategic management of human capital and managing contingent labor forcompetitive advantage.

Ken G. Smith ([email protected]) is the Dean’s Chair and Professor of Busi-ness Strategy at the Robert H. Smith School of Business, University of Maryland. Heearned a Ph.D. in business policy from the University of Washington. His researchinterests include strategic decision making, competition, and knowledge creation.

M. Susan Taylor ([email protected]) is the Dean’s Professor of Human Re-sources at the Robert H. Smith School of Business, University of Maryland. Shereceived her Ph.D. from Purdue University. Her current research examines careertransitions, the employment relationship, and the impact of leadership behavior andemployee emotions on the effectiveness and innovation resulting from radical orga-nizational change.


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