Measuring value creation and appropriation in firms: The VCA model

• Author: Marvin B. Lieberman,Roberto Garcia‐Castro,Natarajan Balasubramanian
• Published date: 01 June 2017
• DOI: http://doi.org/10.1002/smj.2565
• Date: 01 June 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 1193–1211 (2017)

Published online EarlyView 15 December 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2565

Received 10 June 2014;Final revisionreceived 4 January 2016

MEASURING VALUE CREATION AND

APPROPRIATION IN FIRMS: THE VCA MODEL

MARVIN B. LIEBERMAN,1ROBERTO GARCIA-CASTRO,2,*

and NATARAJAN BALASUBRAMANIAN3

1UCLA Anderson School of Management, Los Angeles, California, U.S.A.

2IESE Business School, Madrid, Spain

3Whitman School of Management, Syracuse University, Syracuse, New York, U.S.A.

Research summary: Using a productivity technique(VCA model), we estimate the economic value

created by a rm and appropriated by its stakeholders in two specic empirical contexts. In the

rst application, we use publicly available data from the U.S. airline industry to illustrate how the

VCA model can be used with multiple stakeholder groups. In the second application, we provide

estimates for three global automobile companies (GM, Toyota and Nissan), showing how the

model can be reformulated using value added. In both industries we nd substantial heterogeneity

among rms in the creation and distribution of value. We discuss strengths and limitations of the

VCA model and implications for strategic management research.

Managerial summary: Firms create value not only for shareholders, but also for other

stakeholders, including employees, customers and suppliers. This article applies a method to

quantify the “new” economic value created by a rm over an interval of time; the method

also reveals the distribution of that value among the stakeholders. The proposed method gives

managers some means to assess changes in the economic value created and distributed. We nd

that the creation and distributionof value has varied greatly among major U.S.airlines and global

automakers in recent decades. Moreover, returns to shareholders typically accounted for only a

small proportion of rms’ total value creation and often had little relation to broader changes in

the magnitude and distribution of value. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

This article deals with value creation and appropria-

tion in rms, a central topic in strategic management

research that has been extensively studied from

different perspectives (Bowman and Ambrosini,

2000; Brandenburger and Stuart, 1996; Castanias

and Helfat, 1991; Coff, 1999; Lepak, Smith, and

Taylor, 2007). Despite the many implications of

value creation-appropriation dynamics for strategic

management scholarship, one distinctive feature

Keywords: value creation; value appropriation; stakehold-

ers; productivity; VCA model

*Correspondence to: Roberto Garcia-Castro, Camino del

Cerro del Aguila, 3 28023 Madrid, Spain. E-mail: rgarcia@

iese.edu

Copyright © 2016 John Wiley & Sons, Ltd.

of this body of research is that most discussion

has been at a theoretical level, often relying on

conceptual arguments (Bowman and Ambrosini,

2000; Lepak et al., 2007; Sirmon, Hitt, and Ire-

land, 2007) and formal modeling (e.g., Branden-

burger and Stuart, 1996, 2007; Chatain and Zem-

sky, 2011; Lippman and Rumelt, 2003; MacDonald

and Ryall, 2004). Although observations of value

creation and appropriation across rms suggest that

the patterns of value captured by stakeholder groups

are highly heterogeneous, systematic empirical evi-

dence remains limited.

Given the decit of applied research in this area,

important theoretical propositions remain untested.

For example, Coff (2010) posits that stakeholder

rent appropriation is a dynamic process that

1194 M. B. Lieberman, R. Garcia-Castro, and N. Balasubramanian

coevolves as capability emerges. To date, we

only have ad-hoc evidence conrming that

rent is captured by the stakeholders directly

involved in creating a capability. More recently,

Garcia-Castro and Aguilera (2015) introduce the

notion of stakeholder value creation appropriation

elasticity— VCA elasticity—which captures the

relationship between total value created and value

appropriated by each stakeholder group. They

argue that this elasticity can be positive, negativeor

zero, varying signicantly across rms, industries,

and national systems. However, VCA elasticities

have not been empirically investigated yet, and

the conditions that determine such elasticities

remain unexplored. In general, the measurement

of value creation and stakeholder value appropri-

ation appears as a Gordian knot in the strategic

management eld.

In parallel to the lack of empirical studies, a num-

ber of scholars argue that the term value creation

has often been used incorrectly, when the intended

meaning has really been value capture (Bowman

and Ambrosini, 2000; Coff, 1999; Makadok and

Coff, 2002; Priem, 2007). The confusion arises

when the payments to shareholders are confounded

with the total payments to the rm and all its stake-

holders. Any rigorous analysis of value creation and

appropriation must account for the fact that, by def-

inition, the value created through a rm’s activities,

and the value distributed to the rm’s stakeholders,

must be equal.

In this article and a companion study (Lieber-

man, Balasubramanian, and Garcia-Castro, 2016),

we present an approach to make research on

value creation and appropriation more empiri-

cally grounded, thereby bringing a more applied

dimension to this important topic. The starting

point of our approach is a dynamic notion of eco-

nomic value created— which we call “economic

gain”— dened as the change in the total economic

value created by a rm from one period to the next.

Total economic value isthe economic value created

and appropriated by all the stakeholders of the rm.

This notion of economic gain and the methodology

that we detail below overcome some of the limita-

tions associated with shareholder-centric measures,

which capture only the economic value appro-

priated by the nancial shareholders of the rm.

Furthermore, by adopting a dynamic perspective

on value creation, the method alleviates some of

the common data constraints that affect estimation

of economic value, including the difculty of

assessing the magnitude of “consumer surplus”.

The lynchpin of this approach is a simple

accounting identity that equates the revenues of

a rm to the sum of all payments made to its

stakeholders. Simple algebraic manipulation of this

payment identity combined with some assumptions

yields an equality, one side of which measures

value creation and the other side of which measures

value distribution to the various stakeholders.

Within some limitations, the methodology not only

helps quantify value creation but also sheds light

on the distribution of new value created by the rm

as well as any transfers of existing value among the

stakeholders.

The theoretical basis for the method, and the

relation between economic gain and more conven-

tional shareholder-specic performance measures,

are elaborated in Lieberman et al. (2016). In the

present study, we apply the method, which we label

the VCA model (for ValueCreation and Appropria-

tion), to provide quantitative estimates of value cre-

ation and appropriation in two industries, the U.S.

airline industry and the global automotive industry,

over recent decades. These industries, one in the

services sector, the other in manufacturing, are eco-

nomically important. At the same time, they share

some characteristics that allow a meaningful appli-

cation of the VCA model. Specically, the rate of

product improvement in these industries has been

lower than in high-tech sectors such as computers,

and most companies in these industries are rela-

tively undiversied. Further, public data are avail-

able at a sufcient level of detail to apply the model

to specic rms.

These two industry examples allow us to make

several contributions to the strategic management

literature. First, our applications illustrate the fairly

general and exible nature of the VCA methodol-

ogy to estimate value creation and appropriation.

By focusing on changes over time, the method cap-

tures a common notion of value creation that has

generally been overlooked in the literature, while

sidestepping the need for complex economic mod-

eling to estimate the consumer surplus. The auto

industry example demonstrates how the model can

be applied using fairly standard Compustat-type

data, whereas the airline industry example shows

what is possible in certain sectors where more

detailed information can be obtained. In the lat-

ter instance, we also illustrate how the basic VCA

model can be extended to include other stakeholders

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1193–1211 (2017)

DOI: 10.1002/smj