Value capture theory: A strategic management review
| Author | Michael D. Ryall,Joshua Gans |
| DOI | http://doi.org/10.1002/smj.2592 |
| Published date | 01 January 2017 |
| Date | 01 January 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 17–41 (2017)
Published online EarlyView in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2592
Received 30 April 2014;Final revision received27 February 2016
VALUE CAPTURE THEORY: A STRATEGIC
MANAGEMENT REVIEW
JOSHUA GANS and MICHAEL D. RYALL*
Rotman School of Management, University of Toronto, Toronto, Ontario, Canada
Research summary: This article provides the rst review of a growing line of scholarly work
in strategy that we refer to as “value capture theory.” The common thread in this work is its
use of cooperative game theory as a general, mathematical foundation upon which to build a
deep understanding of rm performance in market settings. Our review:(1) describes the primary
elements of the theory; (2) highlights important blindspots that it resolves with respect to existing
theoretical approaches; (3) calls attention to several of its novel insights; and (4) summarizes
a myriad of applications and empirical studies that have appeared in recent years using value
capture theory.
Managerial summary: Traditionally, theoretical claims in strategic management have been
supported by informal, qualitative reasoning. Recently, however, a new line of theoretical work
based upon mathematical methods, known as “value capture theory,” has been gaining in
popularity. This article reviews the recent advances in this line with a particular emphasis upon
a number of its important insights, several of which challenge longstanding propositions from
the traditional line. For managers, the formal nature of value capture theory is well-aligned with
data-driven analyses of strategic situations. Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
Understanding persistent heterogeneity in rm
performance is, perhaps, the central objective in
the eld of strategy.1The seminal contribution
of Brandenburger and Stuart (1996) initiated a
unique stream of work designed to deepen our
understanding of this phenomenon through the
Keywords: value creation; value capture; competition;
cooperative game theory
*Correspondence to: Michael D. Ryall, 105 St. George
St., Toronto, ON M5S 3E6, Canada. E-mail: mike.ryall@
rotman.utoronto.ca
1As evidence for this assertion, we note that an adequate review
of the existing empirical literature on this topic would require a
separate article of its own. For example, a partial list of relevant
empirical analyses on the extent to which above-average prots
persist includes: Cubbin and Geroski (1987), Dosi, Lechevalier,
and Secchi (2010), Jacobsen (1988), Knott (2003), McGahan
and Porter (2003), Mueller (1977, 1986), Roberts (2001), Rumelt
(1991), Waring (1996), Wiggins and Ruei (2002), and Madsen
and Walker (2015).
Copyright © 2016 John Wiley & Sons, Ltd.
development of a mathematical theory of value
creation and capture under competition. Since then,
this literature has quietly and steadily grown to the
point where it now represents a substantial body
of work. Due to its mathematical nature, the col-
lection of ndings build upon each other, thereby
creating a coherent, interlocking set of theoretical
claims. These claims reveal subtleties of compe-
tition that were not previously apparent, pushing
strategy scholars to rethink some fundamental
ideas about value capture under competition. What
is more, recent advances in empirical methods
have opened the door to empirical investigation
of these claims. Finally, it is important to note
that the theory of interest is entirely published
in strategic management journals. This has not
been an exercise of locating technical results
outside the eld and importing them into strategy
via reinterpretation and analogy. Rather, this
work contains novel propositions of its own, with
18 J. Gans and M. D. Ryall
implications extending well beyond the boundaries
of strategy.
Thus, we presently nd ourselves in a situation
in which a stream of literature has developed to the
point that a general, scholarly audience is likely to
nd the insights it offers of substantial interest, yet
it is early enough in the process that these insights
are not broadly disseminated. In other words, the
time seems just right for a review of this stream
aimed at a general audience. The purpose of this
article is to provide such a review. Our specic goals
include identifying the major issues this research
is intended to address, explaining the mathematical
framework upon which it is built, highlighting
the central theoretical insights thus far obtained,
describing notable applications (both theoretical
and empirical), and concluding with some thoughts
about open issues and future directions.
The scope of our review includes papers (1)
published in management journals that (2) present
novel mathematical propositions using cooperative
game theory. By adopting this unifying theme, the
scope of our article is manageable, permits a coher-
ent discussion, and allows us to treat key ideas with
a reasonable degree of depth. Moreover, by restrict-
ing attention to management publications, we
provide a sense of the novelty and substance of the
stream within our own eld.2Our intended audience
includes those looking for an overview of the cen-
tral concepts and latest results associated with this
line of work as well as those considering entering
and contributing to it. Therefore, this article is con-
structed to be self-contained within the content con-
straint of a single journal article— the formalism,
relevant assumptions, associated interpretations,
and important results to date are all covered, albeit
concisely, with citations to more in-depth sources
for those interested in pursuing them.
This being a literature review, it is also worth
pointing out that the issues elaborated below were
the product of a discovery process: theorists built
models that seemed sensible; based on these mod-
els, formal propositions were proven; mathemati-
cal claims led to insights about value capture under
competition in the real world; these insights led to
a grasp of the kinds of issues that the dominant
2Unfortunately, this scope does imply, on the one hand, passing
over a number of thought-provoking,qualitative papers in strategy
that adopt ideas from cooperative game theory and, on the other
hand, ignoring potentially interesting papers published in other
elds (most notably, economics). Stuart (2001) provides an early
precursor to this article.
paradigms missed. This article proceeds in reverse
order: we summarize the (now) apparent issues;
then, we present the formalism and trace the line
of results derived from it; this should spark insights
in the reader regarding value capture under compe-
tition; which, cumulatively, should lead to a deeper
understanding not only of this line of work but also
to new questions for future inquiry.
A MOTIVATING EXAMPLE
To provide context for our survey, it is useful to
begin not with the literature but with an example
that motivates value capture theory and the contri-
butions it can make. The example is intended to
be illustrative rather than the model of a specic
strategic situation.
Status quo conguration
Any formal model of an industry usually starts
with a benchmark or what we will call a status
quo conguration upon which changes can be
compared. For our example, suppose there is an
industry that consists of value networks composed
of some nite numbers of agents. By “value
network” we mean a collection of agents connected
to one another via chains of transactions that, taken
together, ultimately result in the production of
economic value. The network includes all agents
involved in the production of value, from the most
upstream resource providers all the way down
through the nal consumer. An example of a value
network would be the agents engaged in the Apple
mobile computing ecosystem, including those who
provide platform elements, mobile carriers who
provide access to communications and the Internet,
app developers, the content providers and the
consumers and end-users themselves. The Apple
value network competes with others built around
Samsung, Google, etc.
Suppose there are exactly two such networks,
Aand B. Further, assume that— adding up the
utility enjoyed by end-users and subtracting all
of the economic costs associated with creating
and delivering the products to those end-users
(including costs relating to the transactions
themselves)— Network Acreates economic value
of $200 million and Network Bcreates economic
value of $180 million. This is the situation depicted
in the rst panel of Figure 1 (Conguration #1).
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 17–41 (2017)
DOI: 10.1002/smj
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