1
Value Creation: A Polysemic Concept

1.1. Introduction

This chapter builds a bridge between mainstream economic theory and strategic management regarding the concept of value. Economics has for a long time been an important source of ideas for developing mainstream strategic management theory. More specifically, industrial economics (known also as industrial organization [IO]) has inspired numerous scholars in strategic management. IO is related to the structure of, and boundaries between, firms and markets. The IO approach is based on economic theory and deals with issues such as competition, rivalry and resource allocation. IO is a branch of economics that emphasizes interdependence that characterizes the firms' decisions in their markets.

"Traditional" insights from economics are closely related with the use of "common" concepts such as value. This chapter is dedicated to a discussion of the concept value and its extension in the field of strategy. The design of this chapter is as follows. We begin by explaining the basics of the notion of value from the economic perspective before developing its main meanings in various contexts.

1.2. The economic concept of value

1.2.1. Back to the basics

The history of economic thought has been concerned with economic value. Economic goods either have use value or exchange value. The use value of a commodity is considered as the direct utility that one receives from its consumption.

"It has reference to the needs which the properties of a commodity as a physical artifact can be employed to cater to" [GID 71]

The exchange value is the quantitative aspect of value, i.e. the quantified worth of one good or service expressed in terms of the worth of another. "Use value" and "exchange value" can be illustrated by the famous "water-diamond" paradox, i.e. that diamonds are naturally more valuable than water not because diamonds are more expensive to produce, but rather because diamonds are more scarce than water.

It is worth noting that this debate remains a key issue in the 2000s and 2010s in the field of marketing and strategic management (see section 1.2.2). As mentioned by [KRA 11]:

"A useful contribution to this debate is Bowman & Ambrosini's (2000) distinction between 'perceived use value' (the subjective value perceived by customers) and 'exchange value' (the bargained price that is paid). The distinction is useful because it emphasizes that the use value of a product/service is a perceived value and that this perceived value may differ from the price that is paid".

Ricardo [RIC 51] and Smith [SMI 81] were the first authors to make a distinction between use-value and exchange-value, focusing their attention on the latter. Then, Marx adopted a Hegelian perspective (based on labor theory) and considered use-value and exchange-value as inseparable dialectical aspects of "the commodity". The neoclassical school [JEV 71, MEN 71, WAL 74] highlighted that value should be determined for each commodity taken separately. The exchange value is considered as a function of use value of the utility of the given commodity. Then, the transformation of value into prices must be done. Value reappears in 20th century economics, as in the expression of "value-adding".

Economists have also developed another concept named "economic rent". Ricardo defined rent as "that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil" Marshall added, "the income derived from the ownership of land and other free gifts of nature is commonly called rent".

Modern economists use the word rent as an "economic surplus or transfer earnings that means the earning of a factor of production in excess of the minimum amount necessary to keep it in its present use". Rents can be generated from resources, innovation advances and/or specific market structure (monopoly rents allowing the company to generate significant and exceptional returns).

Schumpeter [SCH 34] is a key figure on technological innovation and is considered "the prophet of innovation" (an expression used by Thomas McKraw in [MCK 10]). He argued that economic development is driven by innovation through a dynamic process in which new technologies replace the old, a process he named "creative destruction". In Schumpeter's view, "radical" innovations create major disruptive changes, whereas "incremental" innovations continuously advance the process of change. Schumpeter [SCH 34] proposed a list of five types of innovations: new products, new methods of production, new sources of supply, the exploitation of new markets and significant changes in workplace organization and management. Schumpeterian competition drives innovation.

From the Schumpeterian perspective:

"economic logic prevails over the technological" [SCH 34]

"Costs as an expression of the value of other potential employments of means of production constitute the liability items in the social balance sheet. This is the deepest significance of the cost phenomenon" [SCH 34].

1.2.2. The concept of value explained by IO scholars

As it has been mentioned in section 1.1, IO takes into consideration several markets (monopoly, duopoly and oligopoly), product differentiation, incomplete information and various strategic variables (price, advertising, R&D, capacity) in order to have a better understanding of strategic interdependence. IO models, to a large extent, adopt an external perspective to explain how the external environment (government decisions, industry) influences firms' strategic actions and interactions between them. There are different approaches to industrial organization: theories of the firm (transaction cost theory, agency theory and economics of property rights), game theory, etc.

1.2.2.1. The notion of value in game theory

Game theory is a branch of applied mathematics in relation to economics that considers strategic interactions between agents in a context of uncertainty. It is the mathematical approach of IO. Game theory is mainly used for analyzing market structures or the behavior of various players (firms, States, institutions, regulatory authorities, etc.) and formalizing the rivalry that characterizes their relationships or the cooperation processes they want to build. It postulates that agents choose strategies to maximize their payoffs, given the strategies of other agents. Game theory, based on a process of iterations, has been applied to cooperation issue.

Box 1.1. Game theory and strategic management (adapted from [DAI 10])

Games can be non-cooperative or cooperative. In non-cooperative games, players move according to an individualistic behavior, without taking into account the general interest, i.e. they exclusively pursue their own interests.

Cooperative games describe specific situations in which players jointly seek a collectively satisfying solution. In this framework, communication among players is possible. In this field, games are often based on the "cake-sharing" problem, i.e. the allocation of the aggregated outcome that results from a common cooperative action: "core" notion, Nash bargaining solution [NAS 50]. It is about determining an allocation that gives each player (or initial coalition of players) at least the payoff that he might individually obtain through an independent action. Nevertheless, as shown by the classical prisoner's dilemma, players' individualistic strategies make it difficult to implement the cooperative solution. The game's outcome does not always represent the collectively optimal (Pareto optimal) solution. Hence, when that the agreement is closed and each player is sure that the others respect it, he may attempt to unilaterally deviate. This deviation (or treason) strategy enables him to obtain a better payoff than that of cooperation. This phenomenon has been treated with scepticism by game theorists, who wonder whether it is possible to stabilize an agreement when players are free to act.

The solution to implementing the "cooperative" situation, i.e. the situation that improves each player's outcome with respect to the non-cooperative situation, can be to modify the game by introducing a third party that punishes deviations or to consider an infinitely repeated game that might enable players to "self-punish" deviations that are observed at a given game's stage (see, for example, [FRI 71, LAM 98, ABR 88, FUD 86]).

In this vein, the theory of endogenous coalition formation [HAR 83, BAL 00, BLO 95, BLO 96, RAY 97, RAY 99] argues that a stable cooperation/coordination is that to which players spontaneously adhere without constraints or irreversible commitments. Hence, only self-enforcing cooperation/coordination is stable, i.e. it is not threatened by players' unilateral deviations, because it results from players' voluntary adhesions.

The non-cooperative approach to coalition formation thus puts forward the idea that coalitions result from players' decisions rather than from the negotiation of contractual agreements. Hence, each player decides whether to adhere to a cooperative (or to a coordinated...