Value Creation

A process of making valuable outputs through inputs is known as Value creation process.
Efficiency and productivity are two important aspects of this process. Bowman and
Ambrosini (2000) define two different types of value at organization level: ‘Use value and
Exchange value’. According to them, use value indicates to certain quality of new task, job,
service or product interpreted by its users according to their needs, such as meeting the
demand, work efficiency on new task or salient features of new products and services. As
Bowman and Ambrosini (2000) argue that such features are subjective and specific to
individuals. Second type of value was named as ‘exchange value’, which can be defined as
the monetary amount in exchange of products and services.
Therefore, degree of new value development would depend on the subjective assessment of
novelty and appropriateness of the new task, product or service being considered by a target
customer. The greater the perceived uniqueness and suitability of the product, task or service
under usage, greater will be the exchange and use value to the user.

Factors Determining Capturing Value:

Organizations that generate new value will either lose it or have to share it with other
stakeholders on micro and macro organization level such as competitors, society or
employees (Coff, 1999; Makadok & Coff, 2002). In order to determine which party captures
the new value created, two key concepts such as: competition and isolating mechanisms,
operate across all levels of analysis. The development of appropriate and innovative jobs,
products or services will often result in a situation where supply is low and demand is high.
As a result of competition (increased supply) is the decrease in exchange value (price) to the
point that supply meets the demand. At this juncture, fractions of value creation will be
shared with other competitors who will provide end users with same product or service. Thus
creating a situation, for original source, where use value is high but exchange value is low. It
would be hard for competitors as well to retain the value as end users will be the beneficiary
of lower prices. Further, it has to be taken into consideration that competition will not only be
limited to organization, but will likely to extend through all macro and micro level in order to
analyze the value capturing process for the original creator.

Therefore, encouraging firms to be more innovative with its products and services by which
they can attain more value throughout this creative and destructive process of high
competition in the market. As a consequence, the diversity of activities, goods, and services
generated by continuous innovation provides a stable base of jobs, education, tax aid,
community service, and the like also promotes societal growth and development (Scherer &
Ross, 1990; Schumpeter, 1942).

However, in some situations, competition is not so intense and supply does not meet the
demand that results in potential of capturing greater value by the creator. In order to explain
how these situations work, another factor known as: ‘isolating mechanism’ is introduced. It is
defined as a mechanism in which any information, physical or legal obstacle that might
prevent a rival from replicating the new job, product or service that generates use and
exchange value for creator. Essentially, isolating mechanisms work across levels of analysis
to restrict the slippage of value, allowing value creator to capture the majority of the value
created. Such mechanism increases the potential bargaining power of the source that creates

BME Assignment# 2 Shah Hussain 1901824

the value and allows it to retain as well. However, the nature of the isolating mechanism may
be quite different at different levels of analysis. Table below will give us the picture of
relationship between value creation processes, value capture process and value slippage.

Source: Lepak, D., Smith, K., & Taylor, S., 2007, Value creation and value capture.

Value Slippage

Value slippage that is, when the party creating the value does not retain all the new value that
is created occurs when use value is high while exchange value is low. Slippage obviously
provides little incentive for a source to continue creating value in the long term. Things which
can be proven fruitful to avoid value slippage are given below:
 Management Define and implement on policies through which
organization can capture maximum value out of their
resources.
 Novelty of Unique production technology which gives advantage over
Technology competitors.
 Knowledge Tacit knowledge of workers within organization through
which tasks can be performed with effectively and
efficiently.
 Resources Unique and intangible resources that are not easy to
replicate or attain also help to avoid value slippage.
 Supply & Demand Effective supply chain network always meet the demand
and supply, which helps to capture the value without
slipping it.

References:
 Lepak, D., Smith, K., & Taylor, S., 2007. Value creation and value capture: A
multilevel perspective, Academy of Management Review, 32, 180-194

BME Assignment# 2 Shah Hussain 1901824