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Value Creation and Value Capture with Frictions


Olivier Chatain


University of Pennsylvania - Management Department

Peter B. Zemsky


INSEAD - Strategy; Centre for Economic Policy Research (CEPR)

March 30, 2011

INSEAD Working Paper No. #2011/46/ST/ACGRE

Abstract:     
We use a formal value-based model to study how frictions in the product market affect value creation and value capture. We define frictions as incomplete linkages in the industry value chain that keep some parties from meeting and transacting. Frictions, which arise from search and switching costs, vary across markets and over time as, for example, products commoditize and competition becomes more global. Importantly, frictions moderate the intensity of industry rivalry, as well as the efficiency of the market. We find that firms with a competitive advantage prefer industries with lower levels of frictions than their disadvantaged rivals. We show that the impact of rivalry on industry attractiveness cannot be analyzed independently of other competitive forces such as barriers to entry and buyer bargaining power. We introduce resource development in our model to study the emergence and sustainability of competitive advantage. Firm heterogeneity emerges naturally in our model. We show that the extent of firm heterogeneity falls with the level of frictions, but sustainability increases. Overall, we show that introducing frictions makes value-based models of strategy even more effective at integrating analyses at the industry, firm and resource levels.

Number of Pages in PDF File: 52

Keywords: Value-based Strategy, Biform Games, Industry Analysis, Rivalry, Barriers to Entry, Firm Heterogeneity, Sustainable Competitive Advantage, Formal Modeling

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Date posted: June 25, 2009 ; Last revised: December 26, 2011

Suggested Citation

Chatain, Olivier and Zemsky, Peter B., Value Creation and Value Capture with Frictions (March 30, 2011). INSEAD Working Paper No. #2011/46/ST/ACGRE . Available at SSRN: http://ssrn.com/abstract=1424950 or http://dx.doi.org/10.2139/ssrn.1424950

Contact Information

Olivier Chatain
University of Pennsylvania - Management Department ( email )
The Wharton School
3620 Locust Walk, SHDH 2000
Philadelphia, PA 19104-6370
United States
1 215 746 3122 (Phone)
1 215 898 0401 (Fax)

Peter B. Zemsky (Contact Author)
INSEAD - Strategy ( email )
Boulevard de Constance
77305 Fontainebleau
France
+33 1 60 72 4162 (Phone)
+31 1 60 74 5500 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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