Value-Based Strategy with Frictions

36 Pages Posted: 28 Feb 2009 Last revised: 26 Dec 2011

See all articles by Olivier Chatain

Olivier Chatain

HEC Paris - Strategy & Business Policy

Peter B. Zemsky

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

Date Written: February 25, 2009

Abstract

We extend the formal literature on the value-based foundations of strategy, an approach which seeks to integrate industry-level and firm-level analyses of superior performance. The value-based approach starts with the set of players in an industry value chain and their value creation possibilities based on heterogeneous resources and capabilities and it then links these elements to the performance (value capture) of individual firms. While the received theory assumes frictionless interactions and perfect rivalry, there is a long tradition in strategy that explores the effect of imperfect competition on firm performance. To incorporate imperfect competition, we add a simple friction parameter into value-based analysis that moderates the degree of rivalry in the market, as well as adding a parameter for barriers to entry. We then analyze a variety of classic issues in competitive strategy. We show that the effects of rivalry and barriers to entry on industry attractiveness cannot be analyzed independently. Firm heterogeneity emerges naturally in our setting and depends on the degree of frictions. We find that firms with a competitive advantage prefer industries with lower levels of frictions than their disadvantaged rivals. Overall, we show that introducing frictions makes value-based strategy even more effective at providing an integrated approach to industry-level and firm-level analyses.

Keywords: value creation and value capture, biform games, industry analysis, friction, rivalry, barriers to entry, firm heterogeneity, formal modeling

Suggested Citation

Chatain, Olivier and Zemsky, Peter B., Value-Based Strategy with Frictions (February 25, 2009). Atlanta Competitive Advantage Conference Paper. Available at SSRN: https://ssrn.com/abstract=1350384 or http://dx.doi.org/10.2139/ssrn.1350384

Olivier Chatain (Contact Author)

HEC Paris - Strategy & Business Policy ( email )

1, rue de la Libération
Jouy-en-Josas Cedex, 78351
France

HOME PAGE: http://www.olivierchatain.com

Peter B. Zemsky

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)

London
United Kingdom

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