Value Creation and Value Capture with Frictions

52 Pages Posted: 25 Jun 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: March 30, 2011


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.

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

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: or

Olivier Chatain

HEC Paris - Strategy & Business Policy ( email )

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


Peter B. Zemsky (Contact Author)

INSEAD - Strategy ( email )

Boulevard de Constance
77305 Fontainebleau
+33 1 60 72 4162 (Phone)
+31 1 60 74 5500 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

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