Tuesday, February 13, 2007

Value Creation Theoretical Review

Five significant Entrepreneurship and Strategy theories are described:.

Value Chain Analysis
Porter’s value chain framework (Porter 1985) analyzes value creation at the firm level. Value chain analysis identifies the activities of the firm and then studies the economic implications of those activities. It explores the primary activities, which have a direct impact on value creation, and support activities, which affect value only through their impact on the performance of the primary activities. Primary activities involve the creation of physical products and include inbound logistics, operations, outbound logistics, marketing and sales, and service.
Value can be created by differentiation along every step of the value chain, through activities resulting in products and services that lower buyers’ costs pr raise buyers’ performance. Drivers of product differentiation, and hence sources of value creation, are policy choices (what activities to perform and how), linkages (within the value chain or with suppliers and channels), timing (of activities), location, sharing of activities among business units, learning, integration, scale and institutional factors. Porter and Miller (Porter 1985) argue that information technology creates value by supporting differentiation strategies.

Schumpeterian Innovation
Schumpeter (Schumpeter 1934) pioneered the theory of economic development and new value creation through the process of technological change and innovation. He viewed technological development as discontinuous change and disequilibrium resulting from innovation. Schumpeter identified several sources of innovation (hence, value creation) including the introduction of new goods or new production methods, the creation of new markets, the discovery of new supply sources, and the reorganization of industries.

Resource-based view of the firm
This view builds on Schumpeter’s perspective on value creation and views the firm as a bundle of resources and capabilities: Even in equilibrium, firms may differ in terms of the resources and capabilities they control, and that such asymmetric firms may coexist until some exogenous change or Schumpeterian shock occurs. Hence, RBV theory postulates that the services rendered by the firm’s unique bundle of resources and capabilities may lead to value creation (Penrose 1959). A firm’s resources and capabilities ‘are valuable, if they reduce a firm’s costs or increase its revenues compared to what would have been the case if the firm did not possess those resources.’ (Barney 1997)

Strategic Networks
Strategic Networks are ‘stable interorganizational ties which are strategically important to participating firms. They make the form of strategic alliances, joint ventures, long-term buyer-supplier partnerships, and other ties’ (Gulati 2000). The size of the network and the heterogeneity of its ties have been conjectured to have a positive effect on the availability of valuable information of the participants within that network (Granovetter 1973). Sources of value in strategic networks are enabling access to information, markets, and technologies (Gulati 2000), offering the potential to share risk, generate economies of scale and scope (Katz 1985; Shapiro 1999), sharing knowledge, and facilitating learning (Dyer 1998; Anand BN. 2000; Dyer 2000), and reaping the benefits that accrue from interdependent activities such as workflow systems (Blankenburg Holm 1999). Other sources of value in strategic networks include shortened time to market (Kogut 2000), enhanced transaction efficiency, reduced asymmetries of information, and improved coordination between the firms involved in an alliance (Gulati 2000)

Transaction cost economies
The central question addressed by transaction cost economics is why firms internalize transactions that might otherwise be conducted in markets (Coase,1937). Williamson (Williamson 1983) suggests that ‘a transaction occurs when a good or service is transferred across a technologically separable interface. One stage of processing or assembly activity terminates, and another begins.’ At its core, transaction cost theory is concerned with explaining the choice of the most efficient governance form given a transaction that is embedded in a specific economic context (Amit 2001). Transaction cost economics identifies transaction efficiency as a major source of value, as enhanced efficiency reduces costs. It suggests that value creation can derive from the attenuation of uncertainty, complexity, information asymmetry, and small-numbers bargaining conditions (Williamson 1975). Moreover, reputation, trust, and transactional experience can lower the cost of idiosyncratic exchanges between firms (Williamson 1979; Williamson 1983). In addition to decreasing the direct costs of economic transactions, e-businesses may also reduce indirect costs, such as the costs of adverse selection, moral hazard, and hold-up (Amit 2001).



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Barney, J. (1997). Gaining and Sustaining Competitive Advantage. Reading, MA, Addison-Wesley.

Blankenburg Holm, D., Eriksson, K., Johanson, J. (1999). "Creating value through mutual commitment to business network relationships." Strategic Management Journal 20(5): 467-486.

Dyer, J., Nobeoka, K. (2000). "Creating and managing a high-preformance knowledge-sharing network: the Toyota case." Strategic Management Journal 21(3): 345-367.

Dyer, J., Singh, H. (1998). "The relational view: cooperative strategy and sources of interorganizational competitive advantage." Academy of Management Review 23: 660-679.

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Gulati, R., Nohria, N., Zaheer, A. (2000). "Strategic networks." Strategic Management Journal 21(3): 203-215.

Katz, M., Shapiro, C. (1985). "Network externalities, competition, and compatibility." American Economic Review 75: 424-440.

Kogut, B. (2000). "The network as knowledge: generative rules and the emergence of structure." Strategic Management Journal 21(3): 405-425.

Penrose, E. (1959). The Theory of Growth of the Firm. London, Basil Blackwell.

Porter, M. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York, Free Press.

Porter, M., and Millar, VE. (1985). "How information gives you competitive advantage " Harvard Business Review 63(4).

Schumpeter, J. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA, Harvard University Press.

Shapiro, C., Varian, HR. (1999). Information Rules: A Strategic Guide to the Network Economy. Boston, MA, Harvard Business School Press.

Williamson, O. (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A study in the Economics of Internal Organization. New York, Free Press.

Williamson, O. (1979). "Transaction cost economics: the governance of contractual relations." Journal of Law and Economics 22: 233-261.

Williamson, O. (1983). Organizational innovation: the transaction cost approach. Entrepreneurship. J. Ronen. Lexington, MA, Lexington Books: 101-133.

1 comment:

Chesna said...

You write very well.