Where Is Your Firm's Value Going?

Garcia Castro Creates Tool to Measure Value Distribution

30/09/2014 Barcelona

"Incremental Value Creation and Appropriation in a World with Multiple Stakeholders"

How do firms create and distribute value? And how does this impact their stakeholders?

Take the example of Toyota. Between 1980 and 2000, the car manufacturer shared productivity gains with employees and suppliers, adopting a more cooperative approach at that time than many of its competitors. Reciprocity ruled the day. At the same time, Wal-Mart was making headlines for turning truck drivers into millionaires. In the 30 years following its first public offering, the US retail colossus delivered a staggering 200,000% in returns to its shareholders.

To better understand the dynamics that govern how value is created and shared by companies, researchers, including IESE Prof. Roberto Garcia Castro, have constructed a tool called the “Value Creation and Appropriation” (VCA) model. This new tool looks at the trade-offs between different stakeholders – customers, shareholders, government, management, suppliers and employees – over fixed blocks of time.

What differentiates the VCA model from the traditional strategic management approach is that it sees value creation and appropriation not as distinct phases, but rather as intertwined processes.

In their article “Incremental Value Creation and Appropriation in a World with Multiple Stakeholders,” published in Strategic Management Journal, Prof. Garcia Castro and Ruth V. Aguilera explain how the VCA model can be used to identify three distinct types of value distribution.

Distributing Value: Three Scenarios

Focusing on two groups of stakeholders – employees and capital providers – Garcia Castro and Aguilera distinguish three different scenarios based on a company’s VCA “elasticity.” This elasticity is determined by comparing percentage changes in the firm’s value creation and distribution over a set period.

  • VCA neutral: Machinery-maker Lincoln Electric tied employee retribution directly to its productivity in the 1980s and 1990s. When productivity levels dropped, employees experienced the loss far more than capital providers.
  • VCA inelastic: Over the same period, car manufacturers Nissan and General Motors delivered a series of salary increases to their employees. These increases led to a loss in profitability – and clear examples of VCA inelasticity.
  • VCA elastic: Wal-Mart and Toyota are good examples of elasticity during boom times. Toyota’s sustained productivity during the 1980s and 1990s had a positive impact both on employees and on capital providers.

A Conceptual Framework for VCA

Garcia Castro and Aguilera map these three value distribution scenarios to three strategic management theory concepts, or lenses, which help clarify the dynamics at work in each.

1) "Property rights" and VCA neutral: Castro and Aguilera see a tie between VCA neutral models and the theory of property rights: where the owner of a value-generating resource has the right to keep or maintain its value, excluding non-owners from access to it.

2) “Stakeholder power” and VCA inelastic: When property rights are not so clearly defined and employees have a higher degree of bargaining power through capacity for collective action, access to key information, and high replacement or exit costs.

3) "Managing for stakeholders" and VCA elastic: When firms voluntarily invest in stakeholders in order to maintain distributional justice, respect reciprocity and build trust.

The authors describe this conceptual framework as having the advantage of being “quite generalizable, yet directly applicable to empirical settings – as most of the parameters in the VCA model can be estimated using public corporate data.”

More information in IESE Insight