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Value Creation, Configuration and Appropriation – Case Study in a knowledge intensive service firm
Fabio Morganti
Dimária Silva E MeirellesUniversidade Presbiteriana Mackenzie
São Paulo/Brazil
Context/Justification• Economic and organizational literatures show that
innovation is a fundamental factor for economic growth for both countries and enterprises.
• Competence to innovate, together with the knowledge itself become the main competitive resources available to the firms. Innovation becomes an essential factor in the pursuit of superior performance by firms (PORTER, 1986, 1989; TIDD, 2001, CHANEY & DEVINNEY, 1992; FREEMAN, 1994).
• Also well explored the fact that not rarely the innovator firms end up not collecting meaningful returns from their technological leadership position (TEECE, 1986).
• Problem even worse when we consider the service business compared to the manufacturing sector.
Context/Justification• Thus, considering that knowledge and innovation
become necessary strategies for obtaining and sustaining competitive advantage as well as are fundamental drivers to company performance (BONTIS, 2002b, 2001; PORTER, 1986, 1989; FREEMAN, 1994), and, on the other hand, investments in innovation per se do not guarantee the expected results by innovators, it becomes relevant understanding the strategies and processes adopted by companies aiming at creating, configuring and appropriating the value generated by their innovations (WINTER, 2006).
Context �Justification• Our view: many of the problems of value creation,
configuration and appropriation can be solved by business model. However business model literature still does not present a clear foundation on such relations.
• Thus, this study throws light on the relations among the business model elements and the value process.
• Additionally, by analyzing the processes of value creation, configuration and appropriation in the service sector, this study presents new elements on the existing literature gap on value appropriation in this important economic sector.
Objectives• General Objective:
o Identify the processes of value creation, configuration and appropriation adopted by a knowledge intensive service firm, as well as the elements of its business model.
• Specific Objectives:
oDiscuss the elements of the value process (creation, configuration and appropriation) of the researched firm.
oDiscuss the processes of value creation, configuration and appropriation of the researched firm and their relation with the researched firm business model configuration.
Methodology• Qualitative exploratory case study, due to:
oPhenomenon under analysis with few empirical studies.
oEvaluate the phenomenon and its boundaries within the reality of its context (YIN, 2006).
oMethod allows obtaining general information about the phenomenon from the informant point of view.
oNo immediate concern with statistical generalization of findings, but with contextual relation to the analyzed theory (TRIVIÑOS, 1987).
o Data analyzed through content analysis technique.
Analyzed company – PDC• PDC (Process Development Corporation) Brazil is a
knowledge intensive medium sized multinational consultancy and service provider firm.
• PDC was founded in US in 1988 and is established in Brazil since 1999 providing services in the areas of Manufacturing, Supply Chain Management, Engineering, Quality Systems, Storage and Movement Logistics as well as Information Systems.
• Employees: 250 (Brazil, 2012)
• In 2013, PDC had operations in the following countries:
o United Stateso Canadao México
o Brazilo Chinao Europe (Commercial Office)
Analyzed company• PDC service portfolio in Brazil:o Controlled Shippingo LEP - Label Error Proofingo Inspectionso Reworkso Quality Workshopso Lean Manufacturing Consultingo Cost Reduction Programso Tooling Trackingo Global Sourcing Program
o QSB (Quality System Basics)o Representation for Foreign Supplierso Sub-assemblieso Teams of Quality Engineerso Supplier Developmento Tooling Inventoryo Operations Management
• PDC customers in Brazil:
Literature Review - Value• Within business management literature, we find several
conceptions of value according to specific contexts:
• For Porter (1986, p. 38), in the context of firm competitiveness, value is:o “the amount that buyers are prone to pay for what is offered by
the firm. Value is thus measured by the total income, which, at its turn, is a reflex of the price practiced by a firm and the number of units that this company may sell at such price… Creating Value for the buyers that exceed the direct cost is the target of any generic strategy.”
• For Ito et al. (2012),in the context of RBT (Resource Based
Theory), value is considered an attribute of the firm’s resource, that is, valuable is the resource that allows the firm to develop and implement strategies that improve firm’s efficacy, allowing superior results or still cost reduction with the maintenance of quality level.
Literature Review - Value• On their turn, Kaplan e Norton (1997), present an
operational concept based in the ontological representation of value:
• In this study, with the objective of identifying the value elements in the context of the business model of the analyzed firm, we adopted Kaplan and Norton (1997) operational definition of value once it presents the elements that constitute the value construct allowing for a prompt analysis of the case in matter.
Literature Review – Value Creation
• Two models of value creation were considered in the study. The first is the model of Use Value, Companies Activity and Value Creation proposed by Ito et al. (2012).
• These authors propose a model in which the value created is a function of the difference between the value perceived by firm’s customers in the offered products and/or services and the value acquired by the firm from its suppliers. Such difference (value created) is a result of firm’s internal processes and management capabilities.
Literature Review – Value Creation• The second model used is presented by Amit and Zott
(2001). It was developed based on a study of value creation in e-business firms. However, many of the concepts raised by the authors are pertinent to firms that are not e-business specific. Authors identify four value drivers: efficiency, novelty, complementarity and lock-in.
Literature Review – Value Configuration
• Stabell and Fjeldstad (1998) propose, three generic models of value configuration:
• Value Chain: the technology involved is of long productive chains in which value is added by transformation of production inputs and components into final products.
• Value Shop: involves intensive technology and value is added by tailored resolution of unique problems.
• Value Network: involves mediating technology, value is added by the validation or promotion of access to direct or indirect exchange means among companies and customers.
• The authors defend that their value configuration typology is more suitable to service companies since the traditional value configuration model by Porter is more suited for industrial activities and is not able to capture well processes related to value creation and configuration in service.
Literature Review – Value Configuration
Value Chain Value Shop Value Network
Value Creation LogicTransformation of inputs
into products
(Re)solving customer
problemsLinking customers
Primary Technology Long-linked Intensive Mediating
Primary Activity
Categories
Inbound Logistics
Operations
Outbound Logistics
Marketing
Service
Problem finding and
acquisition
Problem solving
Choice
Execution
Control/Evaluation
Network promotion and
contract management
Service provisioning
Infrastructure operation
Main Interactivity
Relationship LogicSequential Cyclical, Spiralling Simultaneous, Parallel
Primary Activity
InterdependencePooled, Sequential
Pooled, Sequential,
ReciprocalPooled, Reciprocal
Key Cost DriversScale
Capacity Utilization
Scale
Capacity Utilization
Key Value Drivers ReputationScale
Capacity Utilization
Business Value
System StructureInterlinked chains Referred shops
Layered and
interconnected networks
Generic Value Configuration Models. Source: Stabell and Fjeldstad (1998, p. 415).
Literature Review – Value Appropriation
• For Schumpeter (1942) appropriation of innovation results is a crucial question to the capitalist economic system. This reflection is a result of Schumpeter’s proposition that the temporary monopoly provided by innovations defines the possibility of superior economic returns within the capitalist system.
• In such context, the possibility of exploring such temporary monopoly defines the stimulus required by investors in order to invest and maintain the economic growth of firms and nations.
• Arrow (1962) provides his Model of Innovation Incentives in which Arrow proposes the analysis of appropriability using the contribution of a conceptual “perfect patent” whereby investor could make its rights prevail effectively, fastly and with no costs. Such “perfect patent” allows the analysis of benefits of a specific innovation through the comparison of situation a priori
and a posteriori the introduction of the innovation.
Literature Review – Value Appropriation
• Teece (1986), points that it is common for innovators to regret the fact that competitors and/or imitators end up earning most profits related to new products and processes.
• Teece (1986) published a seminal article on the theme of appropriability of innovation in which he presents the PFI framework (Profiting From Innovation Framework).
• The PFI framework is considered a watershed in the discussion of appropriability and a fundamental model linking two fields of interest in management studies: innovation and strategy.
• The PFI framework explains that distribution of the results of innovation is related to three factors: appropriability regime, complementary assets and dominant design paradigm (TEECE, 1986).
Literature Review – Value Appropriation
• Appropriability regime refers to the environmental factors, excluding firm and market structures, that mold the ability that an innovator has to capture the profits generated by an innovation. Two dimensions are important for the definition of an appropriability regime: nature of technology and efficacy of appropriability mechanisms.
• The nature of technology in Teece’s PFI framework is related to the degree in which a technology may be easily imitated by competitors. Tacit knowledge, for example, is hard to imitate. Technologies which imply high degree of tacitness may be protected through industrial secret mechanism.
• Nature of technology also moderates the efficacy of Legal appropriability mechanisms, as shown in Levin et al. (1987) Use of appropriability mechanisms varies greatly according to the industry and/or sector analyzed.
Literature Review – Value Appropriation
• For Teece (1986) a strong appropriability regime presents both efficacy of appropriability mechanisms, i.e.: Legal protection system is favorable to the concession and protection of intellectual property rights, and the technology itself (its nature) is protectable through Legal intellectual property mechanisms.
• On its turn, a weak appropriability regime in general presents both a Legal system unfavorable to the innovative firms, as well as a technology nature that is not protectable through intellectual property rights.
• For Teece (1986), the development of a dominant design (per Kuhn’s notion of scientific evolution) presents risks to the innovator in cases where the technology is easily imitable and the imitator improves the imitation with small design changes, mainly in case such imitation occurs in the phase of definition of a dominant design.
Literature Review – Value Appropriation
• Teece (1986), goes beyond the issue treated by him as exogenous on the appropriability regime, brings the seminal insight that the successful commercialization of an innovation requires, in general, that the technology or know-how represented by this innovation is used in conjunction with other assets or capabilities, which are referred to, by the author, as complementary assets.
• Examples of complementary assets are found in the various "services" of business activity such as manufacturing, marketing, sales activity and aftersales support. In cases where the innovation is part of a system (is a component of a system), additional assets can be other parts of the system. But, as Teece (1986) argues, even in case of autonomous innovations (ie.: not dependent on other products to be sold), some complementary assets and capabilities will be needed for such innovations to reach the market.
Literature Review – Business Model• Osterwalder et al. (2005) propose the following business
model concept:o “A business model is a conceptual tool containing a set of
objects, concepts and their relations aiming at demonstrating the business logic of specific firm. It is a description of the value a firm offers to one or more customer segments, its architecture, its partnership network and relational capital used to create, market and deliver this value, as a form of generating profitable and sustainable income sources.” (OSTERWALDER et al., 2005, p. 17-18).
• For these authors, the business model concept may be seen as a conceptual link involving strategy, business organization and the systems used in the business. In this sense, it is a translation of conceptual entities, such as business structure, into concrete elements as departments, unities, human resources or business processes into workflow charts, hierarchy/responsibility charts, etc.
Literature Review – Business Model
Element Description
Value PropositionDescribes the package of products and services which create value for a
specific Customer Segment.
Customer
Segments
Defines the different groups of people or organizations that a company
seeks to reach and serve.
ChannelsDescribes how a company communicates and reaches its Customer
Segments to deliver a Value Proposition.
Customer
Relationship
Describes the types of relationships that a company establishes with
specific Customer Segments.
Key ResourcesDescribes the most important resources required to make a business model
work.
Key ActivitiesDescribes the most important actions a company must take to run its
Business Model.
Key PartnersDescribes the network of suppliers and partners who put the Business
Model to work.
Cost Structure Describes all the costs involved in the operation of a Business Model.
Revenue StreamRepresents the cash that a company generates from each Customer Segment
(costs must be subtracted from income to generate profit).
Business Model Elements. Source: Adapted from Osterwalder and Pigneur (2010)
Results – Value• PDC seeks to create value for its customers through a high
quality service, superior, in general, in quality than the offered by its competitors. It has also a clear concern with the development of technological competence as one of the key differentiators of the company, which underlie its offer of a high quality service.
• It was highlighted the importance of service management for PDC and the importance of communication, both between the PDC and its clients, as well as between the senior management of PDC and mid-level leadership.
• Also importance of image/reputation, especially as a factor of risk reduction to the contractor and as a reference to the firm's services.
Results – Value• We found a strong focus of the researched firm in
presenting a differentiated service based both in attributes (quality, technological expertise, better communication), as well as using its image (reputation) and a differentiated relationship based on value and long-term vision. This is in accordance with the definition of value by Kaplan and Norton (1997), which highlights that value can be created exactly on these questions (attributes, image and relationship).
Value Construct. Source: Kaplan and Norton (1997).
Results – Value Creation• Per Ito et al. (2012) value model, we found that PDC, by
seeking to create value in these three elements, adds “use value” to its clients through its activities. While PDC competitors simply provide operational labor, PDC adds final “use value” through its activities and processes.
• We verified also that PDC has elements of value creation present in Amit and Zott (2001) model:
Value Creation Source Activity PDC Example
Novelty New Transaction StructuresUse of web for communication and client
monitoring
Efficiency Information SymmetryReal time communication between upper
management and mid-level leaders
Lock-in Transaction Cost Risk reduction with high quality assured service
Complementarity Inter ActivitiesGlobal and local support structures
Full service provider (desing, execution)
Value Creation Sources Analysis using Amit and Zott (2001) Model. Source: Prepared by the authors.
Value Creation Sources Analysis by Amit and Zott (2001) Model.
Results – Value Creation
Results – Value Configuration• According to Stabell and Fjeldstad (1998) typology, PDC is
classified as a Value Shop, ie., a company whose logic of value creation/configuration is based on understanding and solving the problems of its clients. Furthermore, analyzing the remaining features of a Value Shop, we found that PDC meets most of those features.
Value Chain Value Shop Value Network
Value Creation LogicTransformation of inputs
into products
(Re)solving customer
problemsLinking customers
Primary Technology Long-linked Intensive Mediating
Primary Activity
Categories
Inbound Logistics
Operations
Outbound Logistics
Marketing
Service
Problem finding and
acquisition
Problem solving
Choice
Execution
Control/Evaluation
Network promotion and
contract management
Service provisioning
Infrastructure operation
Main Interactivity
Relationship LogicSequential Cyclical, Spiralling Simultaneous, Parallel
Primary Activity
InterdependencePooled, Sequential
Pooled, Sequential,
ReciprocalPooled, Reciprocal
Key Cost DriversScale
Capacity Utilization
Scale
Capacity Utilization
Key Value Drivers ReputationScale
Capacity Utilization
Business Value
System StructureInterlinked chains Referred shops
Layered and
interconnected networks
Generic Value Configuration Models. Source: Stabell and Fjeldstad (1998, p. 415).
Results – Value ConfigurationCharacteristics
(Value Shop)Quotes
Value Creation Logic
(Customer Problems
Resolution)
"the need these big automakers to close "gaps "... General Motors Brazil identified the need to manage
trouble Suppliers"
"Because obviously the service has to be associated with customer's need"
"So we need to understand what is the duration of the project, what the level of customer requirementis,
at times we understand that the need is so great that we need to consider some investments that we will
have to do throughout the project to maintain this level of customer requirement"
Primary Technology
(Intensive)
"PDC has a portfolio of products and specialties more linked to engineering than quality, development of
layout for machinery, where PDC ends up developing complete manufacture projects, it takes care of
all manufacturing, including performing maintenance in automatic cells, welding equipment, and
everything else. It would really be a service without limit"
Key Value Drivers
(Reputation)
"We'd rather do than run the project than run the risk of delivering service with low quality"
"When we see that we will not be able to assist the customer in full, we talk to our customer, we
apologize, but we end up not accepting the challenge of doing a job where we have any doubt that the
service is going to work "
Business Value
System Structure
(Referred Shops)
"If you leave it in your client's mind that you perform that activity well, when he needs he will consult
you"
Value Configuration Analysis based on Stabell and Fjeldstad (1998). Source: Prepared by the authors.
Results – Value AppropriationAppropriability Regime
• PDC does not use Legal protection mechanisms, especially with respect to the patent system. Reasons are consistent with PDC’s nature of the service and technology, as pointed out by Levin et al. (1987), i.e.: nature of technology, and especially characteristics of the service sector, moderate the effectiveness of Legal appropriation mechanisms.
• PDC uses contractual mechanisms to protect the service projects, but claims that contractual mechanisms are usually ineffective.
• The company identified losses due to the low possibility of appropriation as a result of a weak appropriability regime (due to both, the nature of its service portfolio, as well as the inefficacy of Legal mechanisms as the patent system, industrial secret, and even contractual mechanisms).
Results – Value AppropriationAppropriability Regime
• Another appropriability issue identified the competition from former employees, especially those of higher technical and leadership levels (i.e., those with greater access to confidential information and to internal PDC processes).
• Also with respect to this issue the respondent expressed skepticism regarding the Legal protection provided by non-competing agreements.
“[with respect to non-competition from employees] We ... If you put a
contract for a professional, it is very difficult, you know, under
Brazilian law ... Any contract is signed, then they can be very easily
overlooked when the employee who says he is performing the
activity to survive, that he is unemployed... Then we learned that it
is totally ineffective. Making this type of contract.”
Emphasis added.
Results – Value AppropriationDominant Design Paradigm
• This element emphasizes the risk of imitation in a critical period for firms: the moment of exchange of technological paradigms (TEECE, 1986).
• The researched firm, being directed toward the development of new methods and processes is more vulnerable at a time of paradigm shift, since in such moments there are opportunities for competitors (followers) which may quickly match the leader offer, especially considering the regime of weak appropriability mentioned in the previous item.
• Thus, the weak appropriability regime may prevent the company of bringing items of its portfolio because they are more sensitive due to a paradigm shift. This could explain the fact that PDC offers a more limited service portfolio in Brazil, when compared to that existing in its headquarter
Results – Value AppropriationComplementary Assets
• The analysis demonstrated that the strength of PDC regarding value appropriation is related to its complementary assets.
• In line with the arguments of Teece (1986), the successful marketing of PDC services requires that the technology or know-how embodied in service is used in conjunction with other assets or capabilities, which are referred to, by the author, as complementary assets, so that the firm may appropriate a portion of the value it generates.
• This is highlighted by the respondent when he underscores the importance of image/reputation as one of the key elements of PDC proposal for value creation. Beyond reputation, other complementary assets also stand out as key features in PDC’s value proposal, namely: Management Capability (mainly upper management), Presence in other Markets (support of a multinational structure) and the use of web in its control system.
Results – Value AppropriationComplementary Assets
• Thus, the analysis provided the understanding that the process of appropriation of the analyzed firm is dependent almost exclusively on its complementary assets, since the appropriability regime is weak and the characteristics of the service provided by PDC make unfeasible a dominant design, but rather a cyclic service, project-based, which accentuates the problem of imitability and increases the potential losses within such weak appropriability regime.
• On the other hand, the position held by PDC in terms of distinctive complementary assets, allows it to appropriate a portion of the value created, despite this unfavorable appropriability regime.
Results – Value AppropriationBusiness Model (BM)
• The result of this analysis, on the one hand confirms the previous analysis on PDC value system, and, on the other, brings new elements that contribute to the discussion on its value system.
• Despite the fact that labor is vital for any service company, the analysis of the PDC business model seems to indicate that labor itself, does not constitute a key resource for PDC (at least from the standpoint of value creation and appropriation).
• PDC Operational labor has a low potential of distinctiveness, which would allow relatively ease imitability. This seems to make sense if we consider one of the problems cited in the appropriability analysis: Inefficacy of Legal protection provided by non-competing agreements and the Brazilian Labor Legal System.
Results – Value AppropriationBusiness Model (BM)
• PDC considers its upper Management Capability as its differential in terms of labor. According to our analysis, PDC’s management capability is one of the key resources that differentiates PDC from its competitors and even allows PDC to submit faster responses to client’s needs and allow closer monitoring of service performance.
• Thus, the operational labor per se appears in the PDC Business Model as a cost factor. On the other hand, PDC’s upper management capability is presented in Model Canvas as a key resource for PDC.
• Reputation/image emerges as a key resource for PDC BM supporting two of its BM value propositions: Reliability and Risk Reduction for the client. Moreover, reputation also supports the Trust based Relationship, another point identified in the analysis within the BM “Customer Relationship” element.
Results – Value AppropriationBusiness Model (BM)
• Other key resources which complete this element (Key Resources) in PDC BM are “Multinational Structure” and “Control System based on the Web”.
• Multinational Structure supports BM value proposition “Support Local and Global”, whereby PDC seeks to maintain a value based relationship with its clients.
• Web based control system, besides upporting the value propositions “Reliability”, and “Risk Reduction for Client”, also provides grounding to the BM element “Customer Relationship”, supporting a value based relationship and a trust based relationship.
Canvas Business Model. Prepared by authors based on Osterwalder and Pigneur (2010).
Limitations and Suggestions
• The use of a single case and also the fact that data were collected from a single respondent are important limitations imposed by the aforementioned choices.
• Suggestions are made for further empirical analysis of the relationship between the value creation, configuration and appropriation process and business model configuration, both in terms of how this phenomenon occurs in multiple contexts, as well as the implications for firms in different sectors, with different sizes and with different origin of capital.
Thanks for listening!!
• Fabio MorgantiPhD candidate at Universidade Presbiteriana Mackenzie (São Paulo/BR).E-mail: [email protected]
• Dimária Silva E MeirellesMaster and PhD in Industry and Technology Economics at Universidade Federal do Rio de Janeiro (UFRJ)Adjunct Professor at Universidade Presbiteriana Mackenzie (São Paulo/BR).E-mail: [email protected]
