Toward a Dynamic Notion of Value Creation and Appropriation in Firms: The Concept and Measurement of Economic Gain

68 Pages Posted: 26 Jun 2015

See all articles by Marvin B. Lieberman

Marvin B. Lieberman

UCLA Anderson School of Management

Natarajan Balasubramanian

Syracuse University - Whitman School of Management

Roberto Garcia‐Castro

IESE Business School

Date Written: June 22, 2015

Abstract

The notion of “value creation” is central to strategy, but its exact meaning is often unclear. Confusion arises because value creation can be reasonably defined in two different ways: (1) as the total economic value created by a firm within a specific interval of time, and (2) as the change in this value over longer intervals. To formalize the latter notion of value creation, we introduce the concept of economic gain, defined as the increase in economic surplus generated by the firm between one time period and another. We discuss the advantages of this concept and show that economic gain can arise through innovation and improvement or through the growth and replication of a superior firm. We complement these discussions with a formal measurement framework that quantifies economic gain from innovation and its distribution among stakeholders, including the firm’s shareholders, managers, employees, suppliers, and customers. As an empirical illustration, we apply the framework to compare value creation and distribution by Southwest Airlines and American Airlines between 1980 and 2010.

Keywords: value creation, value distribution, stakeholders, economic gain

JEL Classification: M10

Suggested Citation

Lieberman, Marvin and Balasubramanian, Natarajan and Garcia-Castro, Roberto, Toward a Dynamic Notion of Value Creation and Appropriation in Firms: The Concept and Measurement of Economic Gain (June 22, 2015). Available at SSRN: https://ssrn.com/abstract=2518636 or http://dx.doi.org/10.2139/ssrn.2518636

Marvin Lieberman

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Natarajan Balasubramanian (Contact Author)

Syracuse University - Whitman School of Management ( email )

United States

Roberto Garcia-Castro

IESE Business School ( email )

Camino del Cerro del Aguila, 3
Madrid, Madrid 28023
Spain

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