Toward a dynamic notion of value creation and appropriation in firms: The concept and measurement of economic gain

Abstract

Research Summary: “Value creation” is central to strategy. Even so, confusion arises because it can be defined in different ways, e.g., as the sum of producer and consumer surplus in a given time period, or as the change in surplus over time. To formalize the latter notion, we introduce the concept of economic gain, defined as the increase in total surplus. Economic gain can arise through innovation or when a superior firm displaces competitors. We provide a firm‐level measurement framework to quantify economic gain and its distribution among stakeholders, including the firm's shareholders, employees, suppliers, and customers. As an empirical illustration, we compare the creation and distribution of economic gain by Southwest Airlines and American Airlines between 1980 and 2010. Managerial Summary: Most managers and the business press regard “value creation” as the increase in shareholder wealth represented by a rise in corporate profit or stock price. A broader conception of value creation goes beyond shareholders to include the value that is distributed to additional stakeholders of the firm, including employees, suppliers, and customers. We develop a mathematical framework that allows this broader notion of value creation and distribution to be assessed and quantified in many cases. We illustrate the framework using historical data on Southwest Airlines and American Airlines over 3 decades.