The choice of value-based strategies under rivalry: Whether to enhance value creation or bargaining capabilities

Abstract

The value-based perspective emphasizes the importance of both value creation and bargaining for firm performance. While formal theoretical work has focused on value creation strategies, empirical evidence suggests that substantial performance differences also arise from heterogeneity in bargaining. We develop a model where rival firms choose value-based innovation strategies to enhance either value creation or bargaining capabilities. We show a tendency for homogeneous strategy choices, with coordination on bargaining promoting firm value capture at the expense of overall industry value creation. We identify conditions for strategic heterogeneity, wherein a firm that enhances its bargaining capability risks the sustainability of its competitive advantage. Our model incorporates a natural distinction between incremental and radical value-creating innovations, which influences the risk-return tradeoffs faced by firms in their strategies. A critical strategy choice for a firm's management is where to focus innovation efforts. Should it be on increasing the value the firm creates with other players, or on enhancing the firm's ability to bargain for a greater share of existing value creation? We develop a theory to inform such choices among rival firms. We show that there can be opportunities for rival firms to enhance their performance by coordinating innovation efforts on bargaining rather than on a race for value creation. However, the ability to coordinate on bargaining is undermined when value-creating innovations allow firms to disrupt extant market structures, in which case the pursuit of high-risk, high-return value-creating innovations may become attractive to individual firms even at the expense of overall industry profitability.