Natalie Mizik & Robert Jacobson

Trading Off Between Value Creation

and Value Appropriation: The
Financial Implications of Shifts in
Strategic Emphasis
Firms allocate their limited resources between two fundamental processes of creating value (i.e., innovating, pro-
ducing, and delivering products to the market) and appropriating value (i.e., extracting profits in the marketplace).
Although both value creation and value appropriation are required for achieving sustained competitive advantage,
a firm has significant latitude in deciding the extent to which it emphasizes one over the other. What effect does
strategic emphasis (i.e., emphasis on value creation versus value appropriation) have on firm’s financial perfor-
mance? The authors address this issue by examining the effect that shifts in strategic emphasis have on stock
return. They find that the stock market reacts favorably when a firm increases its emphasis on value appropriation
relative to value creation. This effect, however, is moderated by firm and industry characteristics, in particular, finan-
cial performance, the past level of strategic emphasis of the firm, and the technological environment in which the
firm operates. These results do not negate the importance of value creation capabilities, but rather highlight the
importance of isolating mechanisms that enable the firm to appropriate some of the value it has created.

arketing strategy is concerned with creating sus- costs, advertising, and network externalities, for example,

M tained competitive advantage, which in turn leads to

superior financial performance. Two processes,
which combine and interact, are fundamental to achieving
are isolating mechanisms that are central considerations to
marketing managers.
Firms are faced with the strategic task of balancing the
this outcome. The first process involves the creation of cus- two processes in their marketing strategies and determining
tomer value (i.e., innovating, producing, and delivering an adequate amount of support for each. Firms need to
products to the market); the other focuses on appropriating simultaneously develop or acquire value creation capabili-
value in the marketplace (i.e., extracting profits). Value cre- ties and capabilities that facilitate value appropriation. These
ation is a cornerstone of marketing. The marketing concept two sets of capabilities require substantial resource commit-
identifies the customer as the primary focus and the force ments and management attention. The task of allocating lim-
that defines the scope and the purpose of a business enter- ited organizational resources between value creation and
prise. It postulates that for an organization to achieve an value appropriation capabilities necessitates strategic priori-
advantage, it must create superior value for its customers tizations and trade-offs. As such, we define strategic empha-
(Drucker 1954). sis as the relative emphasis a firm places on value appropri-
Value creation alone, however, is insufficient to achieve ation relative to value creation. A fundamental issue facing
financial success. A second necessary process involves a managers is deciding how a firm chooses to compete (Day
firm’s ability to restrict competitive forces (e.g., erect barri- 1994). Strategic emphasis is a central aspect of this choice.
ers to imitation) so as to be able to appropriate some of the Research in marketing has extensively explored how
value that it has created in the form of profit. Indeed, firms acquiring resources and skills and developing different
have little incentive to engage in value creation in the capabilities affects financial performance (see, e.g., the
absence of “isolating mechanisms” that prevent the immedi- meta-analysis by Capon, Farley, and Hoenig [1990]).
ate dissipation of profits associated with a value creating ini- Although less study has been directed toward assessing the
tiative (e.g., an innovation). Firms that do not have the capa- relative benefits of emphasizing one capability over another,
bilities to restrict competitive forces are unable to prior research has highlighted various types of strategic and
appropriate the value they have created. Instead, competitors tactical trade-offs that firms make. For example, Porter
and customers will claim it (Ghemawat 1991). Factors as (1996) considers the trade-offs involved in positioning
varied as reputation and brand effects, customer switching strategies, Miles and Snow (1978) propose alternative strate-
gic archetypes, Boulding and Lee (1992) address the issue
of marketing mix specialization versus diversity, and Ettlie
Natalie Mizik is assistant professor, Graduate School of Business, Colum- and Johnson (1994) note the trade-off between focusing on
bia University. Robert Jacobson is Evert McCabe Distinguished Professor
customers and processes. Although the inherent trade-off
of Marketing and Transportation, School of Business, University of Wash-
ington, Seattle. between value appropriation and value creation capabilities
has been acknowledged (e.g., March 1991), research to date

Journal of Marketing
Vol. 67 (January 2003), 63–76 Value Creation and Value Appropriation / 63
has not explored what effect strategic emphasis has on finan- sumer surplus, and other firms (competitors and noncom-
cial performance. Our study addresses this issue by examin- petitors) will get a portion of it through profits stemming
ing the effect shifts in strategic emphasis (i.e., the emphasis from imitation and development cost savings (Mansfield et
on value appropriation versus value creation capabilities) al. 1977).
have on stock return. Considerable variation exists across innovations as to
Our analysis makes use of movements in the {[advertis- the proportion of the surplus captured by each of the major
ing expenditures – research and development (R&D) expen- players. The polio vaccine is perhaps the most extreme
ditures]/assets} ratio as an indicator of shifts in strategic example of an innovation that created tremendous societal
emphasis. Although other factors also influence value value, but where the innovator did not appropriate any sur-
appropriation and value creation, movements in this mea- plus. Jonas Salk did not patent the vaccine (stating a desire
sure can be expected to provide information about shifts in not to personally profit from it) but rather wished the vac-
strategic emphasis related to value appropriation versus cine to be disseminated as widely as possible. As such, con-
value creation. That is, increases in the ratio will tend to be sumers claimed the entire surplus from the innovation.
associated with increased emphasis on value appropriation, Even firms with a desire for profit often do not profit
and decreases in the ratio will tend to be associated with from their innovations. For example, the CT scanner was
increased emphasis on value creation. Empirically, we find invented by EMI Ltd., but the firm’s inability to profit from
that the stock market reacts favorably when a firm increases the innovation led to its takeover around the same time the
its emphasis on value appropriation rather than on value cre- inventors were receiving the Nobel Prize in Medicine. Com-
ation. However, this effect is moderated by firm and indus- petitors and consumers claimed the surplus generated by the
try characteristics, in particular, financial performance, the innovation. However, it is the hope of realizing profits that
past level of strategic emphasis of the firm, and the techno- motivates firms to innovate. Indeed, countless examples
logical environment in which the firm operates. These exist in which a firm captured considerable surplus from its
results do not negate the importance of value creation capa- innovation. Dupont with Teflon, G.D. Searle with
bilities, but rather highlight the importance of isolating NutraSweet, Microsoft with Windows, and Pfizer with Via-
mechanisms that enable the firm to appropriate some of the gra, for example, were all able to appropriate a substantial
value it has created. proportion of the societal value created by their innovations.
As such, both value creation and value appropriation
capabilities are required for achieving sustained competitive
Value Creation and Value advantage (Figure 1). A firm, however, has significant lati-
Appropriation tude in deciding the extent to which it emphasizes one set of
Firms engage in innovative activities that lead to creation of capabilities as opposed to the other. They both shape the
societal value, that is, the total social surplus arising from firm’s competitive advantage (Ghemawat 1991; Rumelt
the difference between the utility that consumers derive 1987). Value creation influences the potential magnitude of
from the product and the costs of producing it. The societal the advantage; value appropriation influences the amount of
value will end up being captured by three major players in the advantage the firm is able to capture and the length of
the market: The innovating firm will appropriate some of the time the advantage persists. Because firm value depends on
societal value it has created in the form of economic profit, both the magnitude and the persistence of advantage, both
the customers will claim a portion of it in the form of con- processes influence financial performance. As such, they

FIGURE 1
Marketing Strategy and the Sustainable Competitive Advantage Framework

Marketing Strategy

Superior
Customer-
Value Creation
Capabilities
Organizational Sustainable Superior
Competitive Financial
Advantage Performance
Value
Appropriation
Capabilities

64 / Journal of Marketing, January 2003

both complement and serve as imperfect substitutes for each Technology in the Value Creation Process
other.
Schumpeter (1942, p. 132) discusses value creation activi-
Strategic Emphasis: Trading Off Between Value ties as “to reform or revolutionize the pattern of production
Creation and Value Appropriation Capabilities by exploiting an invention, or more generally, an untried
technological possibility for producing a new commodity or
Firms divide their limited resources and attention between producing an old one in a new way, by opening up a new
the two fundamental processes of creating and appropriating source of supply of materials or a new outlet for products,
value. As a result, trade-offs occur between developing by reorganizing an industry.” As such, value creation uses
customer-value creation capabilities and developing value various organizational resources and encompasses a wide
appropriation capabilities. A firm is forced to prioritize its range of activities. Yet it is the innovations resulting from
resources between these alternative uses according to the R&D that have received the most attention as a cornerstone
way it has chosen to compete. of value creation. Firms engage in R&D and build techno-
At one end of the spectrum, a firm may choose to com- logical capabilities to generate superior products and
pete primarily on the basis of value creation. It constantly improvements in the production and distribution processes.
moves ahead and innovates as competition erodes the prof- A firm uses its technological capability to build a new solu-
its from its previous initiatives. Alternatively, a firm can tion and to answer and meet new needs of the users
choose to fiercely defend its position in the market against (Gatignon and Xuereb 1997).
competition by erecting barriers to imitation through, for Value is created both through product innovations used
example, brand-based advertising. In this case, a firm by firms and/or households and through process innovation
attempts to lengthen the time its advantage persists. (Mansfield et al. 1977). An extensive literature in econom-
Most companies avoid the extremes and strive to choose ics, stimulated by the work of Solow (1957), has docu-
a strategy that balances sufficient support for value creation mented a significant positive effect of R&D on economic
efforts with adequate investments in capabilities that facili- growth and productivity. Some of the estimates from initial
tate the appropriation of value. Yet differences in strategic research in the area serve as useful benchmarks. For exam-
emphasis exist among firms. Although industry characteris- ple, Denison (1962) reports that approximately 40% of the
tics shape the options available to the firm, even within the total increase in per capita national income was attributable
same industry, firms will take different courses of action to technological change and conjectures that about one-fifth
reflected in different levels of strategic emphasis. of this amount stemmed from “organized R&D.” Mansfield
Consider, for example, ethical drug companies. Value and colleagues (1977) estimate the median social return to
creation, such as the development of new drugs, is central to R&D at 56%. Although estimates vary, Griliches (1995)
success for firms in the industry. However, companies vary notes that all recent studies of R&D continue to report sig-
in the degree to which they emphasize value creation rela- nificant social returns from it.
tive to value appropriation. For example, as the patent pro- A great deal of interest has been devoted to the gap
tection for a drug ends and generic clones enter the market, between the societal value created and the profits appropri-
many firms discontinue support for the drug and focus on ated by the innovating firm. At issue is that the returns real-
new innovation and the remaining patent-protected prod- ized by the innovating firm may bear little relation to the
ucts. Alternatively, other drug companies place more commercial success of the product or process it introduces.
emphasis on value appropriation. For example, Johnson & In theory, patents provide a solution to the problem of
Johnson uses an umbrella brand for its products and suc- imperfect appropriability. However, in practice, patent pro-
cessfully competes with generic drug manufacturers on the tection has proved to offer only limited effectiveness. Com-
basis of superior brand image after the patent protection petitors can “invent around” the patent. Levin and col-
expires. leagues (1987) report that managers view other mechanisms
as much more effective than patents in appropriating the
returns from innovation (e.g., in only 4% of the industries
Operationalizing Strategic surveyed did managers view patent protection as highly
Emphasis effective). In particular, marketing activities, such as adver-
Various organizational resources and capabilities (i.e., tech- tising, were viewed as central isolating mechanisms and far
nological, financial, physical, legal, human, organizational, more effective than patents in capturing advantages gener-
informational, and relational) influence value creation and ated by R&D activities.
value appropriation. Most resources cannot be exclusively Advertising in the Value Appropriation Process
classified as pertaining just to value creation or to value
appropriation: They influence both. Just as there does not exist a single organizational factor that
Yet two elements have been consistently highlighted in uniquely defines value creation, no single capability or
prior research as central to the value creation and value activity determines a firm’s ability to appropriate value.
appropriation processes. That is, a firm’s technology capa- Several different capabilities give rise to isolating mecha-
bilities driven by R&D expenditures have been linked to nisms and influence the length of time a firm is able to earn
value creation, whereas a firm’s ability to differentiate its economic profits. Accumulated assets, as varied as a loyal
offering through advertising has been linked to value customer base and network externalities, serve as isolating
appropriation. mechanisms and influence the ability of competitors to dis-

Value Creation and Value Appropriation / 65

sipate a firm’s advantage. One key component of value the substantial empirical literature highlighting the effect of
appropriation capability that is of particular concern to mar- R&D on economic activity, advertising expenditures have
keting managers relates to the effects of advertising. not been systematically linked to value creation. For exam-
Two polar views exist with respect to the role of adver- ple, Ashley, Granger, and Schmalensee (1980) conclude that
tising as an isolating mechanism. One view argues that advertising does not lead to increased economic activity, but
advertising is anticompetitive (i.e., erects barriers to imita- rather follows it. This lack of association is consistent with
tion by differentiating the firm’s offering). The opposing the premise that a substantial amount of advertising is not
view regards advertising as procompetitive, in that it pro- directed at creating value, but rather toward other goals, in
vides information that serves to dissipate competitors’ iso- particular, value appropriation.
lating mechanisms. Although the debate of the aggregate
competitive effect of advertising is likely to be never- An Indicator of Strategic Emphasis
ending, both views suggest that a firm’s advertising will
improve its position by either lengthening its value appro- Within organizations, different projects and applications
priation opportunities or reducing the value appropriation compete for the same scarce resources. In this internal com-
opportunities of its competitors. petition for resources, the most essential and strategically
Of these two, the first—the ability of advertising to dif- appropriate applications win. Resources end up concen-
ferentiate a firm’s offering from that of competitors—has trated in the areas of the greatest perceived importance.
received the most attention (Chamberlin 1933). This ability Consequently, the strategy of a company is revealed in the
is one of the central features governing brand strategy. For allocation choices and the trade-offs it makes between the
example, Aaker (1996) notes that a brand can serve as the different possible applications of its resources. Indeed, past
foundation for meaningful differentiation, especially in con- research (e.g., Harrison et al. 1991, 1993; Ittner, Larcker,
texts in which brands are similar with respect to product and Rajan 1997; Ramaswamy 1997) has used resource allo-
attributes. A brand can be a formidable barrier to imitation, cation patterns to depict the underlying strategies of the
making it difficult for competitors to copy and dissipate a organization.
firm’s advantage. As such, brand-based differentiation Because advertising tends to have a greater association
serves to prolong a firm’s advantage and is frequently used with value appropriation efforts and R&D has greater asso-
as an entry deterrence strategy (Bunch and Smiley 1992). ciation with value creation, we expect the following indica-
Indeed, the often-cited Advertising Age (1983) study tor of strategic emphasis, which we label S9 to be correlated
reports that of 25 leading consumer brands of 1923, 19 still with strategic emphasis:
remained leaders 50 years later. Although the length of time
this stability actually lasts is subject to question (Golder ˜ ˜ = advertising expenditures it − R & D expenditures it .
SE it
assets it
2000), few question the durability of advantage enjoyed by
well-established brands. This durability stems not from the Positive scores represent companies that have relatively
product attributes, which are typically readily imitable, but stronger commitment to value appropriation–based market-
from the differentiation sustained by advertising. Indeed, ing strategies and negative scores represent companies that
Golder (2000) highlights advertising as one of the key fac- have relatively stronger commitment to value creation–
tors that separates market share leaders that maintain their based strategies. Intertemporal increases in the S9 indicator
advantage from those that do not. For example, in contrast will tend to depict an increasing emphasis on value appro-
to American Chicle, which attempted to maximize short- priation, whereas decreases in the indicator will depict shifts
term profits by minimizing marketing expenditures, Wrigley toward greater emphasis on value creation. Because factors
invested in building its brand through a commitment to other than R&D and advertising affect strategic emphasis, it
advertising.1 is possible that the S9 measure is only a weak indicator (i.e.,
Empirical evidence regarding the effect of advertising the signal-to-noise ratio will be low). If this is the case,
on value appropriation capabilities (e.g., the persistence of analysis based on S9 will be biased toward zero, and tests
profits) is sparse but consistent. The empirical results sug- will have low power in uncovering a statistically significant
gest a significant positive effect of advertising on persis- effect. However, given the prominent role played by R&D
tence of profits (e.g., Kessides 1990; Mueller 1990). These and advertising in influencing strategic emphasis, we have
findings reinforce the view that excess returns erode more reason to believe that shifts in S9 will indeed be indicative
slowly for firms advertising heavily. Thus, firm advertising of shifts in strategic emphasis. Analysis of S9 characteristics
facilitates value appropriation because it extends the dura- appears to support this view.
tion of competitive advantage. We observe that the S9 indicator exhibits significant
This is not to suggest that no advertising creates value. variation across different industries, among firms in the
Rather, our contention is that the association of advertising same industry, and over time for the same firm. For exam-
with value creation is substantially weaker than the associa- ple, for the period 1980–99 the mean S9 for publicly traded
tion between R&D and value creation. Indeed, in contrast to firms in food industries (i.e., Standard Industrial Classifica-
tion [SIC] codes 2000–2099) is .091. This indicates greater
1Golder (2000) also notes Underwood’s inability to sustain its relative reliance on value appropriation capabilities. For
place in the typewriter market as a result of a failure to innovate. instruments (i.e., SIC codes 3800–3841), the S9 mean of
Again, this highlights the need for firms to invest in both value cre- –.099 indicates greater relative emphasis on value creation
ation and value appropriation capabilities. capabilities. The difference in the indicator is consistent

66 / Journal of Marketing, January 2003

with the importance technology plays in these industries. In Stock Return as a Measure of the Long-Term
high-technology industries, such as instruments, the success Financial Performance
of a company depends crucially on its ability to constantly
innovate and stay ahead of the competition in developing The economic return to a marketing strategy is not attained
new technologies or introducing new products. For firms in typically in a single reporting period, but rather is realized
low-technology industries, such as food, the importance of over a long-term time horizon. Yet most of the research in
research and technology is not as pertinent. marketing assessing strategic decision has involved mea-
However, even within a given industry, firms will choose sures such as sales, accounting return on investment, or mar-
different ways of competing, and this will manifest itself in ket share, whose current value provides, at best, an incom-
a different level of strategic emphasis. For example, consid- plete picture of the value of a strategy. An alternative is to
erable variation in the S9 measure exists for firms in the make use of stock market data, which provide the financial
pharmaceutical industry (SIC code 2834). The historical markets’ estimate of the total expected value of the strategy.
mean of S9 for Johnson & Johnson (–.026) lies close to the A firm’s marketing strategy can be viewed as an intan-
industry mean of –.036. This can be compared with .083 for gible asset that influences future returns (Srivastava, Sher-
Bristol-Myers Squibb. At the other end of the spectrum is vani, and Fahey 1998). The value of the strategy can be rep-
Genentech with a mean S9 of –.136. These differences resented as the excess future returns generated by the firm
reflect the different emphases firms place on value creation when this particular strategy is employed. As such, the value
compared with value appropriation in their strategies. of a marketing strategy to the firm can be depicted as a dis-
Strategic emphasis will also change for a given firm over counted present value of the future cash flows generated
time to reflect a change in strategy. Consider Figure 2, through the use of this marketing strategy:
which plots the S9 measure for Intel for the period 1982–98. ∞

∑ (1 + r) ,
CFt
Late in 1991, in response to increased competitive pressures (1) Vi =
t
from Advanced Micro Devices and C&T, Intel launched its t =1

“Intel Inside” campaign. The campaign marked a shift in where Vi is the present value of marketing strategy (i), CFt
strategy for Intel to bolster its brand attributes. We show in is cash flow at time period t generated as a result of the use
Figure 2 that the S9 measure captures Intel’s shift to of marketing strategy (i), and r is the cost of capital.
enhancing value appropriation capabilities. Although Intel In practice, it is virtually impossible to estimate the
maintained an emphasis on value creation capabilities (i.e., value of a marketing strategy with this formula. Although
S9 is negative for the entire period), the measure shows a the measure of Vi is not available, under the efficient mar-
definite positive drift associated with the execution of the kets hypothesis, abnormal stock return (the difference
“Intel Inside” campaign and the shift in emphasis toward the between the actual and expected return, given the market
development of value appropriation assets. and firm risk characteristics) will provide an unbiased esti-
mate of the change in Vi. Given efficient markets, all avail-
The Financial Implications of the able information about future cash flows is incorporated into
the current stock price. When an unanticipated change in
Trade-Off Between Value Creation strategy occurs, the markets react, and the new stock price
and Value Appropriation reflects the long-term implications such change is expected
Our research goal is to assess the financial effect generated to have on future cash flows. As such, abnormal stock return
by shifts in emphasis between value creation and value provides an estimate of the difference in market value of the
appropriation and to address the conditions under which firm before and after the change in marketing strategy
these shifts might have differential performance implica- occurs. Therefore, it can be used as an estimate of the long-
tions. To capture the long-term financial impact (i.e., the term financial value that results from a shift in marketing
total expected value), our analysis focuses on the effect of strategy.2
strategic emphasis on the stock market valuation of the firm.
Testing for the “Information Content” of Strategic
Emphasis
FIGURE 2 We seek to assess the extent to which changes in strate-
Strategic Emphasis Indicator for the Intel gic emphasis are associated with long-term financial perfor-
Corporation 1982–98 mance. We do so by examining the information content of
strategic emphasis (i.e., whether changes in the S9 series are
Year associated with stock return). A significant relation would
indicate that investors view these changes as signaling
’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98
0
–.02 2Although market anomalies exist, they tend to be rare and
–.04 short-lived. As such, particularly for analysis based on a large num-
~~
SE –.06 ber of firms across a long time period, the efficient markets
–.08 hypothesis appears to be a good approximation for the functioning
1991
–.1 “Intel Inside” campaign begins of the financial markets. Even those who question the overreliance
–.12 on the efficient markets hypothesis (e.g., De Bondt and Thaler
1985) agree that it is a good starting point.

Value Creation and Value Appropriation / 67

changes in the discounted future cash flow of the firm. That The null hypothesis is that α2 = 0, which would imply
is, stock prices move because investors change their expec- that the indicator of strategic emphasis has no incremental
tations of the future cash flows because of factors associated information content. That is, the financial markets perceive
with information contained in the measure. the measure to provide no information about future earnings
Early work in the area of assessing information content, beyond that reflected in current-term earnings. The alternate
for example, in accounting, focuses on the role of changes hypothesis is that α2
0, which implies that stock market
in accounting variables such as size-adjusted earnings. More participants perceive the change in the strategic emphasis
recent work (e.g., Aaker and Jacobson 1994, 2001; Barth et indicator to contain information (incremental to that
al. 1998) has begun to investigate the role of nonfinancial reflected in current-term accounting business performance)
variables, such as brand attributes. These studies seek to test about future cash flows.
for incremental information content, that is, the degree to In this study, we are particularly concerned with investi-
which a series provides added explanatory power to current gating the opposing elements of the alternative hypotheses
earnings information in explaining stock price movements. of α2 > 0 and α2 < 0, that is, whether a shift in strategic
Assessing the incremental information content of strate- emphasis toward value appropriation versus value creation
gic emphasis can take place by regressing stock returns on has a positive or a negative effect on expectations of future
changes in accounting business performance and changes in cash flows. Although increasing either value creation or
strategic emphasis. That is, estimating the following model:3 value appropriation capabilities should enhance firm perfor-
(2) StkRit = α0 + α1∆ROAit + α2∆S9it + εit, mance, the effects of shifts in emphasis between the two
have not been examined previously.4
where StkRit is the stock return for firm i at time t, ∆ROAit
is the change in accounting business performance, ∆S9it is
the change in our indicator measure of strategic emphasis, Differential Response to Shifts in
and εit is the error term. Because stock market efficiency Strategic Emphasis
implies that investors react only to unanticipated changes, The effect of strategic emphasis on market value may not be
we define changes in the measures as deviations of the series constant across firms. Rather, investors may have a differen-
from what could have been predicted on the basis of past tial response to shifts in strategic emphasis under different
information. These deviations are typically operationalized conditions. In particular, the response may vary systemati-
as the residual from a time series forecast model. cally with (1) situational factors regarding the firm and (2)
Equation 2 reflects that accounting measures supply the type of environment in which the firm is operating.
information about current and future-term financial perfor-
mance. This effect is captured by α1 (commonly known as The Situation of the Firm
the “earnings response coefficient”), which depicts the stock
market response to unanticipated changes in accounting Market response can vary depending on the situation of the
information. However, accounting indicators are limited in firm. One key difference among firms is profitability. Com-
their ability to capture completely the expected net cash peting hypotheses about the moderating effect of profitabil-
flow from the future opportunities facing the firm. Do ity exist. One view emphasizes exploiting opportunities
investors view shifts in a firm’s strategic emphasis as pro- when they arise. Under this view, firms with positive unex-
viding additional information about these opportunities and pected earnings should focus on locking in their advantage
their impact on the firm’s future cash flows? through a shift to greater emphasis on value appropriation.
By the same logic, firms in a weaker than expected financial
position would be better served by emphasizing value cre-
3Differences in firm return stem not only from differential ation capabilities (i.e., they are not creating sufficient value
changes in expected cash flows but also from differences in risk. to justify increased investments in value appropriation).
That is, riskier firms earn higher returns. Historically, differences However, an alternative view emphasizes the dissipation of
in risk have been controlled by modeling the systematic risk of the profits. Under this view, firms cannot rest on their past suc-
firm, as reflected by its beta. More recent work (Fama and French cess. Firms should not focus on sustaining existing advan-
1992, 1996) has expanded on this single-factor capital asset pricing
model by allowing risk to depend not only on beta but also on size
and “book-to-market” factors. Fama and French (1992) find that 4Other studies (e.g., Erickson and Jacobson 1992) have exam-
after the role of size (as modeled by log[market value]) at the start ined the separate effects of advertising and R&D on stock return.
of the period and book-to-market equity (as modeled by the Comparing response coefficients from this type of model would
log[book value/market value]) at the start of the period are result in our testing different effects than what we are trying to
accounted for, estimates of beta are unrelated to firm stock return. assess in our analysis. In particular, this approach would not only
To control for these risk factors, our model also includes log(book capture shifts in emphasis (as does our S9 measure) but also depict
valuet – 1/market valuet – 1) and log(market valuet – 1). Because the market reaction to changes in total expenditures. Consider a simple
effect of these factors may vary depending on economic condi- example to see how the analyses differ. A firm spends equally on
tions, we allow their effect to differ over time (i.e., we allow for R&D and advertising. It doubles both activities, which results in a
differential effects by year). By including these factors in the substantial change in both variables. In contrast, the S9 measure
model, we control for the different types of risk, and as such, our would exhibit no change, because the firm’s strategic emphasis has
analysis is based on abnormal (i.e., risk adjusted) return. The remained the same despite the doubling of expenditures. By being
model also includes (1) annual dummy variables so as to capture a difference, (advertising – R&D)/assets relates exclusively to a
the effects of economywide factors and (2) industry dummy vari- firm’s shift in emphasis; separate analysis of advertising and R&D
ables to capture industry-specific effects. does not.

68 / Journal of Marketing, January 2003

tages, which is often futile, but rather on creating new nology as a key characteristic differentiating industries. He
advantages at a faster rate than the old advantages are being defines high-technology industries as those in which new
eroded by competition (Grant 1991). As such, a firm in a product development is the critical element of interfirm
superior financial position needs to prepare for the eventual competition. These industries tend to be characterized by
dilution of its existing advantages by focusing more on high R&D intensity, changing products, and long-term hori-
value creation projects. zons for achieving a payback. He contrasts this with stable-
The firm’s existing strategic emphasis may also moder- and low-technology industries in which the final product has
ate the stock market response to shifts in strategic emphasis. historically remained much the same. Competition is more
The concept of path dependency advanced in evolutionary functional and strategic than in high-technology industries.
economics postulates that the strategic choices a firm made That is, firm performance, for example, is based more on the
in the past shape its current strategic position and, as such, improvement of the existing product and processes and on
the viability of future choices. That is, the stock market enhanced marketing efforts. Research and development is
response to an unanticipated strategy change (∆SEit) may be still important, but it is likely to be less intensive and focuses
moderated by the past strategic choice (SEit – 1). However, more on product improvement and cost reductions than on
the theory is not clear regarding the direction of the effect. new product development.
Diminishing marginal returns hypothesis suggests that firms One hypothesis is that value creation capability is more
with high levels of value creation capability would receive important in environments in which technology is changing
less gain from expanding their value creation capabilities (i.e., in high-technology industries). A firm cannot stem the
and firms with high levels of value appropriation capability tide of innovation and constantly must adopt new technolo-
would receive less gain from expanding their value appro- gies and create new products to be successful. Conversely,
priation capabilities. Conversely, Lei, Hitt, and Bettis (1996) value appropriation capability is more important in stable-
argue that as a firm’s skills become more specialized, they and low-technology industries. Here, there is less opportu-
may produce expertise that is difficult for the competitors to nity for value creation, and firms must work to sustain their
imitate and, therefore, may become a source of competitive advantages. This suggests that increasing emphasis on value
advantage. Thus, firms with high levels of value creation creation capability is more important in high-technology
emphasis should further enhance their value creation capa- markets than in stable- and low-technology markets. This
bilities, and firms with high levels of value appropriation suggests differences in magnitude (or even in sign) for the
emphasis should continue to enhance their value appropria- estimates of α20 among the technology environments.
tion capabilities. An alternative view stemming from the literature on imi-
Allowing for this type of differential response can be tation suggests that, even for the high-technology firms, the
achieved by modifying Equation 2 to allow for systematic vari- ability to capitalize on innovations is at least as important as
ation in α2 depending on unanticipated ROA and the past level the ability to create new value. Levin and colleagues (1987)
of strategic emphasis. That is, estimating a model of the form find that it is relatively easy and at least 35% cheaper for
competitors to replicate an innovation than to develop it.
(3) StkRit = α0 + α1∆ROAit + α2∆S9it + εit
The majority of typical unpatented innovations can be imi-
with tated within a year, and major patented innovations within
three years. However, it is not easy and cheaper to imitate
α2 = α20 + α21∆ROAit + α22S9it – 1
superior reputation or brand image. Because patents do not
yields the estimating equation provide adequate protection in many high-technology indus-
tries, firms are forced to seek other ways to restrict com-
(4) StkRit = α0 + α1∆ROAit + α20∆S9it + α21∆ROAit ∆S9it
petitors from dissipating their profits. Thus, even in high-
+ α22S9it – 1∆S9it + εit. technology industries, firms should engage in development
of value appropriation capabilities. Testing for differential
The coefficient α21 depicts the extent to which unantici-
effects of technological environment can be achieved by
pated ROA moderates the effect of strategic emphasis on
estimating separate regressions for the different technologi-
stock return. A value of α21 > 0 would indicate that firms in a
cal environments and then testing whether the coefficients
weak (strong) financial position are better suited by empha-
differ among them.
sizing value creation (value appropriation). A value of α21 < 0
would indicate that firms in a weak (strong) financial position
are better served by emphasizing value appropriation (value Data Source
creation). The coefficient α22 depicts the moderating effect of
past strategic emphasis on the stock market response to an The data set used in our analysis comes from the Standard
unanticipated shift in strategic emphasis. Values of α22 < 0 & Poor’s 1999 COMPUSTAT database. This database pro-
would support the diminishing marginal returns hypothesis; vides annual accounting and stock market information for
values of α22 > 0 would support the specialization hypothesis. publicly traded firms on the New York, American, and
Nasdaq stock exchanges. The sample of companies used in
The Role of the Technological Environment the analysis is restricted to manufacturing companies report-
ing their market value, R&D expenditures, advertising
Differences in market response can be posited to stem not expenditures, assets, and net income. Table 1 provides a list
only from firm-specific factors but also from industrywide of the industries included in our study and classifies them
characteristics. Chandler (1994) highlights the role of tech- into the high-, stable-, and low-technology subsamples. To

Value Creation and Value Appropriation / 69

 TABLE 1
Industry Affiliation: High-, Stable-, and Low-Technology Groups

High-Technology Group Stable-Technology Group Low-Technology Group

Pharmaceuticals Chemicals Food and tobacco

Computers Rubber and plastic Textile
Electronics Fuel Apparel
Instruments Industrial machinery Paper and forest
Semiconductors Aircraft Furniture and fixture
Telecommunications Automotive Building materials
Electrical equipment
Metal
Miscellaneous manufacturing
Source: Chandler (1994) and Chan, Martin, and Kensinger (1990).

ensure correspondence between the stock price and account- Rather, consistent with the time series models showing that
ing information, an additional requirement that companies ROA exhibits persistence, a shock to ROA will not dissi-
have a December fiscal year is used. Our data sample con- pate immediately but is likely to persist over several years.
sists of observations from 566 different firms reporting for The greater the persistence of a ROA shock, the larger is
all or some of the period 1980–98. We have a total of 3480 the earnings response coefficient in the stock return equa-
observations available for analysis. In Table 2, we provide tion (Miller and Rock 1985). As such, the market reaction
descriptive statistics for and the definitions of the variables to unanticipated ROA reflects that it provides information
that form the basis of our analysis. not only about the current-term results but also about the
future-term profits.
Table 4 also shows that changes in strategic emphasis
Estimation Results are significantly related to stock return. The positive coeffi-
We first estimate first-order autoregressive time series mod- cient (1.18) means that, on average, investors view increases
els for ROA and strategic emphasis. In Table 3, we present in emphasis on value appropriation coming at the expense of
the estimated models. Following the convention (e.g., Kor- value creation as being positively related to future-term per-
mendi and Lipe 1987), we use the residuals from these mod- formance.7 Because the model accounts for the direct influ-
els as the measures of the unanticipated changes in ROA and ence of unanticipated ROA, this effect is incremental to
strategic emphasis of a firm.5 In Table 4, we present the information contained in accounting returns. Investors per-
results of estimating Equation 4 for our entire sample and ceive strategic emphasis as providing incremental informa-
for the high-, stable-, and low-technology subsamples.6 tion about the future-term prospects of the firm above and
beyond that contained in current accounting returns.
The Full Sample Results However, the total effect of strategic emphasis is not
constant, but rather is evidenced to vary systematically.
In Table 4, the results for the full sample estimation indi-
Although the interactive effect with lagged strategic empha-
cate that unanticipated ROA has a positive (1.58) and sig-
sis (i.e., –.61) is statistically insignificant, the interactive
nificant effect on stock return. The coefficient estimate
effect with unanticipated ROA is positive and highly signif-
greater than 1.0 does not indicate that investors are short-
icant. The positive interactive effect (3.73) indicates that
term oriented in that they overvalue current-term results.
investors view a shift toward value appropriation capability

5The use of a residual, as opposed to the series itself, in a stock

return model follows directly from the efficient markets hypothe- valuet – 1/market valuet – 1) and log(market valuet – 1) measures.
sis. Stock return should exhibit a higher correlation with the resid- Controversy exists regarding how to interpret the coefficients. One
ual series because the raw series includes an anticipated component view is that the estimated effects reflect the mispricing of stocks.
that will be unrelated to stock return. As evidenced by the follow- An alternate view (e.g., that raised by Fama and French [1992]) is
ing correlation matrix, our results are consistent with this efficient that the factors adjust for risk considerations. The overall negative
markets implication: effect of size reflects reduced risk associated with larger firms. The
positive effect of book-to-market reflects risk associated with rela-
Correlation Matrix tive distress. The key for our analysis is not so much interpreting
~~ ~~ the rationale for the significance of the factors, which is an ongo-
StkRetit SEit ROAit ∆SEit ∆ROAit ing debate in finance, but rather controlling for these factors so that
we are able to conclude that shifts in strategic emphasis are not
StkRetit 1.0 associated with stock return merely through risk.
S9it .005 1.0 7An additional effect of ∆S9 , an indirect effect that works
it
ROAit .120 .411 1.0 through ROA, may also exist. We estimate a simultaneous equa-
∆S9it .080 .490 .228 1.0 tions model and find evidence of a positive effect of S9it on ROAit.
∆ROAit .230 .192 .657 .321 1.0 As such, α20 provides a conservative estimate of the impact of
6Although not reported in Table 4, consistent with previous strategic emphasis on stock return because it only assesses the
research, we find significant coefficients for the yearly log(book direct path.

70 / Journal of Marketing, January 2003

as amplifying firm value when a firm is experiencing a pos- appropriation capabilities less positively. Indeed, depending
itive shock to ROA.8 Conversely, when firms experience a on the magnitude of the earnings shock, conditions exist in
negative shock to profits, investors view a shift toward value which investors view a shift toward value creation capabil-

8Another interpretation of this interactive effect, which is obser- higher earnings response coefficients. This interpretation has merit
vationally equivalent, is that ∆S9it moderates the effect of ∆ROAit. in that value appropriation capabilities enhance the persistence of
Firms experiencing increased emphasis on value appropriation have ROA and the magnitude of the earnings response coefficient.

TABLE 2
Descriptive Statistics

Full High-Technology Stable-Technology Low-Technology

Sample Group Group Group

Stock return
Mean .27 .28 .26 .24
S.D. (.87) (.91) (.88) (.69)

ROA
Mean .087 .052 .099 .145
S.D. (.22) (.28) (.19) (.11)
~~
SE
Mean –.024 –.07 –.007 .049
S.D. (.11) (.11) (.10) (.08)

Number of
observations 3480 1288 1770 422

Variable definitions:
shares outstandingit × priceit + dividendsit − shares outstandingit − 1 × priceit − 1
Stock returnit =
shares outstandingit − 1 × priceit − 1

net income before extraordinary itemsit

ROAit =
assetsit

˜ ˜ = advertising expendituresit − R&D expendituresit

SE
assetsit

Notes: S.D. = standard deviation.

TABLE 3
~~
First-Order Time-Series Models for ROA and SE*

Full High-Technology Stable-Technology Low-Technology

Sample Group Group Group

Model: ROAit = ϕ10 + ϕ11 ROAit – 1 + ηit

ROAit – 1 .77** .78** .73** .83**

(64.35) (40.84) (41.99) (28.39)
R2 .57 .59 .51 .71
Number of observations 3563 1324 1808 431
~~ ~~
Model: SEit = ϕ20 + ϕ21 SEit – 1 + µit
~~
SEit – 1 .87** .84** .89** .94**
(88.71) (46.78) (71.06) (47.57)
R2 .76 .64 .78 .88
Number of observations 3563 1324 1808 431
*t-statistics are in parentheses.
**p < .001.
Notes: Each equation also includes (1) annual dummy variables to capture the effects of economywide factors and (2) industry dummy vari-
ables to capture industry-specific effects.

Value Creation and Value Appropriation / 71

 TABLE 4
Stock Market Reaction to Changes in Strategic Emphasis
Dependent Variable: Stock Return*

Full High-Technology Stable-Technology Low-Technology

Sample Group Group Group
~~ ~~ ~~ ~~
Model: StkRetit = α0 + α1∆ROAit + α20∆SEit + α21∆ROAit ∆SEit + α22SEit – 1∆SEit + εiti

Unanticipated ROA 1.58*** 1.36*** 1.80*** 3.09***

(15.26) (9.49) (10.85) (6.45)

Unanticipated strategic 1.18*** 2.01*** 1.50** .91

emphasis (3.54) (3.61) (2.83) (.55)

Unanticipated ROA* 3.73*** 2.79*** 5.37*** –14.77

Unanticipated strategic (6.93) (3.91) (5.93) (–1.42)
emphasis

Strategic emphasist – 1* –.61 6.00** -3.44** –5.80

Unanticipated strategic (–.59) (2.91) (–2.59) (–.91)
emphasis

R2 .20 .26 .22 .43

Number of observations 3480 1288 1770 422
*t-statistics are in parentheses.
**p < .01.
***p < .001.
Notes: Each equation also includes (1) annual dummy variables to capture the effects of economywide factors, (2) industry dummy variables
to capture industry-specific effects, and (3) annual effects for log(market valuet – 1) and log(book value/market value)t – 1 to capture firm-
specific risk factors.

ity as more preferable. This condition exists when unantici- Moderating effects of profitability. The moderating
pated ROA is less than –.32 (i.e., 1.18/3.73). effect of unanticipated ROA on strategic emphasis is posi-
tive for both the high-technology and stable-technology
The Role of the Technological Environment environments. This positive effect indicates that investors
Analysis of the high-, stable-, and low-technology subsam- value a shift toward emphasizing value appropriation capa-
ples reveals both similarities and differences across the three bility when earnings are greater than anticipated. In other
environments. All three samples exhibit positive effects of words, when a firm is doing well, the market wants the firm
unanticipated ROA on stock return. One difference to note to increase emphasis on value appropriation. The moderat-
among the samples relates to the magnitude of the earnings ing effect is larger in stable-technology markets than in the
response coefficient estimates. The estimated effect is low- high-technology sector (5.37 versus 2.79). This is consistent
est for the high-technology sample (1.36), increases for the with the relative role that Chandler (1994) notes innovation
stable-technology sample (1.80), and is highest for the low- plays in these two markets. In stable-technology markets,
technology sample (3.09). Theoretical valuation models where innovation is less central, firms need to place greater
(e.g., Miller and Rock 1985) depict the magnitude of the emphasis on appropriation when the firm has an advantage.
earnings response coefficient to increase the greater the per- Locking in an advantage is still important in high-
sistence of profits and decrease the larger the discount rate. technology markets, but less important than in the stable-
The observed differential effect is consistent with differ- technology markets. The estimated effect is negative for the
ences across the three environments. Shocks to ROA are low-technology firms. However, the size of the standard
more likely to persist and future-period returns are dis- error makes it difficult to isolate the effect or draw
counted less, the less dynamic the environment is. conclusions.
The estimated direct effects of strategic emphasis are Moderating effects of the past strategy. The most dra-
positive and significant for both high- and stable-technology matic difference among industry groupings is for the inter-
markets. Although the estimated coefficients decrease in active effect of unanticipated strategic emphasis with the
magnitude, moving from high- (2.01) to stable- (1.5) to low- lagged level of strategic emphasis. The estimated effect is
(.91) technology markets, a Chow test is unable to reject the positive and significant for high-technology firms (6.00),
hypothesis that the direct effect of strategic emphasis is the negative and significant for stable-technology firms (–3.44),
same across technological environments. Thus, we find no and negative (though insignificant) for low-technology firms
evidence to suggest that value appropriation is any less (–5.80).
important in high-technology markets than in stable- The negative effect is consistent with the proposition of
technology markets. diminishing marginal returns to a high value creation or

72 / Journal of Marketing, January 2003

value appropriation capability emphasis. This finding sug- emphasis with the lagged strategic emphasis is reflective of
gests that in the stable-technology sample, the higher the positive reenforcing or specialization effects. Figure 4
past level of strategic emphasis, the less positive the market graphically represents our findings for the high-technology
reacts to increases in this emphasis. Indeed, for high levels sample. Here, a single optimum solution does not exist.
of strategic emphasis, the effect turns negative. Figure 3 Firms with high orientation on value creation are rewarded
graphically depicts the estimated relation between stock for further emphasis on value creation capabilities. All other
return and strategic emphasis, depending on the previous firms are rewarded for further investments into their value
level of strategic emphasis.9 For the majority of the stable- appropriation capability. A separating point H is estimated at
technology firms, the market reacts positively to emphasiz- advertising intensity – R&D intensity = –.33 (i.e., –2.01/
ing value appropriation capability. However, there exists a 6.00). Movement toward H is viewed negatively by the mar-
threshold value S, such that for S9 greater than S, there is no ket. Movement away from H to the extremes of value cre-
need to increase emphasis on value appropriation capability. ation or value appropriation emphasis (represented by
For those firms, which already have a high emphasis on arrows in Figure 4) is rewarded by the stock market. This
value appropriation capability, its further development has a result suggests two possible sources of competitive advan-
negative effect on stock return. Our results suggest that for tage for the high-technology manufacturing firms: either a
stable-technology firms, there is a single converging equi- high value creation emphasis or a high value appropriation
librium. An optimum point S exists (estimated at advertising emphasis in their marketing strategy.
intensity – R&D intensity = .44, i.e., 1.50/3.44, the numbers
coming from estimating Equation 4). Deviating from point
S has a negative effect on return. Movement toward S (rep- Sensitivity Analysis
resented by arrows in Figure 3) has a positive effect on stock We undertook several tests to assess the sensitivity of our
return. analysis. We found that alternative specifications and
Conversely, for high-technology firms, the positive coef- expanded models did not perform as well or added little to
ficient for the interactive effect of unanticipated strategic the analysis. We tested whether some alternative means of
scaling the advertising–R&D differential for firm size, for
9The result follows directly from taking a first-order derivative
example, dividing by the sum of advertising and R&D
of the estimated Equation 4. That is, we use the coefficient values expenditures, sales, or lagged market capitalization, instead
from Table 4 as the estimated parameters in Equation 4 and take a
partial derivative of the model with respect to ∆S9, while holding of assets, would enhance the information content of the S9
∆ROA = 0. From this, we find a range of S9it – 1, where ∂StkRetit/ measure or lead to different conclusions. Indeed, these alter-
∂∆S9it is positive (i.e., StkRetit increases with increasing ∆S9it) natives generated similar implications (e.g., all showed that
and negative (i.e., StkRetit decreases with increasing ∆S9it). the financial markets react favorably to shifts in emphasis

FIGURE 4
FIGURE 3
Effects of the Directional Change in the Strategic
Effects of the Directional Change in the Strategic
Emphasis on Stock Return Given the Past Level
Emphasis on Stock Return Given the Past Level
of Strategic Emphasis: The High-Technology
of Strategic Emphasis: The Stable-Technology
Sample
Sample
VA
VA
Amount Allocated to Value Appropriation

Positive Effect on
Amount Allocated to Value Appropriation

Stock Return VA = VC line Positive Effect on VA = VC line

~~ (i.e., equivalent allocation Stock Return (i.e., equivalent allocation
SE = .44
to VC and VA) to VC and VA)
S

~~
SE = –.33

H Positive Effect on
Positive Effect on Stock Return
Stock Return
Budget constraint line
Budget constraint line (i.e., the total expenditure on VA and VC)
(i.e., the total expenditure on VA and VC) VC
VC Amount Allocated to Value Creation
Amount Allocated to Value Creation
Notes: Point H represents a separating point ~
because
~ firms tend to
Notes: Point S represents an optimal point ~because
~ firms tend to achieve increased stock return when SE moves away from
achieve increased stock return when SE moves toward .44. –.33.

Value Creation and Value Appropriation / 73

toward value appropriation) and displayed similar or lower operationalized at the business-unit level. These measures
information content than the asset-scaled size adjustment.10 should seek to incorporate factors other than R&D and
We also assessed the presence of feedback effects from advertising that facilitate the processes of value creation and
stock return to strategic emphasis. That is, our results could value appropriation.
stem not from S9 having information content but from firms Another avenue might focus not on trying to measure the
shifting their strategic emphasis in the wake of changes in extent of shifts in emphasis, but rather on isolating events
stock market value. The presence of this type of feedback when a shift occurred and determining whether the event
would induce the correlation between the error in Equation reflected increased emphasis on value appropriation or on
4 and ∆S9it and lead to biased coefficient estimates. We value creation. An event study (i.e., assessing how the stock
found no evidence of such an effect. Although we found that market reacted to these shifts) could then be undertaken.
∆ROAit influences ∆S9it, we observed no feedback effects Future work in the area could also explore the potential
from stock return to strategic emphasis that would lead to role of other moderating factors (e.g., economic conditions,
biased estimates in Equation 4. cross-cultural differences, stage of the company life cycle,
Because the market response to shifts in strategic the effectiveness of patent protection). Indeed, a host of fac-
emphasis may also depend on factors other than those we tors other than those included in our model can generate a
modeled, we tested some additional possible moderating nonlinear or even nonmonotonic stock market response to
factors. For example, the anticipated component of ROAit shifts in strategic emphasis. One approach would be to
(i.e., the predicted value from the univariate return on invest- undertake threshold analysis to isolate different regimes in
ment model), rather than just unanticipated ROA (i.e., which the effect of strategic emphasis on financial perfor-
∆ROAit), might moderate the effect of shifts in strategic mance differs.
emphasis on stock return. However, the tests revealed that Further research aimed at better understanding strategic
only the unanticipated component of ROAit had a statisti- emphasis is also in order. A potential research avenue would
cally significant moderating effect. In addition, we hypothe- be to investigate the factors that influence strategic empha-
sized that the market response might differ depending on the sis and that motivate a firm to shift its emphasis.
change in the intensity of combined R&D and advertising
expenditures (i.e., the extent to which the firm is expanding
or contracting its combined value creation and value appro- Implications
priation activities). However, we found this moderating Our study shows that the relative emphasis that firms place
effect to be small and statistically insignificant, –.12 with a on value appropriation relative to value creation contains
t-statistic of –.1. Similarly, we found no significant differ- information relevant to investors in the valuation of the firm.
ence in response when we estimated separate effects for In general, we find that increases in emphasis toward value
shifts in strategic emphasis for those firms increasing R&D appropriation capability and away from value creation capa-
and advertising expenditures versus those decreasing expen- bility are associated with increases in stock return. This
ditures. The estimated effect of .127 for those increasing result serves to reinforce the view of Teece (1987) and oth-
spending was not significantly different from the estimate of ers who note that many firms, particularly in the high-
.097 for those decreasing spending (i.e., the t-statistic for the technology sector, labor under the illusion that developing
difference in effects was .5). We also tested whether the new, superior products ensures success not only for the prod-
response to shifts in strategic emphasis varied by the size of uct but also for the firm. These firms do not pay sufficient
the firm and the total amount spent on R&D and advertising. attention to restricting competition from imitating innova-
Here, we also found no significant differential. tion and dissipating a firm’s returns from it. Our results show
that even in the high-technology markets, where innovation
Directions for Further Research and R&D are central to firm success, investors view favor-
ably a shift toward value appropriation capability.
Although these sensitivity tests did not uncover results that The positive response to enhancing value appropriation
challenged our findings, this is not to suggest that further is particularly strong when a firm has better than expected
work is not needed. Indeed, many directions for additional earnings. In other words, when a firm is doing well, the mar-
research are warranted. One would be to improve the mea- ket wants it to increase emphasis on value appropriation.
sure of strategic emphasis. For example, we used resource When a positive shock to earnings occurs, this provides a
allocation patterns to discern firm strategic emphasis. An signal to existing and potential competitors as to the direc-
alternative would be to survey experts or use statements in tion resources should flow. The inflow of resources into
the annual reports to operationalize strategy. In addition, areas with positive shocks will tend to bring returns back
because our study examined firms across different indus- toward the competitive rate of return. If management wants
tries, the S9 indicator we employed had merit as an aggre- to insulate itself from this process, it needs to place greater
gate indicator of strategic emphasis. Future work focused at emphasis on value appropriation and restricting imitation.
the business-unit level or on analyzing a particular industry However, conditions exist in which the financial markets
could seek to develop better industry-specific measures of view increases in value appropriation capability negatively.
strategic emphasis. In other words, Figure 1 would be best For example, for firms experiencing a negative shock to
ROA, increased focus on value appropriation capability
10See, for example, Fisher (1984) for a discussion of issues relat- would in some cases lead to a drop in market value. If a firm
ing to alternative size deflators. is not doing well financially, the financial markets respond

74 / Journal of Marketing, January 2003

positively to efforts designed to generate value creation to value appropriation. Rather, it suggests that our results are
capabilities. The same is true for firms operating in stable- driven by those firms having the necessary value creation
technology markets that are already highly emphasizing capabilities that decided to shift their strategic emphasis.
their value appropriation capability. For these firms, further Second, our results may be indicating that firms are inef-
increases in the value appropriation capability can decrease ficient in allocating resources in that they may be consis-
market value. If a firm already has placed considerable focus tently underinvesting in value appropriation (e.g., market-
on value appropriation, the markets realize that there may be ing) relative to value creation (e.g., R&D) activities. This
limits to the firm’s ability to extract surplus. In this case, can be explained by the difficulty managers have in justify-
efforts to expand surplus through enhanced emphasis on ing marketing expenditures. Many commentators have noted
value creation are rewarded. that because of a lack of reliable measures in documenting
Nonetheless, our results serve to highlight the impor- the effect of marketing, fewer resources than should be are
tance stock market participants place on value appropria- devoted to marketing. The Marketing Science Institute, for
tion. Why is this so, and why have firms not already acted example, has noted this problem and has recently called for
on this information? Should firms shift their emphasis proposals to help address this issue.
toward value appropriation? Two phenomena that are not Value creation investment decisions cannot be divorced
mutually exclusive, namely, signaling and managerial inef- from issues of appropriability. Countless examples exist of
ficiency, provide some answers to these questions. First, innovations that created enormous value, but where the inno-
changes in strategic emphasis may provide a signal to the vating firm was unable to capture the surplus. For example,
marketplace. Firms shifting to strategy with greater empha- although exceptions exist, Xerox’s Palo Alto Research Cen-
sis on value appropriation may be signaling that they now ter is best known as a breeding ground for innovations from
possess sufficient value creation capability and are seeking which Xerox was unable to achieve strategic or commercial
to lock in their value creation advantage. Indeed, this can success (e.g., the personal computer, Ethernet, graphical
describe the Intel experience in which Intel possessed great user interface, page-description language). Firms that fail to
value creation capabilities and sought to exploit this advan- pay sufficient attention to value appropriation cannot be
tage by creating brand loyalty with the “Intel Inside” cam- expected to achieve sustained competitive advantage and
paign. This reasoning indicates that not all firms should shift reap the rewards from their value creation capabilities.

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