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Capturing value from client relationships: theory and evidence

Author: Chatain, Olivier INSEAD Area: StrategyPublisher: Fontainebleau : INSEAD, 2007.Language: EnglishDescription: 216 p. : Graphs ; 30 cm.Type of document: INSEAD ThesisThesis Note: For the degree of Ph.D. in management, INSEAD, June 2007Bibliography/Index: Includes bibliographical referencesAbstract: This dissertation investigates firm valkue creation and value capture in client relationships by looking at differences in firm's capabiblities relative to their competitors'. I base my theorizing and my measurement on cooperative game theory, in particular the stream of formal modeling work initiated by Branden-burger and Start (1996, 2004). The first part of the dissertation is a formal model that examines how horizontal scope decisions affect industry structure and firm performance in contexts where client relationships matter for value creation. On the one hand, the ability to build close buyer-supplier relationships over multiple transactions can give an advantage to broad firms that offer buyers "one-stop-shopping". On the other hand, the existence of organizational trade-offs can give an advantage to firms that specialize in a narrower rangeof products or services. The model is based on a biform game that incorporates this tension and shows how the use of three generic scope strategies - specialist, generalist and hybrid - depends on the benefits of close buyer-supplier relationships, the extent of organizational trade-offs, setup costs, the homogeneity of buyer needs, and thepower of suppliers relative to buyers. The second part of the dissertation is an empirical study in which I relate firm performance to measures of a firm's added value (i.e. the ability of a firm to create more value for its clients than its next best competitors). Recent theroretical research based on ccoperative game theoryhas shown that added value is an important antecedent of value capture. My empirical work is the first to test those theories. I use a longitidunal data set of the UK legal market that includes measurements of the capabilities, scope, client relationships, and performance of the top 100 UK law firms. These dara provide a direct and fine-grained measure of law firm capabilities, and allow me to test how differences in capabilities across firms relate to firm profitability. My results suggest that added value, as measured at the level of client relationships, is an important driver of value capture by firms. This finding sheds light on the conditions under which firms can appropriate returns from their capabilities. List(s) this item appears in: Ph.D. Thesis
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For the degree of Ph.D. in management, INSEAD, June 2007

Includes bibliographical references

This dissertation investigates firm valkue creation and value capture in client relationships by looking at differences in firm's capabiblities relative to their competitors'. I base my theorizing and my measurement on cooperative game theory, in particular the stream of formal modeling work initiated by Branden-burger and Start (1996, 2004).
The first part of the dissertation is a formal model that examines how horizontal scope decisions affect industry structure and firm performance in contexts where client relationships matter for value creation. On the one hand, the ability to build close buyer-supplier relationships over multiple transactions can give an advantage to broad firms that offer buyers "one-stop-shopping". On the other hand, the existence of organizational trade-offs can give an advantage to firms that specialize in a narrower rangeof products or services. The model is based on a biform game that incorporates this tension and shows how the use of three generic scope strategies - specialist, generalist and hybrid - depends on the benefits of close buyer-supplier relationships, the extent of organizational trade-offs, setup costs, the homogeneity of buyer needs, and thepower of suppliers relative to buyers.
The second part of the dissertation is an empirical study in which I relate firm performance to measures of a firm's added value (i.e. the ability of a firm to create more value for its clients than its next best competitors). Recent theroretical research based on ccoperative game theoryhas shown that added value is an important antecedent of value capture. My empirical work is the first to test those theories. I use a longitidunal data set of the UK legal market that includes measurements of the capabilities, scope, client relationships, and performance of the top 100 UK law firms. These dara provide a direct and fine-grained measure of law firm capabilities, and allow me to test how differences in capabilities across firms relate to firm profitability. My results suggest that added value, as measured at the level of client relationships, is an important driver of value capture by firms. This finding sheds light on the conditions under which firms can appropriate returns from their capabilities.

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