Value Shop Essay

Value shop models value creation at the firm level in the context of firms that create value by mobilizing resources and activities to resolve a particular customer problem. The value shop model is most suitable for the representation of value creation for firms that compete in the knowledge economy. Typical examples include consulting firms, law firms, accounting firms, and health service organizations. The principal value creation logic is the provision of a perceived beneficial solution to a customer’s problem.

The value shop model is one of three value configuration models. Value configuration analysis is based on the premise that competitive advantage stems from the performance of discrete activities by firms. All value configuration models share the underlying logic that by disaggregating a firm into its strategically relevant activities, managers can understand the behavior of costs and the sources of differentiation and hence understand competitive advantage. A value configuration analysis entails the identification of the primary activities of a firm and thereafter the study of the economic implications of those activities. The models assist managers in determining what activities a firm should perform and what configuration of the firm’s activities would enable it to add value.

Initially the value chain was advanced to assist managers in creating sustainable competitive advantage through the analysis of how companies create value. Proposed in 1985, the value chain, which has become popular worldwide, appropriately describes value creation in the manufacturing sector of the economy. However, not only does the value chain fail to model value creation of, for example, telecommunication companies, consulting firms, doctors, lawyers, and banks, but also its relative importance to managers has been reduced as the contribution of manufacturing companies to the gross national product (GNP) has fallen since the 1980s with current manufacturing share of the gross domestic product (GDP) at merely 15 percent in many developing countries. Those factors have given rise to two complementary value configuration models, namely the value shop and the value network.

The value shop model disaggregates the problem-solving firm into its strategically relevant activities. The primary activities of problem-solving firms are problem findings and acquisition including activities associated with recording; reviewing and formulating the problem to be solved and securing the rights to solve a problem; problem solving including generation and evaluation of alternative solutions; choice including choosing among alternatives; execution or implementation activities of the chosen solution; and monitoring and evaluation including activities associated with monitoring and measuring the extent to which the implemented solution has solved the original problem. The primary activities are recurring. To the extent to which a problem is yet to be solved, a new round from problem finding and acquisition to monitoring and evaluation begins.

A unique characteristic of value creation in the context of problem solving is the existence of two-sided information asymmetry. For manufacturing firms (value chain), the transformation process of inputs into outputs must be well understood prior to its execution. For problem-solving firms (value shop), the appropriate solution cannot be predefined. This dimension of information asymmetry makes the customer and the willingness to reveal problem-related information essential to the quality of the suggested solution. The other side of the two-sided information asymmetry relates to the inability of customers to ascertain the suitability of a specific firm to solve a particular problem. Price, which is a vital distinguishing purchasing factor for buyers of physical products, is only of secondary importance for the customers of problem-solving firms. Low prices for problem-solving services are usually associated with lesser proficiency in solving problems. Furthermore, in the presence of information asymmetry, value shop firms invest heavily in establishing their reputation. Firms develop a reputation relating to the type of problems that they can solve, the process by which they solve problems, as well as their expected remuneration.

Another distinguishing characteristic of value creation in the context of problem solving is the importance of project selection. Project/problem selection determines the path of competence development in firms as well as firm reputation. Taking into consideration the importance of project/problem selection, problem-solving firms routinely turn away potential projects. The industry is characterized by its extensive use of both referrals and subcontracting. Problems that do not fit with either the underlying competences of the problem-solving firm or its strategic competence development trajectory are referred to other more specialized problem-solving firms. For example, a general practitioner (doctor) commonly refers patients to more specialized professionals. Problems that require the collaboration of multiple problem-solving firms are disaggregated to manageable projects that are thereafter subcontracted to specialized firms. Typical strategic challenges that managers of value shop firms face include the tension between specializing in a narrow set of problems versus investing in knowledge breadth, which increases the range of problems that their firms can solve and the tension between taking upon, rejecting, referring, and subcontracting new problems.

Bibliography:

  1. Raphael Amit and Christoph Zott, “Value Creation in E-business,” Strategic Management Journal (2001);
  2. Øystein Fjeldstad and Espen Andersen, “Casting Off the Chains,” European Business Forum (2003);
  3. Petter Gottschalk, Knowledge Management Systems: Value Shop Creation (Idea Group, 2007);
  4. Michael L. Katz and Carl Shapiro, “Network Externalities, Competition and Compatibility,” American Economic Review (v.75/3, 1985);
  5. Michael E. Porter, Competitive Advantage (Free Press, 2004);
  6. Charles B. Stabell and Øystein D. Fjeldstad, “Configuring Value for Competitive Advantage: On Chains, Shops, and Networks,” Strategic Management Journal (1998).

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