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.

M
arketing strategy is concerned with creating sus- costs, advertising, and network externalities, for example,
tained competitive advantage, vyhich in turn leads to are isolating mechanisms that are central considerations to
superior financial performance. Two processes, marketing managers.
which combine and interact, are fundamental to achieving Firms are faced with the strategic task of balancing the
this outcome. The first process itivolves 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 (or its customers
tizations and trade-otfs. 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 finn chooses to compete (Day
firm's abihty 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 aflects financial performance (see, e.g., the
absence of "isolating mechanistns" that prevent the immedi- meta-analysis by Capon, Farley, and Hoenig |I99O]).
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 wiil 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
of Marketing and Transportation, School of Business, University of Wash- customers and processes. Altbough the inherent trade-off
ington, Seattle, between value appropriation and value creation capabilities
has been acknowledged (e.g., March 1991), research to dale

Journat 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 eacb of the major
ing expenditures - research and development (R&D) expen- players. Tbe polio vaccine is perhaps the most extreme
ditures]/assetsl 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 tbis mea- plus. Jonas Saik 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 sucb, con-
value creation. That is, increases in tbe 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 tbeir innovations. For example, tbe CT scanner was
increased emphasis on value creation. Empirically, we find invented by EMI Ltd., but the fitTn's inability to profit from
that the stock market reacts favorably when a firm increases the innovation led to its takeover around tbe satne time tbe
its emphasis on value appropriation rather than on value cre- inventors were receiving tbe Nobel Prize in Medicine. Com-
ation. However, this effect is moderated by firm and indus- petitors and consumers claimed tbe surplus generated by the
try characteristics, in particular, financial performance, the innovation. However, it is the hope of realizing profits tbat
past level of strategic emphasis of tbe firm, and tbe 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 witb Teflon, C D . Searle witb
bilities, but rather highlight tbe importance of isolating NutraSweet, Microsoft witb 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 tbe societal value created by tbeir 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, bowever, 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 botb sbape 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 intluences the potential magnitude of
from ihe product and the costs of producing it. The societal the advantage; value appropriation influences the amount of
value will end up being captured by tbree major players in the advantage the firm is able to capture and the length of
tbe 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 tbe magnitude and tbe 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

Marketine Stratesv

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

64 / Journal of Marketing, January 2003

both complement and serve as imperfect substitutes for each Technology in the Value Creation Process
other.
Scbumpeter (1942, p. 132) discusses value creation activi-
Strategic Emphasis: Trading Off Between Vaiue ties as "to reform or revolutionize tbe 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 bave received the most attention as a cornerstone
way it has chosen to compete. of value creation. Firms engage in R&D and build techno-
Al 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 tbe production and distribution proces.ses.
moves ahead and innovates as competition erodes the prof- A firm uses its tecbnological 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 tbis case, a firm by firms and/or households and tbrough process innovation
attempts to lengtben tbe time its advantage persists. (Mansfield et al. 1977). An extensive literature in econom-
Most companies avoid tbe extremes and strive to choose ics, stimulated by the work of Solow (1957), has docu-
a strategy tbat balances sufficient support for value creation mented a significant positive effect of R&D on economic
efforts witb adequate investments in capabilities tbat facili- growth and productivity. Some of tbe estimates from initial
tate the appropriation of value. Yet differences in strategic research in the area serve as useful benchmarks. For exam-
emphasi.s exist among firms. Altbough industry cbaracteris- ple, Denison (1962) reports that approximately 40% ofthe
tics sbape tbe options available to the firm, even witbin the total increase in per capita national income was attributable
same industry, firms will take different courses of action to tecbnological cbange and conjectures that about one-fiftb
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 tbe median social return to
creation, such as the development of new drugs, is central to R&D at 56%. Although estimates vary, Grilicbes (1995)
success for firms in tbe 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 tbe patent pro- A great deal of interest has been devoted to the gap
tection for a drug ends and generic clones enter tbe market, between tbe societal value created and tbe profits appropri-
many firms discontinue support for the drug and focus on ated by tbe innovating firm. At issue is that the returns real-
new innovation and ihe remaining patent-protected prod- ized by the innovating firm may bear little relation to tbe
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 wilh generic drug manufacturers on the tection bas proved to offer only limited effectiveness. Com-
basis of superior brand image after the patent protection petitors can "invent around" tbe patent. Levin and col-
expires. leagues (1987) report tbat managers view other mechanisms
as mucb 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, fmanciai, 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 botb. Just as tbere does not exist a single organizational factor that
Yet two elements bave been consistently bighlighted 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 tlrm is able to earn
value creation, wbereas a firm's ability to differentiate its economic profits. Accumulated assets, as varied as a loyal
offering tbrough advertising has been linked to vaiue customer base and network externalities, serve as isolating
appropriation. mecbanisms 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 bigblighting the effect of
appropriation capability that is of particular concern to mar- R&D on economic activity, advertising expenditures bave
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 otber 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, botb views suggest tbat a firm's advertising will
improve its position by eitber 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 ibat of competitors—bas trated in the areas of the greatest perceived importance.
received tbe most attention (Cbamberlin 1933). Tbis abiiity Consequently, tbe strategy of a company is revealed in the
is one of the central features governing btand strategy. For allocation choices and the trade-offs it makes between the
example, Aaker (1996) notes that a brand can serve as the diflerent 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 sucb, 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 (Buncb and Smiley 1992). ciation witb value creation, we expect the following indica-
Indeed, the often-cited Advertising Age (1983) study tor of strategic emphasis, wbicb we label SE 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 -- advertising expenditures,, - R&D expenditures,,
tbis stability actually lasts is subject to question (Colder SE =
2000), few question the durability of advantage enjoyed by
well-establisbed brands. This durability stems not from tbe Positive scores represent companies that have relatively
product attributes, which are typically readily imitable, but Stronger commitment to value appropriation-based market-
from tbe differentiation sustained by advertising. Indeed, ing strategies and negative scores represent companies that
Colder (2000) bigbligbts advertising as one of tbe key fac- have relatively stronger coinmilmen( to value creation-
tors that separates market sbare leaders that maintain their based strategies. Intertemporal increases in the SE indicator
advantage from tbose tbat do not. For example, in contrast will tend to depict an increasing emphasis on value appro-
to American Cbicle, 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.' is possible tbat tbe SE 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., tbe persistence of analysis based on SE will be biased toward zero, and tests
profits) is sparse but consistent. The empirical results sug- will bave low power in uncovering a statistically significant
gest a significant positive effect of advertising on persis- effect. However, given tbe prominent role played by R&D
tence of profits (e.g., Kessides 1990; Mueller 1990). These and advertising in influencing strategic emphasis, we bave
findings reinforce the view that excess returns erode more reason to believe that shifts in SE will indeed be indicative
slowly for llrms advertising heavily. Thus, firm advertising of shifts in strategic emphasis. Analysis of SE characteristics
facihtates value appropriation because it extends tbe dura- appears to support this view.
tion of competitive advantage. We observe that the SE 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 tbe associa- ple, for the period 1980-99 the mean SE 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
relative reliance on value appropriation capabilities. For
•Golder (2000) also notes Underwood's inability to sustain its
place in the typewriter market as a result of a failure iti innovate. instruments (i.e., SIC codes 3800-3841), tbe SE mean of
Again, this highlights the need tor firms to inve.st 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

witb the importance technology plays in these industries. In Stock Return as a Measure of the Long-Term
higb-tecbnology 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, sucb 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 sucb 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 tbe SE measure exists for firms in tbe make use of stock market data, which provide the financial
pharmaceutical industry (SIC code 2834). The historical markets' estimate of the total expected vaiue of the strategy.
mean of SE 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 tbat influences future returns (Srivastava, Sher-
Bristol-Myers Squibb. At the otber end of tbe spectrum is vani, and Fahey 1998). The vaiue of the strategy can be rep-
Cenentech with a mean SE of -.136. These differences resented as the excess future returns generated by the firm
reflect the diflerent emphases firms place on value creation when this particular strategy is employed. As such, tbe value
compared with value appropriation in their strategies. of a marketing strategy to the firm can be depicted as a dis-
counted present value of the future cash flows generated
Strategic emphasis will also change for a given firm over
through the use of this marketing strategy:
time to reflect a change in strategy. Consider Figure 2,
which plots tbe SE measure for Intel for the period 1982-98.
CF.
Late in 1991, in response to increased competitive pressures (i)
(l + r)'
from Advanced Micro Devices and C&T, Intel launched its
"Intel Inside" campaign. The campaign marked a shift in
strategy for Intel to bolster its brand attributes. We show in where V; is the present value of marketing strategy (i), CF,
Figure 2 that the SE measure captures Intel's shift to is cash flow at time period t generated as a result of the use
enhancing value appropriation capabilities. Altbough Intel of marketing strategy (i), and r is the cost of capital.
maintained an emphasis on value creation capabilities (i.e., In practice, it is virtually impossible to estimate tbe
SE is negative for the entire period), the measure shows a value of a marketing strategy with this formula. Altbougb
definite positive drift associated witb the execution of the tbe measure of Vj is not available, under tbe efficient mar-
"Intel Inside" campaign and the shift in emphasis toward the kets bypothesis, abnormal stock return (the difference
development of value appropriation assets. between tbe actual and expected return, given tbe market
and firm risk cbaracteristics) will provide an unbiased esti-
mate of the change in V;. Given efficient markets, all avail-
The Financial Implications of the able information about future cash flows is incorporated into
Trade-Off Between Value Creation the current stock price. Wben an unanticipated change in
strategy occurs, the markets react, and the new stock price
and Value Appropriation reflects the long-term implications sucb 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 tbe difference in market value of tbe
appropriation and to address tbe conditions under wbicb firm before and after tbe cbange in marketing strategy
tbese sbifts migbt bave 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 empbasis on tbe stock market valuation ofthe firm.
Testing for the "Information Content" of Strategic
Emphasis
FIGURE 2 We seek to assess the extent to wbicb cbanges 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 SE series are
Year associated witb stock return). A significant relation would
indicate tbat investors view these changes as signaling
'82 '84 '86 88 '90 '92 '94 '96 98
0
-.02 ^Although market anomalies exist, they tend to be rare and
-.04 short-lived. As such, patiicularly lor 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
-.1 Z \ 4OI
1991
"Inlol liisidi:"caiiipaigii ofthe 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

ehanges in the discounted future eash flow of the firm. That The null hypothesis is that a2= 0, which would imply
is, stoek priees 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 ihe area of assessing information content, beyond tbat reflected in current-term earnings. The alternate
for example, in accounting, focuses on the role of changes hypothesis is that a2 ^ 0, which implies that stock market
in accounting variables such as size-adjusted earnings. More participants perceive the change in tbe 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. Tbese studies seek to test about future casb 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 tbe opposing elements of tbe alternative bypotheses
earnings information in explaining stock price movements. of a2 > 0 and 02 < 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
cbanges in accounting business performance and ebanges in cash flows. Although increasing either value ereation or
strategic empbasis. Tbat is, e.stimating the following model:^ value appropriation capabilities sbould enhance firm perfor-
mance, the effects of shifts in emphasis between tbe two
(2) StkRi, = Oo + a, AROAj, + a2ASEj, + t,,,
bave not been examined previously."*
where StkRj, is the stock return for Urm i at time t, AROAj,
is the change in accounting business performance, ASEu is
the change in our indicator measure of strategic emphasis, Differential Response to Shifts in
and Ej, is tbe 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 whal could have been predicted on the basis of past tial response to shifts in strategic empbasis under different
infonnation. These deviations are typically operationalized conditions. In particular, the response may vary syslemali-
as ihe residual from a time series forecast model. eally 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.
infonnation about current and future-term financial perfor-
mance. This effect is captured by a | (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
infonnation. However, accounting indicators are limited in firm. One key difference among firms is profitability. Com-
their ability to capture completely tbe expected net cash peting hypotheses about the moderating effect of profitabil-
flow from the future opportunities facing the firm. Do ity exist. One view cmpbasi7.es exploiting opportunities
investors view shifis in a firm's strategic emphasis as pro- wben tbey arise. Under tbis view, firms witb positive unex-
viding additional information about these opportunities and pected earnings sbould foeus on locking in tbeir advantage
their impact on tbe firm's future cash flows? through a shifi 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-
ation capabilifies (i.e., tbey are not creating sufficient value
^Differences in firm return stem not only from differential
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 ofthe profits. Under this view, firms cannot rest on their past suc-
firm, as retlected 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) lind thai ^Other studies (e.g., Erickson and Jacobson 1992) have exam-
after the role of size (as modeled by log[market valuej) al 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
logfbook value/market value]) at the start of the period are result in our testing different effects than what we are trying to
accounted for, estimate.s 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 SE measure) but also depict
value, _ [/market value, _ i) and log(market value, _ j). 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 tlrm 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 SE 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 ot economywide factors and (2) industry dummy vari- firm's shifi in emphasis; separate analysis of advertising and R&D
ables to capture industry-specific effects. does not.

66 / Journal of Marketing, January 2003

 tages, which is often futile, but ratber on creating new nology as a key characteristic differentiating industries. He
advantages at a faster rate than the old advantages are being defmes high-technology industries as those in which new
eroded by competition (Grant 1991). As sucb, a firm in a product development is the critical element of interfirm
superior financial position needs to prepare for ihe eventual competition. These industries tend to be characterized hy
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 empbasis may also moder- and low-tecbnology industries in wbicb tbe final product bas
ate the stock market response to sbifts in strategic emphasis. bistorically remained mucb the same. Competition is more
Tbe concept of patb 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 eboices. That is, the stock market enhanced marketing efforts. Research and development is
response to an unanticipated strategy cbange (ASEj,) may be still important, but it is likely to be less intensive and focuses
moderated by tbe past strategic choice (SE|, _ ,). 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 tbeir 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 tbal as a firm's skills become more specialized, they and low-technology industries. Here, there is less opportu-
may produce expertise that i.s 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 ereation creation capability is more important in bigb-technology
empbasis should further enhance their value creation capa- markets than in stable- and low-tecbnology markets. Tbis
hilities, and firms with high levels of value appropriation suggests differences in magnitude (or even in sign) for tbe
emphasis should continue to enhance their value appropria- estimates of 020 among tbe tecbnology environments.
tion capabilities.
An alternative view stemming from the literature on imi-
Allowing for this type ot" differential response can be tation suggests that, even for the high-technology firms, the
acbieved by modifying Equation 2 to allow for systematic vari- ability to capitalize on innovations is at least as important as
ation in aj depending on unanticipated ROA and the past level tbe ability to create new value. Levin and colleagues (1987)
of strategic emphasis. That is, estimating a model ofthe form find that it is relatively easy and at least 35% cheaper for
(3) StkRj, = cto + a, AROAj, + a competitors to replicate an innovation than to develop it.
The majority of typical unpatented innovations can be imi-
with tated witbin a year, and major patented innovations within
= CC
three years. However, it is not easy and cheaper to imitate
superior reputation or brand image. Because patents do not
yields the estimating equation provide adequate protection in many high-technology indus-
(4) StkRi, = 0 0 + aiAROA,, + asoASEi, + tries, firms are forced to seek other ways to restrict com-
i, ASE,,
petitors from dissipating their profits. Thus, even in high-
technology industries, firms should engage in development
The coefllcient a2t depicts the extent to which unantici- of value appropriation capabilities. Testing for differential
pated ROA moderates the effect of strategic emphasis on effects of technological environment can be achieved by
slock return. A value of 021 > 0 would indicate that firms in a estimating separate regressions for the different technologi-
weak (strong) financial position are better suited by empba- cal environments and then testing whether the coefficients
sizing value creation (value appropriation). A value of a2i <0 differ among them.
would indicate tbat firms in a weak (strong) financial position
are better served by empbasizing value appropriation (value
creation). Tbe coefficient a22 depicts the moderating effect of
Data Source
past strategic emphasis on tbe stock market response to an The data set used in our analysis comes from the Standard
unanticipated shift in strategic emphasis. Values of 022 < 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 a22> 0 would support the specialization hypothesis. publicly traded firms on tbe 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 I 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-lech noiogy 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 tbe persistence of a ROA sbock, tbe larger is
all or some of tbe period 1980-98. We bave 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 sueb, the market reaction
descriptive statistics for and the definitions of the variables to unanticipated ROA reflects tbat it provides information
tbat form tbe basis of our analysis. not only about tbe current-term results but also about the
future-term profits.
Table 4 also shows that ehanges in strategic emphasis
Estimation Results are significantly related to stock return. The positive coeffi-
We first estimate first-order autorcgressive time series mod- cient (1.18) means that, on average, investors view increases
els for ROA and strategic empbasis. 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.^ Because tbe model accounts for tbe direct influ-
els as the measures ofthe unanticipated changes in ROA and ence of unanticipated ROA, this effect is incremental to
strategic emphasis of a firm.^ 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 empbasis as providing incremental informa-
for the high-, stable-, and low-tecbnology subsamples.^ tion about the future-term prospects of the firm above and
beyond tbat contained in current accounting returns.
The Full Sampie Results However, tbe total effect of strategic emphasis is not
constant, but ratber is evidenced to vary systematically.
In Table 4, tbe results for the full sample estimation indi-
Although the interactive effect with lagged strategic empha-
cate tbat unanticipated ROA bas 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 LO 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

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

value, ^ |/market value, _ |) and log(market value, _ [) measures.
return model follows directly from the efficient markets hypolhe-
Controversy exists regarding how to interpret the coefficients. One
sis. Stock return should exhibit a higher correlation with the resid-
view is that the estimated effects reflect the mispricing of stocks.
ua! series because the raw series includes an anticipated component
An alternate view (e.g., that raised by Fama and French II992]) is
that will be unrelated to stock return. As evidenced by the follow-
that the factors adjust lor ri.sk considerations. The overall negative
ing correlation matrix, our results are consistent with this efficient
effect of size reflects reduced risk associated with larger firms. The
markets implication:
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-
StkRetj, SE,, RO. ing debate in finance, but rather controlling for these factors so that
we are able to conclude that shifts in strategic emphasis are not
StkRct,, I ,0 associated with stock return merely through risk.
SEi, .005 1,0 'An additional effect of ASE,,, an indirect effect that works
ROAj, .120 .411 t.o through ROA, may also exist. We estimate a simultaneous equa-
ASB,, .080 ,490 .228 1.0 tions model and find evidence of a positive effect of SE^, on ROA;,.
AROAi, .230 .192 .657 .321 1.0 As such, 020 provides a conservative estimate of the impaci of
''Although not reported in Table 4, consistent with previous strategic empfiasis on stock return because it only assesses the
research, we find significant coeftlcienls 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.s 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 capahil-

''Another interpretation of this interactive effect, which is obser- higher earnings response coefficients. This interpretation has merit
vationally equivalent, is that ASEj, moderates the effect of AROAj,. 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 outstandingi, x price,, + dividends., - shares outstanding,, , x price,, _,
Stock roturn
shares outstanding,, , X price,, _,

^^^ net income before extraordinary items,.

assets,.

^^ advertising expenditures,, - R&D expenditures,.

assets,.

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: nOAj^ =910*^911 ROAjt - 1 + T]it

.77" .78" .73" .83"

(64.35) (40.84) (41.99) (28.39)
R2 .57 .59 .51 .71
3563 ^ ^.' 1324 1808 431
Number of observations

Model: SEjt = <P20''' ^h'i SEji

.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: StkRetj, = OCQ + OiAROA,.a,oASE,,.c . , , A R O A , ^ E , . « 2 2 S E , . , ,ASE,.e,,i

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 emphasis, _ , * -.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 value, _ i) and log(book value/market value), _, 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., I. i 8/3.73). 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-
pics reveals both similarities and diflerences 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 markcl 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-tecbnology markets than in tbe
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. Tbe estimated effect is negative for the
ences across the three environments. Shocks to ROA are low-technology llrms. However, the size of the standard
more likely to persist and future-period returns are dis- error makes it difficult to isolale 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 tor high-technology firms (6.00),
hypothesis that the direct effect of strategic emphasis is the negative and significant for stable-tecbnology 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 refleclivc 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 fmdings 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.^ 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 SE 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 bas a negative effect on return. Movement toward S (rep- Sensitivity Analysis
resented by arrows in Figure 3) has a positive effect on stock
return. We undertook several tests to assess the sensitivity of our
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
'The 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 respeet to ASE, while holding
of assets, would enhance the information content of the SE
AROA = 0. From this, we find a range of SE|, _ |, where dStkRetj,/ measure or lead to different conclusions. Indeed, these alter-
dASEi, is positive (i.e., StkRetj, increases with increasing ASE|,) natives generated similar implications (e.g., all showed that
and negative (i.e., StkRetj, decreases with increasing ASEj,). the financial markets react favorably to sbifts 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

Positive Effect on
. Stock Return VA = VC tine VA - VC line
(i.e., equivalent aiiocalion i.e., equivalent allocation
to VC and VA) to VC and VA)

H Positive Effect on
Positive Effect on Stock Return
Stock Return
Budget constraint line
Budget constraint line (i.e., the tolal expenditure on VA and VC)
(i.e., the total expendilure on VA and 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."^ 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 SE having information content hut 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 hetween the error in Equation reflected increased emphasis on value appropriation or on
4 and ASEj, and lead to hiased 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.
AROAj, influences ASEjt, 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 ROAj, 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 financiai perfor-
AROA,,), 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 ROAj, 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-
si/,ed 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 o f - . I . 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
and R&D are central to firm success, investors view favor-
Directions for Further Research 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 arc 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 SE 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
cc. for example, Fi.sher (1984) for a discussion of issues relat- would in some cases lead to a drop in market value. If a firm
ing lo alternative size detlators. 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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