A Consumer Perspective on Value Creation

Author(s): Richard L. Priem

Source: The Academy of Management Review , Jan., 2007, Vol. 32, No. 1 (Jan., 2007), pp.
219-235
Published by: Academy of Management

Stable URL: https://www.jstor.org/stable/20159289

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? Academy o? Management Review
2007, Vol. 32, No. 1, 219-235.

A CONSUMER PERSPECTIVE ON VALUE

CREATION
RICHARD L. PRIEM
The University of Wisconsin-Milwaukee

I show how company strategies that focus on improving consumer benefits can create
value by increasing consumer payments to an entire value system. This "consumer
benefit experienced" viewpoint on value creation complements the value capture
orientations of the firm positioning, transaction cost, and resource-based approaches.
It helps to clarify often-blurred distinctions between value creation and value capture
and offers an additional tool for addressing intractable issues in strategic manage
ment.

Consumers are arbiters of value. When 1991). Recent work has examined competitive
Christie's auctions a painting, the highest bid
advantage via dynamic capabilities (Eisenhardt
der determines its value. Motion pictures?even& Martin, 2000) and firm-specific knowledge
those produced with similar investments and(Kogut & Zander, 1996). Yet only sparse attention
resources?succeed or fail based on their boxhas been paid to the demand side and, particu
office receipts. Although Webvan and Grocerlarly, to the consumer's role, even in the most
ies.com each developed capabilities for homerecent and ambitious attempts to integrate the
delivery of grocery products, most U.S. consumfield (e.g., Farjoun, 2002; Hunt & Lambe, 2000).
ers perceived little value and were unwilling toRemarkably, some strategy scholars argue that
pay the price premium necessary for these seran understanding of consumer utility "is largely
vices to be successful. Many defunct "dotcoms"superfluous to the overall goal of the strategy
simply failed to provide sufficient consumerfield" (Makadok & Coff, 2002: 12), which, they
value. The lesson? Willing consumers validate say, is "to explain firm profitability?and firm
the value of products and services.1 profitability is determined by the value cap
Despite this critical role, consumers have retured by the firm" (Makadok & Coff, 2002: 10).
Apparently, willing consumers?and a top
ceived relatively little attention in the strategic
management literature (Brief & Bazerman, 2003). line?may no longer be necessary for strategic
Porter's (1980, 1985) firm positioning ideas success.
guided research in the 1980s, when strategy re The "consumer benefit experienced" (C
searchers built knowledge by focusing on barriperspective (or consumer perspective) I ou
ers to industry competition, generic strategies,is a potentially important alternate viewp
and firms' value chains. The 1990s were domifor strategic management, for several reas
nated by the resource-based view (RBV), which First, consumers must be an important co
looks inward to develop an understanding oferation in strategy formation, because cons
those characteristics?value, rareness, inimitaers experiencing benefits are essential to
bility, and nonsubstitutability?a company's re pany success. Put simply, value creation,
sources must possess in order to produce anoffering benefits that induce payments
enduring competitive advantage (e.g., Barney, willing consumers, is a precondition for
capture.
Second, in the currently dominant perspec
I thank V?ronique Ambrosini, Amit Bhatnagar, Cliff Bow tives?that is, the firm positioning (Porter,
man, Matt Gilley, Paul Nystrom, Abdul Rasheed, Markus 1980) and transaction cost economics (TCE;
Reihlen, Torsten Ringberg, guest editor David Lepak, and
the anonymous AMR reviewers for helpful comments. This
Williamson, 1971) views and, particularly, the
article was accepted in March 2004. RBV (Barney, 1991)?mechanisms associated
1 For alternate viewpoints emphasizing producers' effects with demand are generally ignored. Thus,
on and potential manipulation of consumers, see Galbraith value is determined externally in these per
(1969) and Packard (1957). spectives (see, e.g., Lippman & Rumelt, 2003;
219

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 220 Academy of Management Review January

Priem & Butler, 2001a&b); the attention instead BACKGROUND

is on how a focal member of a value system Definitions
can increase its share of the consumer pay
ments to that system, at the expense of other I follow Bowman and Ambrosini (2000) in de
members, in a zero-sum game that divides up fining use value as the subjective valuation of
a given amount of value. The CBE approach, consumption benefits by a consumer. Exchange
however, emphasizes relationships between value is the amount the consumer actually pays,
company strategies and the mechanisms that representing revenue to a value system.2 These
drive consumers' willingness to pay. It thereby definitions are consistent with those offered in
has the potential to complement the existing the value-price-cost (VPC) framework recently
perspectives by linking firm actions, such as adopted from Tir?le (1988) by Hoopes, Madsen,
strategic positioning or resource recombina and Walker (2003). In their framework, V is what
tions, to consumer value and, ultimately, to a we label use value, P is exchange value, and C
growing top line. is the production cost of the seller. V ? P is
And, third, different viewpoints such as this consumer surplus, and P - C is seller profit.
are interesting because they help to surface, I define value capture as the appropriation
and often deny, long-held assumptions that may and retention by the firm of payments made by
constrain our thinking (Davis, 1971). Rather than consumers in expectation of future value from
argue against inclusion of ideas from other consumption. Value is captured when a firm (1)
fields (e.g., Makadok & Coff, 2002), for example, receives consumer payments by thwarting com
strategic management as an integrative disci petitors' attempts to appropriate those pay
pline might benefit by more idea borrowing, ments (e.g., through imitation) and (2) simulta
even from marketing (e.g., Jemison, 1981). In
neously retains those payments by denying
sum, we can learn much about successful strat claims on them from upstream or downstream
members of the same value system (e.g., through
egy through a long-ignored consumer lens on
value creation. channel power). Thus, value capture involves
the allocation of exchange value.
My intent is not to argue for the superiority Value creation, however, involves innovation
of one or another approach to theory and re that establishes or increases the consumer's
search in strategic management; all make im
valuation of the benefits of consumption (i.e.,
portant contributions. Instead, I hope to show use value). When value is created, the consumer
how consideration of CBE, by bringing a dif either (1) will be willing to pay for a novel ben
ferent perspective to the discussion, can en efit, (2) will be willing to pay more for something
rich and extend our view of strategy. In the perceived to be better, or (3) will choose to re
sections that follow, I initially review, very ceive a previously available benefit at a lower
briefly, the value discussion in strategic man unit cost, which often results in a greater volume
agement. Three central consumer issues are purchased. Thus, from the consumer's view
then examined in detail?consumers as the point, value creation involves increasing use
judges and beneficiaries of CBE (e.g., Ratch value or decreasing exchange value, each of
ford, 2001), consumers as selectors from among which can increase consumer surplus (V ? P).
alternative retail assortments (e.g., Messinger From the firm's viewpoint, increasing CBE is
& Narasimhan, 1997), and expert advisers as particularly important, because it results in an
proxy judges of potential CBE (Wijnberg, 1995;
Wijnberg & Gemser, 2000). Next, I identify sev
eral strategies for increasing CBE and, thus, 2 Bowman and Ambrosini (2000) distinguish between use
value?the subjective evaluation of consumption benefits by
increasing the revenue stream available for a consumer?and total monetary value (TMV)?the monetary
capture by firms in a value system (Porter, amount that the consumer is willing to pay for those bene
1985). I then suggest several areas wherein a fits. In some situations, such as job loss, consumers might be
CBE approach might address challenging unwilling or unable to pay for the full use value that they
perceive. As income rises, however, one might expect that
strategic management questions in new ways.
TMV should approach use value. I eschew the use value
Finally, I discuss the implications and limita versus TMV distinction in this article, for simplicity, because
tions of the consumer lens for strategy re it is not critical to my arguments. But it is clearly an impor
search. tant area for further conceptual work on value.

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 2007 Priem 221

opportunity to increase overall payments re space, in a manner that reflects the current sep
ceived by the collection of companies that make aration between internally focused strategic
up the firm's value system. This, in turn, allows management and consumer behavior. Thus, it
the firm the opportunity to capture some of these may seem to be perfectly sensible to argue that
increased payments, although this result is not competitive advantage accrues to companies
guaranteed for any particular firm in the value that obtain, at low cost, and protect "superior"
system. resources that produce ongoing revenue
streams (Barney, 1986), without any reference to
the source of those streams. Many strategy
Strategic Management and Value scholars have therefore addressed value from
Strategic management scholars recently have the perspective of rents generated by resources
begun to reconsider value and, particularly, the and have parsed rents in numerous ways to
too-often-blurred distinction between value cap examine their appropriability by different mem
ture and value creation (e.g., Bowman & Ambro bers of the value system (e.g., Boddewyn, 2002;
sini, 2000, 2001; Foss & Foss, 2002; Gulati & Kim & Mahoney, 2002; Makadok, 2001).
Wang, 2003; Mizik & Jacobson, 2003; Priem, 2001; Much of this literature follows Ricardo's (1817)
Ramirez, 1999). Value typically has been viewed farmland example by focusing on the capture of
in strategic management from the supply side, rents accruing to scarce resources engaged in
as something created solely by producers. Raw the production of commodity products (e.g., see
materials are combined and modified as they Kim & Mahoney, 2002, on oil field unitization;
move "downstream" through a value system Lippman & Rumelt, 2003, on sunflower produc
(Porter, 1985). Each firm in this vertical system tion; and Makadok & Coff, 2002, on methanol
adds production factors to make its own, unique production). In too much of the literature, how
contribution to value, and each strives to cap ever, the term value creation has been used
ture a share of end user payments at least pro incorrectly when the intended meaning has re
portional to its contribution. The focus on pro ally been value capture (Makadok & Coff, 2002).
ducers is reflected in the common term value Actually, there has been relatively little atten
added and in the notion?similar to Marx's labor tion paid to authentic value creation, even
theory of value?that a finished product is laden through very commonplace factors like assort
with value when it reaches an end user. ments of differentiated products.
This producer orientation is not surprising, for The struggle over value capture (labeled var
two reasons. First, a major objective of strategic iously as value appropriation, allocation, real
management is to create value for shareholders, ization, dispersion, or distribution) among mem
which raises the elemental issue of which con bers of a firm, among firms in a value system, or
trollable factors explain differences in firm per among firms and consumers has a long history
formance (e.g., Rumelt, Schendel, & Teece, 1991). in the economics literature on property rights
This leads value to be considered most often (e.g., Alchian & Demsetz, 1972; Furubotn, 1988)
from the internal perspective of the firm? and consumer surplus (e.g., Hausman, 1981).
creating shareholder value?rather than from These bodies of literature, plus the subsequent
the consumer perspective of this article. strategy work, confirm the elemental impor
Second, industrialization increasingly has tance of value capture to strategic management;
separated production and consumption deci clearly, strategists must be concerned about
sions in both time and space. In preindustrial value capture, both within and outside the firm,
society, households produced goods for their because it is fundamental to profitability. This
own consumption, and, thus, producers and con has led Lippman and Rumelt to argue that "the
sumers were one and the same (Wikstr?m, 1996). only source of wealth in the economy is the
In those days, decisions about accumulating ownership of valuable factors. Owning a valu
productive resources were closely linked with able resource is a good thing, and making its
forward-looking CBE decisions made by house value higher is a good thing" (2003: 922).
holds. Now, however, companies accumulate A critical question remains unanswered, how
productive resources, and households simply ever. How, specifically, is resource value deter
choose among the available alternatives; the mined and increased? Lippman and Rumelt
two types of decisions are separated in time and (2003) offer a start toward an answer: resource

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 222 Academy of Management Review January

value is determined in part by demand for the consumer or household; and (5) a product or ser
product being produced. I assert further that vice that remains unconsumed is without val
consumer (i.e., end user) benefit drives the rev ue?that is, products and services are not "value
enue streams that make resources valuable and, laden."
moreover, that the creation of benefits for con One key role of the firm in this view is to aid
sumers frequently also results in value for consumers in maximizing the use value that is
shareholders. Thus, instead of taking demand created and experienced during consumption,
as a given, it may be useful for strategists to irrespective of the exchange value paid. Al
analyze consumption processes, with the intent though most transactions are firm-to-firm
of developing firm-level strategies that might exchanges (Madhok, 2002), firms are intermedi
increase the top line. One approach to analyzing aries that may be customers of other intermedi
consumption strategically is to evaluate house aries but cannot be consumers because they are
holds as though they are businesses whose not end users. In this perspective, even pure
"product" is their own utility. Before I turn to business-to-business firms must ultimately con
mechanisms that may increase end user de tribute to some consumer benefit. Thus, consum
mand by increasing CBE, however, I first outline ers and firms can be viewed as partners in pro
several foundations of the CBE perspective. ducing value during consumption. Under this
CBE perspective, value added is replaced with
"value aided," and firms strive to increase the
CBE
value experienced by, and thus the payments
My arguments are grounded in an alternate made by, the end users in their value systems.
perspective that emphasizes the role of consumFirm strategies are designed to increase CBE,
ers in experiencing and, through their pay and thereby payments to the value system, and
ments, establishing value. Fundamental to the these payments, in turn, increase the value of
CBE perspective are the ideas that (1) value isthe resources that are necessary to implement
experienced by consumers during their con the value-creating strategies.
sumption activities?that is, the current pur The CBE perspective I advance essentially
chase of a durable good can result in many "flips" the discussion, from the "rents from
barriers, efficiencies, or resources" value
future value-producing experiences; (2) different
consumers experience more or less value, even analyses of the firm positioning, TCE, and RBV
when using the same product; (3) consumers'approaches, on the supply side, to a "pay
ments for benefits" value analysis, on the de
perceptions of the value that will be experi
enced during future consumption will, together mand side. This distinction is illustrated in
with income, affect current willingness to pay;Figure 1. The lower panel represents the more
standard approach, wherein the strategist's
(4) the initial and sole source of all payments to
the firms in a value system is the individualtask is to combine barriers, efficiencies, and

FIGURE 1
Value System Revenues Allocated to Consumer Benefit Versus to Resources0

CBE Payments for Payments for Payments for

consumer benefit consumer benefit consumer benefit
perspective
"A" "B" "C"

Revenue / payments

Payments Payments for Payments for bundle Payments for bundle

for resources commodities in "A" "B"
perspective elastic supply of scarce resources of scarce resources

a Adapted from Lippman and Rumelt (2003).

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 2007 Priem 223

superior resources in a way that will maximize from a consumer perspective. First, house
payments captured by the resources of an in holds are examined as "production functions"
dividual firm. All payments to the firm in Fig that generate benefits (i.e., utility) for them
ure 1 are allocated to one or another resource selves. This simple model is then extended to
or resource bundle, and even entrepreneurial show how such households can gain knowl
and managerial assets are included as a re edge via consumption experiences in market
source bundle, following recent work by Lipp based systems, following the human capital
man and Rumelt (2003). Thus, all firm re arguments of Ratchford (2001). Second, I again
sources can be valued by the payments they begin with the basic household production
generate?even those entrepreneurial re model but then extend it to evaluate house
sources previously "unpriced"?and "net reve holds' valuations of the time saved through
nues are the sum of all payments to resources" "one-stop" shopping at large-scale retailers,
(Lippman & Rumelt, 2003: 921). Payments there following the disposable income arguments of
fore determine the value of a firm's resources,
Messinger and Narasimhan (1997). And, third,
and, according to Lippman and Rumelt, strat nonmarket peer- and expert-based valuation
egists should attempt to accumulate increas and selection systems are explored. These al
ingly valuable resource bundles. ternate valuation systems are often used for
The upper panel in Figure 1 represents the hard-to-value products or services where out
alternative CBE approach. Here, the strate siders, such as art experts or movie critics,
gist's task is to conceive of strategies that will provide value guidance to consumers (Wijn
increase consumer benefit and, thus, pay berg & Gemser, 2000).
ments from consumers. Rather than allocating
a given level of payments, first among firms in
the value system and then to resource bundles Household Production and Human Capital
within a firm, the problem of interest under the Several scholars have offered a "household
CBE perspective is identifying novel resource production" alternative to the customary, prefer
combinations that maximize consumer use
ence-based segmentation approaches for ex
value, and thereby have the potential to max plaining consumer behavior (Becker, 1993;
imize payments to the entire value system. It is Ratchford, 2001; Stigler & Becker, 1977). Under
only after consumer benefits are maximized this alternative, households' consumption activ
for the entire value system, thus "increasing ities are viewed as systems?analogous to busi
the size of the pie" (Gulati & Wang, 2003), that ness firms' production systems?consisting of
value capture logic comes into play for indi inputs, processes, and outputs. In a simple
vidual firms.
model, a particular household consumption ac
Therefore, the CBE perspective offers one tivity (Z2) requires inputs of several goods and/or
means for reestablishing the linkage between
services (Xg, g = 1, . .., G) and time (T^)?that is,
productive resources and consumption deci Z2 = ZiQLi, Tt). Following Ratchford (2001), I add
sions. This link is a necessary step in devel human capital (K), which has two components:
oping actionable prescriptions for resource ac (1) the general knowledge and expertise avail
cumulation in strategic factor markets able in the household and (2) the stock of knowl
(Barney, 1986; Makadok, 2001). Under the con edge that was obtained through learning during
sumer perspective, resource accumulation ac previous experiences with the consumption ac
tions must support strategies that especially tivity in question. Simplifying Ratchford's (2001)
aid consumers in their value experiences; an equations and notation somewhat, a consumer's
inward focus solely on resources and value decision problem may be expressed as follows:
capture likely foregoes top line payments that
could be brought about via the CBE perspec Max V = I/(Zi)
tive.
s.t. P'X, + wT, = W
INCREASING CONSUMER BENEFIT
Z^ZiiXi.Tt.Kt)
In this section I introduce three complemen
tary approaches for evaluating value creation Kt = K(Ziit-i, Ziit-2, ... i E)

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 224 Academy of Management Review January

where, for a particular consumption activity Zi# Zi = Zi(XJ.Tif?:(.A?f/?,fl?)

V = the utility output, X = the vector of goods
or services consumed, P = the vector of prices Kt = K(Zit-i, Zif?_2, . . . , E)
of goods and services, w = the opportunity
cost of time, T? = the time expended in con To clarify these ideas, the CBE from atten
sumption, W = the household wealth, K = hu dance at a baseball game can be analyzed us
man capital (i.e., knowledge through experi ing the consumer perspective. During the game,
ence) obtained previously through activity i, a consumer is inputting time and human capi
and E = general education and other human tal. The game itself is the only input contributed
capital inputs. The desirability of a particular by the producer. Characteristics of the consump
unit of output (Z2) is determined by the house tion process include such activities as paying
hold's concave utility function, and the house attention, reacting to events, and coenjoyment
hold strives to maximize Z over the range of all through interacting with others in attendance
possible activities, subject to income and time (Holt, 1995).3 The output in this case is the benefit
constraints. experienced by the consumer during this partic
The above equations can be solved to yield ular sports entertainment experience. The time
the following system of demand equations for investment and the baseball product delivered
on the field are similar for all consumers, but the
household output Z2, goods Xg, and time T2-:
baseball-specific human capital held by each
Z2 = ZtW.iT? consumer contributes to different amounts of
value experienced. A highly knowledgeable
77, = 77?(P, W, Zf, Zt+l, Zt+2, . . . , Kt) baseball fan with expertise in every intricacy of
the game, for example, likely experiences more
Xg = Xg(P,w,Zf,?f) benefit through attendance (i.e., has a more ef
fective production function) than does a casual
T^UV.w.ZfKt) attendee. Similarly, aficionados of rugby or
cricket experience more entertainment utility
Kt = K(Ziit-\, Zj f_2, ... , E) when attending these games than would an out
where 772 is the full price of consumption activity of-place baseball fan. Therefore, the benefit ex
Z2 and is equal to the marginal cost of producing perienced through the same product or service
is different for each consumer, and each con
it. It can easily be seen that the full prices are
reduced by the future utilities that are influ sumer's human capital determines how much
enced by the knowledge gained in the current value he or she actually experiences.
Outcome differences such as these affect dif
period through consumption (see Ratchford,
2001, for a detailed analysis). The demands for X ferent consumers' willingness to pay, in time
and T are derived from the demand for Z. Under and money. The different consumer valuations
this model, differences in consumer behavior of the same event are not due simply to differ
(i.e., choices) are explained by human capital ences in taste; instead, they are due to asymme
driven differences in consumers' benefit experi tries in knowledge and expertise across poten
ence expectations rather than, as is normal un
der the segmentation view, by relatively opaque 3 See Holt (1995) for a full discussion of CBE based on the
differences in "tastes" or other preferences typology of consumption activities?experiencing, classify
(Smith, 1956). Because consuming often entails ing, integrating, and playing?he developed through obser
learning, in some contexts consumers can be vation of Chicago Cubs baseball fans at Wrigley Field.
Consuming "as experience," involving subjective, emotional
viewed as knowledge workers (Reich, 1991). interactions with the consumption object, most closely ap
Moreover, Ratchford's (2001) model easily can proximates the human capital approach I outline in this
be extended to include additional determinants article. In consuming "as classification," consumers classify
of utility output (Z). These might include other themselves compared to others based on characteristics of
characteristics of a particular consumption pro the products they consume. Consuming "as integration" in
volves self-concept, wherein the consumption object is inte
cess, such as attention (A) and interpersonal grated into the consumer's identity. Finally, consuming "as
interaction CO, or the real capital (fl) represented play" involves interacting with fellow consumers. The base
by the assortment of goods already held by the ball consumption example incorporates each of these con
consumer, as follows: sumption types.

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 2007 Priem 225

tial consumers. Of course, producers strive to competencies may be useful in developing ef

aid consumers' benefit experiences by adjusting fective strategy, just as understanding a firm's
product/service characteristics. And producers internal distinctive competencies can be (Eisen
may offer features aimed at different consumer hardt & Martin, 2000). I discuss additional impli
segments by, for example, stressing symbolic cations for strategic management shortly.
aspects of a baseball game to aid value creation
by those who are casual or less knowledgeable
fans. But consumers' human capital influences Household Production and Shopping Time
their choices and the benefits they ultimately The household production model also has
experience through consumption. been the basis for extensions that evaluate con
Viewing consumption through a human capi sumers' patronage choices among alternative
tal lens has several general implications, out retail establishments. Following Betancourt and
lined by Ratchford (2001), which may be useful Gautschi (1990), for example, the utilities of
for strategists interested in increasing CBE. households' consumption activities (Z) are
First, as consumption occurs, learning increases viewed as ends, while retailers' distribution ser
a consumer's stock of human capital. In the vices are the means for achieving those ends.
baseball example, attendance increases knowl Distribution services provided by retailers in
edge and expertise about baseball, and these, clude the depth and breadth of product assort
in turn, increase the consumer's production (i.e., ments, location convenience, and on-site infor
value creation) efficiency when attending future mation, among others. Such services reduce
games. Moreover, consumers making future consumers' costs in time, transportation, and in
oriented block purchases, such as season tickets formation gathering when making a particular
for baseball, likely consider potential increases purchase. Thus, "most distribution services are
in their human capital stock when estimating net substitutes for the household's time" (Betan
use value. court & Gautschi, 1990: 154).
Second, however, the net present value of the Retail patronage models also begin with the
future utility of current consumer learning de basic household production model Z2 = Z2(X2, Tj
creases with age. When one is older, there isn't
and budgetary constraint P'X2 + wT{ = W. In the
as much future remaining during which to reap discussion in the previous section, I treated the
the benefits of increased knowledge. prices P and time Ti as exogenous. A retail firm
Third, investments in knowledge are rela can provide some services that would help a
tively less expensive and may complement one consumer reduce the time needed for an activity,
another when the knowledge can be applied to however, and therefore time can be a function of
multiple consumption activities. For example, distribution services. The retailer can charge a
there may be both complementarities and econ price premium for these services, as long as the
omies of scope in simultaneously learning to price premium is less than the savings in con
become a gourmet and a gourmand. Such con sumers' time costs. Thus, prices are also deter
sumer human capital synergies may form the mined by the level of services provided by a
basis for company strategies. retailer. The budgetary constraint can be now
Fourth, some learning is brand specific. Expe rewritten, as follows:
rience with a particular statistical package or
computer operating system improves a consum lPg(D)Xig + wUD) = W
er's production efficiency and can result in bar
riers to future brand switching. Thus, first-mover dPg dTi
advantage can create consumer-driven barriers
to product switching, although imitation by com
petitors can lower these barriers. where, for the particular good g required for
Fifth and finally, second-order skills in knowl activity i, Pg = a retailer's price, D = the distri
edge creation (i.e., competence in building one's bution services provided by the retailer, T2 = the
human capital) may be particularly valuable, time required for activity i, and W = the house
because they allow a consumer to increase pro hold's income constraint. As the services pro
duction efficiency in multiple consumption ac vided by a retailer increase, the prices of goods
tivities. Understanding such external consumer increase. However, the time needed for the ac

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 226 Academy of Management Review January

tivity by consumers decreases, leading to lower was slow.4 A different selection system more
time costs. The trade-off presented to the con favorable to Impressionists soon came into
sumer is seen as time saved owing to D versus place alongside the Academy, based on expert
the price for a market basket of items. The re valuation by art critics, art dealers, and museum
tailer, however, can choose to shift more of the curators. These experts lacked the vested inter
distribution burden to the household by offering est in the status quo held by the Academy artists
fewer distribution services, but then must lower and, thus, they were more likely to identify and
prices. Alternately, the retailer can assume reward innovations such as Impressionism (Wijn
more of the distribution burden for the house berg & Gemser, 2000). Therefore, valuation of
hold, and then charge higher prices. hard-to-value works of art shifted from artistic
Viewing consumption through a shopping peers to experts.
time lens has important implications, outlined In this case, the experts were not the end us
by Betancourt and Gautschi (1990), which may ers; instead, they were setting value standards
be useful to strategists interested in increasing for the ultimate art consumers. The experts were
CBE. First, retailers' distribution services affect validating value to allow consumers an easier
shopping time and other costs borne by house consumption experience, or at least to allow
holds in obtaining desired goods. This influ them to select effectively with less human cap
ences their patronage choices as they evaluate ital. Still, expert-based selection systems such
"time versus convenience" trade-offs (see also as this one do not preclude simultaneous appli
Messinger & Narasimhan, 1997). Second, the de cation of the human capital approach. Clearly,
mand for consumer benefits by households (i.e., consumers with more expertise in Impressionist
Z) drives the demand for particular items in a paintings will have a more efficient production
retailer's assortment. This leads to a key strate function and, thus, will receive greater CBE dur
gic question for retailers: "To which Zs do 1 ing consumption than will those with less exper
cater?" (Betancourt & Gautschi, 1990: 152). This, I tise.
argue later, is an elemental strategic question Similar peer-based and expert-based selec
for every member of a value system. tion systems are fairly widespread and often
coexist. These range from the Academy of Mo
tion Picture Arts and Sciences, for the former, to
Selection Systems and Value Determination movie or restaurant critics, for the latter. And
Examining consumer choice from the perspec other selection systems, such as contests and
tives of different types of selection systems (Wijn tournaments, also provide value guidance to
berg, 1995; Wijnberg & Gemser, 2000) uncovers consumers (Rao, 1994).
yet another view of CBE. The most common se These nonmarket valuation systems have sev
lection system is market selection, which I have eral implications that can be extended to stra
been discussing, wherein consumers are the se tegic management. First, a good's value likely is
lectors and the products or services being of increased through isomorphism when peer
fered are selected. Under market selection, con based selection is the rule; in such cases, mim
sumers determine value directly. Wijnberg and icry, or at least closely imitating success, can be
Gemser (2000), however, explore two additional effective in increasing value. Second, innova
selection systems that are common for products tion is more highly rewarded in expert-based
in hard-to-value cultural industries: peer selec systems, in part because experts have reputa
tion and expert selection. These more unusual tion-driven incentives to identify innovative
cases provide additional insights on CBE. goods. Third, suppliers and experts often have
A peer-based system was in place for valuing a symbiotic relationship, wherein the legiti
paintings before the Impressionist movement macy of one is enhanced by the legitimacy of
(Wijnberg & Gemser, 2000). An Academy com the other. And, fourth, although peer, expert, or
posed of established artists was the selector, tournament selection provides value cues for
and new artists' paintings were the selected.
Access to the Academy guaranteed an artist's
career. The issue for Impressionists was that 4 Peer selection should be familiar to management schol
established artists were resistant to innovation, ars, along with the inertia problems of "invisible colleges"
and acceptance of new artists and techniques (Crane, 1972).

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 2007 Priem 111

consumers, these systems do not improve con Another human capital-based approach for
sumers' production efficiency in their own con increasing CBE is to accelerate the consumer's
sumption experiences. Instead, they allow accumulation of consumption experiences,
consumption at a particular CBE with a lower since each consumption experience adds to the
search cost, given a particular amount of hu consumer's stock of product-specific human cap
man capital. ital. Purchase frequency can be stimulated, for
These discussions of (1) human capital in example, simply by offering a low, introductory
household production, (2) one-stop shopping price for?or free samples of?a new product.
convenience, and (3) alternate systems for deter More complex strategic alliances for copromo
mining value help to clarify consumers' and tion and cobranding, as are sometimes seen
their advisers' roles in establishing and experi among movie studios, fast food chains, and toy
encing value. Clearly, however, other consumer companies, represent another option for speed
side factors, such as symbolic and emotive val ing up and otherwise enhancing consumption
ues, also can contribute to CBE and deserve to experiences. These alliances are effective at ac
be explored. Next, though, I extend the previous celerating the buildup of human capital for sev
arguments to show how the consumer perspec eral reasons. First, they accelerate and broaden
tive may be useful to strategists intent on iden the consumption experience, which now occurs
tifying opportunities for building competitive in multiple locations at multiple times. Second,
advantage by aiding consumers in increasing they spread the consumer's investment in hu
CBE. man capital over more experiences?that is, the
movie, the fast food, and the toys?thereby in
creasing the consumer's overall production effi
STRATEGIES FOR INCREASING CBE ciency. Third, they increase the likelihood that
other household members also will accumulate
Can companies identify strategies for "in
knowledge, so the original consumer may share,
creasing the size of the pie" using the consumer
and thereby enhance, the consumption experi
perspective on value? That is, can firms help ence.
increase CBE, thereby increasing either con
Another human capital approach to inc
sumer willingness to pay or the number of con
ing CBE is through consumer knowle
sumers who are willing to make payments to the
leveraging product diversification by a
firm's value system? In this section I build argu
firm. This occurs when a company diversif
ments showing how companies can increase
such a way that a consumer's human ca
CBE through growing consumers' human capi
built via consumption in one product or indust
tal, reducing time required for consumers to se
can easily be employed during subsequen
lect and acquire goods, and leveraging syner
sumption of another of the company's prod
gies from within-household specialization.
even if in another industry. Disney uses su
approach in its theme parks, retail stores,
vision channel, and film studios. In this
Growing Consumers' Human Capital
ple, core knowledge (i.e., human capital)
One implication of the consumer perspective tained through consumption in any on
is that consumers with more product-specific multiple product areas, can be applied syn
human capital have more efficient production tically by consumers to enhance subseq
functions. Such consumers experience greater consumption experiences in the other pr
benefit during consumption than do others with areas. That is, knowledge of a cartoon "
less product-specific human capital, which re developed during a movie will enhance th
sults in a correspondingly greater willingness to sequent experiences of that hero's ride a
pay. One straightforward method for increasing theme park or merchandise at the retail st
consumer payments to a value system, then, is Firms using such diversification-based st
to provide venues for consumers to increase gies for building the consumer's stock of p
their stocks of human capital, thereby improving uct-specific human capital are attempti
their consumption experiences. This could be as provide a more intense consumption experi
simple as creating users' groups or offering by relying in part on knowledge accumulate
classes to build consumer knowledge. the consumer through consumption of othe

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 228 Academy of Management Review January

lated products. These arguments lead to the fol one example of this approach.5 Even more
lowing descriptive propositions for increasing monplace, retailers often provide exper
CBE. assistance to aid consumer selection, par
larly when product lines are wide and com
Proposition 1: Increasing the stock of consumers are unsophisticated and unaw
consumer knowledge creates value by innovations, and consumer situations (i.e
intensifying, reinforcing, or otherwise needs to be satisfied) are heterogeneous
shoppers (Wernerfelt, 1994). In those situa
enhancing the consumption experi
ence. the role of sales assistant "experts" is to
tate a good product-consumer match by so
Proposition 2: Accelerating the out
accuproduct value issues with minimum
costs to the consumer and communication
mulation of consumption experiences
creates value by increasing the to
conthe retailer. In cases where peers, exper
sales assistants contribute to selection
sumer's learning trajectory, thereby
sions, the peers', experts', or sales assis
enhancing future consumption experi
ences. human capital substitutes for that of consu
Therefore, consumers' inputs to the select
Proposition 3: Leveraging consumer
cision?in both search effort and human
knowledge to provide synergy creates
tal?are reduced, relative to the benefits
value by enhancing consumer utility
expect to receive during consumption. Ove
across multiple consumption experi
this makes the acquisition process less de
ences.
ing for consumers. Moreover, consumers'
tainties regarding benefit expectations als
Together, these "human capital growth" stratparticularly when those benef
reduced,
egies?increasing the consumer'scrue
stock of obtaining appropriately ma
from
knowledge, accelerating the rate at which learn
products (e.g., Wernerfelt, 1994) or from co
ing adds to the stock, and leveraging core
ers classifying (i.e., associating) them
knowledge over related products?offer
with firms
top-quality objects (e.g., Holt, 1995).
consumer-focused means for differentiation.
Returning to market-based systems, m
These value-creating strategies arebusiness decisions retailers face also are
similar to
ciated with reducing costs to consumers as
Porter's (1980) generic strategy of differentiation
from the firm positioning perspective search for and acquire products for futur
to strat
egy; as a consumer's brand-specific sumption.
human cap Ehrlich and Fisher (1982), for exa
have modeled
ital grows, the consumer receives unique bene retailers' advertising deci
through the
fits from that brand, for which the consumer is information value advertising
vides consumers
willing to pay more. Moreover, building consum by reducing search cos
creasing
ers' human capital could be viewed as erectingknown purchase opportunities, an
barriers to entry. From the consumer ducing the likelihood of disappoi
perspec
purchases. Other distribution-related dec
tive, however, this improves the consumer's pro
retailers face include determining the b
duction function for CBE with that of specific
assortment, number of locations, and ext
brand/product. services to be offered. Broad assortment
allow one-stop shopping save consumers
and transportation costs, influencing patr
Reducing Demands on Consumers decisions by making the acquisition p
less demanding. The broad assortments of
In industries using the peer or expert selection
by increasingly large-scale supermarket
models, a firm might be wise to bypass efforts are
example, to a response to increasingly aff
build consumers' product-specific human capi desire for the time-saving c
consumers'
tal altogether and to focus instead on influenc
ing experts' value opinions. Pharmaceutical
companies' typical focus on marketing 5to expert
I thank an anonymous reviewer for suggesting t
doctors, rather than directly to theirample.
patients, is

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 2007 Priem 229

nience of one-stop shopping (e.g., Messinger & Proposition 4a: Strategies emphasiz
Narasimhan, 1997). Such strategies have in ing imitation are most successful in
creased patronage and revenues. positively affecting peers' value eval
Other strategies aim to reduce the amount of uations, because peer evaluators tend
consumer attention and human capital that to favor the status quo.
must be expended during the consumption pro
Proposition 4b: Strategies emphasiz
cess, thereby improving the production efficien
ing innovation are most successful in
cies of the household for a particular product
positively affecting experts' value
relative to other products. Assume, for example,
evaluations, because expert evalua
that considerable investments in human capital
tors have reputation-based incentives
and attention are required for a satisfactory con to reward innovation.
sumption experience for alternate brands within
a particular product class. Once these invest Proposition 5: Distribution services
ments are made, they represent brand-switch provided by retailers, such as broad
ing costs for the consumer, which are equivalent assortments and accessible locations,
to exit barriers. Much more human capital create value by reducing consumers'
would need to be developed, and more attention acquisition costs for future consump
would need to be paid, for the user to receive the tion experiences.
same utility from a different manufacturer's
Proposition 6: Rapid market penetra
product. Clearly, being first-to-market conveys
tion creates value by increasing con
important advantages in such situations.
sumer surplus for subsequent product
Still other strategies focus on building "share
versions (i.e., by lowering consumers'
of consumer" through product diversification.
knowledge accumulation investments
They strive to share a consumer's human capital
for future consumption experiences).
knowledge base across products with similar
use characteristics, again minimizing demands Proposition 7: Sharing a consumer's
and helping the consumer to be more efficient product-specific knowledge across re
during consumption. One simple example is lated products creates value by in
found in the development of skateboarding, as creasing consumer surplus (i.e., by
described in the documentary film Dogtown and providing consumers economies of
Z-boys. Surfing enthusiasts' human capital in scope across multiple consumption ex
creasingly was shared between surfing and periences).
skateboarding, both for fun and in competitions.
Surfboard manufacturers capitalized on the sim Together, these strategies for increasing con
ilarities in human capital necessary for each sumer surplus for the same consumption out
sport and increased their share of consumer by put?peer or expert judgments guiding those of
also manufacturing skateboards. Altogether, consumers, reducing acquisition costs, decreas
firms using these "lower consumers' invest ing the stock of knowledge demanded for con
ments" strategies are attempting to provide a sumption, and sharing core knowledge over re
less demanding but otherwise equivalent con lated products?offer firms the means for
sumption experience by relying on the knowl pursuing a low-cost strategy from the consumer
edge of experts, economizing on shopping time, perspective. These strategies for expanding con
accumulating consumer knowledge through sumer surplus are similar to Porter's (1980) ge
previous product experiences, or sharing knowl neric strategy of cost leadership from the firm
edge from other related products. These discus positioning perspective; as the demands on con
sions lead to the following descriptive proposi sumers' brand-specific human capital are re
tions. duced, yet consumers receive the same benefits
from the brand, more consumers are willing to
Proposition 4: Peer- and expert-based buy. Moreover, reducing demands on consum
selection systems create value by re ers' human capital could be viewed as erecting
ducing the knowledge investment re barriers to product switching. From the con
quired by a consumer in selecting a sumer perspective, however, this improves the
particular consumption experience. consumer's production function for specific

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 230 Academy of Management Review January

brands/products, or reduces their acquisition vide power, comfort, and separation for parents
costs, thereby increasing consumer surplus for and DVD players for children.
the same output utility. Multimember households also engage in
teamwork production (Alchian & Demsetz, 1972)
to increase CBE during consumption, in a ver
Leveraging Synergies from Within-Household
sion of Holt's (1995) "consuming as play." House
Specialization
hold members engage one another, enjoy being
Many households have multiple members, al in one another's company, and benefit from one
lowing both specialization of and synergies another's human capital. Such teamwork pro
among those households' members' human cap duction could occur, for example, when house
ital. The idea of household specialization is hold members attend a "hands-on" science mu
common in the work-family literature, with fre seum. Household members interact with the
quent hypotheses that specialization within the museum exhibits and with one another. They
household affects overall household output and share knowledge and enjoy one another's reac
individual members' human capital (e.g., Hersch tions to the experience. Minor league baseball
& Stratton, 2000). For our purposes, companies similarly has been promoted as an interactive
can develop effective, CBE-increasing strategies family activity. These examples suggest that an
based on human capital specializations among other way for firms to increase CBE involves
household members. This approach revolves enhancing teamwork production by providing
around the ideas that (1) the human capital ob opportunities for intrahousehold interactions
tained by one household member through that encourage human capital synergies. In
search can benefit all household members when sum, firms using "specialization-based" strate
they consume together, and (2) household mem gies, by focusing on household experts and on
bers understand one another's stocks of human teamwork among household members with di
capital, so one member can make informed de verse human capital endowments, are again at
cisions on behalf of the others. One household tempting to provide an enhanced consumption
member might, for example, have a well experience. These arguments lead to the follow
developed stock of human capital for a particu ing descriptive propositions.
lar activity?say, gourmet dining or foreign
cinema. This member might search for con Proposition 8: Targeting a specialized
sumption objects or locations that everyone household expert creates value by en
could enjoy. This member also might aid other hancing the consumption experiences
members by providing expert information dur of other participating household mem
ing and after consumption, thereby enhancing
bers.
the other members' consumption experiences. Proposition 9: Sharing through team
The other members benefit, in the form of con work production creates value by in
sumer surplus, because they enjoy a better con tensifying the consumption experi
sumption experience with less investment. ences of all participating members.
It follows that companies in industries where
multimember participation in consumption is Together, these value creation strategies for
common can increase total CBE by helping a multimember households?emphasizing house
particular household member build human cap hold members' specialized human capital and
ital, knowing that all household members will increasing teamwork production?offer firms
benefit. This is why some restaurants offer consumer-based means to pursue a focused
weekly gourmet cooking classes in their kitch CBE-based strategy. Thus, these value-creating
ens?one increasingly knowledgeable house strategies are similar to Porter's (1980) generic
hold member will tend to bring other members strategy of focus from the firm positioning per
and friends to the restaurant. Alternately, firms spective to strategy; as products and services
can create value for coconsumers by targeting are better matched with households' member
specific product features to specific household specific human capital, household consumers
members. In that case, the goal is to provide a are willing to pay more, or more households are
basket of features that best serves the entire willing to buy, or both. From the consumer per
household, as when minivan manufacturers pro spective, however, focus on a particular house

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 2007 Priem 231

hold member or on building teamwork produc ical focus is the household's production func
tion is a way to improve a household's tion. The consumer perspective emphasizes at
production function for a specific brand/product. taining competitive advantage by helping
Overall, the three broad categories of value households to experience the benefits of con
creation strategies just discussed?growing sumption. This contrasts with TCE (Williamson,
consumers' human capital, reducing demands 1971, 1999), the RBV (Barney, 1986, 1991), and the
on consumers, and focusing on member-specific firm positioning view (Porter, 1980, 1985), which
human capital in multimember households? emphasize attaining competitive advantage
together with the examples of specific value cre through lowering exchange costs, obtaining
ation strategies under each broad category, are rent-capturing resources, and establishing a
representative rather than exhaustive. Others protected position, respectively. Table 1 com
will identify additional consumer-focused strat pares the CBE perspective's characteristics with
egies. The important point is that the proposi those of the TCE, RBV, and positioning ap
tions show that specific strategies for value cre proaches to strategy.
ation can be developed using the consumer To be sure, the consumer perspective I have
perspective and that these strategies explicate presented is at an embryonic stage; it requires
the mechanisms through which particular firm much formalization, and it has limitations I now
resources and capabilities contribute value. In note. First, human capital effects may apply
the next section I compare the CBE perspective most directly to complex, differentiated products
to the more traditional, value capture-based ap that require the greatest consumer participation
proaches and discuss possible directions for fu and learning during consumption. This means
ture strategy research using a consumer per that CBE analysis may be less effective in de
spective. veloping strategies for commodities, where a
rent-capturing approach might be sufficient.
DISCUSSION Even for many commodities like basic guitars or
computers, however, one might visualize how
The consumer perspective I have advanced is consumers with high human capital could re
built around the primary theoretical question ceive greater utility during consumption, or how
"Why does willingness to pay differ across con companies might differentiate commodities by
sumers?" Its domain is utility maximizing bundling them with services. Second, the effects
household production during the selection and of CBE-based strategies at times are con
consumption processes, and its primary analyt strained by consumer income; strategies to in

TABLE 1
Transaction, Resource, Positioning, and Consumer Perspectives: A Comparison
Areas of Difference TCEa RBVa Firm Positioning View CBE Perspective
Broad theoretical arena Theory of the firm Theory of a firm Theory of competition Theory of selection
Primary theoretical Why do firms exist? Why do firms Why do returns differ? Why do payments differ?
question differ?
Primary driver Search for efficient Search for Search for a protected Search for value
governance competitive position
structure advantage
Primary domain of Exchange and the Production and Industry and channel Household production
interest transaction firm resources/ power
capabilities
Primary focus of Transaction attributes Resource attributes Barriers to competition Production function
analysis (e.g., asset (e.g., value,
specificity) stickiness)
Primary emphasis (Transaction) costs Firm resources, Firm position in industry Value creation
(competitive skills,
advantage through) knowledge,
routines

a From Madhok (2002).

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 232 Academy of Management Review January

crease willingness to pay will be less effective tal via in-person, product-specific training; re
when there is little capability to pay. Third, fac ducing demands on consumers via local cus
tors affecting CBE will vary across product tomer assistance; and offering specialized
classes, resulting in considerable complexity. accessories appealing to different household
Moreover, issues such as potentially decreasing members. Such new value creation for consum
returns to consumption and producers' efforts at ers may be at least as important as TCE cost
planned obsolescence also contribute to com reductions when making the forward integra
plexity. And, fourth, CBE analyses are based on tion decision (Betancourt & Gautschi, 1998).
utility-maximizing, rational consumer assump Moreover, the CBE perspective suggests that for
tions, but, at times, emotional and spontaneous ward vertical integration between retailers and
consumption clearly occurs. consumers also can increase both production
Still, a consumer perspective can be an effec efficiencies and CBE, as is seen in online bank
tive foundation for new, midrange theories ing and online air ticket reservations.6
(lemison, 1981) that address important topics in These application examples have been rela
strategic management beyond those already tively simple and static, for ease of exposition,
mentioned in this article. For example, the con but the consumer perspective also can comple
sumer perspective could bring new ideas to the ment more dynamic, organic views of strategy
literature on strategic alliances (e.g., Gulati, (e.g., Farjoun, 2002). Consumers' product-specific
2003). Rather than basing alliances on comple human capital changes as a function of product
mentary skill sets, for example, potential alli experience and time. The shapes of these func
ances' possibilities of success might also be tions vary across different products and differ
evaluated by the degree to which partners' mul ent consumer segments. As discussed earlier,
tiple products can share a consumer segment's effective strategies can be developed for some
human capital for value creation. loint ventures segments to increase the trajectory of consum
(Gulati & Wang, 2003) similarly could be evalu ers' product-specific learning. But it is likely that
ated on the marginal consumer value they add, increases in consumers' product-specific human
in addition to factors like partners' skill and capital may produce decreasing marginal re
resource complementarities. And multipoint turns. Moreover, consumers receive utility from
competition could be viewed as competition assortments of goods (Alderson, 1965); too much
among firms across assortments of complemen consumption of one good, now or over time, can
tary products used by the same consumer, as in negatively affect its utility relative to other con
pricing decisions among supermarket competi sumption alternatives. And underlying prefer
tors, rather than as competition over the same ences can change with time. Thus, factors such
product in different locations (e.g., Chen, 1996). as (1) the trajectory of consumers' human capital
This would expand considerably the range of growth with product experience, (2) the marginal
competitive interactions that might be exam returns to increases in consumers' human capi
ined as multipoint competition. tal, (3) the level of usage per unit of time, and (4)
Even "classic" strategies like forward vertical the propensity for preference changes all must
integration, product scope expansion, and re be considered by firms attempting to identify
lated and unrelated diversification?typically strategies that will maximize the net present
analyzed from cost-economizing or resource value of CBE.
sharing perspectives?can be reinterpreted and It should be clear that the consumer perspec
enriched from the consumer perspective. A man tive cannot replace the existing approaches; in
ufacturing company considering forward inte deed, it cannot stand alone without them.
gration by developing or acquiring retail out Instead, it complements and extends the produc
lets, for example, could examine potential value tion-oriented perspectives?most important, by
creation in at least two ways. First, the forward providing mechanisms to link producer strate
vertical integration could create savings by re gies with consumer benefits. This link is impor
ducing manufacturer-retailer transaction costs. tant to strategy scholars and practitioners for
Second, it also could aid the company in creat
ing new consumer value at the margin by offer
ing greater control over distribution services, 61 thank an anonymous reviewer for suggesting this ex
such as growing local consumers' human capi ample.

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 2007 Priem 233

several reasons. First, it helps to align the exist petitive milieu in which other companies are
ing perspectives more closely with strategy also struggling to aid consumers. Therefore,
practice, which has always focused on con identifying "which Zs" to satisfy (Betancourt &
sumer benefit. Thus, the consumer perspective Gautschi, 1990) is important for every member
may have potential as a bridge between the of a value system.
academic world and the world of practice (e.g., I have argued that attention to the end user is
Whittington, 2003). Second, it moves beyond fundamental to successful strategic manage
statements that, for example, skills in "resource ment and, furthermore, that scholarly attention
picking" can reduce costs (Makadok, 2001: 388) to firm-consumer value linkages will likely en
toward uncovering how, specifically, firms can hance our understanding of factors leading to
help consumers experience value. This move sustained high performance. Work that comple
ment from description to useful prescription is ments existing approaches by incorporating a
elemental to the strategy field (Meyer, 1991). consumer perspective on value will be a step in
Third, the firm-consumer link clarifies the dis that direction.
tinction between value capture and value cre
ation. This distinction has been blurred in many
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Richard L. Priem (priem@uwm.edu) is the Robert L. and Sally S. Manegold Professor of

Management and Strategic Planning and a professor of management in the Sheldon
B. Lubar School of Business at The University of Wisconsin-Milwaukee. He earned his
Ph.D. in strategic management from the University of Texas at Arlington. His research
interests include the strategy-making process and chief executive decision making.

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