Understanding value capture
Transforming goods from raw material to a final product adds value to them – customers have a greater willingness to pay for the final products than the costs of the raw materials. However, while this transportation process adds value, it is also important as a company that you are able to capture that value for your own firm. If, for example, customers are able to push down the prices of the good and pay much less than the maximum that they would, then despite creating value, a company may not be able to retain or capture value itself.
Why is value capture important?
Value capture is ultimately just as, if not more important than value creation for firms. Creating large value, but not being able to appropriate any of it, can result in the downfall of a company. Profit margins may be squeezed, and other stages in the industry such as suppliers or customers may see great value, despite your firm not being able to achieve a profit.
What can influence where value is captured in the supply chain?
Value captured by powerful suppliers
If you have a particularly powerful supplier – possibly the only supplier or a particular product that you are dependent upon – it is possible that they may be able to capture a large proportion of the overall value that is being created. By pushing up the costs of inputs, it is possible that suppliers may be able to squeeze your profit margins, capturing a large proportion of the overall value that is being created for themselves.
Value captured by powerful customers
The value may also be captured by powerful customers that can push your prices down. A large customer may for example be able to use their power to force down your prices, capturing a larger proportion of the value for themselves, and squeezing your profit margins.
Value competed away through competition
A final way that you may fail to capture value is if it is competed away by competition, either with direct competitors or by substitute industries. This can have a similar effect as powerful customers – forcing the price down, this time because it is competed away by high industry competition.
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