Value Creation, Value Extraction, and Ecosystem Design

The online economy contains a paradox that we do not yet know how to resolve. Simply put, the paradox is this: Startups create value for their stakeholders, but if they are successful, they become monopolists who extract value from their customers. Take Uber as an example. Initially, it created value for drivers because it offered them a side job, and it created value for customers because of superior service. However, its current goal is “to reduce driver incentives to improve our financial performance.” It sells the rider’s data and aims to monopolize transportation. These goals are about value extraction rather than value creation.

What is value extraction?

Mariana Mazzucato – in her recent book The Value of Everything – explains that value extraction occurs when someone generates income not by producing anything new but by charging above the competitive price, usually by exploiting a monopoly. The classic example is the 18th-century landowner overcharging its tenants for the right to work on his land. Peasants had to give most of the produce of their land to the landowner, keeping just enough to survive.

Value extraction is of all ages. The economist William Baumol lists usury and political payments in ancient Rome, litigation to prohibit competition in the middle ages, and patent monopolies in modern times. Network monopolies, such as Uber is aiming for, are a contemporary example.

How can we create a market that is free of value extraction?

The economic term for value extraction is rent-seeking. Surprisingly, Adam Smith defined a free market not as a market without government interference, but as a market without rent-seeking.  His famous observation that self-interested actions result in unintended social benefits is about self-interested value creation, not about self-interested value extraction. His “invisible hand” takes care that the results of independent, self-interested value creators contribute to the common good.

A role for government

 It seems, paradoxically, that only a central government has the power to put a stop to value extraction and rent-seeking. An example is the call of ten European cities, including Amsterdam, Berlin, Paris, and Vienna, for help from the European Union to combat the excesses of AirBnB rentals. The home sharing economy threatens to turn into a marketplace where landlords can extract value from their property without caring for negative side effects, and these cities want to prevent this. But separately they are not powerful enough to do so. They have turned to the EU for regulatory help.

To prevent that a central government itself succumbs to value extraction, it must be pluralistic and under democratic control, as illustrated with ample historical evidence by Acemoglu and Robinson.

Government intervention may be one element of a solution to the problem of excessive rent-seeking, but we as business actors have a responsibility in this too.

A role for business

Mariana Mazzucato points out one element of a solution: Instead of aiming at maximizing shareholder value only, we should aim at maximizing stakeholder value. Elaborating this in terms of our TEAM framework, each company is part of an ecosystem that not only contains shareholders but also customers and suppliers, their customers and suppliers, and its competitors and partners. To make a business model of a value proposition, we should make a viable stakeholder model of the ecosystem and assess the distribution of benefits, costs, and risks over all stakeholders of that ecosystem.

Ecosystem business modeling

This means that a business model of the ecosystem of a company consists of three parts:

  • A value proposition that describes the offering for customers;
  • A stakeholder model that describes who is involved in producing this value proposition;
  • A profit model that shows how each of the stakeholders profits from participating in the ecosystem, and what risks it takes.

A business model of Uber’s ecosystem would show that, in the world envisaged by Uber, the distribution of cost, benefit, and risk over stakeholders would not be perceived as fair by all stakeholders in its ecosystem.

More about the construction of ecosystem business models can be found in my earlier blog about the TEAM framework. Using this framework for the architecture and governance of ecosystems is not sufficient to solve the problem of value extraction. We also need the willingness to distribute costs, benefits, and risks fairly over stakeholders. But to make this possible, it is necessary to use a constructive approach to ecosystem architecture and governance to get a grip on the problem.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.