Please forgive the length of this reply.
I have thought a great deal about Priyanka Bansal's (Ikea) question since she posted it on this list several days ago. The question she raises about value creation, I think, is right at the heart of strategic management, and especially at the heart of sustainable competitive advantage leading to superior performance. It is a question that centrally informs how I think about, write about, and teach strategy.
A short story from personal experience to illustrate the centrality of her question and the issues in understanding it (and thus managing it)....
Some years ago (longer ago than I care to remember now) I directed new business development for an herbal tea company many of you have no doubt heard about – Celestial Seasonings (in Boulder, Colorado). If you've ever had a cup of Mandarin Orange Spice Herbal Tea, that's a product I introduced. Ten years into our company's existence Lipton, a division of the largest food company in the world and a name synonymous with tea, came after our market. They spent more in the first year on establishing their herbal teas than Celestial Seasonings had earned cumulatively in its entire corporate existence. But when the dust had settled a year or so later after their introduction of herbal teas, Celestial Seasonings enjoyed a commanding market share and superior financial performance compared to Lipton's herbal tea division.
What made this possible? As we had organically grown our business and operations over our ten years, we had internalized vibrant intra-departmental and cross-industry connections. This was all about optimizing our internal and external value chains, although none of us at that time had the language or analytical appreciation of what we were doing. For example, our tea buyers visited upstream growers around the world and purchased specific crops to ensure raw material quality. Lipton relied purely upon herb wholesalers. Our labs analyzed our raw materials for chemical properties, and we fed that into the blending and mixing operation in order to produce truly superior tasting products (confirmed in head to head taste test research). Instead of blending massive quantities at one time and running a continuous tea-bagging operation as did Lipton, we batch-mixed and batch-bagged our blends in smaller quantities, ensuring consistency of product from first teabag to last in every batch. Based on consumer research we had done we decided to avoid using bleached white teabag strings when we installed new teabagging equipment. Customers applauded our decision. We were one of the first companies in America to establish an employee stock ownership plan, after tax law changes, in order to align every employee's behavior with overall corporate direction and performance.
I could go on. The point is that an action we took in one department was not only consistent with how we intended as a company to create value, but actually amplified the effectiveness of actions taken in other departments against the same higher-level strategic goal.
This story illustrates aspects of value creation, using a value chain concept, which often go deeper than merely using the value chain as an interesting depiction of how companies operate. It also points out questions related to doing research on value creation, of the sort that Priyanka has asked about.
Four questions come to mind, especially, about conducting value chain research. First, how can a researcher operationalize the concept of cross-value chain connections, in order to measure them? I suspect that the sort of cross-value chain behavior I described above is idiosyncratic to the organization. Attempting to identify such behaviors that are measurable and comparable across different organizations is terribly difficult.
Second, how does one operationalize performance in this context? Although one might be able to assess enhanced departmental performance more directly, as strategists we are generally interested in firm performance relative to competition. So there exists a levels of analysis issue.
Third, firm performance will likely result from a set of coordinating behaviors across the value chain. Celestial Seasonings' performance did not arise from just one of the behaviors described earlier, but from the entire set. And so it becomes very difficult to isolate performance effects of a single behavior.
Fourth, these questions are identified because as academics we are generally positivists. The question we cannot answer (or maybe even ask if we are interested in publishing) is "what would have happened to Celestial Seasonings if the company had not engaged in these cross-value chain behaviors?" We are not particularly adept at answering "what might have been" questions.
For these reasons, I think, there is a dearth of published research that critically explores these sorts of cross-value chain actions.
Still, I think there are some useful tools for practitioners such as Priyanka. One tool is to use activity-based costing techniques to identify the flows of costs associated with discrete value-creating behaviors in organizations. These help to reveal touchpoints, where for example investing more in behavior A can reduce time and energy (and costs) embedded in behavior D. I also employ the balanced scorecard to help identify the causal connections between activities in one sphere of the organization as well as between different levels within the organization. Neither of these are simple tools to use, and both have in the past been criticized as not really being a part of strategic management. But in practice they can usefully shed light on what I have described above.
Finally, and perhaps most importantly, I believe that the sorts of cross-value chain activities I've described above are right at the strategic core of any organization. Why? Because done right, they are not only valuable but also rare and inimitable. Thus, focusing on such cross-value chain activities can lead nicely into a discussion of resource-based advantage. I also use a form of "root cause" analysis to identify what underlies these sorts of resources.
In my teaching and my consulting work I use these practical tools with positive effect. If you're interested in exposing your students to some of these ideas, I write about them in my textbook Strategic Management (6e, 2020). I'd be happy to get you a complimentary instructor copy. Just shoot me an email directly.
Professor, Strategy & Entrepreneurship
Wake Forest University