"From Value to Innovation" Construct Model

Abstract

There is a clear lack of capacity at organizational decision makers level to develop a decision-making process based upon a complete and clear understanding of multiple potential outcomes derived from different strategic actions. The existing analysis and scenarios creating models, used at the academic and practitioners fields, do not provide a single output that can be interpreted and taken as the unique and relevant information to be used at the decision-making moment, and are not or cannot be dynamic, turning any tentative to create scenarios based upon them impossible. Their lack of capacity to connect distinctive and still related variables creates great difficulty to decision makers when evaluating multiple business variables and producing decisions.

Current existing business simulation and diagnosis models only consider a reduced number of factors or variables, most only two variables represented by 2x2 matrices, not linking multiple existing factors and variables related to the business environment in order to deliver a final and single output, which could be used as the core indication for the decision-making process. That has led to an important question: How can information represented in multiple 2x2 matrices be reduced to a single representation? Or, in other words, can we interconnect two or more 2x2 matrices and create a new matrix that represents all variables in place?

Initially, the practical research work, which served as the base for this paper, focused on existing quantitative models of two and more variables and on theirs final delivered output. As none of those models proved to be capable of producing a final single output when considering more than two variables, the practical research derived to the tentative of finding a mathematical model that could integrate multi-variables and produce a single final output.

The first step was understanding that two variables represented in a 2x2 matrix, providing a positioning (dot) given by two coordinates, one in each axis, could be related to other two variables represented in another 2x2 matrix and all together should come to a single positioning. Coming from two 2x2 matrices, each positioning (dot) in any of them was used as a new coordinate of a third 2x2 matrix. Therefore, the positioning (dot) in this new matrix represents the four initial variables, two in each initial 2x2 matrix.

The proposed models in this paper will provide decision makers with single pieces of information, which have unique and unmistakable meanings, eliminating confusion and potential error at the moment of decision-making. The concept has been used in a software application dealing with multiple variables represented in different 2x2 matrices (3 or 5) and reducing all those variables to a single positioning in a final 2x2 matrix. Therefore, the proposed models provide a new view and understanding of the decision-making process, reducing multiple variables to single pieces of information, facilitating and easing the decision-making process.

The MAP (Moving along Alignments and Paradoxes) model provides a clear definition of any business strategy based on different variables. The model, set on six matrices, interrelated and connected by a mathematical process, brings to the four “strategy” archetypes, each one based on an unique marketing approach, six different factors, three representing independent variables, (1) product “value”, (2) organization “effort” supplied to creating value and (3) market environment (supply vs. demand), two representing dependent variables, (4) margin and (5) profit and a final factor, combining dependent and independent variables, (6) the strategy (Fernandes 2008, 2011)

The VBI (Value Based Innovation) model provides a clear definition of the adequate value curve to be pursued in any innovation action, from strategic definition to operational product conceptualization and production. The model, based on three matrices, also interrelated and connected by a mathematical process, brings to the four innovation proposed archetypes, each one based on an unique value curve, four different and independent factors: difficulty to satisfy (1) consumers qualitative requests and (2) external factors demanding innovation, plus needed organizational capabilities at the (3) knowledge/competencies level and (4) at the technological/processes level to answer innovation needs (Fernandes 2008, Fernandes e Martins 2011).

The DynamicMAP software^[1] will provide practitioners and scholars with a pragmatic tool to determine product value and its relation to strategy. It will help also those in determining the innovation’s value creation path. Connecting this information with strategic thinking and planning will reduce risk and help avoiding failure.

Keywords:

Dynamic models; strategy; innovation; decision-making.

1. Introduction

Using visual models to represent reality in the economic and business environment has been a constant for some authors (Ansoff 1965, Porter 1985, Tesmer 2002, Lowy & Hood 2004, Sarkar 2007), who had approached fields like business strategy and value creation. Many other academics and professional practitioners have worked on visual and non-visual models trying to represent innovation in its different dimensions (Shumpeter 1939; Abernathy & Clark 1985; Kline & Rosenberg 1986; Christensen 1997; Markides & Geroski 2005; Davila, Epstein & Shelton 2006, Sawhney, Wolcott & Arroniz 2006; Kelly & Littman 2006; Kingsland 2007). Their attempts have brought a better understanding to the market about how innovation evolves, develops, disseminates and transforms the economy. However, the conceptual format on many of those models makes their operational application difficult at the enterprises’ level. Entrepreneurs and strategy and innovation managers and practitioners have been seeking, for a long time, for a model that can, in a simple and clear fashion, indicate the most appropriate kind of innovation to be developed and applied on their businesses.

This paper intends to present practical strategic and innovation models to top management and scholars, which will bring the decision point down to a simple and unique proposition, answering entrepreneurs and managers’ doubts and validating the strategic reasons to use innovation as a mean to increase value creation.

2. Literature Review

The concept of “strategy”, from the military point of view to the business environment and management point of view has been deeply analysed and used (Chandler 1962; Ansoff 1965; Steiner 1979; Queen 1980; Porter 1980; Mewes 1981; Mintzberg 1994; Krause 1995; Kaplan & Norton 2001; Kim & Mauborgne 2005; Patel 2006, and many others), in such way that the word and meaning of strategy become vulgar to most entrepreneurs, corporate and business management and students.

Strategy is a kind of “plan” that fimrs define in order to conduct their own future, covering three different levels: corporate – related to different businesses or product lines, business – related to product positioning, and functional/organizational – related to distinctive competencies that may create competitive advantages (Eisenhardt & Sull 2001). From the business stand point, according to Lowy & Hood (2004), authors have worked many different subjects or perspectives like “market needs” (Gale 1994; Hamel & Prahalad 1994), “strategic context” (Porter 1980; Pascale & Athos 1981; Tesmer 2002), “strategic options” (Ansoff 1965; Rowe et al. 1984; Porter 1985), “marketing and communication” (Davenport & Back 2002) and “risk” (Henderson 1979; Ohmae 1982; Ralston 2004). All these authors have proposed their own models for strategic analysis and definition, and most are used in the business and academic world, providing a better understanding of the many different factors that impact business decisions.

The “market needs” perspective brings up the necessity to understand consumers in all its extension. One way to understand consumers’ needs is studying their specific functional and emotional needs and, consequently, transforming those into product attributes or functionalities. Value Analysis (VA) contributes to that understanding through a process of functional analysis (FA) and function costing, determining the relation between the satisfaction of needs and resources utilized, being this relation called “value” (Miles 1972; European Norm EN 12973:2000). A European transnational group of specialists in Value Management (VM) have produced a document (Value Management Handbook, European Commission, 1995) which illustrates the existence of a direct relation between “value” to consumers and business strategic planning and decision making, which is supported by the VM European Norm. Many of those applications of VM concept in the business world have brought up the issue of product value, from the consumers’ perspective, to the level of corporate strategic analysis and definition, impacting many aspects related to different stakeholders beyond consumers, like impact on society and environment, economical influence on suppliers and social influence on internal human resources.

From the observation of direct application of the value concept in strategic planning and implementation in many small and medium size businesses, I came to the construct of a model which progresses from value to product and business strategy, which provides decision makers with a clear vision of some potential scenarios and respective outcomes, based on a set of influential factors, internal and external to the companies.

This model intends to understand the needed alignment of the different factors in play in order to create the right conditions for any strategy to achieve success. The existence of a good and straight alignment of all factors in play is crucial to make any strategy sustainable. This implies that those factors must be controlled and managed by management. However, there are many factors that are outside the scope of control of management, which may be the only ones that support or sustain the business continuity, even without a clear manifestation of such importance. Using those factors as the base for some business development can become a “paradox” in itself, as one may have the feeling of an extreme success in one’s business but may not understand what it behind such success. The confrontation with this reality in many situations, especially in the small and medium size company world, has taken me to name the constructed model as “Moving along Alignments and Paradoxes” (MAP), as it can provide a clear idea about a business’s aligned or paradoxal existence.

On the other hand, as a tentative to comprehend innovation, many authors have come up with their own understanding of such phenomenon that implies change. Schumpeter (1939) defines technological changes and advances as the great cause of economical and industrial changing. To him, the economical cycles in capitalism are the result of changes imposed by innovation, which takes two aspects: the introduction of revolutionary products and services by successful entrepreneurs (1) are fundamental for the sustainable growth of the economy in the long term but (2) is also destroys, in the short term, the power of the established ones. Those fundaments transform innovation into a “destructive” action. Schumpeter divides the process of change in three major steps: invention; innovation and diffusion.

Abernathy and Clark (1985) define innovation as the initial introduction to the market of a new product, which conceptualization is radically different of previous practices. They have suggested four archetypes for innovation: niche creation; regular innovation; revolutionary innovation and architectural innovation. Cummings (1998) refers to innovation as the first well succeed application of a product or process. This concept of “the very first” is criticised by Hogskola (2003) as it leaves out the idea of continuous or incremental innovation. However, the concept of “well succeed application” keeps any tentative that fails to reach the market out of the innovation arena. Piana (2003) refers to innovation as the activity of people and organizations to introduce changes to them selves or to the environment. Innovation can also be, according to this author, an individual attitude, an organizational process and a social movement, therefore, innovation can be applied to products, processes and behaviours. Tidd (2006) refers to innovation as the tentative to work at the frontier level of technology, fragmenting market movements thought out the globe, and at the level of political uncertainty, regulation instability and new competitors coming from many different directions. To be successful in this environment one has to be very good in managing innovation at the network level. Tidd opens a new window in which “context and environment” are also susceptible of innovation. Now, after being from “inside out” and “outside in”, innovation can be also from “inside in”.

The Oslo Manual (OECD 2005) defines innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” (p. 46). It also defines that innovation must have a degree of novelty. Three concepts of novelty or innovation are mentioned: new to the firm; new to the market and new to the world. The manual still considers that “A related concept is a radical or disruptive innovation. It can be defined as an innovation that has a significant impact on a market and on the economic activity of firms in that market. This concept focuses on the impact of innovations as opposed to their novelty. The impact can, for example, change the structure of the market, create new markets or render existing products obsolete (Christensen, 1997). However, it might not be apparent whether an innovation is disruptive until long after it has been introduced” (p. 58).

Kingsland (2007) proposes that innovation can be applied at five different levels: product; service; process; business model and organizational structure. He suggests three types of innovation: breakthrough; differential and incremental. This approach introduces the word “differential” into the used lexicon, meaning that innovation can be applied to create differentiation on new products, processes or markets.

Many authors refer to differentiation as “vertical” when it creates a new of different “value” for consumers, related to the quality offered, and “horizontal” when it creates a different “price” for consumers, which is related to the product offered variety. This concept is mainly used at the macro economical level, mainly to understand IIT – intra-industry trade among countries but, the same concept can be used by firms to comprehend the practical implications that it can have on their innovation actions. Faustino (2003) refers that the pioneering models of Krugman (1979, 1980) and Lancaster (1980) take the horizontal differentiation view and Falvey (1981), Falvey & Kierzkowski (1984) and Flam & Helpman (1987) introduced the vertical differentiation on products. Companies differentiate their products to avoid competition. Doing so they justify different prices. The vertical differentiation takes quality as the basic distinction. However, horizontal differentiation reflects formally the Hotelling competition format (Hotelling 1929), transforming the price differentiation into a ruinous proposition to some competitors.

The product differentiation provides firms with the possibility of recovering some power in the market. Anderson (2005) mentions that this situation allows enterprises and corporations to overcome the “Bertrand paradox”, which would imply that the price of all competitors would be homogenous. The market logic, according to Bertrand’s competition concept, forces enterprises and corporations to bring their prices to the marginal cost level, the unique possible equilibrium point – equilibrium of Nash (Nash 1950). Anderson mentions that, based on special attributes which can differentiate a product from direct competitors, enterprises can exercise some pressure on the market establishing their prices without having an elastic answer from consumers, meaning that a differentiated product becomes a variable of choice, avoiding the Bertrand paradox.

Narajabad and Watson (2007) refer that a horizontal differentiation less expensive depends of the consumers’ preference for heterogeneity and that innovation increases if that preference is high, and that innovation diminishes if the same preference is low. Manez and Waterson (2001) conclude that at the vertical differentiation level one can identify three interrelated results: (1) the self price elasticity diminishes when the product quality increases; (2) the cross product price elasticity diminishes when overall quality increases and (3) the product profit margin increases with the increment in quality. Many innovation models (Schumpeter 1939; Abernathy & Clark 1985; Markides & Geroski 2005; Davila, Epstein & Shelton 2006) are set on what Kline and Rosenberg (1986) call the linear innovation model, where research, development, production and commercialization follow a by order and sequential process. However, many other innovation models (Christensen 1997; Kusiak & Tang 2006; Sawhney, Wolcott & Arroniz, 2006) are set upon what Kline and Rosenberg named the interactive model of innovation.

The other model proposed in this paper, the Value Based Innovation model (VBI), brings all previous understandings of innovation to the organizations’ operational level, in a very practical and easy way of understanding, allowing innovation managers and practitioners defining the most appropriate type and scope of innovation to be developed and implemented.

3. Basic Approach:

It is commonly understood that the mission of any business proposition is to provide economical return to shareholders; otherwise they would not invest their resources in any business, in the first instance. It is in accordance with this simple concept that the MAP model has been developed. It has been constructed with the specific objective of understanding the potential profit of any business proposition and the consequent and appropriate strategy to achieve such objective.

With that purpose set, the model evolves around five major variables plus one, each one represented by a matrix, being three independent and the other two dependent, and the last one a mix of both situations. The dependent variables in a business are those that are subjected to the result of other variables, that is, are themselves the result of something else. In this category we can include product “margin” and “profit”, as both are the outcome or result of decisions and outputs from different factors inherent to the business and to the market. The independent variables in a business are those that we or someone else may impact in different ways, inducing different outputs or results from real situations. In this category we may include the product “value” for consumers, the organization’s “effort” to deliver that value to consumers and the “market potential” derived from the combination of the demand and the supply connected to the same product.

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^[1] Apply for a copy of the software to: mtf@gestaototal.com