Table of Contents
Managing Innovation through Internal Corporate Venturing.
A System Dynamics Approach
Carmine Garzia*
Strategic Management Department
Bocconi University & SDA Bocconi Business School
Viale Isonzo, 23
20136 Milano
T. 0039.02.5836.2522
F. 0039.02.5836.2530
E. carmine.garzia@uni-bocconi.it
*This paper is based on the Intermediate Master Work of the Author for the M.Phill in System
Dynamics of the University of Bergen, Norway. Paal Davidsen and Alexei Sioutine have made useful
comments on earlier drafts of this paper. Participants to the Research Seminar Program at Bocconi
University provided useful comments: Giuseppe Airoldi, Vittorio Coda, Gianluca Colombo, Donatella
Depperu, Giorgio Invernizzi, Cinzia Parolini, Alessandro Zattoni. The research received support from:
Bocconi University through the Fondi per la ricerca di base program and The National Council of
Research CNR through the Borsa Giovani Ricercatori program. The Author is grateful to SDA Bocconi
Business School and the Bocconi University for the financial support as Visiting Scholar at the
University of Bergen.
1. Introduction
This paper explores the firms’ ability to continuously nurture strategic innovation
through the promotion of Internal Corporate Venturing programs. Fundamental goal
of the research is to investigate the conditions that enable companies to conduct
successful corporate venture programs.
During the 70s Corporate Venture Capital - ICV encountered a large diffusion among
US diversified companies as a mean to explore new business opportunities in related
industries and to generate innovation in products, processes and services [von
Hippel, 1977].
Top managers devoted many efforts to design rewards and incentives policies to
stimulate the entrepreneurial behaviour of employees and to increase the number of
submitted projects [Drucker, 1985].
ICV programs experienced three main problems [von Hipple, 1977; Zahara, 1991
1993].
The rate of new project delivered by engineers was lower that expected. Because of
the poor numbers of new projects presented, ICV programs weren't able to provide
significant new strategies.
The second problem concerns the discontinuity in project presentation rate. This
jeopardized the possibility to generate a stable flow of innovation introducing new
products and services (developed in the ICV program) in the normal activity of
corporation.
A further problem experienced by ICV programs was the economic disequilibrium
between resources invested and benefits. The increase of costs was determined by
the introduction of complex mechanisms of incentives and rewards which didn’t boost
enough the development of new projects.
Despite their partial failure, ICV programs remain one of the most powerful mean to
stimulate innovation in large established companies. ICV projects may introduce new
strategies or can contribute to modify the general strategy of the company
[Burgelman, 1983a, b,c]. A typical ICV project incorporates a new market strategy for
the new product or the new service developed. New products and new services may
require new production processes.
Top managers, through ICV programs, can integrate in the company’s corporate
strategy the ideas coming from front line managers which have closer contacts with
final customers.
During the 90s ICV programs were introduced also by non diversified companies to
revitalize mature business or to increase sales and profitability, through to new
products and services [Baden-Fuller and Stopford, 1994].
The problem of the effectiveness, measured by the total number of project presented
and by the continuity of the presentation rate, of ICV programs remains partially
unsolved. This paper tries to answer to the problem exploring, though a System
Dynamics model simulation, the Internal Corporate Venturing process. The analysis
is centred on the design of organizational context and in particular on the role played
by incentives and rewards.
The paper is structured into six parts. After a brief review of the literature, dedicate to
clarify the relation between corporate entrepreneurship and strategic management,
Carmine Garzia 2 Bocconi University - Strategic Management Department
the conceptual model is illustrated. The third part is devoted to the stock and flow
model description, the fourth to the model validation. In the fifth part simulation
results are presented. In the conclusive section | discuss simulation results and | give
address for further researches.
2. Corporate entrepreneurship and strategic management
In the mid 90s inside the strategic management field a debate emerged on the
relation between firms’ strategy and industry structure. According to strategic
management scholars like Abell [1993], Hamel and Prahalad [1995], D’Aveni [1995 e
1999] and Markides [1997, 1998, 1999 and 2000] the industry structure is considered
a dynamic environment that could be modified by companies’ innovative strategies.
Based their work on the model of competitive strategy, they developed an original
approach to analyze industry transformation processes.
D’Aveni [1995] studied the effects of strategic innovation in middle sized companies
and discovered that high focused and innovative companies can build competitive
advantage and become industry leaders.
Markides [1997] has clarified the content of strategic innovation: “the essence of
strategy is to choose one position that the company will claim as its own. A strategic
position is simply the sum of the answers that a company gives to the questions:
Who should | target as customers? What products or services should | offer them?
How should | do this in an efficient way?” Strategy is all about choosing a distinctive
(different from competitors) strategic position, in this perspective strategies are
unique and they can be called “innovative”. To have a unique strategic position a
company must generate constantly strategic options and then has to choose among
them. The competitive advantage based on strategic innovation could be sustained
only if companies are able to renew the sources of their creativity thereby nurturing
internal entrepreneurship.
The power of strategic innovation was recognized also by Henderson and Cockburn
[1994, 2000] which demonstrate how new strategies, implemented by pioneer
companies, can become dominant and can influence the strategic behaviour of
competitors and the industry structure. They relate the ability of the firm to generate
new strategy to a distinctive set of resources. Once the new strategy has been
implemented and has been imitated by competitors, the original set of resources
becomes obsolete and the company must renew it.
These contributions clarified the effect of innovative strategies on industry structure,
but didn’t bring much light on the process through which companies create new
strategies.
A powerful contribution comes from studies on corporate entrepreneurship.
Stopford and Baden Fuller [1994] demonstrated a linkage between the creation of
ventures within an existing organization and the Schumpeterian entrepreneurship,
which happens when an enterprise changes the rules of competition for its industry in
the manner suggested by Schumpeter [1934].
Many authors have underlined corporate entrepreneurship as a process that
contributes to firm survival and performance [Covin and Slevin, 1989; Ducker, 1985,
Lumpkin and Dess, 1996], they argueed that entrepreneurial attitudes and
behaviours are necessary for firms of all sizes to prosper and flourish in competitive
environments.
Carmine Garzia 3 Bocconi University - Strategic Management Department
Bower [1991] argues that in large companies the ability to create strategic innovation
is related to the bottom-up process of understanding the innovation signals that
comes from the front line management.
According to Burgelman’s process model of Internal Corporate Venturing [1983a, b
and c, 1985], the success of ICV depends on the availability of autonomous
entrepreneurial activity on the part of front line management, on the ability of middle
level managers to retain at an higher level of the organizational structure the
implications of entrepreneurial initiatives and on the capacity of top managers to
allow viable entrepreneurial initiatives to influence the corporate strategy.
In a more recent contribution, while presenting an ecological model of strategy
creation process, Burgelmann [1991] emphasizes the role of managers in designing
the firm’s structural context which is constituted by the firm’s organisational structure
and the administrative systems such as, for example, information, rewards and
incentive mechanisms. Administrative mechanisms influence the atmosphere in
which the emergent strategic behaviour of front-line managers is shaped.
The above mentioned contributions clarified the relation between ICV and strategy
formation process, they also pointed out the role of the firm’s structural context, in
particular of the organizational structure and the intangible elements of the
organizational context, in fostering the emergence of autonomous entrepreneurial
initiatives. However remain partially unexplored the theme of effectiveness of ICV
programs, defined as the number of project presented and the constant of the
presentation rate and the role played on it by administrative mechanism like
incentives and rewards.
Capitalising on relevant literature on internal corporate venturing, | propose a System
Dynamics model of ICV process to investigate the determinants of effectiveness of
ICV programs.
Rooted in control engineering and the theory of servomechanism [Richardson, 1991],
System Dynamics (SD) was created at Massachusetts Institute of Technology in the
late 50s by Jay Forrester [1961, 1968a, 1968b, 1969, 1973].
Originally conceived to address problems encountered by managers in corporate
systems [Forrester, 1961; Roberts, 1978], SD modelling contributed valuable insights
in many realms.
SD modelling is based on the assumption that many phenomena can be successfully
analysed as elements of a dynamic system. Such a dynamic system is characterised
by a particular behaviour over time. A system’s behaviour can be studied as the
result of the internal structure of feedback loops among variables. A SD model can
therefore be considered as a reasonable abstraction of the structure and behaviour
of the real system observed [Richardson and Pugh, 1981], and represent a theory of
the behaviour of that system.
SD literature contains an impressive collection of examples of how models, built by
scholars of this field, have facilitated theory building in different contexts.
For example, Forrester pioneered the SD field by modelling urban growth and decay,
and world dynamics [1973]. Meadows [1970] generated a model of the dynamics of
commodity production cycles. Mass [1975] modelled economic cycles and Low
[1980] used a SD perspective to analyse Solow’s model of growth.
Carmine Garzia 4 Bocconi University - Strategic Management Department
Moreover, SD models have provided useful environments to explore theories of
business cycles [Sterman, 1985, 1986], to investigate the petroleum life cycle
[Davidsen, Sterman and Richardson, 1990], to analyse high-technology market
growth-cycles [Morecroft, 1986] and to interpret strategic behaviour of firms
[Markides 1999 and 2000; Senge, 1990].
The use of simulation in organization theory and in the strategic management field
requires some remarks. The translation of a verbal theory to a mathematical
representation results in the loss of richness, however there are two benefits in using
the modelling and simulation. First “The simulations enforces the internal consistency
of the theory, thus ensuring that the behaviour it pourpots to explain can in fact be
generated by its underlying assumptions” [Repenning, 2002]. Second, a simulation
model is a laboratory where it’s possible to discover implications of the theory that
are not intuitively obvious: a theory that describes any type of non-linear process can
often generate a much wider range of behaviour that its author anticipates.
3. Introducing the conceptual model
The model conceptualization could be started unfolding assumptions made to
represent, through causal loop diagrams, the internal corporate venturing process.
These assumptions are based on relevant contributions on ICV processes
[Burgelman, 1983a,b,c; von Hippel, 1977].
e The ICV Unit is an independent organisational unit inside the Corporation. It can
be figured as a "think thank”, like the Xerox Park were engineers work eon
innovative projects that later are implemented in the Corporation.
e The ICV unit has its economic funds, provided by the Corporation. If the initial
stock of funds is entirely consumed, the Corporation will deliver further funds to
the ICV unit.
e Engineers work exclusively for the ICV unit, during the conduction of the ICV
program they are exempted from other tasks in the Corporation.
e ICV unit engineers submit to ICV committee (formed by top managers and
external advisors) projects for new products and/or services. The projects are
presented using an appropriate format: a business plan including the
technical/industrial analysis and the market potential analysis for the new
product/service
e Engineers are responsible for project presentation and for project completion.
They are free to choose how to allocate their time. However if the projects
presented are higher than projects completed, top managers can act to rebalance
the time allocation to project completion.
Managers review and approve presented projects.
Once approved, presented projects are completed and are delivered (or
implemented) in the Corporation. Projects flow out from the ICV unit and enter in
the Corporation. A special force called Delivery force, constituted by high qualified
workers, is in charge of projects implementation. Delivery force is part of the ICV
unit, but operates in the Corporation.
e Incentives are given to engineers to stimulate the presentation of new projects,
independently if they are approved or not.
e Rewards are given to engineers for each project completed.
e The duration of ICV program is of ten years (120 months). The typical duration of
such programs may vary from 3 to 10 years, for the simulation was chosen the
higher level to verify the existence of cyclical behaviour.
Carmine Garzia 5 Bocconi University - Strategic Management Department
The model presents four critical feedbacks (Figure 3.1). The problem of time
allocation plays an important role in each of these feedbacks.
B1 Incentive and time. The more incentives are given to stimulate the project
presentation, the more time will be allocated on project presentation activity. The
more projects are presented the less incentives are given to stimulate the
presentation of projects, because top managers (which govern incentives) are
satisfied with the presentation rate.
B2 Incentive and productivity. The more incentives are given for project presentation
the more will be engineers productivity in project presentation. This will have a
positive influence on the number of projects presented and will stimulate mangers to
reduce incentives.
B3 Approval pressure. Top managers work in the Corporation. Every month they
devote only a small amount of their time to project examination (they devote the
majority of their time to normal tasks). The increasing gap between the project
presentation rate (that can vary according to the time dedicated and the productivity
of engineers) and the approval rate, forces top managers to intervene on the time
schedule of engineers reducing the time for project presentation and increasing the
time for project completion. This will reduce the presentation rate and consequently
the gap.
B4 Rewards and time. The introduction of rewards for each project completed
reduces the time dedicated by engineers to project presentation and increases the
time for projects completion. This will increase the project completion rate and will
stimulate top managers to reduce rewards for project completion rate. Engineers
have a delay in perceiving rewards because these are paid at the end of the project
development process (only when projects are implemented) consequently they will
reduce the time devoted to project presentation only when they will perceive rewards.
Carmine Garzia 6 Bocconi University - Strategic Management Department
Figure 3.1 Main feedback loops
Time devoted to project
completion
Project presented
Project approval ra
B2 Time devoted to project 7 “s
Incentive and time
presentation
Incentive and
Productivity
Incentives
G
Approval pressure
Project completed
Rewards
(es
Rewards and time
The negative feedback, B5 Engineers and presentation rate, describes the hiring
policy for engineers (Figure 3.2). The increasing of the approval pressure, caused by
the gap between the project presentation rate and the project approval rate, will have
a negative influence on engineers hiring rate. Top managers will reduce the new
engineer hiring rate to reduce dimensions of the ICV unit (assuming the quit rate
constant). The reduced number of engineers in the ICV unit will determine a
reduction in project presented.
Carmine Garzia 7 Bocconi University - Strategic Management Department
Figure 3.2 Engineers hiring policy
Time devoted to project
‘completion
Project presented
Project approval rate
Productivity
BS Time devoted to project tive aad t
presentation Incentive and time
Incenti
Produ
*
Approval pressure
Incentives
ts
Approval pressure
Engineers
Project completed
Engineers and
presentation
rate
Rewards
Rewards and time
Engineers hiring
rate
The last two feedback loops are related to economic aspects of the ICV process
(Figure 3.3).
B6 Cost of presentation. The presentation of new projects determines expenses
related to the R&D activity of engineers. The available funds will decrease stimulating
the reduction of incentives which determines a reduction of: time devoted to project
presentation, project presented and costs related to project presentation.
R1 The rewards engine positive feedback introduces the role of the delivery force.
The increase in project completed will determine an increase in the demand of new
delivery force. Projects start to generate revenue only when they are implemented in
the Corporation. The increase of delivery force has a positive influence on project
delivered and finally on available funds. The availability of funds will stimulate: the
increase of rewards, the decrease of time devoted to project presentation and the
increase of the time devoted to project completion.
Carmine Garzia 8 Bocconi University - Strategic Management Department
Figure 3.3 Feedbacks describing dynamics of economics
Time devoted to project
"completion
Project presented
Time devoted to project
presentation
f Project completed
Incentives
+
Rewards *os ‘Sunk costs per project
+ Cost of presentation +
Delivery force
Hiring rate
‘Available funds
fh
Financing from The rewards engine
the corporation i"
Project delivered
Delivery force
The prevalence on negative feedback in the conceptual model can give some hints
on what can be the behaviour of the system. While positive feedbacks generate
growth, amplify deviations and reinforce change, the negative loops seeks balance
equilibrium and stasis [Sterman, 2000]. Negative feedback loops act to bring the
state of the system in line with goal or desired state and during this process they can
cause oscillations.
This conceptual model has been translated into formal model based on stock and
flow diagrams which is described in the following section.
Carmine Garzia
Bocconi University - Strategic Management Department
4. Stock and Flow diagrams
Grounding on the causal loop analysis the model describes the management of the
ICV organisational unit. General assumptions are the same made for the causal loop
design.
The unavailability in the entrepreneurship literature of recent data on economic
aspect of ICV programs was solved adopting conventional values built capitalizing
old values.
The model is articulated into five parts which describe different aspects of the Internal
Corporate Venturing process:
e profitability, incentives and rewards;
project development;
employees dynamics;
salary and incentives for employees;
productivity of employees.
eecee
Profitability, incentives and rewards
The goal of this part is to illustrate the dynamics of main economic aggregates of the
ICV division (Figure 4.1).
Figure 4.1 Profitability Incentives and rewards
Profitability, Incentives and Rewards
er_proje¢ Net_Income
is 45
Average employees salary
Avalaibf.fynds
Incomes Totfl_Exfenditures
Financing_frqm_the_corporation 5 a
g_irgm_tne_corp Projects_presentation_rate
Reward i ct a
‘eward_per_engineer_pePdproje' Cost_of_project_presentation
i ca |
om ‘otal_engineers
KS Total_Rewards_for_project_completion
Projects_completion_rate
The section of the model is built around the stock Available Funds. The stock
represents the amount of money destined to the ICV division by the Corporation. The
initial amount of funds, for a 10 years ICV program, is of 10 million euros.
Using this amount of money the ICV division finances the development and the
implementation of new projects and expenses for the workforce (engineers and
Carmine Garzia 10 Bocconi University - Strategic Management Department
implementation workforce).The stock has two inflows. The first is given by incomes,
generated by projects implemented. Once projects are completed in the ICV unit they
are implemented in the Corporation which pays an amount of money to the ICV unit.
The second inflow is represented by financing from the corporation which are given
only if the available stock falls to 0; this is an emergency financing that enables the
ICV division to continue its work in case of financial difficulties.
Total expenditures are determined by the salary of workers and the cost for project
presentation. The average salary of workers is calculated as weighted average of the
salary for three categories of workers: engineers, working force and delivery force.
The cost of project presentation is given by the expenses in R&D sustained by
engineers to develop new business ideas. Once the project is approved it has to be
completed with more in depth technical analysis and marketing surveys, but it doesn’t
requires R&D expenses.
The salary includes incentives for project presentation. Incentives are given as a
percentage of the salary to stimulate the presentation of new projects; they can vary
from 0 to 10% of the salary of engineers.
Rewards are given to each engineer for each project completed, they can range from
0 to 10 euros.
The Return on Investment - RO/ has been adopted as a conventional measure of
profitability of the projects. In the model the ROI has been calculated as the ratio
between the net profit generated by the project and the total expenses.
Project Development
This is the core part of the model. There are four main stocks controlled by four rates
which represent the flow of projects from the business idea stage to the
implementation stage (Figure 4.2). Projects are submitted to top manager by
engineers, once approved the projects are completed by engineers and come into
the Project completed stock. The delivery force implements projects into the
Corporation.
Carmine Garzia " Bocconi University - Strategic Management Department
Figure 4.2 Project development
Project Development
1
Top_managers_quiting_rfep\ mangers_hiring_rate
Top_managers_quit_fraction . Top_managers_hiring_fractio1
; ( landgers_Prodketi inimffy_approval_time
Minimum _delvery_trginimam_completyn_time\ ob
Proje
Project Z jects_ooifxiorcrate Projects_approval_rate Projects Adfentation_rate
rm™N
NA
Average_productivity
r
& a
Total_engineers
ractional_time_to_project_compleféactionalime_tdf prdject_presentation
Reference_fractional_time_for_pjoject_presentation
ivery_ford
Deliery_force Quiting_rateDelivery_forcethiring_rate
Delivery_force_adj_time
one “
Effestof_rewards fect_of_appfpval_pressure
Delivery_force_quit_ fraction
rN Effes_of_incentives
N44
Average_salary_engineers 5
Rewayd_salary_ratio
WG
Incentive_level
Approval pressure
faks_per_engineer
7
Max_potentfllMapproval_rate Desired apRroval_rate
Reference_rewards Projects_presented
4
I
a Desired_approval_timd
4 nW4 Top_mangers Managers_Productivity
eward_per_engineer_per_projecProjects_completion_rate
Carmine Garzia 12 Bocconi University - Strategic Management Department
The project approval rate has a relative simple structure. The assumption is that the
number of top managers is constant. At the beginning of ICV programs the
Corporation’s CEO choose the team of top managers that have to supervise the ICV
program, during the ICV programs some managers can be allocated to new functions
and new tasks inside the Corporation, consequently they must leave the ICV
committee and are replaced. The participation to ICV Committee is not a full time job,
top managers allocate to this activity only a small portion of their working time,
generally below the 20% of the monthly working hours, consequently can be
assumed that the productivity in projects processing is constant.
The structure of the model was designed to have a stock of project approved which is
higher than the other stocks. This is consistent with the literature contribution on ICV
processes and internal entrepreneurship [Burgelman, 1983a, 1983b; Bower 1970] for
which top managers prefer to have a portfolio of strategic initiatives (as a safety
reserve) exceeding the completed projects.
The number of project completed influences the hiring rate of the delivery force. The
delivery force is constituted by managers and engineers of Corporation, temporarily
allocated into the ICV unit. They do a border line job: they work close with engineers
of the ICV unit to implement in the Corporation new projects. During the ICV program
they can leave the ICV unit and come back to normal tasks (it's assumed a constant
and low monthly quit fraction), in this latter case they are immediately replaced.
The central problem in this part of the model was to determine the time allocation of
the engineers between project presentation and project completion. The fraction of
time devoted to project presentation determines, as difference, the fraction of time
remaining for project completion. The reference fractional time allocated to project
presentation is of 50%. The reference time is decided by the top managers which, at
the beginning of the ICV program, plan that engineers should have an equal
distribution of time between presentation and completion. However is non-realistic to
assume that the real fraction of time will be constant during the program, because
there are many factors which can influence the behaviour of engineers.
The challenge to determine the fractional time to project presentation was solved
introducing the combination of three different effects: effect of approval pressure,
effect of incentives and effects of rewards. The effects represent three different types
of pressure which are directed in different directions, to better represent the total
pressure deriving from the combination of these forces the effects combine each
other through a multiplication.
Effect of approval pressure. This effect was built to represent the behaviour of top
managers inside the ICV process and in particular the level of authority they can
exercise on engineers. Engineers are responsible for project presentation as well as
for project completion. They are free to allocate their time when the approval
pressure is equal to 1 (Figure 4.3). The approval pressure is determined by the
constant comparison between the max potential approval rate (related to the top
mangers productivity) and the desired approval rate (mainly related to the number of
projects presented). When the approval pressure is over 1, means that managers
have to process a number of projects exceeding their capacity, consequently they will
act to reduce the time that engineers can devote to project presentation. An approval
pressure inferior to 1 means that there are few projects presented compared to the
top managers processing capacity, consequently top managers will force engineers
Carmine Garzia 13 Bocconi University - Strategic Management Department
to allocate more time on project presentation. The effect of approval pressure on
fractional time to project presentation ranges from -50% to +50%. The managers can
only address the behaviour of employees using their authority, but they cannot have
the complete control of engineers working time. For instance: as the approval
pressure increase two times the effect on fractional time devoted to project
presentation will be negative for only 50%.
Figure 4.3 Effect of approval pressure
Output (Effect_of_approval_pressure)
0.0 2.0
Input (3)
|Approval_pressure |
p |
Effect of incentives. Incentive level influences the commitment of engineers in project
presentation and stimulates them to spend more time on project presentation (Figure
4.4). Engineers think that the higher will be the project presentation rate the more will
be incentives. Incentives can vary from 0 to 10% of the ordinary salary of engineers;
when incentives are at 10% the increase of time devoted to project presentation is of
50%.
Figure 4.4 Effect of incentives
Output (Elfects_of_incentives}
1
0,00 0,10
Input XI
Incentive_level |
pe |
Carmine Garzia 14 Bocconi University - Strategic Management Department
Effect of rewards. The introduction of rewards for each project completed to each
engineer is a powerful way to influence the time allocation. Engineers will be
stimulated by the possibility to obtain rewards for project completed. Consequently
they will dedicate less time to project presentation to focus on project completion.
The perception of incentives is not immediate. Because incentives are given only at
the end of project development process, is realistic to assume the existence of a
delay in rewards perception. Engineers will start to switch their time only when they
will perceive that the work on project completion is well recognised by top managers,
through incentives. The perception of incentives is not absolute: engineers perceive
incentives comparing them to their salary through the Rewards salary ratio. The
increasing of this ratio will determine a negative effect on the time allocated to project
presentation which can reach the maximum level of 50% (Figure 4.5).
Figure 4.5 Effect of rewards
Output (Etfect_of rewards)
1,07
0.83
0.64
v2:
0.04 1
0,0 05
Input 0};
Reward_salary_tatio
Carmine Garzia 15 Bocconi University - Strategic Management Department
Employees Dynamics
This part of the model represents the dynamics of engineers. The structure adopted
(Sterman 2000) for the stock and flow diagram is built around two stocks: New
engineers and the Experienced engineers (Figure 4.6).
Figure 4.6 Employees dynamics
Employees Dynamics
Time_to_perceive_quit_ra erceived_quit_rate
Engineers_adj_time
action
Total_wdrking_force
Projects_approved
Change_in_perceived_productivi
| ‘
Time_to_perceive_productivity Average_productivitpesied_completion_time
The ICV division is an organizational unit devoted to innovation; the Corporation
doesn’t hire experienced engineers, but it focuses on new high-talented engineers
that can brig fresh ideas. Recruitment is conducted among engineers already
employed in the Corporation as well as on external job market. New engineers
became experienced in two years (assimilation time). The quit rate is supposed
extremely low and it express the number of engineers that leave the ICV unit, they
can remain in the Corporation with other tasks or can leave the Corporation. The quit
rate is not influenced by top managers; they don’t reduce voluntary the number of
engineers because this can affect the competences accumulated in the ICV team.
The hiring policy is governed by the Total working force needed which is constantly
compared to the total engineers available. If the working force needed is less than
totals engineers, it influences the hiring rate. The total working force needed is
determined by the fractional time for project presentation and the desired working
force on projects. This last is determined by top managers that from one side have a
perception of engineers’ productivity and on the other side have a desired completion
rate determined by the number of project approved.
Carmine Garzia 16 Bocconi University - Strategic Management Department
Salary and incentives Employees
The diagram illustrates the calculation of the cost of the total workforce (Figure 4.7).
The salary for experienced engineer, according to what normally happens in the
labour market, is higher than the salary for young. The incentive level, which is
calculated as a percentage of the basic salary, is the same for experienced and new
engineers. The delivery force employees have no incentives because they don’t have
to generate new ideas and complete new projects, but they have only to implement
projects already made; besides is possible to hire new delivery force instead of give
them incentives to boost productivity.
Figure 4.7 Salary and incentives
Salary & Incentives Employees
Delivery_forcéxperienced \engineet¥ew_engineersBasic_salary/ experienced,
Total_Workjng_Force
Incentiye_level
Basic_sglary_new
Salary_experienced_engineers
Safary_new_engineer
omN
Salary_delivery_force op 4)
Total//engineers
Average_salary_engineey
Average_employees_salary
Carmine Garzia
7 Bocconi University - Strategic Management Department
Productivity Employees
The diagram depicts the productivity of new and experienced engineers (Figure 4.8).
The productivity influences the project presentation rate and the project completion
rate (according the time devoted to the two activities). The productivity of new
engineers is supposed to be inferior to the productivity of experienced ones.
Figure 4.8 Productivity employees
Productivity Employees
ra
&
Productivity_eyPerienced_engineers
Productivity_ney® engineers
Incentive_level
The productivity of engineers can be influenced by the introduction of incentives,
however, according to empirical evidence [Hanan, 1976] , effects for the increasing of
incentives’ level will be different for new and for experienced engineers.
The non linear relations shows that
the maximum increase in experienced engineer
productivity reach 60% with an incentive level of 10%, after this is not possible to
achieve better results (Figure 4.9). Young engineers are more sensible to the
increasing of incentives. An incentive level of 8% increases their productivity of the
80%, however, also increasing more the incentive level, is not possible to obtain
further improvements.
Carmine Garzia
Bocconi University - Strategic Management Department
Figure 4.9 Effect of incentives on productivity of new and experienced
engineers
Output (Effect_on_expereinced_eng_productivity) Output (E ffect_on_new_eng_productivity)
1,05 1,05
08+ 0,84
06+ 0,64
04+ 04 E
0,24 0,2
004 , 004 :
0,00 0,10 0,00 0,10
Input (J: Input (J:
Incentive_level | | incentive level 2]
zi ja
5. Validation
Despite the theoretical nature of the paper, the translation into System Dynamics
language of concepts and hypothesis from the literature requires a process of
validation of the model, mainly devoted to asses the internal validity of its structure.
In System Dynamics validity is seen as the adequacy of model structure in
representing the selected aspects of the reality with respect to its purpose [Barlas,
1989, 1990]. The validity is a concept which relates the model structure with the
reality. There are two main type of models: causal and correlational. Causal models
are named also descriptive model where are causal statements on how the real
systems actually operate. In this case what is essential is the internal validity of the
structure creating the behaviour. Correlational models, called also “black box”
models, don’t have any claim of causality in their structure. These models are
considered to be valid if model output matches real data.
Our model is a causal descriptive model built on theoretical contributions, in this case
the validation process must develop through tests for assessing the structural
(internal) structural validity of the model (internal validation) like the structure oriented
behaviour tests. They asses the validity of the structure indirectly, by applying certain
behaviour testes on the model generated behaviour patterns.
Two types of structural validation tests have been performed:
e extreme conditions tests to show the behaviour of the model under extreme
conditions of main variables;
e behaviour sensitivity tests to determine those parameters to which the model
is highly sensitive.
Carmine Garzia 19 Bocconi University - Strategic Management Department
The first extreme condition test was performed assuming that the reference fractional
time for project presentation was 0% of the total time of engineers. This means that
engineers are completely focused on project completion and they don’t work on
project presentation. The expected result is that the project presentation rate will be
0. Simulations confirmed expected values. No project is presented and no project is
processed. The introduction of incentives and rewards doesn’t affect the behaviour of
the system because engineers don’t take into consideration to allocate any time on
project presentation.
Others extreme tests were conducted assuming extreme values for the workforce
involved in different stages of the ICV programs: engineers, top managers and
delivery force
The second extreme condition test was performed assuming that there are no
engineers. The expected result was that no project is presented. Simulation shows
that no project was presented.
The third extreme condition test is performed assuming the absence of top
managers. The expected result is that project presented are not approved and so
they cannot be completed and delivered. Simulation confirmed expected results.
The fourth extreme conditions test was performed assuming the absence of delivery
force. The response of this test was as expected: no project was delivered.
The sensitivity analysis was focused on the three effects which influence the
fractional time to project presentation.
In the effect of rewards graph the shape of the curve, which relates the
rewards/salary ratio and the fractional time devoted to project presentation, was
modified to have a reduced effect of rewards on time allocation: engineers will be
less sensible to rewards in switching their times from project presentation to project
completion (Figure 5.1). The simulation was run introducing the highest level of
rewards. It’ possible to observe oscillations in the original version of the model. After
the modification of the curve’s shape, oscillations disappeared. This means that the
model his high sensitive to the effect of rewards.
Similar modifications on the curves shape of effects of incentives and of effect of
approval pressure were made, without observing macroscopic changes in the
behaviour of the system as in the case of effect of rewards.
Carmine Garzia 20 Bocconi University - Strategic Management Department
Figure 5.1 Sensitivity analysis on Effect of rewards
Original version Modified version
Output (E ffect_of_rewards) Output (E frect_of_rewards)
1,0 1.0
&
Ny
G
nN
&
a
=
°F?
—)
&
in
—
o
=
an
Input ()}: Input ():
Reward_salary_ratio 4] Reward_salary_ratio |
Original version
“1 Projects_presentation rate 46
-2- Projects_approval_rate 37
<g- Projects completion rate 64
n4-Projects_delivery rate 60
—1—Projects_presentation_rate
-4— Projects_presentation rate 22 1
,—Projects_approval_rate
-2- Projects_approval_rate 15 =
=3- Projects completion rate 26 .—Projects_completion rate
<4 Projects_delivery rate 24
3
ay Projects delivery rate
; $
{= Projects_presentation rate 6],
== Projects_approval_rate i
=3- Projects_completion rate 0 f*
<a Projects_detvery_rate
° 50 100
Time
Modified version
j= Projects_presentation rate 40
<p Projects_approval rate 27
3° Projects_complation rate 22
<g-—Projects_delvery rate 23,
ae 3
_,Projects_presentation rate
17 Projects_presentation rate 23
Sr aaeoaae HW _p-Prjects_approval rte
3 Projects_completion rate 9 []]4 =3= Projects_completion_rate
-4- —Projects_delivery rate 9 ~g- Projects delivery rate
“4— Projects_presentation rate 11
-a- —_Projects_approval_rate
3 Projects_completion_rate b 0 f
<4 Projects_delvery rate,
Time
Carmine Garzia 21 Bocconi University - Strategic Management Department
6. Model Simulation
Four simulations were run to analyse the behaviour of the model in the basic version
and after the introduction of three different policies for incentives and rewards.
Base run
Incentive level: 0, rewards: 0
In this simulation there are no incentives for project presentation and no rewards for
project completion. The goal is to show how the system behaves without policies to
stimulate projects presentation.
The economics dynamic shows a linear increase of funds available determined by
the constant difference between /ncomes and Total expenditures.
ROI, the measurement of the profitability of the ICV program, is negative at the very
beginning of the programs because there are more projects presented and no
projects approved and delivered.
Equilibrium is reached after circa 30 months, the ROI stabilizes at 1 which means a
100% of return of investment. Oscillations can be explained by the initial discrepancy
between the presentation rate, the approval rate and the completion rate that is
reduced thanks to the action of the approval pressure on the time devoted to project
presentation and project completion.
Figure 6.1 Available fund. Funds stay constant for 15 months then they increase
linearly.
40.000.00
30.000.00¢
20.000.00
Avalaible_funds
10.000.00
0 50 100
Time
Carmine Garzia 22 Bocconi University - Strategic Management Department
Figure 6.2 ROI. The Return of Investment is negative for a short period of time. The
negative pick is related to an increase of projects presented not balanced by an
increase of projects approved and delivered.
ROI
2
2
Time
Figure 6.3 Average productivity. The decrease of average productivity is related to
the increase of the number of engineers planned by top managers to increase the
project presentation rate.
0,705
0,654
Average_productivity
0,604
Time
Carmine Garzia 23 Bocconi University - Strategic Management Department
Figure 6.4 Time allocation and approval pressure. While the approval pressure
approaches the value 1 the fractional time to project presentation and the fractional
time to projects completion converge.
1,04
1 Fractional_time_to_project_presentation
0,54 4 1 —y~Fractional_time_to_project_completion
—g—Approval_pressure
0,0.
0 50 100
Time
Figure 6.5 Project developments stocks. The number of project delivered reaches
8.300 without incentives and rewards.
Time
~4- Projects_presented 8
-2- Projects_approved 330
=3- Project.completed 81 oO
<4- Projects_delivered 8.300
—4—Projects_presented
“4 Projects presented 32 ge
“2 Projects_approved 132 sae Piet ent
=g- Project_completed 32 —g-Project_completed
<4- Projects_delivered 3.320 nae Projects_delivered
1 Projects_presented’
<y-Projects_approved
3 Project_completed
<4- Projects_delivered,
Time
Carmine Garzia 24 Bocconi University - Strategic Management Department
Figure 6.6 Employees dynamics. The dynamic of employees before the stabilization is
characterised by a peck of the delivery force determined by the increase of the project
presented at the beginning.
-- Experienced_engineers 58
“os New_engineers 210 .
5 Delivery force 27
1 Experienced_engineers
-4- Experienced_engineers 32!
_5-New_engineers,
_ New_engineers 96 a
Delivery force
ages Delivery force 11 3
New engineers 20
-4- Experienced_engineers *}
3
Delivery force 0
0 50 100
Time
Carmine Garzia 25 Bocconi University - Strategic Management Department
Policy 1 — Incentives for project presentation
Incentive level: 0.10 (10% of salary for new and experienced engineers); rewards: 0
The first policy is the introduction of incentives to engineers for project presentation.
The simulation shows a substantial increase in ROI. The number of project delivered
is the 5% more than the basic model. The most impressive result is the increasing of
engineers’ productivity of the 80% compared to the previous simulation. The system
presents more oscillations (compared to the previous simulation) before reaching the
stationary state, this is related to oscillations in the approval pressure.
Figure 6.7 ROI. It’s possible to observe a relevant improvement of ROI compared to
the previous run.
x
ROI
2
Time
Figure 6.8 Average productivity. Despite more oscillations the average
productivity, boosted by incentives, stabilizes at an higher value compared to the
previous simulation.
Average_productivity
Time
Carmine Garzia 26 Bocconi University - Strategic Management Department
Figure 6.9 Time allocation and approval pressure. Engineers, stimulated by
incentives, initially focus on project presentation, the increase of the approval
pressure balances (and brings in equilibrium) the time allocation.
os
oof
Fractional time_to_project presentation
2 Fractional_time_to_project_compltion
Figure 6.10 Project developments stocks. The total
Time
number of projects delivered
increases (9,100) compared to the previous simulation.
={- Projects_presented 150
-2- Projects_approved 380
“3 Project_completed 110
-4- Projects delivered 9.100 1 1
_—Projects_presented
~~ Projects presented 60 ck 5
4 Projects_approve
-p- Projects approved 152 Ene
3 Project_completed 38 —g- Project_completed
-4- Projects delivered 3.580 4 Projects delivered
“1H Projects presented
Remap 9)
-3- Project_completed 10 {T
<4 Projects delivered -100
0 50 100
Time
Carmine Garzia 27 Bocconi University - Strategic Management Department
Figure 6.11 Employees dynamics. Due to the increase of productivity and the
increase of project presented, top managers will suspend the hiring of new engineer
after circa 20 months. The effect is the reduction of new engineers.
-1— Experienced engineers 34
= New engineers 160
= Delivery force 35, 1 1
—,—Experienced_engineers
New engineers,
a Delivery_force
1 Experienced engineers 24
oe New_engineers 82
_ Delivery force 12
acne
‘ee New engineers 30 \4
a Delivery force -4
Time
Carmine Garzia 28 Bocconi University - Strategic Management Department
Policy 2-— Rewards for project completion
Incentive level: 0; rewards: 10 euros per project per engineer
The introduction of rewards, keeping the level of incentives at 0, causes oscillations.
The profitability (measured by ROI) of the ICV unit is oscillating from 0 to 2.5 (fora
brief period is below 0). The number of project delivered falls dramatically. The
oscillations are generated by the combined effect of rewards and of approval
pressure. From one side rewards will push engineers to focus on project completion;
on the other side the increase of approval pressure will determine the intervention of
top managers that will force engineers to allocate the major part of their time to
project presentation.
Figure 6.12 ROI. Despite oscillations, ROI reach periodically a higher value (2.5) compared
with the previous simulation.
ROI
0 50 100
Time
Figure 6.13 Average productivity. The average productivity oscillates because of
oscillations of the number of engineers. _
Average_productivity
0 50 100
Time
Figure 6.14 Time allocation and approval pressure. Engineers are pushed by two
forces: rewards stimulate them to work on the project completion, and contemporarily they
are forced by top managers (through the approval pressure) to allocate their time on project
presentation.
Carmine Garzia 29 Bocconi University - Strategic Management Department
= Fractional_time_to_project_presentation
—-Fractional_time_to_project_completion
—3~Approval_pressure
034 a +
"3
00.
fl 50 100
Time
Figure 6.15 Reward/salary ratio. The oscillations of project completion rate causes
cyclical reduction and increase of rewards which engineers perceive for projects
completed. This causes oscillations in the rewards/salary ratio.
ost
|_salary_ratio
=
Reward_salar
0 50 100
Time
Figure 6.16 Project development stocks. The possibility to adjust quickly the delivery force
smoothes the amplitude of oscillation for the project delivered.
“1- Projects_presented 37
-2- Projects_approved 150
-3- Project_completed 66
“4~ Projects_delivered 2.700
—1—Projects_presented
-1- Projects_presented 15"
=p Projects_approved 60
~3- Project_completed 26
=4- Projects_delivered 1.080,
~~ Projects_approved
—3— Project_completed
4 Projects_delivered
=1= Projects_presented
-2- Projects_approved
=3- Project_completed
<4~ Projects_delivered
Time
Carmine Garzia 30 Bocconi University - Strategic Management Department
Policy 3 - Incentives and Rewards
Incentive level: 0.05 (5% of salary for new and experienced engineers); rewards: 10
euros per project per engineer
With the level of reward at 10, top managers introduce incentives to reduce the time
which engineers devote to project completion. This will cause amplification of
oscillations compared to the Policy 2, however the number of the project delivered
increases and also available funds increases.
Figure 6.17 ROI. Amplified oscillation compared to the Policy 2
py
ROI
Time
Figure 6.18 Time allocation. The combined effect of approval pressure, rewards
and incentives, causes dramatic oscillation in time allocation.
104
—4—Fractional_time_to_project_presentation
os : \_tena_fo_profect_pr
Fractional time_to_project_completion
Approval_pressure
ae
\/
VS
JA
°o 50 100
Time
Figure 6.19 Project development stocks. Despite the amplification of oscillations
the number of final project delivered increases compared to the Policy 2. This is
determined by the effects of incentives on the productivity of engineers and the effect
of rewards on the time allocated to project completion.
Carmine Garzia 31 Bocconi University - Strategic Management Department
— Projects_presented 69)
Projects approved 280
Project_completed 130
Projects delivered 4.500
=1—Projects_presented
n1- Projects_presented 28 ~~ Projects_approved
Projects_approved 112
Project_completed 46
Projects_delivered 1.800,
—g-Project_completed
4 Projects_delivered
Projects presented
Project completed -10
Projects delvered 0
Time
Carmine Garzia 32 Bocconi University - Strategic Management Department
7. Discussion and conclusions
The research findings presented in this paper shed more light on the role played by
rewards and incentives, tangible elements of the organization context in internal
corporate venturing processes.
Simulations results show that two of the policies, commonly implemented in ICV
programs affect seriously the effectiveness of the innovation process.
The introduction of rewards causes oscillation in the project presentation rate. This
jeopardises the possibility to generate a stable flow of innovation introducing new
projects and services (developed in the ICV program) in the normal activity of
corporation. Rewards affect the economic equilibrium lowering the level of available
funds.
The discontinuity in the project presentation rate and poor economic performances
persist also after the introduction of a combination of rewards and incentives.
The analysis shows that the first best policy to maximize the number of projects
implemented is the introduction of incentives. This policy not only influences the
effectiveness of the ICV program (the number of project delivered) but also the
efficiency: the amount of available funds and the ROI are higher than in the other
cases.
The introduction of a combination of rewards and incentives could be considered as
a second best. On one side there is an amplification of oscillations which can be
considered as a negative aspect because doesn’t assure a constant flow of
innovation to the Corporation. On the other side, because the effectiveness was
defined as the number of project completed within the ICV program, the combination
of rewards and incentives improves the total number of project completed with
respect to the introduction of rewards.
The model results are consistent with scholars which consider the introduction of
incentives as the most powerful way to improve the effectiveness of ICV programs
[von Hippel, 1977; Fast 1979; Hanan, 1976].
The same scholars have pointed out how corporations are generally reluctant to
introduce incentives, because top managers cannot see the immediate link between
money expenditures and results. And also when they introduced incentives they
didn’t obtain expected results.
The simulation revealed that the introduction of incentives “tout court” doesn’t
improve the efficacy and the efficiency of the ICV programs if managers don’t act
constantly to equilibrate the engineers’ time allocation. In the model the managerial
action is represented by the approval pressure, that equilibrate the time that
engineers devote to project presentation under the pressure of incentives. The
effectiveness of ICV programs depends largely from the structural context in which
new strategic initiatives grow and in particular by the administration mechanism that
enables top managers to conduct a fine tuning work on the behaviour of the
engineers-innovators.
The model has two major limitations mainly related to intrinsic limits of the modelling
approach.
The model building requires a series of assumptions made to translate verbal theory
into equations. In particular is not completely realistic to assume a standard
Carmine Garzia 33 Bocconi University - Strategic Management Department
productivity of top managers in project approval. For instance: managers’ productivity
can be influenced by the results of ICV program. If they notice good results in terms
of project presented and in terms of economic values they can increase the
productivity. Also the assumptions made on the productivity of delivery force should
be reconsidered and can be linked to the ICV program performances.
The model has a major limit because it assumes that the ICV unit as completely
separated from the Corporation. This is true from a formal point of view, but there are
many factors that link the behaviour of the ICV unit to the behaviour of the
Corporation. The dynamics of employees, the fund available, the managerial action
can be influenced by what is happening in the Corporation. Moreover the
performance of ICV unit can modify the behaviour of top managers and the strategy
of the Corporation with feedback effects on the internal corporate venturing program.
The major improvement in the model can be achieved extending the boundaries of it;
System Dynamics and feedback concept are powerful tools to investigate the
dynamic relation between the Corporation and the ICV unit and to identify the
“corporate” variables that play a major role in influencing the effectiveness of the ICV
processes.
Carmine Garzia 34 Bocconi University - Strategic Management Department
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Carmine Garzia 36 Bocconi University - Strategic Management Department
Appendix 1. Alphabetical equation Listing
Parameters are from the base run of the model (File reference: STRIN4_1.SIM)
init Avalaible_funds = 10000000
flow Avalaible_funds = +dt*Financing_from_the_corporation
+dt*Incomes
-dt*Total_Expenditures
doc Avalaible_funds = The amount of money available to the ICV division to invest
in new projects. The initial amount is provided by the Corporation.
init | Delivery_force = Desired_delivery_Force
flow Delivery_force = +dt*Delivery_force_hiring_rate
-dt*Deliery_force_quiting_rate
doc Delivery_force = The workers implementing projects in the corporation
init | Experienced_engineers =
Assimilation_rate/Experienced_engineers_quit_fraction
flow Experienced_engineers = -dt*Experienced_engineers_quit_rate
+dt*Assimilation_rate
doc Experienced_engineers = The number of experienced engineer doing project
presentation and project completion. The new engineers after the assimilation time
become experienced
init | New_engineers = 80
flow New_engineers = -dt*Assimilation_rate
+dt*New_engineers_hiring_rate
-dt*New_engineers_quit_rate
doc New_engineers = The number of young engineers hired specifically to present
and complete projects
init | Perceived_productivity = Average_productivity
flow Perceived_productivity = +dt*Change_in_perceived_productivity
doc Perceived_productivity = The perception that top managers have of the
productivity
init | Percepted_rewards_per_engineer = Reference_rewards
flow Percepted_rewards_per_engineer = +dt*Change_in_perceived_rewards
doc Percepted_rewards_per_engineer = The reward that engineers extimate as
suitable for their work
init | Project_completed = Projects_completion_rate*Minimum_delivery_time
flow Project_completed = -dt*Projects_delivery_rate
+dt*Projects_completion_rate
doc Project_completed = The project completed by engineers. They can be
implemented in the corporation by the delivery force.
init | Projects_approved = Projects_approval_rate*Minimum_completion_time
flow Projects_approved = -dt*Projects_completion_rate
+dt*Projects_approval_rate
doc Projects_approved = The number of project presented by enigeers. They must
be approved by top managers
init | Projects_delivered = 1
flow Projects_delivered = +dt*Projects_delivery_rate
doc Projects_delivered = Project implemented within the corporation. With the
delivery they go out from the ICV unit and start to generate revenues and costs for
the corporation
Carmine Garzia 37 Bocconi University - Strategic Management Department
init | Projects_presented =
Managers_Productivity*Top_mangers*Minimum_approval_time*0
flow Projects_presented = -dt*Projects_approval_rate
+dt*Projects_presentation_rate
doc Projects_presented = The project presented to the top management by
engineers. The project are in draft format, they must be approved by top managers
and then they are completed by engineers
init | Top_mangers = 20
flow Top_mangers = +dt*Top_mangers_hiring_rate
-dt*Top_managers_quiting_rate
doc Top_mangers = The top managers of the coprporation who examin and
approve projects
aux Assimilation_rate = New_engineers/Assimilation_time
doc Assimilation_rate = The rate that determines the evolution of new engineers in
experienced engineers
aux Change_in_perceived_productivity =
(Average_productivity-Perceived_productivity)/Time_to_perceive_productivity
doc Change_in_perceived_productivity = The rate of change in the perception of
productivity
aux Change_in_perceived_rewards =
((Reward_per_engineer_per_project*Projects_completion_rate)-
Percepted_rewards_per_engineer)/Time_to_perceive_rewards
doc Change_in_perceived_rewards = The rate of change in the perception of
rewards for engineers
aux Deliery_force_quiting_rate = Delivery_force_quit_fraction*Delivery_force
doc Deliery_force_quiting_rate = The workers implementing projects quit rate
aux Delivery_force_hiring_rate = (Desired_delivery_Force-
Delivery_force)/Delivery_force_adj_time+Deliery_force_quiting_rate
doc Delivery_force_hiring_rate = The workers implementing projects hiring rate.
This is influenced by the number of project completed and by the quiting rate
aux Experienced_engineers_quit_rate =
Experienced_engineers*Experienced_engineers_quit_fraction
doc Experienced_engineers_quit_rate = The monthly quiting rate for expericned
engineers
aux Financing_from_the_corporation =
IF(Avalaible_funds+Incomes-Total_Expenditures<0, Total_Expenditures,0)
doc Financing_from_the_corporation = Funds provided by the Corporation in the
case available funds falls to 0
aux Incomes = Projects_delivery_rate*Revenues_per_project
doc Incomes = The incomes derived from projects implemented in the Corporation
aux New_engineers_hiring_rate =
MAX(0,Perceived_quit_rate+WF_gap/Engineers_adj_time)
doc New_engineers_hiring_rate = The hiring rate of new engineers devoted to the
ICV program
aux New_engineers_quit_rate = New_engineers*New_engineers_quit_fraction
doc New_engineers_quit_rate = The monthly quit rate for new engineers
aux Projects_approval_rate =
MIN((Top_mangers*Managers_Productivity),Projects_presented/Minimum_approval_
time)
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doc Projects_approval_rate = The rate at which projects are approved by top
managers
aux Projects_completion_rate =
MIN(Average_productivity*Fractional_time_to_project_completion*Total_engineers,
Projects_approved/Minimum_completion_time)
doc Projects_completion_rate = The rate at which projects are completed by
engineers
aux Projects_delivery_rate =
MIN((Productivity_delivery_force*Delivery_force),Project_completed/Minimum_delive
ry_time)
doc Projects_delivery_rate = The rate at which projects are implemented
(delivered) into the Corporation
aux Projects_presentation_rate =
Average_productivity*Total_engineers*Fractional_time_to_project_presentation
doc Projects_presentation_rate = The number of projects that are presented by
engineers each month
aux Top_managers_quiting_ rate = Top_managers_quit_fraction*Top_mangers
doc Top_managers_quiting rate = The quiting rate of the top managers of the
corporation
aux Top_mangers_hiring_rate = Top_mangers*Top_managers_hiring_fraction
doc Top_mangers_hiring_rate = The hiring rate of the top mangers in the
corporation
aux Total_Expenditures =
Total_Rewards_for_project_completion+Salary_and_material_expenditures
doc Total_Expenditures = The expenditure determined by cost of project
presentation, salaryes (including incentives), rewards
aux Approval_pressure = Desired_approval_rate/Max_potential_approval_rate
doc Approval_pressure = The approval pressure that top managers feel
aux Average_employees_salary =
(Total_engineers/Total_Working_Force*Average_salary_engineers)+(Delivery_force/
Total_Working_Force*Salary_delivery_force)
doc Average_employees_salary = The average employees salary considering
engineers(new and experienced) and the delivery force. This salary includes
engineers incentives.
aux Average_productivity =
(Experienced_engineers/Total_engineers*Productivity_experienced_engineers)+(Ne
w_engineers/Total_engineers*Productivity_new_engineers)
doc Average_productivity = The weighted average of the productivity of engineers
in project presentation and project completion
aux Average_salary_engineers =
(Experienced_engineers/Total_engineers*Salary_experienced_engineers)+(New_en
gineers/Total_engineers)*Salary_new_engineer
doc Average_salary_engineers = The average salry of engineers including
incentives
aux Desired_approval_rate = Projects_presented/Desired_approval_time
doc Desired_approval_rate = The number of projects that top managers should
process
aux Desired_completion_rate = Projects_approved/Desired_completion_time
doc Desired_completion_rate = The rata at which project should be completed. it is
influenced by the projects approved
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aux Desired_delivery_Force =
Project_completed/Productivity_delivery_force/Desired_release_time
doc Desired_delivery_Force = The persons required to implement in the
corporation the project completed
aux Desired_working_force_on_projects =
Desired_completion_rate/Perceived_productivity
doc Desired_working_force_on_projects = The working force that should work on
projects to complete projects approved
aux Effect_of_approval_pressure =
GRAPH(Approval_pressure,0,0.2,[1.5,1.39,1.3,1.2,1.09,1,0.89,0.8,0.69,0.6,0.5"Min:0
-5;Max:1.5;Zoom"])
doc Effect_of_approval_pressure = The effect of approval pressure on time
allocated to project presentation
aux Effect_of_rewards =
GRAPH(Reward_salary_ratio,0,0.1,[1,0.97,0.94,0.9,0.72,0.2"Min:0;Max:1;Zoom"])
doc Effect_of_rewards = The effect of rewards on time allocated to project
presentation
aux Effect_on_expereinced_eng_productivity =
GRAPH(Incentive_level,0,0.01 ,[0,0.14,0.28,0.37,0.45,0.51,0.54,0.57,0.58,0.59,0.6"Mi
n:0;Max:1;Zoom"])
doc Effect_on_expereinced_eng_productivity = The effect of incentives on the
productivity of the experienced engineers
aux Effect_on_new_eng_productivity =
GRAPH(Incentive_level,0,0.01 ,[0,0.13,0.28,0.42,0.57,0.68,0.76,0.79,0.8,0.8,0.8"Min:
0;Max:1;Zoom"])
doc Effect_on_new_eng_productivity = The effect of incentives on the productivity
of new engineers
aux Effects_of_incentives =
GRAPH(Incentive_level,0,0.01 ,[1.004,1.134,1.228, 1.283, 1.338,1.388,1.419,1.45,1.47
4,1.5,1.5"Min:1;Max:1.5;Zoom"])
doc Effects_of_incentives = The effect of incentives on time allocated to project
presentation
aux Fractional_time_to_project_completion =
1-Fractional_time_to_project_presentation
doc Fractional_time_to_project_completion = The fractional time devoted to project
completion by engineers (as residual time of time devoted to project presentation)
aux Fractional_time_to_project_presentation =
Effect_of_approval_pressure*Reference_fractional_time_for_project_presentation*Ef
fects_of_incentives*Effect_of_rewards
doc Fractional_time_to_project_presentation = The time devoted to project
presentation by engineers
aux Max_potential_approval_rate = Top_mangers*Managers_Productivity
doc Max_potential_approval_rate = The number of projects that top managers can
process
aux Net_Income = Incomes-Total_Expenditures
doc Net_Income = The net incomes generated by ICV activity
aux Perceived_quit_rate = Total_quit_rate/Time_to_perceive_quit_rate
aux Productivity_experienced_engineers =
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Standard_productivity_experienced+(Standard_productivity_experienced*Effect_on_
expereinced_eng_productivity)
doc Productivity_experienced_engineers = The productivity of experienced
engineers in project presentation and completion
aux Productivity_new_engineers =
Standard_productivity_new+(Standard_productivity_new*Effect_on_new_eng_produ
ctivity)
doc Productivity_new_engineers = The productiity of new engineers in project
presentation and completion
aux Reward_salary_ratio =
Percepted_rewards_per_engineer/Average_salary_engineers
doc Reward_salary_ratio = The ratio express the relative importance of rewards
compared to salary
aux ROI = (Incomes-Total_Expenditures)/(Total_Expenditures)
doc ROl = The measure of the profitability of the projects
aux Salary_and_material_expenditures =
Average_employees_salary*Total_Working_Force+Projects_presentation_rate*Cost
_of_project_presentation
doc Salary_and_material_expenditures = The cost of projects in terms of salry of
employees and fixed costs
aux Salary_experienced_engineers =
Basic_salary_experienced+Basic_salary_experienced*Incentive_level
doc Salary_experienced_engineers = The total salary of experienced engineers
including incentives
aux Salary_new_engineer = Basic_salary_new+Basic_salary_new*Incentive_level
doc Salary_new_engineer = The total salary of new engineers including incentives
aux Total_engineers = Experienced_engineers+New_engineers
doc Total_engineers = The total number of engineer working on projects
presentation and completion
aux Total_quit_rate = Experienced_engineers_quit_ratetNew_engineers_quit_rate
aux Total_Rewards_for_project_completion =
Total_engineers*Projects_completion_rate*Reward_per_engineer_per_project
doc Total_Rewards_for_project_completion = The amount of money given each
month for project completed to each engineer
aux Total_Working_Force =
Delivery_force+Experienced_engineerstNew_engineers
doc Total_Working_Force = The total working force, not included the top managers
who are in the corporation and not in this ICV unit
aux Total_working_force_needed = Desired_working_force_on_projects*(1-
Reference_fractional_time_for_project_presentation)
doc Total_working_force_needed = The desired working force on project
considering the fractional time devoted to project presentation
aux WF_gap = Total_working_force_needed-Total_engineers
doc WF_gap = The gap between the actual woking force and the desired working
force
const Assimilation_time = 24
doc Assimilation_time = The training time (formal training and on the job trining) for
new engineers to becaome experienced
const Basic_salary_experienced = 1000
doc Basic_salary_experienced = The basic salary fo experienced engineers
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const Basic_salary_new = 800
doc Basic_salary_new = The basic salary fo experienced engineers
const Cost_of_project_presentation = 1000
doc Cost_of_project_presentation = The cost of project presentation, included
material consumption, usage of instrumental tools.
const Delivery_force_adj_time = 1
doc Delivery_force_adj_time = Time necessary to adjust the delivery force
const Delivery_force_quit_fraction = 0.05
doc Delivery_force_quit_fraction = Fraction of delivery workforce leaving the ICV
unit each month
const Desired_approval_time = 1
doc Desired_approval_time = The desired approval time of a project by top
managers
const Desired_completion_time = 1
doc Desired_completion_time = The desired time to complete a project
const Desired_release_time = 1
doc Desired_release_time = The time necessary to implement projects
const Engineers_adj_time = 1
doc Engineers_adj_time = The time takes to complete the hiring process
const Experienced_engineers_quit_fraction = 0.15
doc Experienced_engineers_quit_fraction = The percentage of experienced
engineers that quit each month
const Incentive_level = 0.00
doc Incentive_level = The level of incentives given to engineers. Between 0 and
10% on the standard salary
const Managers_Productivity = 4
doc Managers_Productivity = Projects that top managers can process and approve
each month
const Minimum_approval_time = 1
doc Minimum_approval_time = The minimum time required to approve a project
const Minimum_completion_time = 1
doc Minimum_completion_time = The minimum time required to complete a project
by engineers
const Minimum_delivery_time = 1
doc Minimum_delivery_time = The minimum time required to implement (delivery)
projects in the Corporation
const New_engineers_quit_fraction = 0.2
doc New_engineers_quit_fraction = The percentage of new engineers that quit
each month
const Productivity_delivery_force = 3
doc Productivity_delivery_force = The projects implemented each month by the
delivery force
const Reference_fractional_time_for_project_presentation = 0.50
doc Reference_fractional_time_for_project_presentation = The reference time that
engineers have to allocate on project presentation according to top managers desires
const Reference_rewards = 100
doc Reference_rewards = The reference rewards ais the averegare of rewards
commonly applied by other companies
const Revenues_per_project = 8000
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doc Revenues_per_project = Revenues generated from projects implemented
each month in the corporation
const Reward_per_engineer_per_project = 0
doc Reward_per_engineer_per_project = The amount of money gave to engineers
for ech project completed. Between 0 and 10. Decision maker: the top managers.
const Salary_delivery_force = 800
doc Salary_delivery_force = The salary of the delivery force.
const Standard_productivity_experienced = 1
doc Standard_productivity_experienced = The basic productivity of experienced
engineers (without incentives)
const Standard_productivity_new = 0.5
doc Standard_productivity_new = The basic productivity of new engineers (without
incentives)
const Time_to_perceive_productivity = 1
doc Time_to_perceive_productivity = The time required to top managers to
perceive the productivity of engineers
const Time_to_perceive_quit_rate = 1
doc Time_to_perceive_quit_rate = The time that top managers need to perceive
the quiting rate
const Time_to_perceive_rewards = 1
doc Time_to_perceive_rewards = The time to perceive rewards by engineers
const Top_managers_hiring_fraction = 0.05
doc Top_managers_hiring_fraction = Top managers leaving the ICV programs for
others assignment in the Corporation
const Top_managers_quit_fraction = 0.05
doc Top_managers_quit_fraction = Top managers in the Corporation involved in
ICV program
Simulation set up for each run
Start time: 0.00
Stop time: 240.00
Method: Euler (fixed step)
Time step: 0.0625
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