Untangling the origin of strategic innovation
A System Dynamics Approach
Carmine Garzia
Istitute of Management - IMA
Universita della Svizzera Italiana — USI
via G. Buffi 13, 6904 Lugano
T. 0041.(0)58.666.4476
E. carmine.garzia@lu.unisi.ch
Last Review: 14 June 2007
Introduction
Innovation in strategic positioning enables companies to redefine the way to do business
delivering more non-monetary value to customers with a high level of operational
effectiveness; often, strategic innovators can change the competitive dynamics of
industry and can influence the industry evolution processes [Baden-Fuller and Stopford,
1994; Markides, 2000]. Thanks to these flows of innovations they can remain competitive
and achieve profitable growth within the current competitive environment, characterised
by discontinuity, instability and uncertainty [D’ Aveni, 1994].
The central problem in strategic innovation literature is to understand how it is possible to
generate a constant rate of strategic initiatives that can contribute to the renewal of
company strategy. To answer to this question we built a System Dynamics [Forrester
1961 and 1968; Sterman, 2000] simulation model to represent strategic innovation
process integrating the results of studies on technical innovation and corporate
entrepreneurship. Our main proposition is that the ability of a company to generate and
implement innovation in strategic positioning is determined by three factors. Firstly it is
related to the ability to govern the technical innovation process and in particular the
development and diffusion of technical capabilities. Secondly strategic innovation
processes occur in firms characterised by a certain degree of entrepreneurial orientation.
Entrepreneurial orientation is deeply influenced by the introduction of organisational
innovations that allow the release of the entrepreneurial energy embedded in the
organisational structure. Thirdly, technical innovations become strategic innovations only
if top managers are able to manage a process of integration through which they integrate
new technical initiatives into the company’s strategy.
The paper has been structured into three parts. The first step is dedicated to the
exploration of the feedback relation between corporate entrepreneurship and strategy; the
goal is to develop the theoretical basis for defining strategic innovation. In the second
step the “stock and flow” model is presented. The third part is dedicated to simulation
and results discussion.
1. A feedback interpretation of the strategic innovation process
Our model is based on the following three pillars:
¢ implementation of creative positioning;
¢ ability to generate technical innovations;
* introduction of organisational innovations.
Creative positioning. Innovative firms continuously generate creative positioning
redefining the three dimensions indicated by Markides [1997]: who are the customers in
terms of segments and geographical markets; what the new products are, their features
and their price. Finally they how to deliver them. Creative positioning processes can
involve the development of new products, new markets, new distribution channels and
new strategic business areas.
Technical innovation. Creative positioning process can be sustained thanks to the
integration into the strategy of the firm of technical innovations introduced in production
processes and products [for a partial classification of different forms of innovation see:
Drucker, 1985; Van de Ven, 1986; Utterback, 1971; Henderson and Clark, 1990]
Technical innovations are of two main kinds. Firstly, technical innovations can be
introduced to improve the features of the product. This means that the innovations will
contribute to increase the non-monetary value delivered by the company to customers
sustaining the implementation of a differentiation strategy. Secondly, technical
innovations can be introduced to increase the level of efficiency in product’s production
process and in the delivery of related services.
Technical innovations are the ideal “trait d’union” between the ability to generate
creative positioning, that determines the company’s competitive advantage, and the
diffusion of an entrepreneurial spirit at company level. There are several ways in which
the introduction of technical innovations can sustain creative positioning processes. A
new production process can bring to an increase of level of product quality thanks to
which the company can target a new market segment constituted by customers with a
high sensibility towards quality issues. The introduction of product design innovations
can simplify the number of components and the complexity of components design and
can result in cost reduction. Cost reduction for a product can be the starting point for
achieving strategic innovation because the possibility to achieve cost reductions can be
very useful for sustaining a new position, for example with the introduction of additional
service.
Organisational innovation. The third pillar of innovative companies is constituted by
organisational innovations. Organisational innovations, which involve both soft and hard
organisational variables, structure and processes, are typically finalised to instil bottom-
up discipline and to release initiative capabilities in order to mould an organisational
context which is entrepreneurial and disciplined at the same time. Organisational
innovations have two goals.
The first goal of organisational innovation is to allow the release of the entrepreneurial
energy embedded in the organisation, changing the entrepreneurial orientation of the
firm. This energy is located in the middle level managers that coordinate the work of
front line managers that have a direct contact with firm’s operations: procurement,
production, deliver, after sales service [Burgelman, 1983 a and b; Stevenson and Jarrillo,
1990]. These managers are an ideal engine for new initiatives and in particular, in our
model, they are the generators of new ideas on the technical side. Organisational
innovations act as a rate that regulate the emergence of new initiatives and can be
activated to foster the emergence of innovative technical ideas as well as to slow it.
The second goal of organisational innovations is to integrate the “raw material”
constituted by technical innovations, into new strategic positions. These innovations can
also be defined as “integrative” because, thanks to their introduction, new initiatives that
consist in technical innovations are integrated into the company’s corporate strategy and
contribute to modify company’s position. These organisational innovations typically
include: the creation of new business units or organisational units to deliver new products
and services, the introduction of new procedures for resources allocation to sustain
innovation implementation on a large scale, the redefinition of performance
measurements to evaluate new initiatives. This “integration process”, realised thanks to
the introduction of specific organisational innovations, is a powerful means for balancing
entrepreneurial energy, incorporated in the organisation with a certain level of strategic
discipline.
New forms of positioning, technical innovations and organisational innovations constitute
the main variables for interpreting in a dynamic way process of strategic innovation. Our
analysis identified the existence of two main positive feedback loops and of a balancing
loop among these variables (Figure 1) that represent the firm’s innovative engine.
Figure 1. Feedback interpretation of strategic innovation processes
sp Technical innovations —
+
(Rt
ae
Entrepreneurial orientation engine
Integration capabilities
» aI pe —
j +
V4
Entrepreneurial orientation —_//
W
\ / Pro
| Strategic integration engine
ae
My Innovation performance _
Xe / -
Innovation performance
—— Innovation Performance Gap A
Entrepreneurial energy engine. The first feedback loop (Figure 1, R1) emerges largely
from consolidated research findings on corporate entrepreneurship studies [Burgleman,
1983a and b, Baden-Fuller and Stopford, 1994]. The introduction of organisational
innovations is positively related to the generation of new strategic positions via the
generation of technical innovations. According to our interpretation, only a particular
kind of technical innovations can be useful for strategy redefinition. Innovations in
products and processes that allow the firm to reduce costs, increasing quality and no-
monetary value for customers are the natural pre-requisites for implementing new forms
of positioning [Porter 1996].
This clear relation is the starting point for highlighting the presence of a feedback
structure. The redesign of the organisational structure and of administrative systems
allows the release of entrepreneurial energy embedded in the organisation that can
determine, for instance, the development of new products, processes, and the exploration
of new business areas. Creative positioning has a direct impact on the behavioural context
because it stimulates top managers to introduce more organisational innovations to foster
entrepreneurial orientation. So there is a positive relationship between the introduction of
new forms of positioning and organisational innovations.
A typical example of the dynamics of this feedback is constituted by the early history of
3M Corporation [Von Hippel, Thomke and Sonnack, 1999]. Under Mc Knight’s
chairmanship the company grew from a regional producer of abrasive material into an
international company, a leader in the production of innovative accessories for office and
industrial use based on adhesive technologies. Since the beginning, Mc Knight moulded
an organisational context that allowed the emergence of bottom-up strategic initiatives
which, progressively, enlarged the competitive scope of the company, introducing an
increased managerial complexity that required further managerial system innovations.
The polarity of feedback loop RI (Figure 1) is positive. The increase of the level of
organisational innovations finalized to release entrepreneurial energy allows proliferation
of new initiatives that, once integrated in the corporate strategy of the firm, determines
the renewal of corporate strategy and the introduction of further organisational
innovations. This reinforcing loop will be characterised by an exponential behaviour.
This means that the loop can have also an exponential decay if the state of a variable is
affected by negative changes. The decrease of organisational innovations will determine a
decrease in the flow of technical innovations and in the creative positioning processes.
This is a typical situation of traditional or established competitors [Markides, 1999 a and
b] that decide to preserve the status quo not renewing their strategic positioning and will
undergo the “crystallisation” of the organisational situation. After a certain period of
time, the less organisational innovations will be introduced to stimulate entrepreneurial
orientation implemented, the less entrepreneurial orientation will emerge jeopardising the
ability of the company to generate innovation.
Strategic integration engines. Feedback loop R2 is clearly regulated by the same logic
that underpins the dynamic of feedback R1 (Figure 1). The introduction of organisational
innovations can contribute to create the right environment in which to accommodate new
strategic initiatives [Burgelman, 2002]. The polarity of this loop is positive. The increase
of organisational innovations finalised at developing integration capabilities will
effectively realise the strategic innovation potential of the firm. As we have seen in
feedback loop R1 the more strategic innovations are implemented the more they will
stimulate organisational innovations directed towards integrating technical innovations,
because top managers realise that integration efforts provide positive payback.
When this feedback starts to work in a negative way the exponential decay will manifest
its effects on effectiveness of strategic innovation. Technical innovations will remain
isolated initiatives within the organisation, they will not receive the necessary support, in
terms of organisational, physical and financial resources, to be translated into new forms
of positioning.
6
Innovation performance balancing loop. Feedback loops R1 and R2 (Figure 1) are quite
intriguing because they describe a well know dynamic in strategic management.
However, alone they cannot explain why a firm decides to launch a process of strategic
innovation, changing its entrepreneurial orientation to promote the emergence of
technical innovations and to integrate them into competitive strategy.
The answer to the question is to be found in the traditional competitive strategy approach
[Porter, 1980]. Inside an industry the level of rivalry is largely determined by firms’
ability to introduce new forms of positioning. Top managers appreciate this process of
new positioning development and implementation and on their observations, they set a
desired level of strategic innovation. They appreciate the ability of their firms to generate
new forms of positioning making a continue comparison with the average level of
innovation in the industry. This is consistent also with studies on hypercompetition
processes. According to D’Aveni [1994] stimuli to innovation come from the level of
turbulence of the competitive environment. Such a competitive environment will
stimulate top managers to appreciate the gap between the actual level of company
innovation and the desired level of innovation.
This gap is the result of a process of perception of top managers that set a desired level of
innovation that is a goal to be reached stimulating the spread of entrepreneurial
orientation inside the firm; an increase of EO determines the development of new
initiatives on the one side and the development of integration capabilities on the other.
The presence of the gap with an external target will characterise the negative feedback B1
(Figure 1) that can be called “innovation performance loop”. It will work until
equilibrium has been reached between the desired level of innovation and the actual level
of innovation. The balancing loop will also act as a limit to growth for the strategic
innovation processes. The stimulus to generate organisational innovations for top
managers can vary according to different level of competitive pressure within the
industry. The gap will progressively reduce until the firm reaches the optimal level of
strategic innovation and this will slow and subsequently stop organisational innovation
and the generation of strategic innovation.
There are two considerations that must be made regarding gap dynamics. Firstly,
according to the research findings of D’Aveni [1999] and Markides [2000], a company
will never abandon its desire to introduce strategic innovations in current competitive
environments, this will mean that every time the gap reaches its minimum value it will be
opened again because the external competitive pressure sets higher goals in terms of
innovation. The second consideration concerns the perception of the gap. The gap is
influenced by management perception, and the perception of managers will be influenced
by their mental models. Different top managers will appreciate in a different way the gap
in terms of the generation of new positioning and consequently will act differently to
reduce it. This point of the perception is particularly important and represents an
innovative feature of our conceptual model. D’Aveni [1994, 1999] highlighted how firms
react instantaneously to changes in the competitive environment by launching
competitive escalation. In our model the creative positioning process and its intensity are
strongly influenced by top management’s perception. This means that top managers don’t
react instantaneously to external stimuli. For example conservative top managers, due to
their mental model, can have difficulties in appreciating the necessity of innovate
positioning and will be induced to respond slowly to environment modifications.
2. Stock and flow model
The design of the stock and flow diagram (SFD) is organised around the idea of creating
a distinction between different stages of innovation’. The process of innovation can be
articulated into different steps that represent the flow of innovative ideas inside the
organisation. Each step can be modelled as a stock. The passage between different steps
is regulated by rates that are activated by auxiliary variables.
The idea that the process of innovation can be modelled through different stages is widely
accepted by management scholars. Quinn [1980] describes the process of corporate
strategy formulation articulated into different stages. Van de Ven [1986] distinguishes
four stages in the process of idea generation. Burgelman [1983a], while studying process
of internal corporate venturing, points out that there are three stages in the generation of
new projects. These stages require the collaboration of different actors that interact with
innovators and allow the effective translation of innovations into new strategic initiatives.
According to our general construction we adopted a “pipeline of innovation” to represent
the innovation process in which technical innovations flow (Figure 2). The flow is
influenced by the introduction of organisational innovations. The last state of the process
of innovation is constituted by strategic integration. At this stage technical innovations
became strategic innovations because they are incorporated in the strategy of the firm
contributing to firm’s strategic positioning modification.
' The mathematical model was built with the software Powersim Constructor 2.51. All equations
formulation and Stock and Flow Diagrams SDF graphical representations are taken from the Powersim
built model. For a complete list of equations please refer to the paper’s support material (Annex 1).
Figure 2. General view of the pipeline of innovation
Technical innnovations Strategic
Innovations
Innovationg Refused Obsolete_innGative_projects _Dismissed’fnnovation Fajed
Refpisal_rate First_Developed_Obsolescence_rate Dismfssing_rate| Failure_rata
<Fiist_Developed_innovayig loca apron 46F experiSentif_ developed lnnovati n Strategic_integrat
First_Development_rate Approval_rate Full_development_rate Iiftegration_rate
+ + # a 4
/ 4
4 se e
f Integration capabilities
Entrepreneurial orientation at firm level
>
\
____ Organizational ae
innovations | —-—-——~
The pipeline of innovation is characterised by four stocks, state variables, in which
innovations accumulate and from which innovations depart for the following stage. The
rates that regulate the flow of innovation are influenced by variables representing
organisational innovations. These variables, that we will illustrate, represent two kinds of
organisational innovations: the ones introduced to release the entrepreneurial energy and
the ones introduced to integrate in the corporate strategy of the firm new technical
initiatives.
2.1. The pipeline of innovation
In the following we will illustrate the main stocks that describe the pipeline of
innovation.
Innovation developed. This stock represents technical innovations developed by middle
level managers. Technical innovations allow the improvement of productivity or increase
the ability of the firm to deliver more no-price value to customers. In our model, top
managers decide that a certain level of innovation is optimal to sustain strategic
regeneration. They don’t define the contents of innovation, they only address middle
level managers efforts to obtain technical innovations that enhance productivity and no-
price value. Our conception of technical innovation at this stage is close to the concept of
autonomous strategic initiatives [Burgelman, 1983c, 1985]: top managers define only
broad goals that can be considered as a basic strategic orientation. Middle level managers
can constantly propose innovative projects that respect the general strategic orientation of
the firm coordinating front line managers. Middle level managers are agents of
innovation because they formally generate new ideas basing on their knowledge.
Innovative ideas became technical innovation propositions when they are presented in a
formal way to top managers according to the organisational procedures of the firm. New
technical ideas must be presented to top management in a format that contains a
preliminary analysis of potential benefits and cost of development. This is coherent with
Van de Ven [1986], Van de Ven and Scott Pole [1990] and Burgelman [1983a]
interpretation for which the formal manifestation of the new idea is the moment of
starting the innovation process.
The initial value of the rate has been conventionally set at | to initialise the system. The
analytical formulation is the following:
First_Developed_innovations = 1
-dt*Refusal_rate
-dt*Approval_rate
+dt*First_Development_rate
Unit of measure: innovations
Innovation approved for experimenting. This stock copes with the problem of the small
scale application of innovation. Van de Ven [1986 and 1990 with Pole] while exploring
new ideas generation process inside an organisation, explicitly pointed out the importance
of experimenting. Experimenting is the phase during which organisation creates
consensus around new ideas, that are adopted and then translated into tangible effects.
The concept of experiment is recalled also by Markides [2000] when he investigates
strategic innovation processes. The new strategic positioning must be implemented on a
small scale before being implemented on a full scale.
For these reasons top mangers before proceeding to the full development decide to
approve the small scale development that is a sort of test for the innovation before the full
development process.
The initial value of the present stock as well as of the other stocks of the pipeline of
innovation is set at 0, because it will be fed by the approval rate. The analytical
formulation is as follow
Innovations_approved_for_experimenting= 0
-dt*First_Developed_Obsolescence_rate
-dt*Full_development_rate
+dt*Approval_rate
Unit of measure: innovations
Full development innovations. Once the idea of a technical innovation is approved it
passes through a complex process of implementation. This is an elaborated process can
has been well described into three phases by Utterback [1971]. The first is
industrialisation during which the final project is developed considering problems related
to its production and delivery during this phase the project can be modified and the initial
idea can undergo substantial changes. After industrialisation, there is the phase of
prototyping is in which the features of product are tested and also in this phase changes
can be done. Only after prototyping is the new product released for production. These
three phases can be easily applied also to the development of a new production process or
of new service. With the introduction of this stock we aim to capture the contribution of
industrialisation and prototyping to the strategic innovation process.
The initial value of the stock is 0. The analytical formulation is as follow:
Full_developed_innovations = 0
-dt*Dismissing_rate
-dt*Integration_rate
+dt*Full_development_rate
Unit of measure: innovations
Strategic Integrated innovations. This is the “critical” stock in which technical
innovations are transformed into strategic innovations. Technical innovations are suitable
to become strategic innovations only if they can contribute to redefinition of the value
proposition of the firm. For example the introduction of a new innovation into the
production process can contribute to the redefinition on “how” the product is delivered,
but it does not necessarily influence a modification in the “what” and the targeted
customer segment. Only technical innovations that can sustain strategy renewal allow the
constitution of new strategic positioning. If an innovation cannot contribute to the value
proposition redefinition it is not destined to become a strategic innovation.
The initial value of the stock is 0. The analytical formulation is as follows:
Strategic_integrated = 0 -dt*Failure_rate +dt*Integration_rate
Unit of measure: innovations
Failed strategic innovations. The last stock is built to receive failed strategic innovation.
Technical innovation, once integrated, becomes new forms of positioning of the firm.
New positions include the entrance into new markets, new targeted segments with new
products. These new forms of positioning can be successful or can fail, in this latter case
the firm will abandon them and continue to retain its previous position. At the same time
when one position is obsolete, due the competitive environment evolution, it will be
replaced by a new form of positioning [Markides, 2000]
The initial value of the stock is 0. The analytical formulation is as follows:
Failed = 0+dt*Failure_rate
Unit of measure: innovations
2.2. Rates and auxiliary related variables
To regulate the flow of innovations toward stocks we adopted the following kinds of
variables.
1) the first are main rates that regulate the flows of innovations directly from the stocks;
2) the above mentioned rates are influenced by auxiliary variables. These variables
essentially represent the dynamic of entrepreneurial orientation at firm level.
3) Stocks outflows. All stocks include outflows that represent failure rates, or, in other
words, the rate at which innovative ideas become obsolete and are abandoned.
In the following we shall illustrate main rates and structure of auxiliary related variables.
First development rate
To represent process of strategic innovation we adopted a generative model for which
innovations occur from the entrepreneurial activities of middle level managers that
generate innovative ideas. Top managers want new ideas that can improve productivity
and increase the no-price value delivery to be generated. For this they grant a certain
level of autonomy to middle level managers
Autonomy concerns the independent action of an individual or of a group of individuals
(organisational unit) in developing an idea and bringing it to completion. In this way
autonomy is the result of the efforts of the individual in organising the resources that he
directly control to the innovative idea. Autonomy can be intended also as freedom to act
with respect to organisational constraints that can jeopardise the generation of new ideas
[Lumpkin and Dess, 1996]. For this reason it is necessary to adopt a definition of
autonomy that takes into account these two dimensions: the entrepreneurial ability to
generate autonomously a new idea and the entrepreneurial behaviour to develop it even if
there are some internal constraints. The autonomy level is set by top managers that can
act to promote autonomous behaviour. For example they can change the organisational
structure by flattening hierarchies and delegating authority to operational units [Pinchot,
1985]. These moves are intended to foster autonomy, but the process of organisational
autonomy requires more that a design change. Autonomy is also the result of the impetus
exercised by a champion who sustain the autonomous efforts to develop the ideas
[Burgelman, 1985]. We choose to model the level of autonomy in the first development
rate because it represents essentially the outcome of genuine efforts of middle level
managers that commit their direct resources (time and managerial capabilities) to
generate strategic initiatives.
We focus on managers operating in non-R&D (Research and Development)
organisational units that do not perform research and development as a characteristic
activity. Our idea of technical innovation is slightly more articulated. The generation of
technical innovation in concrete terms is the incorporation into products, processes and
services of technical knowledge accumulated into the R&D units of the firm. This
formulation has been adopted for two reasons. Firstly we are not interest in the ordinary
R&D activity flow, but in the strategic output of R&D that can constitute the basis of a
new strategy. The generation of knowledge inside an organisational unit that has as its
objective the continuous generation of technical innovation (R&D unit) is not intriguing
for us and can hardly be related to the generation of strategic innovations. Secondly, the
research and development activity of an R&D department is its characteristic and
ordinary activity. Inversely, we are interested in understanding how middle level
managers can incorporate into their ordinary activities - they can be involved in ordinary
firms’ tasks and functions as production, distribution, marketing and services —
innovative ideas built on the top of the technical knowledge of the firm. The content of
the development of technical innovations by middle level managers consists of analysing
market opportunities, effecting environmental scanning, then of recognising company
resources and competencies, and finally in formalisation. With formalisation of the
innovative proposal all the analyses made are included in a document that is delivered to
top managers for approval.
Figure 3. First development rate graphical representation
-
initia
QR \
\ iG —_—
Total_time_available =2-—~““\_/ —
ime_to_new_initiatives
Semone erin Sees
ar Yll lgyelbped_innovations
| First_Developed_innovations
\
First_Develo bment_rate
Reference_productiviy_for_unit_of_time
The formulation of the development rate depends on two variables: time dedicated to
innovation and productivity of middle level managers. Time should be intended as the
time that middle level managers can allocate - according to top managers decisions - to
innovative project development. Normally middle level managers concentrated on
ordinary tasks and only a small portion of time is allocated to innovative projects
production. In the model we presumed that top management plan the time that can be
allocated to new initiatives as a fraction of the total time available for all company tasks.
This is consistent with the idea that the process of innovation is governed at the
beginning from a top-down perspective [Burgelman, 1983a], that do not directly induce
new initiatives, but illustrate the goals and act to introduce the right administrative
mechanisms to allow the bottom upwards emergence of initiatives
Time definition in the model must not be intended as a complete informal time dedicated
expressly to generate new initiatives as happened in the case of 3M Corporation [Von
Hippel, Thomke and Sonnack, 1999] in which all managers have a certain amount of
time to develop new initiatives. Time to generate innovation includes the following
definitions of time:
¢ the time that middle level managers spend to get into contact with R&D departments
to capture the knowledge capabilities in terms of new products and services;
¢ the time that middle level managers spend with customers understanding their needs;
¢ the time dedicated to analysing the internal process that can be improved thanks to
technical innovations.
All the above mentioned ways of time allocation are the result of a disciplined
organisational context characterised by the introduction of rules that push time allocation
devoted to the generation of new ideas.
The time allocated to the development of innovative projects in conjunction with the
productivity of middle level managers determine the rate at which new projects are
implemented. The productivity is expressed as the number of innovative projects that
middle level managers can develop per unit of time. This variable expresses the reference
productivity of middle level managers in generating innovation. However the subtle
interpretation of the variable shows that it can represent the effort of top managers to
generate autonomous strategic initiatives in addition to the standard productivity. Of
course this will require a specific structure of the model to exploit factors that stimulate
productivity, for example the introduction of an articulated incentive structure. However,
also if we recognise the importance of this argument, we prefer to keep the model
structure as simple as possible to focus on the relationship among three forms of
innovations.
We introduced the hypothesis that the fraction of time that can be dedicated to innovative
initiatives can be influenced by the implementation rate. This variable is the expression of
the desire of top managers to keep the innovation process in equilibrium. We adopted this
hypothesis even though it is necessary to consider that scholars have emphasised that, in
order to promote a certain level of chaos inside an organisation it can stimulate further
innovation [Burgelman, 2002]. We interpreted chaos as a negative effect of innovation
process that top managers want to govern. For this reason they have constant control over
the projects that are fully developed. If the fully developed projects increase compared
with first developed projects, top managers will act to increase the autonomy of time to
foster the presentation of innovative projects. On the contrary if the first development rate
is too high with respect to the full development rate, top managers will reduce the
autonomy of time to reduce the arrival of new initiative that should be processed in the
pipeline.
Approval rate
The approval rate is the rate at which first developed projects are accepted. Refused
projects will enter into a specific stock with a refusal rate that is equal to the difference
between the total projects in the stock of presented projects and the approval rate. The
approval process consists in the analysis of the projects presented by middle level
managers. Approval is based on the quality of analytical reports made by middle level
managers.
The approval rate in the model was linked to a dimension of entrepreneurial orientation
called innovativeness. “Jnnovativeness reflects a firm’s tendency to engage in and
support new ideas novelty, experimentation and creative processes that may result in
products, services or technological processes” [Lumpkin and Dess, 1996: 142].
Innovativeness can be seen as the willingness to explore new technical alternatives giving
the necessary authorisation to develop it. According to Lumpkin and Dess [1996] the
evidence at firm level of innovativeness can take several forms. Innovativeness may
occur along a continuum from simple willingness to try a new product line or
experimenting with a new advertising venue to “a passionate commitment to master with
a new product” [Lumpkin and Dess, 1996: 142]. The approval rate is mainly an
expression of the dimension of innovativeness of entrepreneurial orientation. Top
managers should approve presented projects only based on a report that contains a
technical and market analysis. In fact projects presented are little more than a theoretical
exercise by middle level managers. New ideas are not subjected to a process of
prototyping, no market response was analysed, for example, with structured interviews.
The projects presented are essentially the output of an internal resources analysis
conducted by middle level managers combined with their “imagination” - the new idea -
about the potential effects of innovation. In this condition it is evident that the approval
rate is essentially a function of the willingness to engage in and support new ideas and
novelty — the innovativeness — of top managers. Innovativeness at firm level is directly
influenced by top managers that, in our model, modify procedures, introducing
organisational innovations, to regulate the approval of first developed project.
Figure 4. Graphical representation of approval rate
Approval rate
First_Develgp}
sinnavations
== ‘Approval\rate
a vA my
—
Reflusal_rate |
Innovations_Refused /
a
Va
Pi i ome
ae Yo rational, Sopagel rate ,
‘ io if Vi
= approval a
Reference_fractional_approval_rate Extbrnal competitive_pressure
ea
Crest
a _—— |_rate
Relative_failure_rate
The mathematical formulation of the model’s approval rate is similar to the previously
analysed variable. Top managers set a standard approval rate. This represents their
reference attitude towards innovativeness, because it is the expression of what percentage
of innovative project they want to implement. The reference approval rate can be
modified by two other variables: external competitive pressure and the effect of failure
rate.
The external competitive pressure is a variable that can assume values comprised
between | and 2. The value | identifies a traditional competitive environment and it has
no effects (negative or positive) on approval rate, a value of over | identifies an increased
competitive pressure determined by rivals, a value of 2 identifies a competitive
environment characterised by a high competitive pressure of the kind described by
D’Aveni as hypercompetitive [1994]. The external competitive pressure multiplies the
reference approval rate and boosts it in the case of increased rivalry. This happens if we
consider that top managers act to close the gap between desired innovation and actual
innovation. If competitive pressure is high, top managers would like to have a higher
innovation rate to renew their strategy, for this reason they will boost the approval rate.
The second variable affecting the approval rate is the effect of the relative failure rate
(Figure 5). The relative failure rate is the result of the ratio between the failed strategic
innovations and the integration rate. It expresses the constant monitoring of the strategic
innovation effectiveness by top managers. Top managers appreciate the speed of strategic
innovation failure comparing it with the strategic innovations that are on the way to be
fully developed. The higher the failure rate, the more the approval rate will fall. No
multiplying effect has been included, because the failure rate can act simply as a brake to
the innovation process [Van de Ven, 1986].
Figure 5 . Effect of relative failure rate on approval rate
Edit Graph/Vector
Coordinates: Output OK
x a 1.03 =
3 Cancel
08 =a
3 Set
0.64 Zoom
4 Edit What:
0.44 Graph x
; Interpolation:
02; ” i tot ~
Points: ; — = =
‘ lorizontal ov
11 Ins | Del 0.04 4+#—§+_§_}_t___t
Fs bs 0.0 1.0 Ge
Axis:
ae a
os acl
Relative_failure_rate |
Step: |0.10 1 3
YoAxis O) ere
Min: [0.00 — - j
Max: 11.00 | z
Full development rate
Full development rate is the rate at which technical innovations are fully developed. Full
development means that the project has undergone a process of industrialisation, pre-
production and introduction on a small scale. In the case of the introduction of a new
product, it will be industrialised, tested with prototypes, produced and finally introduced
on a small scale.
In our model the full development rate is linked to the risk taking attitude of
entrepreneurial orientation. This dimension refers to the in-depth origin of entrepreneurial
literature that emphasised the fact that the entrepreneur works for itself and assumes a
certain level of personal risk [Lumpkin and Dess, 1996].
17
The assumption that entrepreneurial behaviour is linked to the self-employment
dimension and the to the risk is widely accepted by the literature.
Many scholars have focused on risk propensity defined as the perceived probability of
receiving rewards associated with the successful outcome of a risky situation [Brockhaus,
1980, Kogan and Wallach, 1964, Sitkin and Pablo, 1992].
A broader definition of the risk taking attitude is the one given by Miller and Freisen
[1978: 923] and it is particularly suitable for internal entrepreneurship because they
identify risk taking “as the degree to which managers are willing to make large and risky
resource commitments — i.e. those who have a reasonable chance of costly failures”. The
idea that risky behaviour is essentially expressed by the commitment of resources is quite
intriguing. The commitment can be on organisational or physical resources and, in our
innovation model, can be made by top mangers on middle level mangers as innovation
proposals. The commitment of resources is a risk-taking activity because resources — and
in particular resources destined to innovation - are limited. Top managers introduce
certain organisational innovations that modify the allocation of resources and finally
modify the entrepreneurial orientation dimension of the risk-taking attitude.
Figure 6. Graphic representation of full development rate
Full development rate
Oo
Implementation_rate
ae \
senpallatecs _project > )
a NN
/ Resource_for_d evelobment_per_projbe
\
— a
A Rebouteed forteveloomest) \
' J is
Resoytces accumulation rattesources pee
/
2
Time_to_resource_absorption /
ran
( fof
BRO | &
Approval_rate
nnovations_approved “
j
Full_deyélopment_rate
—
a o,
First_Developeq_Obsolescence_r:
& Ref_obsolescence_rate
eee
EAS
Obsolete_innovative_projects ~>
External_competitive_pressure
Strictly in term of mathematical formulation, the rate is constructed using two variables:
the amount of resources required per project and the total resources available over time to
fully develop an innovative project.
The total amount of resources to fully develop projects is the result of a commitment
19
given by top managers on the basis of the previously approved projects. When top
managers approve innovative projects they plan the allocation of a certain amount of
resources to sustain the full development of innovative projects. Essentially the process
of making resource commitment is influenced by reference resources per project that is
the normal amount of resources destined to the development of a project multiplied for
the number of approved projects.
The construction of the rate that expresses the amount of resources needed per project is
more subtle (Figure 7). We again introduced the moderating effect of the implementation
rate that works in an opposite way with respect to what we have observed in the dynamic
of the first development rate. The higher the implementation rate the less resources top
managers will devote to a single project, the lower will be the implementation rate and
the more will be the resources destined to a single project to boost its development. This
is consistent with the definition of a risk-taking attitude. Top managers will introduce
organizational innovation modifying resources commitment rules. Increasing the amount
of resources committed to a single project is clearly a way to increase the level of risk.
Figure 7. Effect of implementation rate on resources for development per project
Edit Graph/Vector x
Coordinates:
x x
Interpolation:
Line bud
Asymptotes:
Horizontal _y
ee
ae 7/8l9
Min: hz, Input Os} - 4 6
Implementation_rate 2]
Step: |0.20 1 3
0 E
‘YAnis '
Min; [0.00 : ~
Max 12.00 >| iy S
Integration rate
The integration rate represents the rate at which technological innovative initiatives are
incorporated into the strategy of the firm. This means that fully developed technical
innovations are implemented on a full scale and become part of the competitive strategy
20
of firm. In this view technical innovations contribute to firms’ strategic positioning as
defined by Porter [1985, 1996].
Typical example can be the introduction of a new product with new features that
substitutes the older one and tries to deliver more value to customers in terms of more
non price value. The concept of substitution is important because according to Markides
[1997, 1999a and b, 2000] as well as to D’Aveni [1994] studies on competition, a
strategic innovation, occur when a company is able to generate new forms of positioning
that substitutes older ones. For Baden Fuller and Stopford [1994] the strategic renewal
process consists of the substitution (total or partial) of the older strategy of the firm.
The need to substitute the older strategic position with the new one is evocative of a
fourth dimension of entrepreneurial orientation that has been defined as proactiveness.
Literally, proactiveness refers to how a firm relates to market opportunities in the process
of new entry. According to Lumpkin and Dess [1996: 147] the firm can exploit market
opportunities “by seizing initiatives and acting opportunistically in order to shape the
environment that is, to influence rends and, perhaps, even create demand”. This
description of proactive behaviour fits in with the description made by strategic
innovation scholars that recognised the behaviour of the firm as the ability to influence
the structure of the industry.
A proactive posture means that top managers would act to anticipate market changes
through the increasing rate at which strategic innovations are implemented. The increase
of this rate depends on the resource commitment that top managers can make in order to
integrate full developed technical innovations. To implement on a large scale a new
strategic position is fundamental for providing further resources to the innovation.
21
Figure 8. Graphic representation of strategic integration rate
Strategic integration rate
( Pet eived | integrations rate
Change_in. ae: Tate_perception \ an
1 my
€ ~ SY OST
a er. | failure_rate
\
ie r 4
Change_in_failure_1
ate_ perception
De \
Time_to_pefceive_failure_rate_changes \
\
xy \
Reference fractional_integration_rate (ae
| Erfect_ of_ relative. failure tate_. on_integration_1 ra
Fractional ee
/
4
Full_develop¢p_innovations —+ ‘a i; Strategiq_
\ inteatetlon state A
iiss Se a i
Dismissing, “> Failure_rate
Reference_dismissing_rate
9 7 - Fractional_failure_rate
Dismissed_innovations DIS
Failed
o
External_competitive_pressure
The mathematical formulation of the integration rate is quite similar to the one used for
the approval rate. The integration rate can be assimilated to the approval rate. In this
sense it can be considered a kind of final approval rate that occurs when technical
innovations should become strategic innovations.
The reference integration rate represents managers’ reference proactiveness. This rate
expresses resource commitment that normally top managers make to integrate into the
strategy of the firm new technical initiatives.
This reference rate is influenced by a “moderating variable” that is represented by the
22
effect of the relative failure rate (Figure 9). An increase in the relative failure rate will
influence top managers’ behaviour and will impact the reference integration rate,
contributing to diminishing the final integration rate. Top managers become more prudent
with the increase of the failure rate and they realise that they have to change the rate at
which innovative initiatives are integrated into the strategy of the firm. This decrease of
the integration rate can be interpreted in different ways: firstly, top managers dedicate
more time to integrate the projects, for example to understand the implication of technical
initiatives for the strategy of the firm; secondly, technical initiatives require more
resources to be integrated into the strategy of the firm on a large scale. This means that
having a limited amount of resources, top managers have to integrate a limited number of
innovative projects. Third, technical innovations continue to be subjected on an
implementation on a small scale because top managers want to understand their potential
effects on the strategy of the firm.
Figure 9. Effect of relative failure rate on integration rate
Edit Graph/Vector
Output (Effect_of_relative_failure_rate_on_integration_rate)
1.0
Coordinates:
x v
«|
Cancel
Ok
Help
Set
Zoom
Edit What
0.6-
0.44 Graph x
: Interpolation:
0.2 4 Line S
4 Asymptotes:
: Horizontal _¥
1S 0.04
——t i eS
os 7/el9
Min: [0.00 Input (} alate
Relative_failure_rate |
Step: |0.10 1 3
YAxis 0 E
x (1.00 | Pace ie| b=)
Failure rate
The failure rate expresses the rate at which innovative strategic initiatives fail. This
means that for example a newly launched product or service is abandoned, or that after
the entrance into a new market segment the firm will exit from it.
In our model we are not interested in modelling the dynamics of market, but we would
like to insert some variables to represent structural dynamics and in particular,
23
competitive aggressiveness of rival firms.
Proactiveness has also been studied in conjunction with competitive aggressiveness
[Lumpkin and Dess, 1996], but when proactiveness is more related to meet demand,
competitive aggressiveness is about competing for the demand. It refers to how firms
relate to competitors and how firms respond to trends and demand that already exist in
the marketplace. The best way to investigate competitive aggressiveness would be to
include in the model a second firm that competes with the original firm for a limited
amount of resources.
Our model is a one-firm model but we could not completely ignore pressure coming from
the competitive environment and in particular from rivals. For this reason this we decided
to adopt a failure rate of strategic integrated innovations influenced by variables
representing the characteristics of industry and the level of rivalry among firms.
Figure 10. Graphic representation of failure rate
Failure rate
Sree integrated
Failed
ees
CD Frarslonelollute. ta +
Fractional_integration_rate <
| Ly
‘ External_competitive_pressure
Reference_fractional_failure_rate
In our formulation the failure rate is a function of three variables. The reference failure
rate represents the characteristics of the industry. Industries are characterised by different
levels of rivalry that determine the obsolescence of strategies implemented by firms, this
happens typically in technology-based industries like the IT and telecommunication
industries. In this sense the reference failure rate represents the characteristics of the
industry in which the innovative firm is competing.
Independently of the type of industry, the level of rivalry can decrease or increase for
certain period of time influencing the characteristics of the industry [D’ Aveni 1994]. This
24
is represented by competitive pressure. Competitive pressure can assume each value
between | and 2. When it is 1, no effect will be evident on the reference fractional failure
rate. When it assumes values of more than 1, the reference fractional rate will
consequently increase.
The third variable influencing the failure rate is the fractional integration rate. We
supposed that the fractional integration rate expresses the accuracy of the integration
process in the strategy of the firm. The lower the rate at which new projects are
integrated, the more time, the more attention and the more resources top managers will
devote to them it, and the lower will be the probability that these projects will fail.
Obsolescence and dismissing rates
These two rates concern two stocks, innovation for experimenting and full developed
innovations, and express that after a certain period of time innovative ideas approved for
experimenting become obsolete and fully developed projects not integrated into the
strategy of the firms are dismissed.
This happens for two reasons. Firstly, inside an innovative company old ideas are
surpassed by new ones. Over time new ideas will emerge and new projects will
substitutes the older ones.
The second reason is that the obsolescence of the projects that are in these two stages of
the pipeline of innovation can be determined by rivalry. Competitors, in a turbulent
environment, continuously introduce innovations that accelerate the obsolescence of
rivals’ innovations situated at different stages of the innovation pipeline[D’ Aveni, 1999].
The first developed obsolescence rate is determined by the action of two variables: first
variable is the reference first obsolescence rate that expresses a kind of internal selection
mechanism for which each period of time (in our case each month) is eliminated from the
pipeline of innovation a certain number of projects that are in the stock innovations
approved for experimenting.
The second rate expresses external competitive pressure. It is neutral when it assumes the
value of 1 (a traditional no-turbulence competitive environment): when it increases, it
boosts the obsolescence rate reflecting the fact that in competitive environments
characterised by a higher level of rivalry competitors generate innovations that determine
the obsolescence of other rivals’ innovations.
The dismissing rate expresses the rate at which fully developed innovative projects are
terminated because after being implemented on a small scale they are not integrated into
the strategy of the firm. This happens due the action of two variables. The first is the
fractional dismissing rate and represents the internal selection mechanism. This rate will
be smaller than the reference obsolescence rate, because the firm has heavily invested.
Innovative projects have been fully developed and implemented on a small scale and top
managers are not willing to lost investments. Considering these aspects, the willingness
of top managers to dismiss these projects will be significantly lower than the willingness
to dismiss projects approved for experimenting that have been developed exclusively “on
paper”. The second variable is the competitive pressure and it works in the same way as
observed for the first obsolescence rate.
25
Performance measurement
The model was completed with a section dedicated to the measurement of innovation
performances (Figure 11). Two variables are particularly suitable for this purpose. These
measurements were inspired by early studies on internal entrepreneurship that were
focused on the number of innovations developed within internal venturing programs
[Bower, 1970]. The first is the total number of strategic innovations, the second is the
percentage of these innovations that has been successful or that did not fail. We have
called the measurement of success S/R - Synthetic Innovation Rate. It can assume all
values between 0 and 2 and can be expressed as a percentage.
Figure 11. Performance measurement
Strategic innovation performances
ii >I
L—J Sy
Failed
2
ae
Tene nig
SIR_Syntheti¢_innovation_rate
Modelling mental models through non-linear effects
Our simulation model was built based on the contributions of literature to represent the
process of strategic innovation inside a large organisation. It allows us to easily capture
the relationship between different types of innovations however it cannot effectively
represent top management’s mental models that it was proved can play a fundamental
role in the process of innovation [Burgelman, 1984; Covin and Slevin , 1991; Lumpkind
and Dess, 1996]. The introduction of a specific section of the model to capture top
managers’ mental model modification will result in the loss of focalisation on the central
research question. For this reason we decided to adopt a formulation based on the
introduction of selected non-linear effects in the model to eventually represent different
kinds of top managers’ mental model. Those non-linear effects are: effect of relative
failure rate on approval rate, effect of the implementation rate on resources for
developing a single project, effect of relative failure rate on integration rate.
The shape of the curves that represents non-linear effects can be eventually modified to
represent firms characterised by top managers with different mental models’.
? Please refer to the paper’s support material for alternative formulations of non-linear effects (Annex 2)
26
Neutral. The neutral profile is characterised by non-linear effects that have a linear
formulation so they do not amplify or moderate the effect of certain variables.
Aggressive. The firm is characterised by top management that wants to maximise the
number of innovations that are integrated. This management is typically oriented towards
minimising the effect of fractional failure rate on both approval rate and integration rate.
Top management does not act to allocate more resources per project in the case of a
lower implementation rate because they trust in the ability of middle managers to speed
up projects. The same is true in the case of the integration rate that will not be exposed to
great reduction if the failure rate decreases.
Conservative. This firm is characterised by top managers that do not want to beat the
market to anticipate rivals’ moves. They will react to pressure exercised by failure rate
and integration rate by slowing down the innovation process: their tendency is to keep the
innovation process in equilibrium rather than accelerate.
In our simulation we decided to adopt the neutral profile.
2.3. Validation and sensitivity analysis
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)
validity of the model (internal validation) like the structure-oriented behaviour tests
[Barlas, 1996]. They asses the validity of the structure indirectly, by applying certain
behavioural tests to the model-generated behaviour patterns.
Two types of structural validation tests were performed:
* extreme conditions tests to show the behaviour of the model under extreme conditions
of certain variables.
¢ behaviour sensitivity tests to determine those variables to which the model is highly
sensitive.
All validation tests were performed on a reference version of the model, that considers a
firm characterised by top management with neutral mental models through innovation,
standard reference rates and a standard competitive pressure. Each run was conducted to
appreciate the reaction to extreme condition tests and sensitivity analysis was conducted
by modifying certain variables. All tests had positive results and confirmed the internal
validity of the modell.
A sensitivity analysis was conducted on three non-linear effects that play a major
influence on main rates of innovation: effect of relative failure rate on the approval rate,
effect of implementation rate on resources allocation, effect of relative failure rate on
integration rate. The model seems to be relatively sensible only at the modification of the
last non-linear effect.
* Please refer to the paper’s support material for a selection of validation tests performed (Annex 3).
27
3. Simulation and discussion
Baden-Fuller and Stopford [1994], while analyzing in a longitudinal study the strategy
renewal process, choose an interval of time of 5 years to exploit the regeneration of
business models of a sample of 20 European firms. In longitudinal studies [Bower, 1970,
Burgelman, 1991] on internal corporate venturing processes, the interval of time of the
case study is 5 years. In Burgelman’s [2002] most recent works, while directing the focus
of the analysis on the strategy renewal process, he enlarged the time interval up to 15
years. To capture the richness of the strategic innovation process we extended the time
horizon up to 15 years. This interval of time will help us to capture the long-term
interactions between the development of organisational innovations and technical and the
implementation of strategic innovations, clearly showing the behavior of the feedback
loop that relates the three forms of innovation. Each single interval of the simulation
represents | month, so the entire simulation will be conducted over 180 time periods’.
The purpose of simulation is to test two different kinds of firms in two different
competitive environments.
The “proactive firm” is characterised by top managers with a clear orientation towards
strategic innovation and renewal. The organisational context will be defined to foster
innovation development through the pipeline.
A “traditional or conservative firm” is characterised by top managers who behave
prudently throughout strategic innovation and tend to retain the current strategic position.
They will be more selective regarding the innovative projects presented.
The parameters that will be used to characterise the type of firms will be:
- reference fractional time to new initiatives;
- reference approval rate;
- reference fractional integration rate.
The modification of parameters expresses a stable modification of procedures. This
means that the firm’s orientation toward innovation is “institutionalised” with a certain
organisational design.
The competitive environment refers to the level of environmental turbulence. The level of
rivalry is high when rivals introduce continuously strategic innovations and this exerts a
high competitive pressure on the firm’s management.
The increase of competitive pressure has two main effects: it stimulates top managers
integrate more innovations and it dramatically increases the failure rate of strategic
innovations. External competitive pressure is the parameter that will be used to
characterise the competitive environment.
Performance will be measured by evaluating the effective contribution of the strategic
innovation process to the renewal of the firm’s strategy. This is expressed by the absolute
value of technical innovations integrated into the strategy of the firm and by the relative
value of the successful strategic innovations (represented by the SIR indicator).
3.1. Base run
The base run highlights the dynamics of the innovative process in large organisations
* Please refer to the paper’s support material for simulation software settings (Annex 4).
28
described by the interaction between organisational, technical and strategic innovations.
The reference fractional time towards new initiatives, the reference approval rate and the
reference fractional integration rate have the same value of 0.30. This means that top
managers allow (as reference) 30% of time for new initiatives, they plan to approve the
30% of innovative technical projects presented and to integrate the 30% of them.
The analysis of the behaviour of rates reveals the existence of temporal delays caused by
the presence of an articulated stock structure (Figure 13).
The innovative firm seems to enter into a stable situation after a certain period of time (40
months), the system starts to work and proposed innovations are processed by the
organisational structure. The approval rate, full development rate and integration rate
start to work by bringing stocks to an asymptotical equilibrium.
Technical innovations at different stages of the pipeline tend to remain in the stocks. This
is consistent with the fact that innovative firms desire to maintain a portfolio of
innovative initiatives from which they benefit through time [Bower, 1970; Burgelman,
1983a].
Innovation approved for experiment stock has a different behaviour because after a
period of accumulation it decreases under the effect of the full development rate. Thanks
to the increase in the implementation rate the number of resources required for each
project to be developed decreases, so the full development rate increases by contributing
to the transformation of the largest part of approved projects in fully developed projects.
On the contrary, the approval rate reduces over the years due to the effect of an
increasing failure rate. This is coherent with the general assumption of the competitive
strategy paradigm for which, after a certain period of time, a new strategy can be imitated
by competitors, so in the long run no competitive advantage can be guaranteed even to a
company that pursues strategic innovations [Porter, 1980]. This is confirmed also from
the behaviour of the SIR the Synthetic Innovation Rate that during the years tends
asymptotically to 0. After 15 years it assumes the value 0.35 this means that successful
integrated strategic innovations are 35% of total implemented strategic innovations. The
total number of innovations produced exceeds 138.
We repeated the simulation applying stronger competitive pressure (2). The results were
as we expected. The competitive pressure stimulates the firm to increase innovation
activity (Figure 14). Top managers feel the gap and activate organisational innovations
that stimulate the development of technical innovations. However the combined effect of
the increase in the integration rate and of a high level of rivalry, increases the failure rate
of strategic innovations. For these reasons, in terms of absolute value, the firm
implements more innovations. However the SIR, that is a measure of the success rate,
decreases to 30%.
29
Figure 12. Model parameters for the Base Run in a traditional and in an
hypercompetitive environment
Parameters Traditional Hypercompetitive
External competitive pressure 1 2
Reference fractional time to new initiatives 0.3 0.3
Reference fractional approval rate 0.3 0.3
Reference fractional integration rate 0.3 0.3
Reference obsolescence rate 0.1 0.1
Reference dismissal rate 0.001 0.001
First developed innovations 1 1
30
Figure 13. Selected results of simulation for the Base Run in a traditional competitive
environment
aE First_Developed innovations 14
-2- Innovations approved for experimenting 5
ER Full developed Innovations 12
~ Stratogicintogratod 50
oF Falled 90
1 Fist_Developed innovations
Innovations_approved_for experimenting
Full developed innovations
Be <g- Sitategie_integrated
g_ Fale
= Fst Developed innovations e
——
-2- Innovations_approved_for experimenting
ge Full_developed innovations
ae Stratogic_intogratod
=s Fal,
o 60 100 150
Time
“= First Development rate 14
a Approval rate 18
3 Full development rate 1.3
a Integration rate 1.2
oS Falue_rate 07
—4-Fist Development rate
-1~ First Development rate 5.6 _p- Approval rate
Approval rate 08 er
& Full development rat
3 Full development rate 0.5 i
4 Integration rate
wi Integration rate 0.5 :
~~ Failure rate 03. ~5-Falure_rate
-- First Development rate 0.0
a Approval rate 0.1
<s-Full development rate’
BA Integration rate + 0.0,
- Falure_rate,
° 0 100 150
Time
== SIR_Synthetc Innovation rate 1.0
i 0} 5
Ea falas fore ate OT
GS Ilegaton oto 12
Ze
| -
Se tag
i/ ae = SIR. Sytatenovaon rata
a :
“t= SIR Synietmovaon ate 04 yf aca ae ce tle te
Implementaton_ fi TRS
Pa a Relative ature rate
S Relative failure rate, de ce =
4
== SIR. Synhete innovation sate) (7
E Implementaton rate j
a : vl og I
Lr Relative faire rate
oe Integration at,
° 0 100 150
31
...Figure 13
1.04
0.84 ee! _
4
a a
A _
0.45 aA _Effect_of_relative_failure_rate_on_i
ntegration_rate
% “2
Relative_failure_rate
0.30-+
0.254
0.20-
0.155
__ Fractional_integration_rate
a
_~ Fractional_failure_rate
32
Figure 14. Selected results of simulation for the Base Run in an hypercompetitive
environment
Fist Developed innovations 24
2 Innovations_approved_for experimenting 7
= Full_developed innovations
aE Strategie_intograted
=e Fealed
—4—Fitst_Developed innovations
2 Innovations_approved_for_experimenting
3--Full_developed anovations
—g_ Stategic_integrated
_g-Faled
ae First Developed innovations"
-2-_Innovations_approved_for experimenting
=e Full_developed innovations
as Strategic integrated
BS Fealed
° 50 400 160
Time
= First Development rate
eo Approval_rate
5 Full development rate
ae Integration rate
ae Failure rate
= 4-Fist Development rate
| Approval_rate
a Patan .
Ea Integration rate ie
See
i
_
yy
oO",
re cell call ft eae 2 meanest
ge Integration rate 1.8 4 ale atl
i
oe implementation rate *
lies Relative faiure rate [°° *
33
3.2. Proactive firms
To characterise proactive firms, a precise choice of selected parameters was effected. The
reference fractional time to new initiatives was set to a higher value (0.40), and that of the
base run (0.30), to represent the willingness to improve innovation performance with
respect to the “neutral” firm (represented in the base run). The reference approval rate
was set at 0.6 this means that 60% of presented projects will be approved (this is what
internal procedures determine, before the effect of other variables reduces it). The
reference fractional integration rate was set at 80%, this means that 80% of fully
developed projects will be integrated into the strategy of the firms (before the action of
other variables reduced it). This combination of rates would express a very aggressive
competitive posture of the firm for two reasons. Firstly, top managers would like to speed
up the innovation process and they increase, with the advancement in the pipeline, the
rates that regulate the flow of innovative projects. Secondly, top managers have a higher
confidence in the quality of innovative projects in advanced stages of the pipeline of
innovation. In fact they allow a very high integration rate of about 80%, compared with
an approval rate (more prudent) of 40%.
In a standard competitive environment, proactive firms achieve poor performance if
compared with the basic run of the model. The number of strategic innovations integrated
is around 90 (Figure 16). The high integration rate determines an increase in the failure
rate that stimulates an increase in the resource allocated to fully develop each project. A
slow implementation rate also stimulates a decrease in the presentation rate. This
determines that top managers dramatically reduce the time to autonomous initiatives for
middle level managers, who are the agents of innovations. The innovation process comes
progressively closer to a complete stop.
The behavior of a proactive firm within a highly competitive environment (characterised
by a level of competitive pressure of 2) shows that the absolute innovative performances
increase (Figure 17.). The total number of innovative projects implemented is over 280.
This is due to the modification of rates that drive innovation flows inside the pipeline.
The effectiveness of innovation is affected by a slight decrease compared with what we
have seen previously. In fact the SIR assumes a final value of 0.25.
The relevant observation that can be made concerns the increase of the innovative
pressure which speeds up the innovation process. The firm responds to
“hypercompetition” increasing the degree of strategic innovation.
Figure 15. Model parameters for the Proactive firm in a traditional and in an
hypercompetitive environment
Parameters Traditional
Hypercompetitive
External competitive pressure 1 2
Reference fractional time to new initiatives | 0.4 0.4
Reference fractional approval rate 0.6 0.6
Reference fractional integration rate 0.8 0.8
Reference obsolescence rate 0.1 0.1
Reference dismissal rate 0.001 0.001
First developed innovations 1 1
34
Figure 16. Selected results of simulation for the Proactive firm in a traditional
environment
First_Developed innovations
Innovations _approved_for experimenting
Full developed innovations
Strategie_integrated
Fated
First Developed innovations
experimenting’
-2- Innovations approved !
Full_developed innovations
Strategle_integeated
Failed,
! ii
K a
First Developed innovations
=
5 Fll_ developed innovations
Innovations_approved_for experimenting
4 Statepic_ntegrated
og Fle
Fist Development rate
cor Approval_rate
3 Full development rate
Integration rate 1.
Failure rate
-1— First Development rato
Approval rate 1.2
Full development rate
Integration rate
Fallure rate
Fist_Development rate
4 First Development rate
—g- Approval_rate
Full development rate
= Integration_rate
ag Fale rate
cor Approval_rate
3 Full development rate
- Integration_rate
Bes Failure rat,
35
...Figure 16.
Fj SIR Synthetic mnovaton rate 10
cs Implementation rata 05
Relatve fare rte 10
Integration rate 17
=4-SIR_Synbete novation rata
-- SIR. Synthotic imovaton rate 04 planar
PM implementation rate 02 Relative failure_rate
Relatve faire rte 04
Integration rato 07 5
-- SIR. Synthetic ovation rat
tz Iplemertaton ato |
ls Relative faire rate
ae tegration rate
100 180
Time
1.0%
ee ae
ue
o.s-+ \ —
0.64 \
—41— Relative_failure_rate
0.44 Effect_of_relative_failure_rate_on_i
i ~2~ ntegration_rate
0.24 2
0.0.
oO 50
Time
0.84
iy
06+
0.44 —,— Fractional_integration_rate
_— Fractional_failure_rate
150
36
Figure 17. Selected results of simulation for the Proactive firm in an hypercompetitive
environment
sox lie. sero Ox steirentig 14
re Ful developed movaions 31 ; <———j.-——
- srawgenwgant 72|] 9 AO SS
y 7 ee
a Fold 220 Y a
| A
Hi Ve aaa Bink pnaneanuensenet
I iy/ _p_hnovatons_ approved fr experimenting
WT il eve oats
WE / $
ill / Ne Stated nerted
i! /
\ “Fold
ao First_Doveloped Innovations { i Zz 2, ag
> Innovatlons_approvad_for experimenting a /
ge Full developed innovations + 0 Ss"
nl Fol
0 0 100 150
Te
== Fist Development rate 25
oa Approval rate
-3- Full development rate
cee Intogration rate
se Faure rate
4 Fist Development rate
-1— Fist Development rate
an ‘Approval rate
_p-Abproval_rate
,— Full development rate
-3- Full development rate cS
—g-nlegration rate
e Integration_rate
rs _Fallure_rate
os Faure rate =
=~ Fist_Development rate
BS Approval rate
-3- Full development rate
vie Integration rate
fiat Falure rate,
== SIR_Synthetic novation rate 1.0
Implementation aio 1.3
Relative failure rate 1.0
Integration rate 8.4
meet ——_
—4-SIR_Sythete_innovaton_rate
-{-SIR_Synthetic novation rato 0.4
= Implemertaton rato 08
= Relative failure rate 04
Implementation rato
Relative fallure rate
ae Integration rate 3.4 Integraton_rate
-1— SIR_Synthetic innovation rate’
x Implementaton_rate
2 mo vio | og
i Relative failure rate
cx Integration rat,
o 50 100 150
Time
37
3.3. Conservative firms
To characterise conservative firms the design of reference rates was inspired by a rule
based on prudence according to which top managers prefer to slow down the innovation
process, so that they will be less proactive in bringing innovations to the markets. The
reference fractional time to new initiatives was set to a higher value (0.40) than in the
base run. The reference approval rate was set at a lower value of 0.3 to express the
orientation towards making a rigorous selection. This orientation is confirmed by the
extremely reduced integration rate that was set at 0.2.
The conservative firm seems to have the most effective innovation process. Considering
standard competitive pressure, the firm produces a relatively high number of strategic
integrated innovations (more than 360) with a very high success rate of 0.42 (Figure 19).
As the relative failure rate increases, top managers correctly slow down the integration
rate to ensure a better process of strategic integration for each technical innovation.
Behavior is confirmed also assuming higher competitive pressure (Figure 20). In this case
the firm produces a higher number (752) of strategic innovations compared with the
conservative firms but with a good success rate of 33%.
Figure 18. Model parameters for the Conservative firm in a traditional and in an
hypercompetitive environment
Parameters Traditional Hypercompetitive
External competitive pressure 1 2
Reference fractional time to new initiatives 0.4 0.4
Reference fractional approval rate 0.3 0.3
Reference fractional integration rate 0.2 0.2
Reference obsolescence rate 0.1 0.1
Reference dismissal rate 0.001 0.001
First developed innovations 1 1
38
Figure 19. Selection of simulation results for the Conservative firm in a traditional
environment
a Fist Developed innovations 27)
2 lnmovations approved for_experimenting 8
ie Full developed innovations 36
as Strategic Integrated 160
i Faled 210,
First Developed innovations
—g- Inmovations_approved_for_experimenting
—3- Full developed innovations
—g- Statogic_Intogeatod
Failed
ae Fist_Developed innovations =
-2-_Innovations_approved_for_experimenting
ae Full developed innovations} 0 |
ae Strategic Integrated
= Fale,
0 0 400 150
Time
Ti Fist Development rate 27
Approval_rate 49
Full development rate 4.8
Integration rate 38
Fale ate 18
First Development rato
=1= Fist Development rate 11
os ‘Approval_rate 20
“3 Full development rate 1.9
bs Integration rato 15
~ Falueaie 07
—y- Aperoval_rate
Full development rate
g-lntegraton rate
_5- Faire rate
“1- First Development rate 0.07
— ‘Approval_rate 0.1
“3 Full development rate”
a Integration rate t 00,
ae Failure rate
0 50 100 150
Time
{= SIR Synthetic Innovation rate 1.0
ES Implementation rate 1.4
ea Relative failure rate 0.9
ies Integration rate 3.8
4 SIR_Synhetie_innovation rate
-;— SIR_Synthetic Innovation rate 0.4 Implementation rate
4 SIR_Synthotic us —-lrolomentaton
2 Implementation rate 06 aeruan as
oa Relative falure rate 0.3 gohan lures
Integration_rate
nan Integration rate 1.5 4 Ilearation +
|; SIR_Syntheic innovation rate’
ied Implementation rate
Le Relative fallure_rate
ee Integration rate,
° cy 400 150
Time
39
0.44
—4— Relative_failure_rate
Effect_of_relative_failure_rate_on_i
~2~ ntegration_rate
40
Figure 20. Selection of simulation results for the Conservative firm in
an
hypercompetitive environment
ae First Developed inovations 47)
<> Inmovations_approved for_ewperinening 14
me Full developed novaions 110
a Stalag. integrated. 250
s Fraled 490,
Fi Developed. novatons
_—Inovaton_approved for experimenting
Ful devlopa.anovatons
Stato ilegratad
Fated
e Fist Developed innovations
2 Innovations_epprovedfr_experimenting
es Full developed novation 0
ae Sato integrated
es Foie
‘0 400 150
Time
Tye Ft Development rato 47
oe Aowroval ate 14
“ge Full development to 11
cq legraion rato 8.7
= Faure falo 49,
Fist Development rato
-t- Fist Dovelopment ato 19 > Aewroval ate
a Approval_rate 56 Full development rato
“ge Ful. development rate 44
—_lnograton ate
ae Integration rate 35 i
7 Falure_rate 2.0 = ial
1+ Fst Development rato
ee Anrovalrate
3 Full development ao } 00
cae togratin rato
aa Faure rato,
° 50 100 150
Time
To SiR Synhote_movaton rato
ve Inpleeriaion ato 2
e Relave_fatre rate ee
Sees
a Ioan rato ———
, es
—4-'SIR_Synthtic novation rate
t= SIR_Synhotic novation. rato fe . Inlementaion sate
= _ r
oa Ieleeriaton rato = Fe sams
ES Relave_faro_rate —
+ tmgraton rate
ve Iiepraton rato 3 <<. +
“
-4= SIR_Synthetic_innovation rate) ea
= Ipleeriaon rato
ea Relave_faire_rate
a Iori rato
° so 100 150
Time
41
1.09 \
\ Pe ale 1 —
0.84 -
0.64 1
_,_Relative_failure_rate
\ 1
0.44 Effect_of_relative_failure_rate_on_i
\ ~2~ ntegration_rate
Conclusions
The model simulations validate the basic propositions of our theoretical construct for
which the introduction of organisational innovations that define entrepreneurial
orientation can influence strategic renewal. In particular the model highlights two very
different dynamics. The first is related to organisational innovations that control the
entrepreneurial energy of middle level managers. The second dynamic depicts the
integration efforts of top management.
The model contributes to the existing theoretical findings, introducing a feedback view of
the strategic innovation process. The entrepreneurial orientation is the result of certain
organisational innovations. It affects innovation processes (in particular: approval,
development and integration rates) and it is influenced by the effectiveness of innovation
processes (failure rate).
The feedback approach to entrepreneurial orientation allows us not only to understand
why firms act entrepreneurially, but also how they act in relation to strategic innovations
generation.
In this context the integration efforts of top managers play a fundamental role. The
integration time has a strong influence on the success rate of strategic innovations. If it is
not well governed an increase in the failure rate progressively depresses the
entrepreneurial orientation of middle-level managers, thus jeopardising the entire
innovation pipeline function.
42
An “active posture” toward innovation is not necessarily a positive component of
entrepreneurial orientation. Firms with more traditional orientation obtain better strategic
innovation performance in traditional as well as in hypercompetitive environments
(Figure 21).
Figure 21. Comparison table of simulation performance
Base run Proactive Conservative
firm firm
Traditional Strategic 138 92 362
environment Innovations
SIR 0.35 0.27 0.42
Hypercompetitive | Strategic 180 283 725
environment Innovations
SIR 0.30 0.25 0.33
The effectiveness of innovation processes is influenced by top managers’ ability to
balance the entrepreneurial orientation of middle-level managers with a high degree of
discipline. The degree of “strategic discipline” in our model is represented by the choice
of reference selection and retention rates that become more restrictive with the advance
of the innovative projects through the innovation pipeline. This seems to be in contrast
with studies on strategic innovations that, referring to a general business model of the
“proactive” firm, sustain that it is the most successful model in turbulent competitive
environments [D’Aveni, 1999].
The managerial implications of the research findings must be found in the area of
organisational innovations introduction. It is essential for top managers to control the
quality of innovations rather than to stimulate a relevant flow of innovations.
Only by controlling the quality at different stages and during the integration phase can
top managers assure a successful strategic renewal process.
The model simulation clearly shows how the introduction of organisational measures
alone, aimed at releasing entrepreneurial energy, does not produce a great deal because
the low quality of the innovations jeopardises the sustainability of strategic innovations.
The failure of integrated strategic innovations has deep negative effects on top managers’
behaviour. In fact they perceive as unsuccessful the process of strategic innovation and,
consequently, reduce the organisational innovations suffocating the entrepreneurial
behaviour and the development of further innovation by middle level managers.
The research has two main types of limitations.
Firstly, there are limitations related to the utilization of modelling methodology. The
representation of the process of strategic integration was extremely simplified with the
concept of “developing integration capabilities” because further assumptions would nor
have been supported by previous research findings and other theoretical contributions.
In addition the representation of organisational innovations was anchored to
modifications of the software part of the organisational structure, like for example, new
procedures for the approval of innovative projects and new criteria for the allocation of
43
resource. The model could be improved including, in an explicit way, the introduction of
innovations that concern the hardware part of the organisation, as for example
modifications in the organisational structure.
Secondly, there are some limitations that affect coherence with the general theoretical
framework that inspired the model.
According to the scholars who introduced the dynamic view of strategy, [D’Aveni,
1994], the rate at which new strategies are implemented influences competitors’
behaviour, and therefore the level of rivalry and, at the end, competitive pressure.
In our model, this variable was modelled as exogenous. The model could have been
improved with the construction of a specific structure that represents how the
implementation of strategic innovations can modify the competitiveness of one or more
rivals and consequently, competitive pressure.
44
References
Baden-Fuller, C.W. and J. Stopford [1994]. ‘Creating Corporate Entrepreneurship’.
Strategic Management Journal, vol. 15, 521-536.
Barlas, Y.[1996] ‘Formal aspects of model validity and validation in system dynamics’.
System Dynamics Review, Vol.8, No. 3: 183-210.
Bower, J. L. [1970]. Managing the resource allocation process. Harvard University Press,
Boston MA.
Brockhaus, R. H. [1980]. ‘Risk taking propensity of entrepreneurs’. Academy of
Management Journal, 23: 509-520.
Burgelman, R.A. [1983a]. ‘A process model of internal corporate venturing in the
diversified major firms’. Administrative Science Quarterly, 28, pp.223-244,
1983a.
Burgelman, R.A. [1983b]. ‘Corporate entrepreneurship and strategic management:
insights from a process study’. Management Science, Vol. 29, pp.1349-1364.
Burgelman, R.A. [1983c]. ‘A model of interaction of strategic behaviour, corporate
context, and the concept of strategy’. Academy of Management Review, Vol. 8,
No. 1, 61-70.
Burgelman, R.A. [1984]. ‘Designs for corporate entrepreneurship’. California
Management Review, Vol. 26, No. 2: 154-166.
Burgelman, R.A. [1985]. ‘Managing the new venture division: Research findings and
implications for strategic management’. Strategic Management Journal, 6:38-54.
Burgelman, R.A. [1991]. ‘Intraorganisational ecology of strategy making and
organisational adaptation: theory and field research’. Organisation Science, 2:239-
262.
Burgelman, R.A. [2002]. Strategy is destiny. The Free Press, New York.
Covin, J. G. and Slevin D. P. [1991]. ‘A conceptual model of entrepreneurship firm
behaviour’. Entrepreneurship: theory and practice; Vol. 16, No.1: 7-24.
D’Aveni, R. A.[1994]. Hypercompetition. The Free Press, New York.
D’Aveni, R.A. [1999]. ‘Strategic Supremacy Through Disruption and Dominance’. Sloan
Management Review, Vol. 40, No. 3.
Drucker, P.F. [1985]. Innovations and entrepreneurship. Harper.New York.
Forrester, J. W. [1961]. Industrial Dynamics. Productivity Press, Cambridge, MA.
Forrester, J. W. [1968]. Principles of Systems; Productivity Press. Cambridge, MA.
Henderson, R. and K. Clark [1990]. ‘Architectural innovation: the reconfiguration of
existing product technologies and the failure of established firms’. Administrative
Science Quarterly, 35: 9-30.
Kogan, N and M. A. Wallach [1964] ‘Risk taking: A study in cognition and personality’.
Holt, Rinehard and Winston. New York.
Lumpkin, G. T., & Dess, G. G. [1996]. ’Clarifying the entrepreneurial orientation
construct and linking it to performance’. Academy of Management Review, 21:
135-172.
Markides, C.C. [1997]. ‘Strategic Innovation’. Sloan Management Review, vol. 38: 9-23.
Markides, C.C. [1999a] ‘Strategic Innovation in Established Companies’. Sloan
Management Review, vol. 39: 31-42.
Markides, C.C. [1999b]. ‘A dynamic view of strategy’. Sloan Management Review,
volume 40, pp. 55-63.
45
Markides, C.C. [2000]. All The Rights Moves, HBS Press, Cambridge, MA.
Miller, D. and P. Friesen [1978]. ‘Archetypes of strategy formulation’. Managemenet
Science. 24: 921-933.
Miller, D. [1983]. ‘The correlates of entrepreneurship in three types of firms’.
Management Science, 29: 770-791.
Pinchot, G. [1985]. Intrapreneuring: Why you do not have to leave the corporation to
become an entrepreneur. Harper and Row, New York.
Porter, M.E. [1980]. Competitive Strategy: Techniques for Analyzing Industries and
Competitors. The Free Press, New York.
Porter, M. E. [1996]. ‘What is Strategy ?’. Harvard Business Review, November-
December 1996, p. 61-78, 1996.
Porter, M.E. [1985]. Competitive Advantage. The Free Press, New York.
Quinn, J. B. [1980]. Strategies for change: logical incrementalism, Irwin, Homewood, III.
Sitkin, S. B. and A. Pablo [1992]. ‘Reconceptualizing the determinants of risk
behaviour’. Academy of Management Review, 6: 97-113.
Sterman, J.D. [2000]. Business Dynamics. McGraw-Hill, New York.
Stevenson , H. H. and J.C. Jarrillo [1990]. ‘A paradigm of entrepreneurship:
entrepreneurial management’. Strategic management Journal, 11: 17-27.
Utterback, J. [1971]. ‘The process of technological innovation within firm’. Academy of
Management Journal, 14: 75-88.
Van de Ven, A. H. [1986] ‘Central problems in management of inovation.” Management
Science, vol.32 No.5: 590-607.
Von Hippel, E, Thomke, S. and M. Sonnack. [1999]. ‘Creating breakthroughs at 3M’.
Harvard Business Review, Sept. 1, 1999.
46
Untangling the origins of Strategic Innovation
A System Dynamics Approach
Support Material
Annex 1. Model equation list
Equation list includes variables description and unit of measures
init Dismissed_innovations = 0
flow Dismissed_innovations = +dt*Dismissing_rate
doc Dismissed_innovations = Innovative projects that are not integrated in the
strategy of the firm are dismissed
unit Dismissed_innovations = Innovations
init Failed = 0
flow Failed = +dt*Failure_rate
doc Failed = Technical innovations that are not succesfully integrated in the
strategy of the firm and enter into the stock "failed"
unit Failed = Innovations
init First_Developed_innovations = 1
flow First_Developed_innovations = -dt*Refusal_rate
-dt*Approval_rate
+dt*First_Development_rate
doc First_Developed_innovations = Technical innovations presented for the
approval
unit First_Developed_innovations = innovations
init Full_developed_innovations = 0
flow Full_developed_innovations = -dt*Dismissing_rate
-dt*Integration_rate
+dt*Full_development_rate
unit Full_developed_innovations = innovations
init Innovations_approved_for_experimenting = 0
flow Innovations_approved_for_experimenting = -
dt*First_Developed_Obsolescence_rate
-dt*Full_development_rate
+dt*Approval_rate
doc Innovations_approved_for_experimenting = Innovation approved to be
implemeted on a small scale
unit Innovations_approved_for_experimenting = Innovations
init Innovations_Refused = 0
flow Innovations _Refused = +dt*Refusal_rate
doc Innovations_Refused = Innovations refused by top managers. These
innovations are abandoned and no more examined to be developed
unit Innovations_Refused = Innovations
init Obsolete_innovative_projects = 0
flow Obsolete_innovative_projects = +dt*First_Developed_Obsolescence_rate
doc Obsolete_innovative_projects = Obsolete innovative projects that are
definitely abandoned and no more examined
unit Obsolete_innovative_projects = Innovations
init Perceived_failure_rate = Failed
flow Perceived_failure_rate = +dt*Change_in_failure_rate_perception
doc Perceived_failure_rate = Strategic integrated innovations failed under
competive pressure and, consequently, abandoned
unit Perceived_failure_rate = Innovations
init Perceived_integration_rate = First_Developed_innovations
flow Perceived_integration_rate = +dt*Change_in_integration_rate_perception
doc Perceived_integration_rate = The total amount of innovations integrated in the
corporate strategy as percepted by top management
unit Perceived_integration_rate = Innovations
init Resourced_for_development = 0
flow Resourced_for_development = -dt*Resources_consumption_rate
+dt*Resources_accumulation_rate
doc Resourced_for_development = The stock of total resources accumulated to
sustain the development of innovative projects
unit Resourced_for_development = Resources
init Strategic_integrated = 0
flow Strategic_integrated = -dt*Failure_rate
+dt*Integration_rate
doc Strategic_integrated = Technical innovations integrate successfully in the
strategy of the firm.
unit Strategic_integrated = Innovations
aux Approval_rate = IF(First_Developed_innovations<0,
0,MIN(First_Developed_innovations,
First_Developed_innovations*Fractional_approval_rate))
doc Approval_rate = Innovation approved by top management ecah month. These
innovations will be developed on a small scale to be tested
unit Approval_rate = Innovations per month
aux Change_in_failure_rate_perception = (Failure_rate-
Perceived_failure_rate)/Time_to_perceive_failure_rate_changes
doc Change_in_failure_rate_perception = The net change in the precepted failure
rate. Top managers perceive how many strategic integrated innovations fail under
competive pressure and must be abandoned
unit Change_in_failure_rate_perception = Innovations per month
aux Change_in_integration_rate_perception = (Integration_rate-
Perceived_integration_rate)/Time_to_perceive_integration_rate_change
doc Change_in_integration_rate_perception = The net change in the perceived
integration rate. Top managers perceive how many innovations are integrated in the
strategy of the firm with a certain delay.
unit Change_in_integration_rate_perception = Innovations per month
aux Dismissing_rate =
Full_developed_innovations*Reference_dismissing_rate*External_competitive_pressure
doc Dismissing_rate = The rate at which fully developed innovative projects are
dismissed. After a certain period of time, innovative projects loose their innovative
attributes for two reasons, the firm develops new innovations, rivals develop similar or
alternative innovations. The rate at which projects are dismissed by top managers
depends on the reference fractional dismissal level that represents the willingness of the
company to maintain the fresher projects and the effect of the approval pressure that
represent the intensity of rivalry.
unit Dismissing_rate = Innovations per month
aux Failure_rate = Strategic_integrated*MIN(1, Fractional_failure_rate)
doc Failure_rate = The rate at which innovations integrated fail and accumulate in
the stock "failed"
unit Failure_rate = Innovations per month
aux First_Developed_Obsolescence_rate =
MIN(nnovations_approved_for_experimenting,Innovations_approved_for_experimentin
g*Ref_obsolescence_rate*External_competitive_pressure)
doc First_Developed_Obsolescence_rate = The rate at which presented innovative
projects become obsolete. After a certain period of time, innovative proposal loose their
innovative attributes for two reasons, the firm generates new innovations, rivals generate
similar or alternative innovations. The rate of obsolescence depend from the reference
fractional level of obsolescence that represents the willingness of the company to
maintain the fresher projects and the effect of the approval pressure that represent the
intensity of rivalry.
unit First_Developed_Obsolescence_rate = Innovations per month
aux First_Development_rate =
IF(Time_to_autonomous_initiatives=0,0,(Time_to_autonomous_initiatives*Reference_pr
oductiviy_for_unit_of_time))
doc First_Development_rate = The number of innovation that are developed to be
examined by top management
unit First_Development_rate = Innovations per month
aux Full_development_rate =
MIN(Innovations_approved_for_experimenting,Resources_consumption_rate/Resource_
for_development_per_project,Innovations_approved_for_experimenting-
First_Developed_Obsolescence_rate)
doc Full_development_rate = Innovations that come under complete development
each month. These depend from the total resources that are available and from the
amount of resources that each innovation requires to be fully developed.
unit Full_development_rate = Innovations per month
aux Integration_rate =
MIN(Full_developed_innovations,Full_developed_innovations*(Fractional_integration_r
ate),Full_developed_innovations-Dismissing_rate)
aux Refusal_rate = First_Developed_innovations-Approval_rate
doc Refusal_rate = Express how many innovations presented by front line
management are refused by top managers
unit Refusal_rate = Innovations per month
aux Resources_accumulation_rate =
Approval_rate*Reference_resources_per_project
doc Resources_accumulation_rate = The rate at which top managers plan resource
accumulation to sustain innovative projects. It is a function of reference resources that
each project needs and the approval rate that represents how many innovative projects
were approved.
unit Resources_accumulation_rate = Resources per month
aux Resources_consumption_rate =
Resourced_for_development/Time_to_resource_absorption
doc Resources_consumption_rate = This represents the rate at which each project
absorbes resources to be full developed.
unit Resources_consumption_rate = Resources per month
aux Effect_of_implementation_rate_on_resource_for_development =
GRAPH(Implementation_rate,0,0.2,[2,1.8,1.6,1.4,1.2,1,0.8,0.6,0.4,0.2,0.01"Min:0;Max:2
;Zoom"])
doc Effect_of_implementation_rate_on_resource_for_development = The more
will be the implementation rate the more simple the implementation will be and the less
will be resources destined to a single project
unit Effect_of_implementation_rate_on_resource_for_development =
Dimensionless
aux Effect_of_relative_failure_rate_on_fractional_approval_rate =
GRAPH(Relative_failure_rate,0,0.1,[1,0.9,0.8,0.7,0.6,0.5,0.4,0.3,0.2,0.1,0"Min:0;Max:1;
Zoom"])
doc Effect_of_relative_failure_rate_on_fractional_approval_rate = The effect of
failure rate is as follow: the more it increases the more prudent will be top managers in
approving innovative projects, so the less will be the approval rate.
aux Effect_of_relative_failure_rate_on_integration_rate =
GRAPH(Relative_failure_rate,0,0.1,[1,0.9,0.8,0.7,0.6,0.5,0.4,0.3,0.2,0.1,0"Min:0;Max:1;
Zoom"])
doc Effect_of_relative_failure_rate_on_integration_rate = The more will be the
fractional failure rate the less will be the integration rate, because top managers become
more prudent and want to spend more time to integrate innovative projects
unit Effect_of_relative_failure_rate_on_integration_rate = Dimensionless
aux Fractional_approval_rate =
External_competitive_pressure*Reference_fractional_approval_rate*Effect_of_relative_f
ailure_rate_on_fractional_approval_rate
doc Fractional_approval_rate = The percentage of developed innovations that are
approved by top managers to be developed on small scale each month.
unit Fractional_approval_rate = Fraction per month
aux Fractional_failure_rate =
(Fractional_integration_rate*Reference_fractional_failure_rate*External_competitive_pr
essure)
doc Fractional_failure_rate = The strategic innovations failure rate depends firstly
on the reference fractional failure rate that is influenced by two factors: fractional
integration rate and external competive pressure. The higher the integration rate the less
top mangers will dedicate attention to innovation integration and the higher the failure
rate will be.
unit Fractional_failure_rate = Fraction per month
aux Fractional_integration_rate =
Effect_of_relative_failure_rate_on_integration_rate*Reference_fractional_integration_rat
e
doc Fractional_integration_rate = The fraction of innovative project that are
integrated in the strategy of firms and became strategic innovations
unit Fractional_integration_rate = Fraction per month
aux Fractional_time_to_new_ initiatives =
Implementation_rate*Reference_fractional_time_to_new_initiatives
doc Fractional_time_to_new_ initiatives = The fraction of time that effectively will
be allocated to new intiatives
unit Fractional_time_to_new_initiatives = Dimensionless
aux Implementation_rate =
Full_developed_innovations/First_Developed_innovations
doc Implementation_rate = Express the performances in term of ability to
implement innovations
unit Implementation_rate = Dimensionless
aux Relative_failure_rate = Perceived_failure_rate/Perceived_integration_rate
doc Relative_failure_rate = Performance in term of failed strategic innovations
that are appreciated in relation with integrated innovations
unit Relative_failure_rate = Dimensionless
aux Resource_for_development_per_project =
Effect_of_implementation_rate_on_resource_for_development*Reference_resources_per
_ project
doc Resource_for_development_per_project = Amount of resource effectively
destined to a single innovation project
unit Resource_for_development_per_project = Resources per innovation
aux SIR_Synthetic_innovation_rate = MAX(0.00001,
Strategic_integrated/Total_innovations)
aux Time_to_autonomous_initiatives =
Total_time_available*Fractional_time_to_new_ initiatives
doc Time_to_autonomous_initiatives = The unit of time available each month for
innovative initiatives
unit Time_to_autonomous_initiatives = Unit of time per month
aux Total_innovations = Failed+Strategic_integrated
const External_competitive_pressure = |
doc External_competitive_pressure = It express the level of competitive
turbulence of the industry [D'Aveni, 1997] also called level of rivalry among firms
[Porter, 1985]. It can vary from | that represents an industry with a low level of rivalry to
2 that is a very turbulent industry.
unit External_competitive_pressure = Dimensionless
const Ref_obsolescence_rate = 0.1
doc Ref_obsolescence_rate = The fractional rate of obsolescence is set as an
independent variable and can be interpreted as the willingness of top managers to retain
in the stock only a small portion of innovative initiatives
unit Ref_obsolescence_rate = Fraction per month
const Reference_dismissing_rate = 0.001
doc Reference_dismissing_rate = The fractional dismission rate is set as an
independent variable and can be interpreted as the willingness of top managers to
abandon older technical innovation and retain in the stock only a small and well qualified
portion of them.
unit Reference_dismissing_rate = Fraction per month
const Reference_fractional_approval_rate = 0.3
doc Reference_fractional_approval_rate = The percentage of innovations that are
normally approved by the firm's top management each month.
unit Reference_fractional_approval_rate = Fraction per month
const Reference_fractional_failure_rate = 0.2
doc Reference_fractional_failure_rate = Reference fractional failure rate
unit Reference_fractional_failure_rate = Fraction per month
const Reference_fractional_integration_rate = 0.30
doc Reference_fractional_integration_rate = This is the reference rate at wchich
top managers wanto to integrate innovative projects. This is an ideal goal set "a priori" by
top mangers.
unit Reference_fractional_integration_rate = Fraction per month
const Reference_fractional_time_to_new_initiatives = 0.3
doc Reference_fractional_time_to_new_initiatives = Percentege of total time
available thta fornt line managers can allocate to autonomous initiatives
unit Reference_fractional_time_to_new_initiatives = Dimensionless
const Reference_productiviy_for_unit_of_time = 1
doc Reference_productiviy_for_unit_of_time = Express how many technical
innovations can be realized in a unit of time
unit Reference_productiviy_for_unit_of_time = Innovations per unit of time
const Reference_resources_per_project = 1
doc Reference_resources_per_project = Reference amount of resources needed to
each project to be developed
unit Reference_resources_per_project = Resources per innovation
const Time_to_perceive_failure_rate_changes = 4
doc Time_to_perceive_failure_rate_changes = Time to perceive the change in the
failure rate. It is normally set at 4 because the reports are examined on a quarterly basis
by top management
unit Time_to_perceive_failure_rate_changes = Months
const Time_to_perceive_integration_rate_change = 4
doc Time_to_perceive_integration_rate_change = Time to perceive the change in
the integration rate. It is normally set at 4 because the reports are examined on a quarterly
basis by top management
unit Time_to_perceive_integration_rate_change = Months
const Time_to_resource_absorption = 1.5
doc Time_to_resource_absorption = Time that innovative projects need to absorb
resources and become fully developed
unit Time_to_resource_absorption = Months
const Total_time_available = 50
doc Total_time_available = The amount of time available each month for work.
The unit of time is a conventional measurment (it can be days, hours or minutes) and
indicates the total time of front line managers to work
unit Total_time_available = Time unit per month
Annex 2
Characterisation of non-linear effects to represent managers’ mental
models
Characterisation of the effect of relative failure rate on approval rate
Aggressive mental models
Edit Graph/Vector
Coordinates: Output OK
x Y 1.05 =
“ 7[ 8/3
: Input
Min: [0.00 =
me Relative falure_rate SPAAELE
Step: [0.70 i[2]3
(__| [|
Yes Dele
Min, [0.00 7 =
Max: [7.00 =| &|83|c8)*)
Conservative mental models
Edit Graph/Vector x|
end Benen Hierro We frre rn
yore 0.2 |
Points: |
1 Ins | Del 0.05
[EE 0.0 1.0 is
Xs 7[ 8/9
Input Bx}.
Min: [0.00 =
Ls Relative failure_rate a) Sets
Step: [0.70 a 2b
Yebvis ; ; OIA KS
Min: {0.00 =
Max: [7.00 =| & ||)
10
Characterisation of the effect of implementation rate on resources for development
of a single project
Aggressive mental models
Edit Graph/Vector x!
Coordinates:
x
y.for3
Points:
iting | Del
Axis: 7lels
Input OS}.
Min, [o.00
a eo =] : : :
P|
YeAxis 7 O/B
Min [0000 = : j
oo ee naa
Conservative mental models
Ed
GraphiVector
Coordinates: ok
x :
Input (&}:
Implementation_rate =]
11
Characterisation of effect of failure rate of the integration rate
Aggressive mental models
Graph/Vector
Output (Etfect_of_telative_feilue_rate_on_integration rate} OK
1.04 T
_—T— Cancel
0.85 — __tee_|
0.64 Zoom
Edit What
0.42 Graph
| Interpolation:
02 Line >
Asymptotes:
Horizontal >
0.04 1
0.0 Uy fos
SS 7/8]
vine [ooo (eat FIGIE
Relative_failure_rate 4]
Step: [010 APS
|
Sv Aue at ol fe
‘Min; [0.00 es i}
Max [1.00
Conservative mental models
Edit Graph/Vector x]
Coordinates: Output (Etfect_of_telative_failue_rate_on_integration rate} a
x y 1.05 _ «|
; Cancel
i
0.84 __ Hep _|
i Loss]
0.64 Zoom
i Edit What:
0.44 — | [Graph =]
3 Peete | | eres
y.frco0 022 Line >
Points: j fazall eed
- i Horizontal _¥
11 Ins | Del 0.04 1
0.0 10 _< t
X Axis las
wine [oD ‘neat A Iale
Relative_failure_rate 2)
Step: [010 ALS
p|
av A = 5 ol fe
Input Variable
Min. [0.00 ds t[)
Max [1.00
12
Annex 3. Selected simulation outputs for validation
Reference fractional time to autonomous initiatives = 0
First Developed innovations 1.007
Innovations_approved for_experimenting 0.17,
Full developed innovations 0.14
———+—_
Strategic _ntograted 0.17
013,
Faled
Fist_Developed innovations
Innovations_approved for experimenting
Full_developed_innovatons
rategic integrated
—4—Relative_failure_rate
Effect_of_relative_failure_rate_on_i
~2~ ntegration_rate
a)
First_Developed_innovations #####” x
Innovations_approved_for_experimenting))
Ful developed. enovatons 2
| developed co f#
Strategie integrated
i Fale
° 0 100 190
Time
T= Fist Development rate 1000
ie ‘Approval rate 0.300
“Full development rate 0.110
Pa Integration rate 0.040
5 Feature rate 0.000,
4 Frat Development rata
=p Fist Development rate -0.20 wp Poproval ate
1
Approval rate 0.120 ul_development rate
ap Ful_ development
Ful. development rate 0.044 incorton rte
a Integration rate 0.016 ‘
‘a Failure rate 0.004 5 Femure_rate
== Fist Development rate -1.00
ok Approval rat
+ Ful development ate
s maponnniriocied CT.
es Integraton_rate
Hess Falure_rat
° so 400 150
Time
10. 1 1 i
13
Reference fractional approval rate
ig
Fist Development rate]
Approval rate
Full_ development rate
Integration rate
Falure rate
Fst Development rate
Approval rate
Full development rate
Integration rate
Falure_ cate
Fist Development rate
Approval rate
Full development rate
Integration rate
Falure cate
10
First Development fate
Approval_rate
204 2948 234 2345
Full. development rate
oF Integra
— 4 Inlegraton rate
Feilue_rate
0
° 50 100 180
Time
14
Reference fractional integration rate = 0
aE Frist Developed Innovations $50.0
Innovations approved for experimenting 98.0
Full developed innovations 7200
Strategic_integrated
ee 10,
Fale
3 Fret Developed, ovations
2 Innovations_approved_for_experimenting
ae ‘4 ad
Ze 5 Ful developed,innovatons
yt ,- Stale. intgrated
¢ Fale
i Fes Developed inovatons s.
Innevaons_ approved tor experimenting 00
Ful developed innovators, |
Sateicintegated
SEK 3s
Fale
° so 100 150
Time
j= Fist Development ro 900)
aa Approval rate 980
ar Fulldevelopment ate 680
sa lagration rate)
Favwesnel a
es area
i
12
Fst Development ate
Fist Development ale 132} _z-Aeprova ate
5 48 45
Approval rate 302 Full development rat
FulLdoveloprent rato 35.24
Iteration
nt lgration rate
este ee) - Forest
5 es 2
Fst Development ats
Approval ate h 00
Fl development rae
Inogration rate
sain tale
S Faure sl
° 0 10 150
Time
“i= SI Syrihete ovation rte 00007070"
ee Implementation ato 220000000
i Retave fare rate’
+ 90000000,
Fe iniegraon rae
SIRS. imovaon rate
“1- SIR Synihete innovation rte 000000098) | . : _- pementation sta
ie Implementation ato 6.80000000 Spohn hun gas
Es Reaver] 99 cs
bee tegration ate“ na heaton
t= SIR_Symote innovation rte .00000800"
oe Implementaion ate 000000000
oe Relative fare rate’ i
1 0000000,
Se tniegraton rae
o 0 too 10
Time
15
...Reference fractional integration rate = 0
1.0.
0.54
0.04 4 1 4 —,— Relative_failure_rate
Effect_of_relative_failure_rate_on_i
2” ntegration_rate
16
Annex 4. Simulation software settings
Software Powersim constructor 2.51
Integration method Euler (fixed step)*
Start time 0
Stop time 180
Time step 0.625
* We adopted Euler’s integration method. We tested the robustness of our model by
running several simulations with the Runge-Kutta method and we did not encounter any
significant differences with Euler’s method simulations
17
18
