1.1 Strategy and Value
The objective of all firms is the creation of value. A firmâs strategies describe how it intends to create value over an immediate time frame, and the value opportunities it is searching for over the long term. Value, however, has different meanings to different stakeholders. Firms manage resources to create value through their capabilities to deliver products or services that provide customer value, maintain relationships with resource providers and customers, and organize activities through governance, management systems and processes. To do this, a firm has to create an equitable balance between stakeholders such as management, customers, employees, financiers, unions, suppliers, shareholders, government and society in general.
Although value has to be established and maintained by firms in order to offer incentives to various stakeholders, a premium is associated with value creation for customers and shareholders. The creation of value for other stakeholders is dependent on the success of creating value for customers and the incentives offered to shareholdersâthe residual stakeholders. Offering unsuitable incentives to stakeholders, however, is likely to lead to the destruction of shareholder value.
Strategy as a search for value is the discovery and development of sources of profitability to maximize firm value. To achieve sustainable shareholder value, firms have to simultaneously manage and deliver on operations in the short term, while investing and divesting to maintain long-term continuity. The issue then becomes the durability of a firmâs competitive advantage to maintain a rate of return on the firmâs assets greater than its cost of capital. A firmâs external environment presents the value opportunities, while a firmâs resources and capabilities determine how to leverage these opportunities.
Analysing how innovation and technology have influenced industries, firms, strategy, business models and investments provides a foundation for identifying what lies ahead. The themes that dominate the external environment today are new technologies and their diffusion, globalization, industry dynamics and climate. The question then becomes how these factors will influence industry transformation, innovation and the firm, strategy and future value.
1.2 The External Environment
1.2.1 Technology and Innovation
Technology is defined as the processes by which an organization transforms labour, capital, materials and information into products and services of greater value. All firms have technologies. Innovation refers to a change in one of these technologies. So spectacular was the wave of innovation in the late nineteenth century that the Commissioner of the United States Office of Patents recommended in 1899 that the office be abolished with the words âEverything that can be invented has been inventedâ.
Since the First Industrial Revolution, economic growth has been driven by science and research funded by financial speculation, with financial bubbles being a persistent feature of this process. Periodically, the focus of the financial speculation is an innovation that fundamentally transforms the economy. This relationship has repeatedly created transformative infrastructures such as canals, railroads, electrification, cars, airplanes, computers and the internet, with the fundamental value to the economy realized decades later.
Business cycles are the recurring levels of economic activity over time, and were once described as having long predictable durations. Kondratiev waves are long macroeconomic cycles lasting 50â60 years that the Russian economist Nikolai Kondratiev theorized existed in capitalist economies. The economist Joseph Schumpeter extended Kondratievâs concept with his own theories on long technology waves. In Schumpeterâs theory of business cycles and economic development, the circular flow of income, an economic model depicting the circulation of income between consumers and producers, is stationary. Entrepreneurs disturb this equilibrium through innovations, and in doing so, create the economic development that drives the economic cycle.
Schumpeter formed two theories in regards to entrepreneurship. The first (1909) was that individuals and small firms were more innovative, which he expanded in a second theory (1942) in which large firms drive innovation by investing in research and development (R&D) through their access to capital and resources. Schumpeterâs âgale of creative destructionâ is the fundamental driver of new industries or industry combinations, the result of entrepreneurs producing innovative new products, processes or business models across markets and industries that either partially or entirely displace previous innovations. Entrepreneurship can, therefore, be framed as recognizing and exploiting value opportunities, and applies to individuals, small firms or large institutions.
Schumpeter also recognized and analysed the dynamic interaction between competition and industry structures. Schumpeter focused on innovation as the central component of competition and the driving force behind industry evolution. In Schumpeterâs view, each long wave of economic activity is unique, driven by entirely different clusters of industry. Each upswing stimulates investment and an expansion of the economy, resulting in an economic boom. Each long boom eventually declines as the technologies mature and investorsâ returns decline, only to be followed by a new wave of innovations that replace the old methods and create the conditions for a new upswing.
The long wave theories of Kondratiev and Schumpeter both focused on economic growth. While Kondratiev does not identify a specific causal factor and Schumpeter tied these waves to technological revolutions, both were attempting to describe long-term deviations in GDP and the economy in general.
Neo-Schumpeterians moved the emphasis to the technological revolutions themselves, the diffusion processes that result with each wave and the resulting transformative effects on the economy. Technological revolutions are viewed as creating clusters, following Schumpeterâs long wave theory, where interconnected innovative new products, processes and infrastructure initially lead to new fundamental industries, which are then followed by their diffusion to incumbent industries.
The economic historian Carlota Perez identified a regular pattern of technological revolutions over the past 250 years that materialized every 50â60 years. These cycles have discrete phases, where the emergence of general-purpose technologies signals massive changes in the economy. These general-purpose technologies lay the foundations for generating clusters of products, processes and innovations, initially with the rise of new fundamental industries, followed by the diffusion of the technologies to more mature industries.
Table 1.1 illustrates the waves of general-purpose technologies that laid the foundations for successive technology revolutions, starting with the Industrial Revolution in the late eighteenth century, the Second Industrial or Technological Revolution, the Thi...