Typically strategic management literature covers sales growth and innovation randomly through several topics, each author placing it in different sections: entrepreneurship, related and unrelated diversification, mergers and acquisitions, growth strategies, new product development, new markets, new customer strategies, new business development, international strategies, research and development, cultural innovation, internal new ventures, corporate strategies, alliances and joint ventures, vertical integration, outsourcing, portfolio management, industry life cycle, and more.

SVM simplifies such atomization by focusing on the second and third dimension of the strategy-value model: innovation strategies and resources strategies.

Innovation and Resources Strategies

Figure 12.4 relies on and modifies McKinsey's "staircases to growth." It provides a platform for understanding the link between innovation and resources, showing how firms that expect to grow steadily need to have special resources.

Figure 12.4 Innovation Strategies

Innovation Strategies

SVM shows how it is possible for a company to acquire resources, use its own resources, or share third-party resources in order to produce an innovative strategy. Each approach has both benefits and risks.

Increase in customer share can be accomplished by proposing to current customers alternative products based on each customer, at different prices. This is called "price discrimination," and consists of the classical promos and combos that you can see in many businesses. Some products are owned (McDonald's offers combos of their own products), are acquired (Disney offers packages of parks, hotels, cruises), or originate with third parties (Amazon sells books from partners).

A firm may increase in market share by using its own resources, such as sales force or telemarketing, by acquiring the markets of firms with similar products or services (AT&T acquiring Cingular), or by sharing customers with other firms or organizations (American Airlines with Avis).

Innovation in products and services can be managed internally by a firm, either led by a single division such as R&D (Hewlett Packard), or by the entire organization (3M). It can be accomplished by acquiring resources (Gillette acquiring Duracell, Parker pens, etc.) or sharing resources (Johnson and Johnson partnering with universities or venture funds).

Innovation in the value chain keeps the same products but provides new value propositions. An example would be when using its own, acquired, or shared resources Ikea created a new revolutionary way to market furniture in a small box that the customers assemble at home.

New business can be led internally (Citibank's cross-functional teams), by acquiring resources (Disney buys ABC channel), or by shared resources (Enron partners with power generation plants). Finally, new locations can be handled internally (exports), by acquiring new resources (Daimler acquires Chrysler), or by sharing resources (McDonald's franchises overseas, or Coca-Cola establishes a partnership with Mitsubishi to market their products in Japan).

Growth and Stock Value Creation

A second critical insight that SVM introduces is the connection between growth and stock value creation. If a firm has low market power, innovation can be too risky and not advisable. The financial resources associated with innovation may not be recovered, as a competitor may reach the market first. If profits are low, growing may empower the losses. This suggests that innovation is quite unlikely in intense competitive environments. As Schumpeter stated, innovation makes sense in monopolistic situations and innovation helps to preserve and defend firms operating in monopolistic environments.

By relying on the EVA model, SVM incorporates such insights, and provides a clear criterion: growth without EVA destroys stock value and therefore is not advisable, unless the firm expects to gain market power, thereby ending up with growth and a positive EVA. This has been the case for some dot-coms, such as Amazon, which is steadily reinforcing its market power and EVA. Many dot-coms that had very negative EVAs, were able to obtain funding for their ventures with the expectation of high sales growth leading the firm into a monopolistic situation. However, such investments may turn speculative; when such positive EVAs do not materialize, the investors abandon the firm leading it to a collapse. This happened massively during the Internet bubble at the turn of the millennium.


As you can see strategies related to growth and innovation fell into disgrace during the 1970s because of the massive failure of such strategies, even though everybody recognizes that growth and innovation strategies are important.

We now understand when innovation strategies make sense and how they can be streamlined with the rest of the strategies of the organization in order to create stock value. You can now better connect the strategic environment, the strategies, and the financial results. In certain environments the strategies may produce good or bad financial outcomes.

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