A Strategic Innovation System Dynamics Process Model Carmine Garzia

Description
A strategic innovation system dynamics process model carmine garzia.

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A Strategic Innovation System Dynamics Process Model
Carmine Garzia
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Introduction
Strategic management scholars such as D’Aveni [1994, 1995, 1999]
and Markides [1997, 1999a, 1999b and 2000] developed dynamic
approaches to competition that moved from Porter’s [1980, 1985]
widespread frameworks of industry structure and competitive
advantage. According to these scholars, the industry structure can be
considered a dynamic environment that can be modified by firm
innovative strategies. The resource-based view of the firm [Barney
1986, 1991, Peteraf 1993] is particularly suitable to explain innovative
strategies development and implementation .
Innovative positioning choices are unique and this uniqueness is a
source of competitive advantage. The uniqueness of the position must
be supported by a unique set of resources. Competitive advantage is
highly sustainable when the resources on which it is based are not
easily identifiable by competitors (causal ambiguity), and are scarce,
or rather available to a limited extent and difficult to acquire. Teece
[2007] argues that in order to sustain competitive advantage in rapidly
changing environments a firm must own not only inimitable and non-
substitutable resources, but also difficult-to-replicate dynamic
capabilities that allow resource combination.
The strategic innovator determines a structural change of the industry
when able to obtain the exclusive control of certain resources that

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Università Della Valle D’Aosta, Department of Economics and Political Science
and AMC Advanced Managament Center, Università della Svizzera Italiana,
Lugano. Email: [email protected], [email protected],

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have a critical role in the competitive advantage in the industry
[Gambardella and McGahan, 2010]. The structural evolution of a
sector can be analysed by referring to resources. Indeed, a sector
changes structurally if the critical resources on which firms built their
competitive strategies change.
Scholars converge on the idea that business model evolution and
reconfiguration can be explained by looking at resource integration
and combination [Jacobides, Kundsen and Augier, 2006; Johnson,
Christensen and Kagermann, 2008; Teece, 2010]. Resources fuel
strategic innovation processes. The strategic innovation process,
generating strategic initiatives that may change competitive
positioning, cannot take place without a specific set of initial
resources. Furthermore, to develop and implement strategic initiatives
requires developing new resources that advance the strategic
innovation process. Resources are generated over time as a result of
firm performance, especially profitability, and are the result of a
complex accumulation process. Resource accumulation can be
represented as positive feedback where the availability of resources
sustains the implementation of innovative strategies that contribute to
better performance.
The aim of the paper is to investigate strategic innovation through a
System Dynamic based process model, built on a qualitative study,
that explains the dynamics of innovative strategy generation and
implementation within firms.
In our model the process of developing strategic initiatives is
extensively influenced by a series of enabling activities that top
management put in place to create the desired organizational context,
a context that is characterized by an optimal level of entrepreneurial
orientation.
According to corporate entrepreneurship studies [Guth and Ginsberg,
1990; Sharma and Chrisman, 1999; Covin, Ireland, and Kuratko,

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2003; Kuratko et al.,2005a; Ireland et al., 2009] a new business idea is
developed and implemented by an organizational unit that acts
entrepreneurially as a new venture start-up within a larger
organization [Beer, Eisenstat and Spector, 1990]. New idea
development is determined by certain organisational actions that allow
unleashing entrepreneurial behaviour within the firm and creating new
ventures [Slatter, 1984; Grinyer, Mayes and McKiernan, 1988,
Hayton, 2005].
The concept of corporate entrepreneurship evolved through the
concept of strategic entrepreneurship entailing the diffusion of
entrepreneurial behaviour within the firm to stimulate strategy
renewal. Entrepreneurial strategies stimulate active, innovative and
creative behaviour within the firm [Baron, 1998; Meyer and Heppard,
2000; Hitt and Reed, 2000] thus sustaining the development and
implementation of innovative strategies.
Entrepreneurial orientation in the organization has a number of
implications on the processes of generating, developing and
implementing innovations. When considering the dimensions that
define entrepreneurial orientation on a firm-level, we have seen that
an organization with a strong propensity towards adopting
innovations, extensive proactivity towards the market and a risk-
taking attitude will more easily generate and develop strategic
initiatives. The ability to act independently from middle level and
frontline managers is crucial in the development and implementation
phase, since this will require a lesser involvement of top managers
who can continue managing the firm's ordinary activities.
The paper is structured into 5 parts. After a methodological note, the
logical model that describe the process of strategic innovation is
presented. The third part is dedicated to the organizational context and
the diffusion of entrepreneurial orientation at firm level. The fourth
part is focused on resource development and allocation process, the

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last section explore the issue of execution and strategy
implementation.

1. Methodology
The SD logical model was developed by adopting a longitudinal case
study methodology [Yin, 1994 and 2004] that is well suited to
responding to exploratory type research questions and allows
analyzing the temporal evolution of strategic choices and the dynamic
links between organizational structures, resources and positioning.
The research followed a multiple case study type design; in particular,
three firms were selected that operate in different sectors and compete
in competitive environments characterized by different levels of
attraction and rivalry among firms.
The multiple case studies were preceded by an analysis of the
literature that enabled selecting the units of analysis and defining the
relevant constructs and propositions that guided the analyses. For each
firm, a specific time interval of analysis was focused on that would
allow capturing the most relevant part of the strategic innovation
process.
Case selection. The cases were selected in order to analyze strategic
innovation processes that would allow a sufficiently detailed
longitudinal observation of the phenomenon [Leonard-Burton, 1990,
Miles and Hubermann, 1994, Pettigrew, 1990]. The case studies were
chosen by selecting firms with very different prior histories and
competitive success and profitability, however, common to all firms is
having implemented strategic innovation processes and significantly
redefining their strategic positioning. To increase the likelihood of
obtaining relevant information, case studies were included that would
allow observing the process of strategic innovation over a number of
different time intervals and in different stages of the life cycle of the
firm [Yin, 2000].

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The companies under study were selected from a sample of successful
firms included in the Business Model Innovation Observatory, a
scientific database created and maintained by the Institute of
Management at the University of Italian Switzerland, that since 2001
collects selected information on strategic decisions and the
performance of a sample of innovative European firms. Based on this
information, companies were selected that were of potential interest to
the study, subsequently progressing to the data collection process.
The sample of companies used for the multiple case studies was
construed to include:
• Two consolidated companies (firms that have existed for a
number of years) undergoing a major change of strategy
determined by the decisions of a new CEO who manages the
process of change. Two very different companies in terms of their
competitive position and performance were selected. ICP is a
company in crisis where the CEO implements innovative
strategies to manage the turnaround. ITT Friction is a successful
company that is facing the challenge of growth that is managed by
the new CEO leveraging on a series of strategic initiatives.
• A company that represents a case of long-term strategic
innovation. Permasteelisa was created with an innovative business
model and in the course of the period analysed has continued to
renew its strategy with innovative strategic initiatives leveraging
on entrepreneurial behaviour and the development of intangible
resources.
Choosing the analysis time interval. The choice of the time interval of
observation of the cases was based on the CEO’s term of office. The
analytical model foresees that strategic change is activated by the
CEO’s activities based on his strategic intentions. It was considered
that the arrival of a new CEO marks the start of the process of

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strategic change that is rooted in the implementation of innovative
strategies.
Analysis levels. The analysis of cases is articulated on four levels:
1. The strategic intentions of the CEO, in particular, analyzing
the deliberate strategy of the CEO at the beginning of the
observation period and hence its evolution over the period
analyzed.
2. The development process and the content of strategic
initiatives promoted by the CEO.
3. Actions of organizational change aimed at increasing the level
of entrepreneurial orientation in the organization.
4. Actions aimed at the development and allocation of resources.

Figure 1. Companies included in the case study
Company Industry Initial
competitive
situation
Interval of
observation
Strategy
Permasteelisa Building
supplier
High growth

1984-2002 Continuous positioning
renewal
ITT Friction Automotiv
e supplier
Low growth 2007-2011 Foster growth through
strategic innovation
ICP Sanitary
service
Near bankrupt 1995-2002 Managing turnaround
leveraging on strategic
innovation

A specific activity concerned the analysis and classification of
strategic initiatives undertaken by the companies under study,

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reconstructing the development process and distinguishing the
transition from the generation to the development phase and thereafter
its implementation. Strategic initiatives were classified according to
the impact they had on the strategic positioning dimension (value
proposition and scope).
Data collection. Data collection took place via document analysis and
interviews.
The document analysis focused on collecting documents related to the
strategic initiatives underway (feasibility studies and extracts of the
business plan). In some cases, it was possible to access documents that
contained the planned organizational actions of change such as
implementing a new organizational structure or the adoption of a new
pay system for middle managers.
The interviews were conducted using a semi-structured interview
approach, supported by a draft document data elaboration technique
and, accordingly, three protocols were developed in line with the
people involved: top management, middle management level and
frontline managers.
The data collection and fieldwork lasted from 6 to 8 months and for
each firm a minimum of 8 to a maximum of 20 interviews were held.
Data analysis. The data analysis was conducted using a grounded
theory approach, namely, continuous interaction between the
collection and analysis of data to verify the internal validity of the
theories developed [Strauss and Corbin, 1990, 1994]. Data analysis
was undertaken in a comparative perspective, that is to say, making
comparisons between the cases in terms of processes, sub-processes
and the relevant variables [Eisenhardt, 1989a].
System Dynamics modelling has been used to increase the level of
internal consistency. The elaboration of the theory was supported by
System Dynamics logical-analytical tools [Forrester, 1961, 1968]: the

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use of the feedback concept and the distinction between stock and
flow variables [Sterman, 2000].
In the following sections the presentation of the model has been
integrated with box, that contains information about the companies
included in the case studies, to exemplify the description of certain
variables and processes.

2. Strategic initiatives and the evolution of firm positioning
The central variable of our model is represented by strategic initiatives
that form the basic unit of the strategic process, they are innovative
projects created within firms, typically designed with the aim of
strengthening or changing the strategic positioning of the firm, defined
in accordance with the strategic intent of top management and the
deliberate strategies [Hamel and Prahalad, 1989]. Strategic initiatives
drive strategic change inasmuch as they transform the firm’s
competitive position and help instigate and sustain profitable growth
processes since they allow the firm to develop sales and, at the same
time, improve operating margins through cost reduction or
improvements in the price position.
The firm’s strategy can be seen as a bundle of strategic initiatives.
When strategic initiatives are aimed towards strengthening strategic
positioning, they can be defined as organic strategic initiatives that fall
within the scope of defending current competitive advantage. When
the objective is to generate new forms of positioning, they can be
defined as radical.
Incremental strategic initiatives are aimed at improving penetration of
a market segment or improving the value proposition of the firm,
implemented to maintain the current position and the ensuing
performance. Radical strategic innovations are intended to change
current positioning through, for instance, entry into new markets,
developing new customer segments, expanding the product range.

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Radical strategic initiatives are those that more accurately represent
the concept of strategic innovation because they imply the redefinition
of the strategic positioning and can entail changes in the competitive
environment and can affect the firm’s value proposition.
Redefining strategic positioning requires the introduction of
substantial changes in the scope of the business and the firm’s value
proposition. Examples of strategic initiatives are the development of
new products for existing segments or entering new segments where
the firm is not yet present with existing products or a geographic
expansion through the process of developing international markets.
Among vertical integration choices, those downstream of direct
distribution can be particularly relevant.
The redefinition of the value proposition affects the relationship
between non-monetary value for the customer and the firm's cost
structure and entails the reconfiguration of the value chain. The
development of a better level of customer service can be achieved by
redefining one or more activities of the value chain that allows the
firm to apply a premium price exceeding that of a direct competitor
who is unable to provide the same level of service. Strategic initiatives
can be aimed specifically at cost savings. For example, a firm can
develop strategic initiatives in redesigning the product or production
process to reduce either the number of components used or the
assembly time, and achieve cost savings that thus allow applying
appropriate pricing policies. Firms can achieve significant cost
savings by outsourcing part of the activities that were previously
performed internally, which requires implementing specific strategic
initiatives to coordinate logistics with suppliers and avoid
diseconomies.
In our representation model of the strategic innovation process [Figure
2], strategic initiatives progress according to a top-down logic,
expressing a deliberate top management strategy and fully developed
in a process that consists in three phases [Burgelman, 1983].

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• Generation. This is the stage where the initiatives are presented in
the form of innovative projects from middle level management
within the more general planning and budgeting process. The
presentation of initiatives is generated and driven by top
management.
• Development. Innovative projects become strategic initiatives and
are developed into products, services and process innovations and
are tested to verify their potential impact on the strategic
positioning under the guidance of middle management. At this
stage, innovative projects become strategic initiatives.
• Implementation. Strategic initiatives derive from the experimental
development phase and become an integral part of the strategy as
innovative strategies.
In the SD logical model [Figure 2], the generation, development and
implementation of strategic innovations is determined by enabling
innovation processes, namely, those processes through which top
management creates the contextual conditions favouring the
development of strategic initiatives. The two types of enabling
processes are the creation of the organizational context and firm
resource management. These are complex processes characterized by
inertia and time delays between the action and implementation phases,
and must therefore be planned and managed by top management.
Enabling innovation processes are supported by control and execution
processes, or rather, processes that are put in place by top
management to ensure that the strategic initiatives are actually
achieved. These also entail two linked processes: control of the
development of strategic initiatives and the execution or
implementation of the initiatives.

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Figure 2. A System Dynamics stock and flow models to represent the
strategic innovation process

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Managing change through strategic initiatives. The ITT Friction case.
ITT Friction, leader in the field of brake pads and friction materials, is a subsidiary
of ITT Corporation, the American multinational operating in various industrial
sectors. In 2007, the company, under leadership of the new CEO, was undergoing
strong growth despite the crisis in the automotive market.
Upon taking office, the new CEO realized that the company had great potential and
developed a growth strategy by focusing on new markets and new customers and to
develop innovative products. The CEO developed a long-term strategic vision and
activated a series of strategic initiatives aimed at changing the firm’s positioning,
both on the level of its competitive environment and in terms of the value
proposition.
In particular, the strategic intentions of top management included doubling the size
of the company within 3 years by focusing on the original equipment segment for
leading car manufacturers. The focus on original equipment was based on the fact
that the company owned the necessary R&D competencies to create innovative
products that are adopted in new platforms (with which different car models are
created). In addition, the OEM market requires high production volumes, which
under certain conditions allows developing economies of scale.
The new CEO formulated the company's strategy as a set of strategic initiatives
dedicated to the pursuit of growth and customer value creation, which can be
summarized as follows:
• development of products for several key platforms for customers in mature
markets;
• development of highly automated production processes for high volume
production;
• strengthening R&D activities to innovate in products and production processes
according to an integrated approach;
• opening technical and commercial branches in mature markets to win new
customers who are leaders in quality and innovation;

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• development of a production and commercial structure in China to serve local
car manufacturers;
• development of a production facility in Eastern EU to develop products for the
aftermarket.
After defining the contents of the initiatives, the CEO distributed responsibilities and
implemented processes to support the development of strategic initiatives in relation
to resources and the change in the organizational context. The CEO, recognizing the
validity of the original positioning of the company and using available resources,
promoted a series of targeted initiatives consistent with the long-term objectives,
which helped change the scope of the strategic positioning.

3. Creating the entrepreneurial context
Top management can shape the organizational context by introducing
a series of organizational activities that directly influence
entrepreneurial orientation at firm level [Morris & Jones, 1995;
Garvin, 2002; Morris, Kuratko and Covin, 2008]. Innovations that are
introduced in the organizational context to obtain the desired level of
entrepreneurial orientation do not produce immediate effects. The
process of changing operating mechanisms, the process of creating
new organizational units, the selection and inclusion of new managers
are activities that require time to be implemented and must thus be
programmed in advance by top management.
Top management can act on two variables: the design of the
organizational structure and the definition of the operational
mechanisms that regulate the functioning of the organizational
structure. In certain situations, specific actions can be taken by top
managers to stimulate the so-called bottom up engine, which consists
in the autonomous generation of strategic initiatives by middle level
and frontline mangers.

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Actions on the hard variable: the organizational structure. Firms can
create mixed organizational units where commercial and technical
managers work on specific projects. This facilitates the management
of technological innovation by empowering staff engaged in research
and development, in terms of economic and competitive objectives, to
optimize the flow of information both within the firm and from the
market to the firm. Innovations on the organizational structure can be
introduced even when strategic innovation and development processes
are in progress (Figure 3). At a certain stage of the development or
implementation of a strategic initiative, top management can create
organizational units dedicated to an innovative project to isolate it
from the management of current activities and promote the clear
allocation of resources. The objective is to preserve the strategic
development of the initiative thereby circumventing that this becomes
the object of internal killing actions by the firm’s organization.
The design of the organizational structure can be achieved by
introducing individuals, such as project managers, who coordinate the
business functions and are able to respond more quickly to market
needs. These individuals, and the organizational units associated with
them, tend to move independently and proactively with respect to the
market.
Actions on the organizational context can also be implemented
through the selection and inclusion of specific organizational figures
who serve as activators of business processes. These individuals are
middle level or top managers who have accumulated experience in
managing strategic innovation and, in particular, the related
organizational aspects, and can therefore act on the organizational
structure to stimulate entrepreneurial behaviour in frontline managers
and increase entrepreneurial orientation in the organization.

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Actions on the soft variable: rules. Operating mechanisms are one of
the most incisive elements to achieve a certain level of entrepreneurial
behaviour in the organization. The key operating mechanisms are the
definition of tasks, proxies and remuneration and career management
systems. The definition of proxies must be structured to encourage
autonomous behaviour by establishing limits and control mechanisms.
The definition of tasks must include explicit rules for the time
management of individual employees. Specifically, there must be a
clear allocation between innovative projects and current operations.
Remuneration systems always play an important role in stimulating
entrepreneurial behaviour in the organization. These systems can be
designed expressly to stimulate entrepreneurial behaviour on the level
of organizational units, circumventing leveraging on only individual
entrepreneurial behaviour, since these depend on the characteristics of
the human resource and are not the result of an organizational learning
process. Performance evaluation systems can be linked to the
achievement of competitive goals (such as growth and level of
customer satisfaction) and profit objectives. Intermediate evaluation
systems of the development process of strategic initiatives can also be
introduced, especially when these affect the development of
innovative products that require time. In this last case, the contribution
of managers to the development of the initiative is evaluated and
directly rewarded in advance of the contribution to business
performance. Assessment systems can provide cross-valuation
mechanisms for frontline managers towards middle level managers to
evaluate their ability to achieve goals while maintaining a constructive
climate and encouraging the development of entrepreneurial
behaviour among employees.
Monetary reward mechanisms can be integrated with non-monetary
rewards, such as business awards, the assignment of new operational
authority, involvement in higher-level organizational units for active
participation in the strategic process. These rewards affect the

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entrepreneurial behaviour of the individual resource and can only
indirectly affect the organizational unit in which it operates.

Figure 3. Enabling actions on the organization to increase the
entrepreneurial orientation at firm level.
Hardware –Structure Software – rules
Reduction of organization levels to
facilitate contact with top management
Definition of tasks that allow
autonomous behavior
Creation of new roles in the organization
and selection of the appropriate humane
resource to accelerate the entrepreneurial
process
Introduction of rewards (monetary and
non monetary)
Creation of new organizational units
dedicate to the development of strategic
initiatives
Evaluation criteria for employees
performance that take into account
their entrepreneurial contribution to
strategic initiatives development

Igniting the bottom-up engine. Top managers, under certain
conditions, can act to promote autonomous strategic initiatives from
middle level and frontline managers. Literature presents an articulated
debate on the possibility of frontline and middle level managers to
offer strategic initiatives in a bottom-up approach [Burgelman, 1983,
1984, 1991; Kuratko et al. 2005b]. The debate stems from studies on
internal venturing processes where the organizational units dealing
with new strategic initiatives consist in frontline and middle level
managers with the task of drawing the top management’s attention to
new initiatives that are often inconsistent with the corporate strategy.
In these projects, top management has a relatively passive role, setting

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guidelines for the presentation of initiatives and, following the
selection of projects to be developed, guiding their implementation.
In a feedback loop interpretation of the strategic innovation process
(Figure 4), initiatives are created with a top-down approach, or rather,
induced by top management consistent with the firm’s deliberate
strategy. Widespread entrepreneurial behaviour stems from bottom-up
type activities that have limited scope in supporting strategic
initiatives, but that cannot be configured as autonomous strategic
initiatives. Frontline and middle level managers can implement two
types of activities that consist in either fine-tuning, namely, refining
specific aspects of a strategic initiative or they can contribute to the
acceleration process by helping to remove inertia and optimizing
resource utilization to reduce the development time of the initiative.

Figure 4. A feedback loop interpretation of the relations between
organizational innovations and strategic innovation

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Organizational
innovations
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Entrepreneuria
l Orientation
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Permasteelisa and the creation of an entrepreneurial organization.
Permasteelisa, world leader in the construction of curtain walls for buildings, has
been able to radically change its competitive position by changing its geographic
scope and product range, and reinforcing a unique value proposition based on
innovation, product customization, level of service and timeliness.
Permasteelisa introduced organizational innovations in the design of the
organizational structure and in operating mechanisms that encouraged
entrepreneurial behaviour. The organizational innovations stimulated and supported
the development of strategic initiatives that contributed to the renewal of the firm’s
positioning.
The ‘project manager’ is the first organizational innovation, introduced to eliminate
the inefficiencies associated with a lack of coordination between different business
functions. Project managers developed close ties with customers and designers and
have embedded themselves in the different markets of reference, which they often
helped to create from nothing. Project manager impetus in the executive committee
gave birth to the idea of developing new markets, such as the Japanese or American
markets. Project managers also inspired the development of innovative products,
such as the Blue Technology active façade system. The introduction of project
managers helped highlight the problems and inefficiencies that characterized
operations, such as during installation when external installers often jeopardized the
quality of the execution, a problem that was resolved with the introduction of an
original procedure of training installers. A further innovation introduced on the
organizational structure by the firm was the method of constituting installation
teams that were organized as small businesses with a coordinator involved in the
stock options system.
A system of incentives based on sharing the entrepreneurial function (with
associated risks and rewards) was introduced to facilitate the entrepreneurial
development of project managers. Some of these have become business
"champions" since by themselves, and with few resources available, they developed
new export markets such as the British or Asian market, or were awarded contracts

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that were particularly significant for the group’s development. The extension of the
incentive system to the front-line management level, such as site managers and
factory managers, reinforced the spread of entrepreneurial behaviour characterized
by initiation spirit, a proactive attitude to problem resolution and sharing the
profitability and quality objectives of the firm.

4. Managing resource development and allocation
The development of strategic initiatives requires top management
resource commitment actions. These are tangible, intangible and
physical resources used by middle level management to develop
strategic initiatives.
The progression of strategic initiatives is influenced by the allocation
of resources that the initiatives are able to attain at different stages
(generation, development and implementation). The generation of
strategic innovation requires an initial stock of resources, such as
technological know-how, business know-how, financial, physical and
tangible resources. In the development of strategic initiatives, tangible
physical resources as well as R&D laboratory facilities, pre-
production and logistics management structures, can be as important
as intangibles resources such as know-how.
The process of creating strategic initiatives begins with the resources
that the CEO decides to allocate in accordance with certain criteria.
During the strategic initiative, top management can conduct a series of
interim evaluations to confirm the allocation of resources or to reduce
and slow down or stop its entire development.
Resource allocation is a process that involves trade-offs, since
resource endowment is - by definition - limited and therefore the
allocation of resources to a specific project reduces the resource
portfolio available for other projects. Strategic initiatives have the

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characteristic of absorbing scarce resources within a firm such as
financial resources and highly specialized human resources.
Top management, with the selection of allocating resources to
strategic initiatives, initiate a process of selecting strategic alternatives
and thus define the boundaries of the strategic positioning of the firm.
During the strategic initiative development process, resource
requirements increase linearly or in some cases exponentially thus,
considering the limited availability of resources, the pressure on top
management in the selection of initiatives to be developed and
implemented increases.
Resource commitment follows the rules defined by budgeting and
strategic planning but foresees a degree of flexibility to seize strategic
opportunities. Some initiatives are subject to acceleration in their
development and implementation due to either exogenous factors or
the capabilities of middle level and frontline managers, requiring rapid
rescheduling of the allocation time of resources to prevent the
initiative from losing momentum and slowing down its development.
Finally, the allocation of resources among strategic initiatives can be
influenced by the negotiating skills of middle level managers,
whereby allocation criteria do not always follow to plan and do not
exclusively rely on the objective measures of performance expected
form the strategic initiative. In a certain way, individual negotiation
skills reflect individual entrepreneurial attitude and can be positively
associated to the entrepreneurial orientation of the organization.

4.1. Dynamic capabilities and resource development
As in the case of organizational innovations introduced to achieve the
desired level of entrepreneurial orientation, resource development
processes must be planned by top management taking into account
implementation times and the subsistence of inertia.

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Resource development processes must be conducted
independently from the strategic innovation development process.
Indeed, the firm must rely on a set of resources that fuel ongoing
management activities, or rather, the implementation of deliberate
strategies, while proceeding with the development of new resources to
meet the demand generated by strategic initiatives that are under
development and implementation [Dierickx and Cool, 1989, Zollo and
Winter, 2002, Romme et al., 2010].
Resource development processes have been studied
extensively in management literature and are linked to the business
organization’s ownership of specific dynamic capabilities, enabling
firms to externally acquire, internally develop and integrate resources
to create strategic initiatives [Teece, Pisano and Shuen, 1997;
Eisenhardt and Martin, 2000, Barney, 2001; Covin and Slevin, 2002,
Helfat et al., 2007]. Dynamic capabilities were introduced to
understand how firms manage their resources and to explain
competitive advantage based on a combination of resources. Dynamic
capabilities can be considered the ultimate source of a firm’s
competitive advantage inasmuch as they are the result of complex
learning processes that are difficult to replicate [Teece, 2007, Wall et
al. 2010]. Furthermore, the very nature of dynamic capabilities makes
them difficult to identify and hence poorly immitigable by
competitors.
Dynamic capabilities can be classified according to their
contribution to the process of creating and implementing strategic
initiatives [Zahra and Nielsen, 2002; Winter, 2003; Covin et al. 2003;
Zahra, Sapienza and Davidsson, 2006]. Among different
classifications, three types of dynamic capabilities are crucial to the
strategic innovation process.
• Exploration capabilities: these are the firm’s capabilities to
implement the resource exploration process, to monitor the
competitive environment in search of resources that can be used

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for the development of certain strategic initiatives. Exploration
capability is linked to the ability to search for heterogeneous
resources with respect to those owned and serving the renewal of
future strategic positioning.
• Integration capabilities: the ability to integrate within the firm the
resources acquired through exploration activities, for example,
human resources or a new industrial process based on the use of
new technologies acquired externally under license.
• Exploitation capabilities are those that enable the firm to
implement the resource exploitation process, to maximize the
productivity of resources owned by combining them in innovative
ways. These capabilities can also be defined as internal integration
capabilities, since they allow rejuvenating the firm’s portfolio of
resources through new combinations of owned resources. This is
the creation of new know-how using human resources,
consolidated technological knowledge and physical resources.

Resource development is a critical process that firms must manage not
only to stimulate strategic innovations but also to renew the resource
base that sustains the current position of the firm. Resources are
subject to a natural process of obsolescence depending primarily on
endogenous factors [Penrose, 1959; Dierickx and Cool, 1989],
namely, the intrinsic characteristics of resources that are consumed
such as physical resources or those that become imitable, for instance,
patents in the pharmaceutical sector. Resources also become obsolete
because of competition that, for example, can render the technological
knowledge at the base of a firm's competitive advantage redundant.
Firms must develop monitoring systems that can detect the rate of
obsolescence of the resources they own. Based on information
received from these systems, top management can decide whether to
accommodate the natural obsolescence of the resources or activate

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resource development processes by leveraging on the firm's
capabilities.

Protection, use and development of resources in the ITT case study
The ITT case study shows that competition in the production of brake pads is based
on the ability to develop unique formulas that enable superior performance. The
development of new products depends on technical production process know-how
and the formulation of compounds; clearly, this knowledge is encoded, in some
cases patented, but in most is kept secret. The competencies of human resources, and
in particular of formulators, are important for the development of new products
inasmuch as the process of creating a new compound for brake pads is the result of
creative contributions determined by the experience and subjective characteristics of
formulators. A key issue is preserving and strengthening know-how and human
resources with distinctive competencies. ITT's top management promoted the
development of advanced research programs for the implementation of compounds
and experimental processes. These research programs allowed keeping the tension
high between employees engaged in R&D and foster technical learning processes,
thus strengthening technological know-how and human resource competencies.
These programs are supported by top management with investments in physical and
financial resources dedicated to enhancing the capability of undertaking research
and development.
Some of the knowledge developed within the advanced research programs has been
patented, while in other cases, it is coded and kept secret. Top managers guided the
resource development process by promoting only those research programs that allow
the development of know-how that in the medium term can be transferred into new
designs for customers. In particular, the CEO promoted research programs for
compounds with high environmental compatibility and the development of so-called
universal compounds, namely, compatible with the needs of the American market as
well as with those of the European market.

#%

4.2. The resource trap
Resource development processes and, in particular, exploitation and
integration processes can be impeded by the so-called resource trap
[Todorova and Durisin, 2007]. Firms with a competitive advantage
based on a set of resources can manifest strong decisional and
operational inertia in undertaking the processes of seeking, acquiring
and integrating new resources; their core capabilities, based on a set of
resources accumulated over time, become core rigidities [Nelson and
Winter, 1982; Leonard-Burton, 1992].
The resource trap can also be manifested in firms in crisis
facing discontinuity in the competitive environment and lacking some
of the resources at the base of competitive advantage, where top
management reacts to the situation by trying to make the most of
existing resources without undertaking appropriate resource
development processes [Gilbert, 2005].
The removal of inertia, rendering the resource trap one of the
biggest obstacles to the strategic innovation process, is the
responsibility of active top management activity aimed at achieving an
optimal level of potentially strategic resources; or rather, those
resources that could help the firm develop new initiatives, regardless
of the resources owned. This involves conducting an undistorted
analysis and diagnosis of both the strategic and organizational context
of the firm and its competitive environment.
The resource trap can be mitigated or entirely removed by acting on
those firm resources that generate it. Top management can implement
two types of actions to remove the resource trap: actions to re-
orientate the resources of the firm or the rationalization of resources.
Reorientation. Reorientation actions foresee that the resources that
could generate inertia are used in exploitation and integration
processes together with external resources. Reorientation actions are
possible when existing resources can be exploited in some way in the

#&

strategic initiatives that the firm is developing. This is the case with
particular technologies or trademarks or highly qualified human
resources that can be used on their own or integrated with new
external resources in the context of strategic initiatives such as the
development of innovative products.
Rationalization. The rationalization process is achieved in the removal
of resources that may cause inertia. These resources must be mobile,
i.e., the firm must be able to extract them and place them on the
market. Mobility depends on administrative and legal factors, the
market value of the resource and the impact on the firm’s economic
equilibrium, which can be assessed by considering the exit costs that
the firm would sustain if deprived of these resources [Tushman and
O’Reilly, 1996]. For example, human resources cannot be easily
removed from the business context since the rules for layoffs in some
countries can be rigid or compensation may be foreseen that would
jeopardize the economic viability of the firm. A patent on an obsolete
technology could be sold at a low price or free of charge and this
would cause a significant economic loss in the form of capital loss in
the income statement. In some situations, firms cannot deprive
themselves of some resources as they are essential for short-term
operativity and thus for the current strategy, although they will no
longer be required with the implementation of new strategic
initiatives. Generally, the costs incurred and associated with the
outgoing mobility of resources render the rationalization processes
difficult and hence reinforce the inertia of the resource trap.
Resources that support the consolidated position of the firm may slow
down or prevent not only the generation but also the implementation
of strategic innovations, especially when they do not use the firm's
consolidated set of resources but leverage mainly on new resources.
The resource trap prevents the development of new strategic
initiatives inasmuch as it prevents the firm from developing new

#'

resources that are needed to support the implementation of high-
potential strategic initiatives.
Hence, the removal of the resource trap does not only affect the inertia
that counteracts the process of igniting strategic change, but also
favours the successful implementation of strategic innovations,
especially when they involve a radical change in the firm’s
positioning.

#(

Removing the resource trap in the ICP case
In the ICP case, top management expressly managed the problem deriving from the
resource trap generated by human resources with competencies that were unusable
in the strategic initiatives promoted to support the firm’s re-focalization process.
They could not dismiss these human resources for two reasons: they were critical to
the firm’s daily operations providing hospital services in several areas that could not
be discontinued immediately while top management was subjected to pressure from
political stakeholders aiming to preserve jobs and the positions of medical directors
and administrative staff. Another resource trap was represented by physical assets
such as buildings and obsolete equipment that were unsuitable for the development
of services for paying patients. These resources could not be dismissed for legal
reasons as well as the low value they would have obtained on the market. The top
management’s decision was to work on the re-orientation of resources, aiming to
valorise human resources in the resource exploitation process by improving
coordination between medical and administrative staff and involving medical staff in
a series of strategic initiatives. Thus, resource exploration activities were activated
by encouraging the entry of new professionals and the acquisition of new know-how
(such as management control software systems). These new resources were part of
the integration process with existing resources that the firm could not abandon. The
re-orientation of resources made it possible to remove the inertia, without removing
the resources and initiating the process of strategic change by focusing the firm on
the therapeutic areas defined by the CEO. When the strategic focalization initiatives
entered into the implementation phase and contributed to the improved performance
of the firm, the CEO initiated a process of human resource rationalization, in
particular, medical staff who had developed expertise in the area of maternal and
child healthcare or in occupational medicine/rehabilitation. The removal of these
resources allowed giving new impetus to the process of strategic change, which also
benefitted from the development of bottom-up type initiatives promoted by medical
staff and valorising the new specialist know-how developed by the firm.

#)

5. Managing the development process of strategic initiatives
The strategic innovation process is fuelled by the spread of
entrepreneurial behaviour within the organization that stimulates the
participation of middle level and frontline managers in the strategic
innovation development and implementation process. Furthermore,
under certain conditions, the level of entrepreneurial orientation also
allows frontline and middle level managers to directly participate in
the process of creating initiatives by proposing innovations.
The process of entrepreneurial behaviour diffusion must be
managed with appropriate systems to ensure that the organizational
context does not becomes unruly and chaotic, namely, the creation of
numerous projects that do not get beyond the generation or
development phase or are not implemented. This type of context is
unsustainable because it consumes resources without contributing to
the renewal of the firm's business strategy and therefore to
maintaining competitive advantage.
The introduction of measures aimed at increasing the level of
entrepreneurial orientation in the organization must be accompanied
by control and execution processes. These processes are managed
directly by top management with the support of planning staff and
have the dual purpose of monitoring and guiding the development
process and the implementation of strategic initiatives.
Control process. Control processes focus on monitoring the
absorption of resources by strategic initiatives and the evaluation of
economic and competitive performance linked to strategic initiatives.
The main problem top managers have to face in designing control
processes is the adoption of appropriate criteria to evaluate on–going
strategic initiatives that do not produce appreciable effects on the
firm’s profitability and growth.
Execution process. Execution processes focus on the
management of operational activities that support the development

#*

and implementation of strategic initiatives. Top management can
adopt two different approaches to execution management, the first
leverages on direct top management execution while the second
leverages on self-discipline.
• Direct execution is a participatory-type approach where
management directly intervenes in the development of projects
using the monitoring system to control middle level and frontline
mangers, while operational development decisions are taken
directly by top management (Figure 5). In the self-discipline-
oriented approach, top management is responsible for monitoring
and sharing resources and information on the progress of strategic
initiatives. This information is shared with middle-level
management to whom the operational decisions are delegated that
enable the development and implementation of strategic
initiatives.
• The self-discipline-oriented approach relies on the entrepreneurial
behaviour of middle level mangers who are empowered to achieve
the objectives and take a series of operational decisions driving the
development of strategic initiatives. The self-discipline-oriented
approach can also stimulate the entrepreneurial behaviour of
frontline managers that fuel the fine-tuning process through which
they contribute to refining the content of strategic initiatives.

$+

Figure 5. System Dynamics Stock and Flow model representing the
strategic innovation implementation process

Direct execution does not always accelerate the development and
implementation process. The acceleration of the process depends on
the CEO’s commitment and productivity that if absorbed by ordinary
company management may, in some cases, slow the development of
the strategic initiative. In fact, in a situation of direct execution, the
CEO is responsible for strategic and operational decisions that
facilitate the progress of the strategic initiative, and thus, in the
absence of his decision, the process is interrupted.
Direct management is not a characteristic of the organizational
context, but is a management choice in the strategic initiative
development process that can be modified by top management over
time or at a certain stage of the strategic initiative’s development. In

Strategic
Initiatives
Strategic
Innovations
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+,)"
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Top down
proposal
Innovative
projects
Direct
development
Direct
implementation
Top management
direct actions

$"

the ITT case study, strategic business development initiatives, after
being launched by direct action of the CEO, have devolved to middle
level managers who have been granted a high level of managerial
autonomy in execute them.

Self-discipline and the management of strategic growth initiatives. The
Permasteelisa case study
The Permasteelisa case study allows fully understanding the importance of
self-discipline in strategic innovation processes. The company has adopted a
network structure with production and commercial distribution centres in
different geographic markets endowed with strategic and operational
autonomy. The choice of granting autonomy was motivated by the need to
create light and flexible structures able to handle orders with a high service
level and hence responding quickly to customers.
The company’s growth and international expansion was managed through a
series of strategic business development initiatives assigned to firms in the
network operating in different geographic markets. The strategic growth
initiatives were supported with the diffusion of entrepreneurial behaviours in
the organization, more specifically, assigning property rights to managers.
These managers are held accountable for the growth and profitability results
of the strategic initiative in their charge, which allows minimizing control
activities over the process of developing new markets. This system was
designed to minimize top management intervention in managing the strategic
growth initiatives and instead focus on the direct management of the
strategic product and process innovation initiatives and external growth
through acquisitions. Notwithstanding the level of self-discipline induced by
the equity sharing system, a sophisticated performance control system was
developed that allowed top management to continuously monitor the
activities of middle level managers involved in the development of new
markets.

$#

Accelerating the process of strategic change by leveraging on direct execution. The
ITT case study
The ITT case study provides an example of the interaction between direct execution
and self-discipline. Top management, recognizing the value of human resources and
know-how in the research and development function, promoted a series of strategic
initiatives aimed at developing new products and processes. The management of
these initiatives was delegated to middle level managers involved in R&D. To
appropriately orient the development process, the CEO facilitated coordination with
the marketing function through a series of actions on the organizational structure and
on operational mechanisms. Furthermore, systems to monitor the development of
strategic initiatives and use of resources were also implemented. The allocation of
resources and, particularly, investments in R&D facilities were used as non-
monetary incentives in support of the proactive behaviour of researchers.
The CEO directly managed several strategic initiatives aimed at business growth; in
particular, he undertook the development of growth initiatives in foreign markets
where the implementation of production facilities and applied research were
foreseen. Direct management was motivated by two factors: the lack of qualified
human resources to entrust the projects to and the need to accelerate the
implementation process.

$$

The choice of approach depends on several factors and is influenced
by the mental models of top management. Often the approach is the
result of competitive-type macro environmental pressures on the firm
or pressures from major stakeholders such as creditors or shareholders
who may ask for a greater degree of control and the active
participation of top management in the development and
implementation process of strategic initiatives. In managing situations
of strategic change, such as turnarounds, actions aimed at the
dissemination of entrepreneurial behaviour are difficult to implement,
since there are targets for the recovery of profitability and to cover the
firm’s short-term financial commitments. In these cases, top
management focuses on strategic initiatives aimed at the structural
containment of costs, activating direct management activities. Actions
on the organizational context can be oriented towards inducing a
reduction in entrepreneurial orientation by changing operating
procedures, reviewing tasks, including or eliminating some
organizational figures. This situation can last for a certain period of
time and hence management can decide to increase the level of
entrepreneurship to pursue the process of growth and improve
profitability.
The strategic innovation model proposed does not foresee an a priori
choice of approach to be adopted to control the strategic innovation
process; in fact, top management should have the perceptiveness to
modify the trade-off between self-discipline and direct execution by
assessing the impact on the effectiveness of the strategic innovation
process. The ultimate goal of top management must be to maintain,
over time, the capacity to generate strategic innovations that are
functional to profitable growth.

$%

Conclusions
Specifically, some critical decisions emerge that determine the
effectiveness of the strategic innovation process. These critical issues
could constitute an operational agenda for managers in carrying out
decisions and for strategic management scholars who could develop
further research aimed at understanding these issues.
Managing organizational change. Strategic innovation processes are
characterized by time delays that are associated with the execution
times of processes that must be monitored and actively managed by
senior management. The process of organizational change is
characterized by perception and decision-making time delays.
Top management wanting to change the organizational context by
acting on the entrepreneurial level of the organization must measure
and evaluate entrepreneurial orientation to implement changes in the
structure and in operational mechanisms. These actions of change
require instances of verifications with potentially interested parties
and relevant stakeholders. Once determined, the organizational change
must be executed. Consider, for example, the implementation of a new
organizational structure or the introduction of new systems of
incentives and the resulting performance measures. These are complex
processes that top management and the team dedicated to human
resource management can design and launch, but they require the
organization’s active commitment and participation.
Managing the resource development process. The development of
resources is another process characterized by time delays that are
similar to those found in the organizational change process. Delays in
perception stem from the fact that the CEO may not perceive the
importance of the endowment of critical resources for strategic
innovation. In this case, the development of strategic initiatives suffers
a slowdown that affects the ability to renew the firm's strategic
positioning. The information gap can be actively managed by senior

$&

management through the implementation of an internal and external
monitoring system of the competitive environment that allows
identifying those resources that are important to compete and those
that the firm is lacking.
The processes of acquiring resources are themselves complex
inasmuch as the exploration process that includes research and
negotiation must be managed. Also to be considered is that an
externally acquired resource becomes fully productive only after
having been integrated into the company's portfolio of resources and
this requires time that depends on the organization’s integration
capabilities.
Top management can reduce acquisition times by building and
maintaining a network of relationships with individuals holding
critical resources such as research centres, distributors, financial
partners, strategic suppliers. The relational network facilitates locating
and acquiring resources such as know-how, human resources with
specific skills or financial resources to support innovative projects.

$'

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