Chapter 13 Appendix B Value Innovation: A Restructuring Perspective on Strategy

There are two completely different viewpoints on the relationship between the industry structure and the strategy of industry enterprises. The view comes from the economics of industrial organization.The "" model in industrial organization economics believes that the market is affected by supply and demand conditions, which shapes the relationship between buyers and sellers, and then determines the final outcome of the market.The reason for systematic changes in the market structure is due to changes in external factors, such as changes in the fundamentals of the economic environment or technological breakthroughs.

The point of view is based on the theory of intrinsic development.The theory of intrinsic development can be traced back to Joseph A. Schumpeter's observations on entrepreneurial innovation.Schumpeter found that the driving force to change the economic structure and industry range can come from within the system, innovation can be endogenous, and its main source is the innovative spirit of entrepreneurs.However, Schumpeterian innovation is like a black box with an unknown internal structure, a product of genius and entrepreneurial spirit, which cannot be systematically replicated. Recently, there has been a breakthrough, and it is believed that through the understanding of the model or concept behind the innovation, innovation can be replicated.This theory actually distinguishes the model or idea behind innovation from Schumpeter's so-called entrepreneurship, opening the way for replicating innovation.But what is the model or idea behind the innovation?Without understanding this, companies will still not be able to innovate effectively.

Structural reconstructionism fills this gap in the new growth theory and reveals how knowledge and ideas work in the process of promoting the intrinsic growth of enterprises through innovation.This theory also specifically proposes that any company, at any time, can complete the process of innovation by reengineering the understanding of concepts under the existing market conditions. Structuralism and structural reconstructionism, the two different views, have different important influences on the strategic decision-making of enterprises.Structuralist perspectives (or environmental determinism) often lead to competition-oriented strategic thinking.Given the given market structure, companies take various defensive measures to resist competition and maintain their survival.Strategic decisions often begin with assessing the behavior of competitors before attempting to outdo them.In this case, the battle for market share is a zero-sum game, where one party's gain is the other's loss.Competition, or the supply side of the supply-demand balance, then becomes the dominant factor in determining strategy.

Such a strategic thinking allows companies to divide the industry into attractive and unattractive categories, and then decide whether to enter the industry.After entering an industry, the company conducts pricing and market positioning according to its own conditions.Cost and value are considered to be a mutual substitution relationship, because the profit level is also regarded as an exogenous variable determined by the industry structure. What enterprises can do is to seek to redistribute the share of profits, but cannot expand this. block profit.Such enterprises focus on dividing the sphere of influence in the Red Sea, but they do not know that the space for development is very limited.

From a structural reconstructionist perspective, strategy is another matter entirely.Market boundaries exist only in the imagination of executives, and this imagination must not be allowed to get in the way of strategic thinking.There are still a lot of needs outside the market, like uncultivated virgin land, the problem is just how to find them.Therefore, the focus of strategic thinking should shift from supply to demand, from competition to value innovation, that is, to provide innovative value for undiscovered needs.Through this kind of strategic thinking, companies can systematically examine the boundaries of competition and rearrange different elements of market innovation to create new demands in new market spaces.

From the perspective of structural reconstructionism, there is no distinction between attractive and unattractive markets in essence, because these can be changed through the efforts and reconstruction of enterprises themselves, the structure of the market can be changed, and the rules of market games can also be changed.It turns out that the competition in the rules of the game can become irrelevant. By stimulating demand and through the strategy of value innovation, the market can be expanded and created.Value can be captured through innovation, not through competition.Such a strategy makes the market game a non-zero-sum game, bringing the possibility of high returns.

So, what is the difference between "reengineering" and the "combination" and "reorganization" we mentioned when discussing innovation issues?For example, Schumpeter believed that innovation is "the rearrangement of production methods". We have already found in the case of Cirque de Soleil that the focus of value innovation is on the demand side, while the combination of existing technologies and means of production is usually on the supply side.The basis of structural reengineering lies in breaking the boundaries of existing industries, not in technical aspects, nor in the way of production.

Restructuring emphasizes supply and seeks solutions to existing problems.Reengineering emphasizes needs, seeks to redefine problems, and changes the rules and scope of competition.For example, Cirque du Soleil does not want to satisfy audiences by reorganizing existing technical means and performances, but creates a brand-new entertainment method by reengineering customer value factors, providing audiences with interesting and exciting circus programs at the same time And the confusing theater experience.The redefinition of the problem usually leads to the change of the entire industry structure and the adjustment of the strategy; while the reorganization only finds the solution to the specific problem and only strengthens the existing strategy.

Through reengineering, the boundaries of the industry can be reshaped and a new market space in the blue ocean field can be created.And through reorganization, we can only tap the potential of technology and find solutions to problems.