Building up a new strategy means dealing with added value and profitability.
Reaching ‘value innovation’ has been reviewed by many theorists over the years. The main topic of discussion concerns the origin of value innovation. Two main theses are related to the points of view of structuralist and reconstructionist.
Structuralists follow a structure, conduct, performance thesis where value innovation doesn’t come from the firm but it comes from fundamental changes in basic economic conditions and technological breakthroughs. Market structure, given by supply and demand conditions, shapes sellers’ and buyers’ conduct, which, in turn, determines end performance.
This means that inside the market structure firms are not able to add value and they will compete into a zero-sum game in which one company’s gain is achieved at another company’s loss. Like chess players, companies will apply strategies to compete within a strict value-cost trade-off. Also profitability is determined from conditions outside of the firm i.e. structural factors and companies principally seek to capture wealth instead of creating wealth.
Competition causes firms to develop new products and services, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to the possible price if there was no competition (monopoly) or little competition (oligopoly).
Companies that follow structuralist thesis will act strategically on the supply side of the equation focusing on dividing up by tailoring products to better fit customers demand.
On the other end of the spectrum we have the reconstructionalist view of strategy. This point of view is based on J.A. Schumpeter’s observation where innovation can happen endogenously (inside the firm).
The reconstructionalists view suggests that value innovation can occur in any company in any time by cognitive reconstruction of existing data and market elements in a fundamentally new way.
They move the strategy from the supply point of view to the demand point of view underlining that the market boundaries can be changed to unlock new demand.
This way it is possible to move out from the value-cost trade-off and there are not going to be any more attractive and unattractive markets since companies will be able to move the market boundaries in order to innovate and create profit.