Value Innovation A Reconstructionist View of Strategy

HERE ARE BASICALLY TWO DISTINCT VIEWS onhow industry structure is related to strategic actions of industrial players.

The structuralist view of strategy has its roots in industrial organization (IO) economics.' The model of industrial organization analysis proposes a structure-conduct-performance paradigm, which suggests a causal flow from market structure to conduct and performance. Market structure, given by supply and demand conditions, shapes sellers' and buyers' conduct, which, in turn, determines end performance.2 Systemwide changes are induced by factors that are external to the market structure, such as fundamental changes in basic economic conditions and technological breakthroughs.3

The reconstructionist view of strategy, on the other hand, is built on the theory of endogenous growth. The theory traces back to Joseph A. Schumpeter's initial observation that the forces that change economic structure and industry landscapes can come from within the system.' Schumpeter argues that innovation can happen endogenously and that its main source is the creative entrepreneur.' Schumpeterian innovation is still black-boxed, however, because it is the product of the ingenuity of entrepreneurs and cannot be reproduced systematically.

Recently, the new growth theory made advances on this front by showing that innovation can be replicable endogenously via an understanding of the patterns or recipes behind innovation.' In essence, this theoretical advancement separated the recipe for innovation—-or the pattern of knowledge and ideas behind it from Schumpeter's lone entrepreneur, opening the way for the systematic reproduction of innovation. However, despite this important advance, we still lack an understanding of what those recipes or patterns are. Absent this, knowledge and ideas cannot be deployed in action to produce innovation and growth at the firm level.

The reconstructionist view takes off where the new growth theory left off. Building on the new growth theory, the reconstructionist view suggests how knowledge and ideas are deployed in the process of creation to produce endogenous growth for the firm. In particular, it proposes that such a process of creation can occur in any organization at any time by the cognitive reconstruction of existing data and market elements in a fundamentally new way.

These two views the structuralist and the reconstructionisthave important implications for how companies act on strategy. The structuralist view (or environmental determinism) often leads to competition-based strategic thinking. Taking market structure as given, it drives companies to try to carve out a defensible position against the competition in the existing market space. To sustain themselves in the marketplace, practitioners of strategy focus on building advantages over the competition, usually by assessing what competitors do and striving to do it better. Here, grabbing a bigger share of the market is seen as a zero-sum game in which one company's gain is achieved at another company's loss. Hence, competition, the supply side of the equation, becomes the defining variable of strategy.

Such strategic thinking leads firms to divide industries into attractive and unattractive ones and to decide accordingly whether or not to enter. After it is in an industry, a firm chooses a distinctive cost or differentiation position that best matches its internal systems and capabilities to counter the competition.7 Here, cost and value are seen as trade-offs. Because the total profit level of the industry is also determined exogenously by structural factors, firms principally seek to capture and redistribute wealth instead of creating wealth. They focus on dividing up the red ocean, where growth is increasingly limited.

To reconstructionist eyes, however, the strategic challenge looks very different. Recognizing that structure and market boundaries exist only in managers' minds, practitioners who hold this view do not let existing market structures limit their thinking. To them, extra demand is out there, largely untapped. The crux of the problem is how to create it. This, in turn, requires a shift of attention from supply to demand, from a focus on competing to a focus on value innovation that is, the creation of innovative value to unlock new demand. With this new focus in mind, firms can hope to accomplish the journey of discovery by looking systematically across established boundaries of competition and reordering existing elements in different markets to reconstruct them into a new market space where a new level of demand is generated.8

In the reconstructionist view, there is scarcely any attractive or unattractive industry per se because the level of industry attractiveness can be altered through companies' conscientious efforts of reconstruction. As market structure is changed in the reconstruction process, so are best-practice rules of the game. Competition in the old game is therefore rendered irrelevant. By stimulating the demand side of the economy, the strategy of value innovation expands existing markets and creates new ones. Value innovators achieve a leap in value by creating new wealth rather than at the expense of competitors in the traditional sense. Such a strategy therefore allows firms to largely play a non-zero-sum game, with high payoff possibilities.

How, then, does reconstruction, such as what we see in Cirque du Soleil, differ from the "combination" and "recombination" that have been discussed in the innovation literature?9 Schumpeter, for example, sees innovation as a "new combination of productive means.

We have seen in the example of Cirque du Soleil a focus on the demand side, whereas recombination is about recombining existing technologies or productive means, often focusing on the supply side. The basic building blocks for reconstruction are buyer value elements that reside across existing industry boundaries. They are not technologies nor methods of production.

By focusing on the supply side, recombination tends to seek an innovative solution to the existing problem. Looking at the demand side, in contrast, reconstruction breaks away from the cognitive bounds set by existing rules of competition. It focuses on redefining the existing problem itself. Cirque du Soleil, for example, is not about offering a better circus by recombining existing knowledge or technologies about acts and performances. Rather, it is about reconstructing existing buyer value elements to create a new form of entertainment that offers the fun and thrill of the circus with the intellectual sophistication of the theater. Redefining the problem usually leads to changes in the entire system and hence a shift in strategy, whereas recombination may end up finding new solutions to subsystem activities that serve to reinforce an existing strategic position.

Reconstruction reshapes the boundary and the structure of an industry and creates a blue ocean of new market space. Recombination, on the other hand, tends to maximize technological possibilities to discover innovative solutions.