The rise and fall of product innovation strategy : a simulation model

The benefits of a strategically balanced product portfolio, as a key driver of long-term business success, are well documented. In this respect, many firms have been unable to achieve a balanced product portfolio. An important cause is the failure to develop dynamic capabilities, that is, the capabilities to reconfigure internal and external competences to address dynamic business environments. In times of environmental instability and financial decay, top managers are facing difficulties in adapting their strategy to changes in market and competitive conditions. Firms can thus become seriously trapped in a reinforcing negative loop, where the changing environment is counteracted with inadequate strategic actions, which in turn results in further decreasing financial performance. This so-called suppression mechanism serves to explain why so many firms fail at building dynamic capabilities. We draw on system dynamics modeling to build and simulate a model of the causes, consequences, and potential solutions of the suppression mechanism. This model is derived from the literature on dynamic capability and, more broadly, strategy and innovation studies. The main contribution of this paper to the literature on dynamic capabilities is the definition and codification of the suppression mechanism.