Decision interval model
Facing a rapidly changing external environment, the traditional concept and method of “decision + execution” are difficult to execute.
Let PLC be the "product life cycle", and IRC be the "investment return cycle". Both innovation and investment decisions become difficult when entrepreneurs cannot clearly see the trend of environmental changes.
- Let x = PLC / IRC, which we will call the “decision interval”.
Then, we obtain the decision risk model: y =ƒ(x). Suppose that the IRC is relatively stable at a reasonable fixed value.
- If PLC → ∞, x → ∞, the decision risk y → 0.
That is, when the PLC becomes sufficiently long, the decision interval is relatively large. Entrepreneurs improve their decisions with complete information; thus, the decision risk is very low, close to 0.
- If PLC → 0, x → 0, the decision risk y →1.
That is, when the PLC becomes infinitely short and the decision interval is close to 0, the investment decision risk is very high, close to 1.
Based on the above analysis, we can obtain a decision interval model.
We discuss three situations:
- First, if PLC ≥ IRCProduct upgrade is very slow, and entrepreneurs have enough time to make investment decisions and choose the best time to invest. The risk of decision-making is very low.
- Second, if PLC > IRCEntrepreneurs have the opportunity to choose the right time to invest through project evaluation, and the decision risk is within an acceptable range.
- Third, if PLC ≤ IRCTo recover the investment, the entrepreneur’s decision needs to span multiple projects successfully.
At this time, the entrepreneur’s investment decision has gone beyond simple project evaluation. It is necessary to accurately predict and evaluate the innovation ability of the project team, and the decision risk has crossed the critical point p, and the difficulty of decision-making has increased significantly. Thus, with PLC shortening, the innovator’s dilemma is becoming increasingly prominent and common. (1)
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(1) | Mechanism and countermeasures of “The Innovator's Dilemma” in business model - Chengbin Wang - Journal of Innovation & Knowledge - 2022 |