Abstract

The purpose of this study is to obtain a deeper knowledge of the problems of highly innovative companies. This model includes the key elements and interactions which arise in these companies. Through a study of its structure, behaviour, and the later simulations and sensitivity analysis, this model allows us to validate our present perception of this type of companies, to point out the policies to be followed and establish the objectives of their management. Few models of socioeconomic systems are currently being created. Moreover, the company models which are created pay a great deal of attention to the traditional aspects of companies such as production capacity, stock breakages and cash management, and do not refer to the activity of R+D. Other models, however, make an exhaustive analysis of product development, completely forgetting its repercussions on the company. The main contributions of this study are therefore:

• It offers a new model which works for companies in which the R+D activity is highly important.
• It offers a generic model which is applicable to a wide range of companies of great interest: innovating companies.
• It lays out in a structured form the problems of innovating companies, the most correct policies and the objectives on which they should concentrate.

The most interesting applications of this are:

• In the field of didactics, it shows the possibility of creating socioeconomic models, the modelling process, the characteristics of these models and the use of Systems Dynamics in this field.
• For the management of the company it should serve as a point of reflection on the concepts and policies they use. It also offers a wide and structured view of the problems and challenges facing the future managers of innovating companies.

Keywords: modelling, companies, R+D, innovating, technology, policies, scientific

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CONTENTS

1. Introduction. Characteristics of the Innovatory Companies
2. The Model
   • Stages
   • Structure
   • Behaviour
   • Simulations and Analysis of Sensitivity
3. Policies and Objectives
4. Summary: The evolution of Innovatory Companies

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MANAGEMENT OF UNBORN AND STARTING INNOVATORY COMPANIES

1.- INTRODUCTION. CHARACTERISTICS OF THE INNOVATORY COMPANIES

In this work we can see the distinguishing characteristics of innovating companies and the steps followed in the construction of the model, the structure of the latest version, the behaviour obtained from this structure and the simulations and analyses of sensitivity that have been made. Lastly, they are explained the most suitable policies and the objectives which should be followed by innovating companies.

The specialists and the bibliography that deal with this subject indicate that the distinguishing characteristics of innovating companies are:

• Small size
• Environment with rapidly changing technology
• High technological risk
• Need for investment in R+D
• Government aid policies and programmes
• Difficulty of access to raw materials
• Difficulty in obtaining qualified staff
• Difficulty in the channels of distribution
• Markets without protective borders
• Attractive margins
• Financial difficulties
• Need for government aid

  
  

MODELS OF COMPANIES

The modelling of companies is nothing new for Systems Dynamics. Thus, according to Forrester, the companies at the beginning seem to follow four behaviours or basic types.
A common characteristic of these four types of companies is that, unlike other companies which hardly manage to start operating as they are badly designed, they enjoy an initial period of growth and apparent success.

In the first type the company manages to maintain sustained growth. These cases are a minority. The second type of companies obtain an unstable growth, with frequent and serious crises in their turnover.

The third type of companies manage to maintain a small number of customers after the initial launching, but this only allows them to survive in a relatively stable phase of stagnation.

Finally, the fourth type do not manage to create a stable and effective internal structure after the initial success, and after a short time undergo a crisis which is fatal for the company.

It should be pointed out that such diverse behaviours cannot be attributed to factors which are exogenous to the company, since they occur simultaneously in companies working in the same sector. We must therefore look for the cause of this behaviour in internal factors.

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2. THE MODEL

After the introduction we will consider the model I created. I will therefore first explain the stages that I followed.

2.1. STAGES

I started the construction of the model on the basis of my own experience, which I extended with information from the bibliography and through interviews with experts on the subject. With these data I developed the first Causal Diagrams. With these I drew up the flow diagrams and wrote the corresponding equations. After computer processing I obtained the behaviour of the main variables.

As this behaviour was not a satisfactory representation of the reality of these companies, we made a survey of companies in the sector and the bibliography was extended. The new data were used to make new versions of the model. This process was carried out several times until the behaviour of the model was considered satisfactory. The simulations were then made and conclusions were drawn from them. Some aspects of these conclusions were validated with a new, more restricted survey. We will now see the Causal Diagram, the Flow Diagram, the behaviour of the model, a brief outline of the simulations, and the conclusions.

2.2. THE STRUCTURE

The next illustration shows a simplified version of the Causal Diagram of the model.

The model is divided into three main areas: the R+D Area, the Production and Market Area, and the Financial and Management Area. We can see how the R+D expenses make it possible to employ scientific staff who generate lines of production which lead to deliveries based on the current production capacity. Moreover, the quality of the products influences the price, and this, combined with the deliveries, defines the turnover. The turnover makes it possible to obtain a profit.

The cash situation limits the volume of the production capacity. In turn the fixed assets, which is the accounting expression for the production capacity, influence the desired profit. When this is higher than the real profit, there tend to be cuts in the R+D expenditure. Although I will explain the main elements below, an overall view allows us to observe the existence of positive and negative loops. The former will by themselves lead the company to an exponential growth or a rapid collapse. The latter will act as stabilizers of the former.

We can clearly see the inputs and outputs of each area. Thus, the R+D Area receives the input of the R+D expenditure from the Finance and Management Area, giving as an output products of a certain quality. the Production and Market Area receives these outputs, together with the cash situation, and gives as an output deliveries at a certain price and production capacity.

Lastly, on the basis of these inputs the Financial and Management Area offers a given R+D expenditure as an output. We will now see the main elements and relations of the model.

THE RESEARCH AND DEVELOPMENT AREA

This is a key area in the model, showing the elements which affect the generation of products. It includes:

Scientific staff: These are persons who may be employed on the basis of the R+D expenditure. It is divided into two groups, the Scientific Staff devoted to R+D and the Scientific Staff devoted to production. Although initially all the scientific staff are devoted to R+D, after the launching of the first line of products they are divided into two groups.

Scientific progress: The scientific progress of the company develops on the basis of the number of employees devoted to research, and is hindered by the scientific difficulty of the chosen area of work and by the scientific level of the R+D work of the company.

Scientific difficulty: The degree of scientific difficulty of the area in which the company wishes to introduce its products, which may be high if it wishes to offer products with the latest technology, or low otherwise.

Scientific level: The scientific advances of the environment. Supposing that there is a fluid relation with the environment, the scientific level of the company increases according to both the scientific advances of the company and the advances in the environment. It is initially higher than that of its environment because it includes research previous to the creation of the company.

Potential quality of the products: This evolves according to the scientific level of the company and the advances in production quality. The increase in lines of products leads to diseconomies which lead to lower increases in quality.

Real quality: This is equal to the potential quality at the time the line of products is launched, and is considered notto vary until the launching of a new line.

Quality gap: Is the percentage by which the technological quality of the company's products exceeds that of the environment. This gap has a clear influence on the price of the product.

Non-applied technological gap: This includes the research efforts devoted to creating a new line of products. It has not yet been applied as the desired technological advantage over the knowledge of the environment has not yet been reached. This increases according to the difference between the scientific level of the company and the scientific level of the environment. It diminishes as the product lines are applied.

Product lines: This indicates the number of lines which havebeen successful and serve as a basis for creation of products. In these companies the products are not generated in isolation, and one product type generates a diversity of products which meet the most common requirements of the customers. Product lines are generated when the Non-applied Technological Gap exceeds the scientific level of the environment by a desired value. This constant permits the simulation of different positions of entry in the market.

Products: After a line has been obtained, the products generated are no more than different applications of a single scientific base - the line of research - for the specific problems of the customers. This variable covers the products which are marketed, not those which may be marketed, as the volume of investment is limited. Thus, products are only launched while the cash available makes it possible to finance the new investments in fixed assets. Due to the dynamism of this sector, it is supposed that products not launched a certain time after the line of research has finished will not remain in the portfolio, and the company loses the opportunity to launch them. The flow of products shows a brief delay with regard to the appearance of the product lines.

PRODUCTION AND MARKET AREA

This contains the main aspects of production and sales.

Production capacity: This increases according to the launching of products. The production capacity determines the flow of deliveries, since production stocks are not considered to be significant.

Orders: These are calculated on the basis of the number of products, the number of customers and their consumption. A constant unit consumption per customer is assumed during the period studied.

Deliveries: This coincides with the volume of orders if the production capacity so permits. Orders which exceed the capacity are considered as lost. If the orders exceed the production capacity, this leads to what we will call Production Tension. The cash situation permitting, after a certain delay this tension will lead to an extension of the production capacity.

Price: It is considered that the company cannot significantly influence the reference price, but it can obtain a higher or lower price according to the quality gap of its products.

Customers: This deals with the number of customers of the company. The company starts to find customers in the desired niche after obtaining the first product line.

Fixed Assets: The value of the investments in fixed assets such as machinery and installations. It is difficult to find outside finance for these investments, and the company must therefore use its own capital. The fixed assets increase according to increases in the production capacity, and decrease according to amortization and the official aid received. They are of great importance in the calculation of the desired profit.

FINANCE AND MANAGEMENT AREA

This deals with the accounting and management aspects of the company. The basic aspects are:

Turnover: The deliveries times the price.

Profit: The concept of operating profit. It is calculated by subtracting from the turnover the cost of raw materials, the cost of production staff, the general expenses - which include research and marketing - and depreciation. Neither cash income nor expenses are considered as they distort the indicators of the evolution of the company with external factors, without making a significant contribution. They are not considered as financial costs since this type of company is unlikely to find outside finance when they have to face liquidity problems.

Cost of raw materials and the cost of production staff: These are fixed percentages of turnover. It has been considered that two aspects come together at this point: firstly, a certain experience curve should permit a lower consumption of raw materials and labour; secondly, price of products reductions must be taken into account. The combination of these two aspects allows us to establish fixed percentages of turnover.

Net Worth: This is the net book value of the company at any given time, as the sum of the initial capital plus the annual profits, according to the policy of profit distribution. According to the profit distribution policy, the model calculates the profit to be carried to net worth when the profit is positive, and apportions losses when they occur.

Profit distribution: This deals with the company policy of distribution or reinvestment of profits.

Desired Profitability: This percentage is applied to the networth of the fixed assets, in order to obtain the desired profit.

Profit Gap: The relative difference between the desired profit and the real profit.

Liquidity: The net worth not applied to fixed assets. According to the net worth, this establishes the maximum amount of fixed assets which the company can acquire, so that by financial orthodoxy the fixed assets are not financed with outside funds.

General expenses: Expenses of research and marketing. This also includes repayment of official aid received for research, since, unlike aids for investment, this is in the form of loans.

Loans for research and development: The amount that the company devotes to R+D. Added to the net official aid to R+D, this comes to the R+D expenditure. The management of the company may alter the R+D budgets with a certain elasticity. The reasons for altering the R+D budget lie in the gap between the real and desired profits. Thus, when the real profit does not reach its objectives, the management tends to reduce the R+D budgets, and when it exceeds them it does the opposite.

Marketing: The expenditure needed to publicize the products and inform potential customers of their characteristics. This depends on the number of products and the customer niche.

Desired niche: The group of customers to which the company wishes to aim its products. It may be very wide, with high marketing costs, distribution networks, etc., or very small, so that the proximity of the company gives it a decisive competitive advantage over others.

Official aid to R+D: Five-year interest-free loans, up to 50% of the costs of the R+D project.

R+D costs: Includes the R+D budget, plus net official aid, i.e. the input of aid plus the return of the loans received.

Lastly, two indicators of the situation of the company are obtained:

Margin: This is calculated as a percentage of Profit/ turnover.

R+D costs/Turnover: As the study deals with innovating companies, the ratio of R+D to Turnover can give us an idea of the importance of this factor in the running of the company.

2.3. BEHAVIOUR

Leaving aside the period in which the founders of the company carry out the initial research and market research and manage to find the necessary capital, we can observe three clearly differentiated stages.

The first begins when the company starts to operate, and lasts until the first product line is obtained. It is characterized by intensive R+D activity focussed exclusively on solving scientific problems so that the company can obtain a certain line of products or services. The only challenge is to obtain the first line of products before the initial capital is exhausted.

The second stage is marked by the launching of the first line of products. This stage is characterized by the need to acquire production machinery, recruit new production staff, start production and transfer scientific staff from R+D to production. Marketing and sales costs must also be met. Thisis all dealt with in an environment of serious cash limitations and capital. The challenge thus lies in creating a production structure in an environment of serious financial difficulties.

The third stage is marked by the birth of new product lines. In this stage there arise problems of distribution of the resources which the company is generating between the different agents who require them. The area of R+D will also request more funds to recover the initial levels of research, the area of production will request funds to increase its production capacity and close the gap between sales and production, and the representatives of the capital, after a long wait, will wish to obtain a high remuneration for the risky investment that they have made. Indeed, the final challenge consists in achieving an effective distribution of the resources.

We will now take a brief look at the evolution of the main elements of the model over a period of 120 months, or 10 years. Firstly, we can see the evolution of the scientific staff. Their behaviour is highly influenced by the obtaining of the first line of products. At this time two phenomena occur: some of them begin to be laid off due to the investments and expenses the company must make and others are redistributed, some of them being transferred from R+D to production.

Let us now see the evolution of the scientific level of the company, the scientific level of the environment, the potential quality and the real quality. The scientific level of the environment is approximately doubled in 10 years and, as a result of the company's research, the scientific level of the company is always above that of theenvironment. The potential quality of the products is lower than the company's scientific level, since the products cannot incorporate all the company's knowledge. The real quality coincides with the potential quality at the time when new lines of products are launched.

We can see how the quality gap between the real quality and the scientific level of the environment is at a maximum after the launching of new lines of products, and then decreases. Lines of products appear successively when the scientific level of the company is higher than the scientific level of the environment, according to the concept of the Non-applied Technological Gap defined above. The products are generated after new lines are obtained. The number of these varies according to the availability of cash. The products which cannot be launched when the line is obtained are considered as lost.

We can see here the evolution of production capacity, orders and deliveries. The evolution of the orders is similar to that of the products, since we assumed a constant consumption. The increases in production capacity occur after the launching of new products, and also when there are production tensions; they are always limited by the cash situation. The decreases occur as a result of the obsolescence of machinery. As we have not assumed the existence of appreciable stocks, the real deliveries always coincide with either the orders or the production capacity, whichever is lower. We can see below the components of turnover, which are deliveries and prices. The evolution of the deliveries is the same as that shown in the above table.

The prices show a sawtooth progression, since the maximum price is obtained on the launching of the lines of products, which is when the difference between real quality of the products and scientific level of the environment is maximum, and then immediately begins to decrease.

We can see a certain tendency to growth as a consequence of the company working in products with a greater and greater quality and price. As a result of the evolution of the deliveries and prices weobtain the evolution of the turnover, which is highly influenced by the launching of new products and by gradual reductions in prices. One of the parameters which best characterizes these companies is the ratio of R+D expenses to turnover. As the R+D expenses have relatively little elasticity, their importance tends to decrease as the company increases its volume of turnover. To a certain extent we can see how the innovating companies, measured according to this ratio, tend to stop being innovative as they increase in size.

In the bibliography it is often stated that innovating companies are generally small in size, without giving an explanation for this. We show here the evolution of the real profit, which is highly dependent on turnover, and the evolution of the desired profit, which is highly dependent on the value of the fixed assets. We can see how scientific staff are laid off in the stages when the desired profit exceeds the real profit. We can see here the closely related evolution of net worth, fixed assets and liquidity. The initial net worth is the capital. This increases according to the profit obtained and the policy of capitalization. In the first phase the capital is the amount of cash, which decreases as a consequence of the expenditure on R+D. When new lines of products are obtained, a large part of this cash is transformed into fixed assets. The fixed assets evolve in line with the production capacity, which in general increases when new funds permit products to be launched.

The operating profit or profit margin of turnover shows a discontinuous evolution, with peaks on the launching of new lines of products and progressive decreases resulting from the price reductions we saw above.

2.4. SIMULATIONS AND ANALYSIS OF SENSITIVITY

The construction of the model and the study of its behaviour has already given us knowledge of the internal structure of the companies. Moreover, with the analysis of sensitivity we can obtain newknowledge on the key aspects of the behaviour of these companies, since different policies may be tried. The simulations are based on producing changes in the model to obtain their repercussions, and finding those which give the best results. These changes are of three types:

• Changes in the parameters of the system.
• Changes in the relations between elements of the system.
• Changes in the policies of management of the system.

Simulations and analyses of sensitivity have been made with reference to the following policies:

• Desired profitability
• Profit distribution
• Distribution of scientific staff
• Official aid
• Initial scientific level
• Customer target
• Elasticity of R+D staff
• Initial capital
• Scientific difficulty chosen
• Technological Gap in the launching of new products I will not comment on all these simulations because their results will be laid out in the conclusions.

3. POLICIES AND OBJECTIVES

We have seen the structure and behaviour of these companies and the graphs of the simulations. We will now see the conclusions which may be obtained from these three areas. These conclusions focus on the following key aspects for the innovating companies:

• Initial situation
• Management staff and scientific staff
• Lines of products
• Scientific difficulty
• R+D expenditure
• Official aid
• Prices
• Location
• Target clients
• Internal tensions
• Desired profitability

For each of these subjects we will see:

• The view of the problems of these companies which has been obtained in the construction of the model, and is reflected in the structure of the model.
• The most suitable policies in the light of the simulations and analyses of sensitivity.
• The objectives which must be met.

INITIAL SITUATION

The company needs to start its activity with two basic elements: capital and technology.

CAPITAL

The most common characteristic of these companies is undoubtedly their limited resources and the difficulty of obtaining finance. A key factor for the later evolution of the company is the correct determination of the initial capital needed to achieve the first line of products and to cope with later investments. It seems highly advisable to have all the capital necessary before embarking on the adventure of starting a company, since the search for finance when the company is decapitalized after a period of operation and has not yet obtained profits will be distressing and very difficult. On the contrary, if the recourse to external sources of finance to face financial difficulties is not excessively difficult because the company is a subsidiary of a larger one, we find ourselves with a company which tends to become increasingly dependent on this external aid. If we are setting up a subsidiary company, we must first define the objectives and the risk which the parent company is prepared to accept in the form of capital (whether or not paid out).

TECHNOLOGY

In order for the first line of products to have a good chance of success, the creators of the company must have some higher knowledge of the future product than the normal scientific level. When the company is set up, the research stage must be already quite advanced, and the main task remaining is that of product development. Starting from a good scientific position is undoubtedly a decisive factor for the company. It seems that the period between the creation of the company and the launching of thefirst products should be as short as possible. A long-term project is unlikely to obtain sufficient finance.

CRITICAL POINT

The model shows that if the company is successful in the development of the first line of research, the most critical point is precisely the completion of this line. This is the time for investments in manufacturing capacity and marketing. This will lead, as we have seen, to a discontinuity in the evolution of its losses and the need for cash to cover fixed assets. This non-linearity of the process may present the company with different options which may be chosen beforehand. A correct estimate of the financial resources needed to overcomethis critical point may avoid friction between the creative team and the company.

MANAGEMENT STAFF AND SCIENTIFIC STAFF

MANAGEMENT STAFF

We have seen above the existence of three clearly differentiated stages. The three stages clearly involve different challenges and opportunities; the style of management and the profile of the managers cannot always be the same. We could say that in this type of company the first stage -fundamentally of researchrequires a good scientist in charge of this type of company. The second stage, in which production becomes crucial, requires a manager with experience in production engineering. Lastly, in the third stage, which requires an efficient distribution of the resources created by the company, an engineer with knowledge of management would perhaps have the most suitable profile. The most advisable policy seems to be to appoint a scientist to manage the company when it is set up, and to plan future changes in the management as the company develops.

SCIENTIFIC STAFF

In the initial phase the scientific staff are totally adapted to their duties, since they have all been recruited to develop new lines and products; once the first line has been finalized part of this staff should be transferred to solving operational problems which appear in the production. In the initial phase the knowledge required is 100 percent scientific and practically zero percent technological, but these percentages are different for the scientific staff working in production. The transfer of staff who have been recruited for their scientific knowledge is therefore not easy. This will lead to persons carrying out tasks to which they are unsuited because they have been forced to move to production, which is not their speciality. This phenomenon may be palliated by the increase in scientific staff in the area of production. However, when the first line of products appears, it is often impossible to increase the work force due to investments in production, sales and marketing. The presence of production specialists in the initial team may clearly facilitate the successful later development of the company if it is not possible to achieve sufficient flexibility in the initial scientific team. In the simulations we observe the suitability of maximizing the percentage of scientific staff working in research, since they will generate the new lines.

LINES OF PRODUCTS

One of the most important characteristics of these companies is the intermittent appearance of new lines of products withlong periods between them. Moreover, the period between appearances becomes increasingly long because the company wishes to work in increasingly higher scientific levels of a rapidly growing scientific environment in order to obtain greater margins. It seems suitable for the company to work in areas of R+D inwhich the periods between lines are acceptable for the stability of the company. Simultaneous research in several lines, with the diseconomies that this involves, allows mature companies to obtain some reduction in the periods between the appearance of new lines. It must not be forgotten that products which are very different from each other may give stability to the company, but they create diseconomies in the scientific staff. Due to the rapid obsolescence of the products of these companies, the products of the competition and incentives towards cannibalism of the company itself, it seems advisable to bear this in mind in the design of the product, creating products with a minimum resistance or solidity. It is advisable for product development to be as flexible aspossible, since the cost of opportunity for these products is high and the initial risk low.

SCIENTIFIC DIFFICULTY

There is no doubt that these companies are working in a very dynamic environment, which makes it possible to carry out multiple areas of work with different difficulties within the same field. In these circumstances the innovating companies, unlike other sectors, must have close relations with the scientific environment. The choice of a very difficult technological area may lead to an excessive delay in obtaining profits, and ruin the company. It therefore seems suitable for this type of incipient companies to seek pockets where the degree of difficulty is consonant with the resources they have. An accurate policy will be to enter sectors of medium to low difficulty, and then gradually work in sectors of greater difficulty and margins as the company becomes consolidated.

R+D EXPENDITURE

The model has shown in these companies a decreasing tendency of R+D expenditure in comparison with the total volume of turnover. This behaviour is brought about by the usual lack of elasticity of R+D expenditure. Although this may attenuate the negative impact of failed lines of research, it must be borne in mind that this leads to increasingly longer periods of incubation of the product lines. In order to avoid these progressive increases in the periodsbetween the appearance of new lines, it is advisable to makeR+D expenditure more elastic.

OFFICIAL AID

Official aid is available for R+D in the form of finance for projects and aid to investment according to the location of the companies. It is undeniable that, from the point of view of the company, being able to maximize official aid to research projects and investments is very important. However, the weighting of other factors such as the proximity to customers and universities, and the areas of knowledge of the scientific staff, must also be taken into account in this type of company. As official aid is limited and regulated, though important it is not absolutely decisive for the evolution of the company, and never leads to addiction to aid.

PRICES

The maximum price of the products is reached at the time of their launching, after which it decreases rapidly. This leads to a saw tooth development which is not surprising in a highly innovative sector. However, we observe a tendency to growth due to the increasing quality of the products. In other words, the company shows a clear tendency to generate products with a higher price. Strategies which can attenuate this unstable behaviour may be the introduction of continuous improvements in the products and a high degree of cannibalism.

LOCATION

This is a very important factor to be considered under different points of reference. In a stable scientific environment such as that of many industrial sectors, the proximity of the university to the company is not relevant. However, in the innovating sectors it is of vital importance. The proximity to the market must also be considered for someproducts or services, although it is less important than theuniversities. Lastly, we must not forget official aid to investments as anadditional motivation for location.

TARGET CUSTOMERS

Although it is difficult to make generalizations because the companies have a great variety of products aimed at very different markets, we can say that in these companies the quality of the products will be more important than the advertising and price. The initial control of a niche of customers will be necessary to allow the company to establish itself, but this is a precarious situation since the consolidation of the company can only be achieved through growth. Industrial companies can afford to live in a relatively captive niche. Innovating companies have to compensate for the significant decreases in prices with increases in productivity which is difficult - or with an increase in the number of customers. An aggressive policy of customer-hunting will be necessary to attenuate the problems arising from dramatic increases in the number of products and price reductions.

INTERNAL TENSIONS

In the behaviour of the model we can appreciate the alternative succession of tensions between the management, the scientific team and the production staff. The long periods during which there are important R+D expenses always lead to tension between the management of the company and the scientific team. This tension will be at its greatest just when the research is approaching its end. This tension is accentuated by the accumulation of resources devoted to the project and the company's urgent need for new products with high prices in order to cover the price reductions in the previous products. However, after the launching of the new line the tensions will be between the management and the production staff, who will find it impossible to fulfill the orders received due to the limited production capacity. It is undoubtedly of great help to be aware of the tensions which will arise at a given time.

DESIRED PROFITABILITY

These companies, like few others, must face a very difficultinitial period. If they manage to overcome it they will undoubtedly find a conflict between the need to obtain short term profits by reducing research and marketing expenses, and the need to carry out research to generate long-term profits. Before the creation of the company, it is important to establish its expected profitability and to know how to maintain it after the initial period of difficulties. In the early years of the company it seems to be more advisable, in the face of poor economic results or difficulties of liquidity, to flexibilize the desired profit or profitability. However, once the company has been consolidated, the initial profitability objective must be returned to and applied strictly. The importance of these indicators lies in their use as points of reference for expectations about the company. It should not be forgotten that here there are many conflicting interests. The real profitability of the company may influence the initially desired profitability, above all in the difficult periods. This process is not dramatic: it acts slowly, but gradually induces in the entrepreneur a more favourable attitude to lowering the desired profitability. It must be borne in mind that setting a high profitability target may hinder the necessary R+D. It is also important for the profit distribution policy to allow for a suitable capitalization of the company.

4. SUMMARY: THE EVOLUTION OF INNOVATORY COMPANIES

In summary, we could say that the model of innovating companies we created has allowed us to observe behaviours which cannot be appreciated in the administrative charts, in the descriptions of processes, or in the plant distribution. We can thus say that the evolution of these companies lies within a range of possibilities limited by the upper and lower curve of the graph.

In this figure the central curve shows the theoretical evolution, measured in turnover, of a company that manages to maintain a constant number of customers and a constant price. Its evolution in steps responds to the appearance of successive lines of products.

The lower line shows this same company in the case when it is forced to progressively reduce the price of its products, working in a closed niche of customers.

Lastly, besides the step effect and the phenomenon of price reduction, the upper curve shows an increase in the number of customers, which makes it possible to compensate for price reductions.

Although it is practically impossible to avoid the step effect caused by the successive appearance of new lines of products, and it is difficult to prevent progressive price reductions, the simulations have shown that the management of these companies must be aimed at three main objectives:

1. INCREASING THE NUMBER OF CUSTOMERS.

2. MAINTAINING PRICES.

3. REDUCING THE PERIOD BETWEEN THE APPEARANCE OF NEW LINES OF PRODUCTS.

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