Computer-Modelling the Innovation-Based Theory of the Firm

A computer-generated 3D quantitative fold is presented called Knowledge Valley and this virtual fold is used to model an Innovation-Based View of the evolution and development of SMEs by means of the growth of their knowledge assets. By using concrete values of employee number and annual turnover the model allows detailed and largely quantitative financial estimations of potential knowledge value in organizations to be calculated and also explains from a knowledge assets viewpoint why the management crises in growing SMEs occur. This model covers all SMEs but is thought to be especially useful to SMEs in the service industries.Computer-mediated Markov-Chain Monte-Carlo (MCMC) modelling along this fold indicates that adding middle-management innovators to low-innovation SMEs can contribute markedly to the potential financial performance of the organization. Conversely, adding innovators to the middle management of high-innovation SMEs does not provoke an absolute increase in financial returns, but rather performance levels are reached earlier, and potential financial gains can be realized indirectly by e.g. entrepreneurial spin-outs from the parent organization. However in all cases potential financial performance was dramatically improved by laying down an innovative middle-management stratum early on in SME development (size 100 or fewer employees), rather than waiting until a size of 100+ employees was achieved then trying to add innovators later. Adding a later layer of innovative managers on top of an already-established less-innovative middle management layer was markedly less effective than having an innovative middle-management in place from an early stage.In terms of the financial performance of organizations, the possession by individuals in management (innovators or not) of relevant networks and the ability to realize "just-in-time" knowledge from external sources appears almost as important as internal innovation. Indeed the results indicate that the differences between "innovators" and "networker" can be largely evened out if "networkers" are able to access and effectively use inspiration, insights or “just-in-time knowledge” gathered from their external networks