EVAT: A PLATFORM FOR ENTERPRISE

VIABILITY ANALYSIS AND PREDICTION

Olusola Oduntan, PhD., Wayne State University

Namkyu Park, Associate Professor, Ohio University

INFORMS Annual Meeting, San Diego 2009

10/09/09 1
Outline

Background

Enterprise Viability Model (EVM)

Development of the EVAT and Viability Experiments

Summary of Results

Conclusions

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Background: Enterprise Viability

Many companies experience difficulties surviving
over the long-term.
 Only one of the companies (General Electric) from the
original Dow Dozen (from 1896) remains on the DJIA today
(Krantz 2006).
 Of the thirty companies making up the Dow Jones Industrial
Average (DJIA) in 1956 seven of them were no longer in
existence by 2006.
 An analysis of the S&P 500 from 1957 reveals that only
seventy four (less than 15%) of the companies remained in
the S&P 500 forty years later (Anon 2000).

Drastic change in business conditions is a major
challenge to the continued existence of companies

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Problem Statement

How can we develop tools and

methodologies to assist enterprises to be
viable and thrive under conditions of high
turbulence?

10/09/09 4
Research Questions

Research Question 1
 Can an enterprise model be developed to delineate the
relationships between functions of the enterprise, its
management and control architecture, the turbulence of its
business context, its short-term results, and its viability?

Research Question 2
 Can an enterprise model identify the context specific
attributes of the management and control systems that are
critical to the viability of an enterprise under specific types of
environmental turbulence?

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Research Questions

Research Question 3
 What product innovation strategic principles can be
found for enhancing enterprise viability in business
contexts characterized by a high degree of
turbulence?

Research Question 4
 What strategy provides greater possibilities for
long-term success in turbulent environments: an
advertising focused strategy or a product
innovation focused strategy?

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Research Approach

1. Development of the Enterprise Viability

Modeling (EVM) framework
2. Development of the Enterprise Viability
Analysis Test-bed (EVAT)
3. Enterprise viability analysis using the EVAT

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Theoretical Foundations of the EVM & EVAT

Axiomatic Design

Viable System Model (VSM)

Agent Based Modeling

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Axiomatic Design (AD)

Axiomatic Design (AD) theory was developed by Nam P. Suh in MIT
to provide a scientific foundation for creating designs of products,
processes, and systems (Suh et al. 1978).

Cochran (1994) used AD to analyze the objectives and designs of
traditional mass production systems and lean manufacturing
systems.

Reynal and Cochran (1996) demonstrated an AD based
methodology for evaluating the application of different lean
manufacturing practices to performance improvement objectives.

Black and Schroer (1988), applied AD to develop the concept of
decoupler elements for manufacturing and assembly cells

Cochran and Dobbs (2001) developed the Manufacturing System
Design Decomposition (MSDD) process for designing discrete-part
repetitive manufacturing systems using AD.

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 Viable System Model (VSM)

VSM was developed by Stafford
Beer (1979) as a conceptual tool
for understanding organizations,
modeling them, redesigning SYSTEM FIVE: The Ethos. The
ultimate policy making subsystem.
them, and supporting the
management of change (Espejo SYSTEM FOUR: Makes decisions
for the entire viable system based
and Gill 2002). on its view of the environment

The VSM is a cybernetic model of SYSTEM THREE: Manages the internal

organization of complex and operations of the viable system

adaptive systems.

It is based on a comprehensive SYSTEM TWO: Co-ordinates
the activities of each of the
model of the structure and SYSTEM ONE elements

behavior of autonomous systems

that need to adaptively interact SYSTEM ONE: These are the
fundamental operations in the viable
with their environments in order system. These are all viable systems
themselves
to survive (Jackson 2000).

It identifies five necessary
functions for any viable system
(Beer 1985, Jackson 2000,
Espejo and Gill 2002)

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Agent Based Modeling (ABM)

An agent are self-contained programs which can control their
own actions and interact with their environments based on their
perceptions of the operating environment (Gilbert and Troitzsch
1999).

Wooldridge and Jennings (1995) identify the following properties
of computer agents:
 Autonomy – agents have direct control over their actions and internal
state
 Social ability – agents interact with other agents through some type
of language (agent-communication language)
 Reactivity – agents are able to perceive their environments
(physical, networked, simulated world of including other agents) and
respond to it.
 Proactivity – agents are able to engage in goal directed behavior and
take initiative to achieve those goals

ABM enables the modeling of heterogeneous behavior at the
individual level (Axtell 1999).
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Turbulence Modeling

Dess and Beard (1984) identified turbulence as a
dimension of “stability – instability” in the business
environment

Child (1972) identified three dimensions for
measuring uncertainty and turbulence:
 Amplitude: Degree of difference involved in the
environmental change
 Predictability: Degree of irregularity in the overall pattern of
change
 Frequency: The frequency of environmental change

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Enterprise Viability Analysis Test-bed
(EVAT)

Viability Scenario I (VS-I):
 Advertising, specifically in the area of selecting the
viable advertising intensity schedule

Viability Scenario II (VS-II):
 Product innovation, in the area of customer
research and feedback frequency

Viability Scenario III (VS-III):
 Advertising emphasis versus product innovation
emphasis

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Sub-models for the EVAT

Customer learning &

Product and technology brand choice
innovation sub-models
sub-models
Utility versus Technology Effort (S-Curve)
1.0000

0.9000

0.8000

0.7000
Utility

0.6000

0.5000

0.4000

0.3000

0.2000

0.1000

0.0000

Technology Effort (Invested Resources)

Environment:
turbulence
and market penetration
sub-models

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 Conceptualization of Brand in the EVAT

Level of the brand in the model is at the firm level.

In the simulation successive generations of the product are introduced
which benefit from the brand leverage created by previous generations
and contribute to the perceptions of the brand at the firm-level

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Brand Choice Model

Multi-attribute utility model
U= ∑W X
i
i i + ∑W X
j
j j
1
4 24
3 1
4 24
3
product related non − product related Erdem et al.,1999
Where :
U = Utility of the brand
i = Product related attribute
j = Non - product related attribute
Wi = Customer's preference for product related attribute i
W j = Customer's preference for non - product related attribute j
X i = Customer's perception of the utility of product related attribute i
X j = Customer's perception of the utility of non - product related attribute j

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Customer Learning Model

Affects customer’s attribute perceptions

Applied a Bayesian learning approach
 Customer updates attribute perception using information obtained in each
brand interaction
 Update is based on the surprise element in the transmitted or received
information
 Customer weighs the new information based on previous interactions with
the brand
E [U | I (t ) ] =
E [U | I (t − 1) ] +
DE ,t β E , t (U E , t − E [U | I (t − 1) ] +
DM ,t β M , t (U M , t − E [U | I (t − 1) ] +
DW ,t β W , t (U W , t − E [U | I (t − 1) ] Erdem and Keane,1996
Where :
E [U | I (t ) ] is the expectatio n of the customer about the attribute at time t
E [U | I (t − 1) ] is the expectatio n of the customer about the attribute at time t − 1
DE ,t , DM ,t , DW ,t are binary var iables that are true if the customer interacts with a brand via
product experience , advertisin g, or word of mouth respective ly at time t
β E , t , β M , t , β W , t are the gain coefficien t the the customer uses to weigh the surprise in the brand
interactio ns from product experience , advertisin g, or word of mouth at time t respective ly

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Product & Technology Innovation
Model
 The technology S-Curve is used in the EVAT to describe the changing
impact of technology over time on the utility of a product attribute.

Utility versus Technology Effort (S-Curve)

1.0000

0.9000

0.8000

0.7000
Utility

0.6000

0.5000

0.4000

0.3000

0.2000

0.1000

0.0000

Technology Effort (Invested Resources)

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Modeling Development of Product
Attribute Utility

In the EVAT the impact of the single technology on a product
attribute (U q,s,a) at a point r in the technology S-curve is modeled
based on the Sigmoid function (Weisstein
2008)
1
U q , s , a ( r ) = Gs , a
1 + e R−2r

Where,
 r is the cumulative amount of resources invested by an agent (q) in
developing a technology expertise that enables the improvement of
an attribute (a) using a technology (s).
 G s,a is the maximum improvement potential of the technology (t) on
the utility of the attribute (a)
 R is the amount of R&D resources investment required to achieve
the development potential of the technology expertise on the
attribute.
10/09/09 19
Comparison of EVAT Concept to Bass
Diffusion Model

The Bass Diffusion model is an aggregate level model which
applies to a whole market population.

The EVAT is an agent model in which the modeling occurs at the
level of individual participants in the market.

As such, the value of p and q cannot be directly implemented in
the EVAT.

In the EVAT we use the Market Penetrability Coefficient (MPC) to
control the brand exposure that can be achieved through the
advertising efforts of a firm.

MPC relates to the advertising effectiveness of the environment,
as defined by Borshchev and Filippov (2004).

We showed that MPC is positively correlated with p.

10/09/09 20
Experimental Setup for Viability Scenarios

1 viable enterprise (referred to as the VE) – focus

enterprise
 Management agent, product development agent, marketing
agent

10 competitor agents (enterprises)

1000 customer agents
 Each customer agent is assigned a randomly generated set
of attribute preference weights at the beginning of the
simulation.
 Attribute preference weight was randomly changed for a
random sample of customers during each tick to model
customer turbulence
 Each customer agent generates an average demand of 4.5
units every 90 ticks

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Experimental Setup: Data Collection

A run length of 7200 ticks (~20 years) is used

to evaluate the survivability of the VE
 The VE is determined to have survived if it has a
market share above 0% at 7200 ticks.

Every 90 ticks the value of all variables are
collected

10/09/09 22
Experimental Setup: Response Variables
Response Variables
Market Share of Focus Enterprise
Average Competitor’ Market Share
Brand Awareness of Focus Enterprise
Average Brand Awareness of
Competitors
Perceived Quality of Focus Enterprise
Perceived Quality of Competition’s
Enterprises
Product Innovation Resources of
Focus Enterprise
Product Innovation Resources of
Competitor Enterprises
Advertising Resources of Focus
Enterprise
Advertising Resources of Competitor
Enterprises
Survival
10/09/09
Definition
Overall market share of focus enterprise (VE)
Average market share of competitor agents
Percentage of customer agents that have the focus enterprise’s brands in their
choice set
Percentage of customer agents that have each competitor agent’s brand in
their choice set averaged over all competitors
Perceived utility of the product of the focus enterprise
Average perceived utility of the products of the competitor agents
Percentage of total resources in the environment available for investment by
the focus enterprise in product innovation
Percentage of total resources in the environment available for investment on
average to each competitor agent for product innovation
Percentage of total resources in the environment invested by focus enterprise
in advertising
Percentage of total resources in the environment available for investment on
average to each competitor agent for advertising
Determined if after 7200 ticks the focus enterprise has a market share greater
than 0%
23
Advertising Intensity Scheduling Scenario
(VS-I)

Viability Scenario Hypothesis I (HVS-I):
Under conditions of high customer turbulence
a firm using a uniform advertising intensity
scheduling policy will dominate a firm that
uses a pulsing/maintenance advertising
intensity scheduling policy, and these results
will be indicated over the long term by higher
brand awareness, market share, and viability
potential.

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Types of Advertising Pulsing Policies
Uniform advertising policy

Pulsing advertising policy

Pulsing Maintenance advertising policy

Mesak and Darrat, 1992

10/09/09 25
Input Factors for VS-I
Factors for Viability Levels
Scenario 1
VE’s Advertising Uniform Policy
Intensity Scheduling
Low Pulsation/Maintenance Policy: D1 = 0.3; and D2 = 0.2; t1 = 2 periods; and
T = 2 periods

High Pulsation/Maintenance Policy: D1 = 0.4; and D2 = 0.1; t1 = 2 periods; and

T = 2 periods

Competitor's Uniform Policy

Advertising Intensity
Low Pulsation/Maintenance Policy: D1 = 0.3; and D2 = 0.2; t1 = 2 periods; and
Scheduling
T = 2 periods

High Pulsation/Maintenance Policy: D1 = 0.4; and D2 = 0.1; t1 = 2 periods; and

T = 2 periods

Customer Taste Low turbulence: 10% of customers change their tastes every 4 periods
Turbulence
Medium turbulence: 30% of customers change their tastes every 4 periods
High turbulence: 50% of customers change their tastes every 4 periods

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Results of Advertising Intensity Scheduling
Scenario (VS-I)

From the graph we observe that the most effective policy is the uniform
advertising intensity scheduling policy.

A low amount of pulsation/maintenance seems to increase the market share of
the VE for low (10%) and medium levels (30%) levels of customer turbulence

Low pulsation/maintenance resulted in a decrease in the VE’s market share at a
high level of turbulence.

The High Pulsing/Maintenance advertising scheduling policy was the least
effective.

Advertising Intensity Schedule

10/09/09 27
Product Innovation: Customer Intimacy
Scenario (VS-II)

Viability Scenario Hypothesis II (VS-II)
Under conditions of increased customer
turbulence, enterprises operating with a
higher market research frequency will
dominate those enterprises operating with a
lower market research frequency.

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Input Factors for Product Innovation:
Customer Intimacy Scenario
Factors Ranges

VE’s Market Research Low Frequency: 1 every 30 ticks

Frequency
Medium Frequency: 2 every 30 ticks (One every 15 ticks)

High Frequency: 3 every 30 ticks (One every 10 ticks)

Competitor’s Market Low Frequency: 1 every 30 ticks

Research Frequency
Medium Frequency: 2 every 30 ticks (One every 15 ticks)

High Frequency: 3 every 30 ticks (One every 10 ticks)

Customer Taste Turbulence Low turbulence: 10% of customers change their tastes every 4 periods

Medium turbulence: 30% of customers change their tastes every 4

periods

High turbulence: 50% of customers change their tastes every 4

periods

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Data Visualization of Product Innovation:
Customer Intimacy Scenario (VS-II)

From the graph it is observed that the final market share of the VE
increases as the VE’s market research frequency is doubled and then
tripled.

On the other hand, customer turbulence does not seem to have a
significant interaction with market research frequency, on the final
market share of the VE.

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Product Innovation versus Advertising
Scenario (VS-III)

Viability Scenario Hypothesis III (VSH-III): Under
conditions of high competition a firm that is biased
towards a product innovation strategy as opposed to
an advertising strategy, as demonstrated by its
resource allocation weights, will dominate a firm that
is biased towards a advertising strategy. The
effectiveness of each strategy is demonstrated by
the long-term perceived quality, brand awareness,
market share, and viability potential of the target
enterprise

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Input Factors for Product Innovation
versus Advertising Scenario (VS-III)
Factors Ranges

VE’s Product Innovation 66% (Production Innovation Emphasis)

Resource Allocation
50% (Neutral)

33% (Advertising Emphasis)

Competitor’s Product 66% (Production Innovation Emphasis)

Innovation Resource
Allocation
50% (Neutral)

33% (Advertising Emphasis)

Market Penetration 1.44 (Low)

Coefficient (MPC)
4.34 (Moderate)

7.23 (High)

10/09/09 32
 Predicted Survival in Product Innovation
versus Advertising Scenario (VS-III)

Two regions with differing strategies for brand management and
viability enhancement
 Low MPC: Advertising emphasis
 High MPC: Product innovation emphasis
High viability

Low viability

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Emergent Dynamics Model: Drivers
of Brand Development

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Contributions of Research
Prior To This Research After This Research
Unstructured Semi Well Unstructured Semi Well
Structured Structured Structured Structured
Enterprise Modeling
• Operational X X
Measurement of
Turbulence
• Modeling of X X
Enterprise
viability
Viability Analysis
• Viability Scenario X X
analysis
• Management X X
strategy influence
on viability
• Brand X X
development
influence on
viability

• Product X X
innovation
influence on
viability

10/09/09 35
On-going Research

Existing implementation of EVAT utilizes a fixed

centralized control system architecture
 Extend the EVAT to enable the modeling of different

types of architectures: centralized, decentralized, and

networked

Existing implementation of EVAT does not implement
the System-4 (strategy selection) functions of the VSM
 Extend the EVAT to enable agents to dynamically

modify their strategies based on market conditions to

enable the investigation of strategic choice on viability

10/09/09 36
 Thank You!
Olusola Oduntan
soduntan@gmail.com

10/09/09