Interdependence of Potentials
All of the potentials are interdependent and a change in one potential will also influence the others.
You will see that after the start-up phase, the product potential decreases continuously and reaches zero potential if no innovation takes place at a certain point of time. The ability to start innovation is dependent on the governance potential supported by the financial potential for investments in R&D activities. This is also at the core of management’s responsibility. After a successful start-up, growth is increasing rapidly, but subsequently it slows down. Growth is dependent on the effort a management team invests in product innovation and the governance system.
The three potentials continuously interact with each other over the lifecycle of a company. For example, strength in relation to the financial potential can compensate to some degree for defects of the governance potential. However, a good financial or product potential can create a blind spot for a weak governance potential. This blind spot can be a reason for the build-up of a latent failure that can come to the surface if there is a significant change in either the financial or product potential. For example, in a crisis, the governance potential decreases because of cost savings translated in standardization and streamlining of processes. It may recover again once the crisis is over, but continuous focus on standardization and cost-efficiency decreases the governance potential which in some instances can result in permanent damage.
A company’s viability level is also influenced by stakeholder determinants. Initially, it is the investor who contributes capital to a start-up company. After that, suppliers, clients, competition, and regulators become important. The complexity of interactions with stakeholders increases over time. Many of the stakeholder concerns are about the continuity of the company either to create a good return on their investment or to simply pay invoices or taxes. They also interact with the determinants of long-term value creation and thereby modify related inputs/elements, e.g. working conditions or interest rates. All these interactions strongly influence the dynamics of a company and impact the financial, product and governance potential.
Next to stakeholder determinants there are also market determinants that influence the company’s viability level. They vary with the geographical location of the company, changing technology and the law & regulations and industry sector in which the company operates. For example, cyclical industries often are influenced by market determinants as commodity prices and weather conditions are outside the control of a company. The market determinants interact with the shareholder determinants, the financial potential, product potential and governance potential, all of which influence long-term value creation of a company. Not all are equal. Some have a larger span of control or influence over other potentials than others. But that still doesn’t mean that, for example, a shareholder or regulator understands or controls the whole system. Nor does it mean that removing or neutralizing them will cause the system to collapse.
As a takeaway, it is important to remember that all three potentials are interdependent and that they always change over time. Therefore, you cannot assess viability as the sum of its individual components; it needs to treated as a system.