4-Assessing-InQ-Innovation-Quotient-of-Indian-Auto-Comp-CIS-report-Manoj-Mishra

MANAGEMENT DEVELOPMENT INSTITUTEGURGAON Assessing Innovation Quotient InQ Of Indian Auto Component Manufacturers ACM An Exploratory Study under CIS Under the guidance ofProf.. 8 Explorat

MANAGEMENT DEVELOPMENT INSTITUTE

GURGAON

Assessing Innovation Quotient (InQ) Of Indian Auto Component Manufacturers (ACM)

(An Exploratory Study under CIS)

Under the guidance ofProf A Sahay Prof Rajen Gupta

By Manoj Mishra EFPM 07 Executive Fellow Program in Management

8 Exploratory Case Studies- Organisation details,

Observations and Discussion

19

14 Annexure A: A note on the Indian Auto OEM and

Auto Component Manufacturing Industry

28

1)Introduction and broad intent of CIS:

The business landscape and context is drastically changing worldwide as a

consequence of globalization, IT revolution and the emergence of new business

models Business organisations are increasingly experiencing the heat ofcompetition and Darwinian challenge for survival is only possible throughcontinuous innovation and application of newer technologies Unlessorganisations develop binocular vision and alert antenna, to scan the everchanging technological scenario and develop appropriate action agenda, theirvery survival, leave alone the growth, will be at stake

Innovation is an imperative today as a key tool for Creating WinningOrganisations globally With many global auto players setting up operations inIndia in last 10 years; Indian companies are now exposed to manufacturingexcellence techniques used globally They need to scale up on innovations toremain competitive and create winning organisations It would also be important

to assess where we stand, identify areas of improvements with respect to Globalbenchmarks and then workout an action plan to have a transition to Global levels

to build winning organisations

Thus, it is vital to: (a) Understand the process of innovation; (b) What drivesinnovations; (c) Where do we stand and (d) How do we carve out a properInnovation strategy to build competitive edge

The broad intent of my work in the Course of Independent Study (CIS), is toidentify drivers of Innovation through a cross sector and exploratory empiricalstudy Further, it will attempt to probe as to where does Indian auto componentIndustry stand on Innovation by suggesting a measurement tool for InnovationQuotient (InQ) and then measuring them over InQ; identify what are the enablersand barriers of innovation and what strategy should the industry and theCompany in specific adopt to accelerate innovation and have transition to reachglobal benchmarks to create world class winning sustainable organisations Thework done in the CIS will prepare the ground work for future research on thissubject

2 Literature Review and research Gaps:

a) Innovation as imperative for Auto Industry:

In the present context of severe competition, where even survival itself is not aeasy task, the growth and even faster growth is imperative and is the biggestchallenge for all top management executives

The captions-“Innovate or perish”, “If you do not Innovate, someone else will

and you will be out of the race” and “Faster, Better, Cheaper” are gathering

relevance today.(Business standard-The Strategist, Dec18, 2007; Interview,Tucher, R., 2007)

In a global survey of top management executives, Innovation is rated as one ofthe top 3 agendas of the Global CEOs (Business Standard, Jan 28, 2008; CarrierExecutive, Jan 2008) In another survey of world’s top 1250 R&D spendingcompanies having total R&D spend of 500 Billion $, only 7 Indian companiesfound their place in the list with just 1.2% of total R&D spend (BusinessStandard, Nov 05, 2007) The long term growth will only be the outcome ofsustainable competitive advantage which can be achieved only through

Innovation in Product, Processes and Strategy All types of innovation namely

Incremental (Continuous), Modular and Architectural as well as Break throughand Disruptive will be required in organisations Its selection will depend onseverity of competition, urgency and scale of growth required and the gap withrespect to bench marks in various organisational efficiency parameters.(Tushman, 1997)

Indian Auto Industry forms over 5% of GDP With automobile penetration ofpassenger vehicles (which accounts for 70% of auto industry sales) of 7/1000people as compared to over 400/1000 in developed nations, industry is slatted forgrowing at over 20% CAGR till year 2015 (ACMA-Mc-Kinsey report,

2005.Vision 2015) The study, further has confirmed that capability of auto

component will be the key success factor to this growth This has seenemergence of many Indian auto component MNCs These companies are

expanding organically as well as inorganically through domestic and overseasMergers and acquisitions As growth of auto industry in developed nations hascome down to a dismal 2-3 % per year, they plan to grow by going global Theyare setting up manufacturing base in India and other developing nations formeeting local demand and for using India as base for cost effective exportscapitalizing on India’s Low Cost Country(LCC) advantage This has alsoprompted many global players to enter India for component manufacturing Thecompetition is heating up from other LCCs, global manufacturers setting up localmfg base and Indian manufacturers trying to expand local and global (ACMA-

Mc-Kinsey report, 2005.Vision 2015; Government of India, 2005-India auto

vision 2015).

Though Indian Auto component manufacturers (ACM) have started focusing oninnovation as strategy for last 5 years, practically no research has been done onIndian Innovation climate and that too in emerging auto component industry inIndia The development of technological and innovation capabilities thus are thedefining strategies to survive the severe competition and also accelerate thegrowth

Although some work in US and Europe has been done on defining andmeasuring Innovation Quotient (InQ), (also referred as Innovation Index insome researches), not much work has been done on Indian innovation statusand still less for ACM Most of the work done relate to measuring the InQ ofindividuals for the purpose of hiring (Irving H.Buchen, 2005) or defininginnovation or competitiveness of Nations Joyce Wyckoff has defined a test

to assess InQ through a 10 point questionnaire which has very few attributesand thus lacks width Similar work by Ilan Mochere in Sept, 2002 through a

20 point questionnaire has attempted the same but with less coverage ofattributes Although more focused on new product related innovations,Higgins through his work on Achieving Innovation, the core competencies(Higgins 1996) has tried to offer a good inventory of 40 innovation attributes

which are categorized in Mc Kinsey’s 7S framework Govindrajan’s (2008)work attempts clarifying myths behind innovation and clarifies don’ts ofinnovation and can be used to build few attributes from the paper Drivers ofimitation (not innovation) have been mapped by Eric Bonabeau (HBR, June2005) but cannot be applicable for the innovation climate and InQ mapping.Most of the other works on Innovation Index has been at country levelmapping and hence donot find relevance to this work (George K.Beard,2007) World economic forum also uses various macro-economic indicatorslike FDI, GDP growth, levels of productivity etc, to define competitiveness.These all factors are more relevant for assessing innovation andcompetitiveness of nations It cannot be applied to innovation assessment oforganisations In the same way, Competitiveness of American companies(Porter, 2006) also reviews all factors of competitiveness and can beconsidered for innovation assessment, but has country level perspective.Thus there is a need to work out an Index for assessing innovativeness ofcompanies which is simple to understand, customizable to various industrysectors, applicable across geographies and can help organisation to plan theirstrategy to improve innovation after their assessment of status

b) Innovation, Entrepreneurship, Creativity and Profitability:

Auto Component Industry profitability has been very low traditionally and more

so in last 5 years due to severe domestic competition, entry of global playersforcing local manufacturers to cut prices in spite of increasing costs and pressurefrom OEM on price reduction to ensure their own competitiveness The Profitafter Tax (PAT) and Earnings before Interest, Depreciation and Taxes (EBIDTA)margins of ACM with respect to other industry players were collected by ACMAand are very low (Please see table below) This further emphasizes the need forInnovation required in the ACM in areas of product, process and Strategy so as

to improve these margins

Industry wise Profit After Tax (PAT) & Earnings Before Depreciation, Interest and Taxes (EBIDTA) of Top three companies in ACM in various technology category and other industry sectors

Realizing the importance of an employee working like an entrepreneur; todayorganisations speak of creating an entrepreneurial culture and mind set for theiremployees .Entrepreneurship build on the bedrock of innovation which hascreativity as its main ingredient The Innovation, Entrepreneurship and creativityare inter-twined in an organisation and result in a sustainable profitableorganisation.

Various studies have been done on relationship between Innovation,Entrepreneurship (Considered here as Entrepreneurial Manager/Employee) andCreativity These studies throw light on how we nurture and increase theinnovation climate in the organisation and improve profitability Findings fromsome of these studies are given below to derive attributes of Innovation,Creativity, relationship of them, their impact on profitability etc

Innovation can be defined as the successful implementation of creative ideas(Brazeal and Herbert, 1999) Innovation is the phase in which new ideas aredeveloped and it includes the ability to change an idea into a money-generatingactivity Innovation is seldom a systematic, structured process in the case of thesmall business venture Creativity is the starting point of innovation (Pretorius et.al., 2006)

Innovation has also been defined by Ireland, Hitt, Camp and Sexton (2001) asthe sum of invention and the commercialization of that invention Innovationthus involves having the idea and turning that idea into an opportunity throughcommercialization Opportunity exploitation for an entrepreneur thereforeinvolves innovation Ireland et al (2001) further postulate that, to be effective, aninnovation has to be simple, and it has to be focused Effective innovatorsusually start small, often trying to do one specific thing Innovation is work(implementation) rather than genius, requiring knowledge, ingenuity and focus;

if an innovation does not aim at industry leadership from the outset, it might not

be innovative enough Innovation should be pursued systematically and not left

to chance (Pretorius et al., 2006)

According to Jun and Deschoolmeester (2003), entrepreneurs' innovativeness isdemonstrated by their willingness and capability to create a paradigm shift inscience and technology and/or market structure in an industry from a macroperspective From a micro perspective, innovativeness is the willingness and thecapability of entrepreneurs to influence the firm's existing marketing resources,technological resources, skills, knowledge, capabilities, or strategy.

Schumpeter defined the entrepreneur as the founder of a new firm and as aninnovator, who breaks up established routines and opposes the old way of doingthings Schumpeter’s entrepreneur only undertakes those ventures which turn out

to be successful (Brouwer, 2000) The entrepreneur’s special leadership qualitiesenable him to see the right way to act Others will follow in his wake In order tointroduce his innovations, the entrepreneur needs to withstand the opposition ofthe environment, which is usually hostile to deviating behavior and novelty TheSchumpeterian definition (Shumpeter, 1934) of innovation states that thecommercialization of all new combinations is based upon the application of any

of the following: new materials and components, the introduction of newprocesses, the opening of new markets, and the introduction of neworganisational forms Only when a change in technology is involved is it termed

an "invention", but as soon as the business world becomes involved, it becomes

an "innovation" (Janszen, 2000) According to this definition, innovations are thecomposite of two worlds, namely the technical world and the business world.Innovation in this sense can be seen as an event: the introduction of somethingnew to the business world as well as a process In other words, innovation leads

to change being introduced in the business environment by the entrepreneur

In Drucker’s view innovation is what entrepreneurs do It involves changing thevalue and satisfaction obtained from resources by the customer Innovationrepresents the specific tool of entrepreneurs, the means by which they exploitchange as an opportunity for a different business or different service (1985)

Drucker argues that there is a need for constant innovation because of thechallenge of ever-changing customer needs, technology, and competition Thetwo primary functions of business are to innovate and to market Marketingcreates a customer, whereas innovation involves doing something better toenhance organizational performance Entrepreneurship does both and involvesdoing something different in order to better utilize resources and to expandmarkets At its core, entrepreneurship is market-focused and market-driven.

In sum, the phenomenon of entrpreneurship is a complex interplay ofopportunity ( Shane and Venkataraman, 2000), human action (Kirzner, 1973),learning (Minniti and Bygrave, 2001), and creativity and innovation (Ward,2004) Each of these elements cannot be examined in isolation

Drucker (1985) challenges the notion that entrepreneurship and innovation areinnate or represent personality-based characteristics or represent the domain ofselect individuals or scientists Instead he describes innovation andentrepreneurship as behaviors that most people are capable of learning

Drucker (1985) argues that innovation rarely arises from "flashes of genius" butrather innovation is purposeful and involves an organized, systematic process ofmonitoring these sources of innovation for innovative opportunities Heidentifies and describes seven sources of innovative opportunity: TheUnexpected, Incongruities, Process Need, Industry and Market Structures,Demographics, Changes in Perception, and New Knowledge Overall, the sevensources represent symptoms of change or "highly reliable indicators of changesthat have already happened or can be made to happen with little effort" (p 35).The role of the entrepreneur is to identify these changes and opportunities andrespond through action The first four of the sources are related to the enterprise

or industry; the second three are outside the enterprise or industry

Drucker also provides a set of principles of innovation representing what he calls

"the hardcore of the discipline" (p 134) He identifies things that should be done(do's), things that should not be done (don'ts), and conditions The first do is that

innovation is purposeful and systematic and begins with the analysis of thesources of opportunity Next comes testing the analysis against reality Thisinvolves going into the marketplace and ascertaining customers' expectations,needs, and values Third, for an innovation to be effective, it must be simple andfocused on a specific need that it satisfies and a specific end result that itproduces Related, it should also start small Finally, it should aim at achievingleadership in a given environment, market, or industry The don'ts include: nottrying to be clever, not trying to do too many things at once, and innovating notfor the future but rather for the present.

Drucker argues that entrepreneurial management is needed to create anentrepreneurial business An entrepreneurial business is an organization thatfosters and exploits innovation This type of business and management approachinvolves building a culture that encourages and provides the resources to itsmembers to be innovative This must be embedded into the company'sphilosophy and practice; acquiring another company in hopes of transformingthe parent company into becoming innovative usually does not succeed.Examples of companies that are entrepreneurial and practice entrepreneurialmanagement that identifies include Procter and Gamble, Johnson and Johnson,and 3M

McLean (2007) defines creativity as the process of generating new ideas Headvocates that innovation is quite distinct from creativity and is theimplementation of ideas generated via the creative process Creativity andinnovation therefore together are the process of generating and implementingnew knowledge Such knowledge can be used to not only create new productsand services but also to enable the organization to learn better and faster than thecompetitors and to gain and sustain competitive advantage Innovation resultsfrom pattern thinking in the areas of: customer, value chains, organizationalforms, products, and channels

Mol and Berkinshaw (2006) have defined Management Innovation as theimplementation of new management practices, processes and structures thatrepresent a significant departure from the current state-of-art practices and areintended to further organizational goals This aspect of innovation however ismost neglected in organizations While technological and product innovation hasbeen used by organizations to gain sustainable competitive advantage,management innovation is rarely thought of even though it is the driver oftechnological, service and product innovation.

Innovations improve the productivity of the existing work processes byincreasing specialization, redesigning processes, investing in new equipment,which enriches society as a whole Through innovation firms take risks tocommercialize new products and services that meet previously unfulfilled needs.This also enhances society (Govindarajan & Trimble, 2005) Innovation is thecore of economic vitality It drives growth, creates jobs, builds wealth, givesemployees new purpose, and revitalizes organizations

Creativity, by itself, does not define entrepreneurship Creativity withoutinnovation does not produce results, and innovation without effectivemanagement does not produce marketable products, processes or services.Furthermore, not all innovations are creative, as some innovations areincremental changes or were developed by others and adapted for use locally.Creativity therefore cannot directly generate innovation, nor does innovationautomatically establish creativity, but the unity and degree of mutualityincorporates the possibilities for further development and a higher level ofquality (Pretorius et al., 2006)

Innovation is considered to be critical for firms to compete Innovation is themost important component of a firms’ strategy (Hamel, 2000) It allows a firm toset the direction of the evolution of an industry Because the competitive space isnon-linear it requires non-linear thinking Hamel (2007) reports the results of asurvey of 500 CEOs who largely agreed that their industry had been changed in

the last 10 years by new-comers and incumbents These new-comers have donethis by changing the rules of the business The reason for success of SiliconValley is not e-commerce but innovation.

Research has pointed out a high correlation between high innovation andsuperior profitability (Roberts, 1999) No support has been found for theargument that firms can earn high profits without being competitive and notbeing innovative Research has also found that early and fast movers who are

first to introduce new goods and services, achieve the highest returns (Lee et.

al , 2000) through monopoly profits, until a competitor introduces new products

or substitutes It has also been found that capability to develop and introducenew products to the market is the main driver to a successful global strategy(Subramanium & Venkataraman, 1999)

3) Research Questions:

Based on the literature review and the research gaps identified, it is clear that nowork has been done to define the Innovation attributes extensively across variousIndustry sectors Further ,although drivers to innovation has been attempted insome researches, for Auto Component Industry and more so for Indian Industry,

no work has been done,Thus this work will fill this gap The research questions

identified are:

a What are the drivers to Innovation in India across various chosen industry sectors

b Do these drivers have equal weightages in innovation culture

c Do some drivers matter more in specific industry with respect to other industries

d Can we form a measurement scale to quantify innovation status in an organisation( Refer this as Innovation Quotient “InQ”)

e Where do Indian Auto Component Manufacturers stand on the Innovation

f What are the factors on which InQ score depends

g What could be the broad strategy to ACM industry in general and how can specific company assess their InQ score and use it for improving their competitiveness

4) Research Methodology:

As the case study method and surveying companies, for understanding specificcases have been taken as best suited for theory building; the case survey methodfor research was adopted for exploring the innovation status in ACM.(Eisenhardt, 1989; Mintzberg 1987, 1978; Mintzberg & Walters, 1985; Yin,1994; Wieck, 1989)

The research methodology adopted is described below:

1 Identifying the attributes and enablers to innovation through a cross sector,cross organisation level survey Sectors identified were IT, Auto component,Pharma, Food, Engineering and reality These sectors were chosen as theyrepresented key sectors in economy as well as sectors where innovation ishappening at higher level, is urgently needed for survival and growth and/orthose are emerging sectors

2 Categorization of the attributes to identify factors

3 Rating of the attributes, through a survey questionnaire, on a 5 point scale ,todefine their relevance to innovation in selected sectors

4 Arriving at a measure of innovation –Innovation quotient

5 Mapping the Innovation Quotient (InQ) of selected key organisations in ACM

sector (auto component manufacturing) .The ACM organisations selectedrepresent various regions of country, size( in terms of sales, investment andpeople employed) as well as type namely Ancillary units of OEM, Jointventures with OEM, JV with foreign collaboration, as well as type of producttier ( assembly—Engine, Drive line, axle and Turbocharger; Sheet metal,Machining and Forgings ) The mapping has also been done of at least one

unit each of other key sectors so as to compare and neutralize the sectorimpact.

6 Coming out with recommendations to the ACM units to improve on the InQindex to build the competitive edge

5) Innovation Quotient Measurement Attribute study

a) Attribute finalisation:

1 As the study was to cover innovations in product, process and strategy,and also the fact that innovation drivers-facilitators and enablers across various sectors of business (manufacturing, IT and services) may have commonality for cross learning; it was planned to do a first

a pilot study The objective of this study was to explore the attributes with various senior and middle level executives across different sectors The attributes were sought from 41 executives and experts through a questionnaire; asking 6 attributes /respondent (total 300

entries) The 27 respondents who replied included executives and

entrepreneurs from Auto component manufacturer (in majority since this is the sector of interest—70%) as well as from IT (19%), Pharma (7%) and services and other sectors (Engineering and Reality)

accounted for the rest

Respondent's sector representation

70%

7%

PharmaIT

Others

1 These attributes were processed for duplication, ambiguity, similarity and affinity and were categorized in Five categories namely

a Culture related (13 attributes)

b Employee related (8 attributes)

c Environment (5 attributes)

d Management related ( 11 attributes) and

e Network of technology partner, suppliers , customers, competitors etc (3 attributes)

They were finalized as the 5 categories and 40 attributes and are listed in annexure 1 in the end of the paper (Refer

annexure 1 on the last page of the paper)

b) Attribute Rating, weightages finalisation and InQ Measurement

Methodology:

The attribute finalized were sent as questionnaire (refer annexure 4 attached) tothe same pool of cross sectoral respondents to arrive at the importance ofthese drivers to the promotion of innovation This was done by seeking theirrating on a 5 point Likert scale The scale for rating was chosen to be on 0 to 5for ease and familiarity of the respondents and to provide a step of 20% ratingdifferential for each step of the scale Due to the phenomenon under study, itmay not be possible for the respondents to differentiate the attributes on lesserscale justifiably and would have otherwise created scale bias in caserespondents do not actually perceive to differentiate but they chooses theirresponse differently while rating The zero on the scale represented no relation

of that attribute on the innovation while a rating of 5 meant a very high impact

of this attribute on driving the innovation

Based on the above attribute study, category wise maximum score of eachcategory works out as under:

1.Culture 13 Attributes *5 Maximum rating =65 (32.5% of total score)2.Employee 8*5=40 (20% of total score)

3.Environment 5*5=25 (12.5% of total score)4.Management 11*5=55 (27.5% of total score)5.Network 3*5=15 (7.5% of total score)6.Total score 40*5=200

The category wise max score graph is given herewith

The above category score shown as % of total score for each category can be considered as their weightages in driving innovation in an organisation with each factor (attribute) contributing max 5 score The rating of these attributes was between 4 and 5 for most of the attributes by many of the respondents proving that all these attributes contribute a great degree in driving innovation

in any organisation After discussion with experts, it was also felt that all thesefactors at a score of 5, will contribute for sure their maximum to InQ and hence the rating given by respondent for individual attribute was considered to

be the executive and organisation specific (respondent bias).Thus this was not taken to moderate the weightages of categories as found earlier through category % score in total score The order of importance or weightages for all the attributes thus was taken to be equal

6) InQ Attribute mapping of organisations:

Through a separate questionnaire, various respondents were also asked to rate their organisations on these attributes on a 5 point scale Total 15 respondents