Innovation Strategies in Emerging Markets - CiteSeerX

ASCI Journal of Management 41(1): 21–45 Copyright © 2011 Administrative Staff College of India

Rishikesha T. Krishnan* Srivardhini K. Jha**

Innovation Strategies in Emerging Markets: What Can We Learn from Indian Market Leaders Abstract What role has innovation played in the leadership positions attained by local firms in emerging markets? What innovation strategies have these firms followed? This paper takes advantage of a natural experiment – the deregulation of the Indian economy – to investigate these questions. We compare the innovation strategies of five local market leaders in India on dimensions related to exploration and exploitation, internal and external sources, technologypush and market-pull and product and process innovation. This study establishes that innovation plays a key role in the leadership position attained by local leaders. These firms display a high degree of ambidexterity in both exploring and exploiting in parallel, an approach that is required to provide speed of response. External sources are tapped for knowledge and ideas, and this learning is integrated with internal innovation. Market exploration, particularly the development of products, services and business models that allow the companies to meet the affordability criteria of the mass market, plays an important role in the innovation strategy of these companies.

Introduction Emerging market economies are low-income, rapid-growth countries using economic liberalization as their primary engine of growth (Hoskisson et al., 2000). Today’s large emerging markets such as China, India and Brazil are expected to be the growth markets in the forthcoming decades (Wilson & Purushothaman, 2003). In many emerging markets, there were expectations that local companies would find it difficult to hold their ground because they lacked adequate resources and capabilities (Dawar and Frost, 1999), and were not truly competitive. Lower trade barriers and import tariffs would make them vulnerable to cheap imports. Multinational companies with strong financial and technological resources, and difficult-to-imitate brand equity would dominate the local market. However, in emerging markets, some local firms have not only belied these fears but either retained leadership positions or gone on to become market leaders. Some have even established strong global positions (Mathews, 2006; Ramamurti and Singh, 2009). While the success of *

Professor of Corporate Strategy & Policy, Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore 560076, India, [email protected] ** Doctoral Candidate, Corporate Strategy & Policy Area, Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore 560076, India. [email protected]

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such “local leaders” has been studied from multiple perspectives, one under-researched area has been the role of innovation strategy in their evolution. An examination of conventional innovation indicators - such as R&D intensity and patenting activity - does not give the impression of a strong innovation strategy in these firms. For example, the Indian company with the largest number of US patents granted to Indian companies over a 14-year period from 1995–2008, Dr. Reddy’s Laboratories, averaged just seven US patents a year (Krishnan, 2010:54). However, the fact that these local firms have attained and retained leadership positions in the face of Multinational competition indicates that they are innovating, perhaps in ways that are not captured by traditional innovation measures. In this paper, we aspire to investigate this phenomenon. We use the natural experiment created by the opening up of the Indian economy over the last two decades to explore what role innovation played in the emergence of these local market leaders by identifying their innovation strategies and linking them to the firms’ competitive strategies and growth. Literature Review and Conceptual Framework Innovation Strategy Innovation is a core renewal process within organizations (Tranfield et al., 2003) and a cornerstone of competitive strategy. It is defined as the development and implementation of a new idea, be it a new technology, product, organizational process, or arrangement (Schroeder et al., 1986). Bercovitz and Feldman (2007) more simply define it as the ability to create economic value from new ideas. Extensive research has established the importance of innovation beyond doubt. The question now is no longer whether to innovate, but what particular innovation strategy to pursue (Gronlund et al., 2010). Innovation Strategy is multidimensional and addresses what a firm innovates and how it innovates. The received view delineates innovation strategy along the following dimensions (March, 1991; Zahra and Das, 1993; Peeters and van Pottelsberghe de la Potterie, 2006; Bercovitz and Feldman, 2007; Brem and Voigt, 2009): l l l l

Exploration versus exploitation of capabilities Market pull versus technology push innovation strategy Internal versus external sourcing of capabilities Product versus Process innovation

Innovation can be characterized as either explorative or exploitative, where exploration spurs new discoveries, while exploitation refines current capabilities (Bercovitz and Feldman, 2007). Early studies on exploration-exploitation treated them as alternatives (March, 1991), with firms opting for one strategy at the expense of the other. However, more recently, the dominant view is that firms need to achieve a balance between the two, leading to the concept of ambidextrous firms (Tushman and O’Reilly, 1996; Benner and Tushman, 2003; He and Wong, 2004; Raisch et al., 2009). However, even if an organization is ambidextrous, it does not imply a balanced exploration-exploitation strategy at the subunit (Gupta et al., 2006) and individual levels (Raisch et al., 2009). Gupta et al., (2006) argue that a firm could have a dominant explorative or exploitative strategy in different parts of the value chain and still

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achieve ambidexterity at the organizational level. Citing the example of Cisco, they elucidate how the R&D function can be predominantly explorative while manufacturing, sales and service can remain exploitative. Therefore, formulating an innovation strategy involves choosing the right mix of explorative and exploitative activities in various parts of the value chain to achieve the required balance at the Organizational level. The second dimension is market pull versus technology push strategy. Market pull strategy is the propensity of a firm to identify and respond to market impulses effectively and thereby achieve commercial success. Technology push strategy is the propensity to incorporate new technologies into the firm’s offerings to succeed in the market (Brem and Voigt, 2009). Empirical work over the years have yielded mixed results, some favoring market pull hypothesis and others favoring technology push hypothesis (See Chidamber and Kon (1994) for a detailed review). Chidamber and Kon (1994) argue that the conflicting results are due to differences in problem statements and research constructs. Another reason for inconsistent findings is because market pull – technology push strategies are contingent upon whether the firm operates in the B2B space or the B2C space (Brem and Voigt, 2009). Since there are several examples of successful market driven companies as well as technology driven companies, the core issue is not of choosing one over the other but of striking a balance between them (Brem and Voigt, 2009). As Howells (1997) puts it, the challenge is to understand user needs and embody it in new production technology i.e., achieve ‘matching’ between technology and market. This technology push-market pull dimension can also be subsumed under explorationexploitation. As Gupta et al. (2006) note, a firm may be predominantly explorative or exploitative in different parts of the value chain. Based on this, we can say that market-pull strategy indicates an explorative strategy in the downstream parts of the value chain while technologypush strategy implies an explorative strategy in the upstream part (R&D) of the value chain. The third dimension of innovation strategy has to do with how a firm generates new knowledge – by developing capabilities through internal efforts or by tapping into external sources of knowledge. Strong global competition and rapid technological changes have necessitated firms to look beyond their organizational boundaries as they develop new innovations (Calighirou et al., 2004; Cassiman and Veugelers, 2006). It is no longer feasible even for some of the largest innovation-active organizations to generate all the necessary knowledge within the firm boundary (Cassiman and Veugelers, 2006). Chesbrough (2003) terms this phenomenon ‘Open Innovation’. Accessing external knowledge is not an imperative for every company and every innovation but is contingent upon globalization, technology intensity, technology fusion and new business models (Gassman, 2006; Lichtenthaler and Ernst, 2009). The external source of knowledge might be another firm, a university or a government laboratory (Bercovitz and Feldman, 2007). Further, the external knowledge thus accessed may be a substitute to internal knowledge or complementary to it (Love and Roper, 2009). In sum, the decision to tap into external sources of knowledge, the type of knowledge sought and the partners chosen to source that knowledge is contingent upon firm level factors as well as macro factors at the industry and market level. The fourth dimension of innovation strategy is product innovation versus process innovation. A firm’s innovation strategy can focus on product innovation, process innovation, or both (Peeters and van Pottelsberghe de la Potterie, 2006). The level of product and process

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innovation is found to be contingent upon firm factors such as the firm size (Cohen and Klepper, 1996), firm strategy (Utterback and Abernathy, 1975) as well as the industry’s competitive landscape (Bonanno and Haworth, 1998; Boone, 2000). More recently, the concept of business model innovation (Chesbrough, 2007) has gained traction and it involves both product and process innovation spanning multiple stages of the firm’s value chain. In sum, the innovative strategy of a firm is multidimensional, with firms having to balance between seemingly incompatible pursuits, taking into account the firm’s overall strategy as well as the competitive landscape and the broader environmental factors. The studies examining innovation strategy of firms discussed in the preceding paragraphs are in the context of developed markets. Emerging markets provide a new context to examine how the different dimensions of innovation strategy play out. Innovation in Emerging Markets Emerging market economies have high growth potential but are characterized by high environmental turbulence (Luo and Peng, 1999), underdeveloped institutional framework (Peng et al., 2008) and a large market at the middle and bottom of the income pyramid that is upwardly mobile (Prahalad and Lieberthal, 1998). As a result, the strategies and business models that work in the developed world will serve only the handful of rich in emerging economies (Prahalad and Lieberthal, 1998; London and Hart, 2004; Wright et al., 2005). In order to be successful in emerging markets, firms need to build business models particularly suited for these markets (Prahalad and Lieberthal, 1998; Wright et al., 2005) and this implies, developing innovation strategies that align with the characteristics of these markets. Though there seems to be a general consensus that innovating for an emerging market poses a unique challenge, we found few studies that have examined innovation strategies comprehensively in this context. Iyer et al. (2006) based on their understanding of the Indian context propose that incremental innovations (exploitative) may be more appropriate in an environment with poor infrastructure for commercialization. Li and Atuahene-Gima (2001) in their study on new technology ventures in China found that a product innovation strategy is more appropriate in a turbulent environment, which is characteristic of emerging economies. There are also studies that have looked at the evolution of technological capability (or innovation capability) in the “newly industrializing country” context. For instance, Dahlman, Ross-Larson and Westphal (1987) identified acquisition of technological capabilities as critical to competitiveness and argued that this can be understood as a learning process. To start with, firms need a production capability – the ability to run a plant that produces a particular product. Through training and “learning by doing”, the firms learn how to operate the plant, and gradually improve the yield from it. In the second stage, firms develop an investment capability – the ability to create a new plant of a chosen capacity and specifications. Finally, firms develop an innovation capability – the ability to create new products, and the manufacturing infrastructure to produce these products. Forbes and Wield (2002) extended the work of Dahlman, Ross-Larson & Westphal (1987) to focus on value addition by the enterprise, again based largely on the development of technological capabilities by the firm. They proposed a sequence of: learn to produce; learn to produce efficiently; learn to improve production; learn to improve products; and, finally, learn to design new products as the path to move from being followers to leaders.

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Each of the studies above examines different dimensions of innovation strategy but we fail to get a complete picture of what a successful innovation strategy in the emerging market context might entail. In this study, we set out to address this gap. A Priori Expectations In view of the exploratory nature of this work, we did not go into the study with firm propositions or hypotheses. However, we had some expectations based on our understanding of emerging markets: •

Since the local leaders attained or maintained leadership in a competitive market, they would have capitalized on their earlier advantages as well as built new ones i.e., there would be both exploration and exploitation

•

As emerging market companies emerged from a regulated economy, they would have weak technological capabilities because of constraints on technology flows and the lack of incentive to build technological capabilities in a closed economy (Krishnan & Prabhu, 1999). Hence companies’ initial efforts would be to explore technology from external sources in order to quickly close gaps in technological capabilities. Even if they had built capabilities these would be inferior to those of multinational corporations. In such cases, effort would be to complete the technology absorption process and then build further on them through exploration both internally and externally.

•

In view of weak or non-existent technological capabilities, one would not expect to see technology-push innovation.

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In the wake of deregulation, a priority would be to upgrade quality and be cost competitive so as to be able to compete with new multinational entrants. Towards this end, innovation efforts would focus on process innovation. Once processes are improved, innovation efforts would focus on products.

•

A key strength of local companies (Dawar & Frost, 1999) would be their understanding of the local market. Thus, we would expect to see local leaders build market driven efforts (“market pull” innovation).

•

Successful firms would have used a combination of internal and external sourcing of knowhow in order to be able to hasten the innovation process.

Methodology India initiated a process of deregulation in the mid-1980s that became more structured and comprehensive with the economic policy reforms launched in 1991 (Panagariya, 2008). At the time of the latter, there were strong fears that Indian industry would be wiped out because it would not be able to compete with strong multinational competitors entering India. However, such scenarios of doom have been belied, and in many cases Indian companies have not only managed to survive, but build strong competitive positions. At the same time, India is today recognized as one of the most important emerging markets and is expected to be one of the primary drivers of global economic growth (Wilson & Purushothaman, 2003). This setting provides a natural experiment to identify and analyze innovation strategies that work in a large emerging market.

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Since the nature of the study is exploratory and the contextual conditions of the study (emerging market) play an important role in the phenomenon, a case study methodology is appropriate (Yin, 2003: 13). We adopt a multiple case study approach that will allow us to do a literal replication across cases (Yin, 2003: 47). We also chose cases from different sectors so that we can contrast across cases (i.e., theoretical replication), to factor in the industry effects. We have chosen cases from three different sectors – Pharmaceuticals, Automotive and Retail. Pharmaceuticals and Automotive are the top two spenders on research and development in Indian industry accounting for 45% and 17% respectively and between them account for almost two thirds of the R&D spending by industry in India (DST, 2009). Organized retail is an emerging sector and presents an interesting area of study. The five companies chosen for the study are local (decision-making is clearly controlled by interests based in India) companies that are market leaders in India. By market leader, we mean that the company is among the top three companies by market share in one of the major industry segments in which it competes, or it is has been recognized by credible external agencies as an industry leader. Three of the companies studied come from the Automotive and Pharmaceutical industries. Tata Motors and Bajaj Auto are from the automotive sector, but with different emphases. Tata Motors is India’s leader in commercial vehicles (trucks), and #3 (by volume) in the car industry. Bajaj Auto is the number 2 player in the 2-wheeler industry and a market leader in autorickshaws. The third company we study, Biocon, is India’s leading biopharmaceutical company. The other two companies we study are Titan Industries (India’s number 1 watch manufacturer and an emerging leader in jewellery and retail), and Pantaloon Retail, a leading multi-format retailer. For each company we present an in-depth case study that describes major innovation initiatives of the company in the context of its history and evolution. These case studies have been developed based on secondary data and published information and are part of a larger study of innovation strategies for competitiveness in the Indian market undertaken by one of the authors. The rich description in each case study allows us to derive the innovation strategy of the company. We then do a cross-case comparison to answer the central question of this study: What innovation strategies help local companies in emerging markets compete successfully? In the following sections we present case studies of the innovation strategies of the five companies. Following the case studies, we identify patterns across the innovation strategies of these firms. We conclude with a discussion of these patterns and implications for future research. Innovation Strategies of Five Indian Local Market Leaders Case 1: Tata Motors1 Tata Motors is one of the flagship companies of the Tata conglomerate. Tata Motors sprung to international attention with the announcement of the Tata Nano, the world’s lowest priced car, in January 2008. In this case, we focus on Tata Motors’ innovation strategy in the car business where it was in the #3 position by 2011. Tata Motors reported a top line of Rs. 1

Unless otherwise mentioned, this case is based on material in Krishnan (2011).

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381.44 billion in 2009-10 with a net profit of Rs. 22.4 billion on a standalone basis in FY 2009– 10. Tata Motors was founded as the Tata Engineering & Locomotive Company Ltd. (Telco) in 1945. Telco commenced the production of trucks through a technical collaboration with Mercedes Benz in 1954. After the expiry of this collaboration agreement in 1969, Telco started designing, developing and manufacturing trucks on its own. Telco set up its research and development in 1959. It had two research centres in India – one at Jamshedpur that focuses on the improvement of components and aggregates and an Engineering Research Centre at Pune set up in 1966. Work done by the Pune Centre resulted in Telco getting the DSIR National Award for R&D Effort in Industry in 1999 and National Award for Successful Commercialization of Indigenous Technology for the Indica in 2000. Under its legendary chairman, Suman Moolgaonkar, Telco built strong engineering capabilities even though these could not be satisfactorily exploited due to the licensing regime of the government. The broadbanding policy for the automobile sector announced in the mid1980s freed Telco from this constraint. Telco was able to prove the strength of its design and engineering capabilities by competing successfully with Indo-Japanese ventures such as Swaraj Mazda, Allwyn Nissan and DCM Toyota in the newly emerging Light Commercial Vehicle segment thanks to its rugged products, simple technology and strong service network. Telco’s first successful internally developed product was the Tata 407 light commercial vehicle launched in the late 1980s. Following the liberalization of the Indian economy in 1991, Telco entered the car and utility segments as well with products such as the Estate (a stationwagon), Sierra, and Sumo (a very successful utility vehicle used in both urban and rural India for multi-passenger transportation). These products built on the capabilities Telco had built in the light commercial vehicle arena. For example, the Estate and Sierra were built on the chassis of the 207 light truck. The car market entry leveraged its existing technology platform developed for the LCV business to create two “car” models for the Indian market and used these to learn more about the car business. This involved exploitation of an existing technology platform, but exploration of the market. The locus of innovation was largely internal to the company. This was followed by Telco’s first ground-up entry into the passenger car market through the Indica, launched in 1998 based on a decision taken in 1995. The Indica was intended to compete in the “entry level” car market in India, targeting cost and value-conscious buyers investing in their first car. The Indica was developed at a cost of Rs. 17 billion (US $378M) and gave Tata Motors the confidence to build other new products. In the Indica project, Tata Motors managed the product development at a system design and integration level and involved a number of international vendors and partners in the project. These included partners / consultants for styling, body, engine design, etc. As its first major clean sheet car design and development project, the Indica was an important learning ground for Tata Motors’ engineers. With the Indica, Tata Motors shifted more to exploration but depended on external sources for most of the knowledge and innovation and inputs. The innovation activity was based more on market pull rather than technology push. The Indica emerged as an important competitor in the entry level market thanks to its low operating costs. It was (and is) particularly successful with taxi operators. Telco subsequently

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launched petrol versions of the Indica targeted at individual consumers. The Indica V2 launched in 2001 overcame many of the niggling problems that plagued the original Indica model, indicating that the company had substantially matured on the process front. Later, a sedan variant on the same platform called the Indigo was launched in 2002, and a station wagon model, the Indigo Marina was launched subsequently. Since then, Tata Motors has launched several variants on this platform including a stretch version targeting higher income customers and enhanced the fuel efficiency of its core Indica model, claiming by 2011 to have the most fuel efficient car on Indian roads. The company has introduced a series of models perfecting and refining the capabilities acquired from the initial set of exploratory activities to introduce Indica. Tata Motors’ next major product for the Indian car market was Nano. It was created to provide safe, low-cost transportation to families who can’t afford the cars currently available in the market. The need to create such a product was reportedly identified by Tata Group Chairman Ratan Tata when he saw a family of 4 or 5 precariously perched on a motorcycle in traffic in an Indian city. The Nano was designed to a price target of Rs. One lakh (approximately USD 2,250) (Chacko, Noronha and Agrawal, 2010). The most distinctive attribute of this car that caught international attention is its price. While Tata Motors considered a number of new technological ideas to come up with a car at this price point, Nano that was finally designed and launched represents an effort at radical re-design and re-engineering rather than radical technological innovation. Every feature and design of the car was questioned and re-questioned till an optimum mix was obtained. To quote Girish Wagh, the project leader of Nano project, “If somebody comes and asks me what fantastic innovation solved the problem, I would have to say there was none. It was small, small things that engineers did” (Chacko, Noronha and Agrawal, 2010:38). Thus, the innovation in Nano was in the ability to use existing technologies creatively and squeeze costs out of the system. A fanatical focus on cost reduction enabled Nano to be the world’s lowest cost car (Chacko, Noronha and Agrawal, 2010). The innovation process was perhaps not substantially different from the typical car design process in that it involved a cross-functional team, substantial engineering inputs, and several rounds of iteration. One distinctive aspect of Nano design process was the strong involvement of Tata Group Chairman, Ratan Tata, in overseeing the integrity of the car (he test drove the car at every major prototyping stage) (Chacko, Noronha and Agrawal, 2010). The second important aspect was the strict cost control through a “Design-to-cost” approach (the development budget was pegged at Rs. 2.2 billion or US $49M) that resulted in the company being rated as a highly effective innovator by consulting firm Booz in its 2006-07 study of innovative companies (Jaruzelski, Dehoff & Bordia, 2006). The third aspect was the participation of suppliers, both Indian and global, in the design process to achieve the highly aggressive cost targets for almost every component and sub-assembly of the vehicle. This involved an even higher level of exploration than the Indica as it required iterative optimization of components and sub-assemblies to meet the challenging cost targets. Tata Motors acquired a controlling stake in Jaguar Land Rover (JLR) in 2008. This was expected to give the company access to the international market, two legendary brands, and access to car design and engineering capabilities that would enhance its capabilities in the Indian market. This acquisition of JLR will provide a major external boost to the car

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business of Tata Motors and allow it to learn, absorb and leverage new technology and engineering capabilities. Case 2: Bajaj Auto2 Bajaj Auto is the second largest player in the Indian motorcycle market and the leader in the executive segment with nearly 60% market share in 2007. Bajaj Auto was the second largest two-wheeler company in India in financial year 2009–10 and had sales of Rs. 119 billion during this year. Bajaj Auto was a major player in scooters, selling scooters from 1945 and manufacturing them since 1959. Historically, Bajaj dominated the scooter market. Even till the mid-90s, the mainstay of Bajaj was the long running Chetak, which was based on a 25-year old Vespa model. Bajaj focused on adaptive changes to Chetak, e.g., developing a 150cc engine which was more suitable to Indian conditions. Bajaj’s reputation for ‘value for money’ and reliability, built over the years, led to continued domination in the scooter market. With the opening up of the motorcycle market in the mid-1980s, Bajaj entered motorcycles in 1985, having signed a technical collaboration agreement with Kawasaki of Japan to produce 100-cc two-stroke motorcycles. Since the company did not have expertise in the motorcycle technology, it explored technology from external sources. The first product was the KB 100 launched in 1986, which performed poorly in the market. Kawasaki’s primary expertise lay in more powerful bikes and the bike technology had to be adapted to the Indian market. However, the “KB” design was found to be ill-suited to Indian conditions resulting in poor performance in the market. A modified version was soon launched in the market, which had a better sales performance. But, by the time Bajaj was able to adapt the Kawasaki technology to compete in the 100cc bike market, the market was dominated by another player (Hero Honda). Bajaj soon realized that the market leader, Hero Honda, had succeeded in moving the market to four-stroke vehicles. Though Bajaj’s first four-stroke bike launched in 1991 offered excellent fuel economy, it was unable to make a significant dent as Hero Honda re-styled its own bike to protect its market. The Bajaj Kawasaki partnership continued to design and launch new motorcycles throughout the second half of the 1990s – the 100cc Boxer, the 111cc Caliber, etc., but made only a minor dent in Hero Honda’s domination. In sum, the company’s effort at product innovation exploiting its existing technological capability met with limited success. In 1999, Bajaj launched a green-field manufacturing facility, incorporating principles from the Toyota production system. The team setting up the new facility also launched a fresh internal product development effort in competition with the Kawasaki-Bajaj collaboration. While the collaboration team was working on the 175cc Kawasaki Bajaj Eliminator, the internal Bajaj team concurrently developed the 150cc and 180cc Pulsar. Eliminator was launched in January 2001 but proved too expensive for the Indian market, and failed to make a dent. In contrast, Pulsar, was launched later the same year, at twothirds the price, and became Bajaj’s first blockbuster bike. The Pulsar came out of the large investments Bajaj made in R&D resulting in strong new product development capabilities 2

Unless otherwise mentioned, this case study is based on information contained in Vallabhaneni & Krishnan (2009) and Krishnan (2011).

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and innovative features like Digital Twin Sparkplug Ignition (DTS-i). Pulsar was developed in collaboration with Tokyo R&D, a design studio specializing in automotive R&D. The DTSi technology incorporated two spark plugs in the combustion chamber. This generates two points of combustion in the engine, and allows quicker and more efficient combustion, and hence better power, fuel efficiency and lower emissions. Bajaj claimed to be the first in the world to incorporate twin-spark ignition into small bore engines (i.e., less than 600cc), and was granted an Indian patent for this invention. Thus, Bajaj established its presence in the motorcycle business through a combination of technological and market exploration. Recognising an opportunity provided by changing demographics that suggested a market for a more powerful yet affordable bike, Bajaj innovated on engine technology to create the DTSi-powered Pulsar. This came out of a combination of external and internal R&D. The launch of Pulsar went hand in hand with a new factory that used new manufacturing processes – the product innovation was supported by process innovation. Bajaj soon launched the 175cc Avenger, which was the Kawasaki Bajaj Eliminator fitted with the cheaper, more powerful and more fuel efficient Bajaj DTS-i engine. The dual success of Pulsar and Avenger made the executive segment a stronghold of Bajaj. Bajaj continued its collaboration with Kawasaki, with Bajaj having developed competencies complementary to Kawasaki’s. The impetus for R&D continued, with Bajaj investing about 1-1.4% of its sales every year on the activities during 2005-2010. The firm developed new features such as ExhausTEC. ExhausTEC stands for Exhaust Torque Expansion Chamber. The technology uses a small chamber connected to the exhaust pipe to modify back-pressure and other characteristics of the engine. Bajaj claimed significant improvement due to ExhausTEC in low/mid-range torque in a four-stroke engine. Several new technologies were developed like SNS suspension, a new generation DTS-i engine (with intelligent control of spark timing) and 4V DTS-I technology. The R&D infrastructure was upgraded in the areas of design, CAE, prototype and testing. It enhanced its digital computational capabilities along with the ability to prototype and test products to even higher standards. This enabled Bajaj Auto to design and produce “ready-to manufacture” prototypes for the new generation products. The firm also commissioned a world class NVH (Noise, Vibration and Harshness) laboratory. As a result, Bajaj launched several new low-end (CT 100, Discover 110, XCD 125 DTS -Si) as well as executive segment bikes (Pulsar 180cc, 200cc and 220cc). Bajaj used its DTSi technology to create a whole range of bikes (technology push to address different market niches). It simultaneously explored other technologies to improve the bike’s performance. In other words, these products were developed using a combination of internal and external exploration, while simultaneously refining and upgrading its flagship DTSi technology. Thus, Bajaj made a number of incremental improvements to its manufacturing process. Case 3: Biocon3 Biocon was founded in 1978 by Kiran Mazumdar, a qualified brewmaster, as an industrial enzyme company. By 2004, when Biocon had its Initial Public Offering of stock, Biocon had 3

This case study is based on the annual reports of Biocon from 2004 to 2011.

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evolved into a biopharmaceutical company. Biocon had standalone revenues of Rs. 15.9 billion in 2010-11 and consolidated revenues of Rs. 28.1 billion in the same year. Biocon’s first move towards the pharmaceutical industry was the founding of Syngene, one of India’s first contract research services companies in 1994. The company’s formal entry into the biopharmaceutical industry happened in 1998. Biocon’s strategy was to target Active Pharmaceutical Ingredients (APIs) with high technology or regulatory barriers but good market potential where they could use their core fermentation expertise. The first such drug developed was Lovastin, used in anti-cholesterol treatment. Lovastin was due to go off patent in 2001 (Biocon, 2008). Biocon’s manufacturing facility for Lovastin received FDA clearance in 2001 (Biocon, 2008). A second therapeutic domain to which they extended the same approach was immunosuppressants. Proprietary process technologies were scaled up to create large manufacturing facilities for these drugs (Biocon, 2004). By 2007, the company had become the largest manufacturer of immunosuppressants in India. Around 2000, the company started R&D on the first Pichia Pastoris-derived recombinant human insulin. The creation of a recombinant human insulin manufacturing facility in 2004 gave the company the twin advantages of a microbial fermentation capability and largescale chromatographic purification of injectable grade therapeutic proteins (Biocon, 2005). Insugen, a formulation based on Biocon’s recombinant human insulin, was launched in the Indian market in November 2004 after necessary approvals. The recombinant human insulin experience enabled the company to undertake the development and manufacture of other biosimilars In 2000, Biocon founded another subsidiary – Clinigene - to enter the clinical research business (Biocon, 2008). By 2004, Clinigene had evolved into a comprehensive clinical services research company with laboratories, patient registries, and the capability to undertake trials from Phase I to Phase IV (Biocon, 2004). In 2002, Biocon decided to enter the new drug development arena (Biocon, 2008). The strategy was to use the profits generated by the generics business (statins, immunosuppressants) to fund innovation-led drug development programmes. The company intended to manage the risk of its R&D strategy by targeting proven targets (e.g. EGFR – see following paragraph), proven molecules (e.g. insulin), a focus on biologicals (which had lower risks of facing toxicity problems), and using its integrated biopharmaceutical manufacturing facilities to be able to develop proof-of-concept quickly and then scale up manufacturing (Biocon, 2005). Since advanced fermentation technologies (particularly for mammalian cell expression) are critical to the development of Monoclonal Antibodies (MAbs) – targeted new therapies for cancer that inhibit growth of the tumor – Biocon identified MAbs as an area of high potential. Their intention was to select a promising molecule, develop it further, and then take it into large scale manufacture. Towards this end, the company entered into collaboration with CIMAB SA, a Cuban organization for technology transfer and subsequently set up a joint venture with CIMAB, Biocon Biopharmaceuticals. The company also sought to improve manufacturing efficiencies through better yields and quicker turnarounds (Biocon, 2004). The first MAb-based drug to come out of the collaboration with CIMAB – an antibody against head and neck cancer – began to take shape during 2005. The drug, BIOMAb EGFR, entered clinical trials the following year. BIOMAb EGFR was launched in September 2006 as

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the “first competitively priced, anti-EGFR humanized MAb for cancer made commercially available anywhere in the world” (Biocon, 2007). During 2007-08, T1h, an antibody for rheumatoid arthritis developed under the programme with CIMAB, entered Phase 2 trials (Biocon, 2008). In 2009–10, Biocon bought out the stake of CIMAB in Biocon Biopharmaceuticals Biocon commenced development of a proprietary oral insulin drug in 2004. It entered into a partnership with Nobex, a US-based company, to have access to its proprietary conjugated peptide delivery technology for oral insulin. In March 2006, Biocon acquired the intellectual property assets of Nobex, thus giving it an end-to-end ownership over its oral insulin product development. The company’s oral insulin drug IN105 entered phase 1 clinical trials during 2005-06 and were successfully completed in 2007. Unfortunately for Biocon, it suffered a setback in January 2011, when IN 105 did not meet its targeted therapeutic effect in Phase 3 trials. The company attributed this setback to a high placebo effect arising from frequent blood glucose self-monitoring and expressed optimism that there was still a future for the drug (Biocon, 2011). Moreover, the company had other novel drugs in its pipeline. The company has, over the years, entered into several other partnerships including with the prestigious Karolinska Institute of Sweden, Pfizer (a global leader in the pharmaceutical industry) and university spinouts and small biotechnology firms in the United States. Biocon formally adopted an affordability plank in 2007 noting in its annual report that innovation without access and affordability is like therapy without patients. In 2009, the company developed an affordability index that showed how much cheaper its drugs were than comparative molecules in other markets – on this scale, BIOMAB EGFR was available to Indian patients at 50% less than global comparators. By 2011, Biocon had become a more domestically-focused pharmaceutical company with strong branded formulations. Exports constituted 40% of sales in 2010–11, and had steadily reduced from 62% of sales in 2004–05. R&D intensity fluctuated between 5 and 8% during the same period. We can see that Biocon’s entry into the pharmaceutical business was enabled by exploiting the fermentation capabilities it had developed through its enzyme business to produce statins and immunosuppressants. Market exploration was initially limited as the company sought to sell these drugs as bulk drugs or APIs to existing pharmaceutical companies. Biocon’s entry into modern biopharmaceuticals came through its internal exploration of a novel process to produce recombinant human insulin. Subsequently, the company had to explore how to scale-up manufacturing processes as well as enter into formulations in order to launch its own branded formulations in the Indian market. Biocon used external alliances to complement exploitation of its own fermentation technology capabilities for manufacture of biopharmaceuticals with the exploration of new molecules. The most successful manifestation of this was the development of EGFR in conjunction with CIMAB of Cuba. The company aspires to use its own exploration skills combined with knowledge sourced externally (in this case through the acquisition of Nobex) to produce a novel oral insulin

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drug. Market demands are playing an increasing role as well, as the company has chosen a therapeutic area (diabetes) that has a large number of patients in India. With the formation of an India-focused drug business in 2007, Biocon underlined the importance of a more customer-driven (market-pull) based formulation business in India. Throughout the history of Biocon’s evolution in the pharmaceutical industry, we see process innovation in the form of development, scaling-up and improvement of fermentation-based manufacturing processes, a key differentiator for Biocon. As a newcomer to the pharmaceutical industry, Biocon also had to learn (explore) all facets of the regulatory and quality certifications required. The launch of two subsidiaries, Syngene and Clinigene, facilitated exploration and learning related to drug development and clinical trials respectively. Case 4: Titan Industries4 Titan Industries is the market leader in the Indian watch industry with an estimated market share of 65% in the “organized sector” (Titan, 2007) and is a major national player in the jewellery business. It had net sales of Rs. 46.86 billion in 2009–10. Titan was founded in 1984 as a joint venture between the Tatas and The Tamilnadu Industrial Development Corporation. Since its inception, Titan has been a pioneer. It focused on quartz watches (rather than mechanical or automatic watches which were the mainstay of its main competitor, HMT), rapidly expanded its portfolio from 200 models to 850 models in a short time using an in-house product development cell, built its own retail network focusing on creating a distinctive shopping experience, used non-conventional retail outlets, integrated backwards into critical components required for watch manufacture, and rapidly expanded capacity. It used advertising extensively to create a strong brand. It entered the international market in 1991. The company launched jewellery and jewellery watches under the brand name Tanishq in 1995 (Ramachandran and Lavanya, 1995) on a plank of purity and quality and was the first company to launch a nation-wide chain of retail stores of modern jewellery. Tanishq was the first store to offer customers the option of testing the purity of its jewellery on instruments available in the store. Titan has been a market explorer – experimenting and establishing products and retail formats to meet customer needs in India. Titan grew steadily in the next decade reaching a net sales turnover of Rs. 14.42 billion in 2005–06 whereupon it entered a phase of accelerated growth. The growth driver was the jewellery business that increased in sales from Rs. 7.91 billion in 2005-06 to Rs. 35.04 billion in 2009–10; during the same period watch sales increased from Rs. 6.55 billion to Rs. 10.26 billion. Titan attributes its rapid growth to exploration of new customer segments, introduction of innovative new products, and rapid growth of the retail network. This is backed by strong brands – both Titan and Tanishq are the most admired brands in their categories according to national surveys (Titan, 2007). Titan has introduced several new brands almost every year targeting different customer segments – It introduced the Aviator range of watches for men, re-launched the Raga collection for women, launched Fastrack range of merchandise for the youth, introduced a new upmarket brand of Jewellery, Zoya and launched Xylys, a Swiss4

Unless otherwise mentioned, this case study is based on the annual reports of Titan Industries Ltd.

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made premium watch to tackle competition in the premium watch segment. A combination of consumer insight and design skills has enabled Titan to sustain this pace of product and brand innovation. Underlying Titan’s brand and product innovation efforts are its Design Studio in Bangalore that enables it to design as many as 1000 new watch models in a year (Titan, 2006–07). Another small group, Innovedge, pursues breakthrough technological innovation in watches. The effort at technological innovation at Titan helped the company launch ‘Edge’, which at the time of its launch in 2001 was the slimmest water-resistant watch in the world. In 2007– 08, Titan launched the Fastrack Neondisc collection, claimed to be the first watches with no hands in the world. The following year, Titan created expertise for tiny watch movements. Titan has exploited its precision manufacturing capability, originally developed for watches through a technical collaboration, and has enhanced it through incremental innovations and adoption of new technologies. In 2009–10, the company claimed a first in the watch industry for using automation with robots in the machining line, thereby increasing manpower productivity by 65% (Titan, 2010). Though Titan has innovated technologically, the fulcrum of Titan’s innovation strategy appears to be in branding, design and the retail experience – the annual R&D expenditure by the company is only Rs. 0.02 billion, accounting for just 0.08% of sales turnover in 2009-10 (Titan, 2010). Titan’s innovation process has largely been internally-driven, based on a strong marketing department and an internally-created design department. These have been complemented in recent years by greater openness and systematic scouting of external ideas through its Hong Kong office. The Hong Kong sourcing office was set up in 2008 and sources not only components for Titan’s products, but also spots and delivers new trends. In 2009–10, a hundred new products were developed through the Hong Kong sourcing office. This office was instrumental in the launch of Titan’s Superfibre watch priced at Rs. 275 that is an aggressive attempt to address the mass market for watches and is Titan’s first major product in the sub-Rs. 500 category (Titan, 2009). To ensure a steady flow of jewellery designs and yet retain high quality standards, Titan’s watch business set up in 2007 a “Karigar Park” (Craftsmen’s Park) near its factory at Hosur (Titan, 2007). By the following year, 400 craftsmen were working in six parks (Titan, 2008). Initiatives such as these enabled the jewellery business of Titan to launch 5000 new jewellery products in 2007–08 (Titan, 2008). The company has been continuously upgrading its manufacturing and supply chain capabilities to support its large product range. In 2008, the jewellery division started an initiative called “Three Day Miracle” to reduce manufacturing lead time from 3 weeks to 3 days (Titan, 2008). The manufacturing division of the jewellery business set up an “Innovation School of Management” in 2009–10 to “create, nurture and realize ideas into action through people development” (Titan, 2010). The integrated supply chain management system of the jewellery business enabled the jewellery business to report a return on capital employed in excess of 90% in 2009–10 (Titan, 2010). Titan attributes its success in the jewellery business to its ability to manage the entire value chain from design to manufacture to sale to delivery with high quality and reliability and believes that the first mover advantage it has achieved through the creation of this integrated model will remain unchallenged for some years to come (Titan, 2010).

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In 2006–07, Titan set up its first prescription eyewear store under the brand name Titan Eye+. By 2009–10, the company had 82 eyewear stores across the country and had decided to integrate backwards into lens manufacturing. Another new retail concept of Titan was the Helios watch store, a high-end multi brand watch chain launched in 2008–09. Two premium jewellery stores branded Zoya were launched in Mumbai and Delhi in 2008–09. To capitalize on its expertise in the retail business, Titan set up an Integrated Retail Services Group in 2008–09 to centrally coordinate the renting of retail infrastructure and training efforts for the company’s diverse retail businesses. The latter helped transfer learning across the brands of the company. In sum, we see a dominant market exploration strategy that is supported by a highly effective technology exploitation using a combination of internal and external sources. We also see that alongside product innovation, the company has innovated in its supply chain and manufacturing processes to meet market needs. Not all initiatives of Titan and Tanishq have been successful. The launch of Titan watches in Europe in the 1990s was unsuccessful and the company later withdrew from the European market. In 2007, the company launched its jewellery business in the United States through two new stores, but these were closed within a year in the face of a recession in that market. Case 5: Pantaloon Retail (Future Group)5 Pantaloon Retail is one of India’s leading retail companies. It generated a consolidated sales turnover of Rs. 97.87 billion in 2009-10 from 13.25 million square feet of operational store space. In 2007, the company was awarded the International Retailer of the Year award by the National Retail Federation of the US, the world’s largest retail trade association. What is today Pantaloon Retail was incorporated in 1987 as Manz Wear Private Ltd. Manz was initially in the garment manufacturing business and made readymade trousers under the brandname “Pantaloon.” The founder of the company, Kishore Biyani, wanted to position the company as a fashion house and in order to expand the size and reach of the business created a pan India network of franchise stores under the brand of “Pantaloon Shoppe” in 1991. The company then decided to make the Pantaloon Shoppes a one-stop point for all the apparel needs of men. The company created different brands for different products and essentially the Pantaloon Shoppes sold private labels under a franchise model. The guiding principle of the Pantaloon business was to provide ordinary people with what only the rich could afford. The products were priced for lower and middle price customers, and the positioning was on a “value for money” plank. To attract more customers, Pantaloon invested heavily in advertising, and tried out innovations like the first denim exchange programme in India. At its peak, there were 72 Pantaloon Shoppes across India. However, growth slowed down as the franchise model faltered due to the absence of a standardized model, clear agreements, and control by the company. In the meantime, organized modern retail trade was beginning to make its presence in India. Driven by a belief that a new phase of consumption-driven growth was around the corner, in 1996, Pantaloon decided to set up its own large format retail stores. The first such store, a 10,000 square feet “Mega Store” was set up in Kolkata in August 1997. These mega stores 5

This case study is based on Biyani (2007) and annual reports of Pantaloon Retail (India) Ltd.

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were positioned as family stores meeting the apparel needs of the entire family, again on a “value for money” plank. These stores primarily sold the private label brands owned by the company. The company believed that by having its own brands, the company could spot emerging trends early, and offer products to meet these trends before other retailers. By the end of 1999, there were 13 Pantaloons mega stores across India. Over time, the Pantaloon brand has shifted its focus to the young, upwardly mobile, aspirational customer, and seeks to provide “fast fashion.” The company was the pioneer of the hypermarket concept in India with the launch of Big Bazaar in Kolakata in September 2001. The Big Bazaar model was a hypermarket concept created for India rather than a blind imitation of hypermarkets in the west. It was designed to combine the look and feel of an Indian bazaar with the convenience of organized retail shopping. Some of the distinctive features of the initial Big Bazaar model were: (1) location in crowded areas well-connected by public transportation rather than suburbs; (2) an effort to retain the chaos and feel of a bazaar; (3) sourcing through consolidators identified for different product categories; (4) concerted efforts to bring in customers who were apprehensive of shopping at modern retail outlets; (5) sale of products in a way that is aligned to the buying habits of the Indian housewife such as the opportunity to get grain freshly ground, or inspect staples and grains before purchase; (6) customization to local market needs. In August 2002, the company launched Food Bazaar within Big Bazaar stores to sell vegetables and fruits. By 2006–07, Big Bazaar had opened 50 stores across India. To keep pace with the rapid expansion, the company shifted attention from the front end of the store to managing the back end. Big Bazaar has an extensive network of small and medium companies from whom it sources products. This is based on a belief that in India, small enterprises have distinctive cost advantages. To enable its small partners to keep pace with its growth, the company raised a private equity fund called Indivision to support its partners’ growth initiatives. The company also believes that indigenous supply chains though lacking the sophistication of the supply chains in developed markets have the potential to meet the needs of Indian business at low cost. In 2005, the company became the first retailer in India to use RFID tags to track inventories in its warehouses. The following year, the company implemented SAP, an enterprise resource planning system, across the company. In an effort to respond to changing customer needs for excitement, the company created another retail format, a destination mall, under the brandname “Central” in 2004. Central seeks to offer a seamless shopping and entertainment experience, and is largely located in big cities with a sizeable population of youth with money to spare. Unlike the Pantaloon stores, the Central Malls have a sizeable presence of other big brands including multinational brands. In subsequent years, the company (and its parent Future Group) has experimented with two dozen different formats across ten lines of business and two distinct positioning – the value segment, and the lifestyle segment. These include food, fashion, furniture, consumer electronics, and restaurants. Prominent retail brands are E-zone, Home Town and Depot. In the process, Pantaloon believes that the group is able to address 70% of a consumer’s shopping needs. Pantaloon has been successful in building several private label brands across the company. Pantaloon has also lent its experience to non-traditional retail formats – e.g. it has taken a controlling stake in Mother Earth, a craft and artisan-based retail chain being set up

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in large cities. The company has forged a deep professional relationship with Idiom, a Bangalore-based design firm. Idiom has about 180 designers and has become a think tank and incubator for the company. The company’s distinctiveness comes from its emphasis on identifying consumer trends, getting insights into consumer behavior and applying these insights to effectively address the mass, value conscious market. For instance, Big Bazaar set up a diversity tracking cell to study local customs and consumption habits. Founder Kishore Biyani himself is known to spend several hours of his time observing people’s behavior in diverse settings in an effort to get customer insights. Employees across the company are encouraged to come up with new ideas and formats to meet the customer needs, and the company is willing to experiment with several of these. Prototyping is used extensively to test out concepts. In sum, exploration and experimentation is centered on business models and store formats, and technology is used to execute the business models. Once a business model is established, the learning is exploited, but even at this stage, there is leeway for adaptation to local needs and cultures. Addressing the mass market is a stated theme of the innovation process, and considerable effort is expended on understanding the demographics and changing customer trends of the new middle class so as to be able to evolve value-based business models. The company sources important technologies such as ERP and analytics processes from outside but external involvement in the core innovation process appears to be limited. External involvement is strong in store design, but the design firm that undertakes this activity, Idiom, is almost an extension of the company itself. The company is open to suggestions and ideas from external consultants and its own employees but believes in rigorous testing of all new ideas. Findings: Innovation Strategy across the Five Leaders The five cases of Indian local market leaders clearly indicate that innovation has played an important role in their growth: l

l

l

l

Tata Motors’ car business did not even exist before deregulation, but today it is one of the top three players in the Indian car industry with products developed through its own efforts and complementary inputs from external sources. Bajaj Auto was an “also ran” in the motorcycle industry well into the late 1990s, but the Pulsar range of sports bikes designed by the company with proprietary technologies such as DTSi enabled it to dominate the executive segment and become the #2 player in the motorcycle industry. Biocon’s biopharmaceutical business did not even exist before 1998; today it is regarded as India’s top biopharmaceutical company based on its core fermentation based production technologies and a combination of chemical drugs produced through fermentation processes (statins, immunosuppressants), biosimilars produced through novel processes (recombinant human insulin) and new drugs such as EGFR created through external collaborations. Titan sustained its leadership in the watches business through product innovation (launch of hundreds of new models), technological innovation (the world’s slimmest watch), distinctive design capabilities and process innovation.

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l

Pantaloon has been a pioneer of new retail formats in India based on an empathic understanding of the Indian consumer and the willingness to experiment.

We find that all the five companies are ambidextrous and have used a combination of exploration and exploitation. For instance, Biocon and Bajaj have coupled their exploration with exploitation of their respective platforms – the DTSi technology in the case of Bajaj, and the fermentation–based manufacturing processes of Biocon - to create a portfolio of products to meet different market needs. Tata Motors has acquired new capabilities while at the same time also leveraging existing technological capabilities to address a wide range of market needs. Titan and Pantaloon have also scaled up their successful formats and products to drive growth. While the exploration capabilities of all the five companies have increased over time, the firms differ in terms of where in the value chain they are explorative. Some firms are explorative in downstream functions (marketing) while others are explorative in upstream functions (R&D and technology development). We find that all firms use a combination of internal and external sources for developing capabilities. But, technology firms (Biocon, Bajaj and Tata Motors) in particular have relied heavily on external sources (through acquisitions and alliances) for complementing their internal capabilities. Retail firms are less reliant on external sources. •

•

•

Bajaj and Biocon appear to be the most exploratory in terms of technology with their efforts on engine innovation and new biopharmaceutical entity innovation respectively. Both of them have used a combination of external and internal sources of ideas and knowledge, though Bajaj has, over time, depended more on its own internal technology capabilities. Biocon on the other hand has consistently used both internal and external sources to build capabilities. Titan and Pantaloon have been exploratory in the market sense, trying to understand emerging needs and crafting products and formats to meet these customer needs. But, we see that Titan has used external sources more actively than Pantaloon (e.g.: the Hong Kong sourcing office). We also see that Titan has proactively used technology to address emerging market needs as opposed to Pantaloon that has used technology in a peripheral manner, only to support market needs. Tata Motors’ exploration has been relatively more balanced from a technology and market perspective, identifying new market segments (Nano) and engaging in iterative experimentation to design and optimize for that segment. The company has also used internal and external sources in equal measure. For instance, development of Nano involved leveraging engineering innovations from external sources while internally developing the capability to manage a cost-driven, participative innovation.

Figure 1 summarizes where each of the firms stand on these two dimensions – nature of exploration and source of capability. The figure captures the predominant innovation strategy of the firm and does not imply the total absence of other strategies. Product innovation has played an important role in all five companies with a visible trend towards products that are affordable to a large mass market. In all of the five cases, we see affordability emerge as an important plank of innovation:

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Tata Motors’ efforts focus on “value for money” and “low cost of ownership” cars to expand the car market; Bajaj combines power and fuel efficiency to give a feel of a sports bike but at a reasonable cost; As Biocon’s Indian formulation business grows, the focus is on affordable medicines as demonstrated by its emphasis on the affordability index; Titan and Pantaloon both look at the mass market to achieve growth though they achieve profitability through other products and services.

Figure 1: Innovation Strategy Discussion and Conclusions Innovation by Emerging Market Local Leaders A priori, we expected that all the companies would have used a combination of exploration and exploitation in order to assume a leadership position. This is supported by all the cases. We expected that as emerging market companies came from a regulated economy, they would have weak technological capabilities and hence the companies’ initial efforts would be to build technological capabilities rapidly through exploration from external sources. This is supported by the Bajaj case where the firm collaborated with foreign firms to rapidly acquire technological capabilities that it lacked.

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We expected that where technological capabilities had already been created prior to deregulation through technology transfer, efforts would be to complete the technology absorption process and then build further on them through exploration both internally and externally. This is supported by evidence from the Biocon and Tata Motors cases. In view of weak technological capabilities, we did not expect to see technology-push innovation. However, in at least two cases, that of Tata Motors and Biocon, pre-existing technological capabilities - engineering in the case of Tata Motors and fermentation-based manufacturing processes in the case of Biocon - became the backbone of their innovation efforts and were used to drive innovation. Both these companies focused on building additional and complementary capabilities through exploration, and by using multiple external sources. We expected that in the wake of deregulation, a priority would be to upgrade quality and be cost competitive so as to be able to compete with new multinational entrants. Towards this end, innovation efforts would focus on process adoption / innovation / upgradation. Once processes were improved (or in parallel), innovation efforts would be to exploit these capabilities better. While all the companies in our study did make efforts to improve manufacturing processes and efficiencies, it is noteworthy that none of them felt they could wait to ascend the ladder in the step-by-step process described by Forbes and Wield (2002). Instead, product and process innovation have gone hand-in-hand with most of the process innovation being internally driven with the help of consultants. We expected that a key strength of local companies (Dawar & Frost, 1999) would be their understanding of the local market and that we would see successful firms build market driven efforts (“market pull” innovation). This has been supported by all the five companies we studied. In fact, responsiveness to local needs is reflected in the product definition, product features, design, and pricing of the successful products of all the companies in this study. We expected that successful firms would have used a combination of internal and external sourcing of knowhow in order to be able to hasten the innovation process. The cases suggest that this is broadly true though the use and impact of external sourcing have been limited in the cases of Pantaloon and Bajaj. This study establishes that innovation plays a key role in the ability of local companies in emerging markets to attain market leadership. However, innovation does not mean “new to the world” products or other forms of radical innovation. Instead, innovation is centered around responsiveness to local needs, particularly the affordability of the mass market. Firms that enjoy the advantage of capabilities built prior to deregulation could leverage these capabilities to accelerate their innovation of products for the changing market. But firms that lacked such capabilities had to build them through a combination of internal and external exploration combined with rapid exploitation of the results of such exploration. Local companies have to compete with multinational companies with strong brands and technological capabilities. They can compensate for their resource disadvantages through their superior understanding of the local market, their flexibility to experiment, strategic

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sourcing of external inputs to innovation, and the ability to rapidly exploit any innovation capabilities or assets created. To attain leadership, local companies do not have the luxury of alternate cycles of exploration and exploitation or using only internal efforts to drive the innovation process; instead companies need to be ambidextrous to a high degree, possibly much greater than that of their multinational competitors. Managerial Implications An important implication of this study is the need for emerging market firms to build strong core capabilities. Though the mere possession of such capabilities does not ensure competitiveness, it provides a strong platform for both exploration and exploitation, and facilitates collaboration with external sources of innovation. While Open Innovation may have come to stay, its difficult to make full use of open innovation unless the firm has a strong capability base of its own. This is a clear lesson from two companies we studied, Biocon and Tata Motors, that used the core capabilities they built prior to the deregulation of the Indian economy adeptly as innovation platforms in a post-deregulation scenario. The importance of such capabilities is reiterated by companies such as Bajaj and Pantaloon that built such capabilities in the last decade or so. However, one caveat regarding capabilities is that they need to be relevant to the local market – the motorcycle engine design capabilities that came from the Bajaj Kawasaki collaboration led to products that were initially too expensive and inappropriate for the local market. A second implication, again from a capability perspective, is the importance of design and integration capabilities. Thanks to the global trend towards open innovation, companies can source know-how from all over the world. This allows companies that have the capability to design and integrate to “mix and match” the technologies and inputs from a diverse set of external sources and synthesise them to suit local needs. Indica and Nano are good examples of products developed through such a process. Biocon has also demonstrated the ability to combine ideas and technologies from different external sources with its own internal ones in the development of oral insulin. A third implication is the need to develop an economic engine for innovation. Biocon’s current innovation efforts are supported by the steady revenue streams provided by the exploitation of products it developed in the early stages of its biopharmaceutical journey – statins and immunosuppressants - that have a global market. Bajaj’s innovation efforts today are facilitated by the cash flows from the Pulsar and its several variants. In the absence of such an economic engine, innovation efforts may splutter and fail. A related implication is the need for the ability to ride across the different phases of the product life cycle. Given the price sensitivity of consumers, innovators in emerging markets can rarely recover the costs of their innovation efforts through premium pricing in the early stage of the product life cycle. Returns on exploration will come only through exploitation of the innovation across the multiple stages of the life cycle. Process innovations and incremental improvements will be necessary to capture the value created by product or format innovation. And the ability to target and serve mass markets with a focus on affordability will be necessary to create the volumes to underwrite the costs of innovation. This only reiterates the need for ambidexterity across functions and activities in the firm.

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Emerging market local firms have a natural advantage of being located in the markets they serve. But converting that natural advantage into a well-embedded capability to understand consumer needs, identify opportunities and launch appropriate products and services requires structured and ongoing market exploration. Firms in emerging markets would do well to build systematic market exploration capabilities as demonstrated by the leaders in this study. Issues for Further Research What are the organizational designs, management systems and mindsets that facilitate the high degree of ambidexterity displayed by emerging market leaders? This important question remained outside the scope of this study because we focused on the innovation strategies of companies, and used secondary data. But this would be a crucial question for future research. There is evidence slowly emerging that local leaders in emerging markets are managed differently (e.g. Cappelli., et.al., 2010), and this stream of work needs to be pursued more rigorously to link management practices to innovation strategy outcomes. From this study, it is clear that emerging market leaders are innovative. But, their innovation is not reflected in the traditional measures of innovation input and output such as R&D intensity and patents. The number of patents or patent citation analysis reveals technology exploration and exploitation. However, often, emerging market companies are explorative in the market sense, experimenting and creating new business models. These are not captured by the traditional measures. Therefore, there is a need to develop measures that can accurately measure and reflect innovation in the emerging market context. Limitations of this Study Our study is based on just five companies that have been local leaders in their respective industries. The innovation strategies followed by these companies may not cover the complete gamut of innovation strategies followed by emerging market leaders. Further, the companies in this study represent just one country, and a limited span of industries. Further research is required to examine whether companies from other industries and other geographies follow similar innovation strategies. To that extent, the findings of this study have limited generalizability.

References Benner, M. J., and M. L. Tushman. 2003. “Exploitation, Exploration, and Process Management: The Productivity Dilemma Revisited”. Academy of Management Review, 28, 238–256. Bercovitz, J.E.L. and M.P. Feldman. 2007. “Fishing Upstream: Firm Innovation Strategy and University Research Alliances”. Research Policy, 36, 930-948 Biocon Ltd., 2004, 2005, 2007, 2008, 2009, 2010, 2011. Annual Report. Biyani, K. 2007. It Happened in India. Rupa, New Delhi. Bonanno, G. and B. Haworth. 1998. “Intensity of Competition and the Choice Between Product and Process innovation”. International Journal of Industrial Organization, 16(4), 495–510

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