Acclaimed Czech author Milan Kundera once commented that, “Business has only two functions - marketing and innovation.” Whilst it may seem a brutally simplistic view, it’s a fair comment when one strips most businesses to their bare fundamentals, i.e. to develop and maintain a sustainable competitive advantage and to sell their product to as many of their target market as possible. To achieve this in the automotive industry, a commitment to innovation is essential.
Automotive Original Equipment Manufacturers (OEM) have historically invested heavily in building internal R&D capabilities. This has worked until the point where effective innovation has become too complex and expensive for companies to achieve wholly from within (Ili et al, 2010). Price erosion and shorter product life-cycles only make the impetus for innovation more aggressive and, thus, demand that innovation be as dynamic as possible. Adopting open innovation is a potential solution.
In this article, we look at how the automotive industry can utilize open innovation in an increasingly competitive and costly environment, identifying the drivers behind this environment, potential solutions and how to successfully adopt them.
Driving the Need for Change
A recent survey conducted by PwC found that strategic risks facing the automotive industry including urbanization, the shift and spread in global wealth, and other demographic changes, have meant OEMs have had to shift a gear to become more innovative. Highlights amongst eight trends outlined by a 2013 Ernst & Young survey were the need for greater collaboration between industry players and a redefining of automotive marketing by social media.
Italian researchers De Massis et al conducted a thorough case study-based analysis of Open Innovation in the European automotive industry, including renowned industry players Pininfarina and Robert Bosch S.p.A., and found that factors such as “technology fusion (i.e. the need of integrating different technologies in the final product - the car)” and “technology intensity” are what appear to “force companies to search for external sources of knowledge”.
A Potential Solution
Numerous reports and surveys have pointed to the same finding: the automotive industry needs to further engage external sources of technology and talent through models such as open innovation. PwC found that “with so many technologies competing for attention, automotive companies will need to look outside for some of the answers”. Similarly, De Massis et al concluded that widespread adoption of open innovation “is perhaps only a matter of time. With adequate protection mechanisms of IP, collaborations with competitors will not seem so risky”. And we are already starting to see a change. Ramírez-Portilla et al (2014) found that all ten major car companies they studied between 2005 and 2012 had made tangible, express commitments to open and collaborative innovation.
This collaborative approach can allow an organization’s innovation capability to grow and become more dynamic. However the automotive industry currently lags behind in its adoption of open innovation, with industries like pharmaceuticals and consumer goods leading the way.
Making Open Innovation Work
The R&D function cannot embrace open innovation in a ‘culture vacuum’ – there must also be change in the overarching corporate culture. Lang & Lindemann (2015) caution that, “a major obstacle for making the Open Innovation Information (OII) collected into products is the integration of the OII into the company [itself]”. While Accenture warns that too many companies are embracing Open Innovation without properly assessing the strategic imperatives thereof.
These trends in more open and collaborative innovation are morphing into another fast-evolving aspect of innovation in the automotive industry – co-creation. Another 2013 study by PwC titled Looking ahead: Driving co-creation in the auto industry commences by stating that, “OEMs are moving to engage stakeholders like never before using the collaborative power of co-creation”. This is the means by which OEMs provide channels for customers, dealers, employees and suppliers to proactively engage in everything from inputs on the interior design of vehicles to innovations in their engineering. Examples include Ford’s “Your Idea” platform, which received over 3,000 ideas from customers, and Toyota’s development of the 3rd-gen Prius - one of the most advanced hybrid cars in the world, which sought Prius owners opinions via an online discussion platform during the development process. PwC is of the firm opinion that, “Companies that successfully tap the feedback will be able to enhance products, create in-depth customer experiences and gain a competitive advantage.”
Peter Drucker famously called the automobile industry “the industry of industries” – no idle statement when one considers that the average vehicle has in excess of 30,000 components and parts. Every one of them requires innovation – consistently and persistently – such is the demands of this industry. That is why innovation must be open and extra-organizational. Open Innovation is not only the future - it’s the here and now, future success in the automotive industry will come from those who embrace it.