innovation strategies in emerging markets

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 emergingmarkets? What innovation strategies have these firms followed? This paper takes advantageof a natural experiment – the deregulation of the Indian economy – to investigate thesequestions. We compare the innovation strategies of five local market leaders in India ondimensions related to exploration and exploitation, internal and external sources, technology-push and market-pull and product and process innovation. This study establishes thatinnovation plays a key role in the leadership position attained by local leaders. These firmsdisplay a high degree of ambidexterity in both exploring and exploiting in parallel, an approachthat is required to provide speed of response. External sources are tapped for knowledge andideas, and this learning is integrated with internal innovation. Market exploration, particularlythe development of products, services and business models that allow the companies tomeet the affordability criteria of the mass market, plays an important role in the innovationstrategy of these companies.

Introduction

Emerging market economies are low-income, rapid-growth countries using economicliberalization as their primary engine of growth (Hoskisson et al., 2000). Today’s large emergingmarkets such as China, India and Brazil are expected to be the growth markets in theforthcoming decades (Wilson & Purushothaman, 2003). In many emerging markets, therewere expectations that local companies would find it difficult to hold their ground becausethey lacked adequate resources and capabilities (Dawar and Frost, 1999), and were not trulycompetitive. Lower trade barriers and import tariffs would make them vulnerable to cheapimports. Multinational companies with strong financial and technological resources, anddifficult-to-imitate brand equity would dominate the local market.

However, in emerging markets, some local firms have not only belied these fears but eitherretained leadership positions or gone on to become market leaders. Some have even establishedstrong 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 ManagementBangalore, Bannerghatta Road, Bangalore 560076, India. [email protected]

22 ASCI Journal of Management 41(1) September 2011

such “local leaders” has been studied from multiple perspectives, one under-researchedarea has been the role of innovation strategy in their evolution.

An examination of conventional innovation indicators - such as R&D intensity and patentingactivity - does not give the impression of a strong innovation strategy in these firms. Forexample, the Indian company with the largest number of US patents granted to Indiancompanies over a 14-year period from 1995–2008, Dr. Reddy’s Laboratories, averaged justseven US patents a year (Krishnan, 2010:54). However, the fact that these local firms haveattained and retained leadership positions in the face of Multinational competition indicatesthat they are innovating, perhaps in ways that are not captured by traditional innovationmeasures.

In this paper, we aspire to investigate this phenomenon. We use the natural experimentcreated by the opening up of the Indian economy over the last two decades to explore whatrole innovation played in the emergence of these local market leaders by identifying theirinnovation 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 acornerstone of competitive strategy. It is defined as the development and implementation ofa new idea, be it a new technology, product, organizational process, or arrangement (Schroederet al., 1986). Bercovitz and Feldman (2007) more simply define it as the ability to createeconomic value from new ideas. Extensive research has established the importance ofinnovation beyond doubt. The question now is no longer whether to innovate, but whatparticular innovation strategy to pursue (Gronlund et al., 2010).

Innovation Strategy is multidimensional and addresses what a firm innovates and how itinnovates. 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):

� 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 spursnew discoveries, while exploitation refines current capabilities (Bercovitz and Feldman, 2007).Early studies on exploration-exploitation treated them as alternatives (March, 1991), withfirms opting for one strategy at the expense of the other. However, more recently, the dominantview is that firms need to achieve a balance between the two, leading to the concept ofambidextrous 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 notimply a balanced exploration-exploitation strategy at the subunit (Gupta et al., 2006) andindividual levels (Raisch et al., 2009). Gupta et al., (2006) argue that a firm could have adominant explorative or exploitative strategy in different parts of the value chain and still

Krishnan and Jha Innovation Strategies in Emerging Markets 23

achieve ambidexterity at the organizational level. Citing the example of Cisco, they elucidatehow the R&D function can be predominantly explorative while manufacturing, sales andservice can remain exploitative. Therefore, formulating an innovation strategy involveschoosing the right mix of explorative and exploitative activities in various parts of the valuechain to achieve the required balance at the Organizational level.

The second dimension is market pull versus technology push strategy. Market pull strategyis the propensity of a firm to identify and respond to market impulses effectively and therebyachieve commercial success. Technology push strategy is the propensity to incorporate newtechnologies 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 hypothesisand others favoring technology push hypothesis (See Chidamber and Kon (1994) for a detailedreview). Chidamber and Kon (1994) argue that the conflicting results are due to differencesin problem statements and research constructs. Another reason for inconsistent findings isbecause market pull – technology push strategies are contingent upon whether the firmoperates in the B2B space or the B2C space (Brem and Voigt, 2009). Since there are severalexamples 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 needsand embody it in new production technology i.e., achieve ‘matching’ between technologyand market.

This technology push-market pull dimension can also be subsumed under exploration-exploitation. As Gupta et al. (2006) note, a firm may be predominantly explorative or exploitativein different parts of the value chain. Based on this, we can say that market-pull strategyindicates an explorative strategy in the downstream parts of the value chain while technology-push 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 ofknowledge. Strong global competition and rapid technological changes have necessitatedfirms 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 someof the largest innovation-active organizations to generate all the necessary knowledge withinthe firm boundary (Cassiman and Veugelers, 2006). Chesbrough (2003) terms this phenomenon‘Open Innovation’. Accessing external knowledge is not an imperative for every companyand every innovation but is contingent upon globalization, technology intensity, technologyfusion and new business models (Gassman, 2006; Lichtenthaler and Ernst, 2009). The externalsource of knowledge might be another firm, a university or a government laboratory (Bercovitzand Feldman, 2007). Further, the external knowledge thus accessed may be a substitute tointernal knowledge or complementary to it (Love and Roper, 2009). In sum, the decision totap into external sources of knowledge, the type of knowledge sought and the partnerschosen to source that knowledge is contingent upon firm level factors as well as macrofactors 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


innovation is found to be contingent upon firm factors such as the firm size (Cohen andKlepper, 1996), firm strategy (Utterback and Abernathy, 1975) as well as the industry’scompetitive landscape (Bonanno and Haworth, 1998; Boone, 2000). More recently, the conceptof business model innovation (Chesbrough, 2007) has gained traction and it involves bothproduct 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 balancebetween seemingly incompatible pursuits, taking into account the firm’s overall strategy aswell as the competitive landscape and the broader environmental factors. The studiesexamining innovation strategy of firms discussed in the preceding paragraphs are in thecontext of developed markets. Emerging markets provide a new context to examine how thedifferent dimensions of innovation strategy play out.

Innovation in Emerging Markets

Emerging market economies have high growth potential but are characterized by highenvironmental 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 thatis upwardly mobile (Prahalad and Lieberthal, 1998). As a result, the strategies and businessmodels that work in the developed world will serve only the handful of rich in emergingeconomies (Prahalad and Lieberthal, 1998; London and Hart, 2004; Wright et al., 2005). Inorder to be successful in emerging markets, firms need to build business models particularlysuited 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 marketposes a unique challenge, we found few studies that have examined innovation strategiescomprehensively in this context. Iyer et al. (2006) based on their understanding of the Indiancontext propose that incremental innovations (exploitative) may be more appropriate in anenvironment with poor infrastructure for commercialization. Li and Atuahene-Gima (2001) intheir study on new technology ventures in China found that a product innovation strategy ismore appropriate in a turbulent environment, which is characteristic of emerging economies.

There are also studies that have looked at the evolution of technological capability (orinnovation capability) in the “newly industrializing country” context. For instance, Dahlman,Ross-Larson and Westphal (1987) identified acquisition of technological capabilities as criticalto competitiveness and argued that this can be understood as a learning process. To startwith, firms need a production capability – the ability to run a plant that produces a particularproduct. 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 investmentcapability – 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 themanufacturing infrastructure to produce these products.

Forbes and Wield (2002) extended the work of Dahlman, Ross-Larson & Westphal (1987) tofocus on value addition by the enterprise, again based largely on the development oftechnological capabilities by the firm. They proposed a sequence of: learn to produce; learnto 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.


Each of the studies above examines different dimensions of innovation strategy but we failto get a complete picture of what a successful innovation strategy in the emerging marketcontext 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.

• 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.


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 isappropriate (Yin, 2003: 13). We adopt a multiple case study approach that will allow us to doa literal replication across cases (Yin, 2003: 47). We also chose cases from different sectorsso that we can contrast across cases (i.e., theoretical replication), to factor in the industryeffects.

We have chosen cases from three different sectors – Pharmaceuticals, Automotive and Retail.Pharmaceuticals and Automotive are the top two spenders on research and development inIndian industry accounting for 45% and 17% respectively and between them account foralmost two thirds of the R&D spending by industry in India (DST, 2009). Organized retail isan emerging sector and presents an interesting area of study.

The five companies chosen for the study are local (decision-making is clearly controlled byinterests based in India) companies that are market leaders in India. By market leader, wemean that the company is among the top three companies by market share in one of themajor industry segments in which it competes, or it is has been recognized by credibleexternal agencies as an industry leader. Three of the companies studied come from theAutomotive and Pharmaceutical industries. Tata Motors and Bajaj Auto are from theautomotive sector, but with different emphases. Tata Motors is India’s leader in commercialvehicles (trucks), and #3 (by volume) in the car industry. Bajaj Auto is the number 2 player inthe 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 studyare Titan Industries (India’s number 1 watch manufacturer and an emerging leader in jewelleryand retail), and Pantaloon Retail, a leading multi-format retailer.

For each company we present an in-depth case study that describes major innovationinitiatives of the company in the context of its history and evolution. These case studieshave been developed based on secondary data and published information and are part of alarger study of innovation strategies for competitiveness in the Indian market undertaken byone of the authors. The rich description in each case study allows us to derive the innovationstrategy of the company. We then do a cross-case comparison to answer the central questionof this study: What innovation strategies help local companies in emerging markets competesuccessfully?

In the following sections we present case studies of the innovation strategies of the fivecompanies. Following the case studies, we identify patterns across the innovation strategiesof these firms. We conclude with a discussion of these patterns and implications for futureresearch.

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 sprungto international attention with the announcement of the Tata Nano, the world’s lowest pricedcar, in January 2008. In this case, we focus on Tata Motors’ innovation strategy in the carbusiness 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).


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) in1945. Telco commenced the production of trucks through a technical collaboration withMercedes Benz in 1954. After the expiry of this collaboration agreement in 1969, Telcostarted designing, developing and manufacturing trucks on its own. Telco set up its researchand development in 1959. It had two research centres in India – one at Jamshedpur thatfocuses on the improvement of components and aggregates and an Engineering ResearchCentre at Pune set up in 1966. Work done by the Pune Centre resulted in Telco getting theDSIR National Award for R&D Effort in Industry in 1999 and National Award for SuccessfulCommercialization of Indigenous Technology for the Indica in 2000.

Under its legendary chairman, Suman Moolgaonkar, Telco built strong engineering capabilitieseven though these could not be satisfactorily exploited due to the licensing regime of thegovernment. The broadbanding policy for the automobile sector announced in the mid-1980s freed Telco from this constraint. Telco was able to prove the strength of its design andengineering capabilities by competing successfully with Indo-Japanese ventures such asSwaraj Mazda, Allwyn Nissan and DCM Toyota in the newly emerging Light CommercialVehicle segment thanks to its rugged products, simple technology and strong service network.Telco’s first successful internally developed product was the Tata 407 light commercialvehicle launched in the late 1980s.

Following the liberalization of the Indian economy in 1991, Telco entered the car and utilitysegments as well with products such as the Estate (a stationwagon), Sierra, and Sumo (avery successful utility vehicle used in both urban and rural India for multi-passengertransportation). These products built on the capabilities Telco had built in the light commercialvehicle arena. For example, the Estate and Sierra were built on the chassis of the 207 lighttruck. The car market entry leveraged its existing technology platform developed for theLCV business to create two “car” models for the Indian market and used these to learn moreabout the car business. This involved exploitation of an existing technology platform, butexploration 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 throughthe Indica, launched in 1998 based on a decision taken in 1995. The Indica was intended tocompete in the “entry level” car market in India, targeting cost and value-conscious buyersinvesting 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, TataMotors managed the product development at a system design and integration level andinvolved 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 designand 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 externalsources for most of the knowledge and innovation and inputs. The innovation activity wasbased more on market pull rather than technology push.

The Indica emerged as an important competitor in the entry level market thanks to its lowoperating costs. It was (and is) particularly successful with taxi operators. Telco subsequently


launched petrol versions of the Indica targeted at individual consumers. The Indica V2launched in 2001 overcame many of the niggling problems that plagued the original Indicamodel, indicating that the company had substantially matured on the process front. Later, asedan variant on the same platform called the Indigo was launched in 2002, and a stationwagon model, the Indigo Marina was launched subsequently. Since then, Tata Motors haslaunched several variants on this platform including a stretch version targeting higher incomecustomers and enhanced the fuel efficiency of its core Indica model, claiming by 2011 tohave the most fuel efficient car on Indian roads. The company has introduced a series ofmodels perfecting and refining the capabilities acquired from the initial set of exploratoryactivities 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


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 theexecutive segment with nearly 60% market share in 2007. Bajaj Auto was the second largesttwo-wheeler company in India in financial year 2009–10 and had sales of Rs. 119 billionduring this year.

Bajaj Auto was a major player in scooters, selling scooters from 1945 and manufacturingthem since 1959. Historically, Bajaj dominated the scooter market. Even till the mid-90s, themainstay of Bajaj was the long running Chetak, which was based on a 25-year old Vespamodel. Bajaj focused on adaptive changes to Chetak, e.g., developing a 150cc engine whichwas 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 motorcyclesin 1985, having signed a technical collaboration agreement with Kawasaki of Japan to produce100-cc two-stroke motorcycles. Since the company did not have expertise in the motorcycletechnology, it explored technology from external sources. The first product was the KB 100launched in 1986, which performed poorly in the market. Kawasaki’s primary expertise lay inmore 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 performancein the market. A modified version was soon launched in the market, which had a better salesperformance. But, by the time Bajaj was able to adapt the Kawasaki technology to competein 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 marketto four-stroke vehicles. Though Bajaj’s first four-stroke bike launched in 1991 offered excellentfuel economy, it was unable to make a significant dent as Hero Honda re-styled its own biketo protect its market. The Bajaj Kawasaki partnership continued to design and launch newmotorcycles 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 effortat product innovation exploiting its existing technological capability met with limited success.

In 1999, Bajaj launched a green-field manufacturing facility, incorporating principles fromthe Toyota production system. The team setting up the new facility also launched a freshinternal product development effort in competition with the Kawasaki-Bajaj collaboration.While the collaboration team was working on the 175cc Kawasaki Bajaj Eliminator, the internalBajaj 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 two-thirds the price, and became Bajaj’s first blockbuster bike. The Pulsar came out of the largeinvestments 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).


and innovative features like Digital Twin Sparkplug Ignition (DTS-i). Pulsar was developed incollaboration with Tokyo R&D, a design studio specializing in automotive R&D. The DTSitechnology incorporated two spark plugs in the combustion chamber. This generates twopoints of combustion in the engine, and allows quicker and more efficient combustion, andhence better power, fuel efficiency and lower emissions. Bajaj claimed to be the first in theworld to incorporate twin-spark ignition into small bore engines (i.e., less than 600cc), andwas granted an Indian patent for this invention.

Thus, Bajaj established its presence in the motorcycle business through a combination oftechnological and market exploration. Recognising an opportunity provided by changingdemographics that suggested a market for a more powerful yet affordable bike, Bajaj innovatedon engine technology to create the DTSi-powered Pulsar. This came out of a combination ofexternal and internal R&D. The launch of Pulsar went hand in hand with a new factory thatused new manufacturing processes – the product innovation was supported by processinnovation.

Bajaj soon launched the 175cc Avenger, which was the Kawasaki Bajaj Eliminator fitted withthe cheaper, more powerful and more fuel efficient Bajaj DTS-i engine. The dual success ofPulsar and Avenger made the executive segment a stronghold of Bajaj. Bajaj continued itscollaboration with Kawasaki, with Bajaj having developed competencies complementary toKawasaki’s.

The impetus for R&D continued, with Bajaj investing about 1-1.4% of its sales every year onthe activities during 2005-2010. The firm developed new features such as ExhausTEC.ExhausTEC stands for Exhaust Torque Expansion Chamber. The technology uses a smallchamber connected to the exhaust pipe to modify back-pressure and other characteristics ofthe engine. Bajaj claimed significant improvement due to ExhausTEC in low/mid-rangetorque 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-Itechnology. The R&D infrastructure was upgraded in the areas of design, CAE, prototypeand testing. It enhanced its digital computational capabilities along with the ability to prototypeand 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 alsocommissioned 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) aswell as executive segment bikes (Pulsar 180cc, 200cc and 220cc). Bajaj used its DTSitechnology to create a whole range of bikes (technology push to address different marketniches). It simultaneously explored other technologies to improve the bike’s performance. Inother words, these products were developed using a combination of internal and externalexploration, 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 industrialenzyme 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.


evolved into a biopharmaceutical company. Biocon had standalone revenues of Rs. 15.9billion 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, oneof India’s first contract research services companies in 1994. The company’s formal entryinto the biopharmaceutical industry happened in 1998. Biocon’s strategy was to target ActivePharmaceutical Ingredients (APIs) with high technology or regulatory barriers but good marketpotential where they could use their core fermentation expertise. The first such drug developedwas 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 approachwas immunosuppressants. Proprietary process technologies were scaled up to create largemanufacturing facilities for these drugs (Biocon, 2004). By 2007, the company had becomethe largest manufacturer of immunosuppressants in India.

Around 2000, the company started R&D on the first Pichia Pastoris-derived recombinanthuman insulin. The creation of a recombinant human insulin manufacturing facility in 2004gave the company the twin advantages of a microbial fermentation capability and large-scale chromatographic purification of injectable grade therapeutic proteins (Biocon, 2005).Insugen, a formulation based on Biocon’s recombinant human insulin, was launched in theIndian market in November 2004 after necessary approvals. The recombinant human insulinexperience enabled the company to undertake the development and manufacture of otherbiosimilars

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 researchcompany with laboratories, patient registries, and the capability to undertake trials fromPhase I to Phase IV (Biocon, 2004).

In 2002, Biocon decided to enter the new drug development arena (Biocon, 2008). The strategywas to use the profits generated by the generics business (statins, immunosuppressants) tofund innovation-led drug development programmes. The company intended to manage therisk 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 toxicityproblems), and using its integrated biopharmaceutical manufacturing facilities to be able todevelop proof-of-concept quickly and then scale up manufacturing (Biocon, 2005).

Since advanced fermentation technologies (particularly for mammalian cell expression) arecritical to the development of Monoclonal Antibodies (MAbs) – targeted new therapies forcancer 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 intolarge scale manufacture. Towards this end, the company entered into collaboration withCIMAB SA, a Cuban organization for technology transfer and subsequently set up a jointventure with CIMAB, Biocon Biopharmaceuticals. The company also sought to improvemanufacturing efficiencies through better yields and quicker turnarounds (Biocon, 2004).The first MAb-based drug to come out of the collaboration with CIMAB – an antibodyagainst 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


the “first competitively priced, anti-EGFR humanized MAb for cancer made commerciallyavailable anywhere in the world” (Biocon, 2007). During 2007-08, T1h, an antibody forrheumatoid arthritis developed under the programme with CIMAB, entered Phase 2 trials(Biocon, 2008). In 2009–10, Biocon bought out the stake of CIMAB in BioconBiopharmaceuticals

Biocon commenced development of a proprietary oral insulin drug in 2004. It entered into apartnership with Nobex, a US-based company, to have access to its proprietary conjugatedpeptide delivery technology for oral insulin. In March 2006, Biocon acquired the intellectualproperty assets of Nobex, thus giving it an end-to-end ownership over its oral insulin productdevelopment. The company’s oral insulin drug IN105 entered phase 1 clinical trials during2005-06 and were successfully completed in 2007. Unfortunately for Biocon, it suffered asetback in January 2011, when IN 105 did not meet its targeted therapeutic effect in Phase3 trials. The company attributed this setback to a high placebo effect arising from frequentblood glucose self-monitoring and expressed optimism that there was still a future for thedrug (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 theprestigious Karolinska Institute of Sweden, Pfizer (a global leader in the pharmaceuticalindustry) 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 innovationwithout access and affordability is like therapy without patients. In 2009, the companydeveloped an affordability index that showed how much cheaper its drugs were thancomparative molecules in other markets – on this scale, BIOMAB EGFR was available toIndian patients at 50% less than global comparators.

By 2011, Biocon had become a more domestically-focused pharmaceutical company withstrong branded formulations. Exports constituted 40% of sales in 2010–11, and had steadilyreduced from 62% of sales in 2004–05. R&D intensity fluctuated between 5 and 8% duringthe same period.

We can see that Biocon’s entry into the pharmaceutical business was enabled by exploitingthe fermentation capabilities it had developed through its enzyme business to produce statinsand immunosuppressants. Market exploration was initially limited as the company sought tosell these drugs as bulk drugs or APIs to existing pharmaceutical companies.

Biocon’s entry into modern biopharmaceuticals came through its internal exploration of anovel process to produce recombinant human insulin. Subsequently, the company had toexplore how to scale-up manufacturing processes as well as enter into formulations in orderto launch its own branded formulations in the Indian market.

Biocon used external alliances to complement exploitation of its own fermentation technologycapabilities for manufacture of biopharmaceuticals with the exploration of new molecules.The most successful manifestation of this was the development of EGFR in conjunction withCIMAB of Cuba.

The company aspires to use its own exploration skills combined with knowledge sourcedexternally (in this case through the acquisition of Nobex) to produce a novel oral insulin


drug. Market demands are playing an increasing role as well, as the company has chosen atherapeutic area (diabetes) that has a large number of patients in India. With the formationof an India-focused drug business in 2007, Biocon underlined the importance of a morecustomer-driven (market-pull) based formulation business in India.

Throughout the history of Biocon’s evolution in the pharmaceutical industry, we see processinnovation in the form of development, scaling-up and improvement of fermentation-basedmanufacturing processes, a key differentiator for Biocon. As a newcomer to the pharmaceuticalindustry, Biocon also had to learn (explore) all facets of the regulatory and quality certificationsrequired. The launch of two subsidiaries, Syngene and Clinigene, facilitated exploration andlearning 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 marketshare of 65% in the “organized sector” (Titan, 2007) and is a major national player in thejewellery 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 IndustrialDevelopment Corporation. Since its inception, Titan has been a pioneer. It focused on quartzwatches (rather than mechanical or automatic watches which were the mainstay of its maincompetitor, HMT), rapidly expanded its portfolio from 200 models to 850 models in a shorttime using an in-house product development cell, built its own retail network focusing oncreating a distinctive shopping experience, used non-conventional retail outlets, integratedbackwards into critical components required for watch manufacture, and rapidly expandedcapacity. It used advertising extensively to create a strong brand. It entered the internationalmarket in 1991. The company launched jewellery and jewellery watches under the brandname Tanishq in 1995 (Ramachandran and Lavanya, 1995) on a plank of purity and qualityand 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 jewelleryon instruments available in the store. Titan has been a market explorer – experimenting andestablishing 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 in2005–06 whereupon it entered a phase of accelerated growth. The growth driver was thejewellery business that increased in sales from Rs. 7.91 billion in 2005-06 to Rs. 35.04 billionin 2009–10; during the same period watch sales increased from Rs. 6.55 billion to Rs. 10.26billion.

Titan attributes its rapid growth to exploration of new customer segments, introduction ofinnovative new products, and rapid growth of the retail network. This is backed by strongbrands – both Titan and Tanishq are the most admired brands in their categories accordingto national surveys (Titan, 2007). Titan has introduced several new brands almost every yeartargeting 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 theyouth, introduced a new upmarket brand of Jewellery, Zoya and launched Xylys, a Swiss-

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


made premium watch to tackle competition in the premium watch segment. A combinationof consumer insight and design skills has enabled Titan to sustain this pace of product andbrand innovation.

Underlying Titan’s brand and product innovation efforts are its Design Studio in Bangalorethat 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 atthe 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 nohands in the world. The following year, Titan created expertise for tiny watch movements.Titan has exploited its precision manufacturing capability, originally developed for watchesthrough a technical collaboration, and has enhanced it through incremental innovations andadoption of new technologies. In 2009–10, the company claimed a first in the watch industryfor using automation with robots in the machining line, thereby increasing manpowerproductivity by 65% (Titan, 2010). Though Titan has innovated technologically, the fulcrumof 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 just0.08% of sales turnover in 2009-10 (Titan, 2010).

Titan’s innovation process has largely been internally-driven, based on a strong marketingdepartment and an internally-created design department. These have been complementedin recent years by greater openness and systematic scouting of external ideas through itsHong Kong office. The Hong Kong sourcing office was set up in 2008 and sources not onlycomponents for Titan’s products, but also spots and delivers new trends. In 2009–10, ahundred new products were developed through the Hong Kong sourcing office. This officewas instrumental in the launch of Titan’s Superfibre watch priced at Rs. 275 that is anaggressive attempt to address the mass market for watches and is Titan’s first major productin the sub-Rs. 500 category (Titan, 2009).

To ensure a steady flow of jewellery designs and yet retain high quality standards, Titan’swatch 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 jewelleryproducts in 2007–08 (Titan, 2008).

The company has been continuously upgrading its manufacturing and supply chain capabilitiesto 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 ofManagement” in 2009–10 to “create, nurture and realize ideas into action through peopledevelopment” (Titan, 2010). The integrated supply chain management system of the jewellerybusiness enabled the jewellery business to report a return on capital employed in excess of90% in 2009–10 (Titan, 2010).

Titan attributes its success in the jewellery business to its ability to manage the entire valuechain from design to manufacture to sale to delivery with high quality and reliability andbelieves that the first mover advantage it has achieved through the creation of this integratedmodel will remain unchallenged for some years to come (Titan, 2010).


In 2006–07, Titan set up its first prescription eyewear store under the brand name TitanEye+. By 2009–10, the company had 82 eyewear stores across the country and had decidedto integrate backwards into lens manufacturing. Another new retail concept of Titan wasthe Helios watch store, a high-end multi brand watch chain launched in 2008–09. Twopremium jewellery stores branded Zoya were launched in Mumbai and Delhi in 2008–09. Tocapitalize on its expertise in the retail business, Titan set up an Integrated Retail ServicesGroup in 2008–09 to centrally coordinate the renting of retail infrastructure and trainingefforts for the company’s diverse retail businesses. The latter helped transfer learning acrossthe brands of the company.

In sum, we see a dominant market exploration strategy that is supported by a highly effectivetechnology exploitation using a combination of internal and external sources. We also seethat alongside product innovation, the company has innovated in its supply chain andmanufacturing processes to meet market needs.

Not all initiatives of Titan and Tanishq have been successful. The launch of Titan watches inEurope in the 1990s was unsuccessful and the company later withdrew from the Europeanmarket. In 2007, the company launched its jewellery business in the United States throughtwo 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 salesturnover of Rs. 97.87 billion in 2009-10 from 13.25 million square feet of operational storespace. In 2007, the company was awarded the International Retailer of the Year award bythe 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. Manzwas initially in the garment manufacturing business and made readymade trousers underthe brandname “Pantaloon.” The founder of the company, Kishore Biyani, wanted to positionthe company as a fashion house and in order to expand the size and reach of the businesscreated a pan India network of franchise stores under the brand of “Pantaloon Shoppe” in1991. The company then decided to make the Pantaloon Shoppes a one-stop point for all theapparel needs of men. The company created different brands for different products andessentially the Pantaloon Shoppes sold private labels under a franchise model. The guidingprinciple of the Pantaloon business was to provide ordinary people with what only the richcould afford. The products were priced for lower and middle price customers, and thepositioning was on a “value for money” plank. To attract more customers, Pantaloon investedheavily in advertising, and tried out innovations like the first denim exchange programme inIndia. At its peak, there were 72 Pantaloon Shoppes across India. However, growth sloweddown as the franchise model faltered due to the absence of a standardized model, clearagreements, 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, in1996, Pantaloon decided to set up its own large format retail stores. The first such store, a10,000 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.


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 thecompany. The company believed that by having its own brands, the company could spotemerging trends early, and offer products to meet these trends before other retailers. By theend of 1999, there were 13 Pantaloons mega stores across India. Over time, the Pantaloonbrand has shifted its focus to the young, upwardly mobile, aspirational customer, and seeksto provide “fast fashion.”

The company was the pioneer of the hypermarket concept in India with the launch of BigBazaar in Kolakata in September 2001. The Big Bazaar model was a hypermarket conceptcreated for India rather than a blind imitation of hypermarkets in the west. It was designedto combine the look and feel of an Indian bazaar with the convenience of organized retailshopping. Some of the distinctive features of the initial Big Bazaar model were: (1) locationin crowded areas well-connected by public transportation rather than suburbs; (2) an effortto retain the chaos and feel of a bazaar; (3) sourcing through consolidators identified fordifferent product categories; (4) concerted efforts to bring in customers who were apprehensiveof shopping at modern retail outlets; (5) sale of products in a way that is aligned to thebuying habits of the Indian housewife such as the opportunity to get grain freshly ground, orinspect staples and grains before purchase; (6) customization to local market needs. In August2002, the company launched Food Bazaar within Big Bazaar stores to sell vegetables andfruits. 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 ofthe store to managing the back end. Big Bazaar has an extensive network of small andmedium 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 pacewith its growth, the company raised a private equity fund called Indivision to support itspartners’ growth initiatives. The company also believes that indigenous supply chains thoughlacking the sophistication of the supply chains in developed markets have the potential tomeet the needs of Indian business at low cost. In 2005, the company became the first retailerin India to use RFID tags to track inventories in its warehouses. The following year, thecompany implemented SAP, an enterprise resource planning system, across the company.

In an effort to respond to changing customer needs for excitement, the company createdanother retail format, a destination mall, under the brandname “Central” in 2004. Centralseeks to offer a seamless shopping and entertainment experience, and is largely located inbig cities with a sizeable population of youth with money to spare. Unlike the Pantaloonstores, the Central Malls have a sizeable presence of other big brands including multinationalbrands.

In subsequent years, the company (and its parent Future Group) has experimented with twodozen different formats across ten lines of business and two distinct positioning – the valuesegment, and the lifestyle segment. These include food, fashion, furniture, consumerelectronics, and restaurants. Prominent retail brands are E-zone, Home Town and Depot. Inthe process, Pantaloon believes that the group is able to address 70% of a consumer’s shoppingneeds. Pantaloon has been successful in building several private label brands across thecompany. Pantaloon has also lent its experience to non-traditional retail formats – e.g. it hastaken a controlling stake in Mother Earth, a craft and artisan-based retail chain being set up


in large cities. The company has forged a deep professional relationship with Idiom, aBangalore-based design firm. Idiom has about 180 designers and has become a think tankand 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 addressthe mass, value conscious market. For instance, Big Bazaar set up a diversity tracking cell tostudy local customs and consumption habits. Founder Kishore Biyani himself is known tospend several hours of his time observing people’s behavior in diverse settings in an effort toget customer insights. Employees across the company are encouraged to come up with newideas and formats to meet the customer needs, and the company is willing to experimentwith 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 needsand cultures. Addressing the mass market is a stated theme of the innovation process, andconsiderable effort is expended on understanding the demographics and changing customertrends of the new middle class so as to be able to evolve value-based business models. Thecompany sources important technologies such as ERP and analytics processes from outsidebut external involvement in the core innovation process appears to be limited. Externalinvolvement 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 suggestionsand ideas from external consultants and its own employees but believes in rigorous testingof all new ideas.

Findings: Innovation Strategy across the Five Leaders

The five cases of Indian local market leaders clearly indicate that innovation has played animportant role in their growth:

� Tata Motors’ car business did not even exist before deregulation, but today it is oneof the top three players in the Indian car industry with products developed throughits own efforts and complementary inputs from external sources.

� Bajaj Auto was an “also ran” in the motorcycle industry well into the late 1990s, butthe Pulsar range of sports bikes designed by the company with proprietarytechnologies such as DTSi enabled it to dominate the executive segment and becomethe #2 player in the motorcycle industry.

� Biocon’s biopharmaceutical business did not even exist before 1998; today it isregarded as India’s top biopharmaceutical company based on its core fermentationbased production technologies and a combination of chemical drugs produced throughfermentation processes (statins, immunosuppressants), biosimilars produced throughnovel processes (recombinant human insulin) and new drugs such as EGFR createdthrough external collaborations.

� Titan sustained its leadership in the watches business through product innovation(launch of hundreds of new models), technological innovation (the world’s slimmestwatch), distinctive design capabilities and process innovation.


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

We find that all the five companies are ambidextrous and have used a combination ofexploration and exploitation. For instance, Biocon and Bajaj have coupled their explorationwith exploitation of their respective platforms – the DTSi technology in the case of Bajaj, andthe fermentation–based manufacturing processes of Biocon - to create a portfolio of productsto meet different market needs. Tata Motors has acquired new capabilities while at thesame time also leveraging existing technological capabilities to address a wide range ofmarket needs. Titan and Pantaloon have also scaled up their successful formats and productsto drive growth.

While the exploration capabilities of all the five companies have increased over time, thefirms differ in terms of where in the value chain they are explorative. Some firms are explorativein 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 developingcapabilities. But, technology firms (Biocon, Bajaj and Tata Motors) in particular have reliedheavily on external sources (through acquisitions and alliances) for complementing theirinternal capabilities. Retail firms are less reliant on external sources.

• Bajaj and Biocon appear to be the most exploratory in terms of technology with theirefforts on engine innovation and new biopharmaceutical entity innovationrespectively. Both of them have used a combination of external and internal sourcesof ideas and knowledge, though Bajaj has, over time, depended more on its owninternal technology capabilities. Biocon on the other hand has consistently usedboth internal and external sources to build capabilities.

• Titan and Pantaloon have been exploratory in the market sense, trying to understandemerging 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 usedtechnology to address emerging market needs as opposed to Pantaloon that hasused technology in a peripheral manner, only to support market needs.

• Tata Motors’ exploration has been relatively more balanced from a technology andmarket perspective, identifying new market segments (Nano) and engaging in iterativeexperimentation to design and optimize for that segment. The company has alsoused internal and external sources in equal measure. For instance, development ofNano involved leveraging engineering innovations from external sources whileinternally developing the capability to manage a cost-driven, participative innovation.

Figure 1 summarizes where each of the firms stand on these two dimensions – nature ofexploration and source of capability. The figure captures the predominant innovation strategyof 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 trendtowards products that are affordable to a large mass market. In all of the five cases, we seeaffordability emerge as an important plank of innovation:


• Tata Motors’ efforts focus on “value for money” and “low cost of ownership” cars toexpand the car market;

• Bajaj combines power and fuel efficiency to give a feel of a sports bike but at areasonable cost;

• As Biocon’s Indian formulation business grows, the focus is on affordable medicinesas demonstrated by its emphasis on the affordability index;

• Titan and Pantaloon both look at the mass market to achieve growth though theyachieve 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 explorationand 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, theywould have weak technological capabilities and hence the companies’ initial efforts wouldbe to build technological capabilities rapidly through exploration from external sources. Thisis supported by the Bajaj case where the firm collaborated with foreign firms to rapidlyacquire technological capabilities that it lacked.


We expected that where technological capabilities had already been created prior toderegulation through technology transfer, efforts would be to complete the technologyabsorption process and then build further on them through exploration both internally andexternally. 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


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.


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 thehigh degree of ambidexterity displayed by emerging market leaders? This important questionremained outside the scope of this study because we focused on the innovation strategies ofcompanies, 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 manageddifferently (e.g. Cappelli., et.al., 2010), and this stream of work needs to be pursued morerigorously to link management practices to innovation strategy outcomes.

From this study, it is clear that emerging market leaders are innovative. But, their innovationis not reflected in the traditional measures of innovation input and output such as R&Dintensity and patents. The number of patents or patent citation analysis reveals technologyexploration and exploitation. However, often, emerging market companies are explorativein the market sense, experimenting and creating new business models. These are notcaptured by the traditional measures. Therefore, there is a need to develop measures thatcan 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 respectiveindustries. The innovation strategies followed by these companies may not cover the completegamut of innovation strategies followed by emerging market leaders. Further, the companiesin this study represent just one country, and a limited span of industries. Further research isrequired to examine whether companies from other industries and other geographies followsimilar innovation strategies. To that extent, the findings of this study have limitedgeneralizability.

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