Innovation, in a traditional sense, will happen only with the corporate sponsorship both financially and strategically. When companies are facing economic downturns, it is no surprise that R&D department is usually the first facing budget-cut and thus it would have to scale down, causing innovation either halted, or at least slowed down to a certain extent. Alberto Di Minin from Sant’Anna School of Advanced Studies was giving a talk at Berkeley recently in “Open Innovation” class, presenting a really good counter-intuitive case where Fiat, the Italian auto giant, succeeded in securing the financial future through open innovation even during a downturn.
Quoting from President Obama: “the international company Fiat is the only route to survival for Chrysler”, he directly pointed out that, without the fruitful R&D in the past decade, Fiat could not possibly be in the place where it is today. In 1994, Fiat was facing a huge downturn; whereas it had to cut back on funding in corporate R&D (Fiat Research Center or CRF) almost 70%. However, CRF was not dead, and instead, it boomed and doubled its revenue in 2004. Why? The secret sauce was that CRF took the initiative to go out and gain access to external resources.
Strategy-wise, with the acknowledgement from corporate headquarters, CRF changed its mission to provide ‘competitiveness’ to its customers, which implied that CRF was then selling not only technology, but also the services plus the human capital that could come along with the technology.
First, a matrix structure was developed to find the right match between the technology and the client profile. Then, its next goal was to identify the “right” customers, develop the client relation and turn them into long term partners, which usually translates to “more trust” and “more profits”. With such good partner relations, CRF could be able to start transferring knowledge, or even people which usually come around technology transfer. This required a HR-oriented culture where competences and high turnovers were encouraged. With these former CRF employees disseminated into other partner organizations, they became the CRF advocates who would in turn bring in more businesses. This was a great ecosystem where both CRF and its customers were mutually beneficial.
Although the system was great, Fiat wasn’t perfect in running the system. Fiat did make a mistake by having the Intellectual Property (IP) exclusively owned by the headquarter who wasn’t aware of the potential impact of some core technology. This caused billions in potential revenue loss, although Fiat corrected the mistake later by changing the policy that CRF would have the right to own IPs.
Alberto explained in much detail about the ‘competitiveness’ selling model. He compared the model to the one preparing dinner for friends. Sometimes, clients might not know what they want, or even they know they want, CRF simply doesn’t know how to price it. This is like having ingredients in your shopping list, but you don’t know how to make the food. In order to make the food, you will have to know the features of the ingredients. Likewise, CRF would have to know more about clients before they could make a technology transfer. In this case, bottom-up planning was required, and researchers would have to carry multiple hats as project managers and marketers to make the technology transfer happen. But when food is prepared, maybe your friends are not satisfied, and they possibly want more: wine, sides, etc. The same case for clients, they might be willing to pay CRF to integrate CRF’s technology with their own system. Or even better, they might be interested in collaborating with CRF for future projects. Both open up an entirely new business space for CRF.
In this particular story about Fiat, the shortness in budget and the dismal future of the CRF raised red alerts for both corporate leaders and regular employees. This “tough-time” mentality enabled them to be more proactive: they are more concerned about the operational efficiency and R&D effectiveness; they are more willing to take initiatives going out and hunting for external resources. That’s exactly a good environment for innovation. But does this only happen during the downturn? Could the leaders be as tough and determined as they could be in the downturn? Could the corporate culture shift as smoothly and swiftly as it could in the downturn from a closed innovation mentality to an open innovation one?
2 replies on “FIAT – Innovation in a Downturn”
Car companies have always worked with outside suppliers. What was different here? Did they co-innovate with the suppliers (ie a true partnership), or did Fiat dictate what should happen?
Morten
The interesting thing here is that R&D division acted almost like a separate entity and they grew with their clients. It is not just a sell-buy model, instead it is more of a mutual-dependent model.