InternationaleJournalofBusiness&TechnologyLeadership

2012

Successful Entrepreneurship and Innovative Strategies in China: The Experience of BYD

Jane P. Wu, Professor, HSBC Business School, Ya-Ting Kuo,

Peking University National

Ph.D. Candidate, Dep. of Business Administration, Taiwan University

Abstract
BYD Company Limited (BYD for short), a Chinese IT and Auto corporation, drew global attention due to being the second largest mobile energy supplier in the world and a leading rechargeable battery manufacturer as well as auto maker. Its legendary founder and CEO, Wang Chuanfu, is appraised by Fortune as a combination of Thomas Edison & Jack Welch and a typical miniature of the Chinese entrepreneurs for the past 30 years. This article aims to analyze what BYDs success comes from. On one hand, the innovative R&D and production modules have created its competitive advantage with a solid core competence in the market. On the other hand, its internationalization strategy has facilitated a swift expansion capturing a large market share in a short period of time. By analyzing and integrating the results of case study, we find the importance of success factors for manufacturing industry in BYD. The main conclusions of this study are as the following: 1. The importance of successful entrepreneurship of the founder of BYD. 2. The importance of successful innovative strategies focused on "hardly imitative technology", "difficultly substitute product", and "more flexible organization".

Keywords: entrepreneurship; innovative strategies;

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1. Introduction In a world of ever increasing global economy, the idea of entrepreneurial leadership has become a crucial theme that leaders and managers need not only be aware of conceptually but also understand in order to be able to strategize and position for organizational viability. In order to succeed and make a competitive advantage for organization, the organization must set a vision that encourages growth, rewards risk taking and leverage innovation by adapting to the fluctuating global economy. The key factor to successful organization in the present competitive and dynamic environment is the need to adopt an entrepreneurial leadership seeking competitive advantage through continuous innovation by effectively identifying and exploiting opportunities in order to sustain and grow. However, little is known about how china's organizations develop their capabilities and learn through entrepreneurial leadership and innovative strategies. In many cases, it is clear from many studies that the entrepreneurial leadership and innovative strategies promote regional enterprises to turn into global enterprises. This article collects secondary data to understand the various aspects of how BYDs success is involved in the successful entrepreneurial leadership through innovative strategies . 2. Literature Review 2.1 Entrepreneurship According to Zhara et al., (1999), different scholars use different expressions to characterize entrepreneurship (e.g., Entrepreneurship , Corporate Entrepreneurship, Intrapreneurship, Entrepreneurship Posture, Entrepreneurial Orientation). However, contrary to the variety of expressions used to characterize entrepreneurship, there is consistency regarding entrepreneurships definition and measurement. Generally speaking, entrepreneurship based research usually focus on either Traits or Behavior. Gartner (1988) argues that the focus should be on what the entrepreneur does and not who is the entrepreneur. Behavior based research focus on the entrepreneurship process through the entrepreneur activities, that instead of referring to personal specific traits (Smart and Conant, 1994). In other words, entrepreneurship emphasize the entrepreneurial process (entrepreneurs carrying out new combinations) and innovativeness (Guth & Ginsberg, 1990). Besides, entrepreneurial competency refers to the sum of the entrepreneur's requisite attributes for successful and sustainable entrepreneurship (Kiggundy, 2002). According to Kiggundy, these attributes include attitudes, values, beliefs, knowledge, skills, abilities, personality, wisdom, expertise (social, technical, and managerial), mindset, and behavioral tendencies. Cunningham and Lischeron (1991) identified six schools of thought on entrepreneurship that explain what constitutes an entrepreneur. Of the six schools, three assert that entrepreneurial

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traits are innate and cannot be developed or trained in the classroom. The other three schools of thought hold that entrepreneurial skills and competencies can be acquired through formal training. From the findings of Cunningham and Lischeron (1991) and Rabbior and Lang (1996), team leadership is a very important entrepreneurial competency. In fact, starting an enterprise is dynamic process. Miller(1983) stresses the companys commitment to innovation, i.e. three related components: product innovation, proactiveness and risk taking. Product innovation refers to the ability of a company to create new products or to modify existing ones to meet the demands of current or future markets. Proactiveness refers to a companys capacity to compete in markets by introducing new products, services or technologies. Competitive aggressiveness is about competing for demand. Finally, risk taking refers to the companys willingness to engage in business ventures or strategies in which the outcome may be highly uncertain (Zahra & Covin, 1995). 2.2 Innovation The earliest definition of innovation comes from Schumpeter(1934). He thinks that the meaning of innovation which the main force of economic development is the firm use resources to fulfill the need of market by new productive way. Besides, Schumpeter (1934) states that innovativeness is the only entrepreneurship behavior that separates between entrepreneurships activities to non-entrepreneurships activities. Innovation relates to the pursuit after creative solutions through the development and improvement of services and products as well as administrative and technological techniques (Davis et al., 1991). Innovation reflects the firms tendency to support new ideas and procedures, which can end as new products or services Lumpkin and Dess (1996). Innovation is largely considered to be a positive, constructive, and productive change. Moreover, a more useful way to distinguish these constructs is to consider creativity as the ideation component of innovation and innovation as encompassing both the proposal and application of new ideas (West & Farr 1990). In the same vein, Porter and Stern (2001) have argued that companies must be able to create and commercialize a stream of new products and processes that extend the technology frontier, while at the same time keeping a step or two ahead of their rivals. Innovation can be described from a variety of perspectives, from a broad inclusive definition such as a process of bringing any new, problem-solving idea into use (Kanter, 1983), to a more outcome-based approach, where innovation is the process whereby new ideas are transformed through economic activity, into sustainable value-creating outcomes (Livingstone, 2000). Indeed, innovation is a complex process (Kline & Rosenberg, 1986) and the ability of an organization to recognize the potential of an innovation is itself not a simple process. Innovation characteristizes as the adoption of an idea or behavior that is new to the organization, where the innovations can be a new product, a new service, a new technology or a new administrative practice (Hage, 1999)

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Innovation can certainly be encouraged but cannot be directly created. Research on innovation has found that the most successful innovation is found to be based on strategy, is dependent on effective internal and external linkages and requires enabling mechanisms for making change happen, in a supporting organizational context (Tidd et al., 1997). The components of an innovative organization is presented in Table 1. Table 1. Components of an Innovative Organization COMPONENT KEY FEATURES Vision, Leadership Clearly articulated and clear sense of purpose and the will to Stretching strategic intent Top management commitment innovate Appropriate Organisation design which enables high levels of creativity structure Key individuals Promoter, champions, gatekeepers and other roles which energize or facilitate innovation Effective team Appropriate use of teams to solve problems. Requires working investment in team selection and building Continuing and Long-term commitment to education and training to ensure stretching high individual levels of competence and the skills to learn effectively development Extensive Within and between the organization and outside. Internally communication in three directions upwards, downwards and laterally. High involvement in Participation in organization wide continuous improvement innovation activity Customer focus Internal and external customer orientation. Total quality culture Creative climate Positive approach to creative ideas, supported by relevant rewards system a winners culture Learning Processes, structures and cultures which help institutionalize organisation individual learning. Knowledge management Source: (Tidd et al., 1997)

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3. Methodology 3.1 Research Structure This article collects secondary data in an effort to understand the various aspects that are involved in the success of entrepreneurship through innovative strategy. Secondary data was also used to acquire an overview of the company. This article depicts how BYD recognizes the opportunities and adjust the external and internal resources to transform a worldwide enterprise when industrial environment changes by integrating all kinds of secondary data. The following, Figure 1, is a diagram of the research structure.

Core Competence

Technology: Entrepreneurship of BYD Product: Difficultly substitute Continuing competitive advantage of BYD Non imitative

Innovative strategy of BYD

Organization: more flexible

Figure 1. Continuing competitive advantage of BYD 3.2 Case Study Methodology This article presents a longitudinal analysis by a single case company to discuss the dynamical process of the firm's development. Hinings(1997) thinks the qualitative research is suitable to analyze the dynamical process, when those process specially need the individuals interpretations. Case studies can be either single or multiple-case designs. Single cases are used to confirm or challenge a theory, or to represent a unique or extreme case (Yin, 1994). Single-case studies are also ideal for revelatory cases where an observer may have access to a phenomenon that was previously inaccessible. Single-case designs require careful investigation to avoid

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misrepresentation and to maximize the investigator's access to the evidence. These studies can be holistic or embedded, the latter occurring when the same case study involves more than one unit of analysis. Yin(1981) emphasizes the types of case study, including exploratory study, descriptive study and explanatory study. Firstly, exploratory study is to develop new issues to offer the references to the later research. Secondly, descriptive study is to describe the existing theory or expand a explanation of the theory. Thirdly, explanatory study is to discuss the relationship of cause and effect. According to the definition of case study and the finding from the literature, this article should be the descriptive study for the BYD case. Besides, the purpose of the article is to understand the strategically administrative present situation, and to offer the references to other relative industry. 4. Two Evolutional stages of Entrepreneurial Leadership and Innovative Strategies 4.1 The Entrepreneurial Leadership Wang Chuan Fu, the founder and CEO of BYD, majored in chemistry at the Central South University and went on to earn a master's degree in 1990 from the Beijing Non-Ferrous Research Institute. Upon graduation, he spent the first several years of his career as a government researcher, and, in 1995, he founded the BYD Company at the age of 29. Different from some managerial leaders, Wang himself is a chemist, a technician, and an expert in the industrial field. He takes part in almost every project and has some inventions himself. He is a workaholic and takes pride in his dedication to his work. He is also very decisive and risk-taking. For example, against managements opposition on the acquisition of Shaanxi Qinchuan Auto Company Limited, he insisted on going through with the transaction and time proof that it was a worthwhile investment. Furthermore, he is even daring enough to drink the battery fluid to prove the safety of his products. Wang has won the Most Creative Leader in the Asia-Pacific region title in 2004 and named the Most Predictive CEO by Chinese Car Newspaper in 2007. Charlie Munger, the Vice-Chairman of Berkshire Hathaway Corporation, even evaluated him like this to Fortune, This guy, is a combination of Thomas Edison and Jack Welch something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.1 It is the Wang Chuanfus powerful and visionary leadership that cultivated a distinctive corporate culture at BYD. BYD is short for Build Your Dream, which conveys the meaning

CNN news (http://www.rationalwalk.com/?p=1376)

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of helping all customers to realize their dreams. From the Wangs leadership, BYD complies with the principle of people-oriented human resource, respects personnel and trains the staff to establish a fair and competitive company. Furthermore, BYD is constantly committed to constructing a strong corporate culture and sharing its prosperity with all of its employees which is a direct reflection of the founders visionary leadership. BYD is devoted to developing a culture of equality, factuality, passion and innovation which are the core elements of its company culture. Also, cultivating a sense of family at the work floor, strong identity with product quality and dedicated work attitude are the main thrust of corporate culture spirit. Furthermore, it strives to realize a high retention rate through its vast opportunities in career advancement, excellent working environment, and its employees love for the company. Wang Chuan Fu with his entrepreneurial leadership has steered the entrepreneurial process and innovativeness. In addition, his entrepreneurial competency such as attitudes, values, beliefs, knowledge, skills, abilities, personality, and wisdom has attributed for the successful and sustainable technology and product innovations in BYD. 4.2 The Organizational Structure In general, the company has a product organizational structure with flat hierarchy. Each segment is responsible for the production, marketing and development for the products itself, and all of the managers of these 28 segments have only one leader, Wang chuan fu, the founder and president of BYD. All managers have to report to him directly and all of the critical decisions are made by him. Through this mechanism, orders are delivered and enforced with less distortion and higher efficiency. A summary of the organizational structure is presented in Figure 2.

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Figure 2. Organizational Structure of BYD

A1 sales department 1, A1 sales department 2, A1 sales department 3, A1 sales department 4, A1 sales department 5, A2 sales department 1, A2 sales department 2, A2 sales department 3, A2 sales department 4, A2 sales department 5, A3 sales department 1, A3 sales department 2 A3 sales department 3, A3 sales department 4, A3 sales department 5

Service management depattment1, technology department1, spare parts service department1, claims service department 1

The general manager

Service management depattment2, technology department 2, spare parts service department2, claims service department 2

Commercial Plan department, storage and transportation department, training department, advertising department, brand department

Channel development department, channel management department, marketing department, public relations department, online marketing department
Source: http://wenku.baidu.com/view/f02878da50e2524de5187e32.html

Therefore, Wang chuan fu gives all of his managers a close proximity or access to the critical resource for them to learn to produce effectively. In such a flat hierarchy of comprehensive delegation of competences, a decentralization of responsibilities occurs. This means that the founder of enterprise transfers directly essential competences and responsibilities to his managers and employees so that they are empowered to decide, instruct and control independently. Ultimately, it is important that the organization structure allows efficient internal activities and processes, promotes innovative strategies and supports a successful operating in the market. 4.3 BYDs research and development cost In china, the most creative technology comes from the grass root enterprises such as BYD. A summary of research and development cost from 2007 to 2010 in Figure 3, we realize that BYD's research and development cost increases every year. Hence, BYD can build non-imitative competitive technology from the increasing research and development cost.

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Figure 3. The Research and Development Cost of BYD

1500000 1000000 Research Cost 500000 0 2007 2008 2009 2010

Source: Annual report of BYD Since BYD highlights the R&D capability as the key to sustainable global leadership in the industry, it has built the T&E research institutes and research labs in different areas as well as a technical school situated in its industrial park. There are 28 segments in BYD now and these segments are established according to the Decomposition Module. One of its important core competencies is to utilize the cheap workforce to substitute the robotic arms used in Japanese assembly lines in an effort to minimize the cost by breaking every job down into basic tasks and apply strict testing protocols to control the quality. This business structure is presented in Figure 4. Figure 4. The business structure of BYD

Source: Official Company Introduction 4.4 The Innovation in IT business: Decomposition According to the literature, innovative strategies include incremental innovation and radical innovation. Since the motivation and drive for BYD to conduct innovation since the inception of the company was the disability to afford any assembly line or any patent, BYD invented three very special processes to tackle the problem: decomposing finished products, studying the published literatures and selecting and integrating suitable non-patent technology to understand the characteristics and principles of the technology. Therefore, BYD's innovative strategies belong to the category of incremental innovation. Furthermore, the section on stages of BDYs innovative strategies describes in detail how BYD create innovation through

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decomposition process and decomposition manufacturing below. (1) Decomposition Process: Through the decomposition process, BYD innovatively imitated, duplicated and even improved those mature foreign end-products 2 . Table 2 has summarized the process of decomposition. Table 2. BYDs decomposition process published literatures One of primary research fields of BYD Central Research Institute is fundamental theories research3; samples BYD F3 auto is criticized by the public for its mimicking in shape-design with Toyota Corolla, however, it didnt bring any patent disputes to BYD4; raw materials BYD Central Research Centre rebuilt the chemical ingredients of battery solution to make nickel plating available for battery manufacture, which decreased cost by ten times5; independent development Auto-lamp of F0 is totally original design by BYD6. Source: Data from CMA-China website (http://www.cma-china.org/CMABase/RD/B_RD080409008.htm). Through this decomposition process, BYD achieved innovative imitation and gradually secured two core technologies: battery technology and mould technology. Undoubtedly, this kind of decomposition process needs legal support and BYD forms a patent-management team in charge of patent research and protection to insure BYD keeps in touch with patent development of its competitors and avoid those annoying patent-disputes7. (2) Decomposition Manufacturing: Technology is only part of the elements in the process of manufacturing a product. With 2 million RMB, BYD couldnt afford any automatic assembly line which cost at least 5 million USD in 1995 8 . So BYD developed its unique manufacturing method which decomposes manufacturing process into hundreds of steps. Some steps can be finished completely through manual operation and some steps can only be done by automatic machines which BYD designed by itself with non-standardized instruments and fixtures. This combination of manual and machine operation has unexpectedly become BYDs competitive advantage with a more effective quality control9and a more flexible assembly line highly responsiveness to customers demands. So, this decomposition manufacturing process not only makes low cost possible, but

Technological overtaking case of Chinese enterprises. Research report by Samsung Economic Research centre. Sep,2009 http://www.bydit.com/doce/edu/central.asp 4 War against Foxconn [J] Word of IT managers. Jul.5th.2007 5 Li Honglin, Yang Di. Factor endowments and technology selection of Chinese enterprises: Take BYD rise as an example. [J] Comparison of Social and Economical Institution. 2004,(2) 6 Important News of Chinese auto industry 7 Important News of Chinese auto industry 8 Li MO, BYD: Cost Killer Origins from Technologies [J] Business Review of 21st Century. Dec,2008 9 Technological overtaking case of Chinese enterprises. Research report by Samsung Economic Research centre. Sep,2009
3 2

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also enhanced the competences of BYD, including Process-design and cost-control, Human Capital and HR management, and Precision manufacture and quality control. The innovative decomposition concept is summarized in Figure 5.

Figure 5. The development progress of decomposition of BYD

Insufficient initial capital

Cant afford patented technology Core Competence Decomposition Development

Cant afford automatic assembly line

Decomposition manufacturing
Process design and cost control

Battery Technology Competence Mould Technology

Human Capital
Precision manufacture and quality control

4.5 The innovation in Auto business: Vertical Integration Due to the vertical integration, BYD is able to produce at least 70% of the components within its automobile parts including mould, steering, shock absorbing, heat dissipation, seats, brake, and even auto-DVD except for tires and windshield glasses. It is clear that without decomposition development, it would be impossible for BYD to launch so many successful cars into the market. Also, without cost control, quality control and sufficient human capital, vertical integration would be impossible. Furthermore, without mould technology and battery technology, BYD would not be able to develop traditional gasoline-driven cars so quickly and launch full electric vehicle. Figure 6 is a summary illustrating the value of the different Vertical Integration process:

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Figure 6. The value of vertical integration process

Facts BYD built a huge research team in Shanghai to develop new-type auto, although it imitates Toyota obviously, but doesnt cause any patent dispute; 70% components of BYD auto is self-produced. Eg: An automatic painting line is worth 100 million RMB, semi-automatic line designed by BYD is worth less than 50 million RMB; Facts The leading auto of BYD such as F3 and F6 shows very excellent sales performance; Much self-production means high demand for skilled workers with both large quantity and high quality BYD purchased the mould company of Beijing Auto, and now has developed very mature auto-moulds which win the orders from GM; BYD has launched F3DM (dual mode) already, and is planning to launch new auto driven by Fe battery Value Decomposition development

R&D

Process design and cost control

Manufacture (Vertical Integration)

Precision manufacture and quality control Human capital and HR management

Mould Technology

Technical Support

Battery Technology

4.6 The powerful strategy of BYD: Internationalization Scholars define the two leading components of the innovative organization are customer focus and learning organization (Tidd et al., 1997). Since BYD's international strategies are targeting at establishing contacts with domestic customers within the international markets, BYD has built a worldwide retailing network. Besides its own retailing network within the international markets, BYD set up collaborations with several car retailers overseas. After 13 years of international expansion, BYD employs 130,000 people in 11 factories with 8 plants in China, 1 in India, 1 in Hungary, and 1 in Romania. Besides these factories, BYD has many branches or offices abroad. For example, its U.S. operations have about 20 people working in sales and marketing outpost in Elk Grove Village near Motorola, and another 20 or so working in San Francisco not far from Apple headquarter. BYD makes about 80% of Motorola's RAZR handsets, as well as batteries for iPods and iPhones10. Over on the IT side of the business, more than 70% of the revenue is from overseas market,

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From the newsWarren Buffett takes charge of Fortune Magazine, April 13, 2009.

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mainly from its five biggest clients overseas, Nokia, Motorola, Philips, Sony and Panasonic. From 2004 to 2007, BYDs sales from these five clients increased from 68.9% to 97.1%.11Currently, BYD has a really big IT service network all over the world and behaves as the worlds second largest rechargeable battery producer, shown in figure 7 below. Figure 7. The IT Global Service Network of BYD until 2007 Source: compa ny introdu ction on BYD websit e. The decom position process, vertical integration and internationalization in BYD bring out product innovation, organization innovation and technology innovation to build the difference between BYD and its competitors. Therefore, BYD effectively demonstrates the importance of entrepreneurship and innovation for maintaining the sustainable competitive advantage and how it ultimately results in an increase in margin or an increase in volume. 5. Conclusions and Recommendations Wang Chuan Fu is a legendary entrepreneurial leader in China with his fast rise to riches and success in his business endeavor. He has devised a system to encourage innovative strategies. Over the past 2 decades, Wang has dedicated much effort to domestic and foreign expansion. His astute business sense of extending BYDs product line from battery to electric cars has made a profitable contribution to his strive to the top. Furthermore, his visionary entrepreneurship style has earned him much respect and loyalty from his people creating an amiable corporate culture. Being in a labor intensive industry, the support and loyalty from his employee is crucial. So, it is clear that Wangs entrepreneurship with good innovation and strategy makes BYD a successful business having great potential for future development in the years to come. While we advocate the success of BYD comes from the entrepreneurship and innovative Strategies which includes decomposition, vertical integration and internationalization, we must point that there still some other aspects to analyze how BYD succeed in china, such as entrepreneurial culture and cultural values in the organization which are not covered. These will be aspects worth further scrutiny for future research.

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From the website of Beiyida, http://source.beiyida.cn/article/show.asp?id=6945.

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