Successful Entrepreneurship and Innovative Strategies in China-The Experience of BYD-Wu and Kuo

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InternationaleJournalofBusiness&TechnologyLeadership 2012

Successful Entrepreneurship and Innovative Strategies in China:

The Experience of BYD

Jane P. Wu, Professor, HSBC Business School, Peking University

Ya-Ting Kuo, Ph.D. Candidate, Dep. of Business Administration, National

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 havecreated 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 ofBYD.

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. IntroductionIn 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 butalso 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 learnthrough 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 Review2.1 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 thatexplain 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 technologyor 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

and the will to

innovate

Clearly articulated and clear sense of purpose

Stretching strategic intent Top management commitment

Appropriate

structure

Organisation design which enables high levels of creativity

Key individuals Promoter, champions, gatekeepers and other roles which

energize

or facilitate innovation

Effective team

working

Appropriate use of teams to solve problems. Requires

investment

in team selection and building

Continuing and

stretching

individualdevelopment

Long-term commitment to education and training to ensure

high

levels of competence and the skills to learn effectively

Extensive

communication

Within and between the organization and outside. Internally

in

three directions upwards, downwards and laterally.

High involvement in

innovation

Participation in organization wide continuous improvement

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

organisation

Processes, structures and cultures which help institutionalize

individual learning. Knowledge management

Source: (Tidd et al., 1997)


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3. Methodology3.1 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.

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

Core Competence

Entrepreneurship of

BYD

Innovative strategy

of BYD

Product:

Difficultly substitute

Organization:

more flexible

Technology:

Non imitative

Continuing competitive

advantage of BYD


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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 Strategies4.1 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

1 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 processand 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 founderand 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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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.

Figure 2. Organizational Structure of BYD

The general manager

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

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


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Figure 3. The Research and Development Cost of BYD

0

500000

1000000

1500000

2007 2008 2009 2010

Research Cost

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 thesesegments 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 stagesof 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 chemicalingredients 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 19958. 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 BYDdesigned 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

2 Technological overtaking case of Chinese enterprises. Research report by Samsung Economic Research centre. Sep,20093 http://www.bydit.com/doce/edu/central.asp4 War against Foxconn [J] Word of IT managers. Jul.5th.20075 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 industry7 Important News of Chinese auto industry8 Li MO,BYD: Cost Killer Origins from Technologies [J] Business Review of 21st Century. Dec,20089 Technological overtaking case of Chinese enterprises. Research report by Samsung Economic Research centre. Sep,2009


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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

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 VerticalIntegration process:

Insufficient initial capital

Cant afford patented technology Cant afford automatic assembly line

Decomposition Development Decomposition manufacturing

Battery Technology

Mould Technology

Process design and cost control

Precision manufacture and quality control

Human Capital

Core

Competence

Competence


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Figure 6. The value of vertical integration process

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 theinternational 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,

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

R&D

Manufacture

(Vertical

Integration)

Technical

Support

BYD built a huge research team in Shanghai to

develop new-type auto, although it imitates Toyota

obviously, but doesnt cause any patent dispute;

Facts

FactsThe leading auto of BYD such as F3 and F6 shows

very excellent sales performance;

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;

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

Process design and

cost control

Precision manufacture and

quality control

Human capital and HR

management

Mould Technology

Battery Technology


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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%.11

Currently, 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

BYDwebsit

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 RecommendationsWang 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.

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

Successful Entrepreneurship and Innovative Strategies in China-The Experience of BYD-Wu and Kuo

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