VežaI., Prester J., Economic and Business Review 1
Innovation in Croatian manufacturing 2004:
What do financial results show?
Ivica Veža[*]
Jasna Prester[¥]
Abstract
Innovations are a core competence today (Loewe, Dominiquini, 2006). Dobni (2006) found more then a thousand recent books and articles on innovation that show a recent positive trend in this field of research. There are breakthrough innovations, and there are incremental innovations. There are innovative new products and innovative new technology.
In this work we present a portion of the first results obtained on the Croatian sample. This whole research project called European Manufacturing Innovations Survey is conducted in most European countries and led by Fraunhofer Institute from Karlsruhe, Germany. The survey instrument is developed by Fraunhofer Institute and is conducted in parallel by all participating countries in order to facilitate cross-country comparisons. This survey started in 1993 inGermany in order to track innovation activities in manufacturing sector in Germany and is conducted on a two year basis. Croatia joined in 2003. and results presented here are the results from this first round. In this work we only consider questions addressing innovation and try to find out how innovations impact the bottom-up results. In exploring that issue we will get a glimpse of innovating activities in Croatian manufacturing sector. As with the first round of Community Innovation Survey led by The Institute of Economics Zagreb, the data shows encouragement in terms of innovation activities in Croatia (Račić, Radas, Rajh, 2005, p. 403)
Keywords: manufacturing companies, innovations, Croatia
JEL Classification: M11, M15, M21
1 Introduction
Today’s challenges to manufacturing companies are much fiercer, because global markets are characterized by more rapid change than experienced in the last decade. This reality requires a strategy with a stronger emphasis on creativity, innovation and on lean systems involved in mass production (Rose-Anderssen et al., 2005, p. 1093). According to Mellor and Hyland (2005, p. 857) over the past decade there has been a significant number of innovations in manufacturing which resulted in more flexible and cost efficient methods, higher quality products, and more economical system performance. Improvements, innovation and the adoption of new technologies are critical to the health of any economic sector, and manufacturing is no exception to this generalization. Manufacturing is one of the most important economy drivers in countries prosperity (p. 858).
The importance of innovations is not a new idea. Drucker (1998), Levitt (1963), Pearson (1988) and Hamel and Prahalad (1994) wrote about it as a necessity to stay ahead of competition.
Croatia is a transition country, with a small market and with open market to foreign competitors which poses a significant threat to our companies. Last decade was turbulent for Croatian industry but it resulted in the survival of the fittest. Therefore we accepted the offer from Institute for Systems and Innovation Research ISI from Karlsruhe (Germany) to conduct a survey with aim of collecting in-depth information about the innovativeness of Croatian manufacturing companies. The research is part of a broader project on European level and survey targets are discontinuous piece manufacturing companies with 20 or more employees.
In this paper we describe the state of Croatian manufacturing sector on issues concerning usage of modern technology, machinery and equipment as wall as modern organizational concepts. The aim is to identify the current state, which will be a base for a longitudinal study of tracking innovation concepts in Croatia.
The aim is to identify gaps between innovation practices in Croatian companies to similar studies in other EU countries. We examine which modernization efforts have been done, as well as the changes in product specifications within last two years. The results for Croatian manufacturing companies are compared with the latest prescribed technology in field of “operations management” and other comparative studies. We explicitly explore which modernization concepts have the highest impacton financial performance using regression analysis.
2 Defining innovations
Since our aim is a cross-country comparison it is only natural to refer to innovations defined by the OECD’s Oslo Manual (1997, p. 31). The definition of innovations in the manual is as follows: “implemented technologically new products and processes and significant technological improvement in products and processes”. Therefore by this definition we consider new products and new processes. By new products and processes we consider new products and new processes in comparison to the market. We make a clear distinction between products that are only modified and those that are new to the market. For this work we broaden the innovation meaning to incorporate management innovations which by Hamel (2006, p. 48) may create a considerable competitive advantage.
Innovation is a complex, diversified activity with many interacting components, and sources of data need to reflect this (OECD, 1997). Therefore a closer and more precise operational definition is needed here.
First of all let us explore the difference between product and process innovation. According to Martinez-Ros, (1999, p.223) product and process innovations are closely linked. But, according to Becheikh et al. (2006, p. 648) product and process innovations follow different processes and do not necessarily have the same determinants. Therefore authors recommend investigating those innovations separately. Like Reichstein and Salter (2006, p. 653), Becheikh et al. (2006, p. 648) also find that process innovations are considerably understudied. In their research 37% authors investigate product innovations, while only 1% investigates process innovations. Reichstein and Salter’s (2006, p. 653) definition of process innovation is “new elements introduced into organization’s production or service operations”. That means that process innovations may be associated with the introduction of new machinery, improvements in manufacturing operations or changes in the process of production.
Management innovation, on the other hand, is defined by implementation of new management practices, processes and structures that represent a significant departure from current norms (Birkinshaw and Mol, 2006, p. 81). Not only do they cite Schumpeter (1947) who said that management innovations are as important as technological innovations, but they also pose a bold proposition that management innovations are bottlenecks to progress (p. 82). According to their research of Business Source Premier Database 0,01% of authors focused on management innovation while all other authors discussed technological innovations. Some of management innovations they cite are: Toyota Lean systems, ISO quality standards, Motorola’s Six Sigma, Schneiderman’s Balanced Scorecards and so on. Edquist et al, (2001, p. 15), Edquist (2001, p. 7) argue that process and management innovations should be investigated separately because process innovations are usually technologically based while management innovations involve only coordination of human resources. The point is that, although we separately investigate those innovations (product, process, and management) we strongly believe that these innovations are intercorrelated and it is difficult to sustain this distinction.
3 Innovation in Croatia – review of literature
A significant advancement in exploring innovations in Croatia has really been the year 2003, with work of Radas (2003a, 2003b, 2004 and 2005). After the CIS survey data was analyzed in 2005 followed papers from Andrijević Matovac (2005), Aralica and Bačić (2005), Aralica et al.(2005), Račić and Aralica (2005), Račić et al. (2005), Račić et al. (2005a). Bartlett and Čučković (2006) compared Croatia and Slovenia on knowledge transfer, innovation and policies and Švarc (2004, 2006) investigated innovation policies in Croatia.
Just to emphasize the nonexistent research activities on innovation in Croatia can be inspection of Innovation Scoreboard. This scoreboard ( publicizes results since 2002 and Croatia appears only in 2006. According to that scoreboard Croatia is lagging behind its closes neighbor Slovenia:
Figure 1: Innovation Scoreboard for 2006.
Source:
Given that innovations are necessary for growth, it is absolutely an imperative to do more research on how to foster innovation in Croatia. Andrijević Matovac (2005, p. 204) nicely states that since Croatian companies cannot compete on price given lower economies of scale – Croatian companies should pursue strategy of differentiation through innovations. Andrijević Matovac though only looks at new successful product/process launches and the expenses of those companies for activities that contribute to innovation. She concludes that government involvement for fostering innovations should be carefully balanced because different industries need different incentives.
Radas (2004) investigated 100 most successful Croatian companies and explored their launching of new products (new to the firm but not new to the market and new to the market). She finds high innovation activity (74% reported new products, 59% reported process innovation) but both of those innovations are of low level of innovativeness. She also finds that these numbers coincide with similar studies conducted in US and Slovenia.
Račić et al. (2005a) analyzed the CIS data for the period 2001-2003. Their sample was 617 Croatian companies but included services and utilities. They find the biggest innovation activities are into new technology and equipment (83.1%) but the number of companies reporting new products is only (36.6%). Further they analyzed innovation by the size of the company and find that bigger companies have a greater probability of launching a new product. They also investigated the return on innovations according to size and found that the returns do not depend on firm size. Our investigation into innovations has a completely different approach, that is, we look specifically into three types of innovations (product, process, and management innovations) and how they influence the final result. One of the results of this investigation might explain why is the most innovations activities concentrated on acquiring new technology or process innovations.
4 Methodology of research
The methodology is prescribed by Institute for Systems and Innovation Research ISI from Karlsruhe (Germany) who runs this survey every two years since 1993. Since then, Belgium, Switzerland, France, Italy, Slovenia, Sweden, Turkey, The Netherlands, Norway and United Kingdom and Croatia have joined. The questionnaire contains parts that are constant over time, parts that change every two year because of technological innovations and a part which is country specific.
The questionnaire had 18 sections covering organizational innovations, technological innovations, advances in working conditions, scheduling and planning, changes in strategy and overall descriptive questions about the company.The questionnaire asks for the level of adoption of 13 manufacturing technology concepts, 13 information technology and organizational concepts, and also a detailed descriptions of new product launches.
The main difference to CIS study is actually in this level of detailed questioning. But, this is possible only because this survey is orientated only on the manufacturing sector.
The survey target are only manufacturing companies therefore only NACE 25, 28-35 where used (Table 1). Among those manufacturing companies’ only discontinuous piece manufacturing was analyzed because this industries are submitted to faster changes then continuous flow manufacturing (Meredith and Shafer, 2003, p. 210). Unlike the CIS survey in our target population enter only companies with over 20 employees, because the original idea was to track innovations of large firms who mostly have R&D institutionalized rather then SME’s who require different approach to investigating innovation.
The questionnaire was mailed to 511 Croatian manufacturing companies that cover the prescribed industries, with over 20 workers. Unfortunately we got a very low response rate (9.8%) and 4 questionnaires had to be excluded because they did not fit in the NACE classification[1] which gives the respond rate 9%. This low response rate is an overall problem (not only in Croatia) and the main reason why Frauenhofer ISI created the web site for benchmarking - is to initiate higher response rate.
Table 1: Representation of industriesCRO / NACE / Description / Parent / Sample / Z[2]
DH / 25 / Manufacturing of rubber and plastics products / 33 / 10 / 1.87
DI / 26 / Manufacturing of nonmetallic and mineral product / 41 / 3 / -0.17
DJ / 28 / Fabrication of fabricated metal products / 149 / 7 / -0.92
DK / 29 / Manufacturing of machinery and equipment / 85 / 8 / 0.06
DL / 31 / Manufacturing of electrical machinery and apparatus / 102 / 9 / -0.03
DL / 32 / Manufacture of radio, television and communication equipment / 33 / 3 / 0.01
DM / 34 / Manufacture of motor vehicles, trailers and semi-trailers / 56 / 4 / -0.22
DM / 35 / Manufacture of other transport equipment / 5 / 1 / 0.36
DN / 36 / Else / 7 / 1 / 0.21
511 / 46
Source: Compiled from HGK and EMIS 2004 data
Table 2: Sample by size of companyNo. of employees / Parent / Sample / Z
do 49 / 375 / 7 / -3.56
50-99 / 203 / 12 / -0.85
100-199 / 159 / 12 / -0.41
200-299 / 56 / 6 / 0.09
300-499 / 54 / 5 / -0.05
500-999 / 27 / 4 / 0.32
>1000 / 15 / 4 / 0.79
511 / 50
Source: Compiled from HGK and EMIS 2004 data
One can see from Table 1 that our sample is representative but in case of “Manufacturing of rubber and plastics products” which is obviously overpopulated. In Table 2, one can see that we have good representativeness except for companies from 20-49 employees which is obviously under populated. If we bear in mind these exceptions we have a representative sample on which we can draw conclusions.
We will first show the descriptive data for our sample but concentrating on three main issues: new products, technology innovations and organizational/managerial innovations. Then these three variables will be regressed on financial performance. We actually want to test the following relationships:
Figure 2: Main relationships that we want to establish through this study
5 Results
We first examined how important are innovations to Croatian manufacturing companies. The results are presented in Table 3. The importance of a competitive factor was ranged on a 6-point scale ranging from 1 – most important to 6 – unimportant.
Table 3: The ranking of the most important categoryCompetitive factor / Most important (1)
Quality / 34%
Low price / 23%
Customized products / 17%
Short delivery times / 13%
Services / 8%
Innovation / 5%
As we can see from the Table 3, Croatian companies tend to differentiate them from others by high quality (34%) or low price (23%). We have to pin point that according to Porter’s theory companies compete through differentiation or through low cost and that these strategies are usually mutually exclusive. What is worrying is that innovation as a competitive factor is almost negligible.
Even though this might seem disappointing, a research done by Mincu and Prester (2004, p. 384) showed that 40% of revenue from manufacturing companies comes from new product. So we investigate further what companies in this sample innovate. They had the options; new product, additional services, enhanced marketing, modernization of the production lines (Table 4). The importance of a modernization aspect was ranged on a 4-point scale ranging from 1 – most important to 4 – unimportant, but here the responders could give the same rate for different concepts so the mean was used.
Table 4: The most important modernization aspectModernization aspect / Mean
investments in machines/ equipment/ IT / 1.48
modernization of production / 1.84
Development of new products / 1.94
personnel development strategies / 2.04
organizational strategies / 2.06
Improvement in sales or marketing / 2.37
Upgrading of the product range by offering services / 2.98
Source: calculated from the data source
In accordance with Račić et al. (2005a, p. 409) modernization of technology and technological innovations are most important to Croatian companies.
Let us briefly look at the innovations we are talking about. We divided them into innovations by usage of information technology (Table 5), innovations in manufacturing equipment (Table 6), new product development (new to the firm and new to the market) (Table 8) and managerial/organizational innovations (Table 7). For each of listed subjects covered, companies had to answer do they use the technology, when they first adopted it and the level of usage. If they do not use the concept they had to answer why (options were: planning to adopt, not applicable to the firm and other). In this paper we only report how many companies use the concept in question and do not enter detailed analysis as when they first adopted it, or reasons of not adopting the concept.
In Columns (2) and (3) ofTables 5, 6, 7 we listed the percentages of usage of this technology and potential payoff in large European companies on grounds of work Mellor and Hyland (2005). Their survey encompassed 584 firms from 17 OECD countries but the survey was conducted in 1999 for the period of 1996-1998. So in comparing our results we have to bear in mind this time difference.
Table 5: Usage of information technology / (1) / (2) / (3)Information technology / Usage % / Usage % / Pay off %
Integration of CAD/CAM (geometric data transfer) / 42% / 55.4% / 52.5%
PPS/ERP module for commercial operations control / 32% / 39.3% / 36%
Intranet for knowledge management / 28% / 42.5% / 41%
Simulation for product design (FEM-computation, digital prototype) / 22% / 29.7% / 30.2%
Simulation of single processing steps (e.g. FEM-forming or weld seam simulation) / 20%
Sales of own products via the Internet (electronic commerce) / 20%
Purchase at suppliers via the Internet (electronic procurement) / 20%
Process simulation (e.g. material flow, collision prevention / 20%
Product Lifecycle Management System (PLM) / 12%
Utilization of tele service (tele diagnosis/tele maintenance via modem) / 10%
Exchange of disposition data with other companies (Supply Chain Management) / 10% / 30.9% / 33.8%
Source: Column (1) is calculated from the data source, Column (2) and (3) are from Mellor and Hyland (2005)
From Table (5) we can see that CAD/CAM, ERP, Intranet and simulation software is underutilized giving space for further modernization in Croatian manufacturing companies. The percentages for year 2003 are even lower then percentages for OECD countries in 1998.
The usage of machinery and equipment is a bit more positive. The usage of CNC machines and visual data processing is almost like in OECD countries in 1998. This might mean that Croatian companies still have to invest more in these technologies to catch up for the time difference (2003-1998).
Table 6: Usage of machinery and equipment / (1) / (2) / (3)Machinery and equipement / Usage % / Usage % / Pay off %
CNC processing centers / 32% / 34.5% / 38.1%
Visual data processing in production (e.g. quality control, process management) / 30% / 28.1% / 26.6%
Machine tools with linear drives / 30%
Hard machining (milling, turning and drilling of hardened materials) / 28%
Automated material flow systems (manufacturing and/or assembly) / 28%
Process integrated quality control (e.g. with lasers, ultra sonic waves) / 22%
Industrial robots and automated handling systems for tools and parts / 18%
High speed cutting (HSC; cutting speed > 300m/min) / 18%
Dry processing/minimal lubrication with traditional “wet” processed parts / 16%
Rapid Prototyping, Rapid Tooling, Rapid Manufacturing (e.g. stereolitography) / 10%
Equipment to manufacture mechatronic components / 4%
Source: Column (1) is calculated from the data source, Column (2) and (3) are from Mellor and Hyland (2005)