Audi’s idea generation

8.1.1.1 Expenditures & focal points

From an outer viewpoint, there can be no mistake that Audi recognises R&D-activities as central for their operation. As a part of Volkswagen Group, Audi is heavily contributing to the consolidated group having the highest R&D-expenditure in the automotive industry within the fiscal year of 2018 (Strategy&, 2019). In 2019, the group’s R&D-costs within automotive rouse by 5% reaching 14.3 billion EUR with a coherent R&D-ratio of 6.7% (Volkswagen Annual Report 2019, 2020, p. 1-3). As the largest subsidiary, Audi spent 4.4 billion EUR in 2019 which is a rise of 5.9% since 2018.

Simultaneously, Audi overdoes the consolidated group with an R&D-ratio of 7.9%, and expect capital expenditures, regarding R&D, amounting to 37 billion EUR over the five coming fiscal years (Audi AR19, 2020, p. 23).

In addition to the means appointed, the perceived importance of R&D-activities is clearly stated in Audi’s latest annual report:

”Competitive cost structures and a clear target vision for the Research and Development area are essential to Audi’s long-term success and its successful transformation in the direction of profitable electric mobility” (Audi AR19, 2020, p. 24).

Audi thus recognises the importance of investments in this area for their long term competitiveness.

The focus on a competitive cost structure does not simply serve to lower cost. It is an acknowledgment of the high degree of R&D-competition within PAM regarding launching new and improved products meeting emerging demands while coping with competitive alternatives. The presented quote also tells the story of Audi’s transitioning to electric mobility in the near future, with 32% of expected R&D capital expenditures earmarked for this shift of emphasis (Audi AR19, 2020, p. 23).

Electric mobility is only part of an environmental sustainable transition, as the sustainability aspect is becoming growingly important throughout VDAs. This spurs from increasing sustainability demand creating severe changes in customer expectations, along with growing expectations regarding digital connectivity and automation as explained in section 7.1.3. Therefore, Audi has appointed massive capital investments exploring new technologies and areas of business needed to adapt to the shifts, which are expected necessary for the entire industry (Audi AR19, 2020, p. 85). The future economic success of Audi is believed to be strongly pegged to the ability of aligning the product portfolio with the alterations in their surroundings swiftly, since there exist a high degree of competition and rapid technological developments in PAM (Audi AR19, 2020, p. 98).

The vast transformation of the industry, brings both opportunities and risks for Audi. Audi believes modified products, increased innovation-pace and new business model adaption are imperative to accommodate the transformation. The R&D-focus is thus broad and placed on EVs, connectivity and AVs to ensure broad future market viability (Audi AR19, 2020, p. 96).

8.1.1.2 External innovation initiatives

In addition to Audi’s purely internal R&D-activities, efforts in integrating idea generation from external sources have been made.

In the course of the past decade, Audi has engaged in open innovation initiatives in terms of crowdsourcing in two ways. Firstly, Audi launched Audi Production Award in the beginning of the 2010’s. Audi Production Award, being a global crowdsourcing initiative, served as a platform for gathering imaginative ideas specifically regarding optimisation or revolutionising of resources in production. The award was organised as a competitive market with a monetary prize as the main

screening of entrees, but submissions were judged by Audi representatives The finalists were invited to Audi headquarters in Ingolstadt to present their ideas, where the winner was granted 5,000 EUR.

Since the award is no longer active, the latest winner was found in 2012 with a submission surrounding novel assistance systems and networking in a more digitised factory setting (ideaCONNECTION, 2013).

Briefly analysing this crowdsourcing initiative, the execution can be criticised for seeking innovative ideas but not managing the crowd. Crowdsourcing and open innovation are often referred to interchangeably, however, crowdsourcing does not necessarily involve innovation. For Audi Production Award to foster innovation, the crowd should be managed by introducing entry requirements, leading to fewer submissions but of greater relevance. Secondly, the size of Audi’s offered monetary incentive, their broad definition of the award and possibly their grading of submissions can be questioned (Dahlander et al., 2019). Seemingly, Audi's current modernisation and digitalisation of production, which will be elaborated upon in section 8.3, did not originate from this open innovation initiative in 2012. However, it tells the story of crowds’ ability to bring greater diversity and scale for that matter into idea generating activities, when activated through a platform solution (Boudreau & Lakhani, 2013).

Audi’s other crowdsourcing initiative, named Audi Innovation Award, is still active. Just like the Audi Production Award, it is organised as a competition with monetary incentives, but has an aim of discovering innovative ideas in the middle east. Audi Innovation Award is, however, not focused on ideas solely implementable within PAM, why winning solutions are not internalised in Audi (Audi Innovation Award). A former winner was thus a device controlling the level of seasoning on food (Al Bawaba, 2019). This initiative will therefore not be further assessed, as its value for Audi falls outside idea generation as it serves more as a light workplace-branding initiative than a channel for external idea sourcing.

Audi is also sourcing ideas outside their internal organisation through Volkswagen Group. The value adding synergies for Audi as a part of Volkswagen Group will be elaborated upon later in the paper.

However, being part of a large conglomerate such as Volkswagen Group naturally comes with possibilities to source ideas around the group. Therefore, aspects directly affecting Audi’s idea generation are concisely addressed.

There exists an alliance within the group, where subsidiaries, including Audi, work with and for each other on technological developments. Within the alliance, entities hold different responsibilities, with Audi being the lead for the development of electric drivers. In this manner, the entities can be said to be working together, functioning as focused departments for each other. Through the alliance, a broad network of experts is enabled, letting knowledge flow within the group (Audi AR19, 2020, p. 24).

With future overall topics being highly technological, the majority of relevant knowledge embedded in the respective entities is arguably highly tacit. The network of experts is thus aligned with theory of transferring knowledge, as socialising in terms of sharing experiences is regarded optimal for tacit knowledge transfer (Nonaka, 1994). The claim is further backed by Jasimuddin (2012), that simultaneously proposes direct contact combined with physical movement of the knowledge-holding experts would prove even more efficient.

In addition to the above, Audi captures innovative ideas through the group initiative FAST, which fosters dialogue with selected suppliers holding potential for innovative co-developments. The initiative aids generation of ideas, but for Audi, it primarily supports the realisation process of ideas (Audi AR19, 2020, p. 26). Therefore, the following idea conceptualisation-section will go more into detail of FAST and the inclusion of suppliers in early stages of product development. It is, however, important to state, that these supplier-based initiatives can bring value in the form of idea generation.

Audi’s ability to absorb knowledge through these partnerships is essential for the probability of intended knowledge spillover’s to foster new ideas and not only benefit conceptualisation of existing ideas (Alcacer & Chung, 2007).

8.1.1.3 Logic behind Audi’s R&D-focus

Why Audi appoints severe means in terms of both human and financial resources into R&D and cohesively idea generation, while placing emphasis on sourcing external ideas, can be understood by revisiting the presented market analysis. The assessment of the technological aspect in the PESTEL-analysis insights are offered regarding technological developments shaping the possible future of mobility through connectivity and machine learning that enables autonomous vehicles. Through the political perspective, of course regulations were introduced as a major obstacle for marketing AV’s in its full potential, but the tides will undoubtedly turn with time in this regard. When including the sociocultural findings, demand for greater connectivity and more sustainable solutions are shown as

Isolated, major technical possibilities are present and user demand pushes two relatively new car-criteria immediately. This is, however, not enough to understand Audi’s immense R&D-focus, as the PAM industry could theoretically ignore these demand shifts and technological possibilities and adherently enjoy larger economies of scale and increased margins as R&D-costs are marginalised.

Simultaneously considering the findings of the conducted five forces analysis, however, reject this theoretical scenario. Firstly, the technological possibilities are partly introduced to PAM by large outside companies such as Google. Simultaneously, the shifts in demand - especially on the basis of environmental sustainability - spurs opportunistic companies that want to eat into PAM-market shares, by accommodating the shift through new business models and solutions. Tesla serves as a great example of the past. If PAM ignores these changes, the large technological companies will have greater motivation to enter the market, and the new sustainable solutions would have better possibility of eating into substantial market shares. Adherently, competition will become fiercer, and a continuous passive attitude from PAM-players would mean an increased risk of becoming a laggard in their own market, as solutions evolve and eventually fully or majorly replace inferior offerings.

Thus Audi and the rest of PAM have incentives to take action. The strong R&D-focus is, however, mostly driven by the fierce competition within PAM, where both organic and non-organic growth strategies are immensely pursued to improve immediate and future competitiveness. The speed of technological adaption as well as creation within PAM, is thus intensified, functioning as an upward spiral for R&D-intensity as others fear becoming a laggard based on competitors’ innovations. This aspect simultaneously explains the broadness of focal points in Audi’s R&D focal points, as competition for new market standards exists through the separate major shifts being connectivity, sustainability awareness (EV’s primarily) and AV’s. The competition for a standard is not nearly as competitively decisive as in purely digital platform based markets, but will give a competitive edge in securing future customers as a first mover or first best developer (Grant, 2016, ch. 9).

The types of innovation pursued by Audi, and in PAM in general, are of diverse nature. Pursuing larger connectivity can be argued to be routine innovation, as it builds upon existing technological competences. No real alteration in the business model is needed, as the development empowers the existing product. The increasing sustainability awareness especially leads R&D-focus on evolving and adapting EVs in respective product portfolios, but also embraces new ways of marketing cars such as ShareNow. As alterations for PAM-players in their way of doing business is required, this can be characterised as disruptive innovation. Whether actual business model innovation is needed

for adapting EVs can be discussed, but the R&D-focus is highly based on technological innovation improving EVs, why this segment is pursuing radical innovation, which can be turned to architectural innovation if a business model innovation is pursued simultaneously. Another highly debated R&D-focus is, however, undoubtedly pursuing architectural innovation, namely development of AVs. The ultimate development of AVs requires severe technological innovation compared to the embedded tech in current marketed cars, while the way of doing business in the industry naturally will require great alterations if AVs are fully accepted by the market and regulators (Pisano, 2015).

The distinction in types of innovation pursued is central when discussing means to obtain these innovations and subsequently derive value. The type of innovations pursued in the industry tells where the competition lies. If a dominant design is yet to emerge, the competition centres around creating a dominant design. When a design has proven dominant, meaning proving superior to its competitors, competition shifts to effectively utilise the design, if the design is even exploitable for others than the innovator. Whether the innovator can capture the profits from the innovation depends on several aspects. Firstly, the innovator needs to have a series of resources to competitively commercialise the innovation. This includes complementary technologies, distribution channels and efficient manufacturing amongst others. Secondly, enforcing a tight appropriability regime, in terms of the nature of embodied technology and legal protection mechanisms, aids the innovator to harvest the innovation’s value (Teece, 1986). Legal mechanisms surely exist in PAM, but patents will not stop reverse engineering from competitor’s experts, allowing them to understand the technology and build upon it in their own version. This leads the discussion to knowledge embedded in the product technology and the competitors’ ability to absorb knowledge.

Generally, the ability to absorb knowledge from competitors is determined by technical capabilities, with innovators typically holding more advanced technical capabilities than laggards (Alcacer &

Chung, 2007). However, with a type of innovation building on existing technology in PAM, competitors will easily catch up on technology, why innovators meet immediate competition in harnessing profits from routine innovations. With technological innovations, in terms of radical innovations and especially architectural innovations, the basic principle of laggards’ lowered ability to absorb knowledge and integrate the innovation is more likely to hold true. Therefore, the strong

It can be argued that a high level of technological capabilities exists within the industry, why it would prove wise to wait for others to innovate and then imitate. Emphasis would then be placed on searching for ideas rather than generating them, and hence not only copy but improve. In many cases the vast majority of an innovation’s value is harnessed through imitation (Shenkar, 2010). So arguments for pursuing a position as a laggard are actually present and imitation can be utilised as a sort of idea generation or substitute. However, being a heavy laggard entails necessary technological capabilities for adapting innovations are potentially diminished. Simultaneously, the imitator needs to ensure a competitive advantage in a complementary asset to outcompete the innovator (Teece, 1986), why this is a risky strategy. Especially, when severe technological innovations are on the table, should this strategy be pursued with caution. Furthermore, imitation fosters no innovation on its own, so once again, if the whole of PAM pursued this strategy, no innovations would be made. Innovations start with knowledge creation, why exploration needs to come before exploitation (Grant, 2016, ch.

9). Managing knowledge sources optimally in accordance to the pursued innovation through sourced ideas, is therefore of high importance especially with the diversity of innovations pursued. How Audi conducts their idea generation, and thus starts innovations processes have been presented and discussed previously, and alternatives enabled by platforms will be analysed in the following sections.

The combination of fierce competition with evolving user demand, diverse technological opportunities and rapidness of technological development within the industry, thus create the basis for Audi’s heavy and broad R&D-focus as it aims to drive the company’s long-term competitiveness through technological development.