Abstract
Abstract
Various movements in the Indian aerospace and defense industry indicate that the forces of disruptive innovation have been set in motion by the Government of India with signals of change in the industry, thereby nudging it toward disruption. This case studies one such company from the micro, small and medium enterprise (MSME) sector in pursuit of disruptive innovation in the Indian aerospace and defense industry. This case introduces and explains in detail the factors of disruptive innovation in aerospace and defense industry. It gives an inside view of Indian MSME’s environmental and internal situations in the Indian aerospace and defense industry and the problems faced by an entrepreneur who is looking for using technology to create disruption in industry.
Introduction
It is a wet and sultry day in New Delhi as Shlok Singh disembarks the plane at Terminal 3 of Indira Gandhi International Airport and moves toward the exit where his driver is waiting to pick him in the car. Once in the car, Shlok checks his iPad for any urgent e-mails and his phone for any messages or calls that require his immediate attention. As his car makes its way through the traffic toward his home in Gurgaon, flashes of memories pass through him. Almost a decade ago, he was sitting across the table with his brother Kintan Singh in USA. The two had few things in common. They were more different than they were similar. But there was one thing both of them were completely in agreement with. That Indian economy was moving up and it was a big opportunity for any businessman. If there was any time that was right for them to start something of their own, this was it. The Indian aerospace and defense industry was poised to grow. Both of them believed that there was a clear gap in the industry and there was a clear opportunity to set up an Indian aerospace and defense company. That chance meeting led them to make the boldest decision of their lives. So in 2009, they started AvidSpace technologies with four engineers and a small start-up capital.
However, they are aware that the dilemma of the executive team is that the minimum expectation of stakeholders of a firm is that it will earn above average returns. The executive team is also expected to lead the firm to growth through investing in innovation. This balance between earning an return on investment (ROI) and also looking into the future and investing in the right innovation is the dilemma of the modern-day management executive teams. Firms formulate and implement appropriate strategies to do this in very dynamic external and internal environments. Firms tinker with diversification, globalization, organization structure along with trying to create value propositions by various actions on resource management and capability development. In this bid, they have to manage innovation. Shok and Kintan aspire to lead disruptive innovation in the Indian aerospace and defense industry.
But they understand the relationship of innovation with invention. Taking an invention from lab to the market and exploiting it successfully to earn commercial profits is called innovation. This journey of an invention from the lab to the hands of end user is the story of innovation. Several factors play a key role in this journey. The leaders of the executive teams that achieve this successfully are people with special skill sets that are quite different from the skill sets of inventors. Most successful innovations in recent times have been led by leaders who had the key combination of providing vision and fostering collaboration (Isaacson, 2014). Both Shlok and Kintan are aware of this and want to champion the process. It is only sometimes that an innovation becomes so successful that it can create the great next wave in the industry and transforms it by destroying the existing setup. Christensen coined the term “disruptive innovations” for such cases of innovation. However, disruptive innovation in aerospace and defense industry is a continuous and regular phenomenon. The pursuit of military supremacy propels governments to invest heavily in defense and aerospace resulting in very heavy investments, leading to rapid development of technologies. Cases of military aircrafts by Lockheed Martin, fighter aircraft engines by Pratt & Whitney, M-777 Howitzer guns and Astute class Nuclear submarines by BAE Systems, Small arms by Remington are all examples of firms leading in disruptive innovation. Majority of the leading firms in aerospace and defense industry have a history of disruptive innovations. Shlok and Kintan want to take a leaf out of the phenomenon of disruptive innovation and aspire to create a new market leader in the Indian aerospace and defense industry.
Disruptive Technologies
Shlok and Kintan have been discussing about disruptive technologies as the fact that the rapid changes in technology and the change in strategic environment will generate several disruptive effects in the global defense industry. The manifestations of these effects will vary between countries on the basis of structural and strategic contexts, but they will present similar risks and opportunities to their respective national governments (FitzGerald & Sayler, 2014).
McKinsey Global Institute identified 12 such disruptive technologies that are expected to bring about disruptive change in the social behaviors, business, and economy (Table 1).
Both Shlok and Kintan are well aware that disruptive technologies are at the center of disruptive innovation. Most of the disruptions in the industry are driven by disruptive technology. An iPhone 4 has an equivalent performance as that of the fastest supercomputer in 1975. There has been 85 percent drop in the cost of solar power generation between 2000 and 2013.
Disruptive Innovation
Disruptive Technologies
In modern-day management, the term appeared in a new form during the analysis of disk drive industry as the impact of disruptive technologies (Christensen & Bower, 1995). While doing deep dive analysis of steel industry, Christensen spotted the pattern in which the mini mills entered the lower end of the business and in a systematic fashion drove away the integrated steel plants to closure. Christensen argued that the process of disruptive innovation is not random and follows a pattern. This pattern can be studied using the theories of innovation and these movements of disruption can be managed, controlled, and predicted. The challenge that Shlok and Kintan are facing is how to go about doing it.
Disruptive innovations lead to change in the value proposition in the market. It involves compromising on performance in comparison to the existing market leading offering in the market. It also involves higher number of defects, lesser speed or power. Some of the key features most valued by the premium customers in the market may be missing from the offering initially. They earn smaller margins and hence are not very appealing to incumbent firms and its premium customers. Disruptive innovations do not catch up with mainstream customers till they achieve desired quality (Christensen, Raynor, & McDonald, 2015). Over time, by numerous cycles of repeated improvements, these innovations achieve mass adoption and eventually disrupt the market.
Disruptive innovations lead to the debacle of existing market leaders and change the social practices. They create a new set of customers who were not consuming a product either due to affordability or due to lack of skills. They also create new jobs that did not exist earlier.
Shlok and Kintan also fear the failure statistics. Over 60 percent of new product-development efforts end up in failures. These failures are not random and are both predictable and avoidable. The traditional method of segmenting markets is wrong and hence should be abandoned in such cases. Instead, circumstance-based categorizations should be pursued as they give explicit clarity to the features, functions, and market positions that will cause customers to buy a product.
The customers have jobs that they need to get done and they choose to hire our products or services to get the job done. Firms target their products to the circumstances in which customers find themselves, instead of customers themselves launching successful products with a high degree of prediction. Disruptive products provide ways for people to hire the products to get the job done that has been impossible before. This strategy was used by research in motion (RIM) by observing customers in waiting lines. RIM observed that customers had small snippets of time which they were filling with unproductive actions. By providing the handheld wireless e-mail device BlackBerry, RIM won a disruptive foothold by bringing the ability to receive and send e-mail to new contexts like waiting lines, public transit, and conference rooms (Christensen & Raynor, 2003). Disruptive innovations are driven to success by observing those customers who are trying or not trying to use the products. The key variable is the circumstance and not the customer behavior. As Shlok’s car enters Gurugram, he reflects that both Kintan and he spend a considerable amount of their time on observing, discussing, and analyzing the circumstances in which the soldiers, air men, and navy men operate. However, it is a very opaque system and considerations of security do not allow them to have as much access as they would like to observe their customers’ circumstances.
Disruptive Innovation in Aerospace and Defense Industry
According to Accenture, disruptive innovation is one of the four key strategic themes that the executive teams of defense industry will have on their table for coming 3 years. It will be the key driver of growth and hence defense firms will have to adapt their business models and capabilities to continuously align with very different kind of technical and business dynamics that these disruptive technologies will give rise to (Accenture Research, 2017).
This will give rise to two important developments. The first is the re organization and emergence of digital-based business models that will allow defense firms to expand their supply chain footprint to include manufacturing in emerging economies like India and high growth markets like Asia Pacific and Middle East. Digitally based business models drive innovation by facilitating collaboration, simulation, and design to globally dispersed teams which can work to contribute equally irrespective of the individual geographies. IoT is enabling predictive analytics, which is bringing a paradigm shift in the way the monitoring and maintenance is done for military equipment. Cloud is enabling data-rich interactions between customers and design teams and helps defense companies to invest resources into designs that generate highest returns. 3D printing is seeing adoption and is changing the way prototyping is done for military technologies. New supply chain strategies aimed at reducing cost and increasing efficiency have led to three key joint ventures (JVs) getting formed in India. Boeing and Tata Advanced Systems Ltd have formed a JV to manufacture aero structures of key Boeing aircraft in India. The JV has set up a facility to manufacture the aero structure of AH-64 Apache helicopter. Airbus Helicopters and Mahindra Defence have formed a JV to manufacture airframe parts for AS565 Panther helicopters in India. Dassault Aviation and Reliance Aero structures have formed a JV to execute the Offset obligations of the US$8 billion deal for Rafale fighter jets.
The second is the rapid adoption of leading-edge disruptive technologies in defense industry. Silicon Valley firms like Intel, Google, Planet, and A3 have started operating in defense industry. Intel has acquired Ascending Technologies that develops AI for UAVs, Movidius, which is a chipmaker for drones, and MAVinci GmBH, which makes flight planning software. Boeing, Airbus, SAAB, and Lockheed Martin are using Augented Reality and Virtual Reality for several applications to improve productivity and performance. Shlok and Kintan travel extensively to US to capture any opportunities of transfer of technology (ToT) or a partnership with the leading firms in aerospace and defense disruptive innovation.
According to Deloitte, rapid sustained growth in Asia will drive boost in defense budgets of low-income nations, whereas pressing domestic economic priorities will force the developed nations to limit their defense budgets. This will lead to narrowing of gap in the military capabilities among armed forces (Deloitte, 2015).
But pursuing disruptive innovation to defense business poses some issues. Firstly defense is a different business and has very specific characteristics. Defense is a business where most of the times the customer demands a functionality rather than the producer coming up with a new idea. This makes it difficult for Shlok and Kintan to step up the innovation momentum, as many times the customer is not very willing to discuss new technology breakthroughs and demands that the discussion be limited to specific demanded functionalities and products.
Disruptive innovation is a continuous pursuit in defense business. Defense firms all over the world invest heavily in pursuing military innovations that can disrupt the market and the military superiority. The disruption sought here is not only commercial. Highly expensive, sophisticated, and commercially unfit innovations are able to create disruptions in military superiority. North Korea’s pursuit of arms is an example to consider. However, there seems to be a gap in the market where desired equipment heavily depends on the local threat and internal situation of a country. Hence nations do seek equipment which is not the best in the world but is better than their neighbors and internal extremist groups. Hence disruptive innovation has a different dimension at the global level than at a country’s level.
Military-use UAVs are on an upsurge and are expected to drive innovation. The cumulative market for global expenditure is expected to reach US$114 billion over the next decade. Defense firms are seen to acquire or partner with UAV developers with niche capabilities. As Shlok’s car turned at Exit No. 10 and turned toward Sohna Road, he was thinking of the discussion he had on this visit with a leading UAV manufacturer and his possible tie-up with them. He was looking forward to meeting Kintan to discuss the developments.
Aerospace and Defense Industry—Global Perspective
According to Accenture Research, globally the defense business is approximately US$420–450 billion annually and is expected to stay flat for next 3 years. Looking geographically at the world, the Americas and the Europe are expected to stay flat while most of the growth is expected in Asia Pacific and Middle East. The regional rivalries between the countries in Asia Pacific (APAC) and the instability in Middle East will be the drivers of rapid acquisition of defense equipment in these regions (Accenture Research, 2017).
American defense firms dominate the global defense market. Lockheed Martin, Boeing, Raytheon, General Dynamics, Northrop Grumman, United Technologies, L-3 Communications, Honeywell, and GE dominate the business of defense in the world. The Europeans are a close second with BAE systems, Airbus, Finmeccanica, Thales, Rolls Royce, Safran, and Saab leading the pack. Russians with Rossonborough Exports, Almaz-Antley, United Aircraft Corp, and Israel with Elbit Systems and IAI are also key global players.
The flat markets of Americas and Europe are driving these global companies to head to APAC and Middle East. India and China lead the APAC market with India spending more than 60 percent of its budget on imports, which is the key growth market for global firms. Shlok and Kintan want to capitalize on the opportunities that will arise out of this.
In North America, the Trump administration is expected to push for increasing military budget; however its impact will be seen only later as there is a lag between the time the Congress approves expenditure to the time when the military actually spends it. So as of now it is expected to remain flat.
In Europe the defense spending is expected to increase slightly due to global and regional threats and Trump administration’s thrust to North Atlantic Treaty Organization (NATO) countries to reduce military dependency on USA.
China and India lead the military spending in APAC with India spending more than 60 percent of its budget on foreign firms. In the Middle East, instability will continue to drive growth in defense budgets despite the falling oil prices. In Latin America, defense spending will continue to decline post its peak in 2013.
Three themes emerge on the global scale in the defense business. The first is that overall the market is expected to have a flat growth but India and Middle East are the geographies where fast growth is expected over the next few years. The second is that the flat market will drive defense companies to strive for innovations in product, process, and services to achieve cost efficiencies. The third is that there is expected to be rapid adoption of new technology in the defense sector.
These three themes are key drivers of innovation and hence it is expected to see high innovation activity in the defense business and India seems to be the market where this action will be seen in full flow (Accenture Research, 2017).
Aerospace and Defense Industry—An Indian Perspective
At approximately US$42 billion per annum, India roughly represents 10 percent of global aerospace and defense spending of approximately US$420 billion. India spends more than 60 percent of its defense budget on foreign firms. It has a large defense industrial base (DIB) but most of it comprises of low-end defense equipment manufacturing and Maintenance, Repair and Overhaul (MRO) setup.
The acquisition of defense equipment is tightly controlled by Ministry of Defence through its Defence Acquisition Wing and heavily regulated by Defence Procurement Policies and Defence Procedures. The defense forces raise their requirements (through their technical managers) to the Ministry of Defence, which decides on the fate of the requirements through its various decision-making bodies and councils. Once approved, the requirements are sent for tendering as per the relevant procedure. Shlok and Kintan are well entrenched into the system and actively participate in discussion forums of the industry.
Breeding Ground for Innovation and Disruption
The long history of defense manufacturing coupled with the large setup of its industrial base has also been a breeding ground for innovation. The successful development of fourth-generation fighter aircraft TEJAS, SU 30 MKI aircrafts, nuclear submarine, naval ships, comprehensive Guided Missile Development Program, Lightweight Howitzer ATAGS, INSAS rifles, Advanced Light Helicopter and ongoing development programs like Network Centric Warfare , Battlefield Management System, Tactical Communication System, Electronic Warfare, Scorpene submarines, and FICV (Futuristic Infantry Combat Vehicle) are examples of military innovation in product, process, and service.
The urgent demand for military equipment along with the modernization of large existing legacy equipment in India presents unprecedented opportunity to both foreign and domestic aerospace and defense firms. The strategic options of joint ventures, technology transfer, local production, and supply chain integration are both welcome and also intriguing. The Indian business firms were used to problems of limited options. Suddenly there is a barrage of economic activity and the problem of plenty is on the table. Shlok and Kintan sometimes wonder as to what are the strategic decisions that will propel AvidSpace to disruptive innovation?
Disruption is a strategic choice. A company may follow disruptive innovation as a strategy to create disruption in the industry, or it may lower the chances of disruption by making it easier for incumbents (Scott, 2007).
There is growth opportunity at the bottom of the pyramid (BOP) and to participate in these markets of 4 to 5 billion people, private sector must learn to innovate (Prahalad, 2010). By adopting the right strategy and innovating appropriately, the firms can grow by serving the needs of the customers with lowest levels of affordability.
Contrary to common belief that only few individuals are creative, everyone has a creative side which needs to be harnessed by a firm to take itself to the leading edge of innovation (Kelley & Littman, 2016).
Indian companies are not known for product innovation. Nano and Edge are two rare product breakthrough innovations (Munshi, 2016).
The problem is that despite these various predictions and favorable economic and market forces movements , during driving disruptive innovation is not easy, it is very difficult to expect the change is the traditional behavioral way of familiarity of a government system which heavily dominates aerospace and defense procurement in India. Disruptive innovation is a complex phenomenon and various forces need to work in tandem for it to happen. Shlok and Kintan are trying to figure out the maze in their endeavor to disrupt the industry.
The key to creating value and future growth for every business will depend on the ability of a firm to access a global network of resources and co-creating unique experiences with its customers, one at a time. The executive teams will have to transform their business processes, technology systems, and supply chain management. They will have to create social and technological architecture to create a competitive advantage of ongoing innovation (Prahalad & Krishnan, 2015)
AvidSpace Technologies: Establishing an Aerospace & Defense Company in India
AvidSpace founders Kintan Singh and Shlok Singh were thrown together by fate across boundaries of space and time. Kintan ( MBA, Wharton Business School) worked in the Silicon Valley and also was the part of a leading engineering software developer there. Shlok studied at IILM and IIM, and then had a decade-long career in an aerospace multinational company.
A small beginning in 2009, with a team of four engineers, it has slowly grown into a team of about 200 management and engineering professionals today. AvidSpace HQ and design office is at the millenium city Gurgaon while the manufacturing, testing, and system integration facility is at Bangalore.
Inside AvidSpace Technologies Office
One day Shlok heard a new engineer chatting with his friends on the phone “this place is just like campus.” AvidSpace has an open, collaborative work environment where the AvidSpace team as well as suppliers and customers feel energized and creative. AvidSpace is sought after in-campus selections at leading management and engineering institutes in India and abroad as it is seen as a good home for patriotic engineers coming back with degrees from foreign universities.
Services and Products
AvidSpace technologies provides services related to New Product Development. Clients range from established large companies to start-ups. A key feature of all AvidSpace projects is that the results produce a significant, long-lasting competitive advantage for the client. Some examples are below:
AvidSpace worked with Escorts for development of a new mobile encryption technology (2009). AvidSpace’s work enabled Escorts to file a patent for the design, and 10 years later this very successful encryption remains the only model of Escorts that has not been copied by competitors. Between 2012 and 2013 AvidSpace worked on designing a wagon controller for ZRF Ltd (a Rata Group Company), while all its five competitors (including Z&T) decided to go for a foreign design partner. ZRF’s wagon controller was the first to market, and achieved 50 percent market share within 2 years. AvidSpace designed a suspension system for gun carriage project. The suspension system was so good that all the local manufacturers in India now source the suspension systems from AvidSpace now.
Diverse Fields but Similar Results
AvidSpace believes in going down to the first principles to build up its design, instead of the traditional practice of making just incremental improvements on previous designs. Some examples are as follows:
Mine Blast Detector and Destroyer (MBDD), used in military ground vehicles to protect troops and occupants from under vehicle mine or IED was developed and proven by AvidSpace for Defence Research and Development Organization (DRDO) indigenous design. Development of Oleo-Pneumatic undercarriage for medium-sized aircraft and Medium Altitude Long Endurance (MALE) drones in 2015. AvidSpace developed a momentum accelerator machine for use in development of our missiles in 2018.
Shlok and Kintan have been discussing that although AvidSpace does not yet market its services internationally, foreign companies have sought out AvidSpace for innovative solutions:
Soakwood, a pioneer in aircraft safety products, has worked with AvidSpace since 2009 for design and analysis support for its products. This partnership is in its 10th year. A leading Global Military Helicopter Manufacturer gave AvidSpace the responsibility to develop a new gearbox. AvidSpace engaged with a global supplier network and integrated into a very efficient design and robust product and its gearbox cleared the field trials in 2018. Happy and satisfied customer has placed bulk orders for next five years. SraunAbility, as US-based manufacturer of specialized vehicles used AvidSpace services in one of its major design projects.
Other than the “Systems Engineering” approach, AvidSpace’s success is also based on its commitment to use the best modern engineering tools and techniques.
All design work in done in with complete transparency to the customer, so it is easy for the customer to see how the ideas are taking shape. The customer can contribute from his experience from very early in the design cycle. Computer Simulation tools (Finite Element Analysis, Computational Fluid Dynamics, and other related tools) are used to thoroughly evaluate the proposed design before first build. Even hard to quantify features are examined and refined through simulation. AvidSpace has extensive data acquisition tools and modular reconfigurable test rigs to verify that that the first production part meets the performance requirements. By matching the test data with the simulations, the chances of—deviations during manufacturing are eliminated. AvidSpace carefully selects, monitors, and nurtures its partner ecosystem for manufacturing, rapid prototyping, specialized tests, etc.
Driving Disruptive Innovation
As his car turned toward his house, Shlok thought that the problem they face is that despite various predictions and favorable movements in economic and market forces, driving disruptive innovation is a very difficult proposition in an emerging economy. As institutional voids exist in emerging countries, firms have to manage political, economic and operational issues (Khanna & Palepu, 2010). It is unexpected that there would be sudden change in the traditional bureaucratic way of functioning of an industry which is heavily in the control of old methods and cumbersome procurement procedures and policies. Disruptive innovation is a complex phenomenon and various forces need to work in tandem for it to happen. The entrepreneur is just one of the many such factors. In aerospace and defense, government is the market as well as the market maker. The power positioning of the buyer is so strong that unless the buyer and the user actively promote disruptive innovation, the disruptive movements may get killed in the nascent stage itself. Existing market leaders across the globe have been in the business for more than five decades and have deep pockets and clout to keep new entrants at bay. They keep an eye on new disruptors and adopt various strategies to neutralize them. How does a small player belonging to micro, small and medium enterprises (MSMEs) drive disruptive innovation in aerospace and defense. This is the management dilemma faced by all new firms aspiring to take the innovation route to disruption.
The Road Ahead
As his car stopped in front of his house, Shlok thought that though this growth over a decade of existence is impressive to investors, journalists, and the aerospace and defense industry, but he and Kintan are not satisfied with it. The AvidSpace founders had not started this firm just to earn profits and build wealth. There is a deep desire to make a difference and they are aware of the amount of difference that can be created by building up disruptive products, solutions, and services in the aerospace and defense sector in India. They want to disrupt the Indian aerospace and defense industry. Both are convinced that the timing and environmental conditions are just right. The Government of India is taking major strides to promote innovation in the aerospace and defense industry. The requirements of users are immediate and critical to the stability of the nation. Billions of dollars worth of acquisition plans are in process.
But they are also at crossroads. What will be the winning strategy in these circumstances?
How can they drive disruptive innovation? What are the options in business model innovation?
Defense Domestic Promotion Initiatives in India
The aerospace and defense sector seems very suitable for AvidSpace, considering the skills and competencies of the firm. Helicopter gear box project of 2017–18 has generated a lot of excitement and has created a long-term growth path for AvidSpace. Global aerospace multinational firm’s approval of its design and development capabilities for implies future helicopter subsystems can be looked as for expansion of business. AvidSpace is also the only Indian company to have the International Aerospace and Defence Quality certificate for design and development of helicopter gear boxes. Apart from this, other large global aerospace and defense companies have been knocking the doors of AvidSpace for ‘Make in India’ projects.
However, the feast and famine nature of aerospace and defense business makes it very difficult for firms to sustain their expenses. Should they expand into non-defense sectors?
The executive team wonders if AvidSpace should focus only on aerospace and defense or look for expansion into other industries considering its capabilities in multiple technologies specially robotics.
The AvidSpace team mainly comprises of technical specialists and engineers. The teams have to work with customers who have different priorities. While AvidSpace ensures appropriate build up and up gradation of technical competence regularly through various partnerships, sometime the founders wonder whether the technical teams will be able to continuously align themselves to the end user perspective and consistently delight customers.
As he entered his house and hugged his wife and son, Kirtan and his family were already there waiting for him to join for dinner. As he sat down for dinner, Shlok started telling Kirtan about his visit to the UAV manufacturer. They talked about many other things like would it make sense to support a few ambitious start-ups in their plans to dramatically improve medical rehabilitation, road construction, and transportation by leveraging robotic technologies?
Will service excellence become the culture of AvidSpace?
The founders also wondered how a balance can be created in the internal culture of the company in such a way that competitiveness and collaborations can simultaneously flourish?
As the founders reflected on the past, they also talked about the future they anticipate and the challenges on operational aspects, and on the sentiment and balance between the multinational giants and disruptors like AvidSpace. They wondered how strong a foundation they are standing on. They wondered whether AvidSpace will be the market leader of the Indian aerospace and defense industry in future.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.