Innovation of the production process of engineering companies in relation to business portfolio

ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) Publisher http://jssidoi.org/esc/home 118 INNOVATION OF THE PRODUCTION PROCESS OF ENGINEERING COMPANIES IN RELATION TO BUSINESS PORTFOLIO * Milan Talíř ¹*, Jarmila Straková ² 1 Brno University of Technology Faculty, Institute of Management, Kolejní 2906/4, Brno, 612 00, Czech Republic) 2 Institute of Technology and Business in Ceske Budejovice, Okružní 517, 370 01 České Budějovice E-mails:1* [email protected] (Corresponding author); 2 [email protected].cz Received 18 January 2023; accepted 8 May 2023; published 30 June 2023 Abstract. The paper is aimed at the innovation process in the context of the business portfolio of micro-enterprises. This type of companies is typical of and prevalent in the southern region of the Czech Republic, and the presented conclusions have general validity. A newly developed method of assessing the innovative technological potential of enterprises called "Business technology assessment system" (BTAS), with the contribution of "Criteria analysis of systems". The research answers the question, what economic efficiency can innovations in the production process bring to SMEs dealing with custom manufacturing in the engineering sector. Technological backwardness including corporate infrastructure was proven. Companies compensate for this shortcoming by an increased focus on satisfying customer needs and a high degree of flexibility and innovation in production. From the point of view of production processes, there is a high degree of interconnectedness between individual operations and sub-processes. The business portfolio of most of these companies is disproportionately broad, and this is reflected in the negative findings in terms of the disproportionate number of methods and technologies that these companies possess, but do not fully utilize. Such behaviour of the companies can be explained by the absence of active creation and updating of business strategy. The economic evaluation of the innovative process (BTAS) proved that the very implementation of innovations did not lead to a major increase in the profit margin. The situation was different when evaluating the benefits of the digitization process, which brought an increase in sales and corporate margins. A completely new finding has been demonstrated, i.e., if a company has unused equipment which brings opportunity costs as well, it is possible to create space for innovation by removing it, and at the same time the sale of equipment can be a significant financial contributor to innovation. Keywords: strategic management; innovation, industry; production process; BTAS. Reference to this paper should be made as follows: Talíř, M., Straková, J. 2023. Innovation of the production process of engineering companies in relation to business portfolio. Entrepreneurship and Sustainability Issues, 10(4), 118-134. http://doi.org/10.9770/jesi.2023.10.4(8) JEL Classifications: M11, M21, O14 Additional disciplines: information and communication, informatics. construction engineering * This paper has been prepared as a part of internal research competition at the department of management for 2022 entitled: “A new approach in the generation of corporate (business) strategy based on the parameterization of business processes“. PID: IVSUPS004. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 119 1. Introduction Companies are constantly interacting with the environment in which they operate. They are exposed to stimuli that require their immediate reactions. One way to respond to these stimuli is innovation. The area in which companies can improve is specific to each business with respect to its size, focus and capacity capabilities. It is possible to improve products (products, services), processes (e.g. production process by changing production technology), logistics (material flow) or areas in the organization and management of the company (choice of strategy, change of organizational structure, choice of information tool such as internal software - flow of information, soft skills of managers, etc.). Although nowadays companies are allowed to offer a range of accompanying services, the most important things for customers in the engineering industry still remain quality, price and time of implementation. This triple imperative creates constant competitive pressure and represents an opportunity for better prepared competitors. Growing competition forces companies to constantly innovate and thus respond to dynamic changes taking place especially in the external business environment. Some companies face this pressure without problems, others, less financially strong and competitive ones, may succumb to this increasing pressure. For companies to be competitive and achieve exceptional performance, it is essential to have a "good" strategy and a tailored value chain. The issue of the innovation potential of small and medium-sized engineering enterprises (SMEs) will be dealt with, with a focus on the production process, its innovation, and in connection with the business portfolio of these companies. In order to achieve the set goal, research questions were formulated. They aim to determine the economic efficiency associated with the innovation of the production process and to find what economic benefit is generated from the introduction of digitization into the production process. Following the research questions, the study captures a view of the business environment and aspects related to the innovations of both the production process and the business portfolio through the prism of the company. Therefore, the aim of the paper will be to identify and evaluate the innovation potential of small and medium-sized engineering enterprises with a focus on the production process with regard to their business portfolio. Based on the aim of this study, the following research questions were formulated: RQ1: What economic efficiency can innovations in the production process bring to SMEs dealing with custom manufacturing in the engineering sector. RQ2: What economic benefit does the introduction of digitization into the production process generate in SMEs dealing with custom manufacturing in the engineering sector. 2. Theoretical background With the beginning of the 21st century, issues of efficiency, stability and growth are coming to the fore in the corporate sphere, including SMEs. There are a lot of financial techniques and indicators that address this issue in this setting (Horák et al., 2020). Growing supply is a key element of today's market, which implies that supply frequently surpasses demand in many areas. As a result, firms confront intense competition in their daily operations (Kollmann and Dobrovič, 2022; Soltes & Gavurova, 2015). This trend is reflected in the works of both domestic and foreign authors (Heekyung, 2015; Civelek et. al. 2020; Krajcik, 2021). One of the main tools to fulfil the above-mentioned goals is to ensure permanent and effective innovation of business processes (Krugman, Obstfeld and Melitz, 2015; Heekyung, 2015). In general, the innovation process can be anchored in the business environment in two levels. The first can be characterized as an operation-process area, the second is a management and organizational area. Despite extensive research on innovation performance relationships, previous studies have focused mainly on technological innovation, leaving the effects of organizational innovation relatively unexplored (Azar a Ciabuschi, 2017; Al-Omoush et al., 2022; Skare and Porada Rochon, 2022). It is always necessary to look at innovations not only from the point of view of what they essentially relate ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 120 to, but it is also important to perceive the links to the overall business system (Sternad et al., 2019; Owalla et al., 2021). According to Ghezzi et al. (2020) innovation begins with the discovery of problems and the search for innovation opportunities through the acquisition and classification of knowledge. The authors state that based on this knowledge, companies subsequently determine the direction, goal and approach to innovation. In the context of unpredictable changes (e.g., the Covid-19 pandemic), not only customer behaviour changes (see Sagapova and Dušek, 2021; Dušek and Sagapova, 2022; Konečný, Kostiuk and Ruschak, 2022; Pollák et al., 2022; Pollák et al., 2021; Xiao et al., 2022; Wang et al., 2022; Skare and Riberio Soriano, 2022), but as Ashrafi et al. (2019) also state, only such companies that are innovative and at the same time strategically oriented and managed have increased resistance to crisis phenomena and are looking for new ways to achieve permanent economic prosperity. The introduction of a mechanism for regular evaluation of the company's position will make it possible to identify potential problems in business activity already in the initial stages, which will allow the companies to develop and implement a set of innovative measures to solve problems and to neutralize them (Tyukhtenko et al., 2021; Phadermrod, Crowder and Wills, 2019). As reported by Wu et al. (2022), the company's human resources play an irreplaceable role in the innovation process, and the application of the principles of socially responsible behaviour is increasingly relevant. For industrial production companies, especially SMEs, the business portfolio and distribution channels are an essential pro-growth factor. Foroudi et al., (2022) claim that corporate strategy and the area of innovation processes form the development base of an enterprise and positively influence the process of corporate margin and building the corporate image, including the corporate brand. Weber and Müßig (2022) state that the company's business strategy, the basis of which is the business portfolio, is a determining factor for both the quantity and quality of information from the perspective of risk factors. Henry et al., (2020) present the concept of a company's absorptive capacity as the ability to recognize the value of new external information, to adopt it and use it for business purposes, including changing the business portfolio. Companies with an innovation-oriented strategy report more about their risk factors than companies with a defensive efficiencyoriented strategy (Putro et al., 2021; Soltes & Gavurova, 2014; Gavurova et al. 2016). Weber and Müßig (2022) mention that business strategy influences coverage of major risk topics and creates a framework for innovation activities. Effective innovations require taking into account the shared values of participants in innovation processes, whereby values are understood as subjective ideas about what is desirable (Breuer and Luedeke-Freund, 2017). To improve the quality and efficiency of business processes with a focus on production, Zuhaira and Ahmad (2021) recommend distinguishing the production process itself from the process of seeking changes and from the process of very change of the production process (Ližbětinová et al., 2017). Continuous process improvement begins with a description of its current state. This is followed by determination of monitored metrics, monitoring of process operation, measurement of process operation. The final point is the design and implementation of an improvement, which is then again a source for new improvements (Sjodin et al., 2020; Kljucnikov, et. al., 2021). In the case of business model innovations, Bocken, Nancy and Geradts (2020) and Podshivalova and Almrshed (2021) mention that business model innovations are extremely important, yet very difficult to achieve. Anshari and Almunawar (2021) hypothesize that there is a positive relationship between company digital ecosystem readiness and SME adoption of open innovations. The fourth industrial revolution refers to innovation and transformation of production processes (Domanižová, Janíčková and Milichovský, 2021). Veile et al. (2019) state that in order to innovate in the sense of the gradual implementation of Industry 4.0 elements, it is necessary for the organizational structure to be characterized by a flat hierarchy and decentralized decision-making, and agility needs to be supported as well. At the same time, the corporate culture should be characterized by flexibility, openness, a willingness to learn as well as entrepreneurial spirit and attitudes. Frank et al. (2019) mention a growing trend in the innovation process of servitization. In today's era of high competition, manufacturing companies are increasingly offering important services as part of their processes that support customer satisfaction with the product itself or the result of the previous service. Servitization includes, for example, training, maintenance, overhaul or customer support. Frank et al. (2019) note that the very change of production organization towards the use of servitization is a challenge. Sjodin et al. (2020) state that in response to customer ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 121 demands for ever better products and services, and in response to preventing the customers from leaving for the competition, companies continuously work to improve their processes using mutual harmony. Knowing the processes and documenting the changes is essential for their improvement (Sjodin et al., 2020; Korshunov, Kabanov and Cehlar, 2020). The very activation of innovation processes in companies largely depends on the ability of the companies to develop their intellectual potential (Kasych et al., 2021; Komang et al., 2022; Belas et al. 2023). The authors state that, paradoxically, this intellectual capital is not sufficiently appreciated by companies. Hwang and Kim (2021) find that the introduction of new Industry 4.0 technologies increases the productivity of small and medium-sized enterprises. The authors report that adoption of these technologies increases the efficiency of the manufacturing process by more than 26 % on average compared to companies that do not implement these technologies. At the same time, the authors see digital transformation as a unique opportunity to increase the productivity of small and medium-sized enterprises. However, Ferdous and Ikeda (2022) also found that, based on structural modelling of the innovation process, it can be concluded that the size of the company raises the probability of its involvement in new-to-the-market innovations. In relation to employees, Suto and Takehara (2022) state that non-monetary rewards act independently and synergistically with monetary rewards to enhance employee motivation to innovate, thereby increasing the company value. Companies that apply these principles will continue to be considered legitimate if they are perceived as socially embedded not only externally but also internally (Wu et al., 2022). A pro-growth-oriented company assumes the intersection of horizontal and vertical integration. While the vertical leads to real modernization and innovation of business processes, horizontal integration has the task of ensuring the connection of the company with educational and research institutions, which is the essence of an effective innovation process. When trying to find an answer to the question of how a company can anchor the ideas of continuous innovation among the basic company components, it is possible to use the CIPF model, the author of which is professor Milan Zelený. Zelený states that CIPF has 4 necessary and fully sufficient components: C (customer), I (innovation), P (process), F (finance), (Zelený, 2021). A number of authors, including the authors of this paper, recommend starting to connect the value chain horizontally in order to implement the elements of Industry 4.0. To optimize processes across the entire value chain, it is necessary to ensure the exchange of data from customers to suppliers and vice versa (Veile et al., 2019). In the context of digitization, Anshari and Almunawar (2021) and Kraj (2022) mention that SMEs should be protected to ensure their survival. Müller, Buliga and Voigt (2021) as well as Nagy, Zábojník and Valaskova (2022) mention that many benefits of Industry 4.0 will become available to small and medium-sized enterprises only if they not only use Industry 4.0 technologies, but also innovate their business models or business portfolio based on the opportunities brought by these innovative technologies. Fernandez-Vidal et al. (2022) and Sommer et. al (2022) state that companies in their transformation primarily choose combinations of small transformational innovation strategies to achieve their large transformational goals. 3. Research objective and methodology Descriptive analysis – this method aims to identify the determinants of innovation potential of enterprises through observation, measuring, and interviews. There will be determined the essence of the problem and its limitations. The focus will be on analysing the causes and motivation of a company to innovate or not to innovate its processes. Furthermore, the production process and the related processes will be analysed with regard to the business portfolio of a model company. There will also be performed an analysis of the determinants influencing the innovation of a production process and business strategy of the company. Criteria analysis of systems – extraction of data from the production process. It is a qualitative evaluation of data according to predetermined criteria. The evaluation will be carried out by assigning values -1, 0 and 1 to a given item being evaluated based on whether it meets (1) or does not meet (-1) a given criterion, or whether the information cannot be confirmed or verified (0). In the case of a zero or negative value, the given item will be ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 122 penalized in fact. Another criterion of the analysis is the significance of a given parameter for a given purpose in the form of weight coefficient. Weight coefficient can be assigned the values ranging from 0.1 to1. For a clear evaluation, the result of the analysis will be also graphically represented. Business technology assessment system – it is an assessment system created by the authors. A trial version is in MS Excel (see Table 1). The assessment is focused on the proportional use of technology in a company in relation to its full use, and its possible attractiveness for a customer. The practical application of this method consists in determining the degree of the company´s ability to use this technology, or its possible use in future. The values assigned can range from 0.1 to 1, where 0.1 corresponds to the minimum use of technology. Value 1 then refers to the maximum possible use of technology which a given company is able to ensure. The attractiveness of the technology then reflects the customer´s demand for the use of the given technology. The possible values range from 1 to 10 where 10 corresponds to the maximum demand for the given technology. Table 1. General (methodical) application of the business technology assessment system (BTAS) Source: Authors To obtain relevant results, the values were symmetrically divided into two parts. There can thus be four alternative outputs: 1. To stop using the given technology (usage < 0.55, attractiveness < 5.5); 2. Consider future elimination or increase interest of Tu customers to use the technology (usage > 0.55, attractiveness < 5.5); 3. To develop the technology, strive for its increased usage, i.e., to increase machine hourly rate, work with the active demand for a given service – focus on technology (usage < 0.55, attractiveness >= 5.5); 4. To maintain and work with the technology within the main activity of the company (rate growth) – focus on technology (usage > 0.55, attractiveness > 5.5). Table 2. Intervals of values for making recommendations in a given area Source: Authors ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 123 The concurrence of current recommendations with the future ones enables to formulate the resulting evaluation. If there is a difference, change is recommended, which can be evaluated as follows: extremely negative, strongly negative, negative, positive, strongly positive, extremely positive. It shall be also noted that even negative evaluation of a given technology may open new innovative opportunities for the company. Economic analysis – economic analysis will be used for the financial evaluation of the innovations implemented. For its evaluation, the average payback period will be used, as stated by Kislingerová (2007). Average payback period indicates the time in which the investment should be paid off considering average cash flows arising from the implementation of the investment. where: C0 is the capital invested ⌀ CF is the average flow of funds arising from investment for its planned economic life By inverting average payback period in percentage, it is possible to obtain average percentage return. The value indicates the average annual percentage return on the amount invested. A simplified form of payback period not including the discount coefficient will be used because the discount coefficient is always difficult to determine precisely for a small engineering company. Moreover, the economic analysis shall include a process to evaluate the change in margin and volume of sales. This evaluation will be carried out by means of the ratio and percentage increase in given parameters in relation to their individual initial values. 4. Results and Discussion Specifics and uniqueness of the transformation process Prior to the actual analysis of relationship between the company´s business portfolio and the innovation process, the specifics and uniqueness of the corporate transformation process were identified. Part of the company´s success is its specific approach to customers and a well-functioning order creation process (see Table 3) where customer awareness and acceptance of future technological process is decisive for the production process and pricing. Table 3. Diagram of order creation process in a company Source: Authors ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 124 The standard production process takes place at point 7 or point 5. Given that it is a unique micro-enterprise, a high degree of interdependence of individual operations and subprocesses have been identified. This means that individual elements, such as logistics, control, or construction design (if carried out directly at the workplace) are inseparable parts of the production process. Risks of transformation process as a framework of innovation process In the context of the production processes, risks could be identified that affect this process. The most significant business risk is considered to be associated with the improper communication of information. Within the solution processes, the management of the company was proposed to replace manual information recording with digital software. Part of the innovations in the model micro-enterprise was thus the implementation of software for order management and extraction of data from the production process. Within the analysis of software suitable for the company, an initial list of systems was compiled. The mapping of possible software solutions was preceded by determining 15 parameters that further specified the suitability of the systems for their possible implementation in the model company. The observed parameters were recording orders, recording employee work on orders, recording of employee attendance, recording material consumption in orders, possibility of data export and import (this is particularly suitable for stock and non-stock items), invoicing options, price setting of different hourly rates of employees and/or machines, basic financial tools for evaluation of cost and profitability of orders, the possibility to rent or purchase a licence (a permanent licence), whether support is provided and whether it is free, possibility to obtain hardware from the system supplier, and the possibility to connect to other systems through API. Based on these parameters, the data were graphically processed (see Graph 1) to be able to clearly assess the suitability of a specific proposed solution. The evaluation was based on assigning values -1, 0 and 1 to given software according to whether a give parameter meets (1), does not meet (-1) the set criteria or whether the information on the software function is not available (0). This implies that even negative values are important for the evaluation. The evaluation also included the weight coefficient (0.1 - 1), which determines the significance of individual observed criteria for the selected model company. Here, 1 indicates the highest weight, while 0.1 the lowest one. In the case of the most observed parameter such as recording orders, employee attendance, material consumption, and possibility of data export and import, the assigned weight of these functions was 1. When comparing the software, the latest commercial version with add-ons was considered, except for the eMistr system, where add-ons go beyond the monitored areas. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 125 Figure 1. Results of comparative criteria analysis Source: Authors (assessed on the basis of publicly available information) As seen from the above graph, all systems can perform the function of work recording. The only system that meets all 6 weight criteria is eMistr. The second most suitable system was “Zakázkovník”, which, unlike eMistr, does not have the function of data import, which represents its biggest advantage for its application in the model company. For implementation, the eMistr system was thus selected, as it enables nearly 100% transition of an industrial company from manual data management to the digital form, and thus reduces the necessary administration. Solution for harmonization of business portfolio with business technologies As mentioned above, the company is characterized by a wide range of production technologies and the corresponding business portfolio. This brings along a risk of their full use, and it can thus be very complicated to determine the benefits of individual technologies for the given company. Table 4 below shows the input values, output recommendations, and resulting evaluation on a representative sample of technologies in the model company. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 126 Table 4. Technology evaluation system in the model company (representative sample) Source: Authors The table shows which technologies were recommended to be phased out from the business portfolio (Other – Truck lift). Economic evaluation of innovations in technology Economic evaluation of the innovation proposal for changes was carried out in relation to the technology evaluation system proposed by researchers for the implementation of digitization in the model company. Table 5 shows the balance of costs of innovation and income from the sales of discarded machines and stock Table 5. Balance of costs of innovation and income from the sale of discarded machinery and stock Item Price [CZK] Costs of implementation of technology changes (purchase of machinery and software) 517 550 Sale of stock not related to the new business portfolio -20 000 Sale of equipment not related to the new business portfolio -183 500 Total costs [CZK] 314 050 Source: Authors The assessment of return on investment was performed using the average payback period (t) where the difference between the annual amount of labour cost savings at the same volume of production and annual fixed costs was used as the cash flow of investment repayment (CF): Where: 81 328 CZK is the sum of the constant annual cost savings arising from implemented innovations. 15 000 CZK are annual fixed costs associated with innovation (costs of machinery and equipment maintenance) The average percentage return that indicates the percentage return in the model company resulting from the innovation implemented is determined as follows: ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 133 Sternad, D., Krenn, M. & Schmid, S. 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Technological Forecasting and Social Change, Elsevier. 174(C). https://doi.org/10.1016/j.techfore.2021.121214 Zelený, M., (2021). Entering the age of accelerated change: In search of equilibrium. Human Systems Management. 40(1), 3-14, https://doi.org/10.3233/HSM-209002 Zuhaira B. & Ahmad N. (2021). Business process modeling, implementation, analysis, and management: the case of business process management tools. Business Process Management Journal, 27(1), 145-183, https://doi.org/10.1108/BPMJ-06-2018-0168 Funding: This paper has been prepared as a part of internal research competition at the department of management for 2022 entitled: “A new approach in the generation of corporate (business) strategy based on the parameterization of business processes“. PID: IVSUPS004. Author Contributions: Conceptualization: Talíř, Straková; methodology: Talíř; data analysis: Talíř, writing—original draft preparation: Talíř, writing; review and editing: Talíř, Straková; visualization: Talíř. All authors have read and agreed to the published version of the manuscript. ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES ISSN 2345-0282 (online) http://jssidoi.org/jesi/ 2023 Volume 10 Number 4 (June) http://doi.org/10.9770/jesi.2023.10.4(8) 134 Milan TALÍŘ is doctoral student at the Institute of Management, University of Technology Faculty in Brno, Kolejní 2906/4, 612 00, Brno (Czech Republic). Research interests: Strategic Management and business strategy. ORCID ID: https://orcid.org/0000-0002-6510-1297 Jarmila STRAKOVÁ, is the Associate Professor on the department of Corporate strategy, Institute of Technology and business in České Budějovice, Okružní 517/10, 37001 České Budějovice (Czech Republic). Research interests: Strategic and value management. ORCID ID: https://orcid.org/0000-0002-3048-3467 Make your research more visible, join the Twitter account of ENTREPRENEURSHIP AND SUSTAINABILITY ISSUES: @Entrepr69728810 Copyright © 2023 by author(s) and VsI Entrepreneurship and Sustainability Center This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/