A visitor at the Youth Innovation Center at the Shanghai Expo. Chinese companies should focus more on innovation, said business strategy experts. Shen Jingwei / For China Daily
Businesses reminded that necessity is the true mother of invention
Singapore - It is hard to imagine any issue more central to Chinese enterprises today than innovation. Rising per capita incomes and wage rates will increasingly make it more difficult for Chinese companies to compete just on the basis of cost efficiency. The imperatives for a shift from a single-minded focus on cost reduction to a focus also on innovation are very strong and very clear.
It is important to remember, however, that how companies must think about and manage innovation is changing rapidly. We focus here on the three most important dimensions along which companies need to re-think their approach to innovation: the rapidly growing imperative for 360-degree innovation; the rapidly growing imperative for frugal innovation; and the rapidly growing imperative for companies to collaborate with other firms in order to develop new products, processes and solutions.
Tomorrow's global enterprises will have to figure out how to make innovation an always-on and 360-degree pervasive activity. Several disruptive forces are causing a steady decline in the half-life of technologies, products, services, processes and even entire business models. As such, innovation will have to be seen as an all-encompassing agenda touching every activity in the value chain. It will have to include innovation in how products and services are produced, distributed, marketed and sold as well as in how the company's organization itself is designed and managed.
The first disruptive force is the ongoing march of technology, which continues to advance at an exponential rate. In 1990, if you needed to buy a book, you had to walk down to a brick and mortar store. By 2000, you could order one over the Internet and it would be delivered to your home in three to five days. Today, you can order it as an e-book and have it delivered instantaneously to your PC, PDA, cell phone or an iPad.
The impact of rapid technological advancement is evident all around us - in autos, pharmaceuticals, clothing and even the lowly toothbrush.
The second disruptive force is the all-around transparency created by the Internet. A company's actions are becoming increasingly visible to almost every stakeholder - customers, competitors, suppliers, shareholders, employees, alliance partners, the community, governments and social activists - in real time.
A direct result has been that barriers to competitive imitation have rapidly gone down even as companies are now scrutinized and held more accountable by more stakeholders more frequently.
The third disruptive force is the emergence of new competitors from non-traditional countries, who bring significantly lower cost structures and larger pools of research and development talent, are very ambitious, and are comfortable moving at great speed. The processes that have resulted in the emergence of new champions such as Huawei, BYD, Infosys and Tata Motors are still in the very early stages.
By frugal innovation, we mean innovation that strives to create products, services, processes and business models that are frugal on three counts: frugal use of raw materials, frugal impact on the environment and extremely low cost. The rapid rise of emerging markets (with China and India as the central players) is the prime mover behind the critical need for all three types of frugality.
Take resources and the environment. Two of the biggest users of raw materials as well as two of the biggest contributors to global warming are cars and buildings. As income levels in China and India rise, demand for cars, larger and newer homes and offices will grow exponentially, creating a challenge as well as an opportunity.
It is unlikely that China and India will decide to put the brakes on their own growth. Instead, what we will witness is a rapid shift from products, services and processes that are energy inefficient, raw material inefficient, and environmentally inefficient to those which are.
Note also that, over the next 20 years, the bulk of the absolute growth in market demand for most products and services will occur at the middle and low-income levels in the big emerging markets. Winning these mega-markets will require that products and services also be ultra low-cost.
A passion for frugal innovation will become increasingly essential not just for companies that sell consumer products and services (such as P&G and Unilever) but also for those which are purely in business-to-business domains (such as Nokia Siemens Networks, IBM and GE). Over the coming decade, companies will have no choice but to become ever more passionate about frugal innovation. Otherwise, the market will move to companies that are.
The dis-aggregation of value chains coupled with greater outsourcing means that, even as companies become more global and more diversified, they are becoming more focused regarding what they manage within their own boundaries. In short, companies are becoming embedded in ever-larger inter-firm networks.
In 2003, P&G's revenues were only $43 billion. By 2007, barely four years and several acquisitions later, its revenues had grown to $76 billion. Yet, at the same time, during this period, P&G had outsourced a greater percentage of its manufacturing operations and a greater percentage of its business support services.
The growth in outsourcing is being fueled by a combination of more intense competition plus developments in information technology. As companies become subject to the transparency brought about by the Internet and as barriers to imitation and new entry decline, companies find themselves facing more intense competition. Consequently, the penalties from internalizing any activity that somebody else can do better, cheaper, or faster have gone up.
The growing need for collaborative innovation is being fueled also by the rising integration of multiple technologies into the same product, service, or process. Today's PC is not just a computing and office productivity device. It has also become a source of multi-media communication, information and entertainment. Today's cars have largely become computers on wheels. Today's books need to be published and made accessible not just in paper-based formats but also in many different types of digital formats.
Can Chinese companies make the transition to become leaders at not just cost efficiency but also innovation? Given China's history of leading edge innovation over the last 2,000 years, the obvious answer is yes. Allocating more money for research and development is a necessary start. However, what is even more critical is to build new mindsets and new organizational capabilities. The education system will need to start cultivating creative thinking and not just rote memorization. On their part, companies and corporate leaders will need to learn how to create and manage horizontal networks rather than hierarchical organizations managed through top-down command and control.
Anil K. Gupta is a professor of strategy at INSEAD Wang Haiyan is an adjunct professor of strategy at INSEAD and managing partner of the China India Institute