What are the innovations coming from China compared to the West?


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Johnson Chng, Managing Partner at ATKearney shares his views on innovation and key findings from the ATKearney Annual Innovation Research, at London Business School's China Business Forum on 10 November 2012.

Some of the big questions Chng is addressing in this session are What kind of innovations are coming from China and why China is not at a state of innovation as the West. Watch the video footage of the event at: http://bit.ly/innovateCBF

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What are the innovations coming from China compared to the West?

  1. The secrets of successInnovation and sustainable growthChina Business Forum, London Business School10th Nov 2012Johnson Chng, Managing Partner, A.T. Kearney Greater ChinaJohnson.chng@atkearney.com+8613501106784, +85268525572
  2. There are typically four types of innovation: product, process,service and business modelTypes of innovation Focused areas Product Focuses on new or improved products derived from trends and Innovation customer needs, including product modifications/improvements, new products based on existing or new technologies, new e.g. Apple’s iPhone applications etc. Focuses on cost savings in production process and entire value Process Innovation chain through process improvements e.g. RFID and bar codes in logistics Service Focuses on services, surrounding the core product offering such Innovation as handling or technical customer service, that will generate e.g. realtime flexible additional value for customers packaging in travel Business Model Focuses on new business models in terms of vertical integration, Innovation sales channels, cost structure, pricing model, etc. e.g. reverse auctions at EBayMeanwhile, technology is typically an enabler for these four types of innovationSource: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 2
  3. The process for successful innovation implies a holistic viewfrom strategy to maximizing product life cycle profitabilityA.T. Kearneys view on innovation process: from the market tothe market Scope of innovation management Business Innovation Idea funnel Product development Profit strategy strategy management & launch generation Customer Product Needs Turnover extensions Macro Idea M trends Market/Techno- Idea M A logy Trends Idea A R Corporate R Capabilities Idea K Strategy Maximize K E Idea Idea Time-to-Market Roadmaps Idea profit E T Idea T Div / BU Strategy Idea T0 TLaunch TProfit TEnd of Life Innovation Budgets Idea Search Fields Time-to-ProfitProfit is not the purpose for innovation, but it is the result of innovationSource: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 3
  4. The leaders in innovation excels in at least four key areasBest practice Innovation leaders Innovation followersStrategy • Innovation part of strategic agenda • Innovation is a result of different • Explicit definition of search fields initiatives and projects (e.g. Product • Separate technology maintenance and Management, IT, etc.) customer-driven projectsValue- • Identify customers’ value perceptions • Create services without considering and purchasing decisions customers’ value perceptionsperception • Focus on building brand loyaltyRoles and • Have a flexible structure and allow • Have a hierarchical structure & confine employees to be creative employees to specific job descriptionsboundaries • Production and criteria-based idea • Poor idea generation and prioritization management • Engage only employees in innovation • Engage partners, customers and employees in innovation activitiesTechnology • Use ICT to support innovation • ICT not leveraged / tools adopted late • Ensure standards and scalability • Island solution (not scalable) • Focus on costs and differentiation • Focus only on costsSource: A.T. Kearney Best Innovator 2003-2008 A.T. Kearney xx/mm.yyyy/00000 4
  5. Major factors to ensure successful innovation include:(1) explicitly defined strategy and governance processCorrelation between having innovationstrategy and meeting or exceeding Commentsinnovation objective • Companies with an innovation strategy are more likely toDoes your company How well has your meet or exceed their innovation objectiveshave a defined company performed • However, strategy alone is not enough; governance and mechanism to drive implementation are critical, includinginnovation strategy? to date against its accountabilities, resource commitments etc.(% respondents) innovation objectives? (% respondents) Best practice 25No 47 43 • Apple: the project team are put into a common physical 25 space, to enhance effective and fast conversations between teammates in order to incubate new ideas • Procter& Gamble(P&G) 43 ‒ Has a dedicated innovation organization with a dottedYes 53 50 line to each of its businesses 14 ‒ Each business has dedicated personnel in R&D responsible for driving innovation and interfacing with external partners, such as suppliers, to connect internal 2011 With innovation Without needs with outside ideas strategy innovation Exceeding all or most objectives strategy • Google: The well-known 20 percent time policy has allowed its engineers to spend one day a week pursuing projects Meeting all objectives outside of their area of responsibility Meeting some or no objectivesSource: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 5
  6. (2) Focus of customer-centric growthPrioritization of focus areas forinnovation (% of respondents) Comments Critical Important Not considered • Customer demand is the leading criteria for innovation strategy design • Such focus will lead to product introductions, faster time to 30 market, and increased sales 40 50 50 • It is not the direct target for innovation to reduce cost, 70 increase profit or improve the operations efficiency Best practice 70 50 40 • Apple 50 ‒ Aims to create rather than cater to the customer need 30 through innovating great products 10 10 ‒ Spend whatever it takes to make and market the products in order to delight the customers Meeting Increase Fit with Access to Build • P&G consumer financial existing new competitive ‒ Known for capturing customer comments in real time to demand returns capabilities markets and advantage customers gain feedback on how a product is performing ‒ Such behavior enables continuous improvement and leads to repeat purchases and product loyaltyInnovation should be focused on satisfying or even generating customerdemand, rather than making money at the very beginningSource: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 6
  7. (3) Led by people with senior and dedicated position, not justbusiness unit headsLeaders and owners for innovationactivities CommentsWho is responsible for Which functions are • Now it is the business unit head that have a leading role increating and leading involved in innovation activitiesthe innovation agenda? formulating the • However, business units leader may comprise the needed(% respondents) innovation strategy1? firewall between today’s needs and tomorrow’s plans (% respondents) • Best innovators usually have dedicated seniors to beLeading Supporting Leading Supporting responsible for innovation – it’s more possible to involverole role role role outside parties into the innovation process in this way 64 R&D 36 Best practice 27 CEO 64 • Apple: as the CEO, Steve Jobs is the core for Apple’s innovation, who developed a top-notch team, set ambitious Marketing and clear vision and acted as both a policeman and 55 and sales 45 Business cheerleader for product development 64 unit 27 leaders • Google Product ‒ Typically encourages open collaboration but is closed at 45 development 45 times to surprise the market Functional ‒ For example, Android and Chrome OS were the results 36 vice 64 of collaboration between Google and The outside presidents community 55 Innovation 9 • IBM: second-highest ranking executive is specifically charged with creating and maintaining innovation programs Director across the company 36 level 55 9 Finance 451. Study respondents also cite three additional areas as support roles: strategic planning (55%), operations(45%), and IT(18%).Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 7
  8. (4) Clearly defined metrics for measuring innovationeffectiveness Comments Best practice • A lack of metrics deprives companies of the • IBM ability to measure progress and drive ‒ Defines business performance targets corrective actions mainly for its core business and growth • Though important, the metrics are difficult to opportunities design and execute ‒ However, for emerging opportunities, it • There are some ongoing initiatives, e.g. The does not set financial targets IMProve initiative in Europe (an initiative of the ‒ Instead, it ensures that clear milestones are European Commission, Directorate General defined to track the progress of riskier Enterprise and Industry), which provides an projects to signal that they are on the right online innovation benchmarking tool for track enterprisesSource: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 8
  9. The innovation in China is increasing fast but is mainly withinChina and of incremental instead of disruptive mannerAnnual grants of patents in China1 Innovation in China(in ‘000, 2007—2011) • Growth and global impact By type CAGR ‒ The innovation in China, represented by patents +29% 961 815 granted every year, is increasing at ~30%, but 172 Invention +26% 582 135 95% of them are solely in China 352 412 128 335 380 Design +30% ‒ China only accounts for ~5% of the international 68 94 250 134 142 204 344 408 Utility Model +28% patent applications2, compared with ~30% each 150 177 for US and Europe 2007 2008 2009 2010 2011 • Innovators by identity ‒ Most innovation is happening in the privateNumber of “Forbes 2012 World’s 100 sector rather than in state-owned enterprisesMost Innovative Companies” by country ‒ The innovation is driven by small to medium- Others sized companies working to fill market needs 14 ‒ The innovation-related workforce is young and UK backed by little institutional expertise • Baidu 4 • Innovation areas • Tencent Switzerland • Moutai 4 US 43 ‒ Higher share of the world’s scientific articles in India chemistry, physics, mathematics, engineering • Wuliangye 5 • China Oilfield Germany and computer sciences than in biology, Services 6 medicine and life sciences • Sany ‒ Most are incremental innovations based on China • Zoomlion 7 existing products or services rather than Japan France disruptive innovations on core technology, 8 91. Including patent applications received from both domestic and abroad business model etc.2. For 2008Source: Business Journal of the German Chamber of Commerce in China, www.SIPO.gov.cn, Forbes.com, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 9
  10. Service innovation case: HaiDiLao Hot Pot cultivates itscapability in innovation by “serving” its employees first (1/2) Introduction Innovative “services” to the employees by the company • A famous hot pot brand founded in 1994 • Free collective apartments (not basement) • 70+ self-owned hot pot restaurants in 15 cities Care in walking distance to the working place including Beijing, Shanghai, Xi’an etc., four • Trainings on reading map, using closestool, logistics center, and one raw material plant obeying traffic rules etc. to avoid blame or • $~360 million revenue and 14,000 employees sneer from the citizens for 2011 • Establishing school in Sichuan province for the children of employees • Preparing for IPO • Compensation and bonus provided for the Filial Piety parents of employees (team leader level Culture above) • Everyone is created equally and deserves the • Free beach tour for the parents of outstanding employees every year care and respect from the company • The company is a platform for employees (normally migrant workers with middle-school • Authorization of employees for free dish Respect and discount as long as the action can education) to change their lives improve customer satisfaction • The company should employ not only the • Name the innovation after the creator hands by also the brains of the employees, where the power of innovation come fromIt is the best innovation by Hai Di Lao to treat the employees with care andrespect, which is seldom seen in the low-end service industries in ChinaSource: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn through》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 10
  11. Service innovation case: hence, unparalleled servicesinnovation for the customers (2/2)Innovative services to the customers Number of Hai Di Lao Hot Pot restaurants • Free gadgets while eating ‒ Glasses cloth 71 ‒ Plastic bag for cell phone +36% ‒ Elastic hair band • Free services while waiting +20% 26 ‒ Shoeshine 1 3 6 ‒ Nail cosmetology ‒ Fruit & beverage 1994 2000 2004 2008 2012 ‒ Chess & poker • After brand establishing stage for a decade, ‒ Internet reaching a stage for rapid expansion while maintaining the image for supreme service • 0.5 RMB1 discount per paper crane made while waiting • Case study for Harvard Business Review (Chinese version, Apr 2009) • Object of the book “Hai Di Lao: something that • Remote video system for dining between Beijing you cannot learn through” by Professor T.Y. and Shanghai restaurants Huang of Peking University • Ten Best Hot Pot Brand 2007-2010 • Cast study object and guest speakers for the top tier local business schools1. About ten cents in USDSource: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 11
  12. Product innovation case: G’Five becomes a major cell phonemaker worldwide by providing highly customized products Innovative products in India Introduction • Entered India in 2008, No.1 in 2010 (21% • Founded in 2003 in Shenzhen as an mobile phone market share, by sales unit), and top five in OEM and started its own brand “G’Five” since 2008 2011 • Revenue $ 635 mil (2010) and ~5,000 employees • Preparing IPO in Hong Kong • Given the poor power supply in India, especially • Most revenue comes from overseas market, including in the rural area, developed new phone models India, Middle East, Africa, South America etc., and with small screen but 30-day standby time, dual entered China market in late 2011 battery, and even #5/#7 dry battery • One of the largest mobile phone makers worldwide, • Customized phone models according to e.g. No. 9 for Q1 2010 and No. 10 for Q2 regional and racial features • Rapid market expansion based on highly customized ‒ For the Muslims: red and thin phones with products, fast product development speed, reasonable the Quran and GPS pointing to Mecca price, and stable dealer relationship ‒ For Sikhs and Hindustanis: white and thickMobile phone market share by sales unit for phones with loudspeakerQ1 2010 Huawei Others • Facing 20+ telecom operators in the market, 19.2% 1.3% developed phones with 2 or 4 SIM cards G’Five 1.4% Nokia ZTE 35.0% 1.7% Innovative products in Middle East and Africa Apple 2.7% • Phones with two loudspeakers (music needed Motorola for BBQ in the desert as a usual family activity 3.0% during weekend in middle east and for dancing Sony Ericsson by Africans) 3.1% Samsung RIM 20.6% 3.4% LG 8.6%Source: www.gfivemobile.com, Gartner, Factiva Inc., Cyber Media Research, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 12
  13. The innovation will be even more emphasized by Chinesecompanies and revolutionary innovators are foreseeable Driving factors for innovation in China Trends in China • Companies have to be more innovative in • In the foreseeable future, many Chinese order to cater to the maturing domestic companies will still focus on incremental market and increasing consumer innovation based on technology transfers and sophistication have relatively much less luxury to engage in fanciful idealizations • The evolution of industries in China from • Meanwhile, leading companies are on their low-end producer to high-end product and way to evolve to be breakthrough innovators service provider requires innovation • A wave of innovations will be seen, particularly in those areas in which China is facing • Through the overseas expansion, the enormous challenges as a result of its rapid Chinese companies will try to reduce the growth: new energy sources, energy efficiency gap in innovation with their foreign peers technologies, new materials, biotechnology, new pharmaceuticals, software and services, • Policies1 are introduced by China’s central as well as new IT and internet solutions government to encourage innovation, especially in industries with high added- value and related with sustainability1. Including 12th Five-Year Plan, The 12th Five-Year Plan on National Scientific and Technological Development, National Long- and Medium-term Program of Sci-Tech Development Planning, The Development Plan of the Strategic Emerging Industry During the 12th Five-Year Plan etc.Source: Business Journal of the German Chamber of Commerce in China, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 13
  14. A.T. Kearney generates insights on innovation managementfrom its cross-industry studies and publicationsStudies and Publications Selection Best Innovator Europe Innova IMP3rove Publications • European • On-line platform White Papers competition to assess • Assessment of innovation leading performance of innovation SMEs capabilities • More than 2500 • More than1000 benchmarks participants Books (2003 – 2009, • CEN Pre- 15 countries) Standard status to assess • Highly reputed innovativeness of jury and media SMEs partnersSource: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 14
  15. A.T. Kearney is one of the largest strategic managementconsulting firms in the world3000 consultants in 59 offices around the world Europe • Amsterdam • Madrid A.T. Kearney WorldwideAmericas • Berlin • Milan• Atlanta • Brussels • Moscow • Founded in 1926 with• Calgary • Bucharest • Munich headquarter in Chicago• Chicago • Budapest • Oslo• • Copenhagen • Paris• Dallas Detroit • Düsseldorf • Prague • About 2,000 engagements• Houston • Frankfurt • Rome per year• Mexico City • Helsinki • Stockholm• New York • Istanbul • Stuttgart • 80% of clients are repeated• San Francisco • Kiev • Vienna• São Paolo • Lisbon • Warsaw clients• Toronto • Ljubljana • Zurich• Washington, D.C. • London Asia-Pacific • Bangkok • Beijing A.T. Kearney Asia • Hong Kong • Jakarta • Kuala • 13 offices in Asia Pacific Lumpur • Melbourne • Over 650 consultants • Mumbai • New Delhi • Broad experience and Africa/Middle East • Seoul • Abu Dhabi • Shanghai coverage across industries • Dubai • Singapore and services • Johannesburg • Sydney • Manama • Tokyo • Riyadh A.T. Kearney xx/mm.yyyy/00000 15