R&D points the way forward for China
0 
Frugal innovation
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.
Collaboration
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
Go to Forum >>0 Comments