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The Lessons from the Chinese Dragons

Peter J. Williamson
 
Forget the idea that the rise of Chinese competitors simply means cheap, low-quality imitations flooding world markets. Chinese companies are starting to disrupt global competition by breaking the established rules of the game. Their tool of choice is cost innovation: the strategy of using Chinese cost advantage in radically new ways to offer customers around the world dramatically more for less. 

The first time you hear it, innovation" might sound like an oxymoron - most of us have got used to associating innovation with the business of providing more functionality and greater sophistication. But the fact that it breaks conventional wisdom is precisely why it has the potential to rewrite the existing rules of global competition. Rather than proving to be just another management fad it will have a significant and sustained impact on world markets. Cost innovation has three faces. 

First, Chinese companies are starting to offer customers high technology at low cost. Computer maker Dawning, for example, has put supercomputer technology into the low-cost servers that are the everyday workhorses of the world's IT networks. 

This novel strategy is demolishing the conventional wisdom that high technology is restricted to high-end products and segments. And it is interrupting the game whereby established global competitors maximize their profits along the product life cycle by only slowly migrating new technology from high-priced segments toward the mass market. 

Second, the emerging Chinese competitors are presenting customers with an unmatched choice of products in what used be considered standardized, mass-market segments. Goodbaby, for example, offers a product line of over sixteen-hundred types of strollers, car seats, bassinets, and playpensfour times the range of its nearest competitor - all at mass-market prices, thus challenging the idea that if customers want variety and customization, they have to pay a price premium. 

Third, Chinese companies are using their low costs to offer specialty products at dramatically lower prices, turning them into volume businesses. 

For example, consumer appliance maker Haier has transformed the market for wine-storage refrigerators from the preserve of a few wine connoisseurs into a mainstream category sold through America's Sam's Club at less than half the then-prevailing price. 

The end result: Haier has a 60 percent market share, while yesterday's niche players have been left floundering. This new Chinese competition is challenging the notion that specialty products must forever remain low-volume and high-priced. 

The cost innovation challenge presented by Chinese companies is disruptive because it strikes at the heart of what makes many businesses profitable today. If your company is to prosper in the face of this new challenge, you too will have to master the secrets of cost innovation. Competing on low price and low inputs cost will no longer be enough to succeed, or even to survive, in the new competitive game. 

Just like other forms of disruptive competition, the global advance of the dragons creates a particular problem for managers: tried and tested strategies that have proven successful in dealing with traditional rivals are unlikely to work in addressing this new challenge from China. 

In positioning yourself for success in this new global environment, whether you are an established multinational, a national champion, or a entrepreneurial start-up, the choices are clear: you can take on board the notion of cost innovation and deploy some of your distinctive capabilities and experience to beat the dragons at their own game; you can restructure your own organization to fully leverage the potential advantages China's unique environment offers across the spectrum from R&D and design to operations and marketing; or you can seek to access these advantages by partnering with a Chinese firm for international (not just local) advantage. 

Whichever path you choose, responding to disruptive competition from the emerging Chinese companies means tapping into the secrets of cost innovation. 

So the prerequisite for all these types of initiatives is perhaps the most difficult adjustment of all: recognizing and accepting China as the source of deep-seated complex learning that can help you deliver high technology, variety and specialist offerings at low cost - and hence improve your own competitiveness. 

Above all else, it will be success in achieving this shift in mind-set that determines which companies can continue to prosper when the dragons come knocking at the door. 

Peter Williamson is Professor of International Management and Asian Business at INSEAD in Fontainebleau and Singapore and author of Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition, Harvard Business School Press, which will be launched on June 7 in Jakarta at Four Seasons Hotel. The writer can be reached at peter.williamson@insead.edu
 
Source : The Jakarta Post