Based in Shanghai, Yi Ta Chng is CEO of ?What If! Asia. Previously VP at Johnson & Johnson and General Manager at P&G, he has lived and worked in London, Paris, Kobe, Singapore, Bangkok and Hong Kong. In this article, Yi Ta explores how the Chinese economy is changing from a sales and distribution-led model to an innovation-fueled growth strategy.
Innovation Becomes the Lead Engine of Growth
The real story here in China isn’t its spectacular economic growth; with a population four times that of the USA or Europe, China is too big and multilayered to be regarded at an aggregate level. The real story is what’s happening beneath the country-level headlines—and its implications not just for those who sell things, but for all of us who are committed practitioners of innovation.
As more people move to cities something profound is changing in the way products are bought and sold. Urban dwellers, driven in part by hugely popular social networks and by the high visibility of China’s 115 dollar billionaires and 500,000 dollar millionaires, are aspiring toward evermore-high-end goods.
Simple economics are playing out around us. As our first- and second-tier cities become more crowded and aspirational, and as third- and fourth-tier cities flood with savvy shoppers (a city dweller in China is paid 10 times more than his rural counterpart), competition is exponentially increasing. Many Chinese companies are targeting smaller cities to maintain their growth rates. But it’s not enough to win through fast following and quick distribution. Increasingly products will need to shout out through their words (advertising) and deeds (product performance) exactly why a consumer should keep buying them.
In this context, we see the skills of innovation and marketing displacing sales and distribution as the lead engines of growth. This is already beginning to happen in first- and second-tier cities. It’s a pattern we’ve seen the world over. And while the skills of marketing and brand-building are already well-established in China, putting these skill sets to use through innovation can deliver a sustainable competitive edge. Innovation enables a company to create a pipeline of new products—along with new reasons for consumers to buy them. Winning companies in China will need innovation as their lead engine of growth. It’s a planned approach to creating new value that is fundamentally different from the model of entrepreneurial growth so ingrained in China—and that, in essence, is the challenge.
Not only will growing demand ‘pull’ innovation, but now the Chinese government is starting to ‘push’. The theme of the latest Five Year Plan is ‘indigenous innovation,’ with RMB17trillion set aside as tax breaks and inducements for private companies to prosper in high-tech fields of environmental protection technology, wind and solar power, biotech, electric battery production, high-speed trains and low pollution air travel.
Innovation Challenges in China
In this fast changing environment the innovation agenda is emerging:
- New Category Innovation: Imagine watching a city grow in fast-forward: clouds shoot by, skyscrapers erupt, and urban centers transform themselves from sleepy neighborhoods to bustling chain stores. But this isn’t a film, and it isn’t fiction: Over 300 million people will move to China’s cities over the next five years. That’s 300 million new urban consumers. What skin-care products should a young woman use? What do I drink if I don’t want to come across as “old-school”? What do I buy for my baby to show that I’m a better mother? The opportunity is here to define new categories, and to own key positions. But it will only come through a considered exploration of consumer insights, the development and rapid testing of different conceptual routes, and swift strategic planning and investment behind the lead idea. This is how new categories are not only created, but owned.
- China Specific Innovation: Although many multinational companies have created substantial businesses transplanting existing global products, there are many local companies that have become bigger players by meeting highly-specific tastes and needs: medical services aimed at one couple looking after six aging dependents, rice- instead of potato-based snacks, the need to excel in English. Like Japan, China is large enough to support specialized offerings for our consumers. Innovation has a critical role to play here, as we need to get under the skin of how people live their lives and tailor products and services for them. The stakes are high. B&Q, the UK-based DIY-house-wares retailer, failed to take off in China— Chinese consumers just don't get the concept of DIY when labour is relatively cheap and willing. IKEA is changing its famous flat-pack furniture model to a delivered and home-‘built’ model. KFC has outgrown McDonalds in China by offering a uniquely Chinese menu that includes thousand-year-old eggs for breakfast.
- Business Model Innovation: As consumers get richer and more discerning in their tastes, the question of how companies make money over the long-term becomes critical. Detailed understandings of the customer interaction journey, as well as the systems that deliver value, often reveal the most disruptive innovation opportunities. A good example is how Alibaba Group’s Taobao was able to outmanoeuvre eBay in China, and dramatically grow the market with a focus on different value-creation points. First, it attracted slews of new users by replacing the transaction fee model with free transactions. Revenues could then be generated with an optional pay-for-performance/click advertising model—on a much larger volume of transactions. Additionally, the Alipay online payment system encouraged users to purchase online using an escrow service and other alternative payment methods (other than credit cards). This allowed Taobao to overcome poor credit infrastructure and cautious consumption habits. Taobao’s focus on different value creation points allowed them to rewire the revenue model with dramatic results—Taobao’s revenues are now four times those of eBay globally.
Against a backdrop of dramatic yearly growth, the challenge isn’t merely to identify innovation opportunities—those are abundant. It’s to decipher and ruthlessly prioritize the opportunities that will sustain that growth year after year—and then move on them swiftly.
This challenge demands answers to a series of fundamental strategic questions, to decide where to focus investments in innovation:
- What do we want innovation to deliver to the business?
- We can’t enter every market just because we could make some money, so where will we play and how will we win?
- Are we closer to our consumers than our competitors?
- Do we have some people with the ability to step outside their comfort zone and collide new thinking?
- Can this business get new ideas to market fast, and without diluting them?
This type of strategic thinking is non-negotiable when it comes to building innovation capability in China!
Internal Obstacles to Innovation
Companies who have been successful in delivering growth via distribution and sales in China face a number of challenges as they migrate to an innovation-fueled growth agenda. Many of these are more internal than external.
For example, so rapid is the pace of market development in China that executives based there often don’t have the time and space to develop expansive, innovation-ready strategic skills. Innovation requires us to play with possibilities and think outside conventional timeframes and market boundaries. It also requires us to slow down, take time out of our day-to-day battles, and think strategically to identify and scope fertile territories for breakthrough innovation.
For multinational players, most major decisions for China require significant senior management alignment, and often involve decision-makers from corporate or regional headquarters outside of the country. A lack of firsthand experience in China then gets countered with an inundation of data, which can make decision-making slow and complicated. We believe strongly that it’s essential to immerse decision-makers and influencers in the market, so that they develop the confidence to set direction and make decisions based on more than a spreadsheet or a market research report.
Some of the other organizational roadblocks to innovation are more nuanced. In general, innovation skills come easiest to people who have worked across different categories in different markets. Simply by virtue of career path, many Chinese executives will not have had the breadth of category experience that facilitates the acquisition of innovation skills. In addition, a customary pattern of polite respect for hierarchy can be at odds with the need for innovators to get outside their comfort zone, look beyond their area of expertise and question why and how others do things. It can be difficult in China to pass comment on a peer, much less a boss. And silence and innovation don't go together.
Building an Innovation Engine in China
First off, we need to select a group of innovation champions within the organization. Selecting transformation agents in China means looking for those people who can make things happen; this doesn't mean choosing the most enthusiastic or the most convivial people. It means bringing experienced, respected people to the challenge. Most companies fall down on this point.
Innovation capability works if we can prove results quickly. So we don't take people out of the office on long training courses; we roll our sleeves up and get very practical—where can we innovate fastest? Learning new skills requires short, punchy training sessions, but the emphasis is on personal coaching. Any material needs an academic and empirical underpinning; anecdotes won’t do.
Cross-functional collaboration needs lots of help in China. Loyalty to team is intense and we need to work hard to get people to focus on the primacy of innovation versus team targets.
Finally, innovation teams with a multi-cultural twist actually do better than those that are mono-cultural. It’s the diversity of thought that brings the best breakthroughs, but we need to create a safe space where emotional expression is unfettered—and where participants can use their mother tongue to give full vent to their feelings.