How Chinese Companies Disrupt Through Business Model Innovation11 July, 2016 / Articles
Experts continue to debate whether Chinese businesses are truly disruptive. For some industries in the West, this question appears a bit ridiculous. The American textile and apparel industries, for example, will tell you that the evidence can be found in the blood on the floor — their blood, on what used to be their floor. American and European metals industries and producers of wind turbines and solar panels will echo that same impression.
But despite all the pain they have experienced, these industries are wrong. Far from being disruptive, Chinese textile, apparel, appliances, metal, and solar and wind players have done little that has been different from the practices they found in these industries when they entered them. They’ve simply undercut Western competitors by offering cheaper prices. They have been displacers, not disrupters.
The difference between displacement (outperforming existing market incumbents at their own game) and disruption (changing the game) is strategically important, no matter how similar the pain they cause is. Displacement generally is easier to combat than disruption.
And while China has been more of a displacer than a disrupter to date, that is changing.
China has not been a huge technology innovator, despite being the world’s second-largest investor in R&D, but Chinese businesses have found ways to use innovations in processes, business models, and customer experience to their disruptive advantage. Xiaomi’s phones are not technologically disruptive in hardware terms, but they are revolutionary in customer experience terms; customers come to expect and appreciate their weekly OS updates. Technologically, Tencent’s WeChat may seem like a WhatsApp knockoff, but it allows users to do a multitude of things that other messaging apps cannot. Again, this is true disruption (although not particularly successful outside of China so far). Haier’s organizational reinventions allow it to accelerate the time to market for its Tianzun advanced household heater/air conditioner/air purifier — a potentially disruptive advantage in what is a slow-moving industry.
We in the West have long prided ourselves on our business process acumen, strategy savvy, and customer centricity while stereotyping Chinese competition as being nothing more than low cost. As a result, we have missed China’s transition from displacer to disruptor. Today China’s businesses are becoming considerably more disruptive than we have given them credit for, making Chinese competition more formidable in the future.
This is not to say the road ahead for China will be a smooth one. The major barrier the country must overcome is entrepreneurial. We spoke with several Chinese entrepreneurs in Kunshan last month — young and old, working in both the private sector and the public. They consistently characterized their peers as too short-term oriented to create truly disruptive change, and the country’s cumbersome state-owned enterprises as too slow. Entrepreneurs in Chinese industries from animated media to applied medical research said that China’s insistence on domestic standards are resulting in less-ambitious innovation and that the education system is not supporting appropriate talent development. The former country head of a major multinational pharmaceutical company (a Chinese-American one) observed that “made for China,” rather than “made for the world,” often is easier, cheaper, and more profitable than pursuing truly disruptive changes, an observation echoed by the Chinese managing director of an internationally funded pharmaceutical venture capital fund operating in the China market. This emphasis on “made for China” is also a peeve of a “returnee” chaired Beijing University professor who pointed out that some returning young Chinese scientists are avoiding new challenges, preferring instead to “continue their advisor’s work.”
Nonetheless, there are enough suggestions of business model disruption appearing in China that it is highly conceivable that soon we might be entering a period of two-speed change. The first will be continued displacement by ever-more-competitive Chinese companies who compete on cost. The second will be disruptive business model innovation occasionally appearing in less-familiar sectors of the Chinese economy, powered by emerging entrepreneurs.
This presents Western companies with a fresh challenge. Displacement can be combatted in a number of ways, from process improvements to government trade actions, and cost advantages tend to be temporary sources of competitiveness, but disruption presents a more profound challenge. It calls for real transformation in incumbent companies — something that is notoriously difficult to achieve.
Bill Fischer is Professor of Innovation Management at IMD, Lausanne, Switzerland. He is the former Executive President and Dean of the China-Europe International Business School (CEIBS) in Shanghai, and a co-author of Reinventing Giants, a study of business model and organizational culture reinvention at Haier.
Denis Simon is Executive Vice Chancellor of Duke Kunshan University. He is the co-author (with Cong Cao) of China’s Emerging Technological Edge, which looks at the supply, demand and utilization of high end talent in China.
While the concept of “displacement” is interesting, what took place in China is still more disruptive than not. “Disruptive” is defined as being an innovation and/or a significant price reduction. The latter took place primarily for three reasons; specifically, (i) the true cost of manufacturing, including but not limited to the disposal of waste, fair and just labor expenditures, and the development of innovations, were not included in their sale prices, (ii) corruption by and between government officials and Western entrepreneurs was staggering at the outset, and (iii) unprecedented Western capital and intellectual property infusion. In short, if a business is able to outsell its competitors by offering incredibly low prices, by destroying its environment, robbing its employees, and colluding with its government for advantageous deals, this is not “replacement”. And, as you are aware, China is now leveling the playing by requiring higher wages, more employee benefits, far less governmental corruption, and stricter environmental laws; which, means just maybe their time of displacement is running short.