Response Journal;Magazine: Summer 2014Research Feature April 23, 2014 Reading Time: 23 min;Peter J. Williamson and Eden Yin
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Accelerated Innovation: The New Challenge From China
Magazine: Summer 2014Research Feature April 23, 2014 Reading Time: 23 min
Peter J. Williamson and Eden Yin
Rather than focusing on technological breakthroughs, Chinese companies are finding new ways to innovate that reduce lead times and speed up problem solving. Companies
elsewhere should take notice.
Chinese companies are reengineering new product development in ways that reduce lead times.
Chinese companies are opening up a new front in global competition. It centers on what we call accelerated innovation — that is, reengineering research and development
and innovation processes to make new product development dramatically faster and less costly. The new emphasis is unlikely to generate stunning technological
breakthroughs, but it allows Chinese competitors to reduce the time it takes to bring innovative products and services to mainstream markets. It also represents a
different way of deploying Chinese cost and volume advantages in global competition.
Silicon Valley and other technology hotbeds may be able to match the speed of Chinese innovation in particular sectors such as electronics and Internet-based services.
However, what’s distinctive about the strongest Chinese competitors is their capability to combine accelerated innovation with rapid scale-up to high volume at low
cost, and to apply these techniques across a wide variety of traditional industries. We saw accelerated innovation being deployed in Chinese industries ranging from
pharmaceuticals, telecommunications and information technology to medical and industrial equipment, consumer electronics and e-business. Although it may not impact
companies that are consistently able to deliver breakthrough innovations, it presents real threats and opportunities to many mainstream competitors.
The Push to Accelerate Innovation
We spent three years researching the way Chinese companies are accelerating R&D and innovation thanks to the low cost and abundant supply of Chinese engineers. (See
“About the Research.”) We found that Chinese companies are industrializing innovation to improve speed and cost by applying lessons from production lines, pushing the
boundaries of simultaneous engineering to cut the lead times for new product development, rapidly incorporating user feedback into new designs to drive down the
learning curve faster and restructuring their organizations to speed up problem solving. These developments have potentially huge implications for how companies should
think about global competition and whether they need to rethink and reengineer their established innovation and product development processes.
About the Research
We began our research with face-to-face, semi-structured interviews with more than 50 representatives of 23 Chinese companies, in an effort to understand their
approaches to R&D and innovation. We then revisited companies that appeared to be pioneering new approaches for speeding up innovation and new product development in
order to get more detail about their processes. We conducted in-depth discussions about exemplary projects, probing into specifics about how the innovation cycle had
been accelerated. Our questions included: the steps into which the innovation process had been divided; the number and qualifications of staff involved in each step;
the role of customer and market feedback; and the organizational design and decision-making processes within the innovation team. We also asked each representative to
compare the speed and cost achieved on the company’s projects with similar product development efforts undertaken by multinational companies operating in China. These
perceptions were then cross-checked through interviews with people at a number of global companies, whom we asked about topics related to the emergence of accelerated
innovation in China.
Industrializing the Innovation Process
The classic image of innovation, especially early-stage R&D, is of an inventor or a small team brainstorming and experimenting with new ideas. Large-scale and tightly
defined processes are generally seen as inhospitable to creativity and innovation. Although innovation may be systematized and scaled up to involve thousands of
scientists and engineers in some industries, such as pharmaceuticals and IT, the core R&D activities nonetheless typically revolve around a set (perhaps a large set)
of relatively small teams.
A number of Chinese companies are challenging this conventional view by pushing the boundaries of systemization and scale to a whole new level in their efforts to
accelerate innovation, leverage the potential of a large pool of competent but often unexceptional technicians and engineers and reduce costs. Their approach is to
divide the innovation process into a large number of small steps and then assign teams to work on each stage. The goal is for this “assembly line” to accelerate the
process and deliver results quickly.
WuXi AppTec, a pharmaceutical, biopharmaceutical and medical-device outsourcing company with operations in both China and the United States, has embraced this
industrialized approach to new product development. Its work on a new drug for the treatment of chronic hepatitis C provides a good example. As with most drugs, the
development cycle involves discovery, preclinical and clinical trials, regulatory approval and marketing. Rather than relying on a small team working in the laboratory
with a few machines, however, WuXi AppTec began by dividing the R&D process into a series of eight steps, with dozens of people assigned to each step. The initial
creation of the reactive intermediates required specialized staff with at least master’s degrees and considerable research training. The other steps required “R&D
workers,” who are graduates of trade colleges from which WuXi AppTec hires thousands of employees each year. Rather than relying on automation (with its associated
high capital costs and risk of bottlenecks), WuXi AppTec uses manual techniques that can be quickly scaled up or down as required to keep the project moving rapidly.
Efficiency is increased by using SAP’s enterprise resource-planning software adapted from a manufacturing assembly line to manage the innovation process. This highly
industrialized approach has enabled WuXi AppTec to complete projects two to five times faster than comparable projects using conventional approaches that the company
benchmarked in the United States.
Pushing the Boundaries of Simultaneous Engineering
Traditionally, new product and service development has been organized as a sequential “waterfall” process, where certain steps needed to be complete before subsequent
stages could begin. In recent years, companies have tried to speed things up by tackling certain steps in parallel, an approach pioneered by NASA and now commonly
referred to as “simultaneous” or “concurrent” engineering. Although the concept of simultaneous engineering is simple, many companies have found it hard to implement
in practice because of barriers such as unwillingness by engineers to release information early and difficulties in coordinating multidisciplinary teams.1
Chinese companies, however, are not only embracing simultaneous engineering but pushing it to new levels. Consider Lenovo Group Ltd., which acquired IBM’s personal
computer business in 2005 and is headquartered in Beijing and Morrisville, North Carolina. In 2005, its new product development cycle was 12 to 18 months. Since then,
Lenovo has managed to cut the cycle in half by applying simultaneous engineering across the entire innovation process, beginning in R&D and continuing through design,
manufacturing engineering, quality control, procurement, marketing and service. For every project, team members work on different elements in parallel, under the
supervision of one leader. Lenovo overcomes the usual problems of implementation by breaking down its product designs into separable modules linked by standardized
interfaces; redesigning its software to be compatible across all activities associated with the new product; establishing short lines of communication where each team
member can represent his or her respective functional department; and introducing open design processes where information is shared with the entire team as early as
possible.
Guangzhou Pearl River Piano Group Co. Ltd., which is based in Guangzhou, China, and is the world’s largest piano maker, has applied a similar approach to its
manufacture of musical instruments. Pianos are made up of four main components: the resonance system, the keyboard, the pedal system and the case. Western piano
manufacturers have traditionally worked sequentially, with teams of two or three professionals spending up to two years going through all of the steps to completion.
Pearl River uses a more industrial process. Recently, for example, for its high-end Kayserburg pianos, the company used a team of 23 workers (including six designers,
10 individuals with expertise in areas such as procurement, manufacturing and sales, three computer engineers and two product testers). This team was supported by an
additional 40 craftspeople to enable rapid prototyping of possible new designs. Using this approach, Pearl River was able to launch a range of 10 new Kayserburg pianos
in less than five months, at a total cost of just $1 million. Pearl River executives estimate that Western competitors using traditional design processes and small
teams would have to invest around $10 million over several years to complete a similar set of new designs.
Innovation processes based on industrialization and simultaneous engineering are also being used in China to develop new Internet services. Consider Tencent, a leading
Chinese Internet service portal that is based in Shenzhen and whose QQ instant messaging service has more than 800 million active user accounts. Tencent developed a
new integrated calendar and reminder service by assembling a team that included individuals from every function and speciality required to host, launch and service the
new product. This allowed Tencent to coordinate all of the critical elements: the user interface, the programming, the enhancement of the IT infrastructure and the
development of maintenance and customer service protocols. The project was completed in just two and a half months, compared with a global norm of six months or more.
Tencent’s goal was to be first to market, but it also wanted to develop a process for launching regular upgrades of the calendar and reminder application based on what
it learned from market feedback.
Cycling Rapidly Through “Launch-Test-Improve”
When Tencent launched the first version of the QQ reminder application, it was geared toward appointments, birthdays and anniversaries. Users quickly pointed out that
the product had a missing feature: reminders for when their favorite sporting events were about to begin. More surprising to Tencent’s developers, however, was the
flood of input they got from gaming enthusiasts who wanted reminders about the schedules of computer-game tournaments. Within weeks, the Tencent team released a new
version that incorporated both functions. This rapid cycle of launch-test-improve has now become core to Tencent’s innovation process. Rather than nailing down a
full-fledged product before launch, the Tencent development team routinely launches ready-to-use new platforms with limited functionality and harnesses user feedback
to improve the final product. To achieve this, the company has created channels to encourage user feedback, to rapidly communicate this to the R&D team and to ensure
that the product architecture and design process is sufficiently flexible to incorporate new functionality quickly.
We saw similar rapid launch-test-improve cycles employed in almost every Chinese company we studied. Mindray Medical International Ltd., a company based in Shenzhen
that is China’s largest maker of medical equipment, for example, released the initial version of its BeneHeart R3 electrocardiograph machine into the market following
18 months of product development. Soon thereafter, doctors asked for some additional functions, such as the capability to monitor oxygen levels in a patient’s
hemoglobin and log electrical activity in the brain. Hospitals, for their part, wanted to use the machine for constant monitoring in intensive care wards rather than
just for ad hoc testing. Working with their marketing and sales colleagues, Mindray’s R&D team started to design new models that incorporated these functions almost
immediately. Using this kind of rapid market feedback, Mindray routinely launches new products every six months, in stark contrast to the typical two-year launch
cycles of some of its foreign competitors.
Each product improvement may be relatively simple, but in combination the changes can transform the customer experience. Guangzhou Wide Industrial Co., Ltd., which
manufactures energy-saving evaporative air conditioners, for example, found that units that expelled exhaust air from the side had a tendency to overheat when
customers installed several of them side by side. In addition, customers complained that the fans were irritatingly noisy at night. Within six months, the company’s
engineers redesigned the machines to expel exhaust air from the top and introduced an automatic control system that reduced fan speeds at night, when ambient
temperatures are lower and less airflow is required. SIM Technology Group Ltd., a designer and manufacturer of cell phones based in Shanghai, practices an even more
active form of launch-test-improve. It launches new products based on market feedback every month — compared with three to nine months for foreign competitors. Some
improvements are relatively minor (such as giving users the ability to turn up the sound volume higher than competing products in noisy urban environments); others are
more significant (such as doubling or tripling battery life). In most cases, rapid response to market feedback drives the innovation process. After SIM Technology
launched a handset with a large font size and oversized keypad buttons designed for senior citizens, for example, it received requests to add an alarm function in case
the user falls or becomes ill and satellite tracking capability so relatives can locate elderly parents when they are away from home.
A number of aspects of the current Chinese market environment encourage companies to embrace rapid iteration cycles in the development of new products. The Chinese
market is particularly fluid and fast-moving, with many first-time buyers and open-minded consumers and relatively few regulatory hurdles to clear before new products
can be launched. Moreover, most Chinese companies have relatively little brand equity and thus face limited risk if a new product fails.
Combining Vertical Hierarchy With Horizontal Flexibility
The final piece in the accelerated innovation jigsaw puzzle is the way the organization makes decisions and solves problems as they arise. In most of the Chinese
companies we studied, project goals, budgets and timelines were set by top management and cascaded down through a strong vertical hierarchy; for many employees, even
senior scientists and engineers, the boss’s word was law. To foreign observers, such a structure might appear to be excessively bureaucratic, with all the attendant
problems of inflexibility and sloth. But while the vertical hierarchy is often rigid in these organizations, there is also a high degree of horizontal flexibility,
allowing for smooth and rapid flows of resources and knowledge between peers in different departments and functions. When an innovation initiative encounters a
problem, the project team (often under intense pressure from above) gathers together everyone within the company who can help them in the mode of “huddle and act”
until a solution can be found. Huddle-and-act problem solving is heavily based on personal relationships (consistent with the Chinese concept of guanxi) rather than
formal processes. This social dimension has the added benefit that once the outline of a solution is agreed upon, the individuals from the departments involved feel a
strong duty to implement their part of the answer quickly so as not to let the team down.
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This type of decision making has a potential downside: Heavy dependence on a small number of senior executives who set rigid goals can result in misguided innovation
efforts. If the judgment of leaders turns out to be flawed, there is little in the system to correct the mistake. At the same time, this approach offers important
advantages, too. Innovation targets and projects can be initiated quickly; resources from across businesses and functions can be marshalled without delay; joint
problem solving can be focused and rapid; and execution can be immediate. SIM Technology, the designer and manufacturer of cell phones discussed above, offers a good
example. Whenever the company hits a roadblock in the course of creating a new product, it brings together experts across all the disciplines (hardware, software,
industrial design, user interface and aesthetics, testing, procurement and production). When we asked representatives about the incentives people had to work across
departmental boundaries, they looked incredulous. Their response was: “Why would we not? The boss only cares about successful completion of the project on time.”
When Chinese interviewees were asked to compare the huddle-and-act approach to innovation they practiced within Chinese companies with what they had experienced
working in more traditional foreign multinational companies, they pointed out a surprising paradox. Foreign multinationals usually had flatter hierarchies than their
Chinese counterparts, but because that meant reaching consensus among a larger group of peers across rigid departmental boundaries, the decision-making process was
often slower. Decision making inside multinationals also tended to be more structured, with systematic processes for diagnosis and resolution that often involved
writing a report and then circulating it for comment to areas of the business that might be affected. Although this approach might help mitigate risk, it often reduces
innovation to a snail’s pace. By contrast, top-down goal setting combined with horizontal flexibility can accelerate the innovation process dramatically by enabling
the organization to reconfigure itself continually to serve customer demand, back new initiatives, solve problems as they arise and speed up joint learning.
Implications for Global Competition
Accelerated innovation and many of the processes and techniques it uses are not unique to China. Start-ups around the world and companies in fast-moving environments
such as Silicon Valley are speeding up the pace of new product development and relying on beta testing to achieve some of the effects of the launch-test-improve cycles
we have discussed. What’s noteworthy about the Chinese economy is its ability to achieve accelerated innovation, with rapid scale-up, low cost and “good enough”
quality across a wide range of industries. The results may not lead to fundamental breakthroughs, but that doesn’t mean that the innovations cannot powerfully disrupt
incumbents’ profit models. In fact, we believe that the accelerated innovation capabilities being developed by Chinese companies are becoming increasingly critical for
global competition in light of changes in the overall business environment.
First, today’s consumers are better informed than ever. As information moves around the world at lightning speed, customers know immediately whether or not your
offerings are up to date. Yet recent research shows that breakthrough innovators often have a harder time capturing market share and cumulative profits than “fast
followers.”2 For example, some have argued that even Apple has built its success “not as a pioneer, but as a user-centric fast follower.”3 The Chinese approach to
accelerated innovation is about bringing affordable new product designs to market in record time. This capability is based on the idea that more and more markets
reflect what Yun Jong Yong, former CEO of Samsung Electronics, called the “sashimi theory,” which he described as follows: Fresh raw fish can be sold at a premium in
an expensive restaurant; the next day, the fish can be sold for half the price at a second-tier restaurant; on the third day, the fish sells for one-quarter of the
original price; and after that it is considered dried fish.4 In practice, companies can earn a premium by staying abreast of competitors’ pace of innovation and by
having up-to-date products available in volume at an affordable price — something Chinese accelerated innovation is well placed to deliver.
A second, related point is that many of the approaches to accelerating innovation we have described can also reduce costs. Industrializing the innovation process, for
example, requires more people, but because it uses technicians who are less trained than traditional R&D staff (and pays them less, over a shorter development cycle),
total outlays for a given project can be reduced. Likewise, companies can rely directly on customer feedback, thus reducing the need for expensive market research and
fancy prototypes.
Third, accelerating innovation may be one of the most effective responses to faster and more aggressive imitation by fast-following competitors. Even where patent
protection is available, trade secrets and associated know-how are notoriously difficult to protect when employees change jobs. Imitation is a natural result of the
free flow of knowledge moving around the world through new technologies, widespread use of outsourcing and offshoring, and new competitors emerging from countries,
including China, where intellectual property (IP) protection is relatively weak. These forces place a premium on an organization’s capacity to innovate rapidly and
stay one jump ahead.
Some companies have reengineered their established innovation processes to meld the principles of accelerated innovation with their own innovation know-how, often by
finding ways to leverage the experience of local employees.
Of course, some industries will be more directly affected by fast innovation than others. The mechanisms Chinese companies are adopting for accelerating innovation are
likely to be most effective in products where a “dominant design”5 or industry-accepted architecture has emerged, so that the innovation process can be defined and
easily industrialized. Accelerated innovation is also likely to be a potent competitive weapon with products and services such as mobile phones and social media
applications, where demand is driven at least in part by changing fashions or lifestyle trends, resulting in short replacement cycles. As techniques for accelerated
innovation are further developed and perfected, however, more and more industries that have historically relied on innovation as a key differentiator will have to be
mindful of the threat.
IP disputes may also complicate the ability of Chinese companies to leverage the results of accelerated innovation in global markets. So far, there has been relatively
little IP litigation by foreign companies arising from accelerated innovation. In fact, claims involving foreigners account for less than 5% of all IP lawsuits in
China;6 the vast majority of cases are between Chinese claimants. One important reason is that accelerated innovation may provide an effective way of avoiding conflict
over IP because it enables rapid, parallel development of innovative products without infringing on existing IP. Alibaba Group, the Chinese e-commerce giant, offers a
good example. It freely acknowledges that it did not think up the original ideas behind its Taobao Marketplace and Alipay products, which offer Chinese customers
services similar to eBay and PayPal, respectively. But the company has used accelerated innovation to develop its own proprietary software and associated
infrastructure that underpin its services.
Responding to the New China Challenge
We see three ways for global companies, large and small, to respond effectively to the new wave of
accelerated innovation that is gathering pace in China. The first way is for companies that are beyond the start-up phase to reengineer their own innovation processes
in accordance with the principles and techniques of accelerated innovation being pioneered in China. The second way is to tap into existing accelerated capabilities in
China by tasking local R&D units to focus on time-sensitive projects and by hiring local staff with knowledge of how to speed up certain aspects of the new product
development cycle while reducing costs. The third approach is to develop alliances with Chinese players in order to tap into accelerated innovation know-how,
especially at the stage of rapid piloting and scale-up of new technologies and ideas. This last approach should be particularly attractive to small- and medium-sized
foreign companies that face financial, regulatory and knowledge barriers to commercializing their innovations at scale at home.
Reengineering Established Innovation Processes
Some companies have reengineered their established innovation processes to meld the principles of accelerated innovation with their own innovation know-how, often by
finding ways to leverage the experience of local employees. Dominique Neerinck, chief technology officer of Belgium-based Bekaert, a global company that specializes in
steel wire transformation and coatings, summed up the strategy this way: “We have had to review the whole R&D process to respond to the Chinese challenge.” Bekaert
makes products as diverse as shields for electromagnetic interference, film coatings and champagne cork wire; the first Bekaert business to take off in China was steel
cords for strengthening truck and automobile tires. Recognizing the growth potential in China, the company has invested heavily in building R&D capacity there. By
reengineering its R&D process to achieve increased speed and productivity, Bekaert’s R&D teams in China have learned how to adapt their processes to use available
grades of Chinese steel, how to reduce energy consumption and how to innovate more efficiently. The company has been able to introduce a variety of new products,
including construction materials, textiles, environmentally friendly gas burners, window films and saws for solar-cell manufacture. “Our innovation efforts were driven
by the local opportunity but have improved [our] global competitiveness,” Neerinck observed.
Focusing R&D Activities on Leveraging Accelerated Innovation Capabilities
Many foreign multinationals have preexisting R&D and innovation activities in China. However, these efforts have been largely focused on adapting existing products to
the Chinese market. In general, the multinationals have sensibly focused on “development” (as opposed to research), but they have often used processes replicated from
overseas R&D centers rather than applying the lessons of Chinese accelerated innovation. When AstraZeneca established its $100 million R&D facility in Shanghai in
2006, for example, its initial research mandate was “In China, For China.”7 Today, however, that facility operates as a full-fledged discovery center focusing on
diseases that are causing widespread and pressing health problems in Asia. By shifting the focus of China R&D activities to projects aimed at getting well-priced
products launched and scaled up quickly, companies can open up new opportunities to leverage local capabilities for accelerated innovation. Indeed, the real benefits
come from breaking free of orthodox development processes and learning from Chinese R&D approaches to accelerate the complete cycle from discovery to product launch,
as opposed to simply focusing on a narrow part of the development cycle. When PepsiCo set up a new beverage and food innovation center in Shanghai in 2012 (its largest
to date outside North America), for example, the main objective was to “help PepsiCo speed consumer testing and get products to market faster,”8 rather than save on
development costs.
Exploiting the Potential of Alliances With Chinese Partners
The final strategy for tapping into the potential for Chinese accelerated innovation is to form an alliance with a Chinese partner. To be sure, the risks of
intellectual property leakage need to be carefully managed, but some companies are finding that such partnerships can be a fruitful way to combine well-developed
overseas capabilities for fundamental R&D with Chinese accelerated innovation know-how. In addition to its own R&D initiatives, AstraZeneca, for example, formed an
alliance with a Beijing-based company, Pharmaron, in October 2012, in the areas of chemistry, drug metabolism and pharmacokinetics, and efficacy screening.
AstraZeneca’s primary goal was to accelerate innovation. As Manos Perros, sponsor of the collaboration for AstraZeneca, put it, “We believe it will help us progress
projects through our R&D pipeline more efficiently.” The impact is not expected to be restricted to China but is intended to help “fulfill our commitment to delivering
meaningful medicines to patients worldwide.”9
Partnering is also an attractive option for smaller companies looking to scale up new inventions and technologies quickly to the mass market. Chinese partnerships
offer not only the prospect of faster commercialization but also access to capabilities for developing complementary processes to manufacture products at large scale —
an area where many Chinese companies excel. Green Biologics Ltd., for example, a start-up based in Abington, England, has developed advanced microbial technology for
the production of renewable chemicals and biofuels, such as biobutanol, to replace petroleum-based chemicals used in plastics and paint. Founded in 2003, the company
struggled to market its technology in Britain. So in 2010, it negotiated partnerships with two Chinese companies to scale up technology that had shown promise on a
small scale. Within two years, Green Biologics was able to tap into the volume market in China and open the door to mass-market opportunities in North America and
Brazil.
________________________________________
Instead of focusing on technological breakthroughs, Chinese companies are organizing to make R&D and innovation faster and cheaper. They are pioneering new ways of
industrializing innovation, pushing the boundaries of simultaneous engineering, leveraging rapid “launch-test-improve” cycles and combining vertical hierarchy with
horizontal flexibility to enhance the innovation process. In a world where consumers have almost instant information about whether a product is truly leading-edge,
where imitation by fast followers is relentless and where there is growing pressure on innovation projects to deliver more quickly with high cost efficiency, companies
everywhere must rethink traditional innovation and new product development processes. The new frontier of global competition will be to combine the strengths of
traditional R&D with the new capabilities for accelerated innovation emerging in China. The question for managers isn’t whether one approach to innovation is superior
or whether China is failing to innovate. The key point is that Chinese companies are beginning to challenge their global competitors on both speed to market and low
costs. To meet this challenge, companies of all sizes will need to understand and leverage the potential of China in new ways.
THIS IS THE RESPONSE INTRODUCTION BELOW:
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