How cheap China became a business disruptor – Bill Fischer

For long China has been displacing Western companies by cheaper products. But many have failed to see how this displacement has been overtaken by disruptive business models, writes IMD professor Bill Fischer in the Harvard Business Review.

Bill Fischer:

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.