Wednesday, July 13, 2011

IP Dragon's Book Review: Dragons At Your Door

Learn to innovate with Chinese characteristics

Before writing The World Is Flat (see his presentation at NUS here) Thomas Friedman realised that his “intellectual software was out-of-date”. His framework of measuring what is important and what is not, needed an update. I think Mr Friedman's humble confession is an exhortation to any Western business manager. One of the updates recommendable to Western business managers is the excellent book by professors Ming Zeng (Cheung Kong Graduate School of Business) and Peter J. Williamson (University of Cambridge, Judge Business School): Dragons at Your Door, How Chinese Cost Innovation Is Disrupting Global Competition

In a 2007 column I wrote that companies that complain about the bad enforcement of intellectual property rights in China should be even more worried about legitimate competition coming from China. Professors Ming and Williamson researched this competition and are fully aware of this disruptive force that is in full swing. Professors Ming and Williamson have thoroughly analysed this fierce competition with Chinese characteristics. Better still, they instruct non-Chinese companies how to use this potentially devastating force to their own benefit. Dragons At Your Door, although published in 2007, is still a very relevant guide and a must-read for professionals that are active anywhere in the product chain; from R&D, design to manufacturing or marketing. Even if you are not active in China, have no interest in becoming active in China, this book is relevant for you. Because if you do not learn the lessons this book provides, you will not be prepared  if  when dragons arrive at your door, flood your market and eat up your market share. And they won't even knock before entering.

Most Western companies' business paradigm is that the innovation should be directed at making the product more sophisticated, so that they first offer the product for a premium to the (Rogers model for the adoption and diffusion of innovation) market segments: innovators and early adopters. So that they can get a high margin with a low volume. The idea is that the price will be sliced when the early majority is ready for the innovation (middle margin, high volume). And in order to convince the late majority and laggards to enter the market, the price will be sliced even more (low margin, low volume).

But as many examples in the book illustrate skimming can leave the company vulnerable. The premise of the book is that Chinese companies compete via a dramatic different strategy: Chinese companies find innovations (innovative processes, methods, and product attributes) and lower the costs in order to lower the price, increase the variety in order to increase the choice, and apply the innovation to specialty products markets where before only expensive sophisticated products were on offer.
If one combines the economic theory of fully informed markets with the theory of globalisation it makes sense that companies win market share that know how to slice costs, add varieties and specialty products. 

One can say that the Chinese companies satisfice the market. The verb to satisfice, coined by Herbert Simon, see here, applies to the decision making process that is both sufficiently satisfactory (meeting criteria for adequacy, rather than to identify an optimal solution). By decreasing the margins and increasing the volume, the Chinese companies can conquer market share, and then take-over ailing companies that focused on the premium-segment. 

The message of the book is: China is the most competitive market in the world. Make yourself China-ready by using the cost innovation. If you can make it there, you can make it anywhere. Professors Ming and Williamson are advising non-Chinese companies to empower their Chinese subsidiaries to make the same kind of cost-innovation efforts as the Chinese companies. Or otherwise start cooperating with a Chinese company that is savvy in cost innovation. The book gives many examples of companies that thrived using this strategy by shifting high-value activities to China and some that failed miserably by not going full-out to make the change.

Lessons for IP holders.
What about IP leakage? As professors Ming and Williamson write: “You will never make the shop completely watertight against IP leakage. But there is a trade-off to be made: either surrender the potential advantages of undertaking more knowledge-intensive, high-value activities in china as a way of tackling the challenges posed by the emerging dragons; or reap those advantages by giving China a more significant role and carefully managing the IP risks."

Although labour costs have been rising significantly the last few years, there is still a contingent of millions of Chinese people coming from the hinterland of China that need work. For some time to come labour will be abundant and costs relatively low coupled with a stable economy and good infrastructure. The biggest challenge is to develop the talent of your employees and, related to IP leakage, make them into loyal employees.

This cleverly written book, which reads like a pageturner but one with academic rigour, has a wealth of illustrative examples and make professors Ming and Williamson's the most powerful advocates of cost innovation.

Ming Zeng and Peter J. Williamson, 'Dragons At Your Door, How Chinese Cost Innovation Is Disrupting Global Competition', Harvard Business School Press 2007 
See index and first 10 pages of the introduction here.

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