What are the innovations coming from China compared to the West?

The secrets of success

Innovation and sustainable growth

China Business Forum, London Business School
10th Nov 2012

Johnson Chng, Managing Partner, A.T. Kearney Greater China
Johnson.chng@atkearney.com

+8613501106784, +85268525572

There are typically four types of innovation: product, process,
service and business model
Types of innovation Focused areas

Product Focuses on new or improved products derived from trends and
Innovation customer needs, including product modifications/improvements,
new products based on existing or new technologies, new
e.g. Apple’s iPhone applications etc.
Focuses on cost savings in production process and entire value
Process Innovation
chain through process improvements
e.g. RFID and bar
codes in logistics

Service Focuses on services, surrounding the core product offering such
Innovation as handling or technical customer service, that will generate
e.g. realtime flexible additional value for customers
packaging in travel

Business Model Focuses on new business models in terms of vertical integration,
Innovation sales channels, cost structure, pricing model, etc.
e.g. reverse
auctions at EBay

Meanwhile, technology is typically an enabler for these four types of innovation

Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 2

The process for successful innovation implies a holistic view
from strategy to maximizing product life cycle profitability
A.T. Kearney's view on innovation process: from the market to
the market
Scope of innovation management
Business Innovation Idea funnel Product development Profit
strategy strategy management & launch generation

Customer
Product
Needs Turnover extensions
Macro Idea
M trends Market/Techno- Idea M
A logy Trends
Idea A
R Corporate R
Capabilities Idea
K Strategy Maximize K
E Idea Idea Time-to-Market
Roadmaps
Idea profit E
T Idea T
Div / BU
Strategy Idea T0 TLaunch TProfit TEnd of Life
Innovation
Budgets
Idea

Search Fields Time-to-Profit

Profit is not the purpose for innovation, but it is the result of innovation


The leaders in innovation excels in at least four key areas

Best practice

Innovation leaders Innovation followers
Strategy • Innovation part of strategic agenda • Innovation is a result of different
• Explicit definition of search fields initiatives and projects (e.g. Product
• Separate technology maintenance and Management, IT, etc.)
customer-driven projects
Value- • Identify customers’ value perceptions • Create services without considering
and purchasing decisions customers’ value perceptions
perception • Focus on building brand loyalty

Roles and • Have a flexible structure and allow • Have a hierarchical structure & confine
employees to be creative employees to specific job descriptions
boundaries • Production and criteria-based idea • Poor idea generation and prioritization
management • Engage only employees in innovation
• Engage partners, customers and
employees in innovation activities
Technology • Use ICT to support innovation • ICT not leveraged / tools adopted late
• Ensure standards and scalability • Island solution (not scalable)
• Focus on costs and differentiation • Focus only on costs

Source: A.T. Kearney Best Innovator 2003-2008 A.T. Kearney xx/mm.yyyy/00000 4

Major factors to ensure successful innovation include:
(1) explicitly defined strategy and governance process
Correlation between having innovation
strategy and meeting or exceeding Comments
innovation objective • Companies with an innovation strategy are more likely to
Does your company How well has your meet or exceed their innovation objectives
have a defined company performed • However, strategy alone is not enough; governance and
mechanism to drive implementation are critical, including
innovation strategy? to date against its accountabilities, resource commitments etc.
(% respondents) innovation objectives?
(% respondents)
Best practice
25
No 47 43 • Apple: the project team are put into a common physical
25 space, to enhance effective and fast conversations between
teammates in order to incubate new ideas
• Procter& Gamble(P&G)
43 ‒ Has a dedicated innovation organization with a dotted
Yes 53 50 line to each of its businesses
14 ‒ Each business has dedicated personnel in R&D
responsible for driving innovation and interfacing with
external partners, such as suppliers, to connect internal
2011 With innovation Without
needs with outside ideas
strategy innovation
Exceeding all or most objectives strategy • Google: The well-known 20 percent time policy has allowed
its engineers to spend one day a week pursuing projects
Meeting all objectives
outside of their area of responsibility
Meeting some or no objectives

Source: A.T. Kearney Innovation Study 2012, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 5

(2) Focus of customer-centric growth

Prioritization of focus areas for
innovation (% of respondents) Comments
Critical Important Not considered
• Customer demand is the leading criteria for innovation
strategy design
• Such focus will lead to product introductions, faster time to
30 market, and increased sales
40
50 50 • It is not the direct target for innovation to reduce cost,
70 increase profit or improve the operations efficiency

Best practice
70 50
40 • Apple
50 ‒ Aims to create rather than cater to the customer need
30 through innovating great products
10 10 ‒ Spend whatever it takes to make and market the
products in order to delight the customers
Meeting Increase Fit with Access to Build • P&G
consumer financial existing new competitive ‒ Known for capturing customer comments in real time to
demand returns capabilities markets and advantage
customers
gain feedback on how a product is performing
‒ Such behavior enables continuous improvement and
leads to repeat purchases and product loyalty

Innovation should be focused on satisfying or even generating customer
demand, rather than making money at the very beginning


(3) Led by people with senior and dedicated position, not just
business unit heads
Leaders and owners for innovation
activities Comments
Who is responsible for Which functions are • Now it is the business unit head that have a leading role in
creating and leading involved in innovation activities
the innovation agenda? formulating the • However, business units leader may comprise the needed
(% respondents) innovation strategy1? firewall between today’s needs and tomorrow’s plans
(% respondents) • Best innovators usually have dedicated seniors to be
Leading Supporting Leading Supporting responsible for innovation – it’s more possible to involve
role role role role outside parties into the innovation process in this way

64 R&D 36 Best practice
27 CEO 64
• Apple: as the CEO, Steve Jobs is the core for Apple’s
innovation, who developed a top-notch team, set ambitious
Marketing and clear vision and acted as both a policeman and
55 and sales 45
Business cheerleader for product development
64 unit 27
leaders • Google
Product ‒ Typically encourages open collaboration but is closed at
45 development 45 times to surprise the market
Functional ‒ For example, Android and Chrome OS were the results
36 vice 64 of collaboration between Google and The outside
presidents community
55 Innovation 9
• IBM: second-highest ranking executive is specifically
charged with creating and maintaining innovation programs
Director across the company
36 level 55
9 Finance 45

1. Study respondents also cite three additional areas as support roles: strategic planning (55%), operations(45%), and IT(18%).

(4) Clearly defined metrics for measuring innovation
effectiveness

Comments Best practice
• A lack of metrics deprives companies of the • IBM
ability to measure progress and drive ‒ Defines business performance targets
corrective actions mainly for its core business and growth
• Though important, the metrics are difficult to opportunities
design and execute ‒ However, for emerging opportunities, it
• There are some ongoing initiatives, e.g. The does not set financial targets
IMProve initiative in Europe (an initiative of the ‒ Instead, it ensures that clear milestones are
European Commission, Directorate General defined to track the progress of riskier
Enterprise and Industry), which provides an projects to signal that they are on the right
online innovation benchmarking tool for track
enterprises


The innovation in China is increasing fast but is mainly within
China and of incremental instead of disruptive manner
Annual grants of patents in China1 Innovation in China
(in ‘000, 2007—2011)
• Growth and global impact
By type CAGR ‒ The innovation in China, represented by patents
+29% 961
815 granted every year, is increasing at ~30%, but
172 Invention +26%
582 135 95% of them are solely in China
352 412 128 335 380 Design +30% ‒ China only accounts for ~5% of the international
68 94 250
134 142
204 344 408 Utility Model +28% patent applications2, compared with ~30% each
150 177
for US and Europe
2007 2008 2009 2010 2011 • Innovators by identity
‒ Most innovation is happening in the private
Number of “Forbes 2012 World’s 100 sector rather than in state-owned enterprises
Most Innovative Companies” by country ‒ The innovation is driven by small to medium-
Others sized companies working to fill market needs
14 ‒ The innovation-related workforce is young and
UK backed by little institutional expertise
• Baidu 4
• Innovation areas
• Tencent Switzerland
• Moutai 4
US
43
‒ Higher share of the world’s scientific articles in
India chemistry, physics, mathematics, engineering
• Wuliangye 5
• China Oilfield Germany and computer sciences than in biology,
Services 6 medicine and life sciences
• Sany ‒ Most are incremental innovations based on
China
• Zoomlion 7 existing products or services rather than
Japan France disruptive innovations on core technology,
8 9
1. Including patent applications received from both domestic and abroad business model etc.
2. For 2008
Source: Business Journal of the German Chamber of Commerce in China, www.SIPO.gov.cn, Forbes.com, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 9

Service innovation case: HaiDiLao Hot Pot cultivates its
capability in innovation by “serving” its employees first (1/2)

Introduction Innovative “services” to the
employees by the company
• A famous hot pot brand founded in 1994 • Free collective apartments (not basement)
• 70+ self-owned hot pot restaurants in 15 cities Care in walking distance to the working place
including Beijing, Shanghai, Xi’an etc., four • Trainings on reading map, using closestool,
logistics center, and one raw material plant obeying traffic rules etc. to avoid blame or
• $~360 million revenue and 14,000 employees sneer from the citizens
for 2011 • Establishing school in Sichuan province for
the children of employees
• Preparing for IPO
• Compensation and bonus provided for the
Filial Piety parents of employees (team leader level
Culture
above)
• Everyone is created equally and deserves the • Free beach tour for the parents of
outstanding employees every year
care and respect from the company
• The company is a platform for employees
(normally migrant workers with middle-school • Authorization of employees for free dish
Respect and discount as long as the action can
education) to change their lives improve customer satisfaction
• The company should employ not only the • Name the innovation after the creator
hands by also the brains of the employees,
where the power of innovation come from

It is the best innovation by Hai Di Lao to treat the employees with care and
respect, which is seldom seen in the low-end service industries in China

Source: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn through》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis
A.T. Kearney xx/mm.yyyy/00000 10

Service innovation case: hence, unparalleled services
innovation for the customers (2/2)

Innovative services to the customers Number of Hai Di Lao Hot Pot
restaurants
• Free gadgets while eating
‒ Glasses cloth
71
‒ Plastic bag for cell phone +36%
‒ Elastic hair band
• Free services while waiting +20% 26
‒ Shoeshine 1 3 6
‒ Nail cosmetology
‒ Fruit & beverage 1994 2000 2004 2008 2012
‒ Chess & poker • After brand establishing stage for a decade,
‒ Internet reaching a stage for rapid expansion while
maintaining the image for supreme service
• 0.5 RMB1 discount per paper crane made while
waiting • Case study for Harvard Business Review
(Chinese version, Apr 2009)
• Object of the book “Hai Di Lao: something that
• Remote video system for dining between Beijing you cannot learn through” by Professor T.Y.
and Shanghai restaurants Huang of Peking University
• Ten Best Hot Pot Brand 2007-2010
• Cast study object and guest speakers for the
top tier local business schools
1. About ten cents in USD
Source: www.haidilao.com, www.ebusinessreview.cn, 《Hai Di Lao: something you cannot learn》(China CITIC Press, 2011), secondary research, A.T. Kearney analysis

Product innovation case: G’Five becomes a major cell phone
maker worldwide by providing highly customized products
Innovative products in India
Introduction
• Entered India in 2008, No.1 in 2010 (21%
• Founded in 2003 in Shenzhen as an mobile phone
market share, by sales unit), and top five in
OEM and started its own brand “G’Five” since 2008
2011
• Revenue $ 635 mil (2010) and ~5,000 employees
• Preparing IPO in Hong Kong • Given the poor power supply in India, especially
• Most revenue comes from overseas market, including in the rural area, developed new phone models
India, Middle East, Africa, South America etc., and with small screen but 30-day standby time, dual
entered China market in late 2011 battery, and even #5/#7 dry battery
• One of the largest mobile phone makers worldwide, • Customized phone models according to
e.g. No. 9 for Q1 2010 and No. 10 for Q2 regional and racial features
• Rapid market expansion based on highly customized ‒ For the Muslims: red and thin phones with
products, fast product development speed, reasonable the Quran and GPS pointing to Mecca
price, and stable dealer relationship ‒ For Sikhs and Hindustanis: white and thick
Mobile phone market share by sales unit for phones with loudspeaker
Q1 2010 Huawei Others • Facing 20+ telecom operators in the market,
19.2%
1.3% developed phones with 2 or 4 SIM cards
G’Five
1.4% Nokia
ZTE 35.0%
1.7% Innovative products in Middle East and Africa
Apple
2.7% • Phones with two loudspeakers (music needed
Motorola for BBQ in the desert as a usual family activity
3.0% during weekend in middle east and for dancing
Sony Ericsson by Africans)
3.1% Samsung
RIM 20.6%
3.4% LG
8.6%
Source: www.gfivemobile.com, Gartner, Factiva Inc., Cyber Media Research, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 12

The innovation will be even more emphasized by Chinese
companies and revolutionary innovators are foreseeable

Driving factors for innovation in China
Trends in China
• Companies have to be more innovative in
• In the foreseeable future, many Chinese
order to cater to the maturing domestic
companies will still focus on incremental
market and increasing consumer
innovation based on technology transfers and
sophistication
have relatively much less luxury to engage in
fanciful idealizations
• The evolution of industries in China from
• Meanwhile, leading companies are on their
low-end producer to high-end product and
way to evolve to be breakthrough innovators
service provider requires innovation
• A wave of innovations will be seen, particularly
in those areas in which China is facing
• Through the overseas expansion, the
enormous challenges as a result of its rapid
Chinese companies will try to reduce the
growth: new energy sources, energy efficiency
gap in innovation with their foreign peers
technologies, new materials, biotechnology,
new pharmaceuticals, software and services,
• Policies1 are introduced by China’s central as well as new IT and internet solutions
government to encourage innovation,
especially in industries with high added-
value and related with sustainability

1. Including 12th Five-Year Plan, The 12th Five-Year Plan on National Scientific and Technological Development, National Long- and Medium-term Program of Sci-Tech Development
Planning, The Development Plan of the Strategic Emerging Industry During the 12th Five-Year Plan etc.
Source: Business Journal of the German Chamber of Commerce in China, secondary research, A.T. Kearney analysis A.T. Kearney xx/mm.yyyy/00000 13

A.T. Kearney generates insights on innovation management
from its cross-industry studies and publications
Studies and Publications Selection

Best Innovator Europe Innova IMP3rove Publications
• European • On-line platform White Papers
competition to assess
• Assessment of innovation
leading performance of
innovation SMEs
capabilities
• More than 2500
• More than1000 benchmarks
participants Books
(2003 – 2009, • CEN Pre-
15 countries) Standard status
to assess
• Highly reputed innovativeness of
jury and media SMEs
partners


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