Incremental verses Dramatic Innovation: Which is the better path in China?
By Amir Gal-Or
In my travels I have noticed that many Chinese companies are experiencing an internal conflict: on the one hand, there is pressure to have an innovative capability
which can support long lasting sustainable growth and brand building; on the other hand, there is a natural tendency and culture to implement a cost effective program that will produce a short term gain as well as a high P/E performance for the stock market and for listing purposes. Hence: the conflict.
At the core of it, I believe that true innovation requires a longer term vision, along with associated risks and costs. But, is there a way to compromise and benefit from the best of both worlds?
Most Chinese companies and products are based on current strong market pull and do not “need” or “want” to take the risk of developing fresh market segments. In short: they do not want to "rock the boat". For these companies, one compromise we are seeing in the market is the exercise of low cost innovation. This entails maintaining the basic product and process, while concurrently improving both or “adding” to them. Certainly, this is the more practical choice for the short term and fits nicely with the culture of lower risks and short term profit. But, is this good for China? Is this really the way to go?
Let’s briefly further review the choices. The low cost option has been referred to in several different ways. GE’s Jeff Immelt and Vijay Govindarajan, of the Tuck Business School, call it “reverse innovation”. S.D. Shibulal, chief operating officer of Infosys Technologies calls it “frugal” innovation. My preference, however, is the popular term “incremental innovation”. No matter what you call it, though, the definitions are congruent. As described by the Economist: companies from emerging countries like China and India, for example, are redesigning products to reduce costs not just by 10%, but by up to 90%. They are redesigning entire business processes to do things better and faster than their rivals in the West. The net result is a sturdy product that can be offered for a substantially lower price and therefore affordable by the middle market.
Most industries worldwide have been touched by this approach from cars to computers and everything in between, and the list of products developed under this umbrella continues to grow rapidly. There are many examples: Tata Motors has produced a $2,200 car, the Nano. Godrej & Boyce Manufacturing has developed a $70 refrigerator that runs on batteries, known as “the little cool”. Start-up First Energy has invented a wood-burning stove that consumes less energy and produces less smoke than regular stoves. And, telecoms entrepreneur Anurag Gupta has reduced a bank branch to a smart-phone and a fingerprint scanner that enables ATM machines to be taken to rural customers.
In China, the list is equally impressive. Haier, a multinational consumer electronics and home appliances company headquartered in Qingdao, Shandong, took wine-cooler refrigerators, a high-end consumer good, and redesigned it into a much cheaper middle-market one. In doing so, Haier secured 60% of the market in the process (Peter Williamson, former INSEAD professor).
All of these case studies demonstrate that incremental innovation has value. Now let’s ask ourselves a fundamental strategy question that many companies face, in and outside of China. Is this enough? Or, is it savvier to follow the “dramatic innovation” track, which provides fertile ground and the open space for the entrepreneurial spirited to freely “break” the rules, challenge assumptions, take risks with an open mind, try to develop something totally fresh and in doing so “create” an entirely new market?
In my opinion, it is more advantageous for companies that want to be market leaders and to build a real brand, to ride both tracks simultaneously, keeping mind that different teams with different skill sets should be set up to support the initiatives taken under the umbrella of these respective approaches. Bear in mind though, that if successful, dramatic innovation has the potential to produce returns that far surpass that of incremental innovation.
A classic example of proven, pure, unadulterated “dramatic innovation” that has reached the highest level of success is Apple, developer of the iPod and iTunes, Mac laptop and desktop computers, the OS X operating system, and the revolutionary iPhone and iPad. Apple is a household name, which means that their branding has been enormously successful. They are well-known not only as industry “leaders” but also industry “creators”. Each year, the world anticipates what Apple will come up with next. This company introduces products that we didn’t even know we needed but discover we can’t live without once we have them. As is the case with dramatic innovation, old assumptions are cast away and replaced by the designs of a totally new concept. The way Apple founder and current chairman of the board Steve Jobs lured John Sculley away from Pepsi-Cola in 1983 to serve as Apple's CEO, sums up very nicely the philosophy of dramatic innovation. Jobs asked Sculley: "Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?" In 2010, Apple surpassed Microsoft in market capitalization; it also became the most valuable consumer-facing brand in the world with an 84 percent increase to $153.3 billion.
A company that has adopted both strategies and has prospered nicely as a result is Chinese telecom giant Huawei. As reported by the press, Huawei absorbed foreign technology and business expertise, and adapted both to create products for the Chinese market before taking the same strategy into global markets. Here we have “incremental innovation”. In April 2011, Huawei announced a net profit in 2010 of US$3.64 billion.
Notably, Hauwei, which reportedly was the world’s fourth largest patent applicant in 2010, has also adopted the dramatic innovation approach, having established many R&D centers worldwide, including one in Israel. The Center in Israel is managed by strong visionary leaders with a long term outlook and a product pipeline in development for market launch not in the near future, but rather in another 5-10 years from now.
In fact, most Israeli innovations would be classified as “dramatic” innovations. One of my favorite examples comes from our company Given Imaging - capsule endoscopy pioneers anddevelopers of the “PillCam”, the gold standard for small bowel visualization. Given Imaging’s PillCam is an edible capsule with a camera inside. The camera photographs its journey down the gastrointestinal tract and then passes naturally with a bowel movement usually within twenty-four hours. The pictures are saved on a data recorder and later downloaded. This offers a beautifully non-invasive and quick way to assess a situation. An anecdote: I gave a “model” of the Pillcam as a “fun” gift to various esteemed colleagues at the 2010 World Economic Forum’s Annual Meeting of New Champions. It was my way of sharing the joy of Israeli dramatic innovation. The enthusiasm spread rapidly. I remember being told by a third party that our friends were sharing with pride the PillCam story with other friends, some who also pulled out “their” PillCam with equal excitement.
Infinity Group’s Israeli portfolio company PowerPaper offers another excellent example of a pure attempt at dramatic innovation, currently in the making. This relatively small company has invented a thin, flexible, environmentally friendly “printable” battery that can be applied to enhance products in just about any industry- medical devices, apparel, shoes, greeting cards, to name a few – the list is as infinite as the imagination but with the classic challenge of price. This “out of the box” thinking led to a product with cosmetic giant Este Lauder to develop, produce and market cosmetic patches to reduce wrinkles. The paper thin battery serves as a conduit to transmit the active wrinkle removal agent in the patch. The same technology has also led to the development of security password patches and RFID battery assisted tags, among other novel and useful products. Founded in Israel, most of Power Paper’s activities today are based in China, where the technology has been fine tuned for application to products for the local market. The challenge now is to build from “scratch” a new market that understands, appreciates and enthusiastically embraces this golden concept. Dramatic innovation projects need market lift and once found, the next step is simply to “go for it”.
