5 Strategy Lessons Companies Can Learn From China

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By Co-Director, CEIBS Centre on China Innovation Professor of Strategy George Yip, Co-authored with Visiting Professor of International Business Bruce McKern

We have a new, perhaps shocking, idea. While China has been learning management practices from the West for the last 30 years, Western companies operating in the country can now learn from China how to improve their activities in the rest of the world.  Why do we say this? Because of (1) the unique characteristics of China’s markets and customers; (2) the fierce competition from local Chinese companies; (3) the fact that confronting Chinese companies on their home turf is the best way to gain the capabilities, and indeed the cash, to confront them in your home market.

China’s Customers — Young and Extreme

In general, China’s customers have many characteristics and behaviors that are unique. Today’s Chinese customers and users behave quite differently from those in the rest of the world. They are fast maturing, fast adopting, often e-savvy, have a “forgive and forget” mentality and are often creating micro-niches. China’s young people, in particular, don’t fit the old stereotype of placid conformists.  They are very diverse, care about their peer group yet embrace personal expression, are materialistic yet idealistic, and have tastes which can be both nationalistic and international. Far from being the conformists people in the West often assume, they exhibit a high degree of diversity that is characteristic of the new China. This matters, because they can be early signals of trends emerging in other markets, including the West.

Today, Chinese consumers are seen as one of the fastest adopting groups in the world when it comes to new products and applications. According to market research firm A.C. Nielsen, China is one of the top three markets for new, fast-moving consumer products. While Chinese consumers often enthusiastically embrace newness, perhaps their most notable characteristic is their passion for internet- and mobile-related products and services. Chinese consumers do so much with their smart phones that they usually carry phones with the largest screens in the world (which are often designed and made by Chinese rather than foreign companies).  This mobile phone obsession has led one city (Chongqing) to institute a separate lane for pedestrians walking while using mobiles.

At the same time, as first-, or at most second- generation consumers, the Chinese are more forgiving and forgetful, so mistakes do not have such long-term consequences.

China’s Market — Different and Diverse

China’s markets are very different from the rest of world and diverse within the country itself. Inside the market which, overall, has a speed and scale of change that is unprecedented, there are smaller segments with their own unique quirks. For example there is a sizable top segment of consumers who are big spenders by global standards, as a third of the country’s wealth is held by one percent of its citizens. So there are many examples of extreme consumption behavior. For example, Carl Zeiss sells million-dollar spectacles that are diamond-encrusted, only in China, and many of the buyers are men, not women.  Design firms tell of the value of learning from “extreme users” who, while not representative of the current average user, are indicators of future trends as tastes become more discerning. And a niche in China can be the size of the whole market in some Western countries. By contrast, at the other end of the income scale, China has hundreds of millions of consumers at the “bottom of the pyramid”. These need a different kind of innovation, which we call “fit for purpose”. Chinese companies have been doing this for many years, but many of the MNC executives we interviewed told us that they had difficulty in “de-featuring” their products or service to suit China’s needs.

Culture:  China’s Intense Competitors

Intense competition breeds winners with superb capabilities, Japan and Silicon Valley being two primary cases. Now it is China’s turn to be the breeding ground for world-beating competitors.  Most world-leading companies are competing in China, and they face local companies which have developed world-class capabilities as they evolved.

Huawei, the telecoms equipment company, has combined investment in innovation and domestic scale to become the world’s largest – as has Haier in major appliances, and Lenovo in personal computers. These companies achieved their dominance not through luck or government support, but through fierce and vigorous competition, led by innovation. Their size today provides the resources and cash for continuing investment in innovation, as well as overseas expansion. Tencent has now rapidly evolved into the world’s third-biggest Internet company and has embarked on international expansion, including entering the US in 2014. Foreign customers who have experienced its services want the same in their home countries. In the US market, Tencent’s WeChat is offering stiff competition for rival service Whatsapp. Alibaba, long dominant in e-commerce in China and already the world’s largest e-commerce company and one of its most valuable following its NYSE listing, is now going global. The success of these companies outside China is a wake-up call to MNCs, which are beginning to realize that China can be a source of global competitive advantage.

Capabilities: What to Learn from China

How should companies exploit the unique characteristics of China? We propose five major lessons that companies should learn from China and implement as strategies.

Bold experimentation and rapid iteration – to identify and create innovation opportunities and ensure agility. Chinese companies, particularly private, non-state-owned ones, are usually quite fearless. They are not ashamed of imitation, seeing it as learning from others.  Made cautious by the low rates of growth and heavy regulation in their home countries many, perhaps most, large Western and Japanese companies seem to have forgotten such fearlessness.

Innovation through creative adaptation – innovate by focusing on local market needs. Many innovative successes from players in China come from turning a nuanced understanding of local culture into a creative adaptation for a new category or consumer need. For locals, this often comes from the strong intuition of a key individual in the organization, usually the founder.

New category creation – develop the ability to find and rapidly exploit opportunities for new categories. In China’s market, new, often surprising, product and service categories are frequently being created. Wahaha, the leading beverage company in China, released Nutri-Express, a blend of juice and milk to create an entirely new sector that has attracted many followers. Coca-Cola borrowed from the locals by imitating Wahaha’s Nutri-Express milk smoothie drink by launching Minute Maid Pulpy Super Milky, which was wildly successful. Some of the new China market categories can be exported to the rest of the world, such as Nestlé’s peelable banana ice cream and GE’s low-priced ultrasound machines. The lesson from these experiences is that it is important to export the China-inspired mindset of constantly seeking novelty.

‘Lean value’ focus – design simple products that target a need very specifically, avoiding anything superfluous and providing only what is vital. Multinationals from developed countries usually suffer from “feature inflation” as they seek constant differentiation in their home markets, resulting in price inflation and value deflation. Chinese consumers do not want to pay for over-featured products and services. China’s strong need for lean value provides an excellent training ground for lean value thinking, and MNCs can benefit greatly from operating in this laboratory where their efforts will be strongly tested. China is an excellent proving ground for design thinking and lean manufacturing and quite a few MNCs have benefited from this approach. In-car air purifiers, garment steamers, low-intensity book lights, formaldehyde-absorbing interior paint, low-cost cardiac monitors and ultrasound machines are all examples of multinationals’ ingenuity at work for the needs of China’s low-income consumers.

Development of mixed teams and global leaders – China’s current business environment, including its acceptance of foreign managers, presents a great setting for companies to manage mixed teams with diverse backgrounds, and to cultivate future global leaders. To paraphrase Sinatra: Shanghai, Shanghai, if you can manage there, you can manage anywhere.

A Call to Action

Leaders of companies operating in China, and any that are not, need to lift their heads from the current focus to ensure their corporation learns the lessons of innovating in China, for China and for the world.

Many centuries ago, the world learned from China. For the last hundred years, however, China has been patiently learning from the world. It is now time for the world to learn from China once again. Multinationals should “seize the day” or, more appropriately, bǎ wò dāng xià (把握当下).  That is the most urgent priority for every CEO.

George Yip is a professor at China Europe International Business School in Shanghai and at Imperial College Business School in London. Bruce McKern is an honorary professor at the University of Sydney, a visiting scholar at China Europe International Business School and recently visiting fellow at Oxford’s Saïd School of Business. This article is based on their new book, China’s Next Strategic Advantage: From Imitation to Innovation (The MIT Press, 2016), and draws on joint work with innovation consultants Lin Xu and Yi Ta Chng.

This article was first published by FORBES.

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