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The lowdown

 

China cost innovation

Unconventional organisational processes, not only lower-cost talent, have led to cost innovation among Chinese companies, says a new study co-authored by Peter Williamson and Eden Yin of Cambridge Judge Business School’s Cambridge Centre for Chinese Management.

Businessman using futuristic mobile phone

The cost advantage of Chinese firms has had many explanations over the past two decades ranging from lower-cost talent to state assets to intellectual property at below-market rates, as the country has become the world’s second-largest economy after the United States.

A new study co-authored at Cambridge Judge Business School examines a very different aspect of China’s advantage: how new or unconventional organisational processes have also created cost innovation that have benefitted the country’s firms.

Professor Peter Williamson
Professor Peter Williamson

Specifically, the study published in the journal Technological Forecasting & Social Change identifies three key techniques that have provided such cost innovation in China: using customer-oriented processes to search for innovative ideas, pragmatic decision making in selecting projects, and flexible product development processes.

“The study has important managerial implications because it shows that organisational processes – not only ‘input’ factors such as lower-cost resources and labour – have become important elements in China’s cost innovation, and this translates into the ability to offer consumer products at lower prices,” says study co-author Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School.

Eden Yin
Dr Eden Yin

Adds co-author Eden Yin, University Senior Lecturer in Marketing at Cambridge Judge: “The study also underlines the importance of orientation toward new customers in achieving cost innovation, especially for emerging companies, as incumbent firms often focus on investments on improving the technology used by current customers. This is important in developing new products at a lower price that appeal to the mass market.”

The study – entitled “Enabling cost innovation by non-traditional organisational processes: the case of Chinese firms” – is co-authored by Feng Wan, who completed his PhD at Cambridge Judge and is now with the Norwich Business School at the University of East Anglia, and by Peter Williamson and Eden Yin of Cambridge Judge Business School.

The study is based on documents, field observations and interviews at 14 companies that are representative of Chinese firms that have used organisational processes for cost innovation. The companies, which range from computers to solar power, include major Chinese companies such as e-commerce giant Alibaba, telecoms firm Huawei, and heavy machinery manufacturer SANY. The interviews were conducted at three levels: executive, senior management, and business unit.

Customer-oriented processes that led to cost innovation include establishing joint labs with customers in order to identify their “latent” needs and develop products that meet their specific needs at low price points. For example, software provider Kingdee set up joint innovation centres with major clients, which led to development of a popular enterprise resource planning tool, while Huawei established joint labs with major clients such as Vodafone, Telefonica and China Telecom which led to some major products and solutions.

“In joint innovation centers, companies co-locate with clients under the same roof, reinforcing their ability to recognize customer needs, to access customers’ intelligence, and to combine or meld these into a creative business concept or an innovative product or service,” the study says. “Establishing joint innovation centers with clients therefore enabled some Chinese companies to bring products to meet key demand of mainstream, mass-market consumers at lower prices than competitors.”

Some of the Chinese companies, such as SANY, also include customers as key members of the research and development team – and it is customers who approve and release new products in the final testing stage.

The involvement of customers in R&D can help in continuous product improvement, transforming a product that is inferior in terms of overall performance into something “good enough” to satisfy mainstream customers at a cheaper price.

Pragmatic decision making in Chinese firms means that problems in the R&D process can be quickly resolved through an immediate meeting among the heads of relevant departments, what the study refers to as “huddle-and-act”. Such a rapid process means that Chinese firms are able to launch many new models of products at low cost, because each innovation represents a “small, rapid-fire bet” – and only some of those bets need to pay off to make the overall programme profitable.

Flexible product development processes can help companies move away from a traditional step-by-step approach, and this lowers cost as it is “not always necessary to work sequentially”. Huawei, for example, has adopted an “R&D assembly-line”, assigning each individual researcher or small team a narrowly defined task. Chinese firms using such techniques benefit from the country’s huge pool of engineers, thus allowing product development to be industrialised in cost-innovative ways.