Revving Up: How Globalisation and Information Technology are Spurring Faster Innovation
Friday, October 12, 2007
IF YOU want a motorcycle, go to Chongqing. Although this dusty central Chinese city of drab office buildings and perpetually grey skies is better known as the gateway to the enormous Three Gorges Dam, it is also the two-wheeler capital of the world. Led by the region’s pioneers, China now makes half the world’s motorcycles. But more important than the numbers produced is the way these motorcycles are made?especially the way designers, suppliers and manufacturers have organised themselves into a dynamic and entrepreneurial network.
Unlike state-run firms, the city’s private-sector upstarts, such as Longxin and Zongshen, do not have big foreign partners like Honda or Suzuki with deep pockets and proven designs. So they came up with a different business model, one that was simpler and more flexible. Instead of dictating every detail of the parts they want from their suppliers, the motorcycle-makers specify only the important features, like size and weight, and let outside designers improvise.
This so-called ?localised modularisation? approach has been very successful and delivered big cost reductions and quality improvements, says John Seely Brown, an innovation expert who used to head the legendary Xerox PARC research centre. It is one example of the sort of business-model innovation which he insists is far more radical than conventional product or process innovation.
China moves ahead
Examples of these business-model innovations are now bubbling up from developing economies to threaten the established global giants. In a report with John Hagel, of Deloitte, a consultancy, Mr Seely Brown argues that the activity of private entrepreneurs means ?China is rapidly emerging as the global centre of management innovation, pioneering management techniques that most US companies are struggling to understand.?
The emergence of Asian world-beaters exemplifies the two forces driving innovation. Globalisation and the spread of information technology allow the creation of unexpected and disruptive business models, like the one used by Chongqing’s motorcycle-makers. Other examples include the design networks established by Taiwanese contract-producers in the textile industry. Groups of innovative just-in-time suppliers abound in Asia, feeding Western fashion and consumer-goods companies. They are often managed by supply-chain experts, like Hong Kong’s Li & Fung. Unlike Japan’s keiretsu, which bound companies and their suppliers together with interlocking shareholdings, these firms are free to leave their alliances. They stay together only if they continue to learn and profit from the experience. In some ways they resemble the nimble networks of firms that underpinned Silicon Valley’s success.
Low labour costs may have given such firms a head start, but that is a transitory advantage. India’s software innovators were once sniffed at as merely low-cost offshoring and back-office operations. But firms like Infosys, Wipro and Tata Consultancy Services (TCS) have become world leaders in business-software services. S. Ramadorai, TCS’s chief executive, says his firm sees ?innovation as a key enabler of its productivity edge?. He points out that his firm has been investing in R&D for 25 years and holds several dozen patents and copyrights. Navi Radjou of Forrester Research, a technology consultancy, applauds TCS’s ?global innovation ecosystem? which brings together academic labs, start-ups, venture-capital firms, large independent software firms and some of its most important customers.
Innovation is also changing the pharmaceuticals industry. Small biotechnology firms, using networked approaches, are getting ahead of Big Pharma. This too opens the way for Asian competitors, like Ranbaxy and Dr Reddy’s Laboratories. These firms were once copycats, trampling on Western patents to make cheap generic versions of drugs. But increasingly they are shifting to process innovation and even new drug discovery.
Such innovation can arise out of necessity. Entrepreneurs in China must compete with privileged state firms with access to cheap credit as well as the local arms of multinationals. That makes China’s ?third sector?, as Messrs Seely Brown and Hagel call it, extraordinarily resourceful in trying to reach global markets. India has been less integrated into the world economy, so many of its innovative firms have initially concentrated on reaching ?bottom of the pyramid? consumers. For instance, Selco, an Indian solar-energy pioneer, found that because many of its customers were living in remote areas, it had to set up local networks of trained technicians to sell, install and repair its products, and provide customers with small loans.
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