China, with its fast-evolving market, is becoming a hotbed of innovation. As more people move to cities, they start to demand different products to satisfy their increasingly sophisticated tastes. Companies, both local and multinational, can no longer rely on existing formulas if they are to flourish, and will need to harness the skills of innovation.

In delivering a competitive edge, companies are employing various types of innovation to create a pipeline of new products and services, along with new reasons for consumers to buy them. It is a planned approach to creating new value that is fundamentally different from the model of opportunism growth so engrained in China. That, in essence, is the challenge. Astute companies are starting to identify and capture various innovation opportunities that are gradually emerging. The most common of these include new category innovation, business-model innovation, and China-specific innovation.  

New category innovation

Over the next five years, over 300 million people (i.e. approximately the entire population of the United States) will move to China’s cities.  The country will thus need to house an additional 300 million new urban consumers. Instead of blindly following foreign brand names, mature city dwellers will likely choose products and services that resonate with their tastes, lifestyles and cultural heritages. Chinese consumers have proven to be aspirational. Questions such as “What do I drink if I don’t want to come across as old-fashioned?” and “What do I buy for my baby to show that I’m a modern mother?” are likely to be asked by China’s future urbanites.

The crux here is for companies to define new categories and to own key positions within them. Xiang Piao Piao, a local beverage start-up, managed to hop onto China’s bubble tea bandwagon, but with a crucial twist. Instead of going head-to-head with the many cafés and drink kiosks selling the sweet concoction, Xiang Piao Piao developed an instant version of Pearl Milk Tea, packaged in a café-style cup. The product innovation ensured the company maintained prime position in the RMB10 billion (US1.6 billion) industry.  

Business model innovation

Wealthier and more discerning, the new breed of Chinese consumers is proving a pickle for companies looking for long-term success. These firms will need to parse through their customer interaction journey and pick out the most value-added elements to find disruptive opportunities, like what Alibaba Group did with its eBay equivalent, Taobao.

By making transactions free and allowing customers without credit cards to purchase online, Taobao overcame poor credit infrastructure and cautious consumption habits. The website managed to garner a critical mass and rewire its revenue model with dramatic results — Taobao’s revenues are now four times that of eBay globally.  

China-specific innovation

Although many multinationals have created substantial businesses transplanting existing global products in China, it is as lucrative to meet highly specific local tastes and needs. For example, medical services aimed at one person caring for four six ageing dependents, rice-based instead of potato-based snacks, and the need to excel in English are some issues peculiar to China.

British do-it-yourself homeware retailer, B&Q, learnt the hard way. It failed to acknowledge that because labour is so cheap and willing in China, consumers could not fathom the concept of building their own furniture. IKEA, on the other hand, sidestepped the problem by changing its famous flat-pack furniture model to a ready-made delivered one.  

Internal obstacles to innovation

As Western multinationals migrate to China’s innovation-fuelled growth agenda, they are finding it tough to pick up the gauntlet thrown by enthusiastic — and not to mention creative — local players. These are some of the many challenges foreign firms face:  

Opportunity overload

Innovation is a sensitive process that needs patience to cultivate. It requires us to slow down, shift our minds of the conventional boundaries and play with possibilities. However, so rapid is the pace of market development in China that locally-based executives often do not have the space and time to develop expansive, innovation-ready strategic skills.  

Inadequate structures

Western companies found success as operators by simply applying a vast backlog of global products and services. However, there was no emphasis on building the structures for innovation. Slow decision-making and lack of an innovating workforce are the most common symptoms for this problem.  

Shallow market understanding

Most multinationals in China make the majority of decisions from their corporate or regional headquarters outside of the country. Global teams lack the necessary depth of familiarity with China and must rely on an inundation of data, which only renders slower and more complicated decision-making.  

Embedded cultural barriers

Western organisations new to China may experience cultural barriers that impede innovation. The ‘face’ phenomenon is a notable example: when in groups, Asians may not speak their mind, nor offer their opinions, for fear of being wrong. Other clichés, such as the customary sense of respect for hierarchy, can also be seen as hurdles to building an innovation culture.  

Building an innovation engine

Beset by these obstacles, Western multinationals looking to thrive in China need to build an innovation engine around three key components: setting up strategic directions, building organisational capabilities and learning from local competitors.  

Directing strategic innovations

Simply identifying innovation opportunities — of which there are plenty — is not enough. The key is to decipher and ruthlessly prioritise the opportunities that will sustain growth year after year, and then swiftly take them on.

Companies must ask themselves: What do we want innovation to deliver to the business? Where will we play and how will we win? Are we closer than our competitors are to consumers? Can this business get new ideas to market fast without diluting them? Do we have people who can step outside their comfort zone and collide new thinking?

Proctor & Gamble is one such pioneer. The company focused investment increases on lower-tiered cities and formulated a series of strategies to compete in the new markets. For example, they employed an innovative distribution method to get them to retailers in those towns.  

Building organisational capabilities

1. Create nimbleness Western multinationals urgently need to be nimble and speed up their decision-making process. This can be achieved by tuning the relationship between global and local teams; companies can choose to let local teams operate with minimum interference, or get close enough to thoroughly understand the situation on the ground.

KFC was able to outgrow McDonald’s in China this way. The fast food chain offers a uniquely local menu — including thousand-year-old eggs for breakfast. That was the result of their China team doing its own tests and product launches with little input from KFC’s global headquarters.  

2. Transform corporate culture The vital task of creating a culture of innovation in China needs to work in harmony with its cultural dimensions, and not against them. Take the ‘face’ phenomenon, an issue that can stagnate innovation. To alleviate this, companies can start sharing ownership of ideas across organisational boundaries, as this will create a safe environment to encourage emergent thinking.

For example, Hai Di Lao, a Sichuan hotpot chain, has achieved huge success through innovative service delivery that increases employee empowerment and, hence, job accountability. The company has created an environment that harnesses the entrepreneurial spirit of employees, making everyone – including the waiters – feel close to the top of the hierarchy, and, thus, more engaged in their daily tasks.

Companies also need to understand that innovation only works if they can prove results quickly. Instead of putting employees on long training courses, firms should roll up their sleeves and get practical, and ask where can they innovate fastest?  

Learn from Chinese companies

As Chinese companies are the ones leading the innovation race, multinationals should start learning from their local rivals. The best homegrown enterprises are street-smart innovators that rarely follow Western best practices, and it would do good for multinational corporations to shed them as well.

The best-performing Western companies have already provided the answers. In 2005, Wahaha, a leading local beverage company, launched a bestselling milkshake drink called Nutri-Express. It was smartly packaged, tasted great and, unheard of at the time, was able to provide all the daily nutrition needed. Later, Coca-Cola appropriated Nutri-Express with its own Minute Maid Juice Pulp Milk, but it was not just any imitation. It was an innovative one; Coca-Cola added real fruit pulp and sold it at a slightly lower price.

Given the rapid rise of the urban class and the competitive climate in China, multinationals cannot rest on their victories from the West. Not only do Western companies need to shrewdly tread this unfamiliar market, they need to assemble an innovation engine to design and develop scalable solutions. These are difficult tasks, but they form one part of a simple ultimatum: innovate or be put to the sword.  

This article was first published in HQ Asia (Print) Issue 03 (2012)