ChinnovationChapter 3: Star Innovators Recognize Scope Innovation

Star Innovators Recognize Scope Innovation

Life could not go on the way it was. The business had to die. A new business had to be created.

—Anonymous

Scope Innovation

Scope innovation is primarily associated with supply-side changes, usually resulting in a better, cheaper, or faster product, typically enabled by technology. This also includes demand-side

changes, such as increasing or decreasing the scope of marketing and distribution of different types of products.

Star Innovators Recognize Scope InnovationHow do entrepreneurial innovators hone the crucial process of prototyping?

How do they incorporate dummy drafts of the actual product into the planning, to work out bugs as they go?

How do innovators generate strategic insights?

How do they filter out the wheat from the chaff (the good ideas from the lousy ones)?

What are the yin and yang of winning scope innovation?

CEO of Alibaba Group

The Rs for Alibaba GroupRemixing. Combining features from Amazon, eBay, and Rakuten, Alibaba's success defied many Western misperceptions about China and innovation

Ma advises Chinese innovators: “Invest in your experiences and foresight.” He elaborates: “Innovators learn by discussing in forums, engaging in conversations and seeing new things. As a leader, having foresight and staying broad-minded is critical. Travel and see New York and Tokyo. If you are perpetually in one city (like Hangzhou), how do you converse with your large clients?”

The Rs for Alibaba GroupRestrictions. The typical perception of small companies is that they are cash-strapped, lacking in resources, and slow to respond, but Ma's philosophy: “By helping people [small businesses] make money, we are making money.”

“In the last century, big was better,” he says. “But in the 21st century, I believe small is beautiful because it is not about how much equipment you have but how quickly you can change yourself to meet the market.”

The Rs for Alibaba GroupRivals. Ma believes rivals keep an enterprise sharp: “Why are goats in the western U.S. more stout and why do they run faster? Because the west has wolves!”

Look far ahead: “Successful enterprises do not measure themselves in the first 100-meter dash, because we are running a 3000-meter marathon. In a long race, one only sees the gap after 300 or 400 meters.”

Looking Inside and Outside for Disruptive InnovationFar East Holdings is the leading player in the China cable industry

It was the first privately owned enterprise to be ranked in China's “100 top electrical industrial enterprise market.”

How do firms like Far East Holdings stay innovative?

One solution is to establish smaller independent subsidiaries with the mandate to innovate

Jiang Xipei, Chairman of Far East Holdings, with the author

Far East Holdings Disruptive Innovation

Far East Holdings, founded in 1990 by Jiang Xipei, invests 10 percent of its profits in research and development, and another 10 percent via a diversified development fund termed the “core

business plus fund”

Far East Holdings Disruptive Innovation

“We invest money into professional fund management companies, for them to invest in appropriate projects and talents. Ten percent of our annual profits are invested as

venture capital. It is okay if only one or two out of three to five projects pay off. If none pay off, it means I have made bad

decisions. But overall, it doesn't have an overly large impact on the group.”

Looking Inside and Outside for Disruptive Innovation

Overlapping of technology at different clusters is the core of integration and innovation that results in a paradigm shift in the

level of product designs.

Study applications that are close to market needs instead of inventions still far away from commercialization.

Corporate venturing, R&D, and an innovative HR policy form the cornerstones of a disruptively innovative company.

Reaching Critical Mass Playing Catch-Up Behind PeersThe semiconductor industry lives—and dies—by a simple creed: smaller, faster, and cheaper.

As chips got smaller and smallercompanies could no longer afford the billions of dollars required.

As a result, independent semiconductor foundries (such as TSMC and UMC) were established.

China's first and largest independent semiconductor foundries, SMIC, & its founder, Richard Chang.

Richard Chang, Founder of SMIC (Semiconductor Manufacturing International Cooperation), with the author

SMIC“The initial strategy for SMIC was to reach critical mass.

However, after reaching critical mass, customers did not feel satisfied (and demanded more sophisticated products).

Now, the focus is on profitability.

Core costs and depreciation have increased. Our 8-inch wafer [smaller than the current state-of-the-art, which is 12 inches] is fully depreciated, but it is not fully exploited, even though we are in the midst of greater competition.

Our EBITA margin is good and we are cash flow positive with faster capability and capacity. The next phase of growth is for size and profitability.”

Reaching Critical Mass Playing Catch-Up Behind Peers

It does not matter who starts first in the race, what matters is whether you can fulfill the requirements of your customers better

than the incumbents.

Miss it and you miss your turn.

Disciplined Effort on Developing In-House ExpertiseOn managing risk in developing in-house expertise, Chang explained that there is no risk, only effort:

Fifty percent of SMIC's effort is to focus on the most advanced technology. Forty percent of our effort is to harvest the mature technology.

Disciplined Effort on Developing In-House Expertise“In the beginning, China's technology is behind the incumbents (We had no 0.35 micron logic (in contract to Chartered's 0.18 (micron), IBM's 0.13 and TSMC's 0.13). Other fabs have accumulated a lot of IP.

If (SMIC) has to catch up in eight years, we catch up in eight years.

Customers do not care whether you are a new player.

If market requires 45nm, we are required to manufacture 45nm.

Looking at our track record, we have made the march successfully from 0.35 micron (mm or 350 nm) to 45 nm.”

Disciplined Effort on Developing In-House Expertise

In developing in-house capabilities, adapt technologies for different applications to meet the market and allocate resources

accordingly.

Innovation Begins with an Eye Toward the FutureWhen the idea of a chipless, fabless ASIC design firm was first espoused, many in the industry felt that it would also be cashless (unprofitable).

Verisilicon defied common wisdom to establish a foothold in the industry.

Since Verisilicon's strength was in design and layout of chips, it decided to focus on that and leave the actual fabrication to others.

It set itself up as a sort of architect of chips, a firm that would be hired for its ability to produce world-class designs the way a great architect is hired to produce world-class buildings.

Other hands do the construction, but the buildings—or the chips—are still regarded as the product of their designer.

Innovation Begins with an Eye Toward the Future

Do you have the foresight to look into the future of your industry and the right risk appetite to act on your insight?

Innovation Begins with an Eye Toward the Future

As an innovator, what is the key question you would need to answer?

It's simple: Why would anyone want your service or product, and why would they want it from you?

The best answer to the “Why you?” question I have heard comes from Liu Xiucai, CEO of Cathay Biotech, a pharmaceutical company with a long chain dibasic acid production technology.

He raised $78 million in Series A and B funding in 2006.

Cathay Biotech has since grown to become a world leader in the production of dibasic acids, carrying one of the broadest product lines in the category using a new yeast fermentation process to produce ingredients for high-performance polyamides, polyesters, and coatings, typically with over 99 percent purity. The company has distribution channels in four continents.

Liu, formerly a tenured professor, has taught at Yale, Columbia, and Stanford—and at every place he has guided 10–15 PhD students.

Due to the stringent requirements he imposed, every PhD student had to produce a significant breakthrough in a technology frontier.

With such resources at hand, it's simple and natural to accumulate the breakthroughs and develop the building blocks of a credible company with high barriers to entry.

Test and Then FocusOne interviewee explained that he did a survey on the death rates of technology firms in China.

He concluded that less than 10 percent of firms fail because their technology didn't work.

Most of the time, failure is caused by lack of technology adoption.

The Achilles' heel of most companies has nothing to do with product development; the problem is customer development, which most companies fail to pursue in parallel.

Test and Then Focus

Do not neglect customer development. Utilize tools (such as forums or Web statistics) and monitor your competitors to glean market insights. Trial and error is the shorthand for innovation.

Adaptation to ChangesAnything that can go wrong will go wrong

One should always be open-minded and accept the changes in environments, people, and conditions, and stay flexible enough to adapt to these changes

Entrepreneurs tend to let ego get in the way of adapting to the real world around them.

If they can manage their egos and focus on creating values in their business, they will be able to improve the business performance and keep going with it.

Adaptation to Changes

Success in this world is always a matter of individual effort, yet you will only be deceiving yourself if you believe that you can

succeed without the cooperation of other people. Be adaptable; always have a Plan B if Plan A fails.

Taking a Step Back

Focus on the fundamentals, always keeping a view on the long term. Get-rich-quick approaches usually equate to getting burned

faster.

Pathway to a Disruptive InnovationWe see similar patterns in China; interviews for this book revealed the following trends:

Companies with sales revenue of approximately $1 million or less tend to focus on one product and one channel of distribution.

Among those with sales revenue between $1 million and $5 million, firms have a higher number of products but still concentrate on few channels of distribution.

And lastly, firms with $5 million to $20 million of revenue have a large number of products and channels of distribution

Pathway to a Disruptive Innovation

Do you want to grow? Take over more of your partners' capabilities over time and build long-term capabilities. Who are

your customers and suppliers with growth potential? Contemplate vertical and horizontal integration.

Service Innovation: Building the Future

Look at the interstices of incumbent industries (for example, between mobile Internet and geo-tagging), as these are likely to give rise to new emerging industries. With the convergence of

networks (telecommunications, Internet, and so on), an integrated platform will eventually emerge. Avoid the focusing

effect.

Occam's Razor—Simplicity: Will Customers Like It?all other things being equal, the simplest solution is the best

The simplest answer is usually the correct answer. Listen to your customer to discover problems and unsatisfied needs.

Produce That First Product QuicklyChinese innovators employ an iterative process akin to what engineers call “rapid prototyping,” involving close interaction with customers.

That is, initial engagement of nearby customers facilitates the iterative development of products and sales process.

Produce That First Product Quickly

Start Small, Think Big. Every great fashion enterprise, every outstanding financial institution, every mammoth IT company,

and every great invention began in the imagination of some one person. A report does not capture the imagination as well as a

prototype, which will help shape ideas.

Innovation Requires GritInnovators can suffer many setbacks before their intuition is proven right.

Market research can be futile if the consumers do not bite, and frequently it takes quite a bit of testing to get it right

Successful companies have the agility to turn small failures or anomalies into big successes

Mengniu was founded in 1999 by its current chairman, Niu Gensheng, together with a management team that has had decades of experience in one of inner China's largest milk product companies, Mongolia Yili Industrial Group (Yili).

The author with Niu Gensheng, CEO of Mengniu Dairy.

Niu was previously Yili's VP of sales, and he had deep experience in both production and sales there. He grew up with Yili, where he worked for 17 years and was the link between Yili and its clients, filling a structural role.

Armed with extensive industry experience and years of in-depth functional experience, he was able to quickly build up Mengniu's productive and sales capabilities to such a scale that within a relatively short span—only nine years—it became one of the largest milk producers in China.

Mengniu Dairy has always stuck to the principle of innovation, to strengthening its research and development so as to provide the finest products,” Niu says, pointing out that innovation has been the crux of Mengniu's success.

Mengniu has a first-class ranch, Mengniu-Australia International Ranch in China, which helps raw milk suppliers upgrade rearing methodology.

It also has a school to train employees in every part of the manufacturing process. And Mengniu invests heavily in R&D.

On average, Mengniu files a new patent application every nine days, and invents a new product every six days

Innovation Requires Grit

An innovator has to weather unexpected ups and downs. Good timing doesn't hurt—catch the right wave to grow. And

remember that integrity is tested in difficult times.