The Cost Innovation Challenge
It’s clear that cost innovation isn’t rocket science. But it should be equally clear that it is a powerful competitive weapon with the ability to disrupt global markets. By leveraging low-cost Chinese R&D and engineering resources; betting on cheaper, alternative technologies; and riding the open architecture wave, the emerging dragons can offer the world high technology at low cost. By using China’s labor cost advantage in novel ways to increase their process flexibility without undermining efficiency and via recombinative innovation, Chinese competitors are offering increased variety and customization at the same rock-bottom prices as standardized products—transforming the economics of supplying today’s high-priced, specialty products.
Today’s global leaders need to take these unconventional strategies seriously because they expose even products and activities requiring leading-edge technologies to competition from the Chinese—and, worse still, competition that comes completely from left field. Faced with new rules, much of the incumbents’ accumulated experience can be rendered irrelevant. And if an emerging Chinese competitor is able to apply high technology to a formerly lower-technology game, to deliver massively greater variety and choice, or to transform the economics of supplying specialist products, established players on all sides are left with frightening challenges. Those who basked in the high margins of the past are faced with a competitor capable of undermining the foundations of their business model by innovative use of cost advantage to deliver more for less. Those who relied on managing product life cycles to recoup their R&D costs and maximize profitability by gradually migrating new technology from high-end segments to the lower-price, mass market will find this strategy stopped dead if an emerging dragon starts to deliver high technology directly to mass-market products almost from day one.
It’s clear that cost innovation isn’t rocket science. But it should be equally clear that it is a powerful competitive weapon with the ability to disrupt global markets. By leveraging low-cost Chinese R&D and engineering resources; betting on cheaper, alternative technologies; and riding the open architecture wave, the emerging dragons can offer the world high technology at low cost. By using China’s labor cost advantage in novel ways to increase their process flexibility without undermining efficiency and via recombinative innovation, Chinese competitors are offering increased variety and customization at the same rock-bottom prices as standardized products—transforming the economics of supplying today’s high-priced, specialty products.
Today’s global leaders need to take these unconventional strategies seriously because they expose even products and activities requiring leading-edge technologies to competition from the Chinese—and, worse still, competition that comes completely from left field. Faced with new rules, much of the incumbents’ accumulated experience can be rendered irrelevant. And if an emerging Chinese competitor is able to apply high technology to a formerly lower-technology game, to deliver massively greater variety and choice, or to transform the economics of supplying specialist products, established players on all sides are left with frightening challenges. Those who basked in the high margins of the past are faced with a competitor capable of undermining the foundations of their business model by innovative use of cost advantage to deliver more for less. Those who relied on managing product life cycles to recoup their R&D costs and maximize profitability by gradually migrating new technology from high-end segments to the lower-price, mass market will find this strategy stopped dead if an emerging dragon starts to deliver high technology directly to mass-market products almost from day one.
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