To launch disruptive innovation, head East

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January 26, 2016

by Alex Kandybin, Partner at Strategy& (Formerly Booz & Company)

In a business world that’s become truly global, successful companies are locating their operations, R&D, sales, marketing, and other critical functions wherever in the world they can create the most value. Increasingly, that means doing business in Asia.

According to PwC’s Global Innovation 1000 study, in 2015 Asia became the global leader in research and development, accounting for roughly 35% of corporate R&D spending worldwide, totaling $166 billion (up from 27% in 2007, the last time the study was conducted).[1] Chief executives in both the US and China expect to see an increase in innovation leaders coming from Asia Pacific economies by 2020.[2]

For Western-based companies that strive to drive innovation, Asia offers three advantages: access to low-cost materials, lower-cost but highly skilled resources (arguably on a level with those in the West), and a large market for testing and launching new products and services.

There’s another reason why Western companies should head East to achieve impactful innovations. Disruptive innovations—the kind that make the deepest impact on industries—typically begin as low-cost products and services that target initially the most price sensitive customers or even non-customers (those who can’t afford the existing products). Asia, with its wealth constraints, vast population, and less stringent regulation, represents an ideal fertile ground for disruptive innovation, as many industries have discovered.

While the above mentioned advantages are available to all businesses operated in Asia, inconsistently enforced laws and regulations can provide an unfair advantage for local companies.  Intellectual property laws are in place in most Asian countries, however, they are not always enforced by the government and often not adhered to by local businesses.  A Western company, on the other hand, must strictly adhere to not only the local law, but also the laws and restrictions in its home market. Bribery often takes place in many Asian and Eastern European countries even though there are laws on the books in these countries prohibiting it. Executives from the West who are caught bribing others risk time in jail in their home country. This inconsistent enforcement of laws creates an unfair advantage for local companies that in the long-term may negatively impact Western companies and discourage investment in the East.

The specialty chemicals industry—born in the US and Germany but now dominated by China—was early to recognize the innovation advantages offered by Asia. One by one, other industries moved to the region, from high tech and consumer products to manufacturing and apparel. Over time, Asia’s capabilities increased and eventually snowballed, transforming the region into an economic juggernaut. This migration of business to Asia is part of a major shift in economic power—one of five global megatrends identified by PwC.

While many industries have made the trek to Asia, the pace of the migration has been uneven. Some industries have not fully embraced the innovation potential the region offers.

The healthcare industry is a prime example. Western healthcare companies have been slow to recognize  Asia as a source of innovation. But low-cost and initially lower functionality innovations that could disrupt the healthcare industry, such as devices or inexpensive surgical techniques, often cannot be launched in the highly regulated healthcare industry in the US and Europe. By contrast, in India, China, and other Asian countries there is far less regulatory scrutiny and far more flexibility to experiment. (At least one Indian health system is exploring the potential for performing heart surgery for as low as $800—a concept that’s inconceivable in the US, where some hospitals charge $100,000 for a similar procedure). [3]

A Western-based healthcare company could potentially leapfrog its competitors by developing low-cost disruptive innovations in Asia for Asian markets initially, then refining the innovations until they meet or exceed US or European performance standards and can be exported to the West. Companies in other industries that face obstacles to innovation could follow a similar route to Asia—and may be able to gain a competitive advantage in the process.

[1] “The 2015 Global Innovation 1000: Innovation’s New World Order,” Strategy&  http://www.strategy-business.com/feature/00370?gko=e606a

[2]    http://www.pwc.com/us/en/apec-ceo-summit/2015.html

[3]  Arion McNicoll, “Enter India’s amazing world of frugal innovation,” CNN, September 16, 2014. http://www.cnn.com/2013/06/25/tech/innovation/frugal-innovation-india-inventors/

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