Book Review: Dragons at Your Door

Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition.
Ming Zeng and Peter Williamson. Harvard Business School Press. 2007. List $29.95. 204 pages.

Ming and Williamson explore the power of the cost advantage that China has in manufactured goods, and the way they are leveraging this to become global competitors in the 21st century. We are accustomed to the fact that American and European companies are off-shoring much of their production to companies in Asia. This has allowed electronic, textile, plastic, and a host of other goods to be offered to consumers at significantly lower prices in recent years. It has also created a very large trade imbalance with Asia. All of this is foundation material which Ming and Williamson use to explore the position of China in future international business in Dragons at Your Door.

The authors suggest that this cost advantage is a disruptive innovation of the type introduced by Clayton Christensen in Innovator’s Dilemma. Chinese companies are outgrowing their role as the world’s manufacturing facilities and are extending their reach to the distribution, retailing, services, R&D, and branding of products. These moves have already begun in a number of global industries, but have just begun to extend into the American retail sector where they are evident to the average consumer. Companies like China International Marine Container Group (CIMC) and Haier are becoming true international companies, supplying both their native country and the rest of the world. To do this they have begun exercising strategy, financing, partnerships, and acquisitions “in the Western style”. These companies are aiming to be international competitors, not simply Chinese suppliers to western international companies. This move will redirect significant profits from the western integrators, branders, and distributors into the hands of the Chinese manufacturers turned full-service competitors.

At the root of this expansion is the cost advantage of labor in China, as well as government support of the expansion. The authors cast this as a disruptive innovation in the Christensen style. But it appears to be more of a competitive advantage ala Michael Porter. In his works, Porter argues that a company can either compete on cost or on unique capabilities. The Chinese companies profiled are currently basing their strategy on lower costs, which has a limited duration. But, they argue that this is just the beginning of a more full-featured advance that includes R&D, branding, and unique product features based on Chinese intellectual property. Their prime example of this is Dawning Computer who offers low-cost, high performance computers (HPCs) based on the intellectual property of China’s Institute for Computing Technology (ICT).

Ming and Williamson point out that Chinese companies are not well prepared to compete in all industries or product classes. Their cost strategy works best when an industry is well established and has a dominant product design. Given this situation, Chinese companies are in a position to imitate that design at a lower cost as the basis for their competition. In industries based on the complex integration of intangible assets like IP and branding, the Chinese competitors are not prepared to mount an effective opposition.

The authors’ prescription for western companies who want to defend against this attack is three fold: (1) begin your own internal cost innovation program, (2) give a global mandate to your Chinese subsidiaries to beat their Chinese competitors at this game, and (3) build alliances with the Chinese dragons to strengthen your global competitiveness.

The story of the emergence and growth of China is not new. It follows a pattern that has we have seen from Japan and that will probably be repeated by Eastern Europe in the near future. Once an international firm gains access to the markets of a rich country it continually expands its ability to win business there. Just as Japanese electronics and automobiles are known for their high quality, Chinese industries will probably achieve a similar reputation over the next decade.

Book Review: The Future of Management, by Gary Hamel

The Future of Management. Gary Hamel with Bill Breen. Harvard Business School Press. 2007. List $26.95. 269 pages.

Hamel opens by explaining that we are running 21st century companies using management ideas and principles that are often 100 years old and were created by “long dead theorists”. These ideas began with Taylor’s principles of scientific management and largely focus on creating static structures that can improve productivity and quality of products that change only gradually over time. At this point in history, however, these ideas are too static, too regimented, and too myopic to be effective among the very dynamic, disruptive, and shifting opportunities that present themselves.

Hamel’s historical analysis of management points to the following list of practices which have evolved over the last century: setting and programming objectives, motivating and aligning effort, coordinating and controlling activities, developing and assigning talent, accumulating and applying knowledge, amassing and allocating resources, building and nurturing relationships, and balancing and meeting stakeholder demands. All of these are sensible, logical, and seemingly effective. But inherent in this list is the assumption that the external environment is largely static and can be operated on in the same manner repetitively and with cumulative effect.

Although the word does not appear in the title, Hamel has written another innovation book. He insists that productivity and quality cannot be the basis of advantage in the 21st century. Companies that hew to these old measurements will become more effective at operations and with products that are increasingly obsolete. Hamel insists that companies must adopt management practices that are centered on innovation and adaptability. He presents a number of different management principles for adaptability. First, life is about creating variety, not enforcing standardization. Second, market forces within a company enable flexibility. A market environment allows innovators to be creative and attracts the types of people that companies need in the present and future. Third, leaders are accountable to those being governed and everyone has a right to dissent about the direction of the organization. Leadership is actually distributed throughout the organization, not resident at the top. Fourth, the mission or the organization really does matter. Modern organizations must be in pursuit of goals that are meaningful to the employees and for which stakeholders are willing to adapt their behavior toward the achievement of those goals. Fifth, diversity of skills and perspectives begets creativity. Organizations must structure themselves so that information and ideas can flow everywhere and come together in unexpected patterns. Serendipity in idea combination will create opportunity, value, and advantage.

In building these ideas, Hamel draws on case studies of Whole Foods, W.L. Gore, and Google. He also turns to lessons learned by IBM in its most recent business transformation. This is an innovation book, but Hamel uses it to challenge the management practices that have evolved over a century and then proposes replacements that may be more effective in the present and future. Those of us who have spent decades in traditional organizations resonate with the established practices that Hamel has distilled. But we are also aware of the limitations that those impose and wonder about ways to incorporate new practices within the old. Hamel suggests that an entirely new set of practices is needed and that they will be more effective at running a business in the future than those put forward by dead theorists. As practitioners we can choose to experiment with Hamel’s new practices or we can choose to ignore them and carry on with our existing practices. Given the extreme changes in the global business world, it appears that sticking with the past will put your company in competition with low-cost providers around the globe. On the other hand, Hamel’s practices will put your company in competition with global innovators who create products with much higher margins. The best choice seems to stem from the business strategy of the company and its plans for its own future.