7 Key Steps to Successful Open Innovation in China

By: Min Zhou / Patrick Berbon

More and more Multinational Companies (MNCs) are turning to China for open innovation for several important reasons. Find out what those reasons are and learn more about best practices to succeed at open innovation in the unique Chinese market. This article delves deeper into how harvest the power of innovation from one of the world’s most populous and fastest-growing countries

More and more Multinational Companies (MNCs) are turning to China for open innovation for several very important reasons: one is the fact that China is becoming more and more innovative as supportive government policies, an increasing number of foreign-educated returnees and a vibrant venture capital system all contribute to an ecosystem that encourages ingenious innovation; second is the fact that China is becoming an increasingly important market for multinational companies as Chinese consumers are increasingly more demanding of products that are tailored to their unique tastes and habits; and last but not least, for thousands of years Chinese people had to be quite ingenious to improve their daily lives. They are now applying those skills in developing new technologies and business models rooted in very practical approaches to the market.

Gone are the days when MNCs could make and sell the same products in China that they sold in the US or in Europe and expect great revenue and little competition from local companies. While MNCs traditionally dominate high-end markets in many industry segments while local companies are resigned to compete at the lower-end, now and increasing number of Chinese companies are becoming innovative and can often compete fairly aggressively in at least the middle-market.

Successful open innovation in China – whereby MNCs can identify and work with innovative partners in the China market well before they turn into a formidable competing force – has become absolutely critical to the long term success of MNCs in China, not to mention the critical opportunity to harvest the power of innovation from one of world’s most populous, and fastest-growing countries.

So how can MNCs succeed at open innovation in China? We summarize seven key steps from our experience.

1. Know your objectives and have internal alignment on the objectives

MNCs could have a variety of different objectives for open innovation in China. More, specifically, companies could be looking:

• for innovations that would work well in their home market;
• for innovations that would work well in China and other emerging markets;
• to establish beachhead relationships with key institutes and influencers;
• to supplement internal R&D efforts.

All of these objectives are valid and can be achieved. In our experience, the key to success is that the objective, whatever it is, needs to be agreed upon by various stakeholders in the company so that when the innovation is sourced, there is a willing audience in the company to “capture” it.

Another benefit of having clear consensus-based objectives is having the best approaches for achieving the goal. For example, establishing beachhead relationships with key institutes and influencers requires mapping out those key opinion leaders who tend to be well-known, well-established players. On the other hand, looking for innovations that work well in the China market requires finding the emerging leaders who tend to be as-of-yet unknown – usually from among smaller companies who are experiencing fast growth.

2. Have a three-year plan and know where you are going

Rushing into and out of an open innovation effort in China does more damage to a company’s reputation than not starting the effort at all.

The success of open innovation anywhere depends on the quality of partnerships. Nowhere is this truer than in China where relationships usually play a more important role than contracts. Chinese society values relationships that are built slowly over time and one step at a time. It is thus critical to have a long-term plan for open innovation efforts in China so that a trustworthy network of innovation partners can be built and reinforced gradually over time. Rushing into and out of an open innovation effort in China does more damage to a company’s reputation than not starting the effort at all. In our experience, companies who develop clear OI roadmaps and those who have consistent goals and objectives have better success rates. Steadiness and consistency yield better results over time than an uneven approach of stop-and-go.

3. Be prompt at follow-ups and keep potential partners informed

In general, corporate decision-making style in China is very different than in the West. Western companies tend to make consensus-, data- and analysis-driven decisions in a meticulous fashion, and once decisions are made, they are not often changed. On the contrary, there is a popular saying in China which is “crossing the river while touching the stones” – meaning Chinese companies tend to make decisions in a top-down fashion and in a much quicker way based on limited information. However, these decisions are constantly re-evaluated as more information comes in and decisions can often be changed. The Chinese style of decision-making is based on necessity – conditions in the market change so quickly and so often that decisions made too slowly will often mean missed opportunities or mistakes. Needless to say, both decision-making styles are based on local conditions and neither is qualitatively right or wrong. On the other hand, as a result of the different decision-making styles, Chinese partners often find the pace of decision-making at MNCs to be painfully slow. While it is often not possible to accelerate the decision-making at MNCs, it is very important to show active listening, give prompt feedback and keep the Chinese partner informed of the decision-making process whenever possible. It is also very important to close-the-loop whenever a conversation was initiated so that there is a positive feeling even when a collaborative relationship is not formed.

4. Share background information and criteria for success

It is no surprise that better-informed partners come up with better ideas. It is particularly important in the context of cross-culture communications. Many Chinese companies and institutes lack an intuitive grasp of the context of the home markets of MNCs. It is therefore very useful for MNCs to share (as much as possible) non-confidential background information about their companies, their particular innovation needs and topics, and information about how the innovation would fit into their product development portfolios. It is also critical to define the innovation criteria or boundary conditions for success acceptable for adoption by the MNC.

In our experience, it is very helpful to have well-written introductory materials in Chinese that introduce the MNC at a high level, the open innovation effort, the particular innovation needs, the processes for evaluating innovation proposals and the key criteria for success. If the MNC is seeking innovation for the home market, it is also very helpful to have information about that market, including: the typical consumer; product positioning strategy; brand attributes, etc. Innovation consists of solutions that can create value in the market place. Thus without a good understanding of the end consumers targeted, it is very difficult for Chinese companies or institutes to come up with innovations that would suit the Western market. The reverse is equally true – Western companies innovating for the Chinese market must start with an understanding of Chinese consumers.

5. Assemble and integrate

Because China is still a developing country, many companies and institutes lack sufficient resources and scale to allow them to develop into multi-disciplinary innovation powerhouses. Often times, small companies can only afford one piece of key equipment or a single experimental platform so that they can concentrate their core differentiation or innovation on what that platform allows them to do. This situation is exacerbated by the fact that the market potential in a given segment in China is often big enough for a small company with a single technology platform, reducing incentives for the owners to do more. As a result of this, one-stop shops where innovation capabilities and talents are all housed under one roof, and where innovative products squarely fit the needs of an MNC in a ready-made fashion, are very rare. Companies often have to be willing to assemble different innovation capabilities to do a project. In this context, it is very useful to have a “map of talents and resources” that identifies expertise and talents in various areas who can potentially work together with the company and transform individual innovative components into a bigger innovation project.

In our work with Si’prod, a French company manufacturing power tools, we worked with five different companies that each had one piece of key equipment to come up with a product that integrated the capabilities of all five companies (plus our own engineering services) to deliver an innovative product solution.

6. Be willing to train and guide

Once you identify the right partners who have the potential to become your long-term innovation partners in China, investment in some training might be very worthwhile. We recently completed a six-course open innovation training for three of Bissell’s key strategic suppliers in China. In the training, we define “open” as “collaboration” and “innovation” as “creating value”, so the course was centered on “collaborate to create value” and the goal was not only to get local suppliers to be more innovative, but also to have better alignment with Bissell’s goals. Besides key concepts such as collaboration, teamwork, cross-cultural communication, market-driven innovation, innovation methods and innovation management, Bissell’s particular consumer profile and innovation needs were woven into the courses so that the participants could practice on subjects close to their daily work. The training achieved the targeted results – the participants ended up speaking the same innovation language as Bissell employees, they looked at consumer needs through the same lens as Bissell, and they are now equipped with tools and frameworks to come up with innovations that can fit into Bissell product development roadmap right away.

This phase of deep dialogue to train and guide is of key importance in fostering mutual understanding between the parties and ultimately increases the success rate of OI in China.

Other forms of training can include inviting potential partners to visit company facilities, meeting with employees, attending product launches, participating in brainstorming sessions, etc. It is also beneficial for an MNC to understand the way its partners look at the market, how they develop ideas on that basis, and how their trial and error mechanism works in their market. A demonstrated interest by the MNC in learning from the partners encourages them to open up more and share more. This phase of deep dialogue to train and guide is of key importance in fostering mutual understanding between the parties and ultimately increases the success rate of OI in China.

7. Be open to different forms of innovation

Innovation is not limited to technological innovation, but also includes market innovation, product innovation and business model innovation. While China is getting better and better at fundamental technological innovations, China is even stronger in product and business model innovations that are particularly well-suited to China and other emerging markets. The reason for this is very simple – rather than being just inventions, innovations become true innovations because they meet specific market needs. Chinese companies which operate locally every day are simply more attuned to the Chinese market needs than an MNC could possibly be. Therefore, being open to sourcing ideas and innovations in products as well as business models would be of great value to MNCs in the China market. With some minor modifications, some of these innovations could even work well in the home markets of MNCs. Finally, the China market is also a great field for experimentation with new products and business models. Consumers are highly receptive of new experiences and the market is big enough to be able to define and properly test-pilot without negatively impacting the global business in case of failure.

In our experience, open innovation in China works best and efforts deliver results in a broader and quicker form if in addition to the R&D department, the marketing, business development and commercial business divisions are also engaged.

By Min Zhou & Patrick Berbon