Collaboration

The dis-aggregation of value chains coupled with greater outsourcing means that, even as companies become more global and more diversified, they are becoming more focused regarding what they manage within their own boundaries. In short, companies are becoming embedded in ever-larger inter-firm networks.

In 2003, P&G's revenues were only $43 billion. By 2007, barely four years and several acquisitions later, its revenues had grown to $76 billion. Yet, at the same time, during this period, P&G had outsourced a greater percentage of its manufacturing operations and a greater percentage of its business support services.

The growth in outsourcing is being fueled by a combination of more intense competition plus developments in information technology. As companies become subject to the transparency brought about by the Internet and as barriers to imitation and new entry decline, companies find themselves facing more intense competition. Consequently, the penalties from internalizing any activity that somebody else can do better, cheaper, or faster have gone up.

The growing need for collaborative innovation is being fueled also by the rising integration of multiple technologies into the same product, service, or process. Today's PC is not just a computing and office productivity device. It has also become a source of multi-media communication, information and entertainment. Today's cars have largely become computers on wheels. Today's books need to be published and made accessible not just in paper-based formats but also in many different types of digital formats.

Can Chinese companies make the transition to become leaders at not just cost efficiency but also innovation? Given China's history of leading edge innovation over the last 2,000 years, the obvious answer is yes. Allocating more money for research and development is a necessary start. However, what is even more critical is to build new mindsets and new organizational capabilities. The education system will need to start cultivating creative thinking and not just rote memorization. On their part, companies and corporate leaders will need to learn how to create and manage horizontal networks rather than hierarchical organizations managed through top-down command and control.

Anil K. Gupta is a professor of strategy at INSEAD Wang Haiyan is an adjunct professor of strategy at INSEAD and managing partner of the China India Institute