For some industries in the West, this question will appear somewhat ridiculous. The American textile and apparel industries, for example, will tell you that the evidence is found in the blood on the floor – their blood, on what used to be their floor. Similarly, American and European metals industries and wind-turbine and solar panel producers will echo that. But despite all the pain that they have experienced, they are wrong. Far from being disruptive, in these industries, Chinese players have done little that has been different from the practices that they found when they entered them.  What the Chinese competitors did was merely to lower costs and lower prices, benefitting from the so-called “China price.” They were “displacers”, not “disrupters.”  Is it realistic to assume that this will continue to be the pattern for the future?

The difference between displacement – outperforming existing market incumbents at their own game, and disruption – changing the game, is a strategically important one, no matter that the pain felt might be similar. There is good reason to believe that, to date, China has been more of a displacer than a disrupter. That should be good news for Western interests because displacement can be combatted in various well-known ways including process improvements and government trade actions.  Moreover, cost advantages tend to be temporary sources of competitiveness.  Actual disruption, on the other hand, is a much more profound challenge, and one that calls for a real transformation of the challenged incumbent firms; something, as the Chinese and we have found out, that is considerably harder to achieve.

The catch is that most of our ideas of innovation are technology based, but what if we rethought these impressions by broadening our definition of “innovation” to that of “offerings”, or, better yet “customer experience”? Then, China’s innovative potential shifts significantly. Xiaomi’s phones, which are technically not disruptive, suddenly become vehicles for changing the cadence of relating to customers, as they come to appreciate Xiaomi’s weekly updating of its OS; this type of sustained behavior can be highly disruptive! Haier’s organizational reinventions allowed it to accelerate the time to market for its Tianzun advanced household heater/air conditioner/air purifier; again, a potentially disruptive advantage in what is otherwise a slow-moving industry. All of these are real innovations, despite not being technical, and all of them speak to disrupting business as usual, rather than a mere lower cost model.  In fact, it is possible to interpret the departure of BMW’s core electric-vehicle design team, along with that of two Tesla executives, to Future Mobility Company, as talent looking for a chance ignite a critical disruption in the EV industry. Such is the attraction of the sort of business model disruption we are sensing in China today.

What is so ironic about the current situation regarding China’s innovation trajectory is that we in the West have for so long prided ourselves on our business acumen and customer centricity, while stereotyping Chinese competition as being simply “low cost.” As a result, our technology focus when we speak about innovation consigns China to the less intimidating role of displacer rather than a disruptor. But, if we recognize innovation as being more about things such as customer experience and less about technology, then China’s challenge becomes considerably more disruptive than we have previously given it credit for, making China a much more formidable competitor in the future.

At a recent conference on “China’s Role in the Global Innovation System,” at Duke Kunshan University,  we saw some early glances at China’s disruptive possibility, punctuated by BGI’s [formerly Bejing Genomics Institute]  President Mr Wang Jian,  who claimed that the genomic research powerhouse is truly a “rule-breaker,”.  Similarly, sophisticated M&A and incubator activities by established players from both the public and private sectors all attest to a quickening of the pace of China’s innovation.

However, disruption may not yet be the norm, and innovation may not be the break-out source of economic growth that many envision for China in the immediate future. The major barrier to be overcome is more likely entrepreneurial rather than technical. Chinese entrepreneurs, whom we spoke with, presented a picture of their innovation scene that appeared to be anything but disruptive.  Was entrepreneurial innovation happening in China? Yes! Without a doubt, there was tremendous innovative activity taking place! But, Chinese entrepreneurs, we were told, were too short-term oriented to create truly disruptive change; and the country’s cumbersome state-owned enterprises were too slow.  Some even stated that China’s insistence on domestic standards was resulting in less ambitious innovation; the education system was not supporting appropriate talent development, and there was a general lack of trust throughout the innovation ecosphere. All in all, the impression was far less disruptive than the popular press, Western or Chinese, has been portraying. China was still accelerating through innovation most often along an existing S-curve in nearly every case, not creating new ones.

What we also heard were sentiments such as “China’s core innovation strength remains dependent upon manufacturing-based activities, or where the quest for short-term profits prevailed there was no meaningful innovation.”  It was admitted that “made for China,” rather than “made for the world,” was often easier, cheaper & more profitable than pursuing truly disruptive changes. We were told that returning young Chinese scientists also avoided new challenges, preferring, instead, to  “continue their advisor’s work.”

In fact, despite the really disruptive accomplishments of BGI, the overarching message from most experiences were best captured by entrepreneurial drone-maker Ehang’s Derick Xiong, who sheepishly admitted that: “I worry that most Chinese firms are not doing real R&D.  They are only doing application. It is possible that in 10-15 years, China could once again be well behind.”

There is no surprise here. In almost every industry, China’s innovation has been along existing S-curves rather than creating new ones; displacement much more than disruption, as long as the S-curves are seen as technology trajectories, as is traditionally the case.  Nonetheless, there are enough suggestions of business model disruption appearing on the China scene that it is highly conceivable that we soon might be entering a period of two-speed change: continued displacement by ever more competitive Chinese firms, and occasional disruptive business model innovation appearing in less familiar sectors of the Chinese economy, powered by emerging entrepreneurs.   These emerging formulas for disruptive success are not easily identifiable, though it is evident they will more likely be the product of significant firm-level behavioral discontinuities than evolving out of the prevailing status quo in the bulk of China’s industries.

[This is a longer version of the blog that appeared in HBR]

About the authors:

Bill Fischer is Professor of Innovation Management at IMD, Lausanne, Switzerland. He is the former Executive President and Dean of the China-Europe International Business School (CEIBS) in Shanghai, and a co-author of Reinventing Giants, a study of business model and organizational culture reinvention at Haier.

Denis Simon is Executive Vice Chancellor of Duke Kunshan University.  He is the co-author (with Cong CAO）of China’s Emerging Technological Edge, which looks at the supply, demand and utilization of high end talent in China

Far-fetched, you think? Well, in fact, the what if is no longer speculative; it is here already. Talk to people in such professional service industries as: private banking, auditing, consulting, even engineering, and you begin to hear concerns about the commoditization of professional knowledge. A consulting civil engineer [the field in which I was first educated, and still find so deliciously complex] admitted to me that much of what you need to know in that field is on line, and that their corporate clients were a new breed who didn’t so much want what he and his colleagues already knew (since that was easily available), as what they didn’t know. Increasingly, tax preparation is being automated, and even auditing is going the way of algorithmic review and big data “sweeps” instead of sampling. Artificial intelligence is writing content that you reading [not this!], and Jancis Robinson, the wine expert and writer, recently wrote that she has “gone from being a unique provider of information to having to fight for attention.” Increasingly, expertise, and the role of “the expert” is losing the respect that for years had earned it premiums in any market where uncertainty was present and complex knowledge valued. Along with it, we are shedding our reverence for “expert evaluation,” resigning our regard for our Michelin guides and casting our lot with the peer-generated TripAdvisors and Yelps of the world.

In fact, as if in a perfect storm, not only is the character of expertise changing, but at the same time, new client needs, and new clients, are emerging and the potential for new delivery of expertise content is also changing in fundamental ways. Firms are fearful of being vulnerable to an unknown [not uncertain] future; and at the same time, conditioned by living in an internet world, they expect instant knowledge responses at reasonable prices. Expertise providers are finding that the models that they have long-relied upon [e.g., the familiar five forces model] are losing some of their potency, as they are based upon assumed knowledge that is increasingly difficult to determine [What industry are we in? Who are our competitors? What are our core-competencies?]. Finally, in a world where advancement is being driven more by experimentation than by reliance upon experts, and where the need for advice has moved from episodic to continuous, the entire delivery model for expertise is also being reinvented, leaving an entire expert value-chain from classical university education, post-graduate professional certification, to continuous education, in disarray:

If expertise is over, or at least no longer commanding its traditional premium in the marketplace, and if the old ways of conveying expertise are also in upheaval, what then do experts have to offer? An answer might be found in David W. Maister et.al.’s trust equation for the professional service firm:

If trustworthiness is the coin of the realm for becoming a trusted business advisor, and if Maister and his colleagues are correct in describing the factors that determine trustworthiness, then it would appear that while Credibility is being commoditized via popular access to expertise and artificial intelligence, Reliability may actually be raised by the reduced variance associated with AI, but at the same time it becomes attribute which is presumably available to all, leaving Intimacy and Self-Orientation as the two remaining variables that are independent of algorithmic thinking and ubiquitous availability. They must be exactly what Richard Straub, President and founder of the Peter Drucker Society Europe, had in mind when we he observed:

Being human is consciously to bring judgment, intuition, creativity, empathy and values into play. In business, it is the domain of entrepreneurial thinking and innovation, of weighing decisions, of collaboration and trust – qualities that are utterly different from the machine logic of networked sensors and processors.

Not surprisingly, because they are so nuanced, these are also exactly the topics that are most difficult to master through a reliance upon a traditional business education. While most business schools offer coursework in entrepreneurship and innovation, there is considerable doubt as to what exactly these subjects mean and how best to convey such learning. Judgment and intuition are even more difficult to define, yet are probably even more important. When Straub suggests that “management is in need of a second curve that sets a new positive path away from the diminishing returns of the first” he is undoubtedly correct, but what might that second curve look like and how to prepare for it?

Innovative organizations require leaders who are role models for living innovatively. While not necessarily being the source of new ideas, these leaders of the future must be comfortable in participating in an organizational environment where everyone is responsible for innovation, where others know more, where experimentation is the key to learning, where inclusiveness is necessary to assure that no good idea goes overlooked and where risk-taking and even daring are the hallmarks of a successful strategy. In a world where expertise is dead, no longer will functional training alone be sufficient to rise to the top, or to take a lead-role. New, more intuitive and relationship-oriented skills will prevail. One is reminded of Apollo 13’s Project Manager, Gene Kranz, possibly the person in the room with the fewest formal educational credentials, yet the one irreplaceable person on the team, thanks to his ability to inspire, direct and maneuver a team of seriously smart people towards a success that their expertise had convinced them was unattainable. In addition, Leadership in the future will undoubtedly be more metaphorically digital, in that it will be: faster, more connected, more inclusive, more risky, but it will also be more intimate and caring as well. In looking at the development of leaders in a future where technical expertise is a commodity, we might well pay attention to Kevin Roberts, Executive Chairman of Saatchi & Saatchi, who suggests that all of this is vivid testimony to “the idea of business management as a liberal art.”

About the author:

Bill Fischer is Professor of Innovation Management at IMD. He is co-founder and director of IMD’s partnership program with MIT/Sloan: Driving Strategic Innovation.