If I gave you a box that, anytime you put in set of instructions, out pops what you wanted. You know that as long as the instructions are clear you will get what you want from the box. You have no idea how the box works or how it is able to work so fast but you like the box because it makes your life easy. You start to wonder how the box works and what it is doing inside. You think that the box is just a machine with gears moving around inside. But what if I told you that inside the box there are hundreds of little beings inside working hard at creating what you want so they can get it back to you right away. How do they do that so quickly, regardless of how hard the request is?
Easy, they break the task up into a million pieces so that everyone has a little project to complete. One person might do a small thing like connect this part, the next person might be responsible for adding the right color, the next might be in charge of testing it, and so on until everyone has done their little part. Many people would call this box magical in a way but it really isn’t. They are simply following the directions given to them.
Structure of American Companies
Walk into any company in america and you will see the same corporate structure, from startups to long running mature companies. They all have a CEO of some sort, they have an executive team, administrative board, senior managers, middle-level managers, IT employees, R&D, and then entry level employees. The style is very much the same across the board.
The idea behind this is that those who have a business idea, they are the ones who should be in charge because it is their company and their idea. Everyone should report to them and call them CEO because of our ideals in power and business behavior. This is not the case with Chinese companies.
Structure of Chinese Companies
In many of these companies seniority and group-think keeps everyone on the same path, where things differ is below that group. Many firms are able to create new supply-chain of labor right away in order to produce a new product and get it to market right away. Many of these departments are created and then resources are shifted again in order to meet their needs. This is just like the magical box. If you bring together large pools of labor and tell them “build this” and break all the parts down they are able to put it all together right away and get it on the market faster. Whereas, American companies can take months just researching consumer interest.
It’s not about Innovation, It’s about Consumer Interest
When you contrast how American companies focus on making sure their product is just right before hitting the market vs a Chinese company getting as many products out on the market as possible you start to wonder if that is a wise financial decision. What if the product flops? Then you spent all that money with no return. So how can Chinese firms get away with that?
They bet, not on the innovation of their product, but on the following their many products will create. This, in America, is called brand loyalty, where companies hope to create a group following of people who only buy their products because it worked right the first time. Chinese firms put out so many products at a time that people will consume them faster and hopefuly find a few that they will stick with in the long run. Those devoted followers make up for all the other products that didn’t make it and because their labor pools are so large, the cost of creating these services or products is not as high when compared to American supply-chains.
When each Chinese firm floods the market with their many products it makes it harder for other firms from around the world to compete. They crowd out the competition, and if this was Europe, their courts would have shut down that process a long time ago, but because their culture is about quantity over quality, firms hire more talent to create more stuff. That is why they are able to reduce costs because why would you hire just a few highly educated, but very expensive, individuals to create one or two products, when you can increase the labor pool to 30 or 40 less skilled workers that can crank out the product in a week or two. Chance tells you with this process that the more you put out the higher the chance of striking it rich with one or three products at that time.
In this case, management can simply draw up a new product and give the instructions to their labor pool in which it will be divided up among them and in just a short time out pops their product, just like a magical little box.
Learning how Chinese firms structure themselves is important in understanding why they are dominating so many industries now. The rise of their automotives in the 80’s astounded the world in how fast they built them but now they are coming around again in other industries. Learning their structure strategy might help you decide how you might be able to benefit from their ability to innovate faster and who knows, might save you a lot of money in the long run.
Side note, I wanted to include the full article from the MIT Sloan Business school but couldn’t. Instead all I can provide is the link and if you are interested please visit your local library and see if they have a subscription that allows you full access to the article.