Sunday, March 23, 2008

Absence Of World-Class Companies

The Economist, known for great analysis, is spot on – again. This time, it has bashed SEA companies for failure to come up with great brands or companies with sustainable long-term business plans.

The article said:

“It is easy to forget, now that China and India are all the rage, that until ten years ago South-East Asia was the world's fastest-developing region, winning the sort of investor attention and breathless column inches that the two new giants now enjoy.

The region has, slowly, recovered from the blight of 1997-98. It has recently had several years of strong growth and its government' finances have been greatly improved.

Even so, after all this time, the region's five main economies – Indonesia, Malaysia, the Philippines, Singapore and Thailand – are still notable for the near-absence of companies that could truly be called world-class.

The region has 570million people and had a head start in economic development over much of the rest of Asia.

So why does it still have no global consumer brands of the stature of South Korea's Samsung and LG? Where are its rising technology leaders, like Taiwan's AU Optronics and Taiwan Semiconductor? Where are its equivalents of India's world-conquering Tata Steel, Ranbaxy and Wipro? Or China's market-devouring Huawei and Lenovo? Ask an investor in London or New York to name globally respected South-East Asian firms and the answer is unlikely to consist of much more than Singapore Airlines.”

If there is one caveat, its that the domestic demand / population is SEA countries are too small and not a cohesive market. Over 500 million people are a lot but it's not the European Union. Plus, a bulk of the population is in Indonesia, scattered among the hundreds of islands.

It may appear to be only too easy for Michael Porter (the author of that report) to sit on his desk trumpeting disdaining commentary on SEA companies.

A good company operating in the US, China, India or Brazil may find it easier to achieve economies of scale in terms of demand, thus making it easier to reinvest into marginal improvements and research and development. But scale also makes it a lot easier to penetrate other markets successfully.Unfortunately, that is a luxury SEA does not have. Even so, it is not enough to excuse the management of companies from planning and strategising more effectively.

The article continues:

“The region's business scene remains dominated by old-fashioned, mediocre, sprawling conglomerates, run at the whims of ageing patriarchal owners. These firms' core competence, such as it is, is exploiting their cosy connections with governing elites.

“Their profits come from rent-seeking: being handed generous state contracts and concessions, or using their sway with officialdom to keep potential competitors out. If they need technology, they buy it from abroad. As a result, the region has “no indigenous, large-scale companies producing world-class products and services.”

There is truth to that. We have to disband the state contracts and concessions seeking companies – but even a first year college student can tell you that.

SEA, as a whole, sides with the narrow elites in major projects, and we know how good that can get. But there are notable exceptions, although too far and few between - IOI Corp, Public Bank, AirAsia, YTL, SIA, Keppel Corp, Sembawang Corp, DBS, Creative...

Is it an issue related to education?

Well, a good many SE Asians do enter good foreign universities and perform exceptionally well in general, and many are helming important positions in numerous world-class companies. They are simply not lured to return home to work.

This dilettantism was once summed up damningly by Michael Porter, of Harvard Business School: “These companies don't have strategies, they do deals.”

How do we get world-class companies?

This is not rocket-science. Boards need to sift through a check list of attributes that make a world-class company and pretty soon, they will have the answer on whether or not they are on the right track. The check list can read something like this:

a) Does your company have a strong product strategy, a good understanding of its strengths and weaknesses, the ability to leverage on strengths and work off the weaknesses?

b) Is there sufficient transparency in managing costs? Always seeking to improve margins and efficiencies?

c) Does the company have a strong understanding and appreciation of the competition? Knows where the sector is heading and where they are in the business growth curve?

d) Is the company innovative in seeking new ideas, adding value upstream and downstream, positioning itself well for the future?

e) Does the company have a good strategy on growth, is it going to be largely organic or should it be via acquisitions?

f) Does the company have a coherent product – sales-clients delivery platform that is always striving to improve?

g) Is there a strong appreciation of branding issues? How to develop the brand and know what the company stands for?

h) Is there strong leadership, the ability to communicate well and motivate well, plus getting everybody on the same page and platform? Is there a strong professionalism culture? Is there gravitation to always adopt global best practices?

i) Is the organisation structured to work well and encourage feedback to the top. Is the company entrepreneurial driven, or are divisions working against one another?

j) Does the company know where it wants to be in 5 or 10 years time?

k) Is it able to attract and retain critical staff? Are there proper standards and integrity in recruitment and appointments of staff?

These are just some of the issues. The board would easily be able tell if they have the right people to move forward. If the board knows that and is unable to effect the changes – then we have an ineffective rubber-stamping board: at least you know where the problem lies. Khazanah's implementation of KPIs is a good move, but it is just a management tool.

You need companies that are “going somewhere”, creating value and knowing what the critical success factors are – only then can they grow beyond local shores and extend their reach.

We also have far too many family-run enterprises. They have to learn to let go and let professionals take over. Nepotism is rife in Asia, and only a very small percentage of family-run companies do very well.

Their mentality also restricts how a good company can grow further. Professional managers know better. Do we have the political will to employ them? Or are the entrenched interests too strong to dismantle?

We should assess our strengths in the various sectors and start from there.


Boon Hock said...

fantastic . the display and arrangements on this blogspot is superb. Kudos a job well done.

pete.low said...

great foresight on the family run businesses. The myopic thinking in family run business are bad and this is one of the major setback for major compnay businesses. with the involvement of more faily member in the operation, it create a dark environment of mistrust on the top management which is not the family member. this create a very political environment and thus, the head of the company, if not manage well, will create bias decision. anyhow, just want to share my piece of mind, that you are darn right!!
keep up mate..i am like you too, too old. too young, too straight..too many

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