Keep your business model simple, and when you find one that works, repeat it. That's the advice James Allen has for evolving Chinese enterprises.
Allen, a senior partner at international management consultancy Bain & Co, has just written a book with Chris Zook, a fellow Bain partner, called Repeatability. The pair studied thousands of companies looking for keys to success. Their overall conclusion is that complexity is a silent killer of profitable growth.
Many companies make the mistake of overexpanding their business lines, embarking on difficult cross-border acquisitions or entering far-flung markets that complicate their management structures and, eventually, threaten their survival.
Some companies get it right. Allen points to Li & Fung, a global sourcing company based in Hong Kong, and Huawei, the world's second-largest telecommunications equipment supplier, which is based in mainland China.
He argues that as more Chinese companies are encouraged to expand overseas, the need to keep their business models simple becomes even more critical.
The South China Morning Post spoke with Allen on his recent visit to Hong Kong about what developing mainland companies can learn from experiences of the likes of Nike, Apple and Starbucks. The following also draws on specific examples from Repeatability.
What are the keys to success for most companies you study?
In the book Repeatability, we wrote that we found the successful companies endure by maintaining simplicity at their core. They don't stray from their business model in pursuit of revolution. Instead, they build a repeatable business model that differentiates from competitors and allows them to rapidly adapt to change without succumbing to complexity.
Nike, for example, has established a repeatable model. In the 25 years from 1986 to 2011, it has grown from less than US$1 billion in size to nearly US$21 billion, with an average 20 per cent annual total return to shareholders in the period. Its repeatable model is built on four core interlocking capabilities - brand management, link-ups with famous athletes, award-winning designs and use of new materials, and an efficient supply chain to Asia.
Its rival Reebok did not create such a repeatable model. It jumped from one idea to another, which created no economic value in the stock market for two decades until it was sold in 2006 to Adidas.
How do you set up such a repeatable model?
There are three ways you should do it. First, understand what your core business is and how well you are performing in the eyes of your customers. Many companies think they understand their customers. A study showed 80 per cent of companies believed they delivered what their customers wanted. But when we asked their customers, we found it was only 8 per cent. You can see the gap is huge. The management can't just sit in a room and think about what they are good at. They have to contact their customers directly to see what they want.
Second, make sure your frontline people understand the products and strengths of the company.
Third, companies have to build up a feedback route to collect views from their customers. This is easier to say than to do. If you mindlessly do the routine, you lose touch with market changes and fail to adapt.
Are there any companies that established a repeatable model and then stopped?
Yes, Dell, Nokia and Starbucks are good examples. They were three iconic businesses in the 1990s. Each company was a model of focus and a paradigm of repeatability. Yet, all stalled out for different reasons. Two prominent reasons are loss of focus on the core, and failure to adapt rapidly enough.
From 2007 to 2009, Starbucks saw its market value decline 70 per cent. Its founder Howard Schultz returned as chief executive and the company closed 700 stores and undertook a major effort to return to its coffee core. Schultz wrote a memo to his management team, saying the uncontrolled growth of the model had caused 'a series of decisions that, in retrospect, have led to the watering down of the Starbucks Experience'. He highlighted the company's movement into movies, music and forms of cooked food in the store that contaminated the distinctive coffee aroma. He reversed this trend and rejuvenated the repeatable model of the past, returning the value of the company close to its historic high.
Dell was the result of the customer, cost and product advantages of its unique direct model gradually narrowing versus competitors. Dell is now reinvigorating its business model.
Nokia in the mid 90s was the dominant mobile phone handset maker, but in recent years it has been eroded by Apple's iPhones and other touch-screen smartphone makers. It was not that Nokia had insufficient time, resources or knowledge to pursue the next wave. It was the hesitancy to invest heavily enough, and soon enough, that allowed Apple, Samsung and LG to jump out in front. Now, Nokia is also making smartphones.
What is the takeaway for Chinese companies?
Many Chinese companies are still in the first stage of developing their businesses. They are successful in the domestic markets. The key issue is how to turn the success story into a repeatable model.
Usually the founder is very good at keeping the business in its core and simple while often working with frontline staff to serve clients. This allows the business to grow quickly and deliver what the customers want.
But when the founders pass the businesses to the second or third generation, the business model may lose focus as the successors may want to add in other business lines or new products.
What should Chinese companies consider before making an overseas acquisition?
Before going international, all Chinese companies should ask themselves some questions: what do you want? Why do you want to buy something overseas? Can the successful formula of the business model in China be repeated in the overseas markets?
It is important for Chinese companies to keep their business models simple, and with a focus. As such, they should buy into companies overseas that can add value to their existing core businesses, but not buy businesses unrelated to their existing businesses. They should avoid any takeover that may make the management structure complicated.
How can Chinese companies prepare themselves to operate in a different culture?
Chinese companies need to study these local markets before doing any investment. In addition, preparing the local talent pool is important. It is a problem if a company buys an overseas company but then does not have any staff member who can understand the local language and culture to manage the newly acquired firms.
Chinese companies that want to expand in Africa can hire some top African students to work in China for some years.
Later, when the Chinese companies expand in Africa, these students would become very valuable talent because they would understand the Chinese companies and could be sent back to Africa to manage the businesses.