Some of the world’s most profitable and fastest-growing business groups are based in East and Southeast Asia’s newly industrialized and emerging economies—Hong Kong, Singapore, Korea, Taiwan, China, Indonesia, Malaysia, Thailand, and the Philippines. Several, such as Indonesia’s Salim Group and the Hong Kong-focused Swire and Jardine groups, have reached a size that would rank them among the Fortune 500; others, such as Sime Darby from Malaysia, are moving close (see Exhibit 1). Even though a few have faltered in recent years, the majority have profitability levels outstripping those of many companies in the United States, Europe, and Japan. They also have healthy balance sheets and cashflow, and are capable of financing much of their own expansion.

The strategies and organizational approaches that have made these groups so successful in the past, however, will not necessarily serve them well in the future, as they pursue further growth and diversification. They are entering an era of more open and demanding Asian markets—an era that will severely test their established business formulas. Some groups have the potential—certainly, most have the resources—to reshape themselves for this new environment, so that they can continue to dominate their home markets and, perhaps, become leading regional or even international players. Those that fail to do so will stall abruptly as customer, competitor, and regulatory changes sweep the region.

Patterns of success

Each of Asia’s economies has a handful of leading companies, most of which are closely held and influenced by their founding families. Indonesia’s Salim Group is guided by the Liem family, for example; Taiwan’s Far Eastern Group by the Hsu family; Thailand’s Charoen Pokphand Group by the Chearavanont family. Despite their size, these companies remain, for the most part, entrepreneurial and agile, willing to experiment with new business opportunities and to seek first-mover or early-mover advantages as new industries and markets open up.

Most have built their wealth by establishing dominant positions in their home markets, although some have expanded regionally and internationally in recent years. Many are in industries that require relatively low technical skills—property, local distribution, trading, and retail, for example. Those in more advanced manufacturing or service sectors often rely on foreign technology and expatriate management. A few see themselves as management and investment companies, not tied to specific products but able to identify opportunities and assemble the finance, technology, and skills needed to exploit them.

All these companies benefit from operating in the world’s fastest-growing region, but they have taken advantage of this opportunity in two very different ways: by influencing the structure of the industries in which they operate in order to create privileged franchises, or by building superior skills and creating value in established business units. The Philippines’ Cojuangco Group, for example, has been enormously successful in influencing or leveraging industry structure and regulation in its home markets. By contrast, Sun Hung Kai Properties of Hong Kong appears to have created most of its value from managing its businesses well in a competitive local environment.

We call the former "structurers" and the latter "builders." No group is exclusively a structurer or a builder; rather, each is some combination and balance of the two. The Cheung Kong Group, for example, has achieved a combination of favorable industry structure and substantial skills in key businesses (notably in property). However, this classification helps to explain the relative competitive advantages of different Asian groups.

Structurers have succeeded largely because of their ability to secure or create business franchises where competition is low. They benefit from situations in which governments are prepared to create monopolies, grant exclusive licenses, or protect domestic companies through tariffs and other means.

The Cojuangco Group, for instance, amassed immense wealth by obtaining the long-distance telephone franchise in the Philippines. Similarly, Cheung Kong has one of Hong Kong’s electricity franchises and is the territory’s leading sea terminal operator, while the Swire Group plays a lead role in Hong Kong’s airport-related franchises, such as cargo handling, catering, and ground handling. The Salim Group has profitable franchises in timber, cement, and chemicals, as does Stanley Ho through his Macau ferry and gambling licenses.

Structurers use their scale and business clout to secure or develop additional local franchises

Structurers are usually good deal makers and first movers in Asia’s rapidly evolving markets, adept at exploiting business and political connections—as the Lippo Group’s Riady family is now doing in China, for example. They are also good at locking out or putting up substantial barriers to new competitors. Once established, they use their scale and business clout to secure or develop additional local franchises, where they are either the sole provider or one of a limited few—in the way that, say, Cheung Kong has taken advantage of its property base to establish its Watson’s and Park’N Shop retail chains. Because they opportunistically leverage their skills and connections to create favorable business environments, structurers are likely to have relatively diversified portfolios.

Builders generate superior returns primarily from managing a limited number of competitive businesses well

Builders typically have more focused portfolios. They generate superior returns primarily from managing a limited number of competitive businesses well. Most started with local businesses in basic industries such as trading, plantation management, and property, and have developed the distinctive competitive skills needed to add value and succeed in them. Sun Hung Kai, for example, excels in the highly competitive Hong Kong property and construction market; the President Group specializes in food processing and retailing in Taiwan.

Builders tend to expand by leveraging their existing skillbase in closely related domestic industries, or by extending their core business overseas. Thailand’s Charoen Pokphand branched out from livestock rearing into food processing. Indonesia’s Astra Group has built an impressive array of auto-parts manufacturing and automotive assembly businesses by consistently developing its production skills. Jardine’s Dairy Farm focused on acquiring retailing skills, established a strong position in Hong Kong, and is now reshaping the retail sector in several other Asian countries. And President Foods has made carefully planned expansions in the US cookie market through its Wyndham Foods and Famous Amos acquisitions.

Significant challenges

For a combination of external and internal reasons, both structurers and builders are discovering that their current formulas of entrepreneurial growth may be running out of steam. Undoubtedly, some groups will continue to expand by pursuing deals and acting as promoters and brokers in Asia’s booming economies. But over time, they will most likely face limits to growth, be confined to local or lower-tech businesses, and/or fail to build the deeper skills needed for sustained competitive success.

The reasons are clear and compelling:

• Externally, these companies face an increasingly demanding and competitive business environment. Governments are aggressively pursuing deregulation and privatization in an effort to increase the openness, competitiveness, and efficiency of many domestic industries. Multinational companies from the United States, Europe, and Japan are finally getting serious about penetrating Asia’s industrial, consumer, and financial markets. Some advanced Asian markets, such as Hong Kong and Singapore, are becoming increasingly saturated, while rising costs erode margins. And emerging markets, notably China, are attracting intense worldwide interest.
• Internally, most Asian groups have not defined their long-term business priorities, nor have they invested in the skills needed to assure success in a more competitive environment. Some are too diversified, and are wasting resources and management effort on businesses that may offer near-term gain but have little long-term potential. In their key businesses, few have invested in the technology, training, systems, and customer service that will be needed to take on more committed competitors in future. Their organizations are overcentralized, and their management processes are too ad hoc or complex for their scale of business.

Although the leading groups seem to recognize these challenges, it is not clear that they fully appreciate the extent and potential impact of the changes under way.

Structurers are most affected by deregulation and intensifying competition

Structurers are most affected by deregulation and intensifying competition. The proposed changes in aircraft maintenance and cargo operations in Hong Kong, telecommunications deregulation in Hong Kong and the Philippines, and drastic cuts in vehicle import duties in Thailand are just a few examples. Moreover, with major political transformations in countries like Taiwan and the Philippines, the likely transition to a new generation of political leaders in Indonesia and Malaysia, and the impending handover of Hong Kong in 1997, some groups may lose their political leverage, making it more difficult for them to manage competition.

Arguably, deregulation creates new opportunities for structurers at home—in telecommunications and media franchises, for example. But these opportunities may well involve entry into new industries and will be fought over intensely by local and foreign players alike.

The opening of new geographic markets may also present timely opportunities for structurers, allowing them to develop advantageous offshore positions. China, of course, is the largest opportunity and has attracted interest from many leading Asian companies, particularly those in Hong Kong and Taiwan. Vietnam also has great allure. However, it remains to be seen whether an ability to influence industries in a home economy can be applied successfully in these far less certain environments, amid tough competition from strong domestic as well as international players. Newspapers and magazines make much of the way that overseas Chinese are returning to China and using their connections to secure major deals. But our discussions with leading Chinese businessmen indicate they are, in fact, moving quite cautiously because of the risks involved.

Builders face a different set of challenges—among them, the saturation of core markets

Builders face a different set of challenges—among them, the saturation of core markets. Hong Kong’s leading property developers may not be able to maintain high growth if they focus exclusively on property development in Hong Kong, and Astra may be facing limits to expansion in the Indonesian automobile market. Equally important, builders are experiencing rising factor costs, which reduce their product competitiveness in global markets: Taiwan’s Tatung Group, which competes internationally in television and electronics components, is one example. Another, the Formosa Group, which is confronted with cost as well as environmental pressures, has considered locating its new petrochemicals plant in China.

Builders that benefited under a protected domestic market environment are also encountering keen competition from international players as tariff barriers are removed and Asian markets grow. Local banks and insurers, for example, are already confronting new entrants and novel marketing strategies.

Agenda for change

Growth in Asia presents leading groups with enormous and varied business opportunities, which they will naturally want to pursue. But by seizing immediate opportunities at the expense of building deeper skills and reshaping their businesses, they may fail to create a platform from which to launch a new wave of regional—or even international—expansion in the future.

Creating such a platform will entail pursuing world-class performance levels, sharper business focus, aggressive asset management, and genuine commitment to organization- and people-building.

Committing to truly superior performance

For groups that aspire to sustained wealth creation and market leadership, there is no alternative to pursuing world-class standards

For groups that aspire to sustained wealth creation and market leadership, there is no alternative to pursuing world-class standards. Sooner rather than later, in both domestic and overseas markets, today’s market privileges will decline, and Asian groups will have to compete head to head with international players that are building and optimizing skills on a global basis.

Thus, Asian groups need to commit—now—to fundamental improvements in product and service development, production, marketing, and sales. For structurers, world-class performance may mean a superior ability to shape favorable franchises in emerging markets such as Vietnam and China, exploiting early-mover advantages. For builders, it may mean substantial technology investment, cost restructuring, and better customer service. For both, it will likely involve a much stronger commitment to training and development, as well as a sharp improvement in management systems and processes.

Today, the Swire Group’s Cathay Pacific Airways—in anticipation of increasingly intense regional competition—is pursuing aviation industry leadership in cost and service performance. It has announced a concerted program to move activities to lower-cost locations, restructure personnel costs, get more value for money in advertising and other outside services, and review all areas of corporate image. Other Hong Kong-based companies are taking similarly aggressive action. Despite its somewhat maverick image, Hopewell Holdings has developed leading-edge skills in structuring innovative infrastructure projects, be they in power generation in China and the Philippines, or transportation in China and Thailand. Its focus on the key value drivers of such projects, such as early completion bonuses, is impressive. Similarly, Hongkong and Shanghai Bank’s high levels of customer service and effective internal systems have helped it build a strong regional position, and are key assets to be transferred to the recently acquired Midland Bank.

Building core businesses

The corollary of world-class performance is the need to focus on selected businesses. Superior performance is possible only in a few areas, where funds, skills, and management passion are concentrated. For structurers, this may mean weeding out their business portfolios; for builders, thinking creatively about whether and how to extend established skills into new markets and businesses.

Asian groups may resist this notion, arguing that such a dynamic region calls for flexibility and the willingness to experiment with a range of different interests. They may also argue that skills and technology can be hired as needed. After all, there are substantial short-term profits to be made in peripheral businesses. The Economist recently quoted the opinion of Keppel Group Chairman Sim Kee Boon that "Theories about conglomerates are like theories about cholesterol: I don’t pay much attention to them."

We, however, would counsel a careful diet. Without a clear focus around a few core businesses, conglomerates will lose ground strategically: the coming shape of regional competition means it is time to place carefully considered bets—and for bigger stakes.

There is ample empirical evidence that this approach makes sense. We have stripped apart the financials of several diversified Asian groups and found that a small number of core businesses account for the bulk of economic value created over time. To cite just one example, Cheung Kong’s highly successful domestic and foreign ventures in its core property business contrast sharply with its apparent difficulties in its non-core oil and telecommunications businesses, which it is cutting back.

A focus on core businesses is only meaningful, however, if it is accompanied by a plan to build the skills and make the investments needed for competitive leadership in the chosen areas. Often, this does not require incremental investment, but simply a redirection of resources from peripheral to core businesses.

Managing ownership aggressively

Leading groups must be willing to sell assets that are of greater value to others

Building core businesses to world-class standards leads logically to the need to trade and share businesses. We recognize that Asian groups may be reluctant to sell businesses lest this be seen as a sign of failure, and that family or closely held ownership limits opportunities for acquisition. Nevertheless, we expect the leading groups to be increasingly willing to sell assets that are of greater value to others, much as Dairy Farm has recently sold attractive local manufacturing ventures in order to focus on its retailing thrust across the region. Another recent sale—by Cheung Kong’s Hutchison Whampoa of 64 percent of STAR TV to Rupert Murdoch’s News Corp.—realized the value of a media franchise that had been developed through local initiative, and marked a recognition that the natural owner of such a business is a specialized industry leader.

There is also room for proactive initiatives to acquire businesses by persuading current owners that they can maximize value by selling rather than keeping them. The major players in Taiwan’s electronics industry, for example, need to build scale through acquisitions and consolidate the industry. Although some Asian companies have encountered problems in acquiring far-flung assets in the United States and elsewhere, their chances of success are greater in better-known regional markets.

Alliances can serve both structurers and builders well

Alliances can serve both structurers and builders well. In fact, they may be the only way for structurers to extend their skills and enter new industries or markets that require greater technical sophistication. This is especially true as Asian groups link up with international leaders in sectors such as power generation and telecommunications—for example, the CP Group’s telecom venture in Thailand. For builders, alliances can bring the management skills, such as brand management and marketing, that are needed to capture higher value from their goods and services. There may even be opportunities for three-way alliances, involving, for example, multinationals and Thai companies along with local organizations in Vietnam.

Setting organization- and people-building priorities

The leaders of Asia’s top groups are enormously energetic and entrepreneurial and have remarkable business judgment. But their organizations are creaking at the seams. Many of the basic improvements needed are fairly clear—better information systems, for example, or increased training and more sophisticated human resource management. The real challenge, however, lies in the management ranks. Middle management is often thin, senior management overloaded, and decision making too centralized in the hands of a few. Growth puts an enormous burden on this kind of management structure.

There are encouraging signs of change: the smooth transition to second-generation management in the Kuok family (owners of Shangri-La hotels and extensive trading businesses); the Lippo Group’s active use of professional management and systems; and the increasing hiring of Asian MBA graduates for managerial development programs.

It can be useful to hold management workshops that use practical case examples of strategic issues and decisions to help clarify gaps in management skills and processes. In one Taiwan family group, for example, this led to a complete reassignment of responsibilities among senior family members, sharp decentralization of financial functions, and clear agreement on where to bolster professional management.

Equally, it can be helpful to use flexible management arrangements—rather than formal corporate hierarchies—that are in tune with the dynamic nature of Asia’s groups. There are easy-to-implement and cost-effective ways to marshal management initiative and resources and avoid organizational bottlenecks. One is the creation of issue teams—some of them long-standing—to engage senior and middle-level executives (including family members) in addressing key challenges and opportunities. Such teams can involve all relevant staff members in a flexible way and can provide a valuable forum for identifying and developing high-potential executives.

The ability of Asia’s leading groups to respond to change is not in doubt

The ability of Asia’s leading groups to respond to change is not in doubt. Most have evolved very rapidly, exhibit enormous energy, and have been spared the demoralizing process of downsizing and restructuring. What may be lacking, for the moment, is a shared vision of how to maintain growth and profitability in tomorrow’s Asia. Each group needs to undertake a frank assessment of its skills in structuring industries and building businesses, as well as a rigorous review of the value potential of different sectors as regulatory and competitive changes occur. With this understanding, it can more purposefully decide where and how it will choose to compete—and then enhance its skills accordingly. Such prudent refocusing can help these groups emerge as leading competitors and alliance partners, and as forceful Asian multinationals.