Finding the next golden goose

SOUTH-EAST Asia’s economy has expanded significantly over the past two decades, and the future looks rosy thanks to rapid digitalisation and increased investments from the West and China. But even as the road ahead appears promising, companies in the region need to watch out for the bumps and potholes, and innovate to stay on top of the game.

Favourable tailwinds

First, the good news. South-east Asia benefits from favourable demographics, such as a young and growing population, unlike many countries in Europe and North-east Asia. The workforce is digitally savvy and much better educated, while the regulatory environment has become a lot friendlier to both home-grown and overseas companies.

In a recent report, the Asian Development Bank predicts South-east Asia will accelerate from 4.6 per cent economic growth this year to 4.9 per cent next year, boosted by a boom in tourism and robust domestic demand.

The golden goose

With the wind in their sails, many companies within Asean are expanding their empires. Like the fabled golden goose, their core businesses and well-known brands have provided them with the resources to diversify geographically and enter related business verticals.

However, these incremental growth strategies may not be sufficient in this fast-changing environment, and incumbents are under pressure to innovate and create new businesses to replace those at risk of being disrupted.

In the airline industry, for example, budget carriers such as AirAsia have grabbed significant market share both from the post-Covid travel bounce as well as their super-app diversification. Several legacy carriers such as Singapore Airlines have responded effectively with their own low-cost offerings, but many others remain alive only because of government support. Other sectors that have seen significant disruption include media, bricks-and-mortar retail, delivery services and land transport.

Even in banking and property, long seen as bulwarks and a source of long-term returns, there are threats on the horizon stemming from the growth of fintechs and trends such as working from home and online shopping.

The innovators’ dilemma

As the late Clayton Christensen wrote in his seminal book, The Innovator’s Dilemma, “successful companies want their resources to be focused on activities that address customers’ needs, that promise higher profits, that are technologically feasible, and that help them play in substantial markets”.

However, abundant resources can also inadvertently dampen the urgency to create shareholder value, leading to complacency. Failing to recognise the importance of constant innovation becomes an obstacle to sustainable growth. Short-term thinking, compensation structures tied to immediate bottom-line growth, and cost-cutting measures that sacrifice future potential all hinder innovation efforts. Such processes tend to screen out unproven, disruptive technologies that offer lower profitability and can only be sold in niche markets.

Schumpeter’s shadow 

Most readers are familiar with Schumpeter’s theory of creative destruction, which warns that capitalism is always evolving and that even the most successful businesses will be rendered obsolete over time by new products and services.

While emerging markets continue to offer fertile ground for expansion, many established businesses are finding themselves on an uncomfortable non-growth trajectory with little revenue growth, as they struggle to find new avenues for expansion. The growth dilemma faced by companies is multifaceted. In the US, Fortune 500 companies, once known for their endurance, stay on the list for an average of just 10 to 15 years today, compared to 30 to 35 years in the 1970s.

Mindful of such statistics, many companies constantly look for new avenues for expansion by developing new business lines, through mergers and acquisitions (M&A) and by investing in startups, often with mixed success.

In the case of M&A, these have long been viewed as the go-to method for growth since they offer access to new technologies and expanded customer bases. Oftentimes though, the corporate instinct to seek precedents and minimise risk result in M&A that provide incremental value, rather than something truly revolutionary.

Unlocking new pathways

In recent years, new growth pathways such as venture building have emerged that let companies develop new business ideas, with the help of outside investors and professionals who are more attuned to operating in the startup world.

Essentially, companies contribute a new idea or technology along with staff, capital and access to resources and customers to a new venture that will be run independently of the parent, while the venture partners provide or help find some of the key managers.

Successful spinoffs resulting from venture building include Shopee (from Sea) and AquaEasy, a shrimp farming business built on technology from Bosch, the German engineering and technology giant.

In Singapore, companies can tap on the Economic Development Board’s (EDB) corporate venture launch pad programme for support in areas such as capability building, validation of venture ideas and in some cases, financial risk-sharing across the early stages of a venture’s growth. EDB will also help pair companies with venture building firms with the expertise to spin off and grow new businesses from within.

Bain & Company (parent company of Rainmaking Asia-Pacific) estimates that corporate ventures have a one-in-eight chance of success compared with one-in-500 for the average startup.

In Asia, Rainmaking works with numerous partners, including French utility company Engie, which has created several zero-carbon spinoffs with the help of external managers.

Conclusion

While Asian companies have experienced remarkable growth in the past, many may stagnate or even fail in a fast-changing environment. To effectively navigate the uncertain terrain ahead, chief executive officers must embrace innovation as the fuel for future growth.

Often, this requires spinning off businesses such that they can operate in a new environment, which is more conducive to disruptive innovation. Finding the right partners to help realise the vision is therefore key.

Inevitably, golden gooses will not live forever, and companies need to rear new golden geese to future-proof their businesses.

The writer is senior adviser, Rainmaking Asia-Pacific (part of Bain & Company)