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Getting Stronger by Getting Leaner

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Getting Stronger by Getting Leaner

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While rival Acer was busy acquiring companies abroad to boost market share, Asustek Computer Inc. was slimming down. It pared down its 11 business groups to just three, helping it become one of the world's top five computer brands.

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Getting Stronger by Getting Leaner

By Elaine Huang
From CommonWealth Magazine (vol. 558 )

Within a second, the laptop computer transforms into a tablet.

It happened at a press launch at the Consumer Electronics Show in Las Vegas in 2011. Up on the stage, Asus Chairman Jonney Shih separated a laptop display from its keyboard docking station with a slight pull, saying, "So this is the Transformer." At that moment, he created a new page in Taiwanese brand innovation.

Twenty years earlier, Shih lacked the skills for such dramatic appearances – he hated interviews and loathed taking the stage. His one and only passion was burying his head in technology development.

Today, Asus has evolved from a motherboard manufacturer into the world's fifth largest computer brand, and the company's transformation has also rubbed off on Shih.

In CommonWealth Magazine's "Most Admired Company Survey" over the past 20 years, Asus has the highest cumulative score in the home electronics and communications services sector for the indicators "Operational Performance" and "Financial Strength," reflecting that the company has outperformed its peers in terms of core business profitability, organizational operations and financial health.

Nevertheless, Asus has followed a much more conservative strategy on international expansion than its rival Acer Inc.

"We place a greater emphasis on our core business and organic growth," remarks Shih.

Key Decision No. 1

Spinning Off Contract Manufacturing – Focusing on Branding

In 2007, personal computers posted 14 percent growth worldwide. Yet the market for notebook computers with 13-inch to 15-inch screens, the mainstream size, was already firmly in the hands of U.S. electronics giants Hewlett-Packard (HP) and Dell.

Asus, at that time not even ranked among the world's top eight computer vendors, was eager to find a way to break their market dominance. Instead of seeking a direct confrontation with the established brands in the mainstream notebook segment, Shih decided to go for a niche. Asus released the light and nimble 7-inch Eee PC.

The moderately priced Eee PC became the most coveted Christmas present in the United States that year. Subsequently, it attracted attention and went on sale at U.S. electronics vendor Best Buy and Amazon.com, sparking other mainstream brands to follow suit with the release of smaller netbooks. Asus had singlehandedly created a brand-new market segment for small netbooks.

In theory, the success of the Eee PC should have strengthened Asus. Instead, the company registered a loss that year for the first time since its founding in 1989.

The following year, consumer demand dried up due to the global financial crisis, and Asus was dragged down by the sheer size of its organization.

Asus had promoted a "giant lion strategy" for many years prior to the economic meltdown, lumping branded products and contract manufacturing under the same roof, while also making motherboards and computer peripherals. The company inflated to 11 business groups, leaving outsiders confused about Asus's true face.

Because of the company's complex organizational structure and businesses, group forecasts became increasingly inaccurate, and Asus unexpectedly booked an inventory loss of NT$45 billion, more than it generated in quarterly revenue.

"A company that manages a brand is more flexible if it is lighter," explains Robert Cheng, head of research at Merrill Lynch Securities (Taiwan) Ltd.

Shih regrouped the 11 business units into three and spun off the contract manufacturing division by founding Pegatron Corp., allowing Asus to concentrate on its branded product business. The company also set up mechanisms for inter-departmental collaboration, business process management and cost control.

Following the restructuring, Asus became a much nimbler organization, with net asset value having shrunk by more than half. Rapid success and an equally rapid downfall forced Asus to address its ills and focus its energy on brand development.

Key Decision No. 2

Transformer Makes ASUS a Winner

In its global strategy, the Asus brand clearly distinguishes itself from its industry peers in that it pursues organic growth instead of growing through mergers and acquisitions.

In 2007, Italian native Gianfranco Lanci, then Acer CEO, went on a buying spree in Europe and the United States, acquiring Gateway, eMachines and Packard Bell.

"At the time Acer fought a price and scale war. It bought brands to push market share in Europe and the United States," observes Tracy Tsai, a Taipei-based research director with Gartner.

Within three years, Acer aggressively expanded its market share, at one point rising to rank second in global PC shipments and threatening to push top-ranked HP from its throne. Asus, for its part, had never even cracked the top five.

"If you simply add things together to become bigger, that's something Asus doesn't really like to do," notes Shih, who wants employees to return to their roots in R&D.

Like Acer, Asus separated contract manufacturing from its own brand business, but it adopted a different R&D strategy. When Acer split up its company in 2000, it transferred all of its R&D personnel to Wistron Corporation, its former design, manufacturing and service arm. Asus, however, retained a large R&D team.

Shih insists on nurturing the company's R&D troops even though Asus has suffered setbacks with less than ideal sales of its mobile phones and designer laptops with cases in unusual, trendy materials.

Asus dedicates 60 to 70 percent of its operating expenses on R&D. In contrast, Acer devotes 80 percent of its operating expenses to marketing, highlighting a stark difference in corporate strategy.

Shih knew that in the PC market, where scale is everything, he could not really make use of Asus' true competitive edge. However, with the spread of mobile devices, Asus' R&D prowess found an outlet.

The release of Apple's iPad in 2010 led to a paradigm shift in the high-tech industry. Tablets were selling like hot cakes, quickly eating away at the market for netbooks, which had been growing fast over the previous three years.

This technological earthquake heavily hit Acer, which tried to push its market share higher with small laptops, resulting in distributors stuck with piles of unsold and unsellable laptops. Acer was clearly unable to parry the blow it was dealt by the paradigm shift.

Asus, however, put up a fight, throwing three punches in a row.

Less than four months after Apple's iPad came out, Shih presented the Transformer Pad at CES. Subsequently, Asus continued to play with the transformer concept, launching the PadFone, which combined tablet and mobile phone.

"When Asus first developed mobile phones, it failed, but the experience of its engineers in developing mobile devices could immediately be transferred to tablet development," says Helen Chiang, associate director for Taiwan research at IDC Taiwan.

Even Android creator Andy Rubin, then vice president of engineering at Google, noticed Asus. Google and Asus then jointly went on to develop the platform for the Google Nexus 7 tablet.

When the Nexus 7 even outsold the iPad in Japan, Asus was able to move up into the ranks of Google's top suppliers. Thanks to this tie-up, any time Google announces a new version of its mobile operating system, Asus and Samsung are given an R&D lead period over other Android users.

It was because of Shih's strategy of "not relying on mergers, exclusively focusing on R&D" that Asus was able to move into the exclusive winner's club of tablet vendors in just two years, claiming third place behind Apple and Amazon.

Tablet innovations are also rubbing off on notebook computers. While the PC market registered negative growth worldwide in 2012, Asus bucked the trend with an EPS of NT$29, a higher earnings per share than Taiwan's highly respected IC design giant Mediatek.

As Dell Inc. was delisting in late October 2013, and Acer was running losses, Asus vaulted into the ranks of the top five in the global computer industry.

Key Decision No. 3

Centralized Power – Seamless Communication

Mobile computing has triggered a paradigm shift that constitutes an unprecedented challenge for brand manufacturers.

New mobile devices replace older ones at a breathtaking pace, leading to highly volatile prices. Tablet computer prices can drop by 50 percent within a year, and the slightest failure to notice changes in trends can lead to massive inventory that drags down profits.

Asus adopts a centralized management model. Its headquarters plays a crucial role in synchronizing back-end R&D with marketing strategies and front-end shipments and inventory management, guaranteeing a smoothly functioning "store in the front, factory in the back" model.

Asus headquarters also gives orders to marketers and plans the allocation of resources – a strategy that greatly differs from Acer where regional markets enjoy a high level of decision-making authority.

In preparation of the launch of the new ZenFone smartphone range earlier this year, Asus CEO Jerry Shen flew to China several times to personally discuss the marketing strategy with local vendors.

With its centralized decision-making, Asus has managed to outsell Chinese smartphone maker Xiaomi Inc. in emerging market India. The target for next year is to overtake Blackberry and Lenovo in Southeast Asia to become the No. 2 smartphone vendor behind Samsung.

The only problem is that pushing lower-priced products also weighs down profits. While Asus emphasizes organic growth, it must not overlook future risks.

"The pursuit of excellence will definitely not change," asserts Shih, who has safely steered Asus through turbulent waters over the past two decades.

The following are the highlights from our exclusive interview with Shih:


Q: What do you think is the appropriate international operations management approach for Taiwanese brands?

A: My own experience is that headquarters is most important in guiding technology, product and DNA. However, when it comes to product sales in more than 100 countries around the globe, we must definitely acknowledge that the battlefield lies in each country.

Whenever a customer in any shop chooses someone else and does not choose Asus, that's a loss. So we have to market (our products) effectively and provide good service in every country, on every battlefield. This is an absolute must.

Therefore, the relationship between headquarters and the generals on each battlefield is very important. In warfare, the generals are extremely important. Headquarters and generals are put to the test on whether they are able to communicate seamlessly.

To fight flawlessly on every battlefield around the world, headquarters must extend our products and technologies into each country and harness their full potential. At the same time, you need to accommodate local characteristics to design the best sales and services and report back to product developers at headquarters about the diversified needs of local users.

This hinges on seamless communication and procedures as well as on genuine design ideas – creating hero products through original thinking or experiments.

If you create many innovations but do not hit home with consumers you will eventually end up with inventory. As management expert Fredmund Malik once said: The only true definition of innovation is market success.

Q: Outsiders believe that Asus is relatively centralized, and prefers to have managers from headquarters run overseas offices. How do you respond to that?

A: I dare not say that we must use local [Taiwan] people. If you find a truly ideal person who also has very good chemistry with headquarters, then there is no problem. 

We also worry a lot that this is a gamble of some sort. If you have not spent a good measure of energy to cultivate this person, to understand him, how can you be sure there won't be problems? When you fight a war, will he be able to have chemistry with you?

We devote a lot of effort in that area, including the Asus Campus Executive Officer training program. Fortunately, here in Taiwan, the Asus brand is still attractive; the talent we get is quite good. After being trained, they are dispatched abroad to let them develop their potential to the fullest and give them an opportunity to thoroughly understand the markets.

This approach is more down-to-earth and not a gamble.

People often think that the generals and the emperor can be separated from each other, but that's actually not the case. It is extremely important that there is a seamless transition from product technology to marketing.

When market intelligence is reported back, you need to make adjustments and respond immediately. In fact, this repeatedly puts to the test the interaction and tacit understanding between headquarters and every battleground and affects overall success or failure.

Actually, I feel that that's the key point.

Q: Asus very seldom uses mergers to expand internationally. Why?

A: If you simply add things together to become bigger, that's something Asus does not really like to do; we hope that the sum has strategic meaning or has basic synergy effects, or else it won't have strategic value. Otherwise, if you add things together to become bigger, you will still have to overcome cultural differences, which also consumes a lot of energy.

We place more emphasis on organic growth – that's for sure.

Q: Some say Taiwan does not fulfill the conditions for branding because its home market is not big enough. What do you think?

A: We can't deny that a big home market is a competitive advantage and a condition. However, you should be aware that when we step out of Taiwan we must develop our own advantages to their maximum. That's why Asus chooses to take the hard way.

God is quite just. A shortcoming of large corporations is probably a lack of "speed," and it's speed and innovation that we need to rely on to break a siege.

Napoleon once said: if your military strength is inferior to that of your enemy and you try to fight a decisive battle by directly confronting him, you face certain death. That's why Sunzi said in The Art of War you need to create partial advantages.

Translated from the Chinese by Susanne Ganz

Keywords:

好友人數