2010 Top 1000 Enterprises
Thriving through Flexibility
The global financial crisis claimed plenty of casualties in Taiwan, but its top enterprises brandished one critical asset that helped many of them thrive: flexibility.
Thriving through FlexibilityBy Ming-Ling Hsieh
From CommonWealth Magazine (vol. 446 )
Taiwan was shocked April 25 when 100,000 cubic meters of earth and rocks – more than two soccer fields worth – suddenly slid down the side of a hill and buried a section of the No. 3 National Freeway near its northern terminus, killing four people.
At around the same time in another part of the world, the shaky finances of the European "PIIGS" (Portugal, Ireland, Italy, Greece and Spain) have stirred up a 600 billion euro crisis that could force Greece to default on its debt or even abandon the euro.
Marked by a spate of unpredictable natural disasters and man-made crises, the start of the second decade of the 21st century has been steeped in turbulence and instability.
These sudden threats and challenges that have created so much uncertainty are usually extreme and require immediate attention, as Taiwan's companies have found out.
According to CommonWealth Magazine's 2010 Top 1000 Enterprises Survey, some companies that re-engineered themselves over the past year during the credit tsunami did so by having the corporate flexibility to make choices, tighten their focus and constantly adjust their structure. Others relied on both perseverance and flexibility, demonstrating the ability to improvise based on timing or prevailing conditions.
This trait enabled companies to post double-digit revenue and income growth during the darkest period of the storm, and even helped some, when facing the greatest adversity, to go from losing money to turning a profit or taking a major step forward.
Fortunes in Flux
Many sectors, such as solar cells, semiconductors and optoelectronics, experienced huge fluctuations in 2009. Taiwan's leading solar cell producer Motech Industries had such a strong fourth quarter, for example, that it offset losses it sustained in the previous two quarters, and the company ended up earning NT$130 million for the year.
The amplitude of these fluctuations is growing wider with time, causing frenzied competition for talent and other resources.
In 2009, with the global economy in a deep freeze, big vendors streamlined their personnel and put employees on unpaid leave. This year, on the other hand, as the economy has improved, companies need to restock their hands. At a job fair held recently at National Chiao Tung University in Hsinchu, Taiwan Semiconductor Manufacturing Co. (TSMC) was offering 3,000 openings, the Foxconn Technology Group 1,000, MediaTek Inc. 600, and HTC 550. There were five jobs available for every Chiao Tung University student.
In 2009, the catchword for companies was "cost down," but this year the emphasis is on "robust recruiting" as competition heats up for shrinking resources.
Wowprime: Experiment and Take Risks
Wellington K. Kuan, a professor in National Chengchi University's Department of Business Administration, observes that rapid, unpredictable changes render previous knowledge obsolete and cast doubt on major premises and assumptions. Corporate competition is no longer just a matter of moving up or down a few notches in a ranking. Winners can become losers, with some turnabouts absolutely eye-opening.
To meet the challenges of the new era, companies must become extremely flexible: unflappable and steady enough to stand up to the strongest wave but also able to improvise and demonstrate the agility of a ballet dancer.
One of the enterprises that have mastered this delicate balance is upscale restaurant chain Wowprime Group, best known for its Wang Steak brand. Since the end of 2008, when the economy froze and consumption plummeted, Wowprime has seen revenues rise 13.48 percent and earnings grow 12.58 percent, seemingly flying over the economic turbulence without being affected.
A strong consolidated balance sheet enables companies to be patient and keep something in reserve to get through a crisis. Wowprime vice chairman & president Endy Wang explains that many food and beverage chains generally carry high levels of debt, so when an economic crisis hits and cash reserves are exhausted, not only are they unable to expand, but their existing outlets are vulnerable to cash flow risks.
Wowprime, however, formally caps its debt ratio (the ratio of total debts to total assets) at 30 percent. The company's strong capital structure helped it steer clear of the deep slump and even capitalize on it, taking advantage of lower rental and decoration costs to open more outlets, and compensate for declining customer traffic per store resulting from the general retraction in consumer spending.
Wang says the key to an enterprise maintaining its agility is preserving a culture of risk-taking and experimentation. In Wowprime's case, creating highly profitable second-generation restaurants after its success with Wang Steak was not a matter of gaining know-how, because it already knew how to open retail outlets and train staff. The major obstacle, Wang believes, was challenging employees to go beyond what they were comfortable with and convincing them to buy into new concepts.
An enterprise can also remain agile by breaking down its organization and procedures into smaller segments and encouraging more detailed and frequent communication, as seen through the success of cosmetics and drugstore chain Cosmed.
Cosmed: Setting Daily Goals
The company, owned by President Drugstore Business Corp., saw earnings rise 30 percent in 2009, and its network grew to more than 300 stores employing over 2,000 people. President Drugstore Business Corp. president Henry Kao installed a system to narrow Cosmed's organizational gap both vertically and horizontally.
Kao has stressed a project-oriented rather than hierarchical problem-solving approach, so when a meeting is held with all the members of a team dealing with a particular issue, problems are dealt with efficiently. Employee evaluations are conducted in a similarly results-based fashion. For employees who have not performed well, evaluations that are normally done on a monthly basis are conducted instead on a weekly basis. Evaluations of good performers, on the other hand, are conducted less frequently than normal to avoid wasting resources.
Kao stresses that for such a system to work, there must be a consistent organizational vision and understanding of goals. "Objectives must be clear. One-month periods must be broken down to every day and every individual," he says.
Being mission-oriented and highly detailed enables the company's goals to be communicated to all corners of the organization. Even the smallest nodes in the network can retain flexibility and adapt to local conditions.
One example of this is Cosmed's outlet in Kaohsiung Medical University's Chung-Ho Memorial Hospital. Aside from stocking items such as diapers and fresh milk that are not available in other stores, its marketing approach is also tailored to its environment. Employees, for instance, call up regular medical cosmetics customers to notify them of new product arrivals and invite them to take a look after work, a strategy that helps maintain relations with customers and appeals to their shopping habits. Having them drop by the store at night means they'll avoid daytime crowds and gives the store more time to introduce the new items.
Uni-President: A Constant Process of Elimination
Constantly experimenting, understanding trade-offs, and knowing how to choose are also keys to maintaining flexibility.
At the beginning of the year, Uni-President Enterprises Corp. president Alex Lo was found shaking his head at how many forecasts had not panned out in 2009 and how problems that used to be confined to a specific region were now linked around the globe. Acknowledging that he is having trouble reading the volatile current macroeconomic environment, Lo described the Uni-President formula as competing and being cautious every day.
"We don't have the right to be pessimistic, and we're not in a position to be optimistic," he says.
In recent years, Uni-President has eliminated uncompetitive products and focused on cultivating brands that are cash cows. The company also sets a very high threshold for every potential new product: if it can't generate at least NT$50 million in sales, it will not make the cut. The strict guideline has lowered the failure rate of Uni-President's new products to below 10 percent, of major importance in a business where every product involves considerable upfront manufacturing and development costs, and failed products involve material and inventory costs that will never be recovered.
Uni-President also reallocated its internal resources by segmenting brands into "niche brands" with sales of NT$100 million to NT$200 million per year, "working brands" with sales ranging between NT$200 million to NT$500 million, "potential mega brands" with sales from NT$500 million to NT$1 billion, and "mega brands" with sales above NT$1 billion.
Because the positioning and maturity of each brand type in the marketplace varies, they have different marketing strategies. For a product with wide distribution like bread, for example, the emphasis is on developing new distribution channels. For milk, where the Uni-President brand is already a market leader, the goal has been to shift away from low-end products to develop higher value-added items and increase profitability.
The result of these precise and rapid adjustments is that the gross margin of Uni-President's core foods business increased considerably, by about 5 percentage points in 2009 compared with the previous year.
Looking inward, companies must understand how to make choices and be flexible enough to adjust their allocations of resources. Looking outward, Taiwan's enterprises have engaged in more cross-sector mergers, both vertically and horizontally, over the past year to strengthen their ability to steer themselves through turbulent times.
Foxconn: Total Control over the Supply Chain
Foxconn Technology Group chairman Terry Gou is one case in point. His group's core company, Hon Hai Precision Industry Co., has traditionally been a specialized manufacturing and services contractor, but Gou's recent spate of acquisitions and partnerships indicates his determination to find a new entry point for creating value in an era of volatility.
Ten years ago, Foxconn's vertical integration, labeled "CMMS" for "Component, Module, Move, Service," provided the impetus for the group's emergence as Taiwan's leading industry with over NT$1 trillion in sales. A decade later, Gou is incorporating manufacturing's last frontier – distribution – into the mix. Foxconn subsidiary Cybermart Worldwide Co. recently was named the preferred bidder to build Taipei's "Akihabara Electric Town," a BOT (build, operate, transfer) project styled after the electronics, animation, and video game center in Tokyo. Also, in the first half of last year, Foxconn Technology Group launched a joint venture with Metro Group of Germany to open outlets of Metro's large-scale consumer electronics retail chain Media Markt in China. The first store was opened at the end of 2009, and another 10 are planned for this year.
Another of the Foxconn Group's initiatives last year, the "Full Steam Ahead" plan, was targeted at its 780,000 employees in China, offering them incentives to open their own stores selling only Foxconn merchandise in fourth- to sixth-tier cities.
The manufacturing giant also has ambitious plans to take the plunge into traditional brick and mortar retailing, setting up "stores within a store" in hypermarts like RT-Mart and others, as well as developing a Shenzhen-based e-commerce website (www.efeihu.com)and expanding its Cybermart chain. Gou hopes this strategy will turn the Foxconn Group into a behemoth that controls all the main links in the supply chain, from product development to retailing.
By searching for new opportunities and expanding, Gou has nimbly preserved his group's flexibility by preparing it for many possibilities. "We are planting seeds in many places," he told CommonWealth Magazine in an exclusive interview.
In turbulent times, businesses are like small boats trying to navigate massive waves. As Taiwan's enterprises have found out, they must be able to cope with rogue waves at a moment's notice if they hope to keep the ship steady.
Translated from the Chinese by Luke Sabatier