Operational Excellence Key to Asia Pacific Midsize Firms Sustaining Growth and Competitive Advantage over Larger Rivals

EIU Research Reveals Scalable IT Investments Vital to Address Growth Challenges Anticipated by Over 1,300 C-level and Senior Executives of Asia Pacific Midsize Firms

SingaporeMidsize companies are the power houses behind many of the world’s national economies but the rising dominance of big players encroaching on their territory manifested in downward pressure on prices, rising costs as well as consolidation, is a major threat in Asia Pacific. To ensure continued and sustainable growth, midsize firms in Asia Pacific will focus strongly on improving their operating performance over the next three years. This is the finding of a major Economist Intelligence Unit (EIU) research programme, sponsored by SAP, based on a global survey of 3,722 business and public sector executives of midsize companies (with an annual turnover of $20-$500m) across Asia Pacific, Europe and the Americas, with 1,383 respondents based in Asia Pacific.

As midsize companies in Asia Pacific seek to grow at a manageable pace, nearly two-thirds of firms (65 percent) cited the growing strength of larger rivals as the main competitive threat to growth over the next three years. There was marked consensus amongst respondents that downward pressure on prices, rising input costs and a shortage of talented staff will be the key hurdles midsize companies will have to overcome if they are to compete effectively. Business leaders of firms in Japan, Australia, India and China viewed a dearth of skilled staff as a serious growth constraint.

Midsize companies must also deal with large and more powerful customers, an effect of increasing industry consolidation. Large customers exert their power, among other ways, by controlling access to distribution and strong buying power leading to lower prices. The power of large customers will be felt most acutely in setting pricing and other contract terms but they will also exert power elsewhere: namely in dictating midsize firms’ product and technology standards. As larger customers innovate their own business models and processes, midsize companies will be forced to adapt or fall by the wayside. The dictates of influential large customers (and also large suppliers) promises to have substantial impact on midsize firms’ IT platforms. 71 percent of surveyed executives in Asia Pacific believe that IT will be critical in helping their firms automate and improve relationships with suppliers.

Midsize firms recognize that they have distinct advantages over their larger rivals citing adaptability (45 percent), better pricing flexibility (41 percent) and deeper customer relationships (35 percent) as key weapons in the battle for market share. However, it is these very characteristics that executives fear most likely to erode as they grow.

Most executives (48 percent) of midsize firms in Asia Pacific across all countries and industries surveyed agree that their chief competitive advantage – adaptability – is most likely to be sacrificed as they grow. In an environment where customers across all industries are growing more demanding, respondents in Asia Pacific are most concerned about being less flexible on price with over a third citing this attribute compared to under one quarter in the US. Furthermore, as customer bases grow, executives fear they will lose their ability to maintain close ties with customers; executives in Australia and Hong Kong expressed strong concern (39 percent) about a potential loss of customer intimacy. Sustaining robust innovation will also be more difficult as firms expand; executives in China are particularly concerned with their ability to maintain this edge.

Profitable Organic Growth at a Manageable Rate
In order to balance these concerns, midsize companies in the region plan to expand over the next three years, but always with an eye on profitability. Seven out of ten surveyed firms—more than in the US and Europe—say their boards and management have identified an optimal rate of growth, as well as size, indicating a recognition that expanding too fast can strain existing resources and structures. For the most part, midsize Asia Pacific companies plan to grow organically (45 percent), using their own resources, although over 20 percent will pursue organic growth with the help of networks of third parties, particularly in Korea (38 percent). Few will consider mergers and acquisitions or joint ventures as a core pillar of growth strategy. Most, particularly manufacturers and retailers, plan to grow first by increasing operating efficiency and then through new customer acquisition.

A leaner, more competitive business environment is forcing leaders of midsize firms to re-evaluate their growth strategies with the survey revealing marked differences in how this will be achieved. Respondents across Asia Pacific (61 percent) put a strong emphasis on cost reductions through improvement of operations compared to 36 percent in the US. Almost two-thirds of respondents in the US will look to expand their existing customer base compared to 50 percent of their peers in Asia Pacific. Where there is agreement however, is the intention to go global with over one-third of executives in both Asia Pacific and the US looking to new geographic markets for growth. The opening up of markets in the BRIC (Brazil, Russia, India and China) areas particularly, are offering a raft of new business opportunities from which midsize companies are well placed to benefit.

“The resounding message from this study is that midsize companies in Asia Pacific are sharply focused on growth but fear expansion will result in them losing the very characteristics which made them successful in the first place,” said Hans-Peter Klaey, President & CEO,
SAP Asia Pacific. “Managing expansion across customers, products and geographies, while staying nimble and responsive, is challenging. However, adapting flexible IT infrastructure and tools ensures that midsize firms stay agile, responsive and innovative even as business priorities change.”

Commenting on the research, Denis McCauley, the Economic Intelligence Unit’s Director of Global Technology Research said, “Midsize firms in Asia Pacific are being squeezed from all sides; larger rivals are trying to edge them out, and customers are increasingly exerting their increased power in pricing and the setting of other contract terms. To respond effectively, mid-size firms must use their people and technology to maximum effect.”

IT Vital to Growth Strategy
Enhancing scalability will be uppermost in management minds as they consider how much to invest in IT and what to spend it on. More than half of survey respondents cite the need to accommodate growth of the business as a key driver of IT investment over the next three years. As firms expand, they often outgrow their IT systems, and the latter come to hem in growth rather than enable it. Many midsize firms will spend to replace legacy software and equipment; in so doing they will seek to ensure that new systems are scalable to allow business growth. They will also invest (manufacturers more than other types of firms) to ensure improvement of operating efficiency. “Used effectively, IT can help stem the erosion of speed, flexibility and customer intimacy that often comes with expansion,” said Denis McCauley, the Economic Intelligence Unit’s Director of Global Technology Research. Indeed, nearly 8 out 10 surveyed executives in the region believe IT is critical to their firms’ ability to maintain flexibility as they grow.

However, midsize companies agree that IT is useful only in the hands of skilled people. More so than in other regions, midsize firms in Asia Pacific struggle with a shortage of IT expertise among their employees and managers, as well as employee resistance to change, problems that are felt most strongly in Japan, China and South Korea. Midsize companies will therefore need to invest more in training managers and employees in the use and management of IT.

The key findings are as follows:

  • Asia Pacific companies most affected by shortages of skilled labour.
    Despite their huge pools of available labour, companies in the Asia
    Pacific region are far more concerned about shortages of talented staff than
    in either Europe or the US. Over 40 percent of Asia Pacific executives surveyed
    said a shortage of talented staff was a major issue for them, against 36 percent
    in the US and 28 percent in Europe.
  • Price competition and rising raw material costs are primary impediments
    to growth.
    Across Asia Pacific, company executives singled out price
    competition as the biggest impediment to growth. However at the same time,
    companies’ margins in the region are being squeezed by the cost of raw
    materials and services. This was cited as a major concern by 47 percent of
    respondents in Asia Pacific.
  • IT will be an important enabler of growth. Over 70 percent
    of executives in Asia Pacific singled out IT as central to their ability to
    grow. Firms will use IT to deepen their knowledge of customer behaviour and
    improve how they service customers. IT will be critical to their ability to
    use this information to innovate.