The pandemic has affected business performance and soured deals

In what would have been the largest US$16.2 billion deal in the luxury industry, Tiffany sued LVMH for deliberately stalling completion of the deal agreed in 2019 before the pandemic emerged. LVMH in turn countersued Tiffany for breach of its obligation to operate in the ordinary course of business through “mismanagement of its business”, such as taking on additional debt and paying regular dividends during the pandemic even when Tiffany posted losses. LVMH further cited the pandemic as a “material adverse event” that changed the understanding of the agreement in 2019. The parties eventually agreed to settle for a lowered purchase price from US$135 per share to US$131.5 per share (2.6% reduction). In other news, WeWork sued Japanese conglomerate Softbank Group for backing out of the US$3 billion tender offer, accusing it of succumbing to “buyer’s remorse” during the pandemic. Softbank stated that several pre-conditions had not been met and the pandemic had impacted the business of WeWork, among other reasons.

Choosing an appropriate closing structure helps prevent repercussions

There are two general types of closing structure (1) simultaneous signing and closing — where the definitive agreements are signed and the deal closes at the same time, and (2) deferred closing — where the closing occurs after the definitive agreements documents are signed, and there are usually closing conditions to fulfil. Simultaneous signing and closing is a simpler process and eliminates transaction risk, such as the risk of Tiffany vs LVMH, but it might not be possible if the deal is conditioned on items such as regulatory approval, shareholder approval, bank financing. There is also the sensitivity of leaking the news of transaction prior to signing if there is a need to solicit for approval beforehand (e.g. shareholder approval, change of control for material contracts). Deferred closing scenario is more complicated as it involves negotiating covenants and conditions, as well as agreement on various key aspects such as termination, restriction on activities, representations and warranties, price adjustment (read up more on locked box and completion accounts mechanism for further information). However, it spells out conditions precedent to closing, such as gaining shareholder and regulatory approval, which eliminates risk of business operations and continuity upon change of hands. In this deferred closing scenario, there will be negotiations required based on the geography, industry and nature of the business.

Negotiate down to the specifics and pave scenarios for bowing out gracefully

In negotiating the clauses and conditions to be inserted in a deferred closing scenario, buyers will inherently want to be as comprehensive and specific as possible to list “walk-away” scenarios, such as defining what constitutes as material adverse events. Permissible and restricted activities, such as distributing dividends and terminating material contracts, should also be stated. While sellers might not always agree to such terms, a discussion is necessary to state and align the intent of the parties. In the case of Tiffany vs LVMH, LVMH argued that Tiffany did not specifically mention the prospect of a pandemic in a detailed list of events where LVMH have to bear the consequences, even though there were specific carve-outs such as “Hong Kong protests” and “terrorism”. Tiffany in turn argued that they need not anticipate every conceivable cause of an industry-wide decline and specifically identify each of those causes. It is always with the benefit of hindsight that including a pandemic in the list of events would have avoided the argument. While we cannot prepare for the unexpected, we have to be prepared that deals might not complete and there might be legal repercussions. Even though the court rarely forces a company to go forward with a deal, plaintiffs (usually seller who want the buyer to commit to the deal) might still pursue for more negotiation power for a settlement. It is hence advisable to adopt a prudent approach when evaluating such risks and reflect extensive consideration in documentation.

Continuously navigate transactions in the midst of a pandemic with care

While the pandemic has caused some companies to delay investments, some have chosen to be proactive in identifying opportunities in this crisis. Cross border transactions are still ongoing as virtual discussions and due diligence have replaced traditional physical business trips, with most being quick to adapt. Valuation and pricing are debatable in this volatile environment, with earn-outs and price adjustments used to bridge the expectation gap between sellers and buyers. As business environment evolves to a new normal brought about by the pandemic, we should be flexible and quick to adapt. Experienced M&A advisory professionals will be able to offer valuable advice to not just guide companies through a smooth transaction, but also to safeguard interests when potential transactions fall through between definitive agreement and transaction closing.

About the Author

Chong Han is a Senior Manager at IGPI Singapore. Chong Han’s career started in 2008 in the M&A advisory arm of a global professional services firm, with a focus on valuation advisory relating to mergers and acquisitions, restructuring, financial reporting and litigation support. Thereafter, he joined a SGX-listed regional real estate player, investing in lands for development and properties for redevelopment or holding. His experiences and skills span across a wide spectrum of investment activities such as market analysis, due diligence, valuation, and financial modelling and transaction execution in Singapore and beyond.

About IGPI Singapore

Industrial Growth Platform Inc. (IGPI) is a premier Japanese M&A advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around funds supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support and consulting towards commercialization and monetization of technologies IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. Our firm acts as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan with consulting services and support. We also provided sell side advisory for SMEs and private equity fund looking to divest. Get in touch with us on strategy, innovation, portfolio planning and M&A related topics! IGPI Singapore – contacts: This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Let’s start with the backstory:

Right before the onset of the pandemic, Industrial Growth Platform Inc. (IGPI) established its Australian office in early 2020 in Melbourne. IGPI is a premier Japanese consulting and M&A advisory firm with offices in Japan, China, Singapore, Vietnam and Australia. One of the aspects that adds to our uniqueness is the fact that apart from providing strategic advice to Fortune 500s, Governments and startups, IGPI also makes principal investments (~40+ till date) and is associated with diverse array of investment initiatives in several countries. This includes investing in established transportation businesses, university-born startups, concession projects such as airports and VC with prominent LPs such as Honda and Panasonic. As a result, when IGPI was evaluating the Australian market, it was paramount to see it through diverse lenses which led to a number of candid in-country interactions (~150 meetings) before we finally decided to set shop. One of the interesting things that we spotted during the meetings and innovation events was that the quality of innovation in Australia across sectors (e.g. agritech, cleantech, healthtech, fintech, spacetech etc.) is promising with a strong enthusiasm for building and scaling startups. However, wearing our Japan/Asia hats, we struggled to recall many names when it comes to Australian startups that ‘made it big’ internationally. The result was quite similar in other casual conversations that we had in professional circles in Singapore and Japan. This made us investigate this disconnect further. If the number of unicorns is considered any appropriate yardstick to measure a country’s startup ecosystem’s success, around 80% of the ~500 unicorns of the world (as of Oct 2020) hail from USA and China alone compared to a modest 6 from Australia, namely Afterpay, Airwallex, Canva, ZipMoney, Zoox and 10X Genomics¹. Even if we compare the number of unicorns in proportion to their populations, Australia lags behind the likes of Singapore, USA and UK (see Figure 1). The burning question is: what is stopping Australian startups from making it big in the international scene?

Figure 1: Statista, World Bank

The key aspects that IGPI came across during our interactions and reflections are:

1.) Small home market size and notion of ‘far away’ makes the journey to achieve scale tougher

⇒ Australia is a developed country with a respectable GDP and economic track record over the past decades. However, its small and scattered population for this massive country (land size wise) makes for a humble ~0.3% of the global population². As a result, there is a concrete ceiling on the scalability of the Australian startups for most industries if they only focus on domestic business. This coupled with Australia’s (distant) location to other major markets makes the journey of scaling a startup even longer as there is a notion of ‘far away’ associated with it (which also implies issues such as time zone differences). As per World Economic Forum’s Enabling Trade Report, Australia ranks 127 out of 136 countries in foreign market access rankings, based on aspects such as trade barriers and margin of preference in destination markets³. This gives some flavor of the challenges faced by conventional Australian businesses in general when it comes to accessing foreign markets and adds to the notion.

⇒ Even if one would argue for the selective lucrativeness of the Australian markets, e.g. startups in mining/METS that are targeting and catering to Australia’s mega-mines have potential to do fairly well domestically without having to rely much beyond the Australian borders, there is a growing focus away from resources and such startups should also look at building more use cases with their capabilities in mid to long term. And those new use cases may not have lucrative markets within Australia and will sooner or later also feel the need to internationalize to achieve their true potential. This view can have applicability to other startup areas too – after all we live in a globalized world! Therefore, apart from fueling growth, scaling up beyond Australian shores is always healthy from a risk diversification perspective too.

2.) Lack of funding pushes many startups into the valley of death

⇒ By developed world standards, Australia is considered quite risk averse⁴ as a country unlike its counterparts such as USA where startup culture is celebrated and VC investing is quite common (and fashionable) – especially early stages. The risk averse behavior can also been seen from the proportion of investment received by early stage companies as compared to more mature/established counter parts⁵ (see figure 2). As per a survey shared on StartupDaily, more than 70% of the VCs in Australia said that their average deal size in 2019 was in excess of A$ 1 million⁶ which reflects the graveness of the situation in especially in early stages. If we look at macro indicators, Australians are quite wealthy by global standards⁷ but probably the inherent conservatism has led them to make investments in more conventional asset classes such as real estate which has worked well for many in the past and that is possibly why angel / early stage funding is not as common as it ideally should be. Also, focusing on Government sources such as grants may not be the ideal answer to address this issue which primarily requires private participation and risk taking. This is the issue from the ‘supply side’ of early stage capital

Figure 2: Australia Bureau of Statistics

 

⇒ If we also evaluate this from the other side i.e. ‘demand side’ of the capital and look into the type of Australian startups and compare with the Silicon Valley, there is a higher percentage of “integrator” type startups⁸ (Integrator startups most frequently attack existing markets by providing a product that is cheaper than the alternatives) – which are usually considered “safer businesses” compared to the ones that challenge the status quo. Unfortunately, “integrator” type businesses have lower scalability than the “challengers” provided they ‘get it right’⁹ (see figure 3).

 

Figure 3: Testingsgblog

 

⇒ To corroborate the risk averseness further, as per a report titled Silicon Beach: A study of the Australian Startup Ecosystem, entrepreneurs in Silicon Valley explore new opportunities/markets 15% more frequently than Australian entrepreneurs, while entrepreneurs in New York seek new markets 12% more often⁸.

⇒ For both investors and investees alike, such factors impact the overall VC ecosystem and can especially dent early stage investing (later stage is relatively ‘safer’ since one can gauge the KPIs more realistically) which pushes startups in the valley of death and probably unknowingly killing the potential unicorns of tomorrow. At the end of the day, startup ecosystems run on a pyramid structure where the failure rate is surely high but if funding is not adequate, then the base of this pyramid will shrink (less startups) and hence lowering the chances of reaching the top of the pyramid i.e. scaled up success stories (irrespective whether a unicorn or not!).

3.) Limited knowledge / readiness for international markets results in selective internationalization

⇒ In our experience, some key factors that make startups successful are identifying the right issue(s) to solve, understanding the dynamics of the environment (3Cs), having a game plan (strategy; including internationalization) – and of course, a solid execution (apart from conventional aspects such as funding etc.)! In this competitive world, whether one is a B2B or B2C startup, internationalization and scaling seldom hurts anyone. In the larger scheme of this journey, building a startup and trialing/POCs in an Australian state can be compared to going to high school, expanding across Australia is like going to a university, and scaling internationally in complex (also less understood markets) outside one’s comfort zone is no less than attaining a PhD in that analogy! A general on-ground observation is that several startups aspire to go to USA and Europe (probably because of a comparable ease of doing business, notion of immediate market size and initial comfort etc.) and put other growing markets (as appropriate) on the back burner (e.g. Japan or ASEAN) which require more thought on aspects such as localization/product-market fit and also overcoming wider cultural barriers. But the journey can be worth the pain – whether through the lens of potential first mover advantage, risk diversification, geo-politics (at times) or with intent to uncover full market potential. For example, Japan continues to be one of the largest economy globally and ASEAN bloc is the 5th largest economy of the world¹⁰. Despite being a trading bloc (and a rapidly growing one), based on many on-ground conversations, Japan and ASEAN are not the first ‘port of consideration or entry’ on many startups’ lists. The common reason cited is lack of market understanding, language barriers and (perceived) market complexity of these markets! Generally speaking, even many listed Australian businesses and their leadership may not be ‘Asia ready’ but that may be where the next wave of opportunity lies for many¹¹ (see figure 4)

 

Figure 4: AsiaLink Business

Using healthtech as an example, Australia is considered to be quite promising in this sector.  Healthtech startups in Australia addressing issues relating to aging or infertility can evaluate potential markets based on commonality of issues and long term potential rather than just immediate attractiveness. For instance, several markets such as Japan could be potential markets as they face aging and fertility issues too¹². Another example can be in the agritech space, where some problems being addressed by Australia’s agritech can have applicability to some ASEAN markets and we see prominent Japanese companies making investments in similar spaces in countries such as Vietnam¹³. There is scope for Australian startups to turn to those markets, attempt to localize and engage in the race either directly or via partnering locally (there can be many ways to penetrate a market and we strongly believe it can’t be a “cookie-cutter” approach especially in Asia).

Strategic Partners: The All-encompassing Solution to These Concerns

It will be a battle half won if we only identify the key concerns of Australian startups that can keep them away from achieving their true potential and not find ways to address it. At the end of the day, successful scale up of any business depends on three aspects: (1) Information, (2) Know-how and (3) Execution. How fantastic would it be if someone can support Australian startups with all the three aspects and in-turn aiding the three issues identified i.e. small local market, funding woes and lack of holistic knowledge related to geographic expansion? The answer lies in finding a good strategic partner i.e. someone who brings you “more than just money” on the table – easier said than done but it can really prove to be beneficial. To complement this, many large Japanese companies are increasingly looking at building new businesses, digital transformation opportunities etc. and are welcoming startups that have differentiated offerings to collectively use the Japanese company’s wide Asia footprint, local knowledge and ability to invest along with the startup’s intellectual property for mutually beneficial long term value creation.

How can IGPI Australia help?

IGPI is well networked with most Japanese mega corporations and SMEs across Asia – be it Japan (HQ), ASEAN (RHQ in many cases) and Oceania offices and support them for a number of initiatives. If you are an Australian startup, we can assist you find the right potential partner for your market expansion plans beyond Australia. IGPI provides highly customized Asia business advisory to its diverse range of clients including but not limited to:

• Market prioritization in Asia
• Market entry and growth strategy
• Strategic partner search
• Commercial negotiations support
• Custom hands-on support (in-market)

Authors

Mr. Rachit Khosla is the Country Manager of IGPI Australia. Rachit is a seasoned strategy consulting professional with rich experience of leading and executing market entry and growth strategy (both organic and inorganic) engagements for Fortune 500 businesses and large MNCs across Asia. Rachit has advised clients in a diverse range of industries including automotive, fin-tech, manufacturing, med-tech & healthcare, construction materials, travel, IT & telecom. Before joining IGPI, his experience includes country manager at YCP Solidiance Asia Pacific and head of an online B2B bidding platform for the consulting industry. Mr. Hui Fu Chua is an Analyst in IGPI Singapore. Hui Fu started his career with IGPI, where he performs research and data analysis to support the team in strategic planning and decision making. In IGPI, Hui Fu has been involved in assignments across different sectors such as renewables, mining, agriculture, healthcare amongst many others with a strong focus in the Australia, Japan and Southeast Asia markets. Ms. Shrutee Chitre is an Intern at IGPI Australia (Aug-Oct 2020). Shrutee is currently pursuing Master’s in Management from the Melbourne Business School. She has had previous work experience of 5 years with Reliance Life Sciences Pvt. Ltd., a group company of an Indian MNC Conglomerate – Reliance Industries in Mumbai, India.

About IGPI group

        Industrial Growth Platform Inc. (IGPI) is a premier Japanese business consulting firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a  €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies IGPI Australia is a branch office of IGPI Singapore. The later which was established in 2013 focusing on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. IGPI Australia was established in 2020 with a dual focus of helping Australian businesses enter and grow in ASEAN/Japan and attracting Japanese investments into Australia. Get in touch with us on internationalization, strategic planning and M&A related topics! IGPI Australia – contacts:  

Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp

Rachit Khosla Country Manager – Australia +61 414 433 572 r.khosla@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Since its establishment in 2015, the KK Fund is a venture capital firm that has invested in more than 20 mobility and internet-related startups in Southeast Asia. By investing in startups in a wide range of industries such as FinTech, logistics, and healthcare from the seed stage and providing hands-on support to the founders, KK Fund has contributed to increasing the value of many startups. In Southeast Asia, there are many cross-industry business opportunities where the development of social infrastructure and the consolidation of SMEs are urgent issues. IGPI Singapore and KK Fund will support the creation of new businesses in Southeast Asia by combining IGPI’s corporate transformation (CX) know-how of large companies and KK Fund’s startup support know-how. In addition to supporting individual projects, we plan together to launch the SEA Point program as a platform for large companies to create new businesses in collaboration with Southeast Asian startups and conglomerates. Overview of KK Investment Management Pte. Ltd. Main Business: Venture capital business in Southeast Asia Date of Establishment: October, 2015 Representative: Koichi Saito, Representative Director Corporate Website: http://kkfund.co/ Contacts: Kohki Sakata Tel: +65-8168-2503 e-mail: info_singapore@igpi.co.jp About Industrial Growth Platform, Inc. (IGPI) Founded in Tokyo in 2007, Industrial Growth Platform Inc. (IGPI) is a professional management consultancy that leverages strong partnership and collaboration with clients to enhance their long-term and sustainable corporate and business value. IGPI is a privately owned company with core staff of over 200 professionals with offices in Tokyo, Singapore, Hanoi, Melbourne and Shanghai. Its management team is headed by Managing Partner Takashi Muraoka.

  This article discusses the importance of innovation to achieve long-term growth, the mindset and culture required to drive innovation, the considerations to form actionable ideas aligned to innovation strategy, the process of managing innovation and the approaches to cultivate innovation.

Utilize innovation as a critical lever to achieve long-term growth

At a time when the pace of innovation is dramatically compressing cycle times, not preparing for the future creates business risk. While it is tempting for businesses to weather the uncertainty either by taking a “wait-and-see” approach or a defensive cost cutting approach, we believe that companies need to focus on both top line and bottom line growth.  Focusing only on cost cutting will tend to impede top-line growth since companies will not be positioned to take advantage after the crisis ends. This aligns with the 2019 study conducted by Gartner on the fortune 1,000 companies. The survey observed that companies that focused on both top-line and bottom-line growth during the 2008 recession emerged as top of their industries in terms of revenue, margin improvement and long-term growth. According to its survey, outperformers posted a 13% annualized growth rate in earnings before interest, tax, depreciation and amortization (EBITDA) between 2009-2017, compared to a 1% annualized contraction in EBITDA among the control group.

 

 

 

Inculcate an explorer mindset – Encourage risk taking and accept failures

Traditional corporate culture of rewarding success and inaction while punishing failure is an obstacle for innovation. As the process of innovation requires exploration and taking risks, companies must rewire their culture and norms to tolerate and value risk. Innovative organizations have embraced an explorer’s mindset, marked by a constant search for new ideas and a passion to solve fundamental problems for the company’s customers and employees. Companies can empower employees by providing them with channels and resources for them to pursue innovative ideas independently. Adobe’s Kickbox program has successfully provided a toolkit to encourage and guide employees to contribute ideas, and has since become an open-source material used by other organizations. Commitment and direct involvement from top management is also crucial to inculcate an innovative culture. While there might be a trade-off between short-term performance and investment in innovation, top management needs to create a clear vision and strategy for innovation with communication and allocation of sufficient resources. Innovation can be broadly classified as sustaining innovation to improve current products within existing businesses and disruptive innovation to discover new products and markets. It is hard for disruptive innovation to happen within most established companies as incentives for business units are aligned to the existing businesses. As such, new business units with new business models are needed for disruptive innovation. External avenues to innovation that are kept separate would be viable as well.

Work on actionable ideas aligned to your strategy that can be monetized

Though it is often tempting for companies to measure innovation by R&D spending in absolute terms or as a percentage of total revenue, studies have shown that there is little correlation between both of them. While R&D spending is an indication of commitment to grow, R&D typically focuses on technical aspects which might not coincide with the needs of customers. Innovation should have needs of customers — either existing or future — in mind. Innovative companies often have clear innovation strategies that typically have a society and customer-centric focus. Amazon has adopted a data-driven and customer-focused innovation approach, using artificial intelligence to understand customer behavior in order to predict what they might want next. Typical questions that help companies to choose focus areas include:

• What are the key challenges of the future? Do customers have needs that they want to be solved?
• In which areas does the company hold the greatest pockets of knowledge, competence, and resources, and how can they be leveraged?
• Which market segments should the company target?
• How do customers define value, and what are the key considerations by which we can create a compelling value proposition for them?
• What data should the company generate during development to prove the value proposition?
• Can we make money from the value proposition?
• Is the value proposition aligned with our strategy?
• What revenue and profit targets need to be achieved?
• What resources are available for reinvestment?

While there will always be a strong element of risk in innovation, the process of managing innovation should never be haphazard or risky. A holistic and data-driven approach to prioritizing innovation investments can increase R&D efficiency and greatly reduce the risks of research bottlenecks and wasted R&D resources.

Develop a formal process for managing the innovation process

Poor management of innovation processes in the organization can have huge long-term economic and strategic implications. A poor process could result in under-utilized capabilities, focusing on unrealizable projects, lack of vision on desirable outcomes, misallocation of resource and no results. Companies that aptly manage their innovation efforts stand to gain an edge over their competitors. Innovative cultures require guiding structure of governance and process to be effective. As innovation requires starting with numerous ideas before narrowing them, it is important to know when to stop investing in faltering ideas or projects. There should be stringent capital controls, resource allocation mechanisms and clear processes in place to guide projects or kill them.

Explore internal and external avenues to innovation

Innovation approaches should complement each other; hence companies should deliberately construct and operate their portfolio of approaches. In addition to openness to ideas created in-house and from internal R&D departments, companies must be open to sources of new ideas through engagement with a broader external ecosystem. Experienced innovators employ a variety of approaches to generate innovation. The portfolio of external approaches include corporate venture capital, business accelerators, incubators, acquisitions and partnerships with the broader ecosystem. Knowing where you are today helps you set the course and prioritize what needs to happen next. It also helps you to strategize your move – either succeed as a disruptive innovator or defend against a disruptive challenger. The following questions are useful to determine which approach best suits your needs:

• How much resources (time, money, human resources) can you allocate internally and externally?
• Do you want to focus on growth of your existing businesses or discover disruptive ideas and new businesses?
• Do you employ enough approaches to constitute a diverse portfolio? Are those approaches aligned with clear objectives?

Highly innovative companies collaborate with an ecosystem of external organizations to tap into specialized expertise and broader talent pools, to build tools and solutions without bearing the full cost and to gain exposure to new ideas and business models.

How can IGPI help you in your innovation journey?

Established companies should encourage innovation by fostering a risk taking organizational that is in line with a clear strategy for innovation focused on customer needs. Companies need to understand that innovation is a journey and there is a need to review their portfolio approach from time to time to make sure they are focusing on the right opportunities that aligned with the changing needs of the business. For that reason, businesses must engage with strategy consulting firms to make strategic business decisions. Based in Singapore, IGPI has the end-to-end capabilities in supporting your innovation journey. As a management consulting firm, we can help you by both looking inside and outside to identify best opportunities that align with your strategy and core capabilities. Here is a representative list of our capabilities to serve your innovation needs:

• Internal change management to shape an innovative culture through empowering employees
• Discover new growth areas by exploring adjacencies where your organization has opportunities and capabilities to win
• Identify disruptions and emerging trends that your business should be aware of and embrace
• Identifying the areas where your competition are placing bets and which emerging players are most interesting or threatening
• Review, align and restructure innovation initiatives to identify loss-making initiatives and focus on the key issues
• Identify the critical capabilities required and define the best path to obtain them whether through corporate venturing, partnership, acquisition, or internal development
• Support for acquisitions, running an accelerator program, identification of partners

Case study:

IGPI developed the concept of ideathon and developed a business model from the ideas shortlisted from the ideathon

Our client, a global fortune 500 conglomerate, wanted to enter a new space in the technology-driven health and wellness sector in Southeast Asia

 

 

1. How to source for ideas?	2. How to define the business model?	3. Who should they partner?

 

 

IGPI’s involvement	Studied the client’s choice of market Identified talent pools for idea generation Identified talent pools for idea generation Developed marketing and execution plan for the client	Conducted market research on the feasibility of the idea Developed business model that includes Go-to-market strategy and monetization strategy	Created list of potential targets for collaboration Contacted targets for collaboration Recommended partners that offer complementary strengths to client’s business
Outcome	Ideathon has been conducted in a leading university in the client’s market of choice Several ideas have been submitted by the participants	Recommended client to work with partners within the ecosystem and separated the new team from current organization	Partnered with MNCs, Startups, and data providing agencies to develop AI based proof of concept

 

Key takeaways: Time to market is key to gain expertise in the new segment. Convinced the conglomerate to partner with ecosystem players because it gives them first mover advantage to bring innovative solutions to market Local knowledge is essential for new business development. IGPI’s local knowledge helped in developing market intelligence in the market. IGPI was able to conduct market research and collaborated with startups and other ecosystem players in local language Pilot partners are necessary to test the viability of the idea. We were successful in identifying the requirements of the partners to run the pilot program

About the Authors

Chong Han is a Senior Manager at IGPI Singapore. Chong Han’s career started in 2008 in the M&A advisory arm of a global professional services firm, with a focus on valuation advisory relating to mergers and acquisitions, restructuring, financial reporting and litigation support. Thereafter, he joined a SGX-listed regional real estate player, investing in lands for development and properties for redevelopment or holding. His experiences and skills span across a wide spectrum of investment activities such as market analysis, due diligence, valuation, and financial modelling and transaction execution. Divya is an Associate at IGPI Singapore. She started her career with Tech Mahindra (then Satyam Computer Services Limited), a leading Indian IT services provider in their technology advisory services team. Later she worked with leading companies in Singapore – Prudential, AIA and Tetra Pak in their IT departments. In a career spanning 15 years in various industries, she has participated in several digital transformation and innovation initiatives in various roles. After attaining her MBA from National University of Singapore, she joined IGPI where she works on strategy projects.  

About IGPI Singapore

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around funds supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support and consulting towards commercialization and monetization of technologies IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. Our firm acts as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan with consulting services and support. We also provided sell side advisory for SMEs and private equity fund looking to divest. Get in touch with us on innovation, portfolio planning and M&A related topics! IGPI Singapore – contacts: This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Since the country began opening up its economy in the late 1980s, Vietnam has been an attractive destination for foreign investors. In 2019, data from the Foreign Investment Agency (FIA) shows that Foreign Direct Investment (FDI) reached USD38.2 bn an increase of 7.2% compared to the same period in 2018. Japan has been highly active in the field of M&A as illustrated in the chart -below. In 2019, total Japanese inbound M&A deals amounted to more than USD 450mn in Vietnam with 12 deals*. During the same year, Japan was the 3rd largest contributor of foreign M&A deals in Vietnam in terms of deal value after South Korea and Singapore.

  Source: Mergermarket, IGPI analysis * For disclosed deal value to be greater than or equal to USD 5 mn and / or the target’s turnover/revenue is greater than or equal to USD 10 mn

Financial services, agriculture, consumer among the key sectors of investments by Japanese firms

Historically, Japanese investors have been focusing on Vietnam’s rapidly growing financialservices sector. One of the notable transactions took place in December 2012 where Tokyo Mitsubishi UFJ purchased a 20% stake in Vietinbank for USD 743 mn. Local financial institutions are looking for strategic foreign investors to improve their business performance and to strengthen their balance sheet through capital injections. Recently in January 2020, Vietnamese mid-sized bank, Orient Commercial Joint Stock Bank (OCB Bank) divested 15% stake to Japanese Aozora Bank for USD 138 mn and the transaction currently represents the second largest deal in Vietnam by Japanese companies over the period 2019 – H1 2020 as shown in the table here-below:     Source: Mergermarket, IGPI analysis *For disclosed deal value to be greater than or equal to USD 5 mn and / or the target’s turnover/revenue is greater than or equal to USD 10 mn   Agriculture is also another driving force behind acquisitions as agricultural companies are looking to expand their technical capabilities. As the demand for increased productivity rises, the players in agriculture sector are looking into adopting technologies (i.e. agriculture technology or “Aggrotech”) to improve yield, efficiency, and profitability. In May 2019, Mitsui acquired a 35.1% stake in Minh Phu Seafood, a Vietnamese shrimp producer and processor for USD 153 mn and is the largest transaction by Japanese companies in Vietnam over 2019-H1 2020. According to Mitsui, this transaction will enable Minh Phu to achieve further growth through the application of digital technology including AI in farming ponds and processing plants and the enhancement of the efficiency in shrimp supply chain from farming to marketing. Additionally, manufacturing is another area of interest for Japanese investors since Japanese companies have higher technological capabilities in comparison to their Vietnamese counterparts and want to bring their expertise to the local companies to expand. Especially, during the current COVID-19 situation, many Japanese consumer and industrial goods manufacturers are considering to shifting their manufacturing bases from China to Vietnam in order to take advantage of more affordable labour costs here in Vietnam. Notably, Hoya Corporation, which manufactures hard-drive components, is expected to move from China to both Vietnam and Laos. Lastly, a large number of workers in Vietnam speak Japanese, which is a distinct advantage compared to other countries in the ASEAN region. On this matter, it is also important to highlight that around 300,000 Vietnamese people live and work in Japan, proving further benefits for both countries.

ICT and digital transformation development

The information and communications technology (ICT) services is a fast-growing sector in Vietnam and will provide further foundation for the digital development of the country. In 2018, the country had an estimated 30,000 businesses across IT hardware, software, digital content and ICT services1. Vietnam benefits from a flourishing community of software developers and start-ups and developing digital products and services, attracting Japanese firms but also global attention as a significant regional hub. Though the digital transformation of Vietnamese firms is taking place slowly, the Vietnam government, large corporates and small-medium enterprises are playing the active roles of adopting and implementing digital transformation initiatives across their organizations. For example, FPT the leading ICT company in Vietnam, has set as one of its mission to be a pioneer in digital transformation to transform the country’s economy and society. On this aspect, in September 2020, IGPI and FPT Japan will jointly hold a webinar to provide insights on how corporates can design its digital transformation through corporate transformation in the Southeast Asian region. 1. Source: Vietnam Information Technology Outsourcing Alliance. 2018. Why Vietnam?  

Challenges in investing in Vietnam

The long-term outlook for further M&A activity by Japanese investors remains highly positive as Japanese firms continue to look outward and see Vietnam as an important and stable investment location that is growing. Vietnam has been a strategic market for Japanese companies investing overseas due to its close geographic proximity, low labour costs, large work force, its openness to investment by Japanese companies and the positive relationship that exists between the two countries. Furthermore, Vietnam targets to become the leading digital country and economy in the ASEAN region by 2030. Under the national e-commerce development master plan in 2021-25 and the national digital transformation programme to 2025, digital transformation represents a vital process to increase the competitiveness of the economy, while further developing the domestic market and increasing exports. Altogether, this will impact positively and transform multiple key sectors from manufacturing and agriculture to trade, payment, transportation, finance, healthcare and education. However, there are challenges to consider when foreign companies are investing and doing business in Vietnam. As with many developing economies, Vietnam is experiencing the rise of its cost of labor year by year. Therefore, it is necessary for Vietnam to create other advantages for itself. Another key challenge faced by foreign investors when acquiring Vietnamese companies is the lack of reliable and publicly available information on target companies. When conducting due diligence on a company in Vietnam, foreign investors often have to heavily rely on the documents and information provided by the target company and some private companies may also lack adequate financial reporting standards which provide further challenges for foreign investors. Finally, given the country still enjoys a strong economic growth compared to other ASEAN countries, foreign investors have to negotiate with high premium valuation of target companies particularly in fast growing sectors such as consumer, healthcare, retail, etc.  

Government support for M&A and other areas of investment opportunities

Despite the existence of these difficulties, we believe that M&A is still one of the most effective and rapid ways by which Japanese companies can gain access to the attractive Vietnamese market. Japanese companies are likely to continue to be one of the key countries leading the M&A investments in Vietnam. Moreover, the Vietnamese government has also streamlined the M&A process to encourage foreign investment. One the key initiatives is the upcoming equitisation process of state-owned enterprises. This represents great opportunities for foreign investors including Japanese firms to acquire a stake in large state-owned enterprises (SOE). Some examples of SOE include Vinacomin, VNPT, VinaPhone, MobiFone, VTV Cab, Thang Long Tobacco Company, Vinafood 1 and 2, Vinacafe, Vietnam Rubber Group, and Vietnam Chemical Group. In addition to SOE, the Deputy Prime Minister, Vuong Dinh Hue, has recently mapped out core fields for restructuring, all of which are to welcome capital injections from investors from Vietnam and abroad. These areas include finance and banking, public debts, and streamlining nonmanufacturing units, which will provide further business and investment opportunities for Japanese investors in the country.  

How can we help? IGPI Vietnam

IGPI Vietnam was established in 2016 to support the Vietnam government in the business revitalization of state-owned companies and disposal of non-performing loans of financial institutions. Through these projects, IGPI Vietnam supported the Vietnam government in reaching the ultimate goal of transforming and improving the quality and competitiveness of Vietnam economy. Today, IGPI Vietnam focuses on management consulting and M&A advisory supporting Japanese investors and local enterprises to expand their business and to find the best partners across sectors. We also act as a bridge between Japan and Vietnam and advise on a wide range of areas that include market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration. Our consultants are also able to speak both Vietnamese and Japanese languages fluently to assist our clients in their projects.  

About the Author

Kim-Lân Dang is Vietnamese born in France and is a Senior Manager at IGPI Singapore. He started his career in 2008 with PricewaterhouseCoopers Luxembourg and later joined in 2012 Ernst & Young Singapore. Before joining IGPI, he worked at BDA Partners and TC Capital in Singapore. Kim-Lân has vast experience in advising blue-chip private equity funds, entrepreneurs, and corporates on divestments and capital raises. He has executed M&A transactions across Vietnam and the rest of Southeast Asia covering various industries including consumer/retail, IT, telecommunications, financial services, and financial technologies.

About IGPI

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a USD 100 bn Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a EUR 100 mn venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies. Get in touch with us on strategic planning, market assessment and M&A related topics! IGPI Vietnam and Singapore – contacts:     This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Adoption of new technologies in Agriculture market in Asia Pacific

Asia Pacific is the largest region in the agriculture market by far, accounting for USD 6,419 bn or 54.5% of global market share in 2018. It is expected to continue growing over the long term as populations and consumption demand increase both in Asia and globally. However, along with weather risks and climate change, Asia Pacific’s agriculture industry faces supply side challenges due to labour (related to ageing farmers, increased urbanization), reduced access to capital and natural resources and fragmented supply chain leading to food wastage. Urgent actions and shared responsibility are required to face these challenges but it also provides significant opportunities for innovation and disruption for the industry. As the demand for increased productivity rises, the agriculture sector is looking into adopting technologies (i.e. agriculture technology or “AgriTech”) that improve yield, efficiency, and profitability. These technologies have already started to help farmers in the region including the following:

• Information and data analytics: farmers and producers are able to plan their production according to accurate data patterns; • IoT and automation: technologies that help in automation of farming processes (such as monitoring the crop field with the help of sensors (light, humidity, temperature, soil moisture, etc.) and automating the irrigation system); • Marketplace platforms: platforms that aid in connecting small scale farmers with larger consumer markets; and • Agronomy and agricultural biotechnology: innovate inputs for crop and animal agriculture (such as seeds, pest control, seeds with new genetics) with the use of scientific tools and techniques.

  There are many technological opportunities throughout the value chain as illustrated in the below chart:

During the COVID-19 pandemic, investments in AgriTech to further strengthen the industry

  Though businesses are resuming slowly in Asia Pacific, the coronavirus pandemic and resulting lockdown restrictions are inevitably still impacting most industries in the region and globally, including agriculture. Global supply chains are disrupted, labour availability is further limited and market access is restricted due to issues in transportation and operation temporary shutdowns. However, Covid-19 represents a unique opportunity for AgriTech startups to highlight how the adoption of technology and innovation in agriculture can solve the problem of not only yield, but procurement and speed up the entire agriculture supply chain. As an example in Indonesia, farmers have great experience but are limited in their ability to predict weather changes. As such, a more data driven approach can help farmers increase productivity and manage risks. HARA, a blockchain-based data exchange platform for the food and agriculture sector in Indonesia, provides farmers and stakeholders with hard-to-find data to improve their production. This data has also been beneficial for several financial institutions to make data-driven decisions by digitizing loan administration and disbursement process. Example of AgriTech in Indonesia, HARA: AgriTech is also a driving force behind acquisitions as agricultural companies are looking to expand their technical capabilities. For example, Japanese conglomerates are acquiring startups and investing in companies that have promising new technology in order to provide further growth outside their domestic market. In February 2020, Sojitz Corporation, a listed Japan based conglomerate that operates in various sectors including agriculture, acquired RYNAN Holdings Joint Stock Company, a digital farming platform startup in Vietnam. With the development of software for IoT and AI services, the startup is able to help farmers improve productivity by offering an app-based system for procuring agricultural supplies, as well as for monitoring crop cultivation and managing water systems. Sojitz is looking to utilize its existing network both in Vietnam and overseas to expand the farming platform’s business with this investment in RYNAN.  

Government initiatives in AgriTech

  Furthermore, in order to keep pace with demand, governments have been supporting the adoption of technologies in agriculture to improve productivity of agriculture. They have implemented various technology schemes over the last few years to help their domestic agriculture producers become more efficient through adoption of relevant technologies. Examples of government initiatives are as follows:

IGPI – Trends and opportunities in the Agriculture sector in ASEAN – May 2020 report

  Leveraging from its deep experience in the agriculture sector, IGPI has recently conducted a research with analysis of various case studies to understand the current landscape of the agriculture industry: “Trends and opportunities in the Agriculture sector in ASEAN.” IGPI has access to local businesses in the ASEAN region that are adopting technologies, providing significant opportunities to expand their business domestically or within the region. We would be happy to share our key findings in this sector, share investment opportunities or assist you to find the best partners for your business to grow. Please contact us to receive the full report About the Authors Kim-Lân Dang is a Senior Manager at IGPI Singapore. Started his career in 2008 with PricewaterhouseCoopers Luxembourg and Ernst & Young Singapore. Before joining IGPI, he worked at BDA Partners and TC Capital in Singapore. Kim-Lân has vast experience in advising blue-chip private equity funds, entrepreneurs, and corporates on divestments and capital raises. He has executed transactions across Southeast Asia including consumer/retail, IT, telecommunications, financial services, and financial technologies. Yvonne Lim is an Associate at IGPI Singapore. She has varied experiences working with large Japanese companies and multinationals across various industries. During her sabbatical year in her consulting career, she headed operations for a Singaporean travel tech startup in Japan. She started her career as a management consultant in Japan, specializing in technology consulting and project management. About IGPI Singapore Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a USD 100 bn Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a EUR 100 mn venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies. IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. Get in touch with us on strategic planning, market assessment and M&A related topics! IGPI Singapore – contacts:   This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

In this report, after explaining the current state of the startup ecosystem in SEA, I would like to provide my views on how to work together with start-ups to gain results. There are two types of start-ups: “global type”, which has the potential to expand into the world due to its excellent technology and business model, and “local type”, which solves the problems specific to each country and region. When collaborating with SEA start-ups, unlike in Silicon Valley and Shenzhen, we must first understand that there are only basic “local” start-ups in SEA. GOJEK, one of Indonesia’s unicorn companies, is a typical “local type”, started its business from organizing regional bike taxis. In the past, users had to physically find a bike taxi, negotiate a price, and guide the driver to get to their destination. GOJEK has solved this complicated process for foreign travelers through this single app. In addition, by building a cash-on-delivery mechanism, GOJEK has overcome the problem of low credit card penetration, which has been an obstacle for EC growth in Indonesia. In addition to establishing a system for collecting money from users, GOJEK has established a mechanism for depositing money in an E wallet, and it has grown into a leading financial institution in Indonesia. This is just one example of GOJEK’s functions, and GOJEK has established its position in Indonesia by controlling the basic infrastructure of payment and logistics under a dominant strategy. Why is the “local type” business, GOJEK expanding into Vietnam and Singapore? The SEA startup ecosystem has a big influence on it. SEA, experiencing rapid economic growth, has been attracting attention from investors all over the world, but the size of the economy per country is small so it is not easy to find an investment target. For investments in early stage start-ups, it would be good if we could exit when start-ups grow to a decent size. But without exit, the ecosystem will not be maintained. To be an attractive company, such as Google, Alibaba, and SoftBank, it is necessary not to become a dominant player in one country but to become a regional player that operates in multiple countries and regions. Considering this background, GOJEK is attempting to expand overseas, but in SEA the number of supporters and management know-how to expand from one country to multiple countries is limited, so there are many start-ups forced to close their business. Such issues are particularly noticeable in Malaysia and Thailand, where the population is relatively small and social issues are rare. So how do Japanese companies and local conglomerates invest in start-ups to get results? There are three important points. These are ① Clarifying the issue you want to solve, ② Finding a reasonable startup, and ③ Using your own capabilities to support the global expansion of start-ups.

① Clarifying the issue you want to solve

It’s not just about collaboration with start-ups. You can’t get results if you just follow trend and do not clarify the issues. Cash flow management, balanced scorecards, IoT, AI, fintech, are examples of trend. Adopting these trends does not always mean that management will improve. These are just tools, and there will be no achievement without considering how to use them. It is very important to clarify “which problem you want solve”, and this will clarify “what you want from start-ups”.

② Finding a reasonable startup

Companies often focus on the uniqueness of technology and business models when making investment decisions, but the most important thing to get a return on investment is to buy at a reasonable price. Such start-ups are relatively easy to be find in Malaysia and Thailand, where the supply-demand gap in financing is huge.

③ Using your own capabilities to support the global expansion of start-ups

Quick business synergies between companies and start-ups are not easy. However, it’s not difficult to leverage companies’ capabilities to help start-ups expand business globally. For example, companies can quickly lend their own free space or introduce an existing customer in a country where the startup has not yet expanded. We can say that gradually increasing mutual trust by supporting regional development of “local type” start-ups and then creating business synergies is one of the ways to minimize the burden on both parties Please feel free to contact us if you have any questions regarding collaboration with start-ups in SEA. Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Few days ago, we conducted a seminar on “How to manage organization and human resource development”. At that time, we received some questions on the importance on conducting employee satisfaction survey and the method to utilize survey results. In this e-mail newsletter, I have summarized my answers to these questions. According to my acquaintance developing Japanese chess software, he analyzed all game records of Japanese chess using AI, and then found that the common thing among the best players, such as Mr. Habu and Mr.Fujii, is that they only made a few bad decisions during the game. Any professional Japanese chess players cannot avoid making bad decisions during one game, but the ratio of bad decisions by Mr. Habu and Mr. Fujii is extremely low. Japanese chess fans might know “Habu magic”, where he makes a comeback victory. However, the secret to maintain a high win rate is not odd hand and exquisite hand in the final stage but low ratio of bad decision. This is exactly the same for corporate management, and I think the key to excellent management is how to reduce risk. So far, I have provided wide range of support from startups to reforms and corporate revitalization in large corporations, and found out that while companies in momentum and high growth are struggling to solve problems every day with a sense of crisis, slower companies are more relaxed. As a result, growing companies are constantly mitigating risk by addressing new issues, while slower companies are unaware of risk, or by the time they realize it is too late and are more prone to make more failures. I first became president of a company about ten years ago. I supported the reform of a company’s management as an external advisor for about half a year, and after that, I became president due to a request from a shareholder. At that time, I received many advices from senior managers, and the most memorable one is the advice from the president of a tax accountant corporation. The advice is that “If you want to succeed as a president, the president should clean the company by himself.” After immediately practicing, I found that I could sharpen my senses and respond to slight changes in the company. For example, these are changes such as desks of employees whose desks are always tidy gets cluttered, and chairs in a conference room not in their original positions. As a result of continuing this practice, I was able to read needs of the customers from the lines in between customers’ emails and to imagine what is happening to the company’s management when I go to retail stores. I feel that this is a turning point for me, not only as a manager but also as a consultant. As is often the case with bad consultants, they don’t understand what is happening on-site and think they are right. As a result, they are not trusted by their clients or their team members. It is an essential skill for managers and consultants to look at the site and understand the whole picture based on the information on-site. Since then, I have always pursued how to utilize the information on-site in managing companies. This applies not only in managing my own company, but also in supporting clients’ companies. For example, does your company conduct an employee satisfaction survey? Many companies may conduct it, but can companies use the results to make management decision? HR department may check the result and then may reflect it in the HR system and enhance training, but can they change the strategy and improve the business process? In the company that I managed previously, I conducted an employee satisfaction survey every quarter related to strategies, customers, business processes, people/organizations, and based on the results, I decided to focus on areas for improvement. Problems in the organization can be detected early and countermeasures can be taken, so it directly improved employee satisfaction, customer satisfaction, and business performance. I have implemented the same strategy on client companies and made successful management reforms. The point here is that there are many hints on-site, but it will be meaningless if managers cannot get them. While confidential information is accessible only to management, management should notice the amount of information that is not visible for upper management. We provide custom solutions, including employee satisfaction surveys, to connect information on-site to management. It is not difficult to absorb information on-site by using IT tools. The issue is whether HR will keep such information for themselves or the management will use it to reform whole management and to reduce the bad decisions. ※ I would appreciate for your comments and questions regarding this e-mail newsletter. This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Australia has a population of 25 million, which is comparable to Malaysia in South East Asia with a population of 32 million. The population density is 3 people/㎢, which is far lower than 333 people/㎢ in Japan and 34 people/㎢ in the United States. By city, there are 430 people/㎢ in Sydney, 453 people/㎢ in Melbourne, and 443 people/㎢ in Canberra, which are far below 15,428 people/㎢ in 23 wards of Tokyo, 8,358 people/㎢ in Singapore, and 11,000 people/㎢ in New York. Although Australia, a resource-rich country, has a GDP of $57,000, higher than that of Japan’s $39,000, its economy has been affected by the Dutch disease for a long period of time. Thus, there is an urgent need for Australia to diversify its industry for future economic development. The Dutch disease is an economic phenomenon where the trade surplus due to the export of abundant natural resources causes the country’s currency to rise and the wages of workers to remain high, which eventually causes the manufacturing industry to lose international competitiveness. In fact, Australia’s automobile industry, which was once a major industry, has ended in 2017. In that context, I would like to explain how Australia has achieved national operations despite its low population density and has created new industries.

① A clear investment and management policy that supports low population density

Many industries are not suitable for countries with low population density. For example, the installation of mobile phone base stations, electric vehicle charging facilities, retail chains, and public transportation systems are not cost-effective when the population density is low. So far, Australia has stuck to its own policy not to invest and manage such businesses. For example, trains only run to downtown Sydney and Brisbane from the international airport; to get to other cities, one will need to take either a taxi or a bus from the airport. Other than that, gas stations are unmanned, and retail stores close early or during times of lower foot traffic.

② Technology that supports low population density

Australia has developed many technologies that support low population density. For example, there are technologies that support gyms to operate 24 hours a day and technologies that automate agriculture. Among companies that provide or support such technologies, the company called Myriota that provides IoT satellite technology is attracting attention. The company is a venture company that spun off from the University of South Australia in 2015 and aims to build a large-scale, yet low-cost and low-power satellite communication network that uses micro-satellites. Its technology is currently being applied in a wide range of areas, from monitoring wind power plants to monitoring farm water tanks. It has raised capital of more than AUD 50M to date, backed by investors such as Singtel-run VC Innov8 and Boeing.

③ The role of the federal government and state governments to create new industries

The key points in creating a new industry in Australia are the federal government’s management of industrial portfolios and the state’s focus on specific industries. Business areas of start-ups responsible for new industries are dispersed across regions even if there are some overlaps. For example, FinTech in New South Wales, Agri (Agricultural) Tech and Health Tech in Victoria, and Clean Tech and Space Tech in South Australia. The Premiers and their respective state governments are also devising ways to develop the towns so that the industries they focus on can grow to their full potential. For example, in South Australia, the Stone & Chalk, an incubation hub, is within a walking distance from University of South Australia, University of Adelaide, and research institutions. Myriota introduced in ② is a university-based startup was born and is evolving in such an environment. We hope that you can use the case study of Australia as a reference to create new business opportunities in the Post-COVID Era. If you have any questions or comments, please feel free to contact us. Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Digital transformation is about positioning companies to fully lever the opportunities new age technologies present

As interest around digital transformation heightened, we observed that companies have started to use digital transformation loosely for their digitization initiatives which have undermined the power and importance of digital transformation. Digitization essentially refers to the process of converting information from a physical format to digital one to automate processes or workflows without any different-in-kind changes to the process itself. Digital transformation, on the other hand, is about exploiting digital technologies to create new or modify existing business processes, customer experiences to meet changing business and market requirements. It means two things at the highest level. Firstly, digital transformation is about exploitation of what the company is already good at doing by transforming its core business using digital technologies to conduct business better, faster, cheaper and more effectively. Secondly and more importantly, it’s about building new businesses by stepping out of the core and creating something that did not exist by exploring new and adjacent business opportunities.

Irrespective of the industry, digital transformation is a business imperative

Even if the company’s business and mission don’t change much over time, we have seen time and again that companies always need to be looking ahead for new ideas and new ways to accomplish familiar tasks because technology is a massive value creation lever and traditional competitive advantages are becoming fragile.

Technology is a massive value creation lever

In the past 15-20 years, digital technology made it cheaper for businesses to store, process, and communicate information in digital form. We also noticed that there is a positive correlation between technology investments and gross margins of a company. Our observation also aligns with the Harvard Business Review study that focused on financial services industry, which found that digital leaders outperform digital laggards by 13% in developed markets and 15% in emerging markets in yearly revenue growth1

Traditional competitive advantages are becoming fragile

Technology has deconstructed the links in the vertically integrated value chains of established industries and lowered significantly the barriers for entry, especially for new digital attackers. This has led to a drastic change in the competitive landscape for established companies. New startups are becoming very good at capturing value from market leaders, especially those that felt a bit too comfortable in their stable, slow-growing plateau. For instance, telco operators face challenges from players such as WhatsApp, which drastically affected their traditional short messaging service business. The advantage that companies have historically enjoyed by being the share leader of their markets is not sustainable anymore. Today, only 7% of companies that are market share leaders are also profit share leaders, down from 25%in the 1960s2.

For a successful digital transformation, companies need a holistic approach

Exploit the core – automate existing processes and rethink how value is delivered to the end user With increasing pressure on companies to become leaner, companies need to manage legacy businesses efficiently. While digitization can help companies with efficiency and getting to operational excellence, it must go hand in hand with enhancing customer experience. A study from the MIT Sloan School of Management found that companies that increase both digital operational excellence and customer experience outperformed industry average net margin by up to 16%3. For instance in 2012, AIA Singapore, a leading insurance company launched the world’s first fully mobile interactive Point of Sales (iPoS) system on iPad4. The adoption of iPoS went beyond the company’s expectations. Within 12 months of launch, 80% of the new business came through iPoS and the net impact to the business was three fold5. Firstly, agents closed more deals, secondly, turnaround times were a fraction compared to paper based approaches and finally, back office costs were much lower.

Establish a strategy to explore and exploit adjacent digital growth opportunities

Companies often focus on exploitation of their current (core) business activities and neglect the need to explore new territories and enhance their long-term viability. Instead of trying to cope with disruption when it happens, you can attack digital disruptors by creating a digital disruptor of your own by leveraging on your assets and brand to create a model disruptors cannot copy. Research shows that over a 10 year period, explorers grew 6% faster than exploiters, and delivered 2.4% higher total shareholder returns6. You can explore adjacent digital growth opportunities internally through R&D departments or setting up new independent business unit, or you can rely on your eco-system to source ideas externally through acquisitions, partnerships and running incubation labs. While exploring new business opportunities however, you need to avoid the perpetual search trap – continually searching for new ideas but failing to commercialize them – by engaging in relevant innovations, selecting opportunities that fit your capabilities and focusing on monetization of the innovation. Tetra Pak, market leader in the food processing and packaging business, best known for manufacturing of food and drinks packaging is a good example of how an established company is exploring and exploiting adjacent business opportunities. Leveraging on its market position, knowledge of the food and beverage industry, new advances in technology, Tetra Pak through its Industry 4.0 initiatives is preparing for the digitization of manufacturing. It has collaborated with other established players in the market like ABB to offer efficient energy management Industry 4.0 solutions to food and beverage industry which is expected to deliver US $5007 billion in value by 2022.

Define organization structure and processes that support digital transformation

Firstly, becoming digital requires a massive change in how an organization thinks and functions. For executing a digital transformation agenda, companies require a whole new set of capabilities –ambidextrous (the ability to foster both explorative and exploitative behaviors) leadership, fast execution, experimental mindset, trial and error approach. Secondly, companies need to ensure right structural framework is in place to support the digital transformation agenda. While there is no one right approach, based on our experience, it is ideal for companies to create a separate team that is independent from the established business units to explore new possibilities, while having access to its existing corporate assets (e.g. client base). The digital activities must be allowed to run in parallel and sometimes in competition with other business units. When the new business is proved viable, it can be quickly scaled and integrated into the organization. Last but not the least, organizations need to adopt new way of working suited to the needs of the digital age. Unlike traditional practice that follow a hierarchical structure where decision making is slow, companies must rely on small execution units and allow for more autonomy by practicing agile at scale to keep up with change. This allows companies to keep the organization adaptive over time, decreases the risk of taking the organization in the wrong direction, gives high visibility on what value every team is creating, allows companies to focus on minimum viable product at every stage and realizes business impact early with early releases and faster time to market.

Successful digital transformations in the industry are far and few

According to Forbes, 84%8 of digital transformations failed and more than 50% did not go right at all – the gap between expectation and actual implementation were so enormous that those implementations were considered a failure. Three major reasons for those failures are described below. Leaders fail to fully grasp the level of uncertainty in their industries when technology led disruptions are in play Unfortunately, many business leaders underestimate the exponential progress of environments they are operating in while embarking on digital transformation journeys. With large organizations operating in multiple markets with multiple lines of business that work in specific environments that change over time, leaders often miss choosing the right approach to winning in the right part of the business at the right time.While embarking on the digital transformation journey, it is critical that business leaders carefully evaluate the environment they are operating in and choose a combination of approaches their businesses need and run them simultaneously.

Companies take a technology first approach instead of business first approach

Many companies across industries are adopting digital technologies like analytics, cloud, mobile, social media and more recently Internet of Things (IoT) to engage customers innovatively, provide greater possibilities for their employees and optimize or redefine operational models. While it is fascinating and heartening to see how digital is revolutionizing several industries and the very nature of businesses itself, companies must also realize that digitalization potential varies across businesses and industries. A comprehensive view spanning front office, mid office and back office is essential to define and drive business and operational outcomes. Trying to adopt digital technologies just because your competitor or industry is doing so will not yield the desired benefits, especially in the absence of a business-focused goal.

Companies run a digital transformation agenda with traditional processes

Having a strategy and technology is insufficient for companies to achieve digital transformation fast enough or in a good enough way. Digital transformation is a fundamental shift in the way people think about how they interact, collaborate and work. According to Forbes, a large part of companies failed at digital transformation because these companies were not prepared to change traditional processes. Digital transformation efforts fall flat when companies do not spend sufficient time changing people’s behaviors, culture and how people make decisions. Companies that achieved successful digital transformation identified adaptation to agile ways of working as the critical underlying secret of their successful digital transformation.

Looking ahead

While successful digital transformations are hard to attain, the benefits are extremely rewarding. To stay relevant, companies need to balance both exploitation and exploration and adopt implementation strategies based on the environment their business is exposed to. While doing so, companies need to ensure that the right structures, processes and ways of working are adopted to support the digital transformation initiatives.

How can IGPI help you in your digital transformation journey?

We understand that technological changes and digital transformation are quite challenging for companies. With this article, we hope you get a deeper understanding of the key constituents necessary for a successful digital transformation program. While these are key underlying themes, there is also no “one size fit all” approach and companies need to employ different strategies based on the unique needs and environment they are operating in. IGPI is known for our corporate turnarounds and transformations and we will be delighted to assist you in strategizing your end-to-end digital transformation initiatives. Our non-exhaustive list of digital transformation capabilities include:

• Assessment of company’s position in terms of its digital capabilities relative to competition by benchmarking with traditional and emerging competitors and making recommendations on areas of improvement
• Market research on the technologies that can impact/improve the service offerings of the company and potential ways of implementation
• Developing and validating existing and evolving consumer behavior and preferences
• Reevaluate the existing processes and tools (to free up capital) that support businesses and identify areas of improvement
• Conceptualize new business models through running ideathon to tap on market opportunities
• Execute an incubator or accelerator program that suits the needs of your organization

Case study:

IGPI’s digital transformation advisory support from identifying opportunities to offering execution support

Our client, a global financial institution that serves customers in more than 30 countries wanted to explore opportunities presented by latest technological advances to drive both top line and bottom line growth

 

Key takeaways: 1. Exposure to technologies and understanding how those technologies can benefit the client is essential. IGPI was able to convince the management why it must look at AI and target automotive segment – to increase revenue and reduce costs 2. Companies often do not have the necessary skill set in technology required for exploring opportunities presented by advanced technologies like AI, IoT and big data. The Japanese client was convinced that it’s in its best interest to collaborate with the ecosystem 3. The new business idea can cannibalize the existing revenue of the company. IGPI was able to convince the management to separate operations

About the Authors

Chong Han is a Senior Manager at IGPI Singapore. Chong Han’s career started in 2008 in the M&A advisory arm of a global professional services firm, with a focus on valuation advisory relating to mergers and acquisitions, restructuring, financial reporting and litigation support. Thereafter, he joined a SGX-listed regional real estate player, investing in lands for development and properties for redevelopment or holding. His experiences and skills span across a wide spectrum of investment activities such as market analysis, due diligence, valuation, and financial modelling and transaction execution. Divya is an Associate at IGPI Singapore. She started her career with Tech Mahindra (then Satyam Computer Services Limited), a leading Indian IT services provider in their technology advisory services team. Later she worked with leading companies in Singapore – Prudential, AIA and Tetra Pak in their IT departments. In a career spanning 15 years in technology, she has participated in several digital transformation initiatives in various roles. After attaining her MBA from National University of Singapore, she joined IGPI where she works on strategy projects.

Notes

1. What the companies on the right side of the digital business divide have in common; Harvard Business Review, Jan 2017
2. Adaptability: The new competitive advantage; Harvard Business Review, Aug 2011
3. Is your company ready for a digital future; MIT Sloan Management Review, Winter 2018 issue
4. https://www.aia.com.sg/content/dam/sg/en/docs/press-releases/2012/AIA_Introduces_First-in-Market_Technology_to_Insure_Customers_as_Fast_as_Within_One_Day.pdf
5. http://ecbeez.blogspot.com/2013/06/aia-singapores-ipos-on-ipad-first-in.html
6. Tomorrow Never Dies: The Art of Staying on Top; BCG Henderson Institute, May 2017
7. https://inside-packaging.nridigital.com/packaging_jan19/industry_4_0_how_tetra_pak_is_adapting_to_digital_manufacturing
8. Why 84% of companies fail at digital transformation; Forbes, Jan 2016

About IGPI Singapore

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a  €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. Get in touch with us on digital transformation, strategic planning and M&A related topics!

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This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.