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Bamboo Innovators: R.E.S.-ilience in Value Creation

Bamboo Innovators: R.E.S.-ilience in Value Creation

24 February 2013

KEE Koon Boon (bambooinnovator@gmail.com)

If only stock price behavior and the firm value creation process was resilient like the bamboo. In emergencies such as a storm, typhoon, or earthquake, the wise ones would head for the bamboo grove. The ground is held firm by the dense mass of interlocking “rhizomes”, or the intricate underground root structure of a bamboo. Bamboos bend but not break in the wildest storms that snapped the mighty resisting oak trees, its leaves blow in the wind but do not fall; it survives and therefore it conquers.

Resilience is rare in companies, even among successful ones. During the 2007/08 Global Financial Crisis (GFC), the S&P 500 Index and Morgan Stanley Asia Pacific ex-Japan Index (MXAPJ) were down 52 percent and two-thirds respectively over a period of 15-16 months from their peaks in November 2007 to their lowest points in March 2009. Despite the strong market rebound since, while the S&P has recovered to its pre-GFC peak level, the MXAPJ is still down around 20 percent. An intriguing unexamined question remains: during the worst of storm, is there a group of companies whose stock prices have fallen far less than the index or even rose – resilient just like the bamboo – and why? And for those who went on to surpass their previous pre-GFC peaks significantly, what are the underlying business fundamentals that enable them to grow and scale up?

These resilient growth firms are Bamboo Innovators, outperforming primarily because of their innovative business models and proactive corporate culture. Studies rife with survivorship-bias abound in examining – and extrapolating – the multiple factors behind the “long-term” performance of firms. Just as character is ultimately tested in periods of crisis and in the inevitable traumatic knocks of life, past contributing success factors may prove fragile and fleeting especially in disruptive upheavals and previously successful firms are unable to bounce back to scale greater heights. Instead, they remain in a state of protracted consolidation or even decline, whereby the very optimization that made it so successful is now maladaptive, confounding conventional rigorous analysis. There is much more to resilience than simplistic oak-like strength, which is achieved typically by efficiency in the hardening of assets of a system.

The study of these Bamboo Innovators globally and in Asia can bring fresh thinking and redefinition about firm innovation, its underlying sources and dynamics, in the face of dramatically changed circumstances and punctuated crises. The key objectives are three-fold: one is to propagate the core ideas in the findings in companies to enable them to be productive innovators in order to surpass stall points in tumultuous periods, particularly among SMEs aspiring to scale up to be regional or global champions; the other is to use this powerful lens to view the value creation process afresh and make predictions to continually find emerging evergreen Bamboo Innovators; the third is to adapt the timeless principles in us all to become a more emotionally engaged innovator-leader, Bamboo-style.

R.E.S.-ilience framework in value creation

A checklist approach in examining “successful” companies might overlook the resilient Bamboo Innovators. After all, there are much larger impressive trees in the forest. By comparison a bamboo looks smaller, thinner, and fragile. The list of Bamboo Innovators is a surprising one; many of them are not the typical ones that one would come across. While the details are always different, certain features of the Bamboo Innovators are remarkably similar to those that resulted in the astonishing vitality in bamboo: the R.E.S.-ilience factors in value creation.

  • R stands for “Rootedness” in cultivating a culture of kindness, trust and cooperation to contend with and heal creative dissent and incentivize innovative experimentations.
  • E for “Emptiness” like the empty hollow center of a bamboo in having (1) “indestructible intangibles” which in turn derives its strength from either a certain know-how or trust and support in the community; (2) a “core-periphery” network; and (3) an “open-innovation” business model in which both internal and external partners co-develop new products and creations
  • S for “Sheath” in leadership to create the context, adaptive-govern, coordinate, synthesize and weave diverse networks and groups who might otherwise be excluded into a coherent whole, rather than the typical command-and-control “positional/title-based” leadership .

“Rootedness”

A culture rooted in kindness definitely seems incompatible in a harsh, competitive business world. But kindness is trusting and ready to risk in new innovations. Without kindness, Google’s web-based email Gmail would have been an aborted project and died. Gmail was a surprisingly result of insubordination, initial widespread dislike amongst the vast majority of “team” members – and a triumphant culture rooted in kindness towards the iterative experimentation with ideas. Created by Paul Buchheit, Google’s Employee No. 23 and the one who famously came up with the “Don’t Be Evil” motto for Google, Gmail “innovated” with a concept which was in existence at the time but not believed viable by most companies: linking ads to the content of an email to bring about monetization and commercialization. When Buchheit told his supervisor of his idea, the VP of Search Products and User Experience shot it down and asked him not to proceed. Buchheit, convinced of the potential of this new product, ignored his supervisor’s orders, stayed up all night (until 7.am) to finish the ad integration component. The Gmail work also subsequently led to the multi-billion-profit AdSense content targeted ad product for Google.

Buchheit was handsomely rewarded for the innovation and “retired” from Google at age 30. Gmail, along with Google News, Orkut, Google Finance and AdSense, were all originated from Google’s “Innovation Time Off” intrapreneurship program whereby engineers can spend 20% of their time working on personal projects unrelated to their primary assignments, “a license to pursue dreams”. It is unusual for companies to trust employees to use their free time productively; in fact, any free time should be soaked up to be “productive”. Google knows that the 20% time is a costly program that is difficult to monitor and they trust the employees to use their time wisely. To trust is to be kind to others – and making ourselves vulnerable. When someone or a place has more faith in us than we have in ourselves, we feel uplifted, because that faith helps us discover in ourselves a trait or ability we perhaps did not know we had. While there are some outstanding successes, a large proportion of such time may well be unproductive. This “failure” is the cost for a few successful innovations. Empathy and tolerance towards failures, frustrations and sufferings are rooted in kindness. A true test of kindness, which is harder than empathy towards failures, is joy at other people’s success – a rare virtue that Buddhists call mudita. A typical response to innovation is that once the “leaders” understood that midlevel functionaries in an obscure initiative were going to become the highest-paid executives in the corporation, their enthusiasm for the project could disappear overnight.

Kindness is like water nourishing the powerful roots of bamboo. Bamboos are found most abundantly along the waterways, among the rice paddies, in coastal regions where they can be bathed by sea mists, but rarely in dry places. And it is the invisible intricate underground root structure that makes the ground around a bamboo grove very stable – and make possible the flexibility and adaptability of the bamboo to bend, not break, with the wind. Just like innovators with their ideas and experiments bending with resistance. Adaptability to the present reality means accepting the frustrations and failures that come from innovative experimentations. We can then open to the new, to paradox and the absurd. Kindness is an inner revolution; as is innovation. We become more fluid, more willing to risk. We are able to let go of old models and the beliefs we are most fond of, and we become humble enough to start and learn all over again. We also put less in our possession and more in people. The boundaries between us and others begin to merge, so that we feel engaged and committed as part of a whole in which it is possible to share resources, emotions and innovations.

“Emptiness”

“Emptiness” in business model is perhaps the most misunderstood and underrated virtue in resilient growth and value creation. Bamboos are among the fastest-growing plants in the world. And there is nothing quite like the sight of emerging bamboo shoots breaking through the earth’s crust to reach for the sun. Remaining underground for the first several years, bamboo has been clocked surging skywards as fast as 47.6 inches in a 24-hour period. The vitality of its growth revolves around its “emptiness”. Instead of sanely constructing itself inch by solid inch like trees, soberly climbing into the contested forest air, bamboo sprints sunward to complete stature in about two months. After this initial vertical burst, bamboo unfolds branches and uncoils leaves to capture the sunlight it leapt up to get. The nutrients and moisture that would have been exhausted making and maintaining this empty center can be utilized for growth of other culms (stem). As a survival tactic among many plant species reaching up to compete for available light, the growth pattern of bamboo is shrewdly designed. From a builder’s viewpoint, the architecture of the bamboo culm presents a powerful configuration: fibers of greatest strength occur in increasing concentration toward the periphery of the plant.

Consider the case of Japan’s Ohsho Food Services (Ticker: 9936 JP), which displayed resiliency by rising 6% during the 2007/09 GFC period when Nikkei index was down from the peak in July 2007 by 61% to March 2009. The “Gyoza Dumpling King” with more than 600 restaurants nationwide in Japan went on to exceed its pre-GFC peak by over 90% to a market value of $620 million while the Nikkei is still down 38%. Ohsho innovated and created value from “emptiness” in a core/periphery business model during difficult times. In the restaurant chain industry, most of the menu development, promotions and event planning take place at the headquarters rather than at the store. At Ohsho, it has been left in the hands of the store manager who firmly grasps the market needs of the region. Instead of scaling up by developing the center to “manage” the individual standardized stores, Ohsho believe in the store managers and employees to build up a store of their own wisdom with the “one-shop, one-of-a-kind” philosophy to assimilate into the local community of consumers and for that unique shop to “be loved forever.”

Employees of each store are required to think for themselves how to delight customers in exploring and implementing innovations in terms of cooking techniques, devising menu, taste of food, in-store atmosphere and planning events. To enhance flexible response and agility, information about the successful and failed innovations and operations at each store is shared by an online network to all stores in a transparent environment that encourages validated learning. Whilst store individuality and institutional independence of employees are embedded into the business model, what does not change at the “core” for its “periphery” is the “creed of the three kings”: food that is delicious, cheap and quick, reinforced by a fresh handmade dumplings policy. Since the founding of the first store in Kyoto in 1967, Ohsho stressed its signature dumplings are to be handmade wholeheartedly in front of the customers’ eyes without resorting to frozen food which creates “waste”. In Japan, children grow up eating homemade food cooked by their loving mother and they wish to create this feeling at each Ohsho store. Ohsho has its own logistics system to deliver fresh and semi-processed ingredients to ensure quality as it scales up its geographical footprint. A proactive human resource support is also developed to help franchisees and store managers grow. New employees are required to go through a controversial five-day Sparta-like training at the Ashigara facility located in the mountains of Kanagawa Prefecture where employees have to scream a three-minute speech about “My Ambition” – to be the store manager in one year. Employees were seen crying and hugging each other in the end, like a motivational seminar.

The same “emptiness” in a “core/periphery” business model has transformed Japan’s convenience store operator Lawson (Ticker: 2651 JP), which was heading towards bankruptcy in 2002, into one of the most innovative companies in Japan with a market value of over $7.3 billion. Like Ohsho, Lawson was up during the GFC storm when Nikkei plunged 61% and it went on to double its pre-GFC peak. Upon taking over in 2002, CEO Takeshi Niinami found out that overly strong headquarter-centric management led to low motivation of the rank and file. Isao Nakuchi, the original founder of Daiei Group who brought the American Ohio-origin Lawson chain to Osaka in 1975, was such a charismatic leader that most of the people under him were used to being given orders from the top. Yet, the Tokyo-HQ management had a hard time understanding the specific needs of local customers. The 1,900 miles of land and sea that separated the northern and southern tip of Japan resulted in geographic, climatic and cultural diversities that only local management could capture. Niinami-san discovered that his people knew how to better solve problems using their local knowledge than the standardized operational know-how directed from HQ. So he delegated decision-making authority on day-to-day functions, such as merchandising, sourcing, store development and local marketing, to “energize” the front-line and changed the corporate philosophy into “Happiness and Harmony in our Community” to stress the importance of front-line staff in serving the customer. Importantly, store managers and supervisors are given a free hand to source 30% of merchandise locally while 70% continue to be nationally sourced by HQ. By empowering people with the “you’ve gotta decide” mentality, the “periphery” started to sense their own state and became more motivated and productive. As a result, new innovative store formats and new product categories, such as fresh fruits and vegetables, pour forth to target new demographics beyond teenagers and middle-aged men by attracting the elderly and female consumers to meet the changing socio-economic trends. Half of the 10,000 Lawson stores nationwide now sell a range of fresh vegetables and fruit, compared with around only 1,200 in fiscal 2009. New format stores, such as Natural Lawson, which offers healthy deli items and organic products targeting health and beauty conscious customers, and Pharmacy Lawson with a dispensing pharmacy to serve the aging population by providing them healthy food items, now account for over half of the stores. A closer connection to the consumer base was forged and Lawson gained greater recognition as a neighbourhood store who knew their needs intimately.

At the “core”, Niinami-san also abolished the seniority system and implemented total meritocracy in the HR management system. Keenly aware that “innovation occurs at the boundary” and that “diversity is one of the most important elements for innovation”, Niinami-san created a culture to actively recruit women as well as foreign nationals from 2006 onwards and half of their new hirers are women and nearly one-third are non-Japanese.  The “Lawson University” was also set up with training programs focusing not only on operational skills for store managers and supervisors but also leadership development and strategic thinking. By 2011, leadership programs had grown to include franchise owners, who run 80% of the 10,000 Lawson stores, and crew members. Lawson HQ also played the role of venture capitalist, providing various supports to entrepreneurs-franchise owners with a desire to expand their business with innovative service and new business models in the “Management Owner System” launched in 2009. One of the most successful Management Owners is only 29 years old, running 31 stores with annual sales of about $70 million and preparing to list his company on the JASDAQ stock exchange. Lawson also seeks to become the world’s first double “O2O” (online to offline and offline to online) enterprise in retail industry by fully utilizing their deep customer knowledge from our real store operations with loyal consumers. Bamboo Innovator Lawson achieved 10 consecutive years of operating profit growth with compound annual growth rate of over 7% and ROE over 15%, far higher than the Japanese average.

The alternating pattern of intangible (hollow emptiness) internodes and tangible (solid) nodes gives the bamboo culm great strength, light weight and flexibility in a raging storm. The upward climb of the bamboo is attained by throwing a horizontal truss across at distances carefully determined by stress levels in the ascending culm, hence the expression “the bamboo blossoms at ever higher nodes”. In the same way, Japan’s mayonnaise king Kewpie (Ticker: 2809 JP, $2 billion market value) leveraged upon its deep intangible knowledge about eggs, the main ingredient of mayonnaise, from handling over 10% (250,000 tonnes) of eggs in Japan over two decades, to pursue the full use of eggs to expand into new product categories and new customer segments without breaking the stress levels of the business model. Through fusing the proprietary technologies, products, information and marketing channels of the group akin to the alternating pattern of bamboo internodes and nodes, the resilient growth at Kewpie came from creating related table-top dressing and kitchen-use products in salad condiments, salads and cut vegetables, ready-made delicatessen, and cultivating latent demands such as nursing care food products for the elderly and baby food. In its fine chemical products business, Kewpie develops medicine stabilization technology using egg-yolk lecithin capsules and extracts hyaluronic acid from eggs that is used in cosmetics and in the medical treatment to strengthen functions in joints, such as knee osteoarthritis, and dry eye.

There is a similar resilient growth pattern at other Bamboo Innovators such as online price-comparison site Kakaku.com (Ticker: 2371 JP, $2.2 billion market value) or online medical information service provider M3 Inc (Ticker: 2413 JP, $2.8 billion market value). Kakaku.com was started in 1997 by Mitsuaki Makino as a website which lists the retail prices of Akihabara, the Japanese electric market. Building upon its intangible quality – its trustworthiness and reliability amongst the Japanese community of consumers, wholesalers and retailers as an informative site which shows the best deals of electrical products – Kakaku.com is able to grow into new areas such as insurance, forex currency trade and finance site, restaurant ranking gourmet site tabelog, word-of-mouth travel site 4travel, last minute hotel reservation site yoyaQ.com, real estate and housing information sites Summaity and Mansion DB and so on. M3 started out with its core MR-kun service, which is like a Google for medical professionals, used as a marketing tool by pharmaceutical companies to provide consistent, repeated delivery of information on products and diseases. MR-kun also provides a channel for companies to receive questions and feedback from doctors, strengthening company/doctor relations. Pharmaceutical companies signed up for MR-kun pay a basic annual fee of ¥70 to ¥100 million ($0.75 to 1 million) per electronic “e-detailing message,” which is the online equivalent of a sales visit by a MR (medical representative) to a physician’s clinic. In the pharmaceutical industry a sales visit by an MR to a doctor’s clinic is called a detail. M3 also charges fees for the production of promotional content and receives fees for other services such as facilitating the exchange of messages between pharma company MRs and their physician clients. A dominant platform used by 80% of Japan’s physicians, MR-kun is rated by over 92% of its users who said its usage “deepened their knowledge of diseases”. With this intangible trust built up amongst the community of users, M3 is able to leverage this relationship with its members to develop new online tools. These include online tools in clinical trials to determine the feasibility of trials and help with patient recruitment, market research and survey panels, and online job search and career information site for member doctors and pharmacists. M3 even expanded from B2B to B2C by providing a range of services for consumers including AskDoctors.jp, a subscription service that gives patients a chance to ask doctors questions about their ailments, and iTicket, whose more than 500,000 members use the service to make reservations at clinics. Both Kakaku.com and M3 Inc are up 370% and 200% respectively from their pre-GFC peaks even when Nikkei is still down 38%.

“Sheath”

Sheaths are not the most obvious structures on a bamboo plant, but they are, perhaps, the most complicated. As the bamboo shoot breaks through the earth’s surface and reaches for the sun, it is covered and protected by a set of distinctive sheaths. Every soft and vulnerable emerging node of rhizome (root), culm, or branch bears a sheath that protects it during growth until it hardens. The outer surface of the culm sheath is usually tough while the inner surface is always smooth and glossy which allows the internode to rise rapidly through its casing. Similarly, upon crafting the culture and creating the context for resilient growth, sheath leaders play the role of protecting emerging nodes of innovation at the periphery from harm. An illuminating example would be how Singapore’s founding Prime Minister Lee Kuan Yew cleared the political obstacles and laid the ground to allow for the innovations devised by his key economic architect Dr. Goh Keng Swee to be implemented, as commented by Lee himself in his eulogy for Goh on 23 May 2010: “He [Goh Keng Swee] was my trouble-shooter. I settled the political conditions so that his tough policies we together formulated could be executed.”

Like its tough outer surface, sheath leaders are brutally honest in recognizing a problem rather than to pretend there is none. In a conservative Japanese culture, Niinami-san was unusually candid by using the word “failed to” repeatedly in highlighting Lawson’s performance, such as failure in rolling out initiatives to boost franchise owners’ motivation, in his presentation to investors during fiscal years 2003 to 2006 and discussed extensively about the improvement measures. Without gratitude, honesty cannot be brought out meaningfully, since gratitude is the ability to see value even in humble, unremarkable and problematic situations as areas to improve through providing his or her service. Gratitude is antiheroic. It does not depend on courage or strength or talent. It is based on our incompleteness and born only where solidarity and the awareness of problems are present. If we are honest and do not hide it from ourselves, we can proactively work to receive the goodness and opportunities that life offers us and we can be grateful.

With its smooth inner surface, sheath leaders are able to weave diverse networks and groups who might otherwise be excluded into a coherent whole, quite unlike the typical command-and-control “position/title-based” leadership Most people regard individual bamboo culms as trees, each a separate, living whole. In fact, the stems are airy branches of a single life whose structural foundation is underground, invisible. Apparent individuals are members of a system of inter-survival, a tuft of giant grasses: sharing, cooperative, striving for the common good of the grove, gathering and storing resources in rhizomes, to be sent then to the most active centers of new growth in the grove, the “bamboo kids” or takenoko, as the new shoots are affectionately known in Japanese. Consider the case of P&G’s Olay Vitamin brand. This innovative product was a result of P&G alumni Brent Bailey facilitating a licensing deal between Pharmavite (part of Japanese pharmaceutical giant Otsuka), which he then served as the president and COO, and P&G in 2003. Historically, when people left P&G, they were shunned and ostracized as “traitors”. But when A.G. Lafley became CEO, he planned for former employees to officially participate in reunions as he realized that they were “extremely valuable allies” to weave into P&G’s network, as was the case for Bailey in the Olay Vitamin innovation. Sheath leaders are able to give voice to the unpopular, unconventional, unorthodox views to foster innovation.

Bamboo is an ancient resident of earth, here before people by some 100 to 200 million years. Its “root-like” rhizome and “hollow” culm is perhaps the hardiest and effective natural structure to evolve in millions of years of restless experiment in cellular life on earth, and the most efficient laboratory that has yet appeared for braiding sunlight, water, and soil into forms which have for centuries proved immensely useful for human needs. Bamboos bend, not break, and remain evergreen even with the onslaught of the atomic bomb. The world’s first atomic bomb over the city of Hiroshima on August 6, 1945, has destroyed streets and houses, charred trees and grasses to bits. Yet, one living thing stood out. In the very epicenter, a thicket of bamboo stood through the blast, suffering only one side to be scorched. The sight was an immeasurable encouragement to the war-shattered citizens. A portion of the bamboo plant is now housed in the Memorial Museum for Peace.

A series of articles will investigate and highlight the top Bamboo Innovators around the world in why and how they are able to create massive value during periods of disruptive upheavals and unorthodox challenges. While the specific application and context changes, the enduring R.E.S.-ilence principles in value creation at these Bamboo Innovators remain relevant and evergreen no matter how the world around us changes. The sage Confucius was reputedly so absorbed in his investigation of bamboos that he forgot to taste meat for three months. He remarked to a friend, “People get thin without meat, but without bamboo they get vulgar”! As with all serious quests, the sought turns out to be the seeker. I hope that the ideas in Bamboo Innovators will come alive not when we “taste” them but when we feel them from inside of us and discover contextually-relevant forms for ourselves. “Give me a lever long enough and a place to stand and I’ll move the world,” says Aristotle. The long lever we choose to innovate in the world is hopefully the Bamboo; the place where we stand is Emptiness – when we empty our heart of prejudices, pride and fear, we become open to the possibilities to innovate – and Emptiness is rooted in Kindness and Trust.

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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