Chapter 48 - Lui Che-woo: Creating Value: The Journey of a Self-Made Billionaire: The Authorized Biography
Today’s Chapter is based on the book “Lui Che-woo: Creating Value: The Journey of a Self-Made Billionaire: The Authorized Biography” by Lui Che-woo, the founder of Galaxy Entertainment Group, one of the largest gambling operators in Macau.
Here’s what I have learned from the book:
Observe
“I have always felt that wisdom is in the air. Structured learning is fine. But you can pick, you can distil, wisdom by yourself. However, to do that, you have to hone your senses, listen more carefully, smell more deeply, see more sharply, and through that try to distil the wisdom from the air.”
— Robert Kuok
Lui Che-woo first started his business career at the early age of 13. He quickly understood a basic principle of running businesses: “focus on observation and seek opportunities from the real environment.”
As a matter of fact, he started selling snacks due to a simple rationale after a long period of observation and deep thought: “the food business is a lifelong endeavour. No matter how difficult life gets, people still need to feed themselves.”
Despite his young age, he had a competitive advantage compared to his competitors: he had a keen observation of society and life. This allowed the young Lui to find the perfect location to reach his customers and to resell peanuts; “The fact that he decided to peddle peanuts was based on what he had observed. There were many people trying to return to their homes in Mainland China now that the war had come to Hong Kong. The queue to apply for travel documents would invariably be long. Lui knew that the people waiting in line would want to snack on something, such as peanuts. So demand gave birth to his business.”
“We need to understand what people and the society need, and then we find ways to meet their needs,”
— Lui Che-woo
Furthermore, when he was running his snack business, Lui enjoyed walking back and forth through Shanghai Street where shop owners sold grains and groceries on the street. Lui’s purpose was to study how shop and stall owners ran their businesses and to learn about their success formula through deep observation.
Later in life, Lui also worked as a stock keeper in a car-parts shop. While for most people the job of a stock keeper was simple and boring, he took it as an opportunity to use his keen observation skills to learn about the business. While others were finishing their work and leaving on time, Lui would stay at the shop to “familiarized himself with the products that were in high demand, and learnt about those which nobody wanted. He understood the underlying reasons from observing and chatting with others.”
From reading Lui’s story, it is fair to say that his keen observation skills were one of the key principles to his success as a businessman as it provided him with the ability to identify opportunities and to learn from others’ success in order to innovate his own businesses.
The other two qualities for success mentioned by Lui are perseverance and fighting spirit. As he once said, “If you think you can do it, then you should persist and never give up. Although you may encounter setbacks, you won’t collapse.”
Lui is not the only businessman to mention keen observation as an essential part of their success. As we have learned from Robert Kuok, the founder of Shangri-La Hotels & Resorts, upon careful observation, he first started his business around the simple trading of three basic food commodities: rice, sugar and wheat flour. His reasoning was that it was important to focus on products for which there are a large market and for which demand is sustainable. As such, considering basic processed foods such as sugar and flour were the base of any diet, they were great products to do business in.
Kuok especially got into trading sugar as it was a volatile commodity where he could make tremendous profit due to sugar prices moving up and down like a yo-yo. Once again, he mentions that success in futures trading depends on one’s feel for the market. Obviously, this did not all come naturally to him, as he learned through experimentation and keen observation.
Another illustration of Kuok’s tremendous senses was his ability to simply complex business problems. For example, while he never studied hotel management, through his observation, he realized that the the hotel business is quite simple. In fact, he explains that “weary travellers need to sleep on a comfortable bed; they need to have a good bath; if they're too tired to walk 100 metres to a restaurant, you should provide some good food and beverage outlets for them. Everything else is a gimmick. It's really a hostelry pattern, just as when the tired, dusty horseback rider hitched his horse at the inn, ate and drank and retired to bed to awake fresher and recharged the next morning.”
“I could make the same statement about the need for simplicity in doing business in general. Mind you, I'm not saying that certain businesses are not more complex in nature, but I am saying that within a complex business you don't have to make it more complex. In each and every business, whether simple or complex, there are simple ways of tackling problems and operating the business. It's those who adopt convoluted ways who never get to the top, because they are tripping themselves up all the time.”
— Robert Kuok
Exploit
“Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”
— Warren Buffett
Lui Che-woo explains that when doing business, it is essential to not let any opportunity slip, especially when you believe it is profitable and when you have the resources available to make it work. He famously said that “in business, you must grasp opportunities.”
This concept of exploiting opportunities can be better illustrated by Lui’s experience at a car-parts shop. As mentioned above, as a keen observer, he was able to understand the reasons why a product would be in high demand and why another one is not wanted.
His ability to use thought experiments by asking himself “What would I do if I were the boss?”, allowed Lui to be ready when the right opportunity would come to him. As such, when the car-parts shop reached its end, Lui quickly proposed to purchase the company from the owner for a mere sum of HK$80,000. With no other options available, the owner had no choice but to sell it to Lui.
“When opportunities emerge, you must hit the bull’s eye by leaving no stone unturned.”
— Lui Che-woo
Lui Che-woo mentions that the formula for success is that “one must prepare well and pay attention to details. When opportunities arise, one’s preparation will pay off.” As mentioned above, keen observation skills were one of the key to Lui’s success. However, any information you learn through observation is only useful when you act on them. Insights obtained by observation are only considered an advantage if you take action.
As Charlie Munger once said, "One should be ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long. You should remember that good ideas are rare— when the odds are greatly in your favor, bet heavily.”
Another example of Lui’s being opportunistic was when he started building hotels in America. While there were some uncertainties, Lui decided to build a hotel in the heart of Silicon Valley due to his forward-thinking. He quickly understood that an opportunity to build a hotel in such a good location does not come often. As he explained to his son later on, “opportunities were hard to come by, so one should grab them even though the conditions may not be perfect.”
This should reminds us of what we have learned from Jeff Bezos who believed that most decisions should be made with 70% of the data you wish you had. As such, if you need to wait for more information before making a decision, you are probably being too slow and the business opportunity may slip away.
Similarly, we’ve learned from Chung Ju-Yung that “timing and action are the keys to success or failure.” In fact, he believed that luck is all about understand when to seize the right moment and that good or bad luck depends on how one manages time. He also believes that everyone, poor or rich, all have roughly the same amount of time to develop themselves to be prepared to take full advantage of a great opportunity.
The difference is that people who work hard are better apt to take advantage of good timing in contrast to lazy people. As a matter of fact, diligent workers, even during bad times, understand that they still need to make continuous effort in order to minimize or avoid adverse consequences. Whereas, lazy individuals will miss the opportunities presented to them during good times and are oblivious to dangers during bad times. Thus, hard working people are deemed to be always lucky compared to others.
“And within our lifespans, I believe each person also undergoes roughly equal amounts of good times and bad times. Self-development is contingent on one's ability to make the most of the good times through hard work and diligence. When times are bad, all we can do is assess our situation and carry on. By doing so, we can overcome the bad times without needing to rely on luck. The course of one's life is not determined by the timing of one's birth, but by the choices he or she makes in both good times and bad.”
— Chung Ju-Yung
Innovate
“Every day needs to be a journey towards growth. If we pause today, it is a step backward. We must move forward even if it means only one or two steps at a time. If we don't, we will be overtaken and soon find ourselves falling behind.”
— Chung Ju-Yung
Lui Che-woo believes that only innovation and creativity can transcend different times. As Robert Iger once said, “Innovate or Die.” However, in Lui’s philosophy, innovation isn’t solely about implementing new technology. He defines innovation as “using new concepts and methods to improve old things and create new value.”
As a matter of fact, Lui believed that the reason why he won over his competitors was due to the fact that he provided a different type of value to customers. By doing so, he won without directly competing against his competition; “I develop my business with innovation. I usually won’t engage in businesses that others have already established a foothold in. My theory of competition is not to compete with others, but to focus on areas in which I can make use of my innovation.”
For example, when he started his hotel business in the American market, he was determined to run his hotel business with a characteristic Chinese style. He explains that “Chinese culture is profound, and its impact on the world is deep, far and wide. Applying our unique and exceptional Chinese culture and art to the hotel business would give us a competitive edge.”
For Lui, one way of innovating was by being a keen observer: he was able to observe and learn from his competitors’ strengths and weaknesses. As Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” However, while Lui learned a lot from observing others, he warns us from copying competitors’ blindly. In fact, he mentions that “To entice people to buy from you, you must make your products more beautiful and tasty. Or else, nobody will buy from you; business grows only after you make enhancements.”
This can be seen in the way he ran his hotel business. His hotel management philosophy was to “Visit other places and learn from them, commit yourself to getting a good grasp of them, be creative and never copy from others.” He was so serious about this that he once visited Dubai with his son and after the trip, he asked his son if he checked out any design of the hotel rooms they stayed at in Dubai. When his son told him no, Lui told him to visit Dubai again and learn.
Another way of innovating is to invest in new technology. And, in Lui’s case, he quickly understood the danger of complacency and the need for innovation when he was running his quarry business K. Wah. Without it, he would not be able to maintain his quarry business in Hong Kong, especially considering the fact that he was competing against giants like Pioneer.
“Observe the surroundings well and never be complacent.”
— Lui Che-woo
Known as the “King of Quarrying”, Lui Che-woo, by using the Pareto Principle, concluded that his company only needed to focus on two things in order to stay in the quarrying business: “One was to lower costs and the other was to produce competitive products. Only producers who aim for low costs with good quality can survive. And a small company which is unable to control its costs will be walked all over. Thus they set their minds to push for the lowest costs among their competitors, and they worked very hard to achieve that.”
So how can one lower production costs? Lui’s solution was to focus on acquiring cutting-edge technology and machinery and to improve the effectiveness of production-to-sales processes. As a matter of fact, after years of experience in business, Lui realized that, in every industry, “one should not expect to succeed with a single constant formula. Business can only grow with new technology, new management and new business deals.”
In his book, Lui presents a great fictional character to remind himself of the need of constant innovation. He explains that he resents Mr Cha Buduo (”Mr. Close Enough”), who is easily complacent does things half-heartedly and that he prefers “Mr. Why” who is consistently asking questions such as “is there a better solution?”. By following the steps of Mr. Why, he would be able to find a better, unique answer to his problems.
Using new technology to lower costs reminds me of the story of Charles Schwab who started his company with one idea in mind: he wanted to build a business that would keep operational costs low to allow their customers, who were individual investors to purchase stocks at a low commission rate. But more importantly, it wasn’t about being the cheapest discount broker, it was about providing his customers the most value.
As such, Schwab was adamant in adopting new technology in his company. He quickly realized that if he wanted to achieve his goal of reaching zero commissions, he had to find ways to reduce operational costs and technology was one way of doing it. As such, he was always ready to invest in technology if it had a chance to increase efficiency and to reduce costs in the long run.
“People often ask why Schwab got into technology so early and in such a big way to make it a defining part of who we are and how we operate to this day. In some ways, necessity is the mother of invention. We had to get more efficient or we were dead in the water. When I first started Schwab and slashed commissions by 75%, I had just a vague idea that I could make it work. I knew it would take volume. It was also a factor of where we were. San Francisco and neighbouring Silicon Valley were all about technology. I was surrounded by people who thought adopting technology was as natural as childbirth. It was the air we breathed.”
— Charles Schwab
Defend
“Offense wins games. Defense wins championships.”
— Bear Bryant
While Lui Che-woo often encouraged innovation and creativity, his core business philosophy was all about defence and security. As a matter of fact, Lui preferred to proceed cautiously and to never fight battles that he cannot win. In that sense, he liked to move steadily rather than to move quickly.
As such, when facing business competitors, Lui believed in implementing Sun Tzu’s motto in the Art of War: “security against defeat.” Sun Tzu wrote that “The good warriors of old first put themselves beyond the possibility of defeat, and then wait for an opportunity to defeat the enemy. The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity to defeat the enemy is provided by the enemy himself. Thus the good warrior is able to secure himself against defeat, but cannot be certain of defeating the enemy.”
The way Lui built Galaxy Entertainment Group as one of the largest gaming operator in Macau is a perfect example on how to build a business by being cautious of defeat. Lui knew from the start that due to his inexperience in the gaming industry compared to his competitors, it would be impossible for them to compete in the beginning.
By consequence, Lui focused on building a solid foundation as it is the key to long-term business success. While others were focused on speeding development to become the largest or the fastest, Lui stayed calmly on the side and preferred to stick to his belief of “quality first, speed second” in developing Galaxy Macau. If given the choice between being the earliest, the largest or the best, Lui Che-woo would certainly choose to be the best. Or, as he would say, “standing firm is more important than standing high.”
Furthermore, he made sure to do so while being extremely cautious in terms of cost and without over extending his company’s borrowing power. As such, when the 2008 financial crisis hit, due to his company’s financial health, he was able to take advantage by borrowing heavily when the market started to recover, as opposed to his competitors. In his perspective, risk prevention is much more important than maximising profit while running a business.
“We shall take it step by step. We have to get it right to make it last.”
— Lui Che-woo
Another example of the efficiency of using a defensive tactics can be seen in the way Lui led K. Wah to earn market shares from Pioneer through a game of perseverance. In fact, considering that professional managers would lose their job if they did not perform for a year or two, he knew that the management team at Pioneer tended to make short-term decisions. By consequence, Lui implemented three tactics that would allow him a chance to win in a game of attrition:
First, in Pioneer’s core market, K. Wah would “bleed” a little to force Pioneer to “bleed” much more. If Pioneer did not want to continue making losses, it would have to surrender the market to K. Wah.
Second, in a market in which both could make money, K. Wah would launch a massive marketing campaign to sign as many contracts as possible, so as to compensate for its losses incurred in the frontal war with Pioneer.
Third, in a market deemed too small for Pioneer, K. Wah would conduct business at the normal price, accumulating the wherewithal for K. Wah to continue engaging in the war of “bleeding” a little.
Finally, Lui Che-woo mentions that the best line of defence is one’s credibility and reputation. As such, Lui believed in putting a great effort in building his credibility. As he would say, “a businessman has the greatest power when people trust him. As long as you keep your credibility, you will have the chance to rise up again. If you lose credibility, you will come to the end of the road sooner or later, even if you have the best business and the greatest strength. Credibility comes from one’s working style and achievements.”
To build a good reputation, Lui believed in “producing concrete results without reneging on one’s promises…. If you expand your business beyond your means, others may not lend a hand when you are in trouble. If you grow gradually and steadily, others will help you out because they know it is not your fault. Honesty is the best strategy.”
“In times of difficulty, friends will come to your rescue. Hence, you must build your reputation in order to survive in society.”
— Lui Che-woo
This concept of defensive business management reminds me of Tom Monaghan, the founder of Domino’s Pizza. He was a strong believer in defensive management, a term coined by Mark Latvala, a Domino’s area franchisee in western Pennsylvania.
Defensive management is defined as taking care of your business’ current existing customers. Monaghan believed that if you take care of every single customer, a business can grow by 50 percent a year. In Domino’s case, it was simple: make sure that every pizza gets there in thirty minutes and make sure every one is good — no burned pizzas and no raw pizzas.
Monaghan gives the example below to explain how making a pizza delivery late can lose future customers:
“Suppose a store is delivering 95 percent of its pizzas within thirty minutes. Sounds pretty good. But let’s look at that 5 percent of orders that are delivered late. Let’s say it comes to fifty late orders per week. We know that more than 10 percent of late deliveries result in lost customers, which means that this store is losing, at minimum, five customers per week. If you multiply that out for the year, then multiply that by twenty-six, which is the average number of times a customer buys from us during the year, you get 6,760 lost orders. It would take a lot of time and money spent on advertising and promotion to bring in that many orders. And there’s no way to atone for bad word-of-mouth from the disgruntled customer.”
— Tom Monaghan
This thought process is similar to Charlie Munger’s idea on how to attract more clients as an attorney: “It’s the work on your desk. Do well with what you already have, and more will come in.”
Furthermore, Monaghan was a firm believer of keeping a business as simple as possible with his defensive management approach. As such, Monaghan had a philosophy of concentrating on the operating of pizza delivery shops and to not get sidetracked into areas he knew nothing about.
Beyond the Book
Read "Explore Or Exploit? How To Choose New Opportunities" by Farnam Street
Read "The Ingredients For Innovation" by Farnam Street
Read "Standing on the Shoulders of Giants" by Farnam Street