Changing realities in emerging economies

Executive Summary

The Rodamas Group is at the Cross-roads. The traditional local partnership role played with different foreign multinationals is fast losing its advantage.

Most of the Joint Ventures are reaching maximum capacities in terms of market reach. A Serious effort has to be made to change the traditional "Neutral Ideology" and "Low Profile" nature of doing business.

With the World Economic Downturn looming large, care has to be taken to insulate Rodamas from its effects. Opportunities must be identified and strategies suitably changed to take advantage of this situation, so that Rodamas will fly high as always.

The Core Competencies of Rodamas.

There are many avenues to competitive advantage, and they can be of two types:

  • Advantages based on the firms position
  • Advantages based on the firms capabilities.

These two attributes of a firm and its relationship to its external environment - its position in its competitive environment and the capabilities based strength that enables it to perform better than its rivals are the two main types of competitive advantage.

Positional advantage usually takes three forms viz

  • Positional advantage from an attractive industry structure
  • Positional advantage from heterogeneity within the industry
  • Positional advantage from a network of relationships.

Within this context, Rodamas took positional advantage thus:

Brand Name: A firm with a recognized brand name has a positional advantage over other firms in the industry. A strong brand commands premium shelf space, wider consumer attention and higher prices.

PT Asahimas Flat Glass Tbk has managed to achieve a position of strength as one of two incumbents in a duopoly within the flat glass industry.

PT Sasa Inti and PT Ajinomoto Indonesia have also managed to achieve a position of strength within the highly competitive MSG Food Products industry.

PT Kao Indonesia is a leading manufacturer for "Attack" detergent brand for Household products with the Consumer Products industry.

Status: Companies like to be associated with a trustworthy partner who is able to capture markets.

Rodamas, as an importer who maintained a low profile and did not align with the ruling government machinery, became a natural ally to Japanese businesses. Good working relationships with bankers and keeping business in private hands allowed Rodamas to grow away from government scrutiny. During the post-Sukarno years, this practice helped Rodamas establish many joint ventures to manufacture MSG, Detergents, Flat Glass, Building Parts and Tools.

Government Support: Special Incentives from the government, can sometimes stimulate one activity over others. Companies that are conveniently positioned to take advantage of this can reap profits for being in the right place at the right time.

In the 1980's, the Suharto government actively promoted exports. Due to its intrinsic strengths, Rodamas was a very successful exporter of Sasa MSG, Detergents with Kao of Japan and Flat Glass with Asahi to Australia. It's printing and packaging business with Dai Nippon Japan has also done very well.

Heterogeniety: A dominant position within a fragmented industry has helped Rodamas secure a strong position compared to other industry incumbents. Rodamas catered to the specific needs of the Asian population. They deliberately used a high tech low man-power route to manufacturing. More automation and reduced dependence on man-power helped Rodamas maintain a niche position within its markets. Most of the manufacturing initiatives undertaken by Rodamas are of this nature.

Network of Relationships: Rodamas has deliberately approached a risk-averse, conservative style with slow and steady growth strategy. In its formative years, during the Sukarno years, Rodamas, has avoided and special relationship with the ruling government. It maintained a very strong tie with its bankers, who financed its various initiatives. Post Sukarno, this righteous stance taken by Rodamas has borne fruit. This "Neutral Ideology" suited its Japanese Partners who were averse to political connections.

Rodamas' capabilities are varied:

  • Right from the owner downwards, Rodamas has had a strong, ethical management, education and training. This has helped the company understand international business owners and international markets as a whole. They are also able to appreciate the Japanese style of management better.
  • Rodamas has understood the cultural diversity and geographical terrain of the region. It has worked within these boundaries.
  • With the changing times- Sukarno years, Suharto years, and after, Rodamas has always tried to fit into the emerging opportunities of the Indonesian Market-space. It has studiously tried to position its products within the disposable income of most Indonesians.
  • With its Neutral Ideology averse to political risks, Rodamas has become a natural choice of partner for many Japanese firms wishing to enter the Indonesian Market-space.

Main characteristics of the business environment before and after the crisis.

Change is the single biggest strategic challenge that Owners and Managers face. If the firm's external environment never changed, the managers could initiate a one-time strategy and devote their time implementing and fine-tuning it.

When the firm's external environment changes significantly, managers must:

  • Recognize the need for change (be Proactive).
  • Understand the changes required.
  • Adjust the strategies to implement the changes.
  • Manage the internal contexts (variables) accordingly.
  • Once again maximize profits.

All changes are usually accompanied by uncertainty. The true caliber of a manager is tested when he has to distinguish between the change being a "long-term change" an "intermediate deviation" or a "temporary aberration".

Changes usually originate outside the scope and control of a firm. New technologies introduced by a competitor, a government's new trade policy introduced to open up new markets are two examples of change.

Before the Asian Crisis of 1997 which was closely followed by President Suharto's demise, the business environment in Indonesia was totally different.

Mucki Tan's father, Tan Siong Kie, after completing a university degree in business and journalism in St. John's University, Shanghai, returned to Indonesia with intent to be an entrepreneur.

After independence from the Dutch rule in 1949, the new Indonesian leaders, led by President Sukarno, set on a path of socialism and "guided" democracy. Economic activities of ethnic Chinese minority were stifled and most foreign companies were nationalized. So, many foreign technical and managerial experts were forced to leave.

Tan senior, recognized the opportunities left by the gaps in businesses.

There was little industrial activity, no expertise to product the basic essentials. So to fill this gap, many Indonesian businesses concentrated on Import trade. Rodamas followed suit.

Post 1965, President Suharto took the reins of the country. He realized the importance of stimulating local manufacturing to substitute costly imports. It became attractive for foreign manufacturers to set shop with local management. Rodamas, successfully set up manufacturing Joint Ventures, where their role was to obtain necessary licenses, land, local management and setting up the local distribution network.

The Suharto regime gave powerful groups of Ethnic Chinese business leaders special favors, and conglomerates functioned close to the ruling Suharto family.

Tan Senior, studiously avoided this strategy as he realized that this was not long term, and instead tried to establish good network of contacts with bankers, which helped his business flourish even while maintaining a low profile. In the nineties, the Rodamas group was among the top 30 business groups in Indonesia with a low profile and a diversified portfolio of joint ventures.

After the Asian Crisis of 1997 and stepping down of President Suharto, the new government set about reversing many of his "pro-crony" regulations and strong anti-corruption measures were put in place.

  1. Many of the protective measures in place were brought down, and 100% foreign ownership in most sectors of the economy except public infrastructure was enacted.
  2. Local Owners with Foreign Partners in Joint Ventures were replaced by Service Companies that helped foreign companies setup 100% owned operations in Indonesia.
  3. Many advanced companies could now control their marketing and distribution without local partners. However, deep market penetration required a local partner.
  4. Local problems were solved by multi-national companies by bringing their own lawyers and consultants rather than rely on local Indonesian expertise and local partner.
  5. More International products made according to world wide trends were imported and distributed in Indonesia. These were not to the liking of local inhabitants.
  6. Products were manufactured according to the rules set by the multinational partner, rather than according to local flavor or after consulting local partner.

Does Rodamas have adequate capabilities to manage the after-crisis environment?

Currently, in the after-crisis environment, Rodamas operates within the following self-imposed constraints:

  • Conservative, low visibility managerial style.
  • From the beginning, Rodamas has always maintained a low profile in the Indonesian Market. This seems to be the managerial style adopted by the family right from inception, during the restrictive regimes of Sukarno and Suharto.

  • Privately held - All money needed for operations is generated in-house.
  • All Financing activities are managed in-house without public participation. This is a style adopted right from the beginning and seems to continue in the changing times.

  • Trading Partner.
  • This is a core competency2 which is the reason for Rodamas' existence. The group has managed to acquire and maintain long-lasting relationships with its international partners.

  • No core competencies, No R&D capability
  • In spite of a spate of Manufacturing Joint ventures with Japanese partners, Rodamas has never entered into a technology transfer agreement. It has been a facilitator in setting up the venture. It has only helped distribute the finished goods. Rodamas has never tried to invest in the understanding of the manufacturing process.

  • Low technology intensive capability.
  • Owing to its lack of competency in Research and Development, development of new product lines and no competency in setting up new manufacturing lines, Rodamas can only take up Low technology assembly type work. It cannot do any value addition to its current lines of products.

  • Only an operator of proprietary technology obtained from Japanese partners.
  • Since inception, Rodamas has been a facilitator for Japanese companies to set shop in Indonesia. It has never tried to assimilate the technology, never tried to maintain the plants or the production. It has only helped in the distribution process.

  • No Strong Rodamas Brand Name.
  • Owing to the strong sentiments of its founding members, Rodamas has conscientiously avoided the limelight. A good example is the Office Building Complex it constructed with Sumitomo1 know-how. Although it was a grand success, the group never ventured further into this field. A strong re-think is required on this matter.

  • Strong Consumer products distribution experience.
  • From inception, Rodamas has been a strong worker in distributing goods manufactured by its Japanese partner. It has displayed strong skills in Logistics and Distribution. It needs to strongly rethink its strategy about this matter.

  • Fear to start outsourcing labor intensive manufacturing work.
  • Due to the lack of manufacturing experience, Rodamas has never ventured into manufacturing parts or sub-assemblies on behalf of other manufacturers.

  • Fear to increase manufacturing base abroad due to inherent lack of competency and high dependency on Japanese partner.
  • Rodamas is afraid to invest money in setting up a plant with Japanese collaboration abroad as it would be at the mercy of the local country partner and the Japanese. This method is not recommended.

  • Lack of any suitable candidates for take-over.
  • Although lucrative, no suitable candidates for a take-over are available.

  • High Employee Attrition at middle management level.
  • One reason for employee attrition at the middle management level is because of a lack of any growth opportunities. The low profile safe attitude pervading from the top down only reinforces the risk-free style of management. The employee will continue to do the same activity without any learning curve or any challenges. This is a serious de-motivating factor which gives rise to this high attrition figure. To retain good manager candidates it is important to allow measured risks which will help employee morale when they succeed.

Looking into the future, Rodamas will suffer from further market erosion if it does not do anything different.

Weighing all these factors, I would recommend the following:

Rodamas either builds further on its core competencies or identifies opportunities for collaboration which forward integrate some of its existing product lines.

Different strategic alternatives along with pros and cons of each.

A serious problem with assessing capabilities is to maintain objectivity in the analysis. As Grant3 has observed, "Organizations frequently fall victim to past glories, hopes for the future, and wishful thinking."

  1. Invest in building a strong technology oriented group of core personnel who will help in setting up technology transfer related projects with foreign collaborators.
  2. PROS

    1. Initiative which will help Rodamas more in consolidating its competencies.
    2. Will help in making products to Indonesian tastes and preferences.
    3. Will help in Forward Integration of existing products.
    4. Will help economies of scale by allowing backward integration.

    CONS

    1. Long Gestation Time
    2. Long time in identifying a suitable Tech Transfer collaborator.
    3. Supply of Raw Materials, Plant Maintenance and other related hassles will be Rodamas' headache.
    4. Costs will go up there will no longer be economies of scale.
    5. Maintaining a suitable team of professionally qualified engineers to maintain plant.

  3. Setup a Logistics and Distribution company which will integrate well with the existing core businesses and also facilitate "positive spillovers".
  4. PROS

    1. Increased Market Penetration.
    2. More preciseness in deliveries due to Service Level Agreements.
    3. Can be used for Supply Chain as also for Distribution of finished goods leading to economies of scale.
    4. Can be outsourced for other multi-nationals wishing to use services of this Logistics company.

    CONS

    • Startup Costs like Vehicles, Computer Systems.
    • Road Network, Weather.
    • Availability of personnel.

  5. Learn to celebrate success and build on it.
  6. PROS

    1. Increased Employee Interaction.
    2. Get out of the mental framework of being a closed, safe, low-profile group of companies.
    3. Let the world know that Rodamas exists by its successes.
    4. Will help in IPO's when the need is felt.
    5. Easy to find suitable personnel when the need occurs.
    6. Divest an allow employee participation.

  7. Create a Core Management group which will oversee management and future initiatives.
  8. PROS

    1. More Sharing of thoughts will lead to positive outcome.
    2. Group Initiatives.
    3. More risk-taking leading to more ownership.
    4. More chances of positive spillovers due to a collaborative atmosphere.
    5. SBU's to cultivate internal competition.

    CONS

    1. Will divert from the closed "safe" and "low profile" methodology of its founder and family members which may give rise to problems.
    2. Inside competition among members which has to be managed carefully.

  9. Venture into the Property Industry.
  10. PROS

    1. Build on the Sumitomo Office Building Project experience.
    2. Build new Office Building property.
    3. Start a Hotel Resort Property with a suitable hotel chain collaboration.
    4. Create an IPO venture to fund these activities with limited owner participation.

    CONS

    1. Governmental regulations.
    2. High startup costs.

  11. Venture into Forward Integration Projects.
  12. PROS

    1. MSG can be used to make Flavoring agents like Chicken Stock etc.
    2. Value addition to existing product lines may seem attractive to current Japanese partner.
    3. Asahi can be convinced to venture into auto wind-shields as a value addition to existing capacity.
    4. Tetra Brik Sweden can also help in setting up a tetra pack, carton manufacturing plant. This will extend the current printing capabilities of Dai Nippon backwards.
    5. The Personal Care Products Division can start new products like Socks and other knit-wear in collaboration with Koh.

    CONS

    1. Existing JV partner may not be convinced and may back out.
    2. Venture Finance.

Strategy recommended for Rodamas

A multi-pronged strategy is recommended.

  • Change Management Structure of Rodamas by appointing a professional CEO and CFO who report to the Vice-Chairman of the Group. See Appendix-A.
  • Move Building Materials into the other business SBU.
  • Add a new SBU called Properties.
  • Properties, Food Products, Consumer Goods, Chemicals and Other Business SBU's will have separate General Managers who will report to the CEO.
  • Strongly consider venturing into constructing properties like Hotels, Office Buildings.
  • Facilitate Positive Spillovers between SBU's.
  • Slow divestment of dependency on Foreign JV partner by having a Technology Transfer and Integration team within the group.
  • Forward Integration into MSG related products like Food Flavoring Agents, Auto Wind-shields by Asahi, extend the Personal Care Range with Knit-wear by Koh.
  • Backward Integration of the Printing by Dai Nippon to include making Tetra Packs and Cartons with suitable transfer of technology from Tetra-Brik Sweden.
  • Recognise and Celebrate achievements like the Sumitomo Office Project.

What would it take to implement this strategy successfully?

For any change strategy to succeed, we need to establish competitive advantage. However, competitive advantage is not forever. It erodes over time.

It is the very nature of competition that rivals will attempt to duplicate or eliminate a firm's competitive advantage.

If a firm's competitive advantage has to be sustainable4, it should either improve its capabilities or make imitation difficult for rivals to catch-up.

Keeping this in mind, I would recommend Mr. Mucki Tan to seriously consider the following:

  • Exploiting the Market Niche by Forward / Backward Integration as mentioned in the Strategy recommended above.
  • Recognize and celebrate achievements. This helps open up the group to the world in a positive way.
  • Use IPO's to finance ventures in Hotel Resorts, Office Properties etc. This will free finances to jumpstart the integration projects mentioned above.
  • Convert a Core Competency into strength by launching a Supply Logistics and Distribution Company to better manage the entire process.

All this can be achieved without touching the existing activities. Once a sufficient momentum is gained, Rodamas can seriously consider converting all their Joint Ventures into Technology Transfers thereby completely owning their Manufacturing Operations.

REFERENCES

  1. Sumitomo to Build Office Building in Jakarta. http://www.hamline.edu/apakabar/basisdata/1991/08/08/0008.html last accessed on 2nd December 2009.
  2. C.K. Prahalad and Gary Hamel, "The Core Competence of the Corporation", Harvard Business Review (May-June 1990), pp. 79-91.
  3. Robert M. Grant, "The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation," California Management Review (Spring 1991), pp. 114-135.
  4. Pankaj Ghemawat, "Sustainable Advantage," Harvard Business Review (September-October 1986), pp. 53-58.

Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!