A New Business of Rodamas - Case Study Example

Executive Summary Rodamas is facing a new business challenge which is expected to happen at the end of year 2008. Because of the changes in the business environment, it is highly recommended for Rodamas to expand its business opportunity in international market by entering into a business partnership or joint-venture agreement with large-scale company in other countries. Since the company has been continuously downsizing the number of its employees, it is essential for Rodamas to make an effort in retaining its highly skilled and competitive employees for a long period of time. This can be done by offering them more attractive benefits and promotional opportunities. Table of Contents I. Executive Summary ………………………………………………….. 3 II. Table of Contents …………………………………………………….. 4 III. Introduction ……………………………………………………………. 6 IV. Main Characteristics of the Business Environment Before and After the Business Crisis …………………………………………….. 6 a. Before the Business Crisis …………..………………….. 6 b. After the Business Crisis …………………………………. 7 V. Core Competencies of Rodamas ……………………………..…… 8 a. Having the Right Connection with Foreign Manufacturing Companies ……………………….……. 8 b. Acquiring the Right Skills and Academic Background in the Case of the Business Owner …….. 8 c. Tan’s Ability to Foresee the High Demand for a Product …………………………………………………… 10 d. Rodamas’ Ability to Hedge the Exchange Rate through Exportation ……………………………….. 11 e. Rodamas Ability to Supply 30% of the Packaging Needs of Unilever ………………………….. 12 VI. Overview Behind the Recommended Solutions ………………… 13 VII. The Different Alternative Strategies and the Pros and Cons of Each Alternative Solution Including the Strategic Ways to Effectively Implement the Recommended Strategies …………… 14 a. Expanding the Business in Foreign Market ….……….. 14 b. Invite Competitive Individuals to Join the Management and Sales Position in Indonesia ……….. 15 b.1 Effective Career Management …………… 16 b.2 Talent Management, Succession Planning, and the Integration of Learning and Development with Employee Relations …. 17 b.3 Reward Strategies ………………………….. 17 c. Selling Out Non-Performing Businesses ………………. 18 VIII. Conclusion ………………………………………………………….… 18 References …………………………………………………………………… 20 - 21 Introduction Back in 1951, Ho Hoa Trading Company Limited was established by Tan Siong Kie (p. 2). It was in 1959 when the company’s name was changed into Rodamas Company Limited. Since then, the company managed to expand its business line from the manufacturing of galvanized iron sheets which are commonly used in building homes to food industry particularly the production of monosodium glutamate (MSG), chemicals, building parts and components like steel shutter doors and louvre windows, printing and packaging, the production of glass, selling of General Electric air conditioners and other consumer products related to health care products like medicated plaster, liniment, and gel, personal care, household, and hygiene products (pp. 4 – 5). Despite the continuous business expansion, Rodamas had to face the consequences of uncontrollable external factors such as the Asian Crisis which occurred back in 1997. Given that the monetary value of rupiah has declined from 2,500 to 10,000 per U.S. dollar (p. 2), the global financial problem had caused a lot of multi-national companies with U.S. dollar loan to become heavily in debts immediately after the 1997 Asian Crisis. Aside from the 1997 Asian Crisis, the economic condition of Indonesia was also disturbed by the bloody military coup which occurred back in 1965. As a result of trying to modernize Indonesia after the serious violence, the inflation rate increased up to 600% (p. 3). Even though companies like Rodamas had to face a serious financial crisis back in 1997 and the incidence of significantly high inflation rate, the company remained strong in terms of keeping the business highly profitable. In line with this, the company managed to remain competitive within several industries in Indonesia. In fact, the company’s revenue for consumer products, hardware, and air-conditioners had increased from US$122.36 million, US$52.08 million, and US$3.04 million in 2002 up to US$179.10 million, US$64.29 million, and US$4.35 million in 2007 respectively (p. 16). Given the ability of Rodamas to overcome the business challenges which took place during the past decades, the key competencies of Rodamas will be identified followed by discussing the main characteristics of the business environment before and after the business crisis has occurred. Eventually the different alternative strategies including the pros and cons of each alternative solution will be tackled in details. As part of going through the proposed recommended solution for the case of Rodamas, strategic ways to effectively implement these strategies will be explained together with the rationale behind the proposed solutions. As part of the conclusion, whether or not Rodamas have adequate capabilities to manage the after-crisis business environment will be answered. Main Characteristics of the Business Environment Before and After the Business Crisis Before the Business Crisis Even before the major business crisis like the Asian Crisis in 1997 took place in Indonesia, the business environment in Indonesia had weak infrastructure and law enforcement aside from the uncontrolled corruption among the government and private institutions. Despite the government’s effort to control the incidence of corruption in Indonesia, corrupt business practices accounted for almost 15% of the total operational costs (p. 8). This made the necessary business transactions including the purchasing of properties, hiring of new personnel, obtaining business permits from the local government, procuring inputs, and distribution of products very difficult (p. 2). This was primarily due to the fact that there was a major historical war that took place in Indonesia. In the past, Indonesia was under the Dutch colonial rule (p. 1). It was only in 1945 after the World War II when Indonesia gained independence from the colonial rule of Dutch (p. 2). Although the market of Indonesia was opened to foreign investors back in 1960s, the issue on cultural diversity also contributes to the difficulty in distributing Rodamas’ wide-range of product line which includes basic commodities like food, clothing, soap, and construction materials to its target market (p. 2). In 1997, the Asian Financial Crisis took place crippling a lot of local businesses that has US dollar loans from the banks and other financial institutions. As a result, the Indonesian currency suffered from a strong devaluation (p. 7). After the Business Crisis After the business crisis in Indonesia, the owner of Rodamas managed to consider foreign investors as a way of opening new business opportunities for the company to expand its existing business. It was in 1980s when Suharto government publicly announced the importance of promoting the export business more than importing consumer goods item (p. 5). Since Rodamas entered into a business partnership with foreign-based companies, Rodamas’ competitors became also diverse since the company is already engaging in different businesses like food, healthcare, personal care and hygiene, chemicals, glass, diamond coated tools, building parts and components, printing and packaging, and other consumer products (p. 5). In April 2007, Indonesian government has declared that foreign business owners will have the privilege to have 100% ownership over the businesses they will establish in Indonesia (p. 7). Because of the tight competition within the domestic market, Rodamas is being challenged to struggle hard in order to maintain and improve its market share within the local market. Core Competencies of Rodamas Having the Right Connection with Foreign Manufacturing Companies Core competencies are referring to Rodamas competitive advantages as compared to its rival companies that produce a similar product with Rodamas’. Even though Rodamas did not have much capital to invest on manufacturing businesses in the past, the Tan family had the right connections with some foreign manufacturing companies. This competitive advantage enabled Rodamas to establish its own manufacturing companies in Indonesia without much technical expertise or capital to establish its own manufacturing firm (p. 3). Considering that the cost of labor in Indonesia is competitive as compared to other developed countries, Tan family was able to easily convince foreign companies like Sasa, Attack, Laurier, Kao Corporation of Japan, Dai Nippon Printing of Japan, and Asahimas among others to enter into a joint-venture with Rodamas (p. 12). This way, the company was able to serve a wide-range of consumer products within the Indonesian market. As a result of entering into a partnership agreement with the foreign-based manufacturing companies, Rodamas became an efficient agent of foreign-made products in Indonesia (p. 3). Acquiring the Right Skills and Academic Background in the Case of the Business Owner Tan is a very simple, humble, and a brilliant Chinese businessman. Being the business owner of Rodamas, Tan studied business and journalism in a university where he was able to understand how international business works aside from learning to communicate with foreign business owners (p. 2). Over the years, Tan managed to keep the contacts of his future business partners. In general, learning how to speak multiple languages is already a competitive advantage as compared to Tan’s rivals. Being able to speak multiple languages enabled Tan to easily deal with foreign business owners with confident. It also enabled him to easily win their trust since knowing foreign language made Tan become more familiar with the business cultural practices of foreign business people. Since Tan was able to frequently travel to Japan, he managed to have multiple business contacts in Japan. This is the main reason why most of Rodamas’ business partners like Kao and Dai Nippon are based in Japan. Since Tan was equipped with proper educational background, his was able to develop a business strategy that is unique from other business leaders in Indonesia. In line with this, Tan gave good financial incentives to most of the Chinese business leaders while he secretly created a crony economy that will benefit the Chinese business people (pp. 3 – 4). By winning the trust and loyalty of the Chinese people in Indonesia, Tan managed to prevent the Chinese Indonesians from becoming involved in politics. This made him able to lead the entire economy of Indonesia effectively (p. 4). With regards to entering into a business partnership with foreign-based companies, Tan was clever enough to enter a business deal with its business partners such that “any foreign companies that will leave the partnership contract with Rodamas will not be allowed to enter into any business partnership deal with other companies in Indonesia” (p. 5). Tan’s Ability to Foresee the High Demand for a Product Back in the late 1960s, Tan was able to project the demand for galvanized iron sheets to provide roofing for the rural areas in Indonesia (p. 4). It was in 1968 when Rodamas decided to enter the food business by selling a gourmet powder known as the monosodium glutamate (MSG). In 1970s, Tan acknowledged the demand for glass products. This made Tan decided to enter a business partnership with Asahi under the local company name ‘Asahimas’ (p. 4). Eventually, Tan decided to become an agent of General Electric air conditioners. It was in 1980s, the owner of Rodamas started entering into business partnership with foreign-based food and manufacturing companies. The economic concept of the basic supply and demand is important in terms of enabling the business owners project the potential profit of a business project. Since the business owner and shareholders in general are in-charge of making major business decisions, it is very important to have the skills in projecting the type of products that will easily sell in Indonesian market. In line with this, the ability of the business owner to foresee or project a good product will significantly affect the profitability and failure of a company. Rodamas’ Ability to Hedge the Exchange Rate through Exportation Rodamas’ ability to export some of its consumer products is another core competency of the company. Back in early 1970s, the exchange rate regime of Indonesia was pegged to the US dollar. It was in 1980s when its exchange rate was allowed to float (Rana, 1998). (Table I – Exchange Rate Regimes of the Affected Countries below) Table I – Exchange Rate Regimes of the Affected Countries Source: Dowling et al. (1991) Changes in the exchange rate could significantly hurt or contribute to the success of a business in terms of profitability. Since the Suharto government started discussing the importance of promoting the exportation of goods and services, the weakening of Indonesian Rupiah during the 1980s made Rodama able to take advantage of earning more profit out of exporting its product outside the Indonesian market (p. 5). In line with this, Rodamas has been exporting MSG and detergent products among others to other countries like Australia. Aside from being able to hedge the differences in the exchange rate currency, Rodamas was able to capture at least 6% of the market shares in Australia (p. 5). (Table II – Changes in Bilateral Nominal Exchange Rates below) Table II – Changes in Bilateral Nominal Exchange Rates Source: IMF in Rana (1998) eds. Rodamas Ability to Supply 30% of the Packaging Needs of Unilever Rodamas’ ability to supply 30% of the packaging needs of Unilever is one of the core competencies of the company. Since the business has already saturated some of the existing markets in Indonesia, being able to supply the packaging needs of Unilever open entirely new business opportunity for Rodamas (p. 6). In general, globalization is actually referring to the business practice that aims to integrate the world economy, culture, technology and business governance including the people who lives in different countries. (Lopez 2000) Likewise, globalization also expands the market opportunity for local businesses such as in the case of Rodamas. Aside from the fact that globalization increases business security, it also contributes to a significant change in the way traditional business processes are being conducted (Connell & Wood 2005). As part of globalization, the significant changes in the way businesses are being operated has shifted from the local movement of goods to a more rapid international trading of goods and services. The shift from a pure national economy into a globalized economy is made possible through continuous global trade, outsourcing of goods and services, foreign direct investment, the use of information and communication technology, migration, and the international capital flows (Friedman 2008, p. 49; Bhagwati 2004). Overview Behind the Recommended Solutions Born in 1957, Mucki Tan – the son of Rodamas founder never had the chance to enter the business before he graduated from the University of Portland in Oregon back in 1979. Since he was the only son of Rodamas founder, it was expected that he will become the next heir of the Rodamas family business. In 1980, he was appointed as a manager. Nine years after being a manager of the business, he was eventually appointed as the commissioner (2009, p. 6). Although Mucki Tan’s approach to business is similar to his father’s approach, he takes a more conservative way running the business. Under his leadership, the company has been continuously downsizing the number of its employees to cut down on unnecessary operational costs. Although the overall performance of the company has been satisfactory, it remains a fact that the company is suddenly experiencing a rapid turnover of managers (p. 6). The company’s profit had significantly increased from US$17 million in 2006 up to US$32 million in 2007 (p. 6). Even though the business had almost saturated the potential domestic market, Mucki Tan needs to develop new business strategy to keep the company growing since the company is struggling hard to pay the principal and interest rate of the company’s US$35 million worth of loan back in 1995 (p. 7). The Different Alternative Strategies and the Pros and Cons of Each Alternative Solution Including the Strategic Ways to Effectively Implement the Recommended Strategies Expanding the Business in Foreign Market Since the tariffs and other trade barriers had been removed in Indonesia (p. 7), Rodamas should take advantage of expanding its business in international market. Given that Rodamas had almost saturated the domestic market in Indonesia, expanding the business in international market like China and India is more advantageous since it could open up new business opportunities and growth for Rodamas. Although the advantages of expanding the Rodamas business in a foreign market is clear, the problem with pushing through the expansion plan in foreign market lies behind the fact that Rodamas has limited knowledge on how to market their products in the global markets. To effectively expand Rodamas’ business in China and India, the company should enter into a business partnership with a local business partner. Not only will this strategy save Rodamas a lot of time in setting up the business, it will also enable the company to minimize the risk of shouldering the loss in case the business expansion failed. Invite Competitive Individuals to Join the Management and Sales Position in Indonesia Inviting more competitive individuals to join the management and sales position at Rodamas in Indonesia will enable the company to increase its ability to distribute its product all over the Indonesian market. The advantages of this strategy is that the company will be able to gather a team that is open to organizational changes and has the ability to learn fast as compared to Rodamas’ old employees. However, this group of individuals is difficult to retain with the company since this group of individuals could easily adjust to environmental changes including their work environment. To effectively invite competitive individuals to join the team, HR manager of Rodamas should design and offer attractive packages combined with flexible time at work. For existing management and sales personnel who are currently working at Rodamas, the HR management should design a training program that will improve the competitiveness of its future managers. As part of the promotional program, this particular HR strategy can actually be done internally in order to motivate Rodamas existing employees to work harder. This option is advantageous in the sense that the company doesn’t have to spend more time training employees about the company’s products and services. On the contrary, retaining the company’s old employees will make it difficult for Rodamas to implement necessary organizational change which is vital for the company’s plan to expand the business in foreign market. To make this strategy work, HR manager should carefully assess the skills and important contribution of each employee before promoting them to a higher position. To improve the company’s retention rate, the HR manager of Rodamas should use of effective career management, talent management, succession planning, integration of learning and development with employee relations, and reward strategies. In other words, the ability of the HR manager to satisfy employees with their existing jobs will result to a higher chance that the business organization will be able to control employee turnover and increase the rate of employee retention (Tas, Spalding, & Getty, 1989). Effective Career Management Career development program (CDP) is referring to the actual organizing, formalizing, and planning on employees’ career growth based on the specific job requirements needed by the business organization (Lips-Wiersma & Hall, 2007). Although career management is viewed negatively by some employees because of its paternalistic nature (Maume, 1999), Cassirer and Reskin (2000) stated that “gender is not associated with promotion attitudes”; since male employees give more importance to work promotion that made most of them able to reach higher managerial positions than female employees. As a result of continuously promoting the equal rights of women, modern HR managers of Rodamas should consider this HR strategy to be effective in terms of improving the work performance of both male and female employees by allowing them to manage their own career growth (Baruch, 2003; Dreher, 2003). As a result of giving employees the power to control their career path, competition between male and female employees increases. Talent Management, Succession Planning, and the Integration of Learning and Development with Employee Relations There are similarities between talent management and succession planning in the sense that both are sensitive to environmental and economic changes (CIPD, 2008: p. 8). Basically, talent management is about effectively managing employees with outstanding talents in different areas which can be an advantageous on the part of the business organization (Blass, 2007) whereas succession planning is referring to the process wherein organizational position like senior-level openings are carefully planned for and eventually filled based on the employees’ adopted skills and other qualifications that are suitable for the work demands of a successful manager (Dessler, 2000: p. 133, 681). Due to external pressure related to globalization and work-life balance, a lot of business organizations have been competing on hiring the best talents within the industry (Pearson & Bracker, 1986). Training and development is a key factor that contributes to an effective succession planning. When it comes to building the personal character of employees and retaining them to serve the needs of the business organization, Krewson (2004) explained that skills can be developed through daily experiences at work. Therefore, allowing each employee to share their work experiences with other employees can improve the skills of other workers. Reward Strategies The type of company rewards offered by any business organization contributes a lot in the quality of work performance and job satisfaction of its employees. Although the use of traditional reward system such as compensation and promotions are still effective in some employees, this type of reward are slowly becoming ineffective in terms of motivating the generation X and Y employees (Craig, March-April 1989). Several studies revealed that the use of material rewards such as cash incentives could demotivate employees (Anthony, Dearden, & Bedford, 1989: p. 57). In line with this, the use of ‘pay-for-performance’ strategy does not guarantee the improvement in employees’ work performance, retention rate, and job satisfaction (Bowley & Link, 2005; Sherwood & Wechsler, 1986). One of the main reasons why ‘pay-for-performance’ concept fails to work is because in exchange with the money, the pride and job satisfaction of employees suffer. Eventhough extrinsic rewards given to employees can still be effective in motivating employees and increasing their job satisfaction (Heywood & Wei, 2006), a study shows that the use of intrinsic rewards such as congratulating the employees for a job well done either verbally, written on a personal note, through public recognition, or implementing a celebration for success in work performance is more effective in motivating employees to increase their work performance (Graham & Unruh, 1990). Selling Out Non-Performing Businesses Selling out non-performing businesses like the Rodamas’ Tumbakmas galvanized iron sheets and the small textile business is a good strategy since it could save the company from the need to cover up the fixed operational costs of these two non-profitable businesses (p. 7). Aside from the savings the company would benefit out of not paying the fixed operational costs, the top management can also make use of their valuable time trying to concentrate on how they can expand the business opportunity out of Rodamas’ high performing businesses. Depending on the future demand for galvanized iron sheets and textile business, the sudden increase in the demand for these products would mean a business loss on the part of Rodamas. Conclusion Given that the company will be experiencing another financial crisis at the end of 2008, it was a good strategy for Tan to consider selling out non-profitable businesses after going through a thorough study behind the factor that causes the business not to earn a profit. In case the reason for non-profitability is due to the tight competition in the market causing the demand for a particular consumer goods to decline, it is good to just close down the business and concentrate on expanding the bigger and more profitable businesses. However, given that the main reason why a business is not earning good profit is due to internal errors and not the demand for the said product, Tan should consider re-organizing the company to make it more profitable in the future. Considering the changing business environment, Tan should consider expanding the business in international market since the company has almost saturated the domestic market in Indonesia. Entering into a business partnership with a foreign business company, the company will be able to benefit from a market expansion plan. Considering the strategies used by the company before and after business environmental crisis, it is safe to conclude that Rodamas has an adequate capability in terms of enabling the company survives another business challenge which is expected to happen at the end of year 2008. *** End *** References Anthony, R., Dearden, J., & Bedford, N. (1989). Management Control Systems, 5th Edition. Irwin: Homewood, III. Bhagwati, J. (2004). In Defense of Globalization. New York: Oxford University Press. Blass, E. (2007). Ashridge Business School. Retrieved November 30, 2009, from Blass, E. (2007). Talent Management: Maximising talent for future performance. London: Chartered Management Institute. In Blass E. & April K. (eds) 'Developing Talents for Tomorrow': http://www.ashridge.org.uk/Website/IC.nsf/wFARATT/Developing%20Talent%20for%20Tomorrow/$File/DevelopingTalentForTomorrow.pdf Bowley, J., & Link, D. A. (2005). Supporting Pay for Performance with the Right Technology. 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