Strategic alternatives for Rodamas Group after Indonesia's 2008 economic crisis

Rodamas Group

Core Competencies of Rodamas Group

The Business Environment Before and After the 2008 Economic Crisis

Strategic Alternatives for Rodamas Group

Recommended Strategy for Rodamas Group

Implementation of this Strategy

The Rodamas Group was founded in 1951 as Ho Hoa Trading Company. Its original focus was what other Indonesian companies focused on -- trade. As the country didn't have manufacturing capabilities or industry, this trade was primarily import items through multinational partnerships. In the 1960s, Rodamas Group diversified their core competencies into manufacturing. The company's partners quickly saw with the changes taking place, that Indonesia held many opportunities for manufacturing.

Prior to the economic crisis, which began in 2008, the business environment in Indonesia was changing. President Sukarno's socialistic approach closed off foreign business opportunities, and made it impossible for Chinese descendants to do business in the country. The economy plummeted and the rate of inflation skyrocketted. When Suharto took over, he understood that the country needed a more open economy and a focus on manufacturing was needed. In 1998, the Asian economic crisis came about and another political change would lead to more turmoil in Indonesia. However, recently, the country has become one of the largest democracies in the world.

Increased competition, due to new economic policies, and challenges due to the economic crisis beginning in 2008, has meant Rodamas Group needs to change their business strategy. Instead of partnering with multinational manufacturers, the organization needs to take a consultancy role, doing what they do best -- establishing businesses in Indonesia. Developing one of their strongest assets, their office space real estate, can help provide long-term, steady income. Lastly, pursuing existing business acquisition internationally will help the organization acquire new core competencies, while also giving them geographic diversification.

Introduction

With approximately 240 million people, the growing country of Indonesia is a strong, emerging economy. Rodamas Group, an import trading company based in Jakarta, has seen a country that was once stifled by imperialism and then socialism, begin to bloom under increased capitalism. However, with these new economic opportunities, coupled with increasing globalization, the traditional local partnership role Rodamas Group played, with foreign multinationals, was in question. The increasing use of outsourcing, as well as Indonesia's recent policy allowing some businesses to operate within the country, with 100% foreign ownership was a concern, for the organization. To add to the challenges Rodamas Group was facing, the economic turmoil which began in 2008, not only has brought new opportunities to Rodamas Group, but also new challenges as well. Deputy Chairman and primary shareholder, Mucki Tan, wondered if the business model developed by his father, at the founding of the organization was still effective in the modern economy. Mucki Tan reorganized and streamlined Rodamas Group, and sold off some of the smaller business units. However, he needed a new plan of action to take his organization into the 21st century.

To determine what Mucki Tan's best course of action is for Rodamas Group, it's important to first understand the organization's core competencies. Knowing what the main characteristics of the business environment before and after the beginning of economic problems in 2008, will also help in determining which plan will ensure Rodamas Group is most successful. This will also help determine if Rodamas Group has the capabilities needed to manage the environment post-2008's economic crisis. Once these facets of Rodamas Group and the environment are explored, the different strategic alternatives can be given, with their benefits and disadvantages. From these alternatives, one strategy will be chosen as the recommended strategy, and the requirements to implement this strategy will be presented.

The Business Environment Before and After the 2008 Economic Crisis

Prior to the beginning of the economic crisis in 2008, the business environment Rodamas Group had to work within varied greatly. Originally, under the leadership of President Sukarno, Indonesia's business environment was challenging at best. As mentioned, Sukarno put in place policies to promote socialism. Economic growth became stagnant. According to Dieleman and Kamal (2009) inflation rose dramatically. Sukarno implemented policies that restricted the economic activities of the ethnic Chinese. Although this demographic was a minority in the country, it had a great effect within the private sector, as many, large, family-owned, sprawling conglomerates were owned by descendants of Chinese migrants. Sukarno also nationalized many foreign companies driving out many foreigners who held invaluable managerial and technical expertise. However, there were opportunities available.

Despite these challenges, this environment opened up new opportunities for Rodamas Group. The organization was able to step into the spaces left by the foreign companies that had been closed down. However, it wasn't until military leader Suharto came into power that Rodamas and the Indonesian economy would begin to really prosper. Despite the militaristic style of Suharto, this president understood that his first order of business was to fix the flagging Indonesian economy, complete with a 600% inflation rate. Suharto focused on promoting national manufacturing and opening up Indonesia's borders to foreign investment (Dieleman & Kamal, 2009). Both of these had a significant economic impact, until 1998.

The Asian Crisis of 1998 ushered in the demise of Suharto, while halting Indonesia's economic growth. The country adopted a more democratic political system, in response; however, many companies faced severe economic challenges as the rupiah, the local currency, plummeted from 2,500 to a dollar to 10,000 to a dollar. Most of Indonesia's banks failed and the government had to bail out the financial sector. Another change in presidential leadership and the country moved to a more open economy, with tariffs and trade barriers coming down, and became one of the world's largest democracies. Included in these recent changes was the new regulation allowing 100% foreign ownership of companies in most sectors, other than public infrastructure (Dieleman & Kamal, 2009).

Today's business environment is even more complex. In the past, the multinationals involved in Indonesian business were primarily from the United States, Europe and Japan. Now, there is an increasing number of multinationals coming from emerging economies, like India and China. Adding to this challenge was the economic crisis that began in 2008. It is anticipated that this crisis will lead to lower demand for a variety of products, Dieleman and Kamal (2009) surmised. This means the environment Rodamas must now operate in is one that is increasingly competitive.

Strategic Alternatives for Rodamas Group

There are a variety of strategic alternatives Rodamas Group can consider to address the emerging threats and take advantage of the upcoming opportunities with the new business environment within which the organization must operate. Of course, one possible alternative is that Rodamas Group simply keeps their current business model. They continue to look to partner with multinational companies for the manufacture and distribution of Indonesian made goods. Although now foreign organizations can entirely own a business in Indonesia, Rodamas offers unique benefits with their skills and experience that could still be of benefit to multinational organizations.

However, as Mucki Tan has realized, the organization does not own any proprietary competencies. Rodamas Group had sold off many of their smaller business units. This would facilitate one possible strategic option of focusing on a single business line he already had in place. However, Mucki Tan decided that this would not be a viable option since all of Rodamas Group's businesses had natural limits to growth. In addition, he was concerned about the instability of the Indonesian economy, and the need to diversify to minimize this risk ("Dieleman & Kamal, 2009). Putting all of Rodamas Group's eggs in one basket could spell disaster for the company, should the chosen industry fail.

A third strategic option Rodamas Group may consider is developing their own core competencies. These core competencies could then be used in a variety of businesses. Although Mucki Tan felt this would be a good solution, he was not sure his organization had core competencies that could be used in this option. It did not have technical research and development expertise, needed to be a competitive independent manufacturing unit. There was also the added complication of the non-competition clauses Rodamas Group had with its current partners that prohibit it from doing business in segments it was already operating in. Instead, Rodamas Group was only well-suited to producing simple products. Dieleman and Kamal (2009) note that this is a highly competitive market; however many other Indonesian firms had been successful producing products as diverse as clove cigarettes to basic toiletries. However, as noted, this is already a highly competitive market and the low barriers to entry mean that this competition is likely to increase.

Focusing on property development and management is another option Rodamas Group may consider. In this way, the organization could focus on an industry that was low-tech. Specifically, Mucki Tan considered the office rental sector. The office building the organization owned had transformed from being located in the middle of paddy rice fields to the center of a rapidly growing Jakarta. The property could be converted into office towers and the company could generate revenues through office rentals in the buildings they've built, as opposed to simply building buildings to sell directly upon completion . A past real estate project was conducted jointly between Rodamas Group and Sumitomo, one of the company's Japanese partners, and this venture was successful. However, again with the unstable Indonesian economy this could be risky. In addition, there are many larger players already in the real estate segment that Rodamas Group would have to compete against. Obviously, Mucki Tan's lack of experience in the sector would be a weakness for the organization, and the brand name of Rodamas Group was not established. Not to mention the current tax system in Indonesia which makes this strategy unfavorable. There is an expected tax structure, which could be a factor in the future (

Dieleman & Kamal, 2009).

Of course, Rodamas Group could transition into labor-intensive manufacturing, according to Dieleman and Kamal (2009). One disadvantage to this strategy is China's strong presence in the industry already. However, many multinational companies prefer to spread their suppliers out from different countries, to minimize risk. If Rodamas Group could meet the price and quality aspects to be competitive, it could receive a percentage of the industry. Much like the real estate option, Rodamas Group did not have much experience with this sector. There was concern that the company wouldn't be able to handle the varied requirements needed for the industry.

Rodamas Group could adopt a strategy of internationalization, undertaking foreign direct investment. This would help protect Rodamas Group from economic challenges that were specific to one country or region. However, the organization does not have the human resources capacity to effectively establish itself on foreign soil and successfully compete. Yet, there are new opportunities available globally, thanks to the current economic challenges, that may still make this an attractive option. To help mitigate risk, and to enhance available human resources capacities, Rodamas Group could internationalize through a partnership, with someone with whom they already have a relationship. Helping current partners, such as Japanese Asahi, set up manufacturing outside of their home country could help the organization develop regional manufacturing facilities. The primary drawback to this strategy would be the heavy reliance on Rodamas Group's partner in making the venture a success. Rodamas Group's experience with some Japanese managers made them doubt that regional decisions could be made effectively and that the company would be bogged down in bureaucracy (Dieleman & Kamal, 2009).

A last strategic option Rodamas Group could consider, Dieleman and Kamal (2009) put forth, would be to purchase existing manufacturing organizations that already of developed or licensed a technology. Business acquisition could be the perfect way to expand and acquire core competencies. However, Mucki Tan did not find an appropriate business, at the right price, in Indonesia. One small manufacturer the organization tried to purchase saw Rodamas Group's offer rejected, because it was perceived to be too low. Instead, the company remained in the control of the bank.

Recommended Strategy for Rodamas Group

The recommended business strategy for Rodamas Group is based on the organization's current core competencies, their current strengths, and opportunities to expand their core competencies. First, to date there is one set of skills at which Rodamas Group is truly good. The organization's current success is due to this reason, as it is what sets them apart from other competitors in the industry. Their primary competency lies in helping foreign countries establish themselves in Indonesia. Although Rodamas Group may consider itself an importer, manufacturer and distributor, what it truly is a facilitator of business. The company's primary role has been to handle local management personnel, as well as manage the interactions with the Indonesian government and other local players. Mucki Tan has developed a strong, personal network in Indonesia. As many multinational organizations understand, these connections can be critical to the successful establishment of a business in a foreign country. It's not necessarily what you know always, but instead it's oftentimes who you know.

Rodamas Group's core competency is consulting in the establishment of businesses in Indonesia, and should be a primary strategic focus. Instead of partnering with multinational corporations, Rodamas Group needs to take them on as clients. As noted earlier, Indonesia is enjoying significant growth and many companies are going to want to take advantage of this, especially with the new regulation allowing foreign companies to own 100% of businesses.

The second part of the organization's strategy should look to one of their current strengths in their land asset. The currently renovated factory space that has now become prime Jakarta real estate should be further developed. Building office space and leasing it out is the perfect way to have steady, long-term cash flow for the organization, while it pursues other objectives. In this way, the company further diversifies their holdings. This does not mean Rodamas Group should purchase more land and build multiple office space complexes, but they should definitely use their current assets to their fullest potential.

The third prong of this recommended business strategy is a hybrid of two alternatives already discussed. Rodamas Group should expand internationally; however, they should do so through existing business acquisition. As noted, Mucki Tan was unable to find a suitable business to purchase in Indonesia. With the current economic challenges being faced globally, Rodamas Group is likely to find the perfect business at the perfect price, outside their own borders. Not only will this give the organization proprietary competencies, but it will also help the company diversify geographically. Given the past economic challenges that Indonesia and the Asian region has experienced, looking to expand into the Western world through acquisition will help protect against a repeat of these localized challenges. Furthermore, given the effect the economic crisis has had on the Western world, in general, Rodamas Group could find a business for an incredibly reasonable price.

Implementation of this Strategy

To implement this three-prong strategy, there are several things Rodamas Group needs to do. First, the company needs to change their business mission and their mindset about what relationship they are to have with other companies. Again, gone will be the days when the company will partner with multinational organizations, but instead they will take them on in a client/consultant capacity. Certain tasks will have to either remain in the hands of the client, such as distribution, or Rodamas Group could facilitate the relationship with an outsourcer who handles this task. Rodamas Group could even develop a subsidiary to handle certain common tasks that organizations want outsourced; however, its many focus should be on consultancy.

Development of the current office space is the second stage of this strategy implementation. Office towers in such a key real estate area could maximize revenues for Rodamas Group. Obviously the organization would need to hire an architect and determine what building would best suit the area and provide the best revenue/cost ratio. Once built, marketing the available space should be fairly straightforward.

Lastly, expansion internationally through business acquisition is also fairly straightforward. Mucki Tan is already familiar with the process involved in reviewing potential businesses and determining their worth. It is recommended that the organization look to Western countries where the current economic challenges have depressed the sales of businesses, making it the perfect time to make a purchase. Again, it will also give Rodamas Group the benefit of being able to diversify geographically. In this way, national political turmoil and regional economic challenges (such as the 1998 Asian crisis) can all be mitigated with businesses located elsewhere.