Indonesian Expansion of Financial Products Retailer - Coursework Example

Introduction Capital One Financial Corporation (COF), a Fortune 500 US based financial institution headquartered in Fairfax County, Virginia has been accredited to having initiated the mass marketing of credit cards. The company’s main product lines include its flagship credit cards in addition to offering loans and savings. It has over 31,800 employees, $115.8 billion in customer deposits and $212.0 billion in total managed assets by 2009 but conversely had a net loss of 46 million in 2008 (Yahoo!Finance, 2008). As part of its international expansion strategies, the firm has decided to venture into the Indonesian market. This report therefore aims at expounding the company’s proposed strategy for the market entry in the Southeast Asia region. Figure 1 Background COF was started by Richard Fairbank and Nigel Morris in 1988 branching off from Signet Banking Corp. It later expanded in 2005, acquiring the Hibernia National Bank of New Orleans and the North Fork Bancorporation of New York in 2006, while Chevy Chase Bank was purchased in 2008. The global financial crisis resulting from the subprime mortgage market adversely affected the company and it subsequently sold off its affiliate, the GreenPoint Mortgage to stem the losses (Goldfarb and Appelbaum, 2008). Nevertheless, COF needed a $3.56 billion federal stimulus loan in late 2008 to regain stability but was able to repay by mid-2009 (Capitalone.com, 2010). International Expansion COF international expansion started in Canada mainly focussed on the credit market business where like in its domestic US operations it largely relied on direct mail marketing hence is the largest client for US Postal Service and Canada Post. The firm has also expanded in the UK market but has disembarked from the Spanish, French and South African markets after poor returns and acute competition. Resilience despite Global Financial Crisis COF has managed to survive the turbulent economic crisis despite its lack of diversification characterised by a monoline structure due to its foresight of accumulating a large capital base and a consumer database dubbed Information Based Strategy that accumulates client preferences thus is able to tailor its products according to their tastes. The company has diversified into other banking products though still managed to endure despite issuing credit to the ‘subprime’ market although with very limited limits. Although developing countries always strives to encourage foreign direct investments (FDI), Djiwandono (1998) argues that the injection of capital may lead to instability in the event the flow is stemmed or reversed during moments of global crisis. Similarly, the FDI exposes the local economies to the fragilities of the international markets. The Indonesia Market Indonesia has enjoyed a relatively stable economic growth of 4.6 percent for the last 15 years, which however is below the regional average [see figure 2]. The Asian financial crisis of the late 1990s adversely however affected the country’s economy which shrunk by 13 percent in 1998 due to its overreliance on exports (Djiwandono, 1998). Nevertheless, the country has fared well during the current global financial crisis, having minimal impact on the economy. IMF projections for 2009 were 3.5 percent growth, thus outperforming neighbouring economies apart from India and China. Exports constituted 60 percent of GDP in 2008 while FDI comprised only six percent of actual investments in the country by 2007 (EFIC, 2010). The country has a population of 240 million, has poor infrastructure and unreliable investment environment hindering growth hence leading to escalated unemployment and stagnation. Figure 2 Indonesia’s Economic Forecast Nonetheless, the country has still managed to record impressive development with a threefold per capita income growth to US$2,200 within the last 30 years (EFIC, 2010). The country has been rated at BB by Standard & Poor’s, Fitch BB and Moody’s Ba2 for long-lasting foreign exchange bond risk. Indonesian currency has constantly been unstable indicating poor central bank control however; the country has maintained an open door policy in its international transactions encouraging FDI whenever possible. The government intends to disinvest in major state corporations to enhance efficiency through privatisation and has now been actively wooing COF group to invest in government owned Garuda Indonesia and steel giant Krakatau Steel selling 30 percent of their stake (Indonesianstockmarket.com, 2010). In one of its major strategy approaches, the Indonesian government identified the strengthening of the country’s financial segment to advance improved financial sector resilience (Asian Development Bank, 2009). This is critical in enhancing the country’s growth in line with the other Southeast Asian countries like Singapore, South Korea, China, and Hong Kong that have far more vibrant markets. Indonesia’s equity market has been tagged at 36 percent of the GDP by end of 2009, thus making it one the smallest in the region, even lesser than Malaysian, Philippines and Thailand markets (EIA, 2003). There is therefore an urgent need to initiate financial sector reforms to improve the sector growth. Political Situation and Bureaucracy Indonesia has an open democracy with periodic elections whilst the upsurge of Islamic religious radicalism has driven the people to centrist parties with the tendency of separation of religion and state now being the norm. Additionally, the slogan of ‘KKN’ (korupsi, kolusi, nepotisme – corruption, collusion and nepotism) has gained prominence though the country is still viewed as relatively unstable largely due to perceived likelihood of terrorist attacks after the 2009 Ritz-Carlton Hotel bombings and the 2000-2005 attacks. Similarly, separatist movements in the north and east of the archipelago continue to rock the country though they have been recently muted as semi-autonomous status was granted. The proliferation of many strata of bureaucracy is a great hindrance to foreign investors who have to contend with varied authorities in addition to covert nationalism that negates FDI overtures compounded by some government operative’s private industry interests (EFIC, 2010). The investment climate has however been steadily improving in recent years as exemplified below [figure 3]. Nonetheless, Indonesia ranks at a lowly 129 out of 181 countries in the World Bank’s ‘ease of doing business rankings while Transparency International rates the country at 126 from among 180 nations in corruption status (EFIC, 2010). The country’s judiciary has been accused of bias against foreign companies seeking legal redress, which have been noted by rating agencies as ambiguities in the Indonesian regimes exemplified by a Supreme Court ruling that exonerated Asia Pulp and Paper Company from honouring US$1 billion in bonds payments in 2006 (EIA, 2003). However, the current leaders have prioritised judicial reforms to move away from the dark past (EFIC, 2010). Figure 3 COF’s Expansion Strategies in the Indonesian Market Firms venturing into global foreign markets are eventually constrained by the latent hostility of the host enterprises and paucity of local customs and practices hence are at a disadvantage due to their foreignness (Yip, 2009). Most international financial institutions venturing into foreign markets initially target their own domestic corporations’ resident in the target market in addition to other international companies. This is because these international firms prefer stable and reputable corporations in contrast to the local companies (Tschoegl, 2001). The Indonesian financial sector is well developed with many banking institutions well represented domestically and regionally in the Southeast Asian countries. The main foreign corporations entrenched are from Australia which shares a close proximity with the region. International Business Frameworks Peng et al. (2009) through their unified international business configuration suggest two approaches in understanding international business frameworks. These are the institution-based view whereby the foreign venture firms aims at developing an understanding of the local business environment; and the resource-based view in which the firm utilizes its competitive advantage like superior technology or products to gain a foothold in the local markets [see Table 1]. Table 1 Porter (1994) has asserted that ‘frameworks identify the relevant variables and the questions that the user must answer in order to develop conclusions’ (Pg. 427). Peng et al (2009) therefore argue that global business frameworks elementary function is the determination of “the success and failure of firms around the globe” (Pg.29). They consequently conclude that the international business framework must be based on the collective impact of institution and resource centred analysis. Capital One Strategy The recommended international expansion framework will therefore be threefold: exporting the company’s traditional products into the Indonesian market; establishing localised products that are specifically tailored for the Indonesian market; and engaging into joint ventures with local firms through franchises or licensing firms with established networks for distribution purposes only. For the later strategy, the selected firms must not be engaged in similar production but may be engaged in comparable financial products marketing hence complementing COF’s product range though not providing direct competition. Sturgeon (2002), through his production network paradigm acknowledges the shift in focus from the inevitable development of the internal configuration of contemporary firms to the external economies through ongoing exchanges among organizations. However, franchise or network strategies necessitate tactical grouping among competitors and concerted interactions amongst suppliers, manufacturers, and marketing firms that enhance the firms’ networks. Investment Environment Although Indonesia lags behind its more robust neighbours, the country’s leadership has worked hard to enhance FDI by improving the investment environment through ease of doing business in the country. The country’s large population with well-developed natural resources like oil, natural gas and coal industries has made the population enjoy a relatively comfortable lifestyle with high per capita income thus making it ideal for COF financial products. International strategic management encompasses firms engaged in cross-border trade and globally taking advantage of local resources in diverse geographical locations to enhance their productivity and returns. Lessard (2003) has identified four strategic frameworks that distinguish these international firms: geographic span of the particular industry; the pull of the specific locations including the markets, resources, and the competitive edge; upholding of the international strategy; and the extent of global incorporation including the localized spread. The country’s turbulent financial past, which culminated in the near collapse of the financial sector in 1998, made it undertake several crucial economic reforms that have prevented a recurrence of the crisis during the current global economic crisis. The government has therefore provided incentives to foreign firms interested in expanding in these regions in form lowered statutory requirements and other fees as well as providing a good communication and infrastructural networks (Dhanani, 2000). The geographic span of the country takes into account the industrial analysis significant in strategizing the impact of its merchandise while considering the environmental factors as envisioned in Potter’s Five Forces framework and the firm’s own internal dynamism or core competencies. In an international framework, the firm considers the geographic scope of the industry in regards to the critical aspects that influence the envisioned industry on a global basis while analysing the current and prospective adeptness of the firm (Sykes et al., 2001). The firm uses the local prevalent market leaders to benchmark the required factors necessary to succeed within the particular market segment. The market research therefore analyses the upstream and downstream aspects for operation within a particular country or region (Yip, 2009). Business Processes Re-Evaluation COF’s global expansion strategy in Indonesia’s market will be primarily aimed at capturing the potential customers through its high quality products and fast after-sale service that can generate loyal clientele thus giving us a competitive edge in the market. In generic business frameworks, the focus has shifted to a horizontal view of satisfying customers rather than the vertical view of garnering profits (Tourism Australia, 2008). Business process reengineering (BPR) and total quality management (TQM) stress on business processes re-evaluation with the former leading to fundamental shifts in an organization’s structure while the latter calls for a continuous improvement of the business process to lead to higher customer satisfaction that s leads to enhanced sales and production hence greater profits. Goldkuhl (1996) has described generic business process framework that is based on an “action workflow” as par the various stakeholders desires including the producer, supplier, and customer that are acted upon to generate an acceptable product. Market Entry Modes Hill (2009) identifies six distinct market entry modes for companies entering a foreign market [See Table 2]. These include exporting, turnkey ventures, and licensing, franchising, joint ventures with local firms, and establishing an auxiliary firm in the vicinity. The ‘timing of entry’ is crucial to a firm’s successful entry in a foreign market. These embrace any potential benefit of ‘first-mover advantages’ or ability to pre-empt rival firms by capturing demand through early entry (Hill, 2009). Foreign market entry is therefore marked with potential hazards and risks especially in the developing countries but also may be hindered by issues of ‘national pride’ that are marked by latent hostility to foreign firms gobbling up locally established companies. Hill (2009) describes how a firm is able to gain competitive advantage by aptly ‘transferring its core competencies to foreign markets’ thus garnering a niche in the local markets that lack the particular skills. COF’s core competencies include its advanced product range; highly trained and motivated human resources; experience working with the less privileged sectors of the population; and large capital base that can enable it promote its products internationally. Table 2 Cultural Conflict COF will be majorly challenged in venturing in a market that has quite a different culture from its usual undertakings in the developed world (mainly UK and Canada) as it invests in Indonesia’s vast archipelago with diverse ethnic, cultural and economic identities. A country’s culture influences the decision of foreign firms to venture in their markets as it inherently affects values in the workplace tradition and methods. Bothma (2008) argues that even with the advent of globalisation, which has tended to consolidate consumer tastes across the borders; there are still major differences between international markets that embody major challenges to the exporting firm. These differences include cultural, political, economic, religion, legal and other social factors between different countries. Supply Chain Network COF was the forerunner in establishing a customer database that helped it evolves its products tailored to the specific needs of its clients in the US; however, in Indonesia the company will have to rely on conventional mail order catalogues as well as accessing a strategic partner local bank that has a large clientele. To provide a viable distribution network, the firm can contract existing local firms who can be allowed to operate on franchise basis or joint ventures. The firm will later set up its own supply chain network after establishing a marked market presence. Aliouche & Schlentrich (2009) assert that most US firms have a penchant for franchise business thus the International Franchise Association, asserts that by 2006, 52 percent American firms had established franchise units abroad. Marketing Options To establish an operations management support plan for the regional expansion strategy, a marketing strategy is required to incorporate the various factors necessary to establish a market presence in the region [see Figure 4]. In launching an operations plan for foreign market entry, the four Ps in the marketing mix are considered. These include product, price, placement, and promotion, while a further three Ps are suggested, process, physical evidence and people as the original four Ps were considered limited to internal viewpoint (CIPD, 2009). Figure 4 Recommendations for Consolidating and Developing the Indonesia Market COF has determined that foreign venture or establishing new overseas markets will enhance the firm’s profit while diversifying from the saturated domestic market. In this regard, the Indonesian market offers an attractive lucrative market as the countries sound economic policies have steadily developed the country despite the eroding factor of the global economic crisis. The country’s diversification from its overreliance on foreign exports to more localised strategies makes it ideal for COF’s products. Likewise, the emerging sophisticated middle class will serve as major customers for the firm’s products including credit cards, mortgages, and car loans among others. This means that the market is ripe for COF’s financial products with a good marketing plan that must utilise the aggressive promotion and marketing methods for enhanced brand awareness. Marketing Promotion Capital One corp. foreign venture should incorporate marketing campaigns aimed at promoting its brand among the Indonesian market by using its already effective strategies including sponsoring sporting events, billboards, and community programs among the poor, media outlets among others. Although far-off, foreign ventures are viewed with trepidation due to the cost outlays, the relative low costs involved in setting up some of COF’s financial products may offset these disadvantages as it is deemed critical to the foreign firm’s performance (Schoenberg, 2005); (Very et al., 1997). Nonetheless, the nature of the expansive Southeast Asia market requires a foreign investor to engage local public relations firms for such campaigns. Similarly, the firm should consider entering into partnerships with local financial companies and other stakeholders like nationally spread supermarket chains, gasoline retailer firms, food chains among others to not only promote their products but also serve as critical customer base. Benefits COF will be able to take advantage of the new market by diversifying from its saturated North American and UK markets by using Indonesia as an entry point into the emerging economies of the Southeast Asia region. Beizhong (2009) cites three criterion used by firms intending to venture into foreign markets. These include ‘the competitive ability in the international market, the competitive advantages and competitive risks’ (Pg.2). International expansion allows firms to maintain growth amidst slow domestic sales hence sustain profits through foreign ventures. There are however a significant number of major international brands in the region which can pose as the real threat to market entrants that are affiliated to the local banks including Visa and MasterCard. Flexible Organisational Structures In instances where the management culture of a company does not conform to its organisational culture, the result is a mediocre efficient productivity (Ward and Duray, 2000). A firm’s performance is heavily dependent on its organisational structure being aligned to its corporate culture in conjunction with suitable human resources strategies (Charvatova and Veer, 2006).Performance therefore improves when the management style is structured in way to fit the organisational structure of the firm rather than vice versa (Bozarth and McDermott, 1997). Nevertheless, at COF, the flexible organisational structure has been found to enhance performance including having less rigid hierarchical structures. This organisational structure has improved communication, involvement of non-managerial staff in decision-making and other informal mechanism is more productive. COF has therefore identified its own organisational culture, objectives and leadership style that are unique to its business ethics. Conclusion An international expansion though strenuous and sometimes risky on the venture firm has proved to be rewarding to firms with positive strategies as it reaps from the overseas markets. The factors that encourage firms to expand into overseas markets are the rapidly evolving changes in technology, short-lived commodity life cycles, and consumer segmentation, and borderless markets promoted by globalization and internet marketing. COF as a financial products retailer has chosen the most opportune moment to venture into the Indonesian market due to the relatively stable political climate and steady growth rate backed by enhanced per capita income. The firm’s ability to develop its group culture within its ranks has enabled it to forge formidable employee loyalty that can be replicated in the overseas markets by having standardised corporate strategies. Apart from the advantage of diversification, the firm will be able to learn new methods of business operations, gain new partnerships, enlarge its customer base and enhance its returns. Capital One organisational structure and culture therefore can ensure successful ventures in Indonesia and Southeast Asia region by maintaining its strategic management style shrewdly integrated with modern innovative corporate expansion methods. References Asian Development Bank. (2009). Republic of Indonesia: Strengthening Indonesia's Capital Market. Capacity Development Technical Assistance (CDTA). Bhushan, A. (2010). Capital One Financial Corp. U.S. credit-card defaults rise and delinquencies slowed. Retrieved May 7, 2010, from CEOWORLD Magazine Online: Bothma, C. 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