The Strategy of Indonesia's Biggest Conglomerate Salim Group - Assignment Example

? Total number of words: 3005 The Salim Group wants to capture whatever opportunities may arise across nations. However, global expansion has its own challenges. This is the era of global scanning where MNEs use a combination of resource-based and market-driven approaches to strategic management. However, it has now become essential to consider the positioning perspective. The Salim Group is not interested in being a product-based company focusing on core business. It has initially been selecting its business opportunities but now realizes that it should pick up whatever comes its way. The Group is now concentrating on fewer investments after the crisis. The new investments have been made in industries with which they are familiar – such as TV stations in Indonesia. They now focus on strengthening the existing business such as the food and the telecom business. His strategy is to maintain a majority stake in crucial group companies so that the giants do not swallow him up. He is a small player and his future strategy is limited by capital availability. His earlier strategy was to be involved in large number of small businesses. Now he does not want to limit to one or two core businesses. The key competence of the group is flexibility and he wants to capitalize on this. He does not want to be a product-based company but would like to use their expertise and capital in any business that is lucrative. He believes that continuous transformation has to take place. He places more emphasis on contacts rather than on capital to achieve success. Cultural orientation However, sustainable competitive advantage can be build upon strengths. He wants to produce in Australia and sell in China. He does not want to follow the strategies common to the western MNEs. However, selling goods and services to long-distance customers can be challenging. These include language and culture barriers and hence it is always advisable to use local partners. They see enormous potential in China but the business environment differs in China. In the case of this group using local partners is all the more important because the culture of China differs from that of Indonesia and the Indonesian values. As pointed out by Hofstede, accepted management style varies across nations (Stonehouse et al, 2004). When expanding outside the triad countries it is better to have a country-by-country approach in the management of government relations and customer interface (Birkinshaw et al, 2003). The group’s intention of acquiring a pig farm in Australia and engaging in wheat trading activities is to bring the superior knowledge of farming to less developed Asian economies. This does not appear to be a practical approach to expansion. The company would have to embrace societal differences in culture, processes and systems. Group is not strong in technology. Communications are poor and the final decision lies with Anthony Salim. However, they feel that they can be successful in diverse fields such as retail, food and media because what matters is to understand the consumer trends. Knowing the sector and industry is unimportant. Knowing the consumer and consumer behavior is what matters. Lack of environmental analysis They are trying to enter the retail sector but Carrefour had failed when they tried to expand into other countries within Europe. Since their early ventures failed, they started focusing on emerging economies with a growing urban middle class population. Thus, in any sector meeting local cultural preferences is paramount to success. The process of globalization is not smooth and the uncertainties have to be coped with. Salim group’s contention, that understanding consumer trends in any sector is more important, is valid to some extent. However, knowing the industry is equally important. Salim Group should conduct PESTEL analysis before they consider venturing into any nation. Understanding the macro environment is the first step while understanding consumer trends comes later. Other tools such as Porter’s Diamond also helps evaluate the national, industry and market forces. Leadership qualities The Group is not engaging in any planning but planning is a scientific approach to strategic management. Leaders should make rational decisions for others to implement but within this Group there are no leaders. All decisions are taken by Anthony Salim and their strength lies in their capability to be close to the customer. They are not strong in technology so they buy technology whenever necessary. While Salim has the leadership dynamism, he lacks vision. He wants to lay his hands on anything that comes his way but in companies without corporate vision and mission, the corporate level strategy and the business unit level strategy cannot be formulated (Strategy Web, n.d.). Salim hires the best people who have the ability to argue and reason with Salim but at the end the decision lies with Salim when it comes to acquisitions and strategic decisions. The group has informal culture and is still family-oriented. He has an in-depth knowledge of various businesses but the group lacks professionalism in their approach. Lack of strategic direction The purpose of planning is to improve one’s condition which includes enhancing the market share and profits (Dooris, Kelley & Trainer, 2002). Strategy selection should be a scientific process where organizational goals and purpose is defined. The organization has to engage in examining the internal and external environment to identify the opportunities and constraints that impact the strategy (Kaplan, Nortan & Barrows, 2008). The concrete goals can be determined only if the organization has corporate vision, mission and values, which is obviously lacking at Salim Group. Transnational way – a distinctive capability Organizations must develop their core competencies within subsidiaries but Salim Group has decided to enter into partnership with anyone who comes with a lucrative offer. The country risks can be minimized by distributing resources. Samil is not doing so and hence remains vulnerable to country risks. The Group has not even considered the currency fluctuations across borders. Moreover, because of their flexibility they are always approached by possible partners in different projects and businesses and this is what makes them enter new industry each time. This however exposes them and makes them vulnerable to breaches of trust by business partners. The success lies in constantly questioning and challenging to bring about change in a way that forces adaptation and learning (Bartlett et al, 2008). Conclusion The chances of success and failure in their strategy are equal. This is because as a leader he is very dynamic. They have their strengths on which they can build. However, they do not engage in environmental analysis which is critical to the success of any venture. They must develop worldwide human resources and capabilities because nations differ across business norms, culture and management of government relations. Their strategy do take up whatever comes their way can be successful only in certain nations where they have an understanding of the local business environment. Moreover, there are no best practices in human resources which imply that local conditions are important. The group has not considered the drawback of globalization which is perhaps the reason that their chances of success have been halved. Most importantly they lack corporate vision and philosophy which implies they lack direction. 2. Since 1990 Salim Group has been influenced by the environmental forces that have shaped the strategic development. Between 1990 and 1997 the economy was booming and hence every business that one could lay his hands on became gold. Many large businesses in Indonesia saw a rapid increase in wealth. However, no business can remain independent of the local economy and the external forces. One of the most important learning is that banks attract customers offering very low rates of interest but these are like traps. Individuals and organizations get caught in this which ends up in huge debts as was the case with Salim Group. Such situations make the corporate sector vulnerable to currency fluctuation as the debt-equity ratio goes up. Moreover, non-performing loans indicate stagnant business conditions. The larger conglomerates control the economy and the small businesses suffer in the process. While equity funding is the most appropriate, Salim Group was involved in heavy debts. Thus, the economic stability of the nation is critical to the success of businesses. Moreover, risk evaluation is essential before venturing into new areas. The political environment too impacts how businesses grow or perish. Because of the Salim group’s close connections with the presidential family, they were able to move the noodle business out of Indonesia under the umbrella of a Singapore-based affiliate. This implies that it is necessary to have inside information of the upcoming political changes. Indonesia is known for political corruption. Even when they tried to recover the debts through the establishment of Indonesian Bank Restructuring Agency (IBRA), the process caused political turmoil. Preferential treatment causes social upheaval. The social structure is also important. The local people are generally given preference and when the Chinese in Indonesia were favored, widespread violence against the Chinese in Indonesia could be witnessed. This implies that race and ethnicity should not be given preference over the local populace. The incidents that the Salim Group faced teach us that one cannot operate independent of the macro-environment. However, these factors should not deter one from starting or continuing the business activities. Ups and downs in business should be taken in the stride. Determination and crisis management can help overcome situation such as these. The Salim Group is a closely-held company where the family has the majority of shares in the main operating companies. A closely held company may give it better control but it also makes the company vulnerable to risks. Moreover, in privately held companies, temptation of tax evasion is likely. Public funding is restricted in closely held companies as this could dilute the control but this spreads the financial risks. While Salim ensures that each unit is a profit centre, being within the family there is certain amount of cross-transaction within the firm. Thus, if one firm is adversely affected, it could impact the operations of other firms as well. Moreover, their profits come from the listed companies, which exposes them to external control mechanism of the market and minority shareholders. It also teaches us that one must know how to utilize the resources effectively. It is possible to overcome any situation with grit and determination. It is essential to have a resource-based and a market-driven approach to strategic management. This can be done through the application of certain analytical tools. PESTLE analysis helps identify the national differences and help evaluate the political, economic, social, technological, environmental and legal position of the country in which one wants to operate. This evaluation then helps in strategic direction. This reveals the cultural differences which impacts human resource management, which reveals consumer characteristics and behavior, all of which are critical to decision-making. In addition, businesses should apply Porter’s Diamond to identify and evaluate national industry and market forces. This model presents a dynamic and evolutionary view of the creation of firm advantage. This model places innovation at the centre of the process of development and competition (O’Connell, Clancy & Egeraat, 1999). Domestic rivalry and geographic concentration have powers to transform the diamond into a system. Since the macro- and micro-environments impact the business, determining the national competitive advantage through Porter’s Diamond Model can bring about success in any country in any sector. Thus, Salim Group should use this model before they venture into any business. This would help in guiding and providing the right direction. Another important tool at the industry level is the Porter’s Five Forces. This helps to evaluate the competitors, suppliers and buyers, including rivalry amongst firms. Overall, the case of Salim Group teaches us that environmental analysis is critical before venturing in any sector or any country. This provides strategic direction. Companies should not be too closely held as debt-equity ratio tends to be high. Efforts should be to have a low debt-equity ratio. Closely held companies stifle creativity and innovation; they also tempt the directors towards tax evasion. They may give excellent remuneration to their executives but the final decision lies with Salim. Moreover, the internal members and the external world are ignorant of what is going on within. They do not even have a public relations department on the premise that they want to maintain a low profile. To be an MNC, to experience growth and development, vision should be to be a professionally managed company. Good public relations can draw investors and thereby reduce the debt-equity ratio, reduce the risks and enhance the profitability and the corporate image. 5. The Salim Group has been growing since the 1950s and its top management has remained in place throughout the Asian financial crisis of the late 1990s. These managers have lots to learn from the “Late Movers”. The top management has experienced several ups and down of the business as the economic and the political environment changed over the years and particularly during the Asian financial crisis. Being a late mover can be a source of competitive advantage rather than a disadvantage (Bartlett & Ghoshal, 2000). What is important is to break the mindset that one does not have the resources and the capabilities to compete in the global market place. This mind set can arise even because the organization has never evaluated its resources and capabilities as in the case of the Salim Group. To go global all organizations face the same core challenges. To face these challenges also calls for a culture of cross-border learning. This implies that one should be prepared to change with the changes in demands and customer preferences; change with the changes in the business environment. However, only the most sophisticated companies are able to withstand these challenges. Globalization should be seen as more than a path to new markets and resources. The Salim Group comes from a humble background and not from one of the developed countries. Being from a peripheral country, the group lacks in technology to compete with the global giants and they could be incapable of meeting the world-class standards. If the demand at home is strong then the managers can postpone investments to meet international standards. Sometimes, such events prevent the management from pursuing their passion for going global. Management may also be unaware of the tremendous potential that exists overseas and besides they doubt their own capability to compete. Sometimes, late movers have overconfidence in their abilities and also remain blind to the risks posed. Salim realizes that China has potential but they do not feel confident of achieving success in that environment. They should first carry out an assessment of their internal resources and capabilities and then take the step forward. When consumer products are well regarded at home, it can have negative consumer perceptions abroad even if they have excellent technology, as was the case with Samsung. Overseas consumer expectations have to be changed. Investments in their commitment to globalization should not be ahead of demand as this can result in failed investments. Leap of faith is essential but so is the right timing and for the right purpose. Besides, the same product specification cannot be applicable at the global level some amount of adaptation is essential as Thermax adopted when they designed the boilers to the specification of the overseas consumers. Apart from push from home there should be pull from abroad. It is not enough for Salim group to send their managers on an exploratory tour of the countries they want to export to. There must be strong offshore associations and affiliations because hiring unsupported middle-level associates can be disastrous. They do not have the credibility to win the top management’s attention. Investing ahead of demand and hiring people in key position who are committed to the organization, speaks well of the company and its products. Ranbaxy followed this strategy and the executives had clear and unwavering belief in Ranbaxy and his commitment to building European business. Many adopt the riskier strategy by using their new comer status to challenge the rules of the game and capitalize on the inflexibilities in the existing players’ business models. Some benchmark the established players and then hover round to see what has been overlooked by these players. Emerging MNCs do not have to go overseas to experience how to compete against the players. When the MNCs enter the emerging economies, the small players can learn from the MNCs and adapt and respond to those players. It teaches them how to manage operations and controls as a small food chain in Philippines learnt when McDonald's entered the country. They then further innovate and enhance their capabilities. They also learnt how to move abroad and hence late movers can adopt the latest management techniques. Salim Group has plenty to learn from the late movers. They must adopt a resource-based approach. They must first evaluate their own resources and capabilities so that they neither become overconfident of their capabilities nor undermine their capabilities. According to Rajani and Pangarkar (2000) the resources and capabilities constitute the competencies of a firm and guide the firm how to best utilize it to gain competitive advantage. This would also help them evaluate the risks involved in overseas ventures and in alliance with partners. Because of lack of professionalism Salim spent several years in solving the debt problems with the international banks and the Indonesian government. He now has a geographical orientation with less focus on Indonesia but a global approach should be carefully evaluated. Nevertheless, as Bartlett and Ghoshal contend, openness to new ideas can bring about a change in fortunes as was the case with Dr. Farrell of ResMed. Salim has to demonstrate that he has the potential to be a model leader for the marginal companies in peripheral economies. He can work like a global player even when he is not but this should not be based on overconfidence. He has to prove that he can climb up the value curve and reach the main stream economy by learning lessons from the late movers. The lessons mainly pertain to confidence and assessment of one’s resources and capabilities. References Bartlett, CA & Ghoshal, S 2000, 'Going Global Lessons from Late Movers', HARVARD BUSINESS REVIEW March-April 2000 Kaplan, RS Nortan, DP & Barrows, EA 2008, 'Developing the strategy: Vision, Value Gap, and Analysis'. Harvard Business School Publishing. accessed 08 June 2011 from http://www.exed.hbs.edu/assets/developing-strategy.pdf O’Connell, L Clancy, P & Egeraat, C 1999, 'Business research as an educational problem-solving heuristic - the case of Porter's diamond', European Journal of Marketing, Vol. 33 No. 7/8, pp. 736-745. Rajan, KS & Pangarkar, N 2000, 'Mode of entry choice: an empirical study of Singaporean Multinationals', Asia Pacific Journal of Management, vol 17, 49-66 StrategyWeb. n.d. 'Strategy Web'. accessed 08 June 2011 from http://www.civ.utoronto.ca/sect/coneng/i2c/My%20Lectures/Strategy-web.pdf Read More