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Polytron: Preparing Foreign Competition at Home Market
Kevin Yulianto Master Degree Student
Business Strategy
BINUS Business School 2016
I
Executive Summary
Polytron is an Indonesian electronic goods producer based in Kudus, Central Java.
It was established in May 16th 1975 with the name PT. Indonesian Electronic &
Engineering. It changed its name to PT. Hartono Istana Electronic in September 18th
1976 before merging with another company and changed its name again to PT.
Hartono Istana Teknologi.
Polytron currently has three factories in Central Java producing wide range of
electronic goods such as television, refrigerator, speaker, home theatre, phones, air
conditioner, and various other home electronics. The first producing facility is
located in Kudus Krapyak with size of 109.000 m2. The second factory was
operated in 2009 with size of 130.000 m2 and the third factory is in Sayung
Semarang with size of 160.000 m2 and is the largest refrigerator factory in Central
Java.
In operating the factories and distributing the goods produced, Polytron employed
over than 6000 employees in total and have 19 representative offices with through
PT. Sarana Kencana Mulya. It also has 7 authorized dealer and over 63 service
centers across Indonesia.
II
Introduction
Background
Polytron was established by PT. Djarum Kudus, a cigarettes company with Rp 50
millions capital. It first launched its product in 1978, a black and white 20” TV that is
not very well accepted by the market. In 1980 Polytron collaborate with Salora, a
Finland TV producer to improve the quality of its television product and design. To
reduce its dependency to third party, Polytron established research and
development department in 1982, which made Polytron as a self-design producer.
Polytron managed to became the market leader for color TV and audio products in
1990 with 50% market share. Due to the success in domestic market, management
decided to export its color TV to several countries in Europe. It is ISO 9002 and ISO
9001 certified in 1995 and 1998, however due to the Asian crisis in 1998, Polytron
had to layoff 3000 employees from 4600 to 1600 employees.
Apart from television, portable audio player and parabolic antenna, in 1995 Polytron
started producing air conditioner commercially and in 1997 it expand its production
facility into refrigerator producer. In 2001 the company produced water jet pump, two
years later it introduced its plasma TV products. With rising market demand for
washing machine at that time, it also produce washing machine in 2005.
In the last ten year, Polytron has been certified for ISO 14001 and OHSAS 18001. It
products line includes water dispenser, LCD TV, and LED TV. With the rapid
demand increase of smartphones, in 2011 Polytron collaborate with Chinese
producer to sell smartphones in domestic market, going forward to 2013 Polytron
managed to produce its own smartphones through facility in Kudus, Central Java.
Currently Polytron has 9 granted patent and 29 pending patent in US, Canada and
Indonesia. It also has been awarded for its development by Government of
Indonesia, Industrial Department, Ministry of Research and Technology, Ministry of
Environment, MURI, and other various institutions.
Today, Polytron products are produced and exported to many Asian countries,
including Philippines, Thailand, India, Pakistan, Bangladesh, Sri Lanka, Bahrain,
Myanmar, Dominican Republic, United Arab Emirates and Vietnam.
Vision
• “Leading the movement of digital conversion”
Mission
• To be the best digital e-company
• Creating products and technology services that lead the industry
• Have the most efficient management and production processes
• Keep the focus on strengthening our organization to be the leader in global
technology and company that is responsible and could be trusted.
Objectives
• 2016 Revenue growth of 15-20%
• To be the market leader in sales, volume and market share
• Have the best distribution network
• Develop on innovative technology and efficient process in creating new
market
• Sustain the belief of Polytron as trusted digital leader
III
External Analysis
Macro Environment Analysis
• Political Factors
Indonesia participation in ASEAN Economic Community has created a free
trade of electronic products among ASEAN countries, Vietnam and Malaysia
are the top competitors of Indonesia and their electronic products have been
exported to other countries. To protect local products and its competitiveness,
government has imposed PPN for products with less than 40% local
components. In the next 10 years government wants electronic producer to
use at least 50% of total components coming from local sources. However,
government has lax the regulation for producer to invest and open production
facilities in Indonesia. This regulation benefitted local electronic producers
including Polytron.
• Economic Conditions
Since 2013, Indonesian consumer spending has been growing slowly after
the commodity boom in 2010. In early 2015 consumer confidence dropped
significantly below 100 level, signifying pessimism among the population.
Consumer confidence improved in the second half of 2015 and decrease
slightly in 2016. Despite the improvement in consumer confidence recently,
people are still on hold to purchase goods and upgrading their gadgets.
Retail sales as measured on year-on-year basis also been flat with tendency
to decrease since 2010, as the world economic slump including Indonesia as
emerging market. Compared to the era of commodity boom with 40% sales
growth, current 15% growth seems quite low. The purchasing power of
society has been eroded by period of high inflation as well.
In aggregate, growth of Indonesian people consumer spending has been on
the rise in particular due to the population growth rather than the increase of
individual consumer purchase.
• Sociocultural Forces
Indonesian population in the middle class segment is rising rapidly from
37.7% in 2003 to 56.5% in 2010. The growth of middle class population is
expected to increase the purchase of electronic goods such as washing
machine, air conditioner, and smartphones. Affordable price electronic goods
are suitable for the demographic of Indonesian population in general.
Indonesian has also the habit of upgrading their gadgets to the newest
technology when the economic condition is good.
• Technological Factors
The advancement of smartphones technology is very fast in the last decade,
but in the middle-income segment, household electronic goods technology
innovation is slower as there is few significant innovations for products such
as television, refrigerator, air conditioner and washing machine.
• Environmental Forces
In Indonesia, E-waste is regulated through Kerpres 61/1993, Perpres
47/2005, UU 32/2009, PP 18/1999, UU 18/2008. However, the enforcement
of these regulations and the awareness by businesses and society has been
minimal. Most of e-waste is being pawned to small shops that will recycle and
sell the valuable components. However, in smartphones producers we see
the trend of trade in program where producers are willing to pay some parts
of consumer used smartphone and recycle it themselves.
• Legal/Regulatory Factors
Indonesian government has set regulation to give tax free (PPN) for local
industry through Inland Free Trade Agreement (FTA) The terms and
condition for business to apply for the facility is to use at least 40% of total
product components from local sources. Government also enforce the
standardization for products through Standar Nasional Indonesia or
commonly known as SNI to protect local industry from overseas import.
Industry Analysis
• Competitive Force of Buyer Bargaining Power
Buyer has strong bargaining power because there are many similar electronic
products available in the market with similar price level and consumer could
change their brand preference according to the weighting of product
specification they wanted. The availability of Chinese electronic products in
the domestic market also becomes a challenge for Polytron to give more
unique selling proposition and value to buyer.
• Competitive Force of Substitute Products
Competitive force of substitute product is weak due to the wide range of
electronic products offered by Polytron.. People are assumed to buy
refrigerator, TV, air conditioner every several years to replace obsolete
products and there is no substitute for those products. However, in the
smartphones product, there are many substitutes available such as normal
phones, tablet, PC, etc.
• Competitive Force of Supplier Bargaining Power
Supplier competitive force is weak due to in-house production for Polytron
product components and the availability of many raw materials supplier. The
moderate size of the company also gives advantage for Polytron in
negotiating with suppliers.
• Competitive Force of Potential New Entrants
There is weak threat from new entrants for Polytron due to the high cost of
setting factories for electronic goods and the cost needed for research and
development to sustain competitiveness. Economies of scale also prohibit
new entrants to become the lowest cost producer for electronic goods. Brand
awareness is also important in electronic market and it takes time to
introduce new brand to market. Therefore, Polytron has the capability to
defend its market share from new entrants.
• Competitive Force of Rivalry among Competing Sellers
There is strong threat from competing sellers to Polytron products. The
availability of cheaper and more differentiated products makes fierce
competition among electronic producers. Competition includes PT LG
Electronics Indonesia, PT Samsung Electronics Indonesia, PT Panasonic
Gobel Indonesia, PT Toshiba Visual Media Network Indonesia, PT Sharp
Electronics Indonesia, PT Sanyo Sales Indonesia, PT Maspion Group, PT
Istana Argo Kencana (Sanken), PT Midea Electronics Indonesia.
Competitive Environment
• Market size and growth rate
Indonesian electronic products in 2014 exceeded Rp 152.4 trillion, a huge
market being dominated by several electronic producers from Korea, Japan,
China, and Indonesia. Around 40-50% of the market is a telecommunication
goods including hand phones and smartphones. Indonesian export value to
the world reached US$ 8.09 billion while to ASEAN is about US$ 593.2
million. The growth rates vary from year to year with range from 15-20%
annually. It is also important to note that 80% of products sold are priced
below Rp 2 million.
• Scope of competitive rivalry
Polytron competes not only in domestic market (Indonesia), but also compete
regionally across Asian countries. Polytron expands its export to Philippines,
Thailand, India, Pakistan, Bangladesh, Sri Lanka, Bahrain, Myanmar,
Dominican Republic, United Arab Emirates, Brunei, Sudan, Papua New
Guinea, Iran, and Vietnam. Recently Polytron has focus on capturing wider
market share in Pakistan.
• Demand-supply condition
The surplus of capacity from many producers regionally and the supply from
China have been flooding the market with wide array of electronic products to
choose. Demand has been slowing due to economic slowdown but supply
has been constant, even increasing slightly due to increase of competitors.
The industry is arguably overcrowded with many competitors with
specialization in low-cost or differentiated products for customer to choose
based on their preferences.
• Market segmentation
Polytron focuses on middle class segment, the largest proportion of
Indonesian population with less brand-mindset than upper class segment.
• Pace of technological change
The innovation in smartphones industry has been rapid and new product is
launched annually to keep on the newest technology. However, home
appliance electronic goods innovation has not been as fast and new
innovations are updated less frequently due to the durability nature of such
electronic goods (refrigerator, TV, audio player, home theater, etc.)
IV
Internal Analysis
Resources
• Three production facilities in Central Java
• Cheap trained labor for manufacturing activities
• Effective management
• Research and Development Department
• Brand equity
• Good dealer relationship
Capabilities
• Product innovation through R&D
• Human capital improvement through 3I (Invention, Innovation, Improvement)
• Strong team work ethics
• Fulfilling consumer needs in competitive way (specification and price)
Core Competence
• Continuous innovation and breakthrough in product design and specification
• Fulfilling middle class electronic products need with low price
Value Chain Analysis
Product R&D
• This is arguably one of the most important activities in Polytron value chain.
Product design and technology improvement combined with cost awareness
are the core of Polytron competitive advantage. Despite Polytron target
market of middle class population, innovative design and technology
specification have drive the key success factor in the industry.
Marketing and Sales
• PT. Hartono Istana Teknologi does not perform Marketing and sales, but PT.
Sarana Kencana Mulya, an affiliate company for distributing Polytron
products, markets Polytron through 19 representative offices. It has 7
authorized dealer and over 63 service centers across Indonesia. 95% of
Polytron products are marketed in domestic market while 5% are exported to
32 countries. Therefore, marketing and sales activities are important but not
the core competencies of Polytron value chains.
Operations
• Operation including purchasing raw materials, manufacturing, assembling
and boxing electronic products are done in-house by Polytron and is their
main competency in producing low-cost electronic goods. Using three
production facilities in Central Java, Polytron is able to produce various
products with competitive cost compared to competitors.
Distribution and Service
• Distribution is not the core competencies of Polytron, it is also done by
affiliate company, PT Sarana Kencana Mulya across Indonesia. However,
export to overseas market is done through PT. Hartono Istana Teknologi.
VRIN Analysis
The core competence of Polytron is design and technology innovation, and fulfilling
middle class electronic needs with low price
• Valuable
Innovation in electronic products are valuable competitive advantage for
Polytron as market demand change, the ability of Polytron to manufacture
wider range of electronic products with low price is also valuable for middle
class segment it targeted.
• Rare
Most of competitors have only one from two competitive edge Polytron have,
innovation or low-cost. However, Polytron managed to acquire expertise in
both aspects, it is an arguably rare condition for electronic producers.
• Inimitable
Polyton has established its R&D department since1982 and has been leading
the local innovation of electronic goods. It has also patented over 38 of its
innovation in US and Indonesia, which make Polytron able to secure the
competitive advantages it have. For competitors to pursue and match
Polytron strategy, it would takes time and large capital that makes it
unattractive.
• Nonsubstitutable
Due to the automatization of manufacturing process, there is a risk that
competitors may use machinery to reduce the cost of goods instead of
employing cheap labor as Polytron does. However, the Polytron competitive
advantage in innovation is non-substitutable and is the driver of the industry
itself.
V
Analysis of Firm’s Business Strategy
SWOT Analysis
• Strength:
o Strong brand image and awareness in society
o Continuous technology innovation in wide range of products
o Affordable price range for middle class segment
o Appealing design to consumer
o Wide distribution and export channels
• Weakness:
o High R&D cost may not always translate to products with high sales
and profit
o High maintenance cost of three production facilities
o There’s a pressure among employees in manufacturing line to fulfill
quota
o Lack of in-house strategy in marketing and distribution, dependent on
affiliate company
• Opportunity:
o Huge market for household electronic appliances in middle class
segment
o Innovative products tend to be more accepted by market
o Growth of Indonesian population impacts to rise in demand
• Threat:
o Fierce competition among electronic producers, both domestic and
overseas.
o There’s a tendency for middle class segment to aim for cheaper
alternatives from premium brand
o Sensitivity to economic cycle, people tend to hold on buying new
electronic goods during economic downturn
Generic Strategy
Polytron is currently following the best-cost provider strategy, a hybrid of low-cost
provider and differentiated products innovation to satisfy buyer’s expectation.
Polytron tries to give more value in its product to customer while maintaining an
economical price. In the same price range Polytron products give better value to
customer in middle class segment.
Proposed Value Proposition and Business Model
The membership of Indonesia in Asean Economic Community has created a free
trade inflow of cheap competitor goods to Indonesian market. To defend Polytron
market position from foreign competitors in Free Trade society, below are
recommendations that could be undertaken by management.
• Polytron could maintain its value proposition to customer by continue providing
innovative products at competitive price. The current regulation of 40% minimal
local content in electronic product is benefitting Polytron. Polytron 4G
smartphone currently use 35% of total component from local sources and
management plan to increase the local content progressively.
• Management should consider entering to new market such as tablet,
smartwatch, compact camera, and water heater among other product line. In
2015 Polytron introduced various products in all line, consumer electronic (audio
video), home appliances, and mobile phones. These products are not designed
by following existing product in the market, but are the innovation of Polytron
itself. For example the washing machine with tempered glass finish, air
conditioner with lower electricity consumption, and smartphones using Fira OS.
• Management also should consider vertical integration, both backward with
suppliers of raw materials and forward to the distribution and marketing of the
value chains. Effective utilization of R&D funds should also be optimized to
ensure accepted return on investment. Strengthening the brand among
Indonesian and Asian countries.
• Polytron could also better adapt with the local market than imported producer
through routine consumer survey and market research.
• The focus on exporting products to various countries also reduces the
dependency on volatile exchange rate. Polytron management should be more
aggressive in exporting their products to Asian market, which has enormous
growth potential.
• Brand awareness of Polytron as local producer also becomes the competitive
advantage through nationalism of its consumer. Currently Polytron has 20%
market share in refrigerator market.
VI
Conclusion and Recommendation
Conclusion
Polytron is a well-established domestic electronic producer in Indonesia and has
been popular among middle class segment population. Through three production
facilities in Central Java and strong R&D department role in product development,
Polytron managed to produce low-cost electronic goods that fulfill market demand.
With the current government regulation for electronic goods producer to contain at
least 40% local contents, Polytron is benefitted among other competitors. According
to Porter’s competitive forces, Polytron is has weak threat except in rivalry among
current competitors and bargaining power of buyer. Polytron also has many
opportunities with Indonesian membership in AEC such as the huge market of
Asean demand for electronic products, but also many threats as cheap overseas
product flood the Indonesian market.
Recommendation
Polytron should continue maintain its value proposition to customer by continue
providing innovative products at competitive price. Management should consider
entering to new market such as tablet, smartwatch, compact camera, and water
heater among other product line to defend its position as leading affordable
electronic products in Indonesia. Management also should consider vertical
integration, both backward with suppliers of raw materials and forward to the
distribution and marketing of the value chains. Effective utilization of R&D funds
should also be optimized to ensure accepted return on investment. Management
may also want to strengthen the brand among Indonesian and Asian countries
through market research and advertisement. Polytron management should be more
aggressive in exporting their products to Asian market, which has enormous growth
potential.
Implementation Issues
• New product line may be unsuccessful
• Vertical integration may take huge capital investment and extended time to
reach break-even
• Aggressive export to other Asian countries may not be successful due to lack
of knowledge regarding market condition
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