Based on information below:

A. Internal Analysis 1. What is the analysis of the company's resource and capability at the corporate level? 2. Strategic Business Unit Portfolio ? What is the primary value chain at each Strategic Business Unit?

B. Strategy Analysis ? Choose one of the alternative strategies presented in the case 1. What is the attractiveness test results to the company? 2. What are the current resource and capability that match with the industry that the company plans to enter? 3. What is the synergy that might be achieved by the chosen diversification? a. For related diversification ? What is the value chain that might be used by the new Strategic Business Unit? b. For unrelated diversification ? What are general resources and capabilities that might be used by the new Strategic Business Unit?

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For the exclusive use of U. PUTRO, 2018. Richard Ivey School of Business The University of Western Ontario IVEY 909M49 RODAMAS GROUP: DESIGNING STRATEGIES FOR CHANGING REALITIES IN EMERGING ECONOMIES Marleen Dieleman and Shawkat Kamal wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, clo Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca Copyright @ 2009, Ivey Management Services Version: (A) 2009-06-23 Mucki Tan, deputy chairman and main shareholder of the Rodamas Group, was thinking about the future of his group of companies. It was a hot and humid afternoon and clouds were building up on the horizon in Jakarta, the capital of Indonesia. Tan wondered whether the traditional local partnership role his company had played with different foreign multinationals was losing its advantage. The roles a local partner fulfills for multinational players in emerging economies can also be outsourced, and Tan had noticed the rapid growth of service firms in Jakarta that employed consultants, lobbyists and lawyers working for multinationals. Also, starting from 1994, the Indonesian government allowed multinational companies to operate in the country with 100 per cent foreign ownership in certain sectors. In 2008, the world economy was about to enter into a crisis, which was likely to bring problems, but also to offer opportunities. Did the business model developed by Tan's entrepreneurial father need a major overhaul? What were the alternatives? After Tan had reorganized and streamlined the company, selling off some of its smaller businesses, it was time to choose a new course of action. He knew he had to be very careful in selecting the right option. INDONESIA: A PROMISING EMERGING ECONOMY Indonesia is a vast archipelago with a population of around 240 million, and has, over the years, experienced significant growth. The country became independent from Dutch colonial rule after the Second World War, and has since transformed from a mostly agricultural society to an emerging industrial economy. The period in which Suharto was president, from 1966 to 1998, was one of especially rapid economic growth. This came with inflows of foreign direct investment, for example in manufacturing for the large local market or in the extraction of Indonesia's many natural resources. Economic prosperity translated into declining poverty rates, but was also accompanied by a system of cronyism in which Suharto nurtured relations and distributed business opportunities to a limited group of business families. The larger business families developed sprawling conglomerates that spanned several sectors of the economy. Often they were owned by families descended from Chinese migrants This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 2 9309M049 Foreign investors operating in The country looked for partners. and often found Them among These larger family rms. Local partners were essential to manage The appropriate connections in a country That was rapidly developing buT which still suffered from weak in'astructure. law enforcement and rampant corruption. making every aspect of operations. including obtaining permits. buying land. hiring personnel. procuring inputs and distributing products. a challenge. The cultrual diversity and geography for example. with hundreds of languages and islands. made iT hard to distribute products and effectively market Them. The low disposable income compared with The large population meant That there were large markets for products ThaT catered to daily needs. such as food. clothing. soap. construction materials and other basic products. The economic growth in Indonesia abruptly halted with The Asian Crisis in 1998. accompanied by The demise of Suharto and The implementation of a more democraTic political sysTem. During This crisis most companies ThaT had debt denominated in US. dollars. a popular borrowing strategy at the Time. faced ballooning debts when The local crurency. The rupiah. declined dramatically from around 2.500 To The dollar To 10.000 To the dollar. Most banks in the country collapsed and The financial sector had to be bailed ouT by The government. With The departure of long-Term dictator Suharto. a range of new presidents came To power who slowly opened rip the economy. improved banking oversight. decentralized power from Jakarta to The regions. and reduced pr'oTecTionism. DespiTe all These efforts. The insTiTuTional environmenT in Indonesia remained weak in particular in The areas of law enforcement and endemic corruption. TURNING AN IDEA INTO GOLD Rodamas (which means \"golden wheel") was sTarted by Mucki Tan's father. Tan Sion g Kie (hereafter Tan senior). in 1951 in Jakarta as Ho Hoa Trading Company Limited. In 1959. The corupany was renamed as Rodamas Company Limited. with Tan senior and his wife. Liao Man Hua. as The founders.1 Tan senior was born in Semarang in 1916 as a second generation Chinese Indonesian. He went To China and completed a 1miversity degree aT ST. John's University. a prestigious university in Shanghai. in 1941. Although by 1940 Shanghai was occupied by The Japanese. The ruiiversiTy continued to function. and Tan senior was able to return To Indonesia just before the war came To Southeast Asia. Upon his reTrun from China. Tan senior decided To become an entrepreneur. He had studied business and jorunalism in The rmiversity and This education proved very useful for his career as a businessman. IT enabled him To communicate with international business owners and he understood international markets. He spoke several languages. Travelled To foreign countries such as Japan frequently. and was Truly a global person. This made Tan senior stand out. compared to his peers. since most of the up and coming business leaders in Indonesia at The Time had liTTle formal education and were newly arrived migrants. When Tan senior sTarted his fu'sT Trading ventru'e. industrial development was in an early stage in Indonesia. Indonesian leaders had proclaimed independence from The DuTch colonizers in 1945. buT only gained it in 1949 after ghTing The Dutch in a civil war. Following independence. The country's new Indonesian leaders. in particular President Sukarno. set out on a path of socialism and \"guided\" democracy. His policies. influenced by connnunism. were detrimental to The economy. During Sukarno's rule. economic growth declined and ination soared. Sukarno also implemented measures To restrict The economic activities of The ethnic Chinese minority. which played a major role in The private sector. In The years prior to The founding of Rodamas. Sukarno nationalized most foreign companies. which implied that I Preiiminary internationai Offering Memorandum of PTRodamas Tbk, May 2003. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. Page 3 9B09M049 many foreign technical and managerial experts were forced to leave the country. For people like Tan senior, it was a difficult and hostile setting in which one had to navigate carefully. But it was also one of opportunities, since many existing foreign businesses closed and left a gap that needed to be filled. In this context, with little industrial activity and no expertise to produce even basic products domestically, many business leaders focused on trade, mostly import trade, and Rodamas followed this pattern. It developed partnerships with foreign manufacturers and became their agent in Indonesia. The objective was to become an efficient and trustworthy partner of those multinational companies interested in selling their products in the Indonesian market. Initially, the multinationals were only interested in exporting. So the role of Rodamas was mainly that of an importer. At the time, it was mostly Japanese products that were successful in Indonesia, as they were more suitable and more attractively priced than American or European products. Hence, the majority of the partners were Japanese firms In 1965, Indonesia was shaken by a bloody military coup that came with violence against the ethnic Chinese minority and the killings of hundreds of thousands of real or imagined communists. Sukarno was replaced by Suharto, a military man, who reversed the socialist turn that Sukarno had envisioned. Suharto understood that in order to modernize Indonesia and make it stable and powerful, he had to restore the economy, which was in a dire state, with inflation running up to 600 per cent. He took advice from a group of U.S.-trained economists, later referred to as the "Berkeley Mafia," and opened up the country for foreign investment. Realizing the reliance on imported goods, he started to stimulate local manufacturing, in particular in those industries that produced goods that used to be imported. Rodamas did not have the required capital to enter manufacturing but it had the right connections with foreign manufacturers. While the foreign multinationals had previously only exported, it now became attractive to manufacture in Indonesia, although foreign ownership was limited by law and a local partner was necessary under the prevailing regulations. As a former importer that had already proven to be trustworthy and able to capture the local market, Rodamas naturally extended its trading partnerships with foreign companies into manufacturing joint ventures in Indonesia in the late 1960s and 1970s. Other local business leaders at the time did the same. Rodamas's leaders were careful and conservative, and Rodamas proved itself once again as a reliable partner, playing key roles in obtaining licenses and land, hiring local management and doing local distribution for products that were produced in the manufacturing joint ventures. This business model remained more or less similar over the years, with a focus on manufacturing businesses that were non-labor intensive. The company itself phrased its mission as follows: Rodamas acts as the central hub for a global array of industry leaders. It operates in a wide range of industries and product categories and provides the critical central connection to the local Indonesian market and business environment. With more than five decades of experience in Indonesia, Rodamas has in-depth knowledge of the market, consumers, regulators, the regulations, the opportunities and local challenges. In both manufacturing and distribution, Rodamas provides local solutions for its global partners. Tan's father had a different strategy than other business leaders in Indonesia at that time. Suharto stayed in power for 32 years, and he created a sophisticated crony economy in which he favored a select group of mostly ethnic Chinese business leaders, whom he showered with incentives. Hence, the largest conglomerates in the country were those that were closest to Suharto and his family. At the same time, he restricted the ethnic Chinese minority in its cultural and linguistic expression, and he prohibited Chinese Rodamas Brochure, 2007 This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 4 9309M049 Indonesians from engaging in political or bureaucratic roles. In this manner. he could stimulate and direct the economy without these powerful business leaders becoming a political threat. This way of running the country legitimized a centralized form of rent-seeking and corruption. and a group of business leaders received monopolies and other incentives as long as they supported Suharto's goals for the nation and for his family. Many smaller business leaders realized how the system worked. and tried to link up with bigger and more well-connected tycoons in order to gain a share of the bounty. In this context. Tan senior's decision was to stay away from a crony relationship with Suharto. His vision was instead to maintain a very low prole and steer clear of the type of rent-seeking behavior which many of his peers displayed. His son continued this attitude. which is ingrained in the company culture. Mucki Tan believed that if only the bankers knew them well. that should be enough to continue business smoothly. Given the culture of extortion in Indonesia. staying below the radar screen of bureaucrats proved to be a very sensible strategy for the company. This neutral ideology tted well with the Japanese partners. who did not want to be subject to political risks due to intimate political connections. and who wanted to maintain a low prole. Although Rodamas cultivated good connections that facilitated doing business in a corrupt and sometimes chaotic setting. it was not considered a \"crony company." Father and son both kept a low profile and quietly built up a diversied portfolio of joint ventures. In the nineties. the company entered the ranks of the top-30 business groups in Indonesia with few people knowing anything about this business family. Contrary to most other groups in Indonesia. Rodamas had only listed one of its ventures on the local stock exchange. and all other businesses were kept in private hands. allowing the Tan family to keep business figures away 'om public and government scrutiny. The fact that Rodamas was not very close to the Suharto regime helped the Tan family to cope better with the fallout of the Asian Crisis that started in 1997r and that was accompanied by the demise of the Suharto regime in May 1998. While other groups suffered great losses and were put under a lot of political pressure. resulting in some owner's being jailed or forced to ee the country. Rodamas survived the Asian Crisis relatively unscathed. Next to its independent strategy. its survival was also due to its prudent and conservative management. in a time where other groups went on a borrowing spree and subsequently spent years renegotiating their debt. THE RODAMAS PORTFO LIO After the country opened tip in the late 1960s. Tan senior believed that the first demand for products in the domestic market would come in the form of basic needs such as food and housing. This was the reason the company started its 111anufacturing operations with the production of galvanized iron sheets which it initially imported (the business was sold later}. This product was used for roofs in rural areas. In 1968. the company entered the food industly by offering a gourmet powder (monosodium glutamate. hereafter MSG) that enhanced the natural avor of foods and was frequently used for Asian cooking. Later. Tan senior realized that glass would be in demand in Indonesia and he conducted a feasibility study which supported his idea. So the family fum entered the glass industry together with the Japanese company Asahi. under the local company name Asahimas. Although at the beginning Asahimas only did the packaging. eventually it moved into glass production in the early 1970s. In 1995. the company got listed on the stock exchange in Indonesia. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. Page 5 9309M049 Although Rodamas became the agent of General Electric air conditioners following Tan senior's visit to the United States in the 1970s. the company had only a few Western partners. and it concentrated on Japanese companies. as they were perceived to be able to cater to the special needs of Asian people. These Japanese partners of Rodamas played the most signicant role in the success of the company. While the Japanese were in charge of technology and production. they tended to involve the Rodamas management in making decisions and they tried to avoid potential conicts. Rodamas took care of local issues including licenses. hiring and managing local staff and complying with local regulations. In addition to transforming historical trading links into rrranufacturing joint ventures. Rodamas also acted proactively in building partnerships with foreign companies. Mucki Tan took over the business in the mid- 1980s and became deputy chairman while his father stayed on as the chairman. In 2008. about 30 per cent of the business stemmed from activities initiated by him. This included developing the distribution side of the business and initiating some of the food and Irlanufacturing joint ventures. The Tan family actively approached companies that were big in similar markets but had not yet entered the Indonesian market. The joint venture contracts were very long-term in nature (often 75 to 100 years) and to protect its interest. Rodamas negotiated a clause that. if foreign companies left a partnership with Rodamas. they would not be allowed to take anybody else as a partner in Indonesia. The competitors of Rodamas were diverse and there was no specic competitor. as the company was engaged in a variety of businesses. Like many other large businesses in Indonesia. Rodamas engaged in unrelated diversification. It was involved in a number of sectors. These included food. healthcare. personal care and hygiene. chemicals. glass. diamond coated tools. building parts and components. printing and packaging. and consumer product distribution. Exhibit 1 gives an overview of the group structure. including the different businesses in the portfolio. Exhibit 2 shows the contribution of each division to the overall prot. The notable brands of Rodamas's joint ventures included Sasa. Attack. Laurier and its flat glass brands. However. competition was picking 11p. and Rodamas was struggling to maintain its market share against local and multinational competitors. Exhibits 1 to 9 provide more information on the composition of the Rodamas group and the performance of the different divisions as compared to local competitors. Its MSG brands (Sasa and Ajinomoto. in which Rodamas had a 50 per cent share each) were leading in the Indonesian market. Attack. a detergent manufactured in a joint venture with the Kao Corporation of Japan. was also a strong brand. Other Kao products in the facial and body care sections were losing market share against Unilever and other competitors. although Rodamas had still been able to maintain its sales because the entire market was growing. By 2007. Asahimas was the largest producer of at and fabricated glass not only in Indonesia. but in Southeast Asia as a whole. Because of its reputation and domination in the market. glass and Asahinras at glass had beconre synonymous in Indonesia. Rodamas had also done very well with its printing and packaging business. which it formed with Dai Nippon Printing of Japan. Its printing and packaging products were being exported to more than 20 countries and the customers included large MNCs such as Unilever. Consumer products produced by the various joint ventures were sold through Rodamas's distribution business. In the 1980s. the Suharto governnrent started to promote exports. rather than stimulating import substitution industries. Rodamas followed suit and started to export various products. in particular the excess capacity beyond what the domestic market could absorb. One example of this was Sasa. the MSG producer. The company also exported detergent with Kao Company. The export activities helped Rodamas hedge some of its currency positions. The best performing international market was Australia. With its glass partner. Asahi. Rodamas held six per cent of the Australian market. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. Page 6 9309M049 Despite these exports. international activities were not very substantial for Rodamas. and the company was not very keen to go abroad. as it lacked the necessary experience. However. the issue of internationalization canre 11p because several of the Indonesian businesses had reached their limits. For example. Rodamas supplied 30 per cent of Unilever's packaging needs in Indonesia. and Unilever was unlikely to allow one single supplier an even more important position. Given that in several businesses the local market was saturated. it seemed that growth in these lines of business could come only 'om going abroad. MANAGEMENT AND ORGANIZATION STRUCTURE Mucki Tan (alias Tan Pei Ling) was born in 1957. He was the only son of Tan senior. and his sisters never entered the business. So it was clear from the beginning that he would be the heir to the Rodamas family business group. He graduated in 1979 'om the University of Portland in Oregon. United States. where he obtained a degree in business. and joined the family business in 1980 as a manager. His father slowly exited from the scene and he gradually took over in the late 1980s and was appointed as a commissioner in 1989. Tan's business approach was quite similar to that of his father. and the existing corporate culture and strategy was largely continued. However. he appeared to be more conservative and risk-averse and had a preference for slow and steady growth. rather than applying a high-risk high-return strategy. as many of the other family business groups in Indonesia were doing. He was a very careful man and always made sure that his company abided by the regulations. He also invested in accounting and ICT systems to make sure that the company followed international reporting standards. an essential tool for a company working with multinationals. But he was also known as a tough negotiator with a keen eye for opportrmities. The company was loosely structured into headquarters and the different joint ventrn'es. The management divided the company into food. chemicals. construction materials and other businesses (see Exhibit 2). Rodamas also maintained a distribution division to sell consumer products in Indonesia. Next to Tan. the management was made up mostly of long-term and loyal professional managers and partners. although at the middle-management level. the company experienced a rapid turnover of managers. The strategic decisions were taken by a small core team which included people from the joint ventures and the distribution business. The strategy for the company had always been to maintain a conservative approach and play the role of a niche player in the market. Excluding the joint ventures. a total of 4.000 people were working for Rodamas. with 600 of them working in the headquarters. Including the joint venture companies. Rodamas had around 12.000 employees. The company was continuously downsizing its employee base through more automation and optimization. In one business that produced parts for windows. the number of employees required used to be 600. However. with more automation and more skilled employees this number was reduced to 150 without hampering the output level. The overall performance of the business group was quite satisfactory. The combined joint ventures had revenues of just over US$1.5 billion in 2007. and the consolidated turnover of Rodamas was around US$250 million for 2006 and 2007. The fact that revenues did not grow had to do with the spinning off of some companies. Prots almost doubled from US$17 million in 2006 to US$32 million in 2007. But Tan wondered how he could keep on growing in the future. He felt that several of his businesses had reached their limits. already having substantial market shares locally. while others faced tough competition. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. Page 7 9B09M049 As far as management was concerned, Tan, like his father, believed in providing autonomy to the managers. However, one persistent problem that the company had to face was the lack of qualified people for management and sales positions in Indonesia, a problem that all large local companies faced. Before the Asian Crisis, the company had a process of training its future managers internally. Things had changed since then as some people left the company during and after the crisis. So the current middle management was comparatively new. The company replaced 80 per cent of the middle and senior management in the last five years. Rodamas was proud of its management trainee program and most of the managers that the company had moved up through this program. One of Tan's goals was to improve the retention rate of the trainees in the long term. Hiring also took place from outside. The positive aspect of the high turnover at the middle management level was the entry of many new and dynamic people into the firm who were not yet stuck in old routines and were more willing to accept a future change of strategy. Tan had also started selling off a number of businesses, such as the Tumbakmas galvanized iron sheets business, and a small textile business, as he believed that the best strategy for the company would be to sell off the small businesses and concentrate on the large core businesses, which had more growth potential. Although some could be sold off, he was facing difficulty in selling the smaller businesses which did not generate enough revenue. He believed that businesses that generated only one million dollars or less in profits in a year should be phased out. But he wondered how much he should cut, and what he should do after the various spin-offs were be completed. THE CHALLENGES AHEAD The Suharto era was one of seven per cent economic growth per annum on average over a period of 32 years, and despite its cronyism and corruption, was a relatively stable and prosperous period for businesses. This ended abruptly with the Asian Financial Crisis of the late 1990s. The crisis consisted of a strong devaluation of the Indonesian currency. Prior to the crisis, most companies had converted their loans to U.S. dollar loans, since interest rates were more attractive. This backfired, loans exploded, and most companies were technically bankrupt due to the crisis. In addition, the entire financial sector collapsed. The government had to pick up the tab, nationalizing a large number of banks and recapitalizing them. Rodamas was also exposed to the currency crisis, as it had issued convertible subordinated notes worth $35 million in 1995, and struggled to pay when this amount became due. It first contemplated converting loans into equity and conducting an initial public offering in 2003, but finally renegotiated and serviced the debts without going public, since the stock market at that time was not favorable. The Asian Crisis also brought down Suharto and he was replaced with a new regime with anti-corruption and anti-Suharto overtones. Many of the protective measures for companies enacted by Suharto were now abolished, and Indonesia moved towards a more open economy and the country transformed into one of the world's largest democracies. Tariffs and other trade barriers generally came down, making Indonesia more competitive In April 2007, for example, a new presidential regulation was passed that allowed 100 per cent foreign ownership in most sectors of the economy except public infrastructure, and the government actively promoted foreign investment, which had fallen to much lower levels than before the Asian Crisis. Some foreign companies already operated without a partner. A number of service companies catering to multinationals started to thrive, for example, in the legal, financial, lobbying and management consulting services. Many multinationals started to understand how to cater to low-income groups, sometimes referred to as "the bottom of the pyramid." With a population of 237 million and rapidly growing, Indonesia was a This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 8 9309M049 lucrative market. The most advanced companies. such as Unilever. could operate very well in Indonesia's difcult business environment without a partner and control their own marketing and distribution channels. The govelnment. after Suharto. had changed frequently. with no party or president holding power for more than a few years. Conuption continued to be widespread and local economists estimated that bribes continued to cost companies about 15 per cent of the total costs of operations. This was despite the government's efforts to reduce corrupt practices. Without the light connections and some protection. few businesses could operate efciently. Courts could not be counted upon to uphold property rights and contlacts. and therefore trusted partners were still important. With poor infra structure and people scattered in thousands of islands. the distribution of products outside the big cities was a challenge for those unfamiliar with local conditions. Indonesia was still one of the riskiest markets in the region. But Indonesia was also the largest consumer market in Southeast Asia. and thus could not easily be ignored by multinationals. As a result. trustworthy partners were still sought-after. It was not only in the local environment where Tan noticed new developments. Changes affecting the global business environment also had implications for Rodamas. The rst of these developments was linked to changing govelnance practices within multinationals. Scandals in the United States and elsewhere had led to tightening laws on cmporate governance and more stringent accounting rules. This made 111111tinationals more inclined to solve local problems through lawyers and consultants than via local partners. An example of this occurred when an American rm had a problem registering its trademark because a competitor had registered it instead. The company solved the problem through expensive lawyers. and in addition could not sell for two years. Tan felt that \"he could have just picked up the phone and solved it." But the trend seemed to be that foreign companies operating in Indonesia would hire consultants and lawyers and send out expatriates rather than having a local partner who was also a shareholder. Fortunately for the company. most multinationals that followed the outsourcing model were faced with extremely high costs. and it was a problem for the multinationals to select good service providers . With the increasing standardization of products worldwide. it was sometimes becoming difcult to convince Rodamas's partnels to adapt a product to t local market demand. As Tan put it. \"instead of doing what the Indonesian consumer wants. they do what Tokyo wants.\" Rodamas was often a minority shareholder in the joint ventures. As a consequence. the more the business was centralized. the less Rodamas was able to make use of its knowledge of the local market to increase sales. Rodamas had recently experienced 'iction with one of its partners. which quit the pa11ne1ship despite sales going up. The more successful the partneiship was. the more the multinational had wanted to control the distribution and local marketing. and the more it demanded from Rodamas. Was this a foreboding of more trouble to come? Whereas virtually all multinationals used to be mostly from the United States. Europe or Japan. Tan noticed another trend. namely the 1ise of multinationals from emerging economies. such as China and India. Rodamas had already signed a distribution agreement in Indonesia for a consumer product with a Thai multinational. The company was monitoring companies from China and the Middle East. Tan knew that his Chinese background would help him get businesses from the mainland Chinese companies. He also believed that the Chinese companies were more likely to understand the value of connections. and that Rodamas could portray itself as a useful partner because of Tan's strong pelsonal network in Indonesia. However. there were two problems. First. the Chinese firms that had already come to Indonesia were still ve1y much focused on export. Second. the ones that were interested in investing were looking for investment in natural resources. This was an area where Rodamas did not have expertise and Tan thought it would not be a wise idea to enter this sector at this stage. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. Page 9 9B09M049 Lastly, the global economy was entering into a crisis at the end of 2008, which would most likely also affect Rodamas. On the one hand, lower demand for various products was predicted, which would impact Rodamas's cash flows. However, due to a generally conservative strategy and sufficient capital, Rodamas would also be able to benefit from the fact that some companies were now for sale for reasonable prices, both at home and abroad. Under these changing local and global conditions, what would be the role of Rodamas? Were these trends undermining or supporting its current business model? Would multinationals still need Rodamas, and if so, what kind of competencies would be required in the future? STRATEGIC OPTIONS Due to the changing business environment, Rodamas started to think of moving away from its traditional business model. Tan thought that Rodamas's position was precarious, as it did not own any proprietary competencies. For this reason, he had already prepared by selling off some of the smaller companies. However, focusing on one single line of business only was also not a viable option, since all his businesses had natural limits to growth, and besides, the Indonesian economy was so risky that most companies considered diversification a necessary risk moderator. So Tan thought about developing his own capabilities that could be used in multiple businesses. But it was not clear whether Rodamas had the core competencies that were required to take it in a different direction. For example, it lacked the technology and research and development (R&D) expertise that is required to operate as an independent manufacturing unit, and the family was bound to non-competition clauses in the businesses it was already operating in. The company's capabilities would only allow it to produce simple products. This was not necessarily an attractive option, as the market for such products was already crowded. Yet many local firms had achieved success by using this strategy, including several property firms, clove cigarette manufacturers and manufacturers of basic toiletries. However, the simple technologies implied that every company could embark on such ventures if they wanted to. So, with no base to start with, and hefty competition, this could prove to be a difficult bet. Rodamas did not benefit from knowledge transfer, as technology was proprietary and owned by its Japanese partners. The main role of Rodamas was to handle local management and interactions with the government and other local players. To start for himself in an area that was low-tech and relatively easy, Tan was toying with the idea of entering the property sector. He was confident that his company could add value in the office rental sector. His office building, a spacious former factory site that used to be surrounded by paddy rice fields, was now in the city center of rapidly expanding Jakarta, and the area could be converted into office towers as a first step. But he also considered it a volatile industry in which he would be a small player. His version of a real estate venture was one which would generate revenues through long-term office rentals (build and rent) rather than through the conventional process of buying land, developing buildings and selling them (build and sell). In the past, Tan had invested in such a real estate project jointly with Sumitomo from Japan, and it had been a successful venture. But he had already calculated that the current tax system in Indonesia was not very favorable for these sorts of arrangements. Although a change in the tax structure was expected, Tan was not sure whether or not to extend his investments in this line of business based on this expectation. Also, Tan was wondering if he had enough experience in this sector. Rodamas did not have a strong brand name and he felt that without having this essential element, it would This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 10 9B09M049 be very difficult to be successful in the real estate business considering the current level of competition in the industry. The other option was to move into labor-intensive manufacturing. While Indonesia was facing competition from China in this regard, most multinationals spread their suppliers and sourced from different countries, which meant Indonesia would likely get a small share if minimum price and quality were met. However, in this field the Rodamas management lacked the necessary confidence. Tan was skeptical about his company's ability to handle the different requirements of such an industry and he felt that the multinationals "could walk out tomorrow." Internationalization via foreign direct investment was also a long shot. The company lacked the necessary human resources to establish a base in foreign soil and compete successfully, but on the other hand, the economic crisis worldwide did offer opportunities otherwise not available. The management of Rodamas also thought of internationalizing along with the company's partners. Its partnership with Asahi had already led to exports, and it envisioned that it could expand its role and help Asahi set up manufacturing in other Asian markets such as Thailand. Japanese companies had traditionally concentrated all manufacturing and R&D in Japan, producing locally only the simple products. But this model was changing. As global business tended to move towards regional manufacturing centers, Rodamas could be a partner in making regional concentration successful. But for this, it would depend on its partners, and Tan sometimes witnessed the local managers of Japanese firms carrying out the wishes of Tokyo, so he wondered whether these managers would have the power to decide on regional expansion. Another idea was to focus on the company's already existing consumer products distribution business. It had experience in this sector, as it already distributed the products manufactured in its joint ventures both in urban and rural areas. It had started handling the sales of a few consumer product companies that did not manufacture in Indonesia. The consumer product market in Indonesia was attractive, but margins were low compared to other countries, so to obtain a high level of profit, companies had to depend on high volumes. Poor infrastructure and high fixed costs (transport, information technology, etc.) kept most multinationals except the largest ones out of this business. In addition, the distribution business was not easy. Large companies usually did not need a distributor like Rodamas, while companies that were too small would not generate enough volume to make profits. Rodamas could focus on the mid-sized accounts, but if it was successful and sales improved dramatically for a foreign company, the company would probably then prefer to get more involved and squeeze out its distributor in order to retain as much of the profit as it could. When the sales were not high, the company would do little promotion, making success difficult. Thus, it would involve a lot of bargaining, and possible business conflicts if Rodamas did better or worse than expected. In addition, finding the right products and bargaining with multinationals abroad would require an investment in management time. Another option was to buy existing manufacturing businesses from owners that already licensed or developed a technology. Acquisitions of existing businesses seemed a lucrative idea. Tan, a shrewd businessman, had looked at a few companies, and made a few bids, but found that what was on the market in Indonesia was either not worth the effort or was overpriced. In a recent deal, Tan bargained hard to buy a small manufacturer, but his offer was perceived to be too low, and the ailing company remained in the hands of the bank. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 11 9309M049 FUTURE DIRECTIONS Tan tried to evaluate the impact of the recent changes he noticed in the Indonesian and global markets. He wondered whether the Rodamas business model was losing its value as the global economy moved into a recession. Should he sell off more businesses, and when was it time to stop? Where should he invest his time and money? How could he turn the economic crisis into an opportunity? How could he continue to grow the company in a changing environment? Tan realized that, now that the company was in good shape, he should take the opportunity and make a decision in the course of the next few months. If he decided to change the business model, building new capabilities would take time and energy, and competition in Indonesia was getting more intense. The clouds had now become dark, and had caused a late afternoon downpour. Looking at the trafc jam outside his ofce, he wondered what to do and how. The research on which this case is based was supported by grant no. R-313-000-O79-112 from the Naticrria.I University of Singapore. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018. For the exclusive use of U. PUTRO, 2018. 9B09M049 Page 12 Exhibit 1 GROUP STRUCTURE OF RODAMAS Rodamas Building Food Consumer Chemical Other Material Product Goods Product Business . PT Asahimas . PT Dai Chemical Nippon 18% Printing PT Riken Indonesia Asahi Plastics (49%) Indonesia . PT Saint (10% Gobain Winter PT Kao Diamas (25%) Indonesia PT Eratex Chemical Djaja Tok 5%) (19.6%) (sold) . PT Video Display Glass Indonesia (5%) (sold) MSG Other Foods Personal Care Medicated Product and Household Plaster, Product Liniment, and Gel . PT Sasa . PT Mitratama Inti (50%) Rasa Sejati . PT Kao . PT Sasa (100%) Indonesia . PT Hisamitsu Fermentasi . PT Mitratama (49.97%) Pharma Indonesia (25%) (50%) Kencana . PT Sejati (100%) Ajinomoto . PT Nabisco Indonesia Foods (30%) (50%) (sold) Galvanized Steel Shutter Louvre Glass Iron Sheets Door's Windows . PT Asahimas Flat . PT Tumbakmas . PT Sanwamas Metal . PT Dicky Metals Glass Tbk (40.67%) Inti Mulia (100%) industry (50.13%) (100%) :old Source: Company documentation. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 13 9B09M049 Exhibit 2 CONTRIBUTION TO OVERALL PROFITS OF THE RODAMAS GROUP IN 2007 Other, 7% _ Building _ Materials, 24% Consumer Products, 3% Food Products, 42% _ Distribution, 15% Printing & Packaging, 9% Source: Company documentation. Exhibit 3 MARKET SHARE OF INDONESIAN SKIN AND FACIAL CARE SEGMENT 2002 2007 Others, 16% Unilever, 15% Others, 21% Kao, 20% Unilever, 59% Kao, 69% Source: Company documentation. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 14 9B09M049 Exhibit 4 MARKET SHARE OF INDONESIAN BODY CARE SEGMENT 2002 2007 Unilever, 27% Others, 32% Others, 39% Unilever, 42% Kao, 34% Kao, 26% Source: Company documentation. Exhibit 5 MARKET SHARE OF INDONESIAN SANITARY NAPKINS SEGMENT 2002 2007 Others, 20% Others, 20% Kao, 32% Kao, 49% Wings Group, 17% Wings Group, 18% Charms, 30% Charms, 14% Source: Company documentation. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 15 9B09M049 Exhibit 6 FLAT GLASS PRODUCTION CAPACITY IN INDONESIA IN TONS 2002 2007 Tersindo, 100,000 Tersindo, 40,000 Other, 135,00 Asahimas, 570,000 Asahimas, 570,000 Mulia Glass, 400,000 Mulia Glass, 500,000 Source: Company documentation. Exhibit 7 MSG PRODUCTION CAPACITY IN INDONESIA IN TONS* 2002 2007 Cheil _Others, 15,000 Samsung, 20,000 Ajinomoto, 36,000 Others, 75,500 Ajinomoto, 65,000 Sasa, 50,000 Ajinex, 30,000 Cheil Samsung, 40,000 Miwon, 60,000 Miwon, 40,000 Sasa, 57,000 Ajinex, 30,000 Both Ajinomoto and Sasa belong to the Rodamas Group. Source: Company documentation. This document is authorized for use only by UTOMO SARJONO PUTRO in 2018.For the exclusive use of U. PUTRO, 2018. Page 16 9B09M049 Exhibit 8 REVENUE GENERATED BY DISTRIBUTION OPERATIONS Revenue generated by 2002 2007 (In million USD Consumer Products 122.36 179.10 Hardware 52.08 64.29 Air-conditioners 3.04 4.35 Source: Company documentation. Exhibit 9 FINANCIAL RESULTS OF PT ASAHIMAS FLAT GLASS TBK Financial Results 2002 2007 In million USD except Earnings per Share) Revenue 134 206 Net Profit 21 16 Net Earnings per Share 0.049 0.038 (USD) Return on Equity 28% 12% Source: Annual reports, Asahimas Flat Glass Tok. 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