Yogya Group Strategic Objective At Risk (case Study)

YOGYA GROUP STRATEGIC OBJECTIVE AT RISK

“TAKING YOGYA GROUP TO THE NEXT LEVEL” YOGYA GROUP is faced with savage competition, with price war being carried on the competition rivals are pushed to lower their price in order to remain competitive to their customer. Profit margin is diminishing, even in some products they have to reduce their price below their marginal cost just to keep their customer out of their rival’s territory. Now profitability is very difficult to retain. YOGYA GROUP needs to make action towards this severe condition. There are not many options, whether to achieve cost leadership or make a significant differentiation to keep the firms alive and achieve their strategic objectives.

RETAIL BUSINESS IN INDONESIA Retail business is direct sale of goods in any type of outlet such as kiosk/stall, traditional/modern market, department store, boutique, etc including delivery service, which generally supplies for purchasers personal consumption. Retail business in Indonesia can be classified into two main groups, i.e. Modern Retail and Traditional Retail. Modern retail is basically an expansion of traditional one. This retail format emerged, growing side by side with economic, technology developments, as well as changing in society life style which demands a more comfortable shopping experience.

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Modern retail first emerged in Indonesia when Sarinah Department Store was established in 1962 and this system continued to grow during 19701980. Early 1990 is a milestone for foreign retailer entrance into Indonesia, marked by the first operation of the largest Japanese’s retail chain ‘Sogo’. Modern retail grew rapidly when the Government, by President Decree No. 99/1998, removed the retail business out from foreign investment negative list. Before the decree was issued, there were very few foreign retailers operated in Indonesia. At present, there are various types of modern retail ranging from Modern Market, Supermarket, Department Store,

Boutique,

Factory Outlet,

Specialty Store, Trade Centre, and Mall / Super Mall / Plaza. Growth of these types of modern retail outlets will continue to follow economic development, technology and demands made by society lifestyle.

Challenges in Retail competition Afterwards, Retail Market, which has experienced high performance, will face several challenges. One of the major challenges will be the possible slowing down of turnover growth as an impact of economic slowdown due to 2008 global crisis. At present, people’s purchasing power has been affected and is predicted to continually decrease due to the slowing down of economic growth. However, as Modern Market offers consumer’s basic need, this type of market is forecasted to remain developing, although not as high as before. If during 2004-2008 modern market turnover grew on average 20% per year, thus, in 2009-2010 - when the negative impact of global crisis on real sector reach its peak, turnover of modern market is forecasted to increase at only 5-10%. Yet, as global economy improves, by year 2011, turnover growth will bounce back to its level of growth as before global crisis.

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Another challenge comes from regulatory framework. A fact that Traditional Market is weighing down gradually, which is shown from declining of their turnover and the lesser consumers shop in Traditional Market, have forced the Government to issue several policies that regulate harmony between Modern Market and Traditional Retail.

YOGYA GROUP Back sixty years ago, Gondosasmito established Toko Djogdja in Kosambi, Bandung. The shop was focused on Batik which made in solo and Yogyakarta. at that moment they still taking goods from Cibadak with a real minim capital not rarely payee behind a.k.a owes at the shop owner . The Shop was 100 m2 large with only ten workers. The shop managed to hold out to twenty four years without significant progression. Changes was finally occurred when Boedi Siswanto Basuki join the family business. He married to Gondosasmito’s daughter, Tina Handayani. The Shop enter its new regime under Boedi siswanto’s control. a big opportunity come when Budi Siswanto Basuki the owner of Djogdja is offered a land in Sunda street, blessing of saving which he has save for many years he finally bought that land. And that is the first breed of Djogdja, Named Toserba Yogya, located at Jln Sunda 60 Bandung, 300 m2 large with 40 workers. To cope with the existing competition, Toserba Yogya begins its expansion outside Bandung. At the beginning of 1984 Toserba Yogya established its branch in Cirebon. Four years after Cirebon expansion Yogya spread it wings

to Tasikmalaya, followed

by

Sukabumi, Jakarta, sumedang,

kuningan, indramayu, majalaya, Garut and subang. When monetary crisis knocks over Indonesia Yogya almost experiences bankruptcy but blessing of sprier and readiness of thinking from the owner and his team Capability and Character which strong Yogya successfully rise and reach feather in one's cap though resides in middle

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of incursion minimarket and Hypermart which many spread over in Bandung, now Yogya has around 52 store which spread over in West Java. In Indonesia the competition draw both Supermarket and hypermarket in to the same battle. Hero, Superindo, Giant, Carrefo, ur are counted as rivals in the competition. Within group of supermarket there are six major player i.e. Hero & Giant, Carrefour, Superindo, Foodmart, Ramayana, Yogya & Griya. These six retail networks account for 76% supermarket turnover in Indonesia, as displayed on the following table.

Supermarket Market Share 2008

NO

Supermarket

Share

1

Hero + compact Giant

14,61 %

2

Carrefour

13, 95 %

3

Superindo

13, 35 %

4

Foodmart

12,19 %

4

5

Yogya Group

11,62 %

6

Ramayana

10,61 %

7

Others

23, 67 %

Source : Media Data 2009

YOGYA GROUP’S STRATEGIC OBJECTIVES Vision Mission

: Constantly being customers number one choice : Loyal to fulfill customers demand

Yogya group established its corporate strategy 2009 into two main objectives. To achieve 17.5% annual sales growth and to achieve merchandising excellence measured by detailed SKP (Stock keeping period) for the inventory of each type of products (food : 23 days, nonfood : 27 days and Households/GMS : 50 days). By maintaining growth of sales and ideal SKP it is expected to keep the firm financially healthy so they can sustain the appalling competition they are currently facing. To support their effort to achieve the desired goals, Yogya Group weaved 3 moral philosophy values to their daily operation activities. Honesty, loyalty and modesty.

What Yogya Group have done : Cost leadership Yogya Group has claimed to have been striving for cost leadership to achieve its strategic objectives. From the upstream process to the downstream process, yogya group work everything they can to reduce costs while on the other side, service level is still subject to their primary concern. It improve its traditional supply chain to get the advantage. 5

Yogya Group believes that in order to achieve cost leadership there are sources of cost advantages that could be utilized by

firms in retail

industry. Not as much like in manufacturing industry, there are only few sources that are available for firms in retail industry to exploit, as in retail industry the value chain process are cut and shortened. There are only few nested processes in every steps of process in completing the supply chain.

There

are

supplier

relationship,

purchasing,

inventory

management, Sales and operations and customer relationship. These are sources of cost advantage that have been wielded by Yogya Group : 1. Technological software of firms such as quality of relations among

labor and management and Organization culture. In Yogya Group the quality of relationship among the worker and management are superbly maintained. There are strong kinship surrounds the daily working attitude at yogya group. By developing strong kinship among the firm it will reduce possible and labor cost such as cost of high employee turn over. There are three core corporate value at Yogya group, Honesty, Loyalty and modesty. Those three core values contribute fair cost reduction to yogya group’s cost reduction objective. It will prevent workers from stealing, reduce cost of poor service quality provided by employee to customer and helps Manager to maintain labor cost at reasonable and fair level. 2. Supply

chain activities, Starting from Purchasing, distribution

system, inventory management to the Sales and operations Yogya Group believe that cost leadership strategy work best when there are only few ways to achieve product differentiation that bring value to the customer, when the competition is very tight, price war occurs, and profit margin are diminishing. Those are conditions the are facing. Yogya group always make sure they have fair and beneficial contract with their supplier. If they can assure this, it will support their cost cutting policy on daily basis. Here is the description on how beneficial contract could help the firm to maintain it low cost operational. 6

1. With beneficial contract we can make sure that lead time of

delivering goods ordered will not took very long time before we can receive

the ordered goods. With lead time beneficial to our

operations Yogya can prevent Stock Out cost and making a lean inventory system. 2. When receiving goods,Yogya double check the goods and matched it with purchase order, if there is spoiled or wrecked goods detected, beneficial contract could approve us to return those particular goods back to the supplier, so we prevent cost of shrinkage. 3. Beneficial contract help Yogya to maintain and control its cash flow, they usually calculate the stock keeping period of selected goods and push term of payment to be longer than the stock keeping period as possible. Within The operational processes, Yogya pressed down their overhead cost to retain profitability. In each divisions cost prevent action and cost decompression is valued at every activities. But not all employees understand the importance of this philosophy. Yogya still need to enhance their employees understanding about cost leadership. Regular training and development scheduled for their employees. On those training, The management always remind and weaved the importance of cost leadership attitude among the employee.

Is it enough? Retail industry which Yogya group have been facing from beginning, have come to the point that the competition is savage and profit margin from each products they sell is diminishing. This problem is also faced by Yogya Group rivals such as Hypermart, Carefour, Superindo and Giant. Especially in West Java, The only region that Yogya Group is

operating, every

retailer have to press down cost so they can improve their pricing strategy and profitability. Apparently, what Yogya has been doing is also been 7

done by the competitor. Event the Operational Director is having a headache thinking new ways to get on top over his rivals. “What we do, everyone can do, and we will do, everyone is going to do it too” said the gentleman. It appears that all of the competitors in the industry have the same ability or access to its supplier and customer. “there’s nothing else that we can do to create distinctive advantage to win the market share over the rivals! All we do is keep press down costs and keep an eye of what our rivals do. If it means to drop the price below the marginal cost temporarily for specific product, then we must do it. Otherwise they will get the big pie, not us!” The cost leadership is no longer cost leadership if everyone is equally adept on doing it. It is actually no longer provide Yogya a strategic advantage over its rivals. It is not enough if Yogya are going to achive their strategic objective, 17,5% growth of sales. Carrefour have done so well on their one stop shopping trends, Private labeling and cost leadership. Is it enough for them? Rivals are now doing the same thing. If it is not enough then maybe Yogya have to look the other way. It is difficult time for Yogya and there is nothing much that Yogya could do in this competition except doing what the others going to do and so on. While there is plenty of area available for expansion, should Yogya continue to survive the war at west java retail competition? Or they could take a chance on expanding their flag to other regions with risk of new market that doesn’t even know that they are exist…

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Teaching Note Case Synopsis This case

describe

how Yogya Group strive to achieve its strategic

objective i.e. 17,5 % sales growth by focusing on Cost Leadership while the competition among rivals is very tight and that everyone have the same strategy on dealing with rivals and to achieve their strategic objective.

Teaching Objectives This case was written for Strategic management class in Magister Management at Parahyangan Catholic University, Bandung. It gives students a chance to develop their analytical and conceptual skills concerning the retail competition faced by Yogya with their Cost Leadership strategy.

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Immediate Issue In current conditions of the competitions, Everyone on the competition is doing the same thing while there is not much options to differentiate from others. This Create a conditions of where Profit is diminishing and difficult to achieve their strategic objective.

Basic Issue 1. Strategic Advantage (Cost Leadership) 2. Strategic Objective at risk

Suggested Student Assignment 1. Do you agree that there is not much options left for Retailer in

West Java to get a Strategic Advantage over its rivals ? 2. What is the biggest risk that Yogya Group will face if they are to

stay in west java competition? How should Yogya Group Act?

Case Analysis Competition is made not to be perfect, there will always be leader and follower, it is supposed to be dynamic. Every firm has its own core competencies, then from this competencies value creation are supported. What occurs in retailer industry seems to be a headache to every manager involved. Profit margin is limited, even low operational cost focus still could not give them cost advantage as all players have same capability to press its operating cost. By the way, it is depend on the commitment of the management on how they see the word cost leadership. If the words only means words not as policy or a matter that have to be concerned in every business decision, then I’ll say they don’t really understand the absolute needs of cost leadership. It needs long time commitment and control. It needs real daily basis control and report. 10

It needs evaluation and mitigation. Giving training regularly doesn’t always prove to be effective. If we are going to give training, then we need feedback. How to get feedback? We need to give target and evaluation to the employees. I am not quite agree that there is not much options left for retailer to differentiate, there is always a way. By using the correct tools we can identify further actions that we could take. We identify our positioning and we take it to the next level. It is true and normal if rival keeps their eye on their opponents, watching what they do and imitate, analyze what they are going to do next and steal their moment. It is true that the competition is not very friendly but I think Yogya Group could still improve and do better. Evaluating their products would very helpful in reducing cost. Product review should be scheduled more often and customer survey should determine customer needs deeply. Fixing basic needs of customer that have been problems (parking lot) will also benefit Yogya in the long run.

1. Do you agree that there are not many options left for

Retailer in West Java to get a Strategic Advantage over its rivals? I don’t agree….. When there is a will, there is a way… Here is my plan….

PLAN A Continue being committed into cost leadership would be a good answer when firm’s financial positions are not adequate to support market development (geographical expansion). It is 11

difficult to keep up with fierce competition, and players hope that they never get trapped in a dilemma between low costs and good quality. Once they have determined to go for this approach, then here are aspects that need our attention so we can make this strategy work for your business. Technological improvement, being a low cost provider requires plenty of flexibility in product procurement. We need to be able to respond quickly to shifts in market dynamics. Therefore, we cannot afford to maintain expensive equipment designed to manufacture specific products. Sell off such equipment or unnecessary components. Invest your capital in other technology areas such as coming up with innovative techniques for cost reduction. Evaluate our products periodically, take

a look at our existing

product, and determine whether your targeted market segment really

needs

its

existing

attributes.

Often,

price-sensitive

customers want products that fulfill their promise of delivering one result. The other add-ons, which are costing you and also the customer, are not needed. Think simple. Find cheaper materials for internal work processes. Expensive materials don’t necessarily mean good quality, while lower prices don’t always equate to inferior quality. Never compromise on quality. It pays to do your research and test some inexpensive available materials for usage in your internal activities. In the long run, your business becomes more cost-effective, and thus in a better position to continue your low-cost leadership strategy. This will press down our overhead cost. We don’t have to spend millions on advertising. Price tag already obtains attention from consumers. We do not need to spend huge amounts of money on marketing to create more hype for your brand. I am not suggesting that you cut out marketing totally, but that you spend only on what’s definitely going to benefit your 12

sales. For example, reach out to your customers by providing samples of your new and improved product, emphasizing the attractive price, and give a few clues on how you manage to offer this price. In addition, Yogya group has its own first mover advantage which gave them the lead in winning customers heart and stronger customer brand awareness. People are wary of things that seem inexpensive yet claim to be of good quality. It is thus important to communicate to them that you have implemented a new production process that allows production costs to be cut, for example. They want to believe you, and you need to provide information to back your business up. Your position as a low cost provider gets stronger as you build up your business’ cost effectiveness. I talked about evaluating your technological capabilities in the first point, because I believe that external factors are susceptible to changes, and these changes can come on suddenly, such as a price hike from raw material suppliers. Therefore, maintaining internal efficiency is the most important way of achieving cost effectiveness for your business.

PLAN B If the financial conditions provide possibility for Yogya to develop its market, than we should use strategic tools like ansoff matrix to determine the next step. To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown on the next page:

Existing Products

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New Products

Existing Markets

Market Penetration

Product Development

New Markets

Market

Diversification

Development

Ansoff's matrix provides four different growth strategies: 1. Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. 2. Market Development - the firm seeks growth by targeting its existing products to new market segments. 3. Product Development - the firms develops new products targeted to its existing market segments. 4. Diversification - the firm grows by diversifying into new businesses by developing new products for new markets. Selecting a Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration

has

limits,

and

once

the

market

approaches

saturation another strategy must be pursued if the firm is to continue to grow. The competition has reached the phase that it is very hard to get result in growth if we are still doing market penetration. While there is another option provided by ansoff, let see the next adequate option below.

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Market development options include the pursuit of additional market

segments

on

other

geographical

regions.

The

development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. But on the other side Pursuing additional market on other geographical regions would pay off more and growth is very likely to be reached. 1. What are the possible risk that Yogya Group will face if

they are to develop its market on other geographical regions? How should Yogya Group Act? From a business perspective, staying with current existing product in current existing market is a low risk option, we know how the competition works, and the market holds few surprises for us However, we are going to expose ourselves to a whole new level of risk either moving into a new market with an existing product, or developing a new product for an existing market. The market may turn out to have radically different needs and dynamics than you thought, or the new product may just not work or sell. And by moving two quadrants and targeting a new market with a new product, you increase your risk to yet another level. We ought to manage the risk appropriately. For example, if we are switching from one strategy to another, make sure that we research the move carefully, that we build the capabilities needed to succeed in the new strategy, that you've got plenty of resources to cover a possible thin period while you're developing and learning how to sell the new product, or are learning what makes the new market tick, and that you have firstly thought through what you have to do if things don't work out, and that failure won't "break" you. There is always ways to handle risk, here are steps of handling risks: 15

1. Identify strategic risk and functional risk 2. Measure the risk identified 3. Monitor the risk 4. Control the risk 5. Embed risk awareness in organizational culture

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