Table of Contents

Introduction..............................................................................................................2 Indonesias Current Condition.................................................................................3 FDI and Its Threats to Local Firms..........................................................................4 The Strategies...........................................................................................................6 External and Internal Analysis.........................................................................7 Porters Generic Strategies...............................................................................8 Corporate Governance...................................................................................10 Conclusion.............................................................................................................11 Appendix A............................................................................................................12 References......................................................................................................12 References

Introduction
Indonesia is now listed as one of many countries in Southeast Asia which has become a preferred country for investors around the globe. As one of the 1

largest economy in the Southeast Asia, Indonesia has the most attractive and emerging markets in its region after it has successfully survived from the 1990s political and economical difficulties. Recent reforms adopted positively impacted the economic climate and continuously generating increases in foreign direct investment. This phenomenon resulted in a sustained increase of local resource consumption while it also significantly supported the economic growth. Alongside the foreign direct investment, Indonesia also has signed the free trade agreement with China in conjunction with the wider part of ASEAN China Free Trade Agreement that was signed in 2004. Effective from January 1st, 2010, Indonesia has eliminated customs taxes for products imported from China. Both foreign direct investment and free trade agreement were hoped to give positive impacts to the Indonesias economic climate; however there are limits and risk attached to the local environment, especially those risks that are faced by local firms. It is important to note the limitations and risks that can seriously affected the future economic growth of Indonesia. In this paper, we are going to discuss about current condition in Indonesia, the threats that are faced by local firms in Indonesia, and what strategies should be undertaken to gain long term competitiveness in conjunction with the foreign direct investment and the free trade agreement. Additionally, one local firm is chosen to be discussed through the paper to give a real example in Indonesian context.

Indonesias Current Condition

Indonesias GDP per capita has risen by 6 percent on average by 2010 [5]. Indonesia currently ranks after China and India as the third fastest growing economy among G20 member countries. The increased of Indonesias economy has led to the raise of foreign direct investment inflows. Foreign direct investment started to take place in Indonesia in 1967 and it was expected to give benefits to the host economies, but without the capabilities to cope with the global suppliers and multinational companies, it is hardly would benefits the host economy. Local firms must acquire partnership readiness prior to the firm establishing itself in the host country [1]. Foreign companies that were entering Indonesia had the main objective to eliminate the cost they suffered in their home countries and to gain competitive advantage in the international market. Indonesia has the availability of highly diversified natural resources and a productive labor force, thus making the reduction of production cost can be easily achieved in Indonesia. However, the study conducted over companies in Batam showed that local procurement occurred at very low levels (less than 10 percent); the remaining was sourced from the home countries such as Singapore and Japan. The main factor behind the low level of local procurement was listed as due to the production capacities and technological capabilities of local firms that were not meeting the required specifications [1]. On the other hand, ASEAN China Free Trade Agreement that has been established since January 1st, 2010 in Indonesia also gave an enormous effect to

the local economies. China, which is known with its cheap products were started to dominate the local market and stiff competition was then being faced by local firms. In this matter, the correct strategies have to be planned by local firms in order to achieve a long term competitiveness in which we are going to discuss it in this paper. Beside the given benefits of free trade and foreign direct investment into local economies, unfortunately there are threats, risks, and limitations associated with them. These are the tasks for local firms to be solved.

FDI and Its Threats to Local Firms

Foreign direct investment or foreign investment refers to the net inflows investment to acquire a lasting management interest, 10 percent or more of voting stock, in an enterprise operating in an economy other than that of the investor [6]. Foreign direct investment, primarily in the form of multinational corporations (MNCs) has played a great role in Indonesia. By inviting foreign investment, developing countries like Indonesia can absorb tacit knowledge that comes from the cooperation with foreign sides. Developing countries are relying on foreign direct investment to meet needs for technology transfer, pure capital flows, employment, and foreign exchange. So far, the relationship between national firms and multinational firms has been well understood. The competition arouse at the highest level, not to mention that multinational firms have greater power among these two types of firms. As many as the benefits coming from foreign investment, however, there are threats associated with it, especially when it comes to the existence of national firms. Multinational firms have a great potential to destroy national firms by pushing 4

them out the competition or even by preventing new national firms to compete if they feel that those firms would give any difficulties. Thus, it is arguably said that foreign direct investment can be beneficial to nations economic climate and it is also threatening national firms existence. The entrance of multinational firms into domestic market also changes the environmental conditions. Multinational firms bring new resources and different strategic objectives into the market. National firms that do not have unique resources and do not intend to adapt to this new environmental condition would be suffered the most. However, those firms that do change and make increased investment would realize greater performance [2]. The negative impacts of foreign direct investment would not threatening local firms if they were fully aware of the external environment and adapting a right strategy. Moreover, foreign direct investment is unavoidable as the world of business globalizes. Another phenomenon that impacted Indonesias local firms was the nations agreement of free trade with China, Indonesia China Free Trade. Free trade is a system of trade policy that allows traders to trade across national boundaries without any interference from the respective government [7]. China has been exporting final products that compete with the products of local firms and also exporting materials for local firms to process. Some voices emphasize the opportunities, while others consider it as a threat to the Indonesian economy. This trade agreement would be beneficial to some sectors in Indonesia such as rubber, machinery, equipment, and minerals industry, but there are others that experienced pressure such as leather and apparel products. Cheaper products are coming to Indonesia and they compete with existing domestics products, and not

few have gone bankrupt because they couldnt face the challenges. Despite of the reality, Indonesias local firms must take the free trade as an opportunity rather than a nightmare. The ability to generate global and local creative strategies are needed by local firms to compete and winning the competition as the foreign direct investment and the free trade started to challenge them.

The Strategies
To complement the analysis I am going to choose one company that operates in Indonesia, Bakrie Telecom. Bakrie Telecom is a new comer in telecommunication industry in Indonesia. Through its products, Esia, Bakrie Telecom provides telecommunication services throughout Indonesia by its mobile phone products, SIM card products, and its telecommunication networks. The courage Bakrie Telecom had has by entering this market is considered risky, as many other companies in a form of foreign investments (e.g. Telkomsel) or domestic investments (e.g. Telkom Flexi) have played a successful role in Indonesias telecommunication industry and have great number of shares in the market. In order to keep their existence and compete with other companies, the role of strategic management is crucial. Strategic management includes understanding the strategic position of an organization, strategic choices for the future and managing strategy in action [8]. To start, Bakrie Telecom has conducted external and internal analysis, said Anindya Novyan Bakrie - President Director of Bakrie Telecom. External and internal analysis, usually called as SWOT analysis, helped Bakrie Telecom to position itself in the market. External analysis examines opportunities and threats that exist in the environment, and

internal analysis examines the strengths and weaknesses; focuses on internal factors that give advantages and disadvantages in the market. Furthermore Anindya Novyan Bakrie explained she was focusing on the internal factors first by examining the human resources inside the company. If the company doesnt have the talents that align with the strategy, she would then try to find the talents outside the company. External and Internal Analysis The following area analyses are used to look at all external factors affecting a company:

Customer analysis: Segments, motivations, unmet needs. Competitive analysis: Identify completely, put in strategic groups, and
evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, and weaknesses.

Market analysis: Overall size, projected growth, profitability, entry

barriers, cost structure, distribution system, trends, key success factors. Environmental analysis: Technological, governmental, economic,

cultural, demographic, scenarios, information-need areas Goal: To identify external opportunities, threats, trends, and strategic uncertainties [9]. Additionally, the following are to be considered into the internal analysis:

Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis.

Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties [9].

The given primary strategy helped Bakrie Telecom to position the company in the market, and the steps taken by Bakrie Telecom is highly recommended to other local firms to be taken. Moreover, doing the analysis repeatedly is a must as the external and internal environment always change. Porters Generic Strategies Bakrie Telecom positions itself by leveraging its strength. As Michael Porter argued, that one firms strengths ultimately fall into cost leader and differentiation. Bakrie Telecom chosen to be a leader in cost by providing cheap products and services to the market, thus creating a trademark budget operator in peoples mind. Cost leadership strategy is defined as an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers [8]. Cheap products provided by Bakrie Telecom were being questioned as to whether Bakrie Telecom was ready to compete with the cheap products imported from China. Anindya Novyan Bakrie said, If you feel that you cant compete with them, try to synergize with them. This became the reason they imported the materials from China, a creative strategy that would bring more benefits to the company. There are three types of potential competitive

advantage that local firms can achieve as described by Michael Porter, they are [8]: Cost Leadership Strategy In this type of strategy, a company is trying to achieve lower overall costs than rivals, thus making the products to be sold are cheaper. Differentiation A company tries to possess the capability to differentiate the firms product or service and command a premium price Integrated Cost Leadership / Differentiation In this strategy, a company would want to achieve both in cost leadership and differentiation. Furthermore, the three types of the strategies are then divided into two targets of competitive scope, broad scope and narrow scope (focus strategy). The Porters Generic Strategies can be used by the local firms to use core competences to implement value creating strategies that satisfy customers needs. Bakrie Telecom showed they can obtain a cost advantage by creating activities associated with the cost leadership strategy. The value chain activities include: Inbound logistics include the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product. Outbound logistics are the activities required to get the finished product to the customer, including warehousing.

Marketing and Sales are those activities associated with getting buyers to purchase the product, including channel selection and pricing.

Service activities are those that maintain and enhance the product's value including customer support and repair services [10].

The need to reconfigure the value chain was felt by Bakrie Telecom since the company began to dig the globe in search of raw materials. Understanding how the value chain works is important to the firm, as in this case, Bakrie Telecom tried its best to create a chain that can develop a sustainable competitive advantage. Corporate Governance Good corporate governance also has been implemented in Bakrie Telecom. One procedure to support it is the implementation of risk management. One focus in risk management at Bakrie Telecom is to how to deal and spot the new or existing competitor. The presence of many competitors in the telecommunication industry made Bakrie Telecom faces stiff competition. The first step in identifying potential competitors is to follow each source of information outward from your companys market [3]. New entrants are also being considered as a potential threat to the company, they could see the opportunities in the market that the company couldnt see. This is the risk by being locked into particular ways of doing things and chooses not to innovate [3]. Bakrie Telecom solved the problem by innovating products while also improving its services.

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Conclusion
The strategies implemented by Bakrie Telecom have helped the company to achieve competitive advantages. They keep investing and innovating in order to compete with multinational companies and foreign products. Others may found it difficult to survive, but Bakrie Telecom has proved itself by implementing the correct and suitable strategies, the company would achieve long term competitiveness. In the global capitalism, globalization of the existing value chain must be created, making a global value chain that link firms together in a variety of international design, production and marketing networks. Moreover, local firms must also know their opportunities and threats through the SWOT / external and internal analysis while also implementing good corporate governance through the organization.

Appendix A
References [1] Iman, M.S., Nagata, A., 2005. Liberalization policy over foreign direct investment and the promotion of local firms development in Indonesia. Technology in Society, 27 (2005), pp.399-411. [2]Carpano, C., Rahman, M., Roth, K., Michel, J.G., 2006. International competition in mature, localized industries: Evidence from the U.S. furniture industry. Journal of Business Research 59 (2006), pp.630-637. [3] Geroski, P.A., 1999. Early Warning of New Rivals. Sloan Management Review 40 (1999), pp. 107. 11

[4] Chussil, M., 2007. Learning fasters than the competition: war games give the advantage. Journal of Business Strategy vol 28, no 1 (2007), pp.37-44. [5] CIA World Factbook., 2011. Indonesian Economy 2011, [online] Available at: http://www.theodora.com/wfbcurrent/indonesia/indonesia_economy.html [Accessed on 23 July 2011]. [6] Wikipedia., 2011. Foreign Direct Investment, [online] Available at: http://en.wikipedia.org/wiki/Foreign_direct_investment , [Accessed on 23 July 2011]. [7] Wikipedia., 2011. Free Trade, [online] Available at: ,

http://en.wikipedia.org/wiki/Free_trade , [Accessed on 23 July 2011]. [8] Ireland, R.D., R.E. Hoskinsson & M.A. Hitt., 2011. The Management of Strategy: Concept and Cases. 9th ed. South-Western Cengage Learning. [9] MyStrategicPlan., 2011. Internal and External Analysis, [online] Available at: http://mystrategicplan.com/resources/internal-and-external-analysis/ , [Accessed on 24 July 2011]. [10] QuickMBA.,2010. Value Chain, [online] Available at:

http://www.quickmba.com/strategy/value-chain/ , [Accessed on 24 July 2011].

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