MARKETING IN 2007:

INNOVATE AND GROW

The MarkPlus Conference 07

Hotel Mulia Jakarta,
December 14, 2006
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 1
Contents

Chapter Contents Page Reference

1 Executive Summary
2 2006 Review

3 Indonesia in 2007: The 4C Analysis

- Macro-Level Outlook: The Growth Opportunity

- Micro-Level Outlook: The Business Profitability

- Company-Level Outlook: The Innovation Capability

4 Conclusion

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 2

 Executive Summary

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 3


Early in January this year, we had published our paper on “Marketing in
2006: The Indonesia Perspective”
The Year of Hope?
Evidently our analysis proved to be just right:
(1) The reshuffled cabinet did perform just
what the market had expected from them;
(2) Many players across industries had fasten
their seatbelt.
(3) Companies who take the risks apply our
formula: Flexibility, Creativity, Loyalty.
Executive Summary
Summary
Our Analysis on the Macro Level…
• The year 2006 will be a challenging marketing year in
Indonesia, mainly because of the price factor. The increase
in fuel price—which triggered the immediate increase of
inflation rate up to 17%—and the depreciation of Rupiah
against the US Dollar in 2005 is likely to have a carry-over
effect in 2006.
• The reshuffled SBY economic team, led by Dr. Boediono, will
take severe tightening policies to bring economy back on
track.
On the Micro Level….
• Collectively, these phenomena will increase the costs from
micro-economic point of view and weaken the purchasing
power from the consumer’s point of view.
• As the level of uncertainty rise, the risks are higher. Due to
this, we can predict that many players across industries will
play the business game in a safe mode.
On the Company Level…
• Flexibility to manage the risks will be one significant factor,
while Scenario Planning in business is becoming more useful
than ever.
• Creativity in value offering is increasingly important to be
implied as the offensive strategy. While, conversely,
harnessing Customer Loyalty will be the appropriate
defensive strategy in order to survive in 2006.
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 4
 Executive Summary

While we are entering a brighter year, in this paper “Marketing in 2007:

Innovate and Grow” we argue that companies need to drive their innovation
capability to grow in “the year of economic growth”
Marketing in 2007

1 On the stronger fundamentals built in 2006, many economists and experts

have predicted that there is a growth momentum for the economy to enjoy
brighter year in 2007. Indonesia's economy is expected to expand by 6
Growth Opportunity percent next year on the back of continued increasing consumption and
exports of selected commodities. Rising domestic demand will keep
consumption robust, backed by declining inflation and interest rates -- the
main ingredients for spurring consumer spending.

While macro outlook indicate a better year, from the micro standpoint,
2 2007 will be the momentum to drive business profitability. Based on our
quantitative research(1) , several business domain is expected to be in the
high business profitability zone with Return on Net Assets (RONA) exceed
14%, including telecommunication, pharmaceuticals, cosmetics, cigarettes,
Business Profitability
and coal. Business domain in the medium profitability zone (9-13%
RONA) include food and beverage, automotive components, oil & gas,
plantation. While we expect businesses in property & real estate, banking,
textiles, and some commodities to be in the low profitability zone.

3 In the light of the optimistic year ahead of an improved macro-economic

condition and momentum to boost business profitability, companies need
to drive their innovation capability. In terms of marketing, there are three
Innovation Capability
platforms of innovation capability; (1) minor marketing innovation, (2)
incremental marketing innovation, and (3) disruptive marketing
innovation.

Note: (1) Sector-based average RONA of public companies listed in Jakarta Stock Exchange
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 5
 2006 Review

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 6

 2006 Review

After severely hit by oil price hike in Q4-05, in 2006 the economy is slowly
moving on track…

GDP Growth Rate

Comments
Quarterly GDP Growth Rate
(1998-2006, in %) • The growth momentum was once peaking in Q4
10 2004 (during the transition between Megawati and
SBY government), where Indonesian GDP growth

6.6
6.2
5.5
5.0
rate was recorded at 6.6%, the highest ever since

5.5
5.4
4.9

5.2
4.7
5
the economic crisis in 1998.
• Throughout the course of 2005, the government had
0 failed to sustain the GDP growth achieved by the
Q1-98
Q2-98
Q3-98
Q4-98
Q1-99
Q2-99
Q3-99
Q4-99
Q1-00
Q2-00
Q3-00
Q4-00
Q1-01
Q2-01
Q3-01
Q4-01
Q1-02
Q2-02
Q3-02
Q4-02
Q1-03
Q2-03
Q3-03
Q4-03
Q1-04
Q2-04
Q3-04
Q4-04
Q1-05
Q2-05
Q3-05
Q4-05
Q1-06
Q2-06
Q3-06
previous administration due to several external
factors (including oil crisis) and internal consolidation
-5 issues.
• The situation had complicated further as the global
oil price rose to USD 70,85 per barrel in August 2005
-10
which eventually increased the cost of oil imports.
The government then took an unpopular move by
-15
increasing domestic fuel price by more than double
in October 2005, which caused on-year inflation to
spike to 18.38% in November 2005 and the BI
-20 responded with a severe monetary tightening policy
that boosted the benchmark Bank Indonesia one-
month rate to 12.75% in April.
• While the world oil price remains high in 2006, the
cost of oil imports has been controllable.
• Economic growth has since begun to rebound due to
After seeing the ups and downs in the economy, a gradual loosening of monetary policy that saw the
the year of 2006 eventually allow us to hope for BI rate ease to 10.25%, while on-year inflation
“THE REAL TURNING POINT” to come. eased to 5.29% in November 2006.

Sources: BPS; Bank Indonesia (BI); LPEM UI; MarkPlus&Co analysis MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 7
 2006 Review

…on the back of continued increasing consumption and exports of selected

commodities…

Economic Growth Engines

GDP by Expenditures Comment

(2004-2006, in %) • Consumption makes up about 60 percent
Description 2004 2005 Q4- Q1- Q2- Q3- of Indonesia's gross domestic product
2005 2006 2006 2006 (GDP), with net exports and investment
Private consumption 4.9 4.0 4.2 3.2 3.0 3.0 making up the remainder.
• While consumption continue to be strong
Government consumption 2.0 8.1 30.0 14.2 31.4 1.7 in 2006, the economy also gained
significant boost from anticipated export

! growth, particularly in some commodities

Fixed capital formation 15.7 9.9 1.8 2.9 -1.0 -0.2
(Investment) such as coal, crude oil and rubber.
Exports of goods & services 8.5 8.6 7.4 10.8 11.3 12.0 • Investment performed better in Q1,
before slowing down in the Q2 and Q3.
-/- Imports of goods & services 3.0 12.4 3.7 5.0 8.3 9.7 The main issue is still in the ability of the
government to improve the investment
GDP 5.1 5.6 4.9 4.7 5.2 5.5 climate. Several regulations still need to
be reform significantly including labor,
tax, and investment.

While the growth can be applauded, the fact that investment had performed poorly
throughout the year, especially in Q2-3, can question the quality of the economic
engine if not the substantiality of the economic growth.

Source: (1) BPS, BI Data, MarkPlus Analysis

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 8
 2006 Review

…backed by declining inflation and interest rates.

Easing Inflation, Fallen BI Rate, and Stable Rupiah

Inflation Trend ’05-’06(1) (in %) Exchange Rate ‘05-06(3) (USD/IDR)
2005 2006

ay

ay

ay

ay
ov

ov

ov

ov
p

p
ar

ar

ar

ar
n

n
18

l
Se

Se

Se
Se
Ju

Ju
Ju

Ju
Ja
Ja

Ja

Ja
M

M
N

N
16

18,38% (Nov 06)

8,000
14

12

10
8,500
8

4
9,000
6,29% (Oct 06)
Apr May Jun Jul Aug Sep Oct Nov Dec Jan F eb Mar Apr Mei Jun Jul Aug Sep Oct

9,500

BI Rate ’05-’06(2) (in %)

13.0
10,000
12.5

12.0

11.5

10,500
11.0

10.5

10.0

9.5

9.0

8.5
10,25% (as per 11,000
Nov 7, 06
Aug-05

Aug-06
May-06
Sep-05

Nov-05

Apr-06

Jun-06

Sep-06

Nov-06
Dec-05

Feb-06

Mar-06
Oct-05

Jan-06

Oct-06
Jul-05

Jul-06

8.0

Notes: (1) Inflation jumped to a six-year high of more than 18 percent in November 2005 after the government sharply raised domestic fuel prices, but has
fallen since allowing the central bank to make a series of cuts this year in its BI target rate.
(2) Bank Indonesia cut down its interest rate by 2.5 percent points to 10.25 percent. The rate is predicted to be at a 1 digit level later this year
(3) Exchange rate of the Rupiah has moved back to a stable level satisfying exporters and importers. As per Dec 1, 06, Indonesian Rupiah is trading at
Rp 9,140 againts 1 USD

Sources: BPS; Bank Indonesia (BI); LPEM UI; MarkPlus&Co analysis

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 9
 2006 Review

The bright economic performance in 2006 is reflected in the overall business

confidence level…

Business Confidence
The Business Tendency Index The Consumer Tendency Index
2002-2006 2002-2006
130 130

120 120

110 110

100 100

90 90

80 80
*
Q 002
Q 003
Q 003

Q 003
Q 003
Q 004
Q 004
Q 004
Q 004
Q 005
Q 005

Q 005
Q 005
Q 006
Q 006

4- 6
06
Q 00

Q1 02

Q2 3

Q3 3

Q4 03

Q1 3

Q2 4

Q3 04

Q4 4

Q1 4

Q2 5

Q3 5

Q4 5

Q1 5

Q2 6

Q3 6
Q4 06
6*
00
00

00

00

00

00

00

00

00

00

00

00

00
20

0
20
2

2
2

2
2

2
2

2
2

-2

-2

-2
-2

-2

-2

-2

-2

-2

-2

-2

-2

-2

-2

-2
-2
4-
1-
2-
3-

4-
1-
2-
3-
4-
1-
2-
3-

4-
1-
2-
3-

-
Q4
Q

Businesses and consumers have positive perception towards the economy and
becoming more optimistic about the future

Source: (1) BPS, BI Data, MarkPlus Analysis

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 10
 2006 Review

…while the great performance of the stock market is important to attract

interests of foreign investors

Jakarta Composite Index (JCI) Performance

1,700 Comment
1,600
• The bullish mood at Jakarta's stock exchange is
1,500
expected to continue even after 2007.
1,400
• Experts at Deutsche Bank have, consequently,
1,300
been recommending only selected blue chip
1,200 companies such as noodle producer Indofood,
1,100 construction subcontracting company
1,000
Indocement, infrastructure group United Tractors,
the country's biggest financial service provider
900
Bank Mandiri, gas supplier Perusahaan Gas
800 Negara and telecommunications provider Telkom.
700 • Experts say that a drop in the BI rate could
600 provide a strong impetus for the continuing rally
500 at the stock exchange.
400

300
28-Oct

31-Oct
30-Sep

26-Sep
11-Jun

29-Aug
Mei-06
16-Jan

29-Jun
7-Oct

3-Aug
12-Jul

27-Jul
16-Mar

29-Mar
9-Aug
7-Sep

7-Feb

10-May

1-Sep

1-Feb
8-Jun
9-Dec

2-Dec
7-Jan

2-Jan

1-Jun
9-Mar
8-Apr

1-Mar
4-Nov

2-May
6-Jul
Mar

2004 2005 2006

The composite share price index at the Jakarta Stock Exchange hit the first-ever
record of 1,700 points in 2006

Source: (1) BPS, BI Data, MarkPlus Analysis

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 11
 2006 Review

There are many differences in term structure between the GDP and the JCI-
weighted industry, therefore JSX can not reflect the economy as a whole.

Correlation between GDP and JCI

Structure JCI-weighted Difference Comment

of GDP (%) industry (%)
• Significant differences can be noticed
Agriculture 15.0 1.3 +13.7 from the differences in composition in
GDP structure vs. JCI structure, e.g.
Mining & Quarrying 10.5 7.8 +2.7
agriculture, construction-financial-
Manufacturing 27.6 32.9 -5.3 transport &communication –
electricity,gas & water – trade, hotel &
Construction 5.8 2.4 +3.4 rest – services.
Financial 8.2 28.3 -20.1 • In our analysis, we conduct profitability
analysis (RONA: low, moderate and
Transport & Comm. 6.3 high) based on JSX’s data (audited
21.2 -14.0
Electricity, Gas & Water 0.9 financial statement - public listed
companies), assumed that it can, to
Trade, Hotel & Rest. 15.8 certain extent, represent the economic
6.0 +19.7 condition.
Services 9.9
Total 100.0 100.0 0.0

Sources: BPS and JSX.

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 12
 2006 Review

While the non-tradable sectors have been performing well in supporting the
economy, the tradable sectors have shown the otherwise

The Lack of Support from the Tradable Sectors

GDP growth: tradable vs. non-tradable Comment

y-o-y, % • The gap between tradable vs nontradable
8
Non-tradable is still further apart.
• As it can substantially create jobs, the
6
government should focus on efforts to
GDP boost the real sector, instead of relying
4 on consumption alone for growth.
• However to drive the real sector growth,
2
2001 2002 2003 2004 2005
Tradable
2006 government first need to improve the
investment climate.
• While it is important to also note that
GDP growth: tradable vs non-tradable boosting growth in the real sector will
y-o-y quarterly growth rate, % require considerable efforts and support
10 from the banking sector to outflow bank
Non-tradable credits.
8

4
GDP

Tradable The sustainability of the economic growth

0
Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Q3-06 will greatly depend on the tradable sectors
in the long run.

Source: BPS; Bank Indonesia (BI); LPEM UI; MarkPlus&Co analysis

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 13
 2006 Review

To achieve quality economic growth, it is imperative for the government to

improve the tradable sector

Real GDP Growth by Sectors

Real GDP growth of tradables (%) Real GDP growth of nontradables (%)

Sector/sub-sector 2004 2005 Q1-06 Q2-06 Sector/sub-sector 2004 2005 Q1-06 Q2-06
1. Agriculture 3.3 2.5 3.9 5.0 4. Electricity, water and gas 5.2 6.5 5.8 5.7
a. Farm food crops 2.9 2.6 2.7 6.8
5. Construction 7.5 7.3 7.2 8.3
b. Others 3.6 2.4 5.3 3.5
6. Trade, hotel & restaurant 5.7 8.6 4.7 4.6
2. Mining & Quarrying -4.5 1.6 3.6 5.4
a. Wholesale & retail trade 5.6 9.2 4.8 4.7
a. Oil & gas -4.3 -2.2 -1.9 0.5
b. Non-oil & gas -8.0 7.8 14.2 14.4 b. Hotel 7.9 6.7 0.5 3.1

c. Quarrying 7.5 7.3 7.1 8.2 c. Restaurant 6.1 5.9 5.5 5.0
3. Manufacturing industries 6.4 4.6 3.1 3.0 7. Transport & communication 13.4 13.0 11.0 13.3
a. Oil & gas industries -2.0 -5.3 -3.2 0.2
a. Transport 8.8 6.3 3.8 7.2
b. Non-oil & gas manufac. 7.5 5.8 3.8 3.4
- Railways -0.9 -3.0 6.8 6.6
- Food, beverages &tobacco 1.4 2.7 1.2 3.0
- Road 5.0 4.9 4.1 4.8
- Textile, leather & footwear 4.1 1.3 1.5 1.8
- Wood & forest products -2.1 -1.3 -2.9 0.2 - Air transport 30.1 10.4 5.6 12.0

- Paper & printing 7.6 2.4 -4.2 -0.3 b. Communication 22.9 25.1 22.8 23.0
- Fertilizer, chemical & rubber 9.0 8.9 3.2 4.5 8. Finance 7.7 7.1 5.4 5.1
- Cement & non-metal min 9.5 3.8 -3.5 -4.2
a. Banks 6.1 4.8 1.6 0.5
- Iron & steel -2.6 -3.8 4.2 5.5
b.Non-bank financial 9.3 8.3 7.4 7.1
-Transport & Machinery equip. 17.7 12.4 11.0 5.6
c. Others 9.1 9.2 8.6 8.9

Top Growth (Tradables): Non-oil & gas, Quarrying, 9. Services 4.8 5.2
Top Growth (nontradables) : 5.4 5.9
farm food crops. While Paper & Printing, as well as
Telecommunication, Air Transport, non-
cement and non-metal mineral have been
banking financial, construction.
experiencing a terrible year
Source: (1) BPS, LPEM UI MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 14
 2006 Review

Bank loans across credit types remain almost flat throughout the year,
indicating possible safety game played by industry, investors, and consumers

Bank Credit Disbursement 2006

Perkembangan Kredit Menurut Jenis Penggunaan
per 2001-September 2006
Credit Growth
by Type of Credit, 2001-2006
800.000 Comment
Total Credit • According to Infobank Research Bureau,
700.000
bank credit growth has only achieved
600.000
4,63% (from Rp 695,648 trillion to Rp
500.000
727,854 trillion) during the first eight
months in 2006.
(Rp Miliar)

400.000 Working Capital Credit • Declining bank interest rates in 2006

300.000
does not stimulate bank credit expansion
Consumer Credit automatically. As far of it concerned, it
200.000 only started to flow in the beginning of
Q3 with total growth of 7%.
100.000 Investment Credit
0
2001 2002 2003 2004 2005 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06
Tahun
Sumber: BI, diolah kembali oleh Biro Riset InfoBank (birI). Year Kredit Modal Kerja Kredit Investasi
Kredit Konsumsi Total Kredit

Source: (1) BI data, Infobank Research Bureau, presented by Eko B. Supriyanto at Seminar InfoBank Outlook 2007, Hotel Shangri-La,
Jakarta, 23 November 2006
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 15
 2006 Review

Although many have fastened their seatbelts, several players are bold
enough to strive in 2006

Marketing Approach in Selected Companies

Marketing Approach

Company Industry Situation Flexibility Creativity Loyalty Marketing Impact

The significant increase Supported by hard-fact
in fuel price in 2005 has and accuracy in
effect a drop in forecasting, Yamaha
consumer purchasing fully able to sense and
power. This bring respond the market variants; New Jupiter Z
implication to the trend. While several
motorcycle industry as motorcycle segments
compounded annual have shown sign of
growth rate drop by declining, it
21% continuously develop
new segments , while
attracting competitors
to join force for market
enlargement
As part of its ongoing The company conduct Entering 2006, in the
product innovation several experiential light of a weakening
program, Yamaha below the line market, Yamaha
launched several new activities in 2006 accelerate at a faster
including Jupiter MX speed. Market share
(April 2006), Yamaha Pan ASEAN Touring, increase by 35% in Q1
New Mio dan New and Yamaha Mio 2006, while competitors
Nouvo Z (July 2006). Convoy in Bali, in an share slightly drop.
attempt to cultivate
on customer loyalty.

The year 2005 is a Ranch Market tried to In 2006, Ranch Market Ranch Market did some Ranch Market grew
stagnant year for retail predict the shift in decided to expand the efforts to build the 20% in the first quarter
industry in Indonesia. The customer behavior market by opening new loyalty of the customers of 2006 when the
first quarter of 2006 towards bird flu and store in Surabaya. It e.g. building cooking market is stagnant
showed no significant mad cow by launching a also redefined the school, conducting
improvement because the campaign on hygiene shopping experience by school tour, and
drop in purchasing power and healthy life renovating the Pondok sponsoring book on
Indah; New Pondok balance diet
Indah was launched
with “home meal
replacement” concept

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 16

 Indonesia in 2007

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 17

 This chapter will present our analysis on 2007 outlook by using the
4C model

Landscape Analysis: 4C Model

Value-migrator
CHANGE Growth
Opportunity
Certain/Uncertain Important/Unimportant
Technology

Pol-Leg Economy Soc-Cul

Market
Value-supplier Value-demander
COMPETITOR CUSTOMER
Winner,Loser,Emerging
TOWS
Committed,Lost,New
Business
Profitability
Examination

Value-decider
COMPANY
Existing-competence,Risk-attitude,Stretch-possibilities
Innovation
CHOICE
Go/Invest No Go/Hold
Capability
Harvest Divest

Sources: Philip Kotler, Hermawan Kartajaya, Hooi Den Huan, and Sandra Liu, “Rethinking Marketing: Sustainable Market-ing Enterprise in
Asia”, Prentice Hall, 2003.
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 18
 Macro-level Outlook:
The Growth Opportunity

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 19

 Macro-level Outlook: the Growth Opportunity

Economy is expected to expand by 6 percent next year in the light of

optimistic atmosphere
2007 Economic Forecast
Macroeconomic assumption for 2005-07 budget The government expects
2005 2006 2007 next year’s inflation rate to
Indicator 2nd Revised Outcome Budget Projection Draft come in at 6.5 pct against 8
Budget Budget pct seen this year. The
GDP growth (%) 6.0 5.6 6.2 5.8 6.3 rupiah is seen averaging
9,300 to the dollar against
Inflation (%) 8.6 17.1 8.0 8.0 6.5 9,000 this year, while
Rupiah rate (Rp/US$1) 9,800 9,705 9,900 9,300 9,300 interest rates for three-
month Bank Indonesia
3-month SBI rate (%) 8.4 9.09 9.5 12.0 8.5
Certificates (SBI) are seen
Oil price (USS/barrel) 54.0 51.8 57.0 64 65 averaging 8.5 pct against
12.0 pct. Oil is seen
Oil lifting (MBCD) 1.075 0.999 1.050 1.000 1.000
averaging 65 USD a barrel
next year.
Projection of GDP growth by several agencies

Agency Date 2006 2007

1 Gov’t of Indonesia August 16, 2006 5.8 6.3

2 Bank Indonesia Nov 2006 5.5 6.1

3 IMF September 2006 5.2 6.0 The forecast remains positive to enjoy the
4 World Bank March 2006 5.5 6.2 growth momentum in 2007
5 ADB 2006 5.4 6.0

6 Citigroup September 2006 5.4 6.0

7 The Economist August 19, 2006 4.9 5.5

8 Consensus September 2006 5.2 5.6

Source: Republic of Indonesia, State Budget 2007.

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 20
 Macro-level Outlook: the Growth Opportunity

Several factors in the forces of change indicate that 2007 present itself the
growth momentum
2007 Macro Outlook

Forces of Change Key Changes Implications

• 3G Technology will be commercially available for
the first time for Indonesian mobile consumers,
Technology
while internet and IT will continue to develop at a
faster growth
• As it’ll be only a year before the next general election,
Politics
2007 will see SBY do some populist move in favor for the
people and further economic improvement, as part of his
possible bid for the second term.
• Several industry sectors in ASEAN region will be
Legal facing the implementation of one ASEAN market
sooner than other sectors.
• Government is to increase the standard pay of
government civil servants
• ICT will still have significant effect on the
way consumers interact socially
• Several new laws to improve bureaucratic
and legal system, investment climate and
to tackle labor issues could well be
delivered in 2007
• The implementation of AFTA and further
trade liberalization next year will remain
threat to domestic industries especially those
who are listed in ASEAN 11 industry priority
• The implementation of the new standard pay
will boost consumption further.

• Economy is expected to expand by 6 percent next year in

Economy • Although the outlook seems bright,
line with increasing domestic demand. Consumption will
government needs to solve several
continue to be strong in 2007, while the economy is also
homework in terms of fiscal as well as
likely to get a boost from anticipated export growth.
monetary policies in order to achieve the
• Indonesian central bank also predicted that currency projected GDP growth.
reserves will reach a new record of 47 billion U.S. dollars
in 2007.

• Hypocrites culture are still dominant in the

Social/Culture • Recent social issues such as Polygamy (AA Gym
Indonesian society.
case) and YZ-ME sex video indicate that “private
but transparent” is the new social/culture paradox

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 21

Business Profitability Outlook

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 22

 Business Profitability Outlook

Tradable sectors are projected to grow less than the nontradables in 2007

Projection of Growth Rate by Sectors

Tradable Sector Non-Tradable Sector
(2000 base year, year-on-year growth rate, %) (2000 base year, year-on-year growth rate,
%)
3.5 2 6.4 8.6 6.5 7.5 10 7.5 4.7
2007*
2007*

-1.5 2.4 5.5 8.8 6 8 9.8 7.4 4.6

2006*
2006*
2.5 1.6 4.6 6.5 7.3 8.6 13 7.1 5.2

2005
2005
-4.5 3.3 6.4 5.2 7.5 5.7 13.4 7.7 4.8

2004
2004

Agriculture Mining & Quarrying Manufacturing Electricity, Gas, Construction Trade, Hotel &
& Water Restaurant

Services Financial Transport &

Communication

While GDP growth is still derived mainly from private consumption and fixed investment, sectors’
growth will still be dominated by non tradable sectors. It is also important to note that the macro
economics condition is still not yet conducive to drive faster growth on tradable sectors.

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 23

 Business Profitability Outlook

Giving the facts that high industry’s profitability will have much room to maneuver,
compared with the lower one, the growth momentum can drive several industries to
increase their RONA

Business Profitability Outlook by Sectors

•Telecommunication Methodology
•Pharmaceuticals

RONA > 14% •Cosmetics and Households RONA or Return On Net Assets is equal to
•Cigarettes Net Operating Profit After Tax
•Coals
divided by:
•Ceramics, porcelain, cash plus the working capital requirement plus
•Oil and Gas
•glass the fixed assets.
•Metals & Mineral
RONA: 9 – 13% •Food and beverages •Automotive and components
•Agriculture
•Construction
RONA < 9% = low profitability
•Textiles •Property and real estate RONA: 9 – 13% = moderate profitability
•Agriculture •Wood and Forest Product RONA > 13% = high profitability
RONA < 8%
•Plastics •Pulp and Paper
•Fisheries •Animal Feeds References:
•Chemicals •Cement Average SBI (3-months), 2005 = 9.09%
BI rate, November 2006 = 10.25%
BI rate, December 2006 = 9.75%

Source: audited financial statement –

We calculate the average RONA as it public companies listed in JSX.
indicates….xxx.xx.xx.xx.x

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 24

 Innovation Capability

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 25

 Innovation Capability

We admire Porter’s thoughts on Industry Profitability, just as we like

Prahalad’s ideas on Industry Restructuring through innovation

Porter vs Prahalad

Five Forces Value Chain

Assess industry Decide your

PROFITABILITY DIFFERENTIATION
Michael Porter

Industry Analysis Core Competence

INDUSTRY INDUSTRY
RESTRUCTURING INNOVATION
CK Prahalad

We
We think
think that
that Porter
Porter and
and Prahalad
Prahalad both
both come
come from
from different
different school
school of
of thought.
thought. Porter
Porter is
is more
more concern
concern on
on the
the outside-in
outside-in
perspective;
perspective; i.e.
i.e. assess
assess industry
industry profitability
profitability and
and then
then check
check whether
whether you
you have
have to
to the
the ability
ability to
to gain
gain your
your the
the competitive
competitive
edge.
edge. Conversely,
Conversely, Prahalad
Prahalad talk
talk about
about what
what you
you have
have (core
(core competency)
competency) toto innovate
innovate and
and reshape
reshape the
the whole
whole industry.
industry.

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 26

 Innovation Capability

There are three different levels of innovation capability

3 Levels of Innovation Capability

Innovation Capability
I. Minor
• MINOR: Companies are only able to innovate in
terms of (1) segmentation, i.e. remapping the
market in order to find the most appropriate for
profitability, (2) selling, i.e. redesigning the sales
structure and system to approach appropriate
II. Incremental
customers,
(3) and process, especially in Quality, Cost,
Delivery (QCD) improvement.
• INCREMENTAL: Companies are capable to
innovate in terms of (1) targeting, i.e maintain
current target market, find another new and
III. Disruptive underserved target market; (2) marketing-mix,
i.e. creating new sets of access and offer in order
to find higher profitability; and (3) Enhance value
via more relevant service.
• DISRUPTIVE: Companies are capable to
restructure the industry through innovation in the
strategic business architecture/ PDB (Positioning-
Differentiation-Brand) Triangle, before eventually
redesign their whole marketing approaches in
terms of (1) targeting the customers, (2) selling
the marketing mix, and (3) processing the
service.

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 27


Companies with minor innovation capability usually have limited space to
innovate, but what happened at United Tractors was an exceptional case
Minor Innovation: UNITED TRACTORS Example
Remapping the market in order
to find the most appropriate for
profitability.
SEGMENTATION
INNOVATION
From niches to 1-to-1
As part of its survival program after
Indonesian economic crisis, UT progressed
itself from being a market-driven company
to customer-driven company. Its new
segmentation profile is based on customer
life-time value from what was used to be
segmentation by niches.
Segmentation based on strength of
relationship and attractiveness.
Innovation Capability
Redesigning sales structure and Improving QCD
system to approach appropriate continuously
customers.
SELLING PROCESS
INNOVATION INNOVATION
From Transactional-Consultative-Enterprise Segment-based process
It design its selling activities based on the Routine order delivery, customer
new segmentation strategy while it shifting handling, and new offering
its paradigm from seeing customer as a development for its customers
profit object to customer as an investment based on the level of commitment
asset. of each customer type.
Segment-based Process
Segment-based Selling Strategy
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 28
 Innovation Capability

Companies with incremental innovation capability have the creativity in

terms of engaging a new market, creating new sets of access, and enhancing
more value
Incremental Innovation: Toyota’s Lexus Invention
Maintain current target market, Creating new sets of access and Enhance value via more
find another new and offer in order to find higher relevant service
underserved target market profitability

TARGET-MARKET MARKETING-MIX SERVICE

INNOVATION INNOVATION INNOVATION

Upper-class consumers Separate brand and sales channel Experiential Service

The successful launch of the Acura marque
by Honda had influenced Toyota to advance
its plans to target the premium segment in
1983. At that time Chairman Eiji Toyoda
asked some of his executives: “Can we
create a luxury vehicle to challenge the
world's best?” and announced that he aims
to develop a luxury car that would expand
Toyota’s product line, giving it a foothold in
the premium segment and offering both
longtime and new customers an upmarket
product….
… Toyota then launched an entirely
new brand named: Lexus, with a new
dealer channel, and then was able to
leverage its vaunted Toyota production
system to take on Mercedes and BMW
directly. It was a higher-risk option
considering Honda had failed with its
Acura and so did Nissan with its Infiniti
brand. However Toyota had learned
from a market research which conclude
that a separate brand and sales
channel was needed to market its new
luxury flagship, and plans were made
to develop a new network of
dealerships in the U.S and in other
markets.
Since its debut in 1989, Lexus has
developed a reputation for the reliability of
its vehicles and the quality of its customer
service. In 2006, consumer ratings firm
J.D. Power named Lexus the most reliable
brand in the U.S. based on its Vehicle
Dependability Survey, a measure of over
47,000 vehicle owners and the problems
they experienced in the first three years of
vehicle ownership

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 29

 Innovation Capability

Companies with disruptive innovation capability are bold enough to

transform their PDB triangle before making substantial innovation practices
on other marketing elements
Disruptive Innovation: INTEL Example
Strengthening Your Continuously Renew Your State your value via
Positioning Strategy Differentiation to Support the building a strong indicator
Revamp Positioning

POSITIONING DIFFERENTIATION BRAND

INNOVATION INNOVATION INNOVATION

“The most ahead “Platforms for

technology company, everything, from PC
exist to improve to everything and
people’s lives” everywhere”

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 30

 Marketing in 2007:
Conclusion

MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 31

 Conclusion

2007 macro outlook seems favorable to steer business profitability, so this is

the time for companies to drive their innovation capability and reap profit

Business Profitability - Innovation Capability Matrix

Green Zone Yellow Zone Red Zone Business Profitability/

Innovation Capability Matrix
• Inspired by McKinsey-GE Matrix,
High

we simplify industry
attractiveness as business
profitability, while adopting
Business Profitability

company’s competitive
advantage as firm’s level of
innovation capability.
Medium
Low

Size reflect the impact to

Company’s profit

Disruptive Incremental Minor

Innovation Capability
MarkPlus&Co/Corporate & Strategy/ Marketing in 2007 32
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