A case study of rangdong plastic company

DEVELOPMENT STRATEGY FOR VIETNAM PLASTIC INDUSTRY: A CASE STUDY OF RANGDONG PLASTIC COMPANY by Ly Thi Minh Chau A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration Examination Committee: Dr. Fredric William Swierczek (Chairman) Dr. Truong Quang Dr. Clemens Bechter Nationality: Vietnamese Previous Degree: Bachelor of Economics HCMC University of Economics, Vietnam Bachelor of English HCMC University of Education, Vietnam Scholarship Donor: The Government of Switzerland Asian Institute of Technology School of Management Bangkok, Thailand April 1999 ACKNOWLEDGEMENT I would like to express my deepest gratitude to my research advisor, Dr. Fredric William Swierczek for his intensive support, valuable suggestions, guidance and encouragement during the course of my study. My sincere thanks are also due to Dr. Truong Quang and Dr. Clemens Bechter for their valuable time as the members of the examination committee. Their constructive suggestions were of great help in my completing this study. I would like to express my sincere gratitude to all of my teachers at SOM-AIT for their teaching and guidance during my course. I sincerely thank Mr. Uong Tien Thinh and Mr. Le Dinh Tuc for providing me the opportunity to carry out the study and such valuable information. I appreciate the assistance of managers and staff of Rang Dong Plastic Company who were helpful in the collection of data. I would like to specially express my thanks to all of my friends for their support and encouragement. Finally, I heartily dedicate this study to my beloved parents and my husband, Nguyen Thanh Long who have always sacrificed to encourage and support me during my study at AIT. ABSTRACT Rang Dong Plastic company is one of the most successful companies in terms of high market share. It has produced plastic products of various kinds in which PVC films is the core product of the company. The PVC films product accounts for 70% of the market share. However, in the competitive environment, Rang Dong Plastic company has faced various difficulties especially the lack of the vision in the long term. The objective of the study will therefore design a development strategy for the company in the long term. Based on the examination and analysis of the external and internal environment, the study will determine strengths, weaknesses, opportunities and threats (SWOT). Derived from the SWOT and based on the general process of strategy formulation, the study will develop the most appropriate development strategy for the company. Finally some recommendations are suggested for the company to be able to implement the proposed strategy. Table of Contents Chapter Title Page Title Page i Acknowledgement ii Abstract iii Table of Contents iv List of Figures vi List of Tables vii 1 Introduction 1 1.1 Background 1 1.2 Problem Statement 1 1.3 Objectives 1 1.4 Scope and Limitations of the Study 2 1.5 Methodology and Framework of the Study 2 1.6 Organization of the Study 4 2 Literature Review 5 2.1 Strategic Management Perspective 5 2.2 Definition of Strategy 5 2.3 The Process of Strategic Management 6 2.4 Structural Analysis of the Competitive Environment: 8 2.5 Selecting Development Strategies 12 3 External Environment Analysis 16 3.1 Macro-Environment Analysis 16 3.2 Current Situation and Trend of Investment of Plastic Industries in Asian Nations 19 3.3 Current Situation of Vietnam Plastic Industry 22 3.4 Development of Vietnam Plastics Industry of 2005 25 3.5 Investment Potentials 28 3.6 Industry Environment Analysis 31 3.7 Summary of Opportunities and Threats for Rang Dong Plastic Company 32 4 Internal Environment Analysis 34 4.1 History of Rang Dong Plastic Company 34 4.2 Company Missions 35 4.3 Organizational Structure 35 4.4 Production at Rang Dong Plastic Company 38 4.5 Sales and Net Income 45 4.6 Marketing 47 4.7 Finance 49 4.8 Conclusions on Strengths and Weaknesses of Rang Dong Plastic Company 50 5 Development Strategy Design 51 5.1 Foundations of Rang Dong Plastic Company’s Strategy 51 5.2 Strategic Options for Rang Dong Plastic Company 52 6 Conclusion and Recommendations 55 6.1 Conclusion 55 6.2 Recommendations 56 References 58 List of Figures Figure 1.1 - Framework of the Study 3 Figure 2.1 - The Determinants of Company Performance 5 Figure 2.2 - Strategy Formulation Process 7 Figure 2.3 - Requirements for Competitive Success 8 Figure 2.4 - The Five Forces Model 9 Figure 2.5 - The Porter Model Applied for the Vietnam Plastic Industry 12 Figure 2.6 - Development Strategies 13 Figure 3.1 - GDP during the Period of 1990-1998 18 Figure 3.2 - GDP Growth Rate in the Period of 1990-1998 18 Figure 3.4 - Asean Thermoplastics Consumption by Type 21 Figure 3.5 - The Competitors in the Field of Producing PVC Films 32 Figure 4.1 - Rang Dong Plastic Company’s Organizational Chart 36 Figure 4.2 - Process of Producing PVC Films 39 Figure 4.3 - Process of Producing PVC Leathers 40 Figure 4.4 - Process of Producing Sheets for Roofing and PVC, PE Boards 41 Figure 4.5 - Process of Producing Pet Bottles 41 Figure 4.6 - Current Product Structure of Rang Dong Plastic Company 44 Figure 4.7 - Sales Revenue 45 Figure 4.8 - Net Income (1994-1997) 46 Figure 4.9 - Structure of PVC Films Market Share 46 Figure 4.10 - Distribution System of Rang Dong Plastic Company 48 Figure 5.1 - Development Strategy Designed for Rang Dong Plastic Company 54 List of Tables Table 2.1 – Generic Strategies 14 Table 2.2 – Product / Market / Distinctive Competence - Choice and Generic Competitive Strategy 14 Table 2.3 – Alternative Directions for Development 15 Table 3.1 – The Economic Growth Rates (%) 20 Table 3.2 – 1997 Asean Per Capita Thermoplastics Consumption 21 Table 3.3 – Plastic Product Structure Compared with Thailand and Malaysia 23 Table 4.1 – Labor Force of Rang Dong Plastic Company 38 Table 4.2 – Price List of PVC Films Products According to Methods of Payment 47 Table 4.3 – Rate between Sales Revenues and Advertising Costs 48 Table 4.4 – Fixed Assets Turnover 49 Table 4.5 – Total Assets Turnover 50 Table 5.1 – Direction for Rang Dong Plastic Company’s Strategy Development 54 CHAPTER 1 INTRODUCTION Background In the past 20 years and in the following years, together with the expeditious development of scientific and technical areas such electronic, communication, biotechnology advance in the world, the plastics have also had outstanding technological progress. As plastic products in these days are serving not only for family life activities but in all economic sectors, through the experience of developing countries it is proven that if the growth ration of the national economy is 1%, the plastic industry will develop accordingly from 2% to 3%. In the next 10 years, according to a forecast of economic experts, our country's economy can grow stable at a rate of 7%-8% or more. Therefore, the annual growth rate of the plastic industry will also be in the range of 20%-25% consequently. The center of the development of the plastic industry as well as the center of the plastic industry is now concentrated in Ho Chi Minh City with productivity of over 70% output of the country with plastic products of various kind. This situation leads to the benefits for consumers and the profit reduction for producers. In addition, the plastic products serve mainly for consuming household utensils at the rate of about 65% of the total output. Plastic products for other economic areas are not much, remarkably are the packaging products covering 20% of the total output, plastic product or electric and electric industry and for other production industries are very little. The plastic industry of Vietnam is on the threshold of a new and highly promising but also of the challenging era of development. Vietnam Plastics industry has gained such a high development. However, due to the low start, the per capita of 2.8 kg is still not comparable with that of 100-200 kg per annum in other developed countries. Not only the per capita is too low but product structure accounts for the low level of Vietnam Plastic industry in comparison with other countries. Moreover, most of the manufacturers are of small and medium size and the number of big-sized manufacturers are very few. This situation results from the lack of the management at the macro level. It is clear that the Vietnam Plastic Industry needs a development strategy in the long run. This problem will be illustrated more clearly through the case of Rang Dong Plastic Company. Rang Dong Plastic Company has faced with various difficulties especially the lack of the vision and the limitation of information about foreign market and competitors for strategic management in the long term. Problem statement Based on the examination and analysis the external and internal environment, the study will formulate the development strategy for the Rang Dong Plastic Company in the long term. Objectives The study is an attempt to establish the development strategy for the Rang Dong Plastic Company. The following are the specific objectives of the study: To review literature dealing with the strategic management process, especially the process of strategy formulation. To identify strengths and weaknesses as well as opportunities and threats that the Rang Dong Plastic Company has been faced with. To assess the current situation of the company to develop its competitive profile. To formulate the development strategy for the Rang Dong Plastic Company in the long term. Scope and limitations of the study The study is about the Rang Dong Plastic Company. It aims at the formulation of the development strategy for the company in the long term. The depth of the study depends partly on the availability of the data of Vietnam's economic situation and plastic industry in general, especially of Rang Dong Company. It depends on the cooperation from the company and the Vietnam Plastic Association (VINAPLAST) as well. Methodology and framework of the study The study begins with the literature review which concerns the strategic management process, particularly the process of strategy formulation. It refers to the concepts and principles of the Porter Model to analyze the competitive environment of the industry. Data for the study are collected from 2 main sources: Primary data: Interviews with by persons of VINAPLAST and the Rang Dong Plastic Company as well as other plastic companies. Secondary data: Annual reports and other relevant data about the Rang Dong Plastic Company. Relevant data about the plastic industry and the Vietnam economy will be collected from Ministry of Industry, VINAPLAST, the National Statistics Office, Ho Chi Minh City Statistics Office, Ho Chi Minh Department of Industry and Commerce, from newspapers, magazines and from Internet and media as well. The framework of the study can be illustrated by Figure 1.1. Figure 1.1 - Framework of the Study Organization of the study Chapter 1 presents an introduction including the rationale of the study, and statement, the objectives, the scope and limitations as well as the methodology and framework of the study. Chapter 2 summarizes the literature review and contains the fundamental ideas on strategy, strategic management, strategy formulation process as well as the Porter Model for analyzing industry. Chapter 3 provides and analysis of external factors to identify the company's strategic position as well as strategic orientations and investment opportunities for the Vietnam plastic industry in the coming years. Based on the Porter model for examining the plastic industry environment, the opportunities and threats for the Rang Dong plastic company is found out. Chapter 4 includes the current analysis of the Rang Dong Plastic Company in terms of organizational structure, production, sales, marketing and finance. The goal is to identify strengths and weaknesses of the company to depict its current competitive situation. Chapter 5 presents the design of development strategy for the Rang Dong plastic company. Finally, Chapter 6 includes recommendations on the implementation of the proposed strategy. CHAPTER 2 LITERATURE REVIEW Strategic management perspective The central objective of strategic management is to assess why some organizations succeed why others fail. Three broad factors determine a company’s success: the industry where it is based, the country (or countries) where it is located, and its own resources, capabilities and strategic. It is illustrated in Figure 2.1: Figure 2.1 - The Determinants of Company Performance Source: Hill / Jones 1995 Before mentioning the strategic management process in greater detail, we need to define: “What is strategy?” Definition of strategy Reflecting the military roots of strategy, The American Heritage Dictionary defines strategy as “the science and art of military command as applied to the overall planning and conduct of large - scale combat operations” (Boston: Houghton – Mifflin, 1992). The planning theme remains an important component of most management definitions of strategy. Chandler defined strategy as “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Cambridge, Mass.: MIT Press, 1962). The main idea in Chandler’s definition is that strategy involves a rational planning process. The organization is depicted as choosing its goals, identifying the courses of action (or strategies) that best enable it to fulfill its goals, and allocating resources accordingly. Quinn of has defined strategy as “the pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. (Hill / Jones 1995) However, planning-based definitions of strategy have been strongly criticized. A new approach based on Henry Mintzberg’s definition of strategy as “a pattern in a stream of decisions or actions” the pattern being a product of whatever intended planned strategies are actually realized and of any emergent (unplanned) strategies (Management Science, 24-1978). The process of strategic management The strategic management process can be broken down into five different components. The five components are (1) selection of the corporate mission and major corporate goals; (2) analysis of the organization’s external competitive environment to identify opportunities and threats; (3) analysis of the organization’s internal operating environment to identify the organization’s strengths and weaknesses; (4) the selection of strategies that build on the organization’s strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats; and (5) strategy implementation. The task of analyzing the organization’s external and internal environment and then selecting an appropriate strategy is normally referred to as strategy formulation. In contrast, strategy implementation typically involves designing appropriate organizational structures and control systems to put the organization’s chosen strategy into action. Based on the context of this study, the focus will be on the strategy formulation process. The first six steps commonly found in strategy formulation are a series of interrelated activities: (1) Evaluation of: the corporation’s current performance results in terms of return on investment, profitability, etc, and the corporation’s current mission, objectives, strategies, and policies. (2) Evaluation and evaluation of the corporation’s strategic managers – board of directors and top management. (3) Scanning of the external environment to locate strategic opportunities and threats. (4) Scanning of the internal corporate environment to determine strategic strengths and weaknesses. (5) Analysis of the strategic factors from step (3) and (4) to pinpoint problem areas, and review and revise the corporate mission and objectives as necessary. (6) Generation, evaluation, and selection of the best alternative strategy appropriate to the analysis (Source: Wheelen / Hunger, 1988) The above strategy formulation process can be divided into sub-stages, as illustrated in figure 2.2: The first is the situation analysis. Beginning with an evaluation of current performance and ending with the review and possible revision of mission and objectives. The second is the process of generation, evaluation, and selection of the best alternative strategy. In order to build up an appropriate competitive strategy, it is necessary for the competitive environment analysis - an industry structure analysis. Figure 2.2 - Strategy Formulation Process (Source: Wheelen / Hunger, 1988) Structural analysis of the competitive environment: To succeed a company must either fit its strategy to the industry environment in which it operates, or be able to reshape the industry environment to its advantage through its chosen strategy. Companies typically fail when their strategy no longer fits the environment in which they operate, as illustrated in Figure 2.3. Figure 2.3 - Requirements for Competitive Success A formal strategic industry analysis can be used to identify environmental opportunities and threats. Opportunities arise when environmental trends create the potential for a company to achieve a competitive advantage. Threats arise when environmental trends endanger the integrity and profitability of a company’s business. Porter’s framework, known as the five forces model helps managers in this analysis. This model focuses on five forces that shape competition within an industry: (1) the risk of new entry by potential competitors, (2) the degree of rivalry among established companies within an industry, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5) the closeness of substitutes to an industry’s products, as shown in Figure 2.4. The task facing strategic managers is to determine which of these forces are of greatest importance to the organization and which can be influenced by the strategic decisions of management and to recognize opportunities and threats as they arise and to formulate appropriate strategic responses as well. Porter argues that “competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry”. (Porter, 1980). He further suggests that to compete effectively a company should strive to find a position where it is best able to defend itself against these competitive forces or can influence them its favor. The task of the strategist is therefore to determine which of these forces are of greatest importance to the organization and which can be influenced by the strategic decisions of management. Each of these forces is now considered in greater detail. Figure 2.4 - The five Forces Model Potential competitors The strength of competitive force of potential rivals is largely a function of the height of barriers to entry. The concept of barriers to entry implies that there are significant costs to joining an industry. The greater the costs that potential competitors must bear, the greater are the barriers to entry. High entry barriers keep potential competitors out of an industry even when industry returns are high. Clearly, it is in the interests of existing firms to have as high entry barriers as possible. Porter lists major barriers to entry which are: Economies of scale Product differentiation Brand identity Switching costs Capital requirements Access to di