Harvard Case - Kossan Rubber Industries Berhad: Stretching to its Maximum Potential through an Expansion Strategy
"Kossan Rubber Industries Berhad: Stretching to its Maximum Potential through an Expansion Strategy" Harvard business case study is written by Siriwan Chutikamoltham, Chee Ming Lim. It deals with the challenges in the field of Finance. The case study is 19 page(s) long and it was first published on : Jan 12, 2018
At Fern Fort University, we recommend that Kossan Rubber Industries Berhad (KRIB) pursue a strategic expansion strategy focused on diversifying its product portfolio, entering new markets, and leveraging technology to enhance its manufacturing processes and profitability. This strategy should be implemented through a combination of organic growth, strategic partnerships, and selective acquisitions.
2. Background
Kossan Rubber Industries Berhad (KRIB) is a leading manufacturer of rubber gloves, primarily serving the healthcare industry. The company has enjoyed significant growth in recent years, driven by the global demand for disposable medical gloves. However, KRIB faces challenges such as increasing competition, rising raw material costs, and the potential for economic downturns.
The case study focuses on KRIB's CEO, Dato' Lim, who is considering various expansion strategies to ensure the company's long-term sustainability and growth. The main protagonists are Dato' Lim, the CEO, and the company's senior management team who are tasked with evaluating the various expansion options and making recommendations.
3. Analysis of the Case Study
To analyze KRIB's situation, we can use a framework that considers both internal and external factors:
Internal Analysis:
- Strengths: KRIB possesses strong brand recognition, established manufacturing capabilities, and a loyal customer base. The company also has a proven track record of innovation and product development.
- Weaknesses: KRIB's reliance on a single product line (rubber gloves) makes it vulnerable to market fluctuations. The company also faces challenges in managing its workforce and maintaining cost competitiveness.
- Opportunities: KRIB can capitalize on the growing demand for medical supplies in emerging markets. The company can also explore new product lines, such as surgical gowns and masks, to diversify its portfolio.
- Threats: Increasing competition from low-cost manufacturers, rising raw material costs, and potential economic downturns pose significant threats to KRIB's future profitability.
External Analysis:
- Market Trends: The global healthcare industry is expected to continue growing, driven by rising healthcare expenditure and an aging population. This presents a significant opportunity for KRIB to expand its market reach.
- Technological Advancements: Advances in automation and robotics can help KRIB improve its manufacturing efficiency and reduce costs. The company can also leverage technology to enhance its supply chain management and customer service.
- Economic Conditions: Global economic uncertainty and potential trade wars could negatively impact KRIB's business. The company needs to carefully monitor economic trends and adjust its strategy accordingly.
- Regulatory Environment: Changes in government regulations, particularly in the healthcare sector, can impact KRIB's operations. The company needs to stay abreast of regulatory changes and ensure compliance.
Financial Analysis:
- Financial Statements: KRIB's financial statements reveal strong profitability and healthy cash flow. However, the company's high debt levels and reliance on external financing raise concerns about its financial stability.
- Capital Budgeting: KRIB needs to carefully evaluate the financial viability of its expansion plans, considering the cost of capital, return on investment (ROI), and payback period.
- Risk Assessment: KRIB faces various financial risks, including currency fluctuations, interest rate changes, and commodity price volatility. The company needs to develop a comprehensive risk management strategy to mitigate these risks.
4. Recommendations
KRIB should pursue a multi-pronged expansion strategy that combines organic growth, strategic partnerships, and selective acquisitions:
1. Organic Growth:
- Product Diversification: KRIB should invest in research and development to expand its product portfolio beyond rubber gloves. This can include developing new types of gloves, such as those with enhanced features or those designed for specific medical procedures.
- Market Expansion: KRIB should target new markets, particularly in emerging economies with growing healthcare sectors. This can be achieved through establishing new manufacturing facilities or entering into joint ventures with local partners.
- Process Optimization: KRIB should invest in technology and automation to improve its manufacturing processes, reduce costs, and enhance efficiency. This could include implementing activity-based costing (ABC) to identify cost drivers and improve cost control.
2. Strategic Partnerships:
- Joint Ventures: KRIB can form joint ventures with other companies in the healthcare industry to leverage their expertise and expand into new markets. This can include partnerships with distributors, retailers, or other manufacturers.
- Technology Partnerships: KRIB should collaborate with technology companies to develop innovative solutions for its manufacturing processes and supply chain management. This could involve leveraging artificial intelligence (AI), big data analytics, and other advanced technologies.
3. Selective Acquisitions:
- Target Companies: KRIB should consider acquiring companies that complement its existing product portfolio or provide access to new markets. This can include companies that manufacture other medical supplies, such as surgical gowns or masks, or companies that operate in emerging markets.
- Valuation Methods: KRIB should use a variety of valuation methods, including discounted cash flow (DCF) analysis and comparable company analysis, to determine the fair value of potential acquisition targets.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations are aligned with KRIB's core competencies in manufacturing rubber products and its mission to provide high-quality healthcare products.
- External Customers and Internal Clients: The recommendations address the needs of KRIB's customers, who are seeking high-quality and affordable medical supplies, and its internal clients, who are seeking opportunities for growth and development.
- Competitors: The recommendations take into account the competitive landscape and aim to position KRIB as a leader in the healthcare industry.
- Attractiveness ' Quantitative Measures: The recommendations are supported by quantitative measures, such as ROI, payback period, and NPV, which demonstrate the financial viability of the expansion plans.
- Assumptions: The recommendations are based on the assumption that the global healthcare industry will continue to grow and that KRIB will be able to successfully implement its expansion strategy.
6. Conclusion
KRIB has a significant opportunity to expand its business and achieve its full potential. By pursuing a strategic expansion strategy that combines organic growth, strategic partnerships, and selective acquisitions, KRIB can diversify its product portfolio, enter new markets, and leverage technology to enhance its manufacturing processes and profitability.
7. Discussion
Other alternatives not selected include:
- Focus on Cost Reduction: KRIB could focus on reducing costs by outsourcing manufacturing to lower-cost countries or by automating its production processes. However, this could compromise the quality of its products and damage its brand reputation.
- Merger with a Competitor: KRIB could merge with a competitor to create a larger and more dominant player in the market. However, this could face regulatory hurdles and may not be in the best interests of KRIB's shareholders.
Risks and Key Assumptions:
- Economic Downturn: A global economic downturn could negatively impact demand for medical supplies, reducing KRIB's sales and profitability.
- Competition: Increased competition from low-cost manufacturers could erode KRIB's market share and profitability.
- Regulatory Changes: Changes in government regulations could increase costs and impact KRIB's operations.
- Technology Disruption: Rapid technological advancements could disrupt the healthcare industry, making KRIB's existing products and processes obsolete.
8. Next Steps
KRIB should take the following steps to implement its expansion strategy:
- Develop a Detailed Business Plan: KRIB should create a detailed business plan that outlines its expansion strategy, including specific goals, timelines, and financial projections.
- Secure Funding: KRIB should secure funding for its expansion plans, either through internal resources, debt financing, or equity financing.
- Identify and Evaluate Potential Acquisition Targets: KRIB should identify and evaluate potential acquisition targets that align with its expansion strategy.
- Negotiate Partnerships: KRIB should negotiate strategic partnerships with other companies in the healthcare industry.
- Invest in Technology: KRIB should invest in technology to enhance its manufacturing processes, supply chain management, and customer service.
- Monitor Progress and Adjust Strategy: KRIB should regularly monitor the progress of its expansion strategy and make adjustments as needed.
By taking these steps, KRIB can position itself for continued growth and success in the years to come.
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Case Description
Kossan is a publicly listed company in Malaysia that produces rubber gloves for industrial, medical and household uses. The industry is oligopolistic and the products are basically homogenous. Thus far, its competitive strategy has relied on low cost, low profit margin, and high volume production. This cost-based competitive industry, as a whole, has been growing at 6-8% per annum and the industry prospect seems promising. In February 2016, the issues facing the company were about its expansion plan and future competitive strategy. Kossan's top management needed to address these concerns: -Should Kossan invest in the expansion plan, amidst similar expansion by its competitors and therefore, potential over-supply scenario in the market? -What should be the product mix of Kossan, given the changes in market demand and competitors' production? -Given the homogenous products and possible expansion by competitors, what were possible strategic options for Kossan to consider to prepare itself for a potential over-supply? -Given that the US market is one of its largest markets, the company also worried about the rising Trump's protectionist sentiment, although it was not certain if and by how much the rubber gloves industry would be affected.
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