hashim final sm 1.docx

8/10/2019 Hashim Final SM 1.docx

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Table of Contents

INTRODUCTION ................................................................................................................................... 3

PESTEL ................................................................................................................................................. 4

POLITICAL and LEGAL............................................................................................................... 4

ECONOMIC................................................................................................................................... 5

TECHNOLOGY and ENVIRONMENT........................................................................................ 5

MARKET CHARACTERISTICS ................................................................................................................ 7

SIZE................................................................................................................................................ 7

MARKET SHARE.......................................................................................................................... 8

GROWTH....................................................................................................................................... 9

INDUSTRY AND COMPETITIVE ENVIRONMENT ................................................................................. 10

Buyers Power:.............................................................................................................................. 10

Suppliers Power:.......................................................................................................................... 10

Threat of New Entrants:................................................................................................................ 10

Rivalry among Existing Firms:..................................................................................................... 11

Threat of Substitutes:.................................................................................................................... 11

FIRM SPECIFIC ISSUES ....................................................................................................................... 13

MAJOR INVESTMENT............................................................................................................... 13

OBJECTIVE................................................................................................................................. 13

PROFITABILITY......................................................................................................................... 13

CAPABILITIES............................................................................................................................ 14

COMPETENCES.......................................................................................................................... 14

TRENDS....................................................................................................................................... 14

LONG-TERM COMPETITIVENESS.......................................................................................... 14

SWOT ANALYSIS.......................................................................................................................... 15

RESOURCE AUDIT.................................................................................................................... 16

FINANCIAL RATIOS.................................................................................................................. 16


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CONCLUSION ..................................................................................................................................... 19

REFERENCES ...................................................................................................................................... 20

APPENDIX 1.................................................................................................................................... 28

OTHER APPENDICES.................................................................................................................... 31


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INTRODUCTION

In laymans term, a strategy is a carefully constructed plan in helping to achieve a particular

set of objectives or goals. The role of strategy within an organisation is said to be the main

determinant of its success or failure. According to strategic management theory, a firm must

be able to change their strategies in relation to the conditions of their external environment

(Parker, Storey, van Witteloostuijn, 2010). Through strategic analysis, firms can examine

their external and internal environment in identifying whether their current strategies are

effective. First step is to scan the macro-environment through PESTEL, a tool used to

evaluate external variables such as politics, economics, sociocultural, technological,

environmental, and legal factors (Huiru, 2011). Next, the industry which the firm operates in

is examined through factors such as size, growth, and market share. The competitiveness of

the industry is also evaluated by using Porters Five Forces. Finally, we scan the internal

environment of the firm through financial ratios, SWOT analysis, and resource audit to

determine their capabilities and long-term competitiveness. Strategic analysis is important

because it allows strategic decision makers to modify their expectations and take corrective

actions in relation to the changes in the environment. Regular strategic analysis helps a firm

in achieving its long-term goals. For this report, we have chosen to analyse Ann Joo

Resources Berhad (AJRB) by using the steps mentioned previously. AJRB is a group that

specialises in manufacturing and trading steel products. They are considered to be the most

trusted and reliable provider of steel products and services in Malaysia (Ann Joo Resources

Berhad, 2014).


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PESTEL

POLITICAL and LEGAL

In 2012, Asian firms from China, Hong Kong, Japan and Australia faced a steep decline in

stock prices due to the Greek political crisis baring to the fact that Asian firms are a major

market player in Greece (Sampson, 2012; Papaconstantinou, Tsagkanos & Siriopoulos,

2013). AJRB will indirectly face the effect of the instability in Greece as 50% of their

production is exported, especially into Australia, which is one of the countries where they

have managed to establish their presence (Tan, 2010). Furthermore, AJRBs presence in the

Middle East is another risk that they face from unresolved issues such as the Iranian nuclear

program that faces threats from the United States and Israel and the Syrian political turmoil

(Sengupta, 2012). In addition, the Malaysian political situation is very tense due to the

general elections which are going to be held in the near future causing AJRB to face a

dampened market share due to investors being extra cautious of investing in Malaysia

(Ramasamy, 2012). Appendix 1 shows that many Middle Eastern and certain other countries

have increased their import duty on steel since 2008 and 2009, which increases costs for

AJRB for exporting their product. Moreover, in November 2008 the Malaysian government

implemented new technical regulations on 57 steel products for which it requires certificates

of approval to ensure companies follow the Malaysian standards set by them (OECD, 2009).

This requirement therefore heightens the import barrier and helps domestic steel firms reduce

competition from overseas firms. In addition, the anti-dumping policy will further help in

protecting the interest of local firms such as AJRB.


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ECONOMIC

China implemented a dumping policy on their steel industry, which had severely impacted

the global price of steel due to oversupply of steel product in the market (Metal Bulletin

Daily, 2012). Malaysian steel industry also suffers due to this policy enacted by china (Wire

Journal International, 2013). One of Malaysias leading steel companies, AJRB had

experience a drop in revenue from RM2, 237,230,000 in 2011 to RM2, 080,237,000 in 2012

(Ann Joo Annual Report, 2012). Therefore, the Malaysian government announced an anti-

dumping tax policy for Chinese and Turkish steel firms beginnings from 20th February 2013

in order to safeguard local firms from further loses (China daily, 2013). Moreover, the

industry faced another problem where the market was silenced due to the Euro-zone crisis

causing AJRB which was focused on exporting 50% of their production to deal with a weaker

export market (Ann Joo Annual Report, 2012).

Government initiated the Economic Transformation Programme (ETP) plan which focuses on

building major infrastructure such as Penang bridge 2, Ipoh-Padang Besar Double- Track

Railway, Mass Rapid Transit (MRT), KLIA 2 and the extension of the Kelana Jaya and

Ampang LRT(Govind, 2014). The constructions of these infrastructures requires a vast

amount of steel, which provides a domestic business opportunity for AJRB to alleviate their

losses caused due to a sluggish international market (Economic transformation program,

2012).

TECHNOLOGY and ENVIRONMENT

Aligning with todays requirements of greener technology, AJRB has invested in the latest

blast furnace technology and the first modern and environmentally friendly furnace in


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Malaysia. The advantage of this is that AJRB will not have to worry about the increase in the

electricity tariff, (Star Property.my, 2013), as their new Burning Furnace technology will

consume lesser energy without sacrificing the product purity and quality (Ann Joo Resources

Berhad, 2014). To maintain AJRBs competitive advantage they have made an agreement

with one of Chinas largest steel firms thus benefiting from the technology transfer. Another

competitive advantage for AJRB is that it is the first steel firm to gain three international

certificates. First certification is (ISO 14001:2004), representing their concern towards the

environment and reflecting a good socially responsible corporate image (ivkovi & Taki,

2013). Second certification is (ISO 9001:2000) that shows their product quality, which meets

international standards, therefore giving customers confidence in the product that they want

to buy (Psomas, Pantouvakis & Kafetzopoulos, 2013). The third certification is the

Occupational Safety and Health (OHSAS 8001:2007), which shows their concern for the

labor force and helps attract potential labor to work for their company (Abad, Lafuente &

Vilajosana, 2013)


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MARKET CHARACTERISTICS

SIZE

The attractiveness of a market can be evaluated through a number of factors. One of the

factors is the markets size. The steel industry plays a huge role in Malaysias infrastructure

and economic development. The rapid pace of globalization has led firms to enter foreign

markets through exporting since it requires minimal financial and human resources (Reis and

Forte, 2014). Malaysias steel industry is not confined exclusively to a domestic market as

our steel products are exported to countries such as Australia, Singapore, China, Vietnam,

and Thailand. The exports value of metal products has improved from RM 1.4 billion in

January 2012 to RM 2 billion in January 2013 (Ministry of International Trade and Industry,

2014). Despite their presence in the international market, Malaysia produces 0.00029 % of

the worlds steel production in 2010 which is minuscule compared to other major producers

such as China and India (Mason, 2011). This shows that Malaysia has little to no influence in

the worlds steel production. The industry now focuses more on being the primary supplier to

the domestic consumption as influx in infrastructure projects fuels demand in steel production

(Oxford Business Group, 2012). The local steel industry is rather oligopolistic as it consists

of few but big players. AJRB and its competitors such as Lion Industries, Kinsteel Bhd,

Malaysia Steel Works (Masteel) Bhd, Perwaja Holdings Bhd, and Southern Steel Bhd are the

top steelmakers in the country.


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MARKET SHARE

The competitive environment of an industry is reflected by the market share. Many

companies place a great emphasis on capturing a large segment of the market because relative

market share is said to offer opportunities for mass production with consequent economies of

scale (Karlof and Loevingsson, 2005). In the local steel industry, the market share shows that

Lion Industries is the leading company. The market share represented by the following pie

chart is based on the total revenue of AJRB and its competitors in 2013. The reason why Lion

Industries has higher total revenue compared to the rest is because it operates in business

segments other than those related to steel production. On the other hand, AJRB is more

focused on the manufacturing and trading of their steel products. Even though they engage in

investment holding and property management, those segments are closely related to their

primary activities.

(Source: Financial Times, 2014)

36%

16%7%

10%

10%

21%

Market Share of Domestic Steel Industry

According to Revenue in 2013

Lion Ann joo Perwaja Masteel Kinsteel Southern Steel


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GROWTH

An industrys life phase influences the growth of its market. According to Michael Porters

concept of industry life cycle, the factors that determine a firms survival and development

within its industry are its properties, strategies, and competitive advantage. This makes the

industry itself as the most integral aspect of a firm in reaching its objectives (Sabol, ander,

and Fukan, 2011). Malaysias steel industry is at its maturity stage of the industry life cycle.

This is proven by a number of trends in the industry. For example, the profitability of the

industry is decreasing due to numerous macroeconomic factors. Most local steelmakers with

the exception of Masteel reported losses on the third quarter of 2013 (The Edge, 2013).

Another trend is that the rise of global competition forces Malaysia to rely on foreign

steelmakers as well for supplies. Although we export steel to other countries, Malaysia is a

net importer of steel (Mason, 2011). Data shows that the overall production of steel in

Malaysia stagnates as production in first half of 2013 is lower than that of last year. In

addition to that, import of steel is increasing 24 per cent year-over-year (Yong, 2013). Due to

this issue, AJRB exports 50 per cent of their total production to capture the market share of

foreign markets (Tan, 2010). The combination of slower industry growth and greater

technological maturity means that firms would focus more on the pricing of their respective

products. For example, the domestic steel industry is burdened by the recent increase in

electricity tariff. This results in an additional cost of approximately RM 200 million to the

local steelmakers (The Borneo Post, 2013). However, AJRBs past performance shows that

cost can be reduced through successful execution of the product stabilization and

optimization through the blast furnace (Ann Joo Resources Berhad, 2012). Overall, it is

difficult for a firm to sustain their competitive advantage in a volatile industry such as the

steel industry. We will further explore the intensity of the steel industry through our

discussion of Porters Five Forces.


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INDUSTRY AND COMPETITIVE ENVIRONMENT

Porter's 5 forces for Malaysian Steel Industry

Buyers Power:

Increase in demand for steel (Misif.org.my, 2012)

Cheaper imports Options (Doyle, 2012)

Low product differentiation

Suppliers Power:

Scarce suppliers for raw materials (Tse, 2013)

Raw material prices on a decline (Insider Asia, 2013)

Threat of New Entrants:

High raw material costs (Doyle, 2012)

Cheaper Imports (Doyle, 2012)

Rivalry In

the Industry

(High)

Threat of

NewEntrants

(High)

Buyers'

Power

(High)

Threat ofSubstitues

(Low)

Suppliers'

Power

(Medium)


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High Production Costs (Tse, 2013)

Rivalry among Existing Firms:

Approximately 22 domestic competitors (Bursamalaysia.com, n.d.)

Product Differentiation is low

Growing Import Penetration (Doyle, 2012)

Threat of Substitutes:

No primary substitute

Growing demand for steel (Misif.org.my, 2012)

With the high power of domestic buyers and increasing imports, Ann Joo has invested in a

first of its kind Blast Furnace in Malaysia to increase its capacity and quality of steel products

and also unlike other firms, exports nearly half of its products into foreign markets (Tan,

2010) which can help it to compensate for the pressures posed by oversaturation and import

penetration in the local market.

Moreover, this move to vertically integrate backwards through the construction of their own

blast furnace has allowed Ann Joo to reduce the intermediaries in its supply chain as they can

now produce their own iron for manufacturing their steel products and have greater control

over their operations. This move to backward integrate has allowed them to source their raw

material locally at cheaper rates and also allowed end a 20 year contract with international

resource giant BHP Billiton (New Strait Times, 2011).

Furthermore, in an industry with low differentiation between products of different producers,

Ann Joo is trying to differentiate itself on the basis of better quality and purer steel products

of engineering grade. Also, in an industry plagued by high operation costs mainly on account


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FIRM SPECIFIC ISSUES

MAJOR INVESTMENT

One of the major investments of Ann Joo Resources Bhd (AJRB) is the subscription of the

Redeemable Unrated Bonds of RM 500 million by Affin Investment Bank, Affin Bank,

Alliance Bank, OCBC and United Overseas Bank. The proceeds of the bond subscription are

being used to finance the modern blast furnace project. This blast furnace technology also

happens to be an environmental friendly technology (Financial Daily, 2010).

OBJECTIVE

Firstly, the main objective of AJRB is to develop and encourage a positive affiliation with all

stakeholders through an active two-way communication. Another objective of AJRB is to

invest in new and innovative machinery technologies to increase the productivity of the

company. AJRB also wants to reduce its operational cost and increase their profitability at the

same time. Furthermore, AJRB manufacturers its products as internationally-acclaimed

quality, environmental and product certified standards. Last but not least, AJRB desires to be

positioned first in the Malaysian market as the most favoured provider of steel products.

PROFITABILITY

Overall the profitability of the AJRB has decreased over the years because during these years

AJRB had foreign exchange losses due to the weak Malaysian Ringgit against the US Dollar.

Although in 2010, AJRB made a high profit of RM 139,848,000 but since then the profits

have decreased drastically until it made a loss of RM 37,131,000 in the year 2012. However,

in the year 2013 AJRB was able to generate a small amount profit which amounted RM

4,480,000.


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CAPABILITIES

As for the capabilities, AJRB is furnished with the modern shearing machines and slitting

machines which are the forefront of the steel industrys machinery. AJRB was able to expand

its exports to other countries through upgrading its steel manufacturing plant so that AJRB is

able to produce double its production rate efficiently. Therefore, it has more finished goods to

export overseas and to penetrate new markets.

COMPETENCES

AJRB is widely regarded and reputed in the steel industry in Malaysia due to its many years

of experience in the steel business. Another reason being that AJRB produces a variety range

of high grade steel products which consist of a diverse of long products and flat products.

This is because AJRB wants to satisfy their local and regional market customer needs. And

all of these steel products are kept in their well-organized warehouses which is equipped with

hi-tech logistic facilities.

TRENDS

AJRB have a trend of acquiring steel companies such as Anshin Steel Processor Sdn Bhd.

This shows that AJRB would not hesitate to acquire or merge with other companies to

increase its profitability and increase the demand for their products domestically and

internationally and to also develop business growth.

LONG-TERM COMPETITIVENESS

AJRB is planning to establish and operational base in the Southeast Asia as it intends to be

the number one steel manufacturing company in the region. AJSB also has signed a five year

contract to purchase 450,000 tonnes of iron ore each year from an Australian company which

should satisfy AJRBs long term demand for iron ore (Bloomberg, 2008). This way would


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help AJRB stay competitive in the steel industry as it would not have any problem in

acquiring iron ore which is an essential product in the steel industry.

SWOT ANALYSIS

We conducted a swot analysis for AJRB for this strategic management assignment.

The first strength of AJRB is its efficiency in producing steel products. This is because

AJRBs plants and rolling mills concentrate more on the manufacturing side of the steel

products. Secondly, AJRB integrates its manufacturing of iron and steel. As a result, the

consumption of electricity in AJRBs steel manufacturing plant has decreased by more than

40%. Moving on, AJRB also has introduced the modern blast furnace for the purpose of

manufacturing steel products efficiently and effectively.

As for the weakness, AJRB would have to reduce their production or temporarily stop their

production if the demand of steel and the price of steel declined (Joanne Nayagam, 2012).

When that happens, AJRB would experience a restricted working capital scenario and they

would also have problems with their cash flows which includes both cash inflow and cash

outflow.

As for opportunity, there is demand for steel products in India, Middle East and Australia.

Therefore, AJRB can seize this opportunity to export their products to these regions and

established their presence there besides increasing their brand recognition worldwide

(Bloomberg, 2008).

One of the threats of AJRB is the dumping of steel products by Chinese steel mills from

China to the world including Malaysia (Hanim Adnan, 2013). This leads to increase in steel


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production capacity worldwide which cause an excess of steel supply in Malaysia (Borneo

Post Online, 2012). As a result, steel prices worldwide and in Malaysia are reduced

drastically. The next threat is the increase in raw materials prices. This subsequently will

affect the production quantity and cost reduction of steel products of AJRB.

RESOURCE AUDIT

From the point of view of financial resources, AJRB has had cash and cash equivalents of

RM 47,400,000 at the end of 2012 and RM 48,045,000 at the end of 2013. As for the non-

current assets of AJRB, in 2012, AJRB had a total non-current assets amounting to RM

1,218,498,000 and in 2013, AJRB had non-current assets amounting to RM 1,201,468,000.

This resources were acquired through the proceeds from the issue of shares to common

shareholders.

In 2012, the equity that was attributable to owners of AJRB was RM 1,036,763,000. In 2013,

the equity amount was RM 1,049,195,000. AJRB made a profit of RM 4,480,000 during the

year 2013. Besides that, AJRB has a total of 588 employees working for them.

FINANCIAL RATIOS

(1) Gross profit margin = Gross profit / Sales

= RM 197,598 / RM 2,155,373

= 9.17%

The ratio is not good because the company can only generate less than 10% of profit from

their sales.

(2) Working capital = Current assets - current liabilities

= RM 1,896,641,000 - RM 1,722,102,000


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= RM 174,53

The working capital is good because it is positive which means there is more cash inflow than

cash outflow.

(3) Current ratio = Current assets / Current liabilities

= RM 1,896,641,000 / RM 1,722,102,000

= 1.10

The current ratio is good because it is more than 1 which means current assets mostly consist

of inventory.

(4) Acid test ratio = (Cash + Cash equivalents + Marketable securities + Accounts

Receivable) / Current liabilities

= (RM 52,805 + RM 387,249) / RM 1,722,102

= 0.26

This ratio is not good because it is less than 1 meaning there is not enough cash to manage

their debts.

(5) Return on stockholders' equity

= Net income /Average stockholders' equity

= RM 12, 268 / (RM 1,049,195 + RM 1,041,437)/2

= 1.17%


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The ratio is bad because the return is less than 2% meaning high incomes cannot be

generated.

(6) Accounts receivable turnover = Sales / Average accounts receivable

= RM 2,155,373 / (RM 387,249 + RM 284,286)/2

= 6.42 times

This ratio is good because the company is able to turn accounts receivable to cash quickly.

(7) Inventory turnover = Cost of goods sold /Average inventory

= RM 1,957,785 / (RM 1,449,827 + RM 1,339,427)/2

= 1.40 times

This ratio is not good because the company is not able to turn inventory into sales often.


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CONCLUSION

In conclusion, for this report we carried out certain analysis to justify our findings for

this strategic management assignment. Firstly, examined Ann Joos external and internal

using strategic analysis. We had to justify the AJRBs performance and strategy by analysing

the macro-environment of Malaysia using PESTEL. We also analyse the shares, growth and

size of the steel industry in Malaysia and its characteristics. Next, we assessed the industrys

competitiveness by exercising Porters Five Forces to analyse which factors influence the

Ann Joos strategies. Then,we also analysed Ann Joos internal environment using SWOT

analysis, resource audit and financial ratios to examine Ann Joos specific issues.


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Industry & Chemical Engineering Quarterly, 19, 4, pp. 541-552, Academic Search

Complete, EBSCOhost, [Accessed: April 11, 2014].
http://www.theborneopost.com/2013/12/06/malaysian-iron-steel-industries-at-crossroads-due-to-hike-in-electricity-tariffs-federation/#ixzz31kbXmFllhttp://www.theborneopost.com/2013/12/06/malaysian-iron-steel-industries-at-crossroads-due-to-hike-in-electricity-tariffs-federation/#ixzz31kbXmFllhttp://www.facebook.com/l.php?u=http%3A%2F%2Fwww.theedgemalaysia.com%2Ffirst%2F200695-tough-times-for-local-steel-players.html&h=gAQGECq9Shttp://www.facebook.com/l.php?u=http%3A%2F%2Fwww.theedgemalaysia.com%2Ffirst%2F200695-tough-times-for-local-steel-players.html&h=gAQGECq9Shttp://www.facebook.com/l.php?u=http%3A%2F%2Fwww.theedgemalaysia.com%2Ffirst%2F200695-tough-times-for-local-steel-players.html&h=gAQGECq9Shttp://www.facebook.com/l.php?u=http%3A%2F%2Fwww.theedgemalaysia.com%2Ffirst%2F200695-tough-times-for-local-steel-players.html&h=gAQGECq9Shttp://www.theborneopost.com/2013/12/06/malaysian-iron-steel-industries-at-crossroads-due-to-hike-in-electricity-tariffs-federation/#ixzz31kbXmFllhttp://www.theborneopost.com/2013/12/06/malaysian-iron-steel-industries-at-crossroads-due-to-hike-in-electricity-tariffs-federation/#ixzz31kbXmFll


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APPENDIX 1

Ann Joo Resources Berhad, listed on the Main Market of Bursa Malaysia Securities

Bhd since 26 November 1996, is an investment holding company. The Group is primarily

engaged in the manufacturing and trading of steel and steel related products.Ann Joo started

out primarily as a scrap metal dealer in 1946 by the late Mr. Lim Kah Seng, its founder,

whose vision and strong entrepreneurial spirit have brought much success to the Group.

Today, the Ann Joo Group has grown to become one of the most efficient and reputable steel


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groups in Malaysia.

Ann Joo committed in providing steel products and services, whose uncompromising

standards and quality are among the industrys highest, to their customers. Ann Joos highly

regarded reputation in the steel business as one of the countrys most prominent steel experts,

with its wealth of experience and unparalleled expertise, has assured Ann Joos position as

the most trusted and reliable total business solution provider of steel products and services in

Malaysia.

Company vision in 2020 :

-To excel as the leading steel Group in Southeast Asia, by manufacturing and trading a wide

range of steel products, achieving long term growth and lasting value for all stakeholders

-To fulfill this aspiration through prudent investment, modern technology and world-class

performance

-As a caring corporate citizen, we are committed to serving the well-being of the community,

promoting public interest and the conservation of the environment

In terms of manufacturing, through its steel-making plant and rolling mills, focuses on

the production of steel product ranging from billets, bars to wire rods serving mainly the

construction and engineering sectors. Our upstream expansion into the iron and steel-making

business, which enhances efficiency, further enables the Group to excel as the leading steel

group and the most cost effective producer not only in Malaysia but also in Southeast Asia.

These activities complement our well-diversified downstream steel business.

Manufacturing Division Mission Statement:


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-To excel as the leading steel producer in the region, operating the best performing blast

furnace and electric arc furnace in Southeast Asia, producing products of the highest quality

at the most competitive prices:-

-To invest in technology to increase productivity, lower costs and enhance profitability

-To manufacture to internationally-acclaimed quality, environmental and product certified

standards

-To produce engineering grade of steel products at the most competitive cost

-To expand the Groups operational presence across Southeast Asia

In terms of trading

The trading division deals with a broadly diversified product

portfolio comprising of a variety of flat and long steels for supply to a wide array of

economic sectors such as oil and gas, petrochemical, palm oil and oleochemical, food and

beverage, consumer electronics, automotive, engineering-fabrication intensive sectors,

constructions and infrastructure. In fact, our trading division is one of the leading suppliers in

the infrastructure and engineering-fabrication intensive sectors In addition. In short, we also

can be said that Ann Joo specialise in the slitting and shearing of steel coils into plates and

sheets of various shapes, sizes and dimensions as well as the supply of precision metal

pressed and metal stamped parts to our customers and maintains a commanding presence as

one of the countrys top distributors of a diverse range of high grade steel products.

Trading Division Mission Statement:

-To be positioned first in the Malaysian market as the most preferred stockist and supplier

-To field a dedicated and resourceful sales and marketing team delivering exceptional service

to customers


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-To extend downstream services to create more value in the steel industry

-To expand the Groups market presence in Southeast Asia through effective business

collaboration with partners and associates, creating a comprehensive distribution network

OTHER APPENDICES

Appendix 2


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http://www.oecd.org/sti/ind/43312347.pdf

Appendix 3

http://www.misif.org.my/index.php?option=com_content&view=category&layout=blog&id=

79&Itemid

hashim final sm 1.docx

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