Small and Medium Business Improvement in the ASEAN Region: Marketing Factors 9789814345811

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SMALL AND MEDIUM BUSINESS IMPROVEMENT IN THE ASEAN REGION Marketing Factors Edited by

KENNETH JAMES lrutitute of Southeut Asian Studies

and

NARONGCHAIAKRASANEE Jltlbutrltll MiuttlpmDit Co. Ltd., Bllngkok

Field Report Series No. 20 ASEAN ECONOMIC RESEARCH UNIT INSTITUTE OF SOUTHEAST ASIAN STUDIES

1988

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced , stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1988 Institute of Southeast Asian Studies

The responsibility for facts and opinions expressed in this publication rests exclusively with the authors, and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Cataloguing in Publication Data Small and medium business improvement in the ASEAN region : marketing factors I editors, Kenneth James and Narongchai .A.krasanee. (Field report series I Institute of Southeast Asian Studies ; no. 20) 1. Small business ·· A SEAN. 2. Marketing-· ASEAN. I. James, Kenneth George. II. Narongchai Akrasanee. III. Institute of Southeast Asian Studies . ASEAN Economic Research Unit. IV. Series. 1988 DS501 1594 no . 20 ISBN 9971-988-86-0 ISSN 0217-7099 Printed in Singapore by Fong and Sons Printers Pte Ltd

CONTENTS

List of Tables List of Figures Contributors Preface xi I

iv ix x

Marketing Factors Affecting Small and Medium Businesses 1 in the ASEAN Region: An Overview Kenneth James

II Marketing Problems of Small and Medium Businesses in Indonesia 19 M. Dawam Rahardjo 01 Marketing Issues of Small and Medium Businesses in Malaysia: 67 Practices, Problems, and Assistance Sieh Lee Mei Ling IV Marketing Factors and Small and Medium Enterprises in the Philippines 137 Melito S. Salazar, Jr. et al. V

Marketing Factors and Small and Medium Enterprise 204 lmprovemen t in Singapore Ch 'ng Hak Kee and Kau Ah Keng

VI Marketing Factors Relating to Small and Medium Business Improvement in Thailand 253 Narongchai Akrasanee, Preeyanuch Apibunyopas, and Thitiraht Chudasring

LIST OF TABLES

1.1

Type of Marketing System, by Proportion of Firms

12

2.1

Development of Industry in Daerah Istimewah Yogyakarta, 1979/80 to 1983/84

21

Number of Licensed and Registered Small-Scale/ Handicraft Industrial Businesses in Daerah Istimewah Yogyakarta, 1979/80 to 1983/84

23

Provision of Small Investment Credit (KIK) in the Industrial Sector in Daerah Istimewah Yogyakarta, 1977-83

24

Provision of Permanent Working Capital Credit (KMKP) in the Industrial Sector in Daerah Istimewah Yogyakarta, 1977-83

24

Small and Larger Industries in Daerah Istimewah Yogyakarta, 1983/84

27

Number of Companies by Commodities of Respondents in Daerah lstimewah Yogyakarta, 1985

29

2.7

Type of Firms

31

2.8

Length of Time Respondent Companies Have Been in Business

33

Products Produced by Respondent Companies

34

2. 10 Kinds of Goods Produced by Respondent Companies

37

2.2

2.3

2.4

2.5 2.6

2.9

List of Tables v 2.11

Product Durability of Respondent Companies

38

2.12 Quality of Goods Produced According to Respondents

39

2.13 Standardization Basis Used by Respondent Companies

40

2.14 Stock of Goods in Respondent Companies

43

2.15 Period between Time Good Is Produced and Time Good Is Sold

44

2.16 Method of Calculating Selling Price

46

2.17 Method of Payment by Buyer

47

2.18 Method of Marketing

48

2.19 Marketing Territory and Type of Goods

50

2.20 Distribution Pattern According to Industrial Sector

56

2.21 Percentage of Commodities Produced and Patterns of Distribution

58

2.22 Inclination of Respondent Companies in Selecting Buyers/Clients

61

2.23 Respondent Company Becoming Foster Child of Big Company

63

2.24 Type of Co-operation between Respondent Companies and Foster Parents

64

3.1

Distribution of SMBs by Main Industry, Race, and Size

71

3.2

Proportion of Personnel in Marketing by Industry and Marketing Distribution System

75

3.3

Extent of Marketing Planning by Size, Industry, and Marketing Distribution System

77

3.4

Number of Major Product Lines by Main Industry, Marketing Distribution System, Size, and Race

81

VI

List of Tables

3.5

Marketing Distribution System by Main Industry

84

3.6

Final Outlet Type by Industry and by Marketing Distribution System

86

3.7

Most Important Promotion Method and Proportion of Cost Spent on Advertising by Main Industry and by Marketing Distribution System

88

3.8

SMBs' Largest Customer Type by Industry and by Marketing Distribution System

94

3.9

Difficulties in Deciding Product Strategy

99

3.10 Problems of Pricing

102

3.11 Problems of Distribution and Final Selling

104

3.12 Economic Problems

111

3.13 Political, Government, and Legal Problems

111

3.14 Problems of Technology, Finance, Suppliers, and Distributors

113

3.15 Differences between Awareness and Usage of Specific Marketing Assistance

126

4.1

NCSO Listing of SMis in Regions II, IV, NCR, and VII

140

4.2

Targeted and Actual Respondents

141

4.3

Asset Size

147

4.4

Employment Size

148

4.5

Marketing Objectives

156

4.6

Achievement of Marketing Objectives

157

4.7

Marketing Arrangements

159

4.8

Market Coverage

166

List of Tables 4.9

Pricing Objectives of SMEs

VII

172

4.10 Pricing Strategies

173

4.11 Marketing Problems Faced by SMEs

181

5.1

Percentage Distribution of Responding Firms

217

5.2

Source of Finance

219

5.3

Comparison of Product Characteristics with Those of Closest Competitors

224

5.4

Extent of Product Changes

226

5.5

Methods of Promotion

229

5.6

Methods of Selling Overseas

234

5.7

Strength of Marketing Mix in Export Markets

236

5.8

Problems in Export Marketing

237

5.9

Factors Influencing Export Development

238

5.10 Usage of Marketing Systems by Firms

240

5.11 Organization of Functions

242

6.1

Number of SMBs under IFCT's Credit Financing by Type of Industries from April 1984 to August 1985

257

6.2

Size of SMB Employment under IFCT's Credit Financing, 1985

257

6.3

Distribution of SMBs under IFCT's Credit Financing, 1985

258

6.4

Sampled Firms: Number of Responding Firms Classified by Manufacturing Sectors and Size of Work-Force, 1979

266

Details of SMB Management under IFCT's Credit Financing, 1985

267

6.5

Vlll

6.6 6.7 6.8 6.9

List of Tables Composition of Goods in Manufacturing Production by Size of Employment, 1983

268

Origin of Buyers for Products Produced in Selected Industries, 1982

271

Types of Sales Channel of Selected Rural Town-Based Industries, 1982

272

Promotional Methods Used by Selected Rural TownBased Industries, 1982

274

6.10 Sampled Firms: Number of Firms Classified by Type of Industries and Marketing System Presently Adopted, 1985

275

6.11 Market Areas of Small-Scale Industry Products Surveyed in Chiengrnai-Lampang-Lampoon, Nakhon Rajsima-Khon Kaen Provinces, 1985

277

6.12 Marketing Intermediaries of Village-Based and TownBased Industry Products Surveyed in ChiengrnaiLampang-Lampoon, Nakhon Rajsima-Khon Kaen Provinces, 1985

279

6.13 Percentage Distribution of Firms with Changes in Sales Volume Classified by Marketing Models and Type of Industries, 1985

292

6.14 Marketing Model and Type of Industries Classified by Location, 1985

294

6.15 Marketing Models Preferred by Firms Classified by Type of Industries, 1985

296

LIST OF FIGURES

2.1

Pattern of Distribution Employed by Company Respondents

52

6.1

Map of Thailand with Study Areas Identified

256

6.2

Model of a Marketing System

259

6.3

Marketing Channel of Embroidered/Ready-Made Gannents in Chiengmai Province, 1985

280

6.4

Marketing Channel of Silk in Nakhon Rajsima Province, 1985

282

6.5

Marketing Channel of Noodles, 1985

282

6.6

Marketing Channel of Wood Products and Lacquer Ware, 1985

283

6.7

Marketing Development Network of SMBs

300

6.8

Proposed Inter-Market Linkages under the Subcontracting System

303

CONTRIBUTORS

Ch'ng Hak Kee is Senior Lecturer at the School of Management, National University of Singapore. Kau Ah Keng, Ph.D., is Associate Professor at the School of Management, National University of Singapore. Kenneth James, Ph.D., is a Fellow with the Institute of Southeast Asian Studies. Narongchai Akrasanee, Ph.D., is Managing Director of the Industrial Management Co. Ltd., Thailand, and Senior Vice-President of the Industrial Finance Corporation of Thailand. M. Dawam Rahardjo is Director (Special Programmes and Consultancy), Lembaga Penelitian, Pendidikan Penerangan Ekonomi dan Sosial (LP3ES). Melito S. Salazar, Jr., is Director of the Institute of Small-Scale Industries, University of the Philippines. Sieh Lee Mei Ling, Ph.D., is Associate Professor, Faculty of Economics and Administration, University of Malaya. Preeyanuch Apibunyopas is Consultant to the Industrial Management Co. Ltd., Thailand. Thitiraht Chudasring is Project Co-ordinator with the Industrial Management Co. Ltd., Thailand.

PREFACE

Development policies in the countries of the ASEAN region have in recent years reflected an increasing awareness of the significance of the small and medium-sized business enterprise in economic This has manifested in official action, initially development. hesistant but now increasingly vigorous, to develop and support small and medium businesses (SMBs), financially and otherwise. The ASEAN Small and Medium Business Improvement project seeks to contribute to this awareness of the significance of SMBs in a direct and practical manner: through the examination of SMBs at ground level, and the dissemination of findings for policy action. The project is the collaborative effort of research teams in each of the ASEAN countries (except Brunei; the project was formulated before that country joined ASEAN), co-ordinated centrally at the Institute of Southeast Asian Studies (!SEAS). The general objectives of the project are: ( 1) (2)

(3)

to collect, develop, and organize information relating to the role and potential of small and medium-scale enterprises in GNP formation, employment creation, and industrial growth; through overall analysis of problems involved, as determined through primary (field surveys and case studies) and secondary research, to identify and recommend economic policies and measures (institutional, educational, and commercial) geared to the improvement of the small and medium business sector in ASEAN countries; to disseminate the findings and recommendations of the project in a readable and easily comprehensible form.

The first phase of the project focused on financial (including fiscal) factors affecting the improvement of ASEAN SMBs. In the second phase, the participating research teams studied issues and problems relating to the marketing of SMB products. As with the first phase, the research teams in each country obtained primary

xn Preface data from surveys they carried out, and supplemented this with relevant secondary information from published and unpublished sources. Early drafts of the country studies were revised in the light of valuable feedback from several experts in SMB marketing, from both the public and private sectors. This interaction between academicians and practitioners helped ensure that recommendations were as realistic as they were innovative. The present volume is the distillation of the substantial output from the second phase. (Readers interested in the original papers should contact the respective writers.) The country studies are preceded by an Overview chapter which describes the analytical framework followed by the research teams, looks at similarities and differences in findings, and summarizes the conclusions and recommendations. We hope that this publication, and its companion volumes on Financial Factors and Production Management, will contribute to an increased understanding of SMBs and their potentially powerful role in the economic development of the region. The editors are grateful to the !SEAS Publications Unit, in particular Miss Tan Kim Keow and Mrs Triena Ong, for their unflagging efforts and unfailing good humour under occasionally testing circumstances; and to Miss Nurul Ithnin, who typed the several drafts. !SEAS Director Prof. K.S. Sandhu was, as always, a constant source of support. All three phases of the ASEAN Small and Medium Business Improvement Project were supported by the United States Agency for International Development (USAID). ISEAS would like to thank USAID for this most welcome and timely assistance. However, the conclusions of the present study remain the responsibility of the authors and their views do not necessarily reflect those of USAID or ISEAS. May 1988

Kenneth James Narongchai Akrasanee

I MARKETING FACTORS AFFECTING SMALL AND MEDIUM BUSINESSES IN THE ASEAN REGION: AN OVERVIEW

Kenneth James

Introduction Previous studies have indicated that finance, marketing, and problems of production management are three of the major constraints facing small and medium-sized businesses (SMBs) in the ASEAN region. These three concerns are addressed in successive phases of the ASEAN Small and Medium Business Improvement Project co-ordinated by the Institute of Southeast Asian Studies. The present paper draws on the findings of the second phase, which focused on marketing issues. The nature of the marketing problem as it applies to SMBs in the ASEAN region is first defined, while the following section describes the analytical framework The findings are then employed by the research teams. internal factors related to the presented in two parts: marketing decisions of SMBs, and external factors which influence those decisions. This provides the context for the discussion following, on the marketing systems practised by SMBs. Finally, some conclusions and recommendations are offered. Nature of the Marketing Problem for SMBs Definitions of the the marketing process range from the simple and straightforward to the complex and comprehensive, but all seek to specify this essential commercial activity

2

Kenneth James

in terms of elements that are applicable to all businesses, irrespective of the business environment.

Thus, marketing

is: the

performance

direct

the

of

flow

business

of

goods

activities

that

services

from

and

producer to consumer or user (American Marketing Association 1960) the

process of planning, organizing,

directing

and

controlling

the

staffing,

forces

of

production in order to fi 11 the wants and needs of a di st i net set of consumers for a product or service preferred

with by

a

unique those

set

of

consumers

characteristics or

end-users.

Includes market segmentation, brand management, market

research,

pr1c1ng

strategy,

sales,

distribution and promotion (del Val 1983) a process aimed at finding and keeping satisfied customers

(Australia,

Department

of

Industry,

Technology and Commerce 1985) With a deeper understanding of the marketing process, traditional and more limited approaches as reflected in the first

definition

perspective

which

above

have

sees

given

marketing

way

to

as

an

a

broader important

socio-economic process, in fact, "a basic component of the social structure in all (Yoshino 1971, p.

but the most primitive societies"

xiii).

Thus, while the principles of

marketing may have universal application, they have to be tailored to the nature of the marketing problem which is specific

to

prerequisite,

the

particular

therefore,

is

environment. an

An

understanding

essential of

that

environment, and how it affects the marketing efforts of a particular business community.

Overview 3 "ASEAN Small and Medium Business" defines such an An understanding of the small and medium environment. business sector is all the more imperative for the ASEAN region because, more than their Western counterparts, SMBs form the core of business activity in their respective countries (Chee 1984). Recognizing this, ASEAN governments have in recent years paid closer attention to SMBs. Increasingly, government development policies reflect a growing awareness of the needs of SMBs, in the hope that they might provide the stimulus for renewed economic growth (James 1986). Given that official interest in SMBs is of comparatively recent origin, it is not surprising that reliable primary data on SMBs, particularly in the area of marketing, is at a premium. The research findings from "ASEAN Small and Medium Business Improvement in the ASEAN Region: Marketing Factors", the second phase of a project co-ordinated by the Institute of Southeast Asian Studies, is a modest • contribution towards redressing that lack. The five country studies from this phase of the project provide an excellent illustration of the marketingenvironment relationship, all sharing elements common to the regional environment with each nevertheless presenting a unique identity arising from its own domestic environment. In formulating a common approach, therefore, the challenge was in applying a uniform set of analytical tools within a framework flexible enough to highlight the similarities as well as the differences. Analytical Framework Borrowing from marketing management theory, the various aspects of marketing were analysed in terms of the five e 1ements of Product, Place, Price, Promotion, and Customer -- the 4PlC approach. Besides serving as a common set of tools, the approach provided a common language as researchers compared and contrasted differing sets of data.

4 Kenneth James Internal aspects examined in the sample surveys (carried out in the latter half of 1985, which focused on industrial SMBs) included the characteristics of the product(s) of the firm; the methods of distribution (that is, place) of the product(s); who determines price, and how; who handles promotion, and how; and the relationship between the producer and the market (the customer who makes the fi na 1 purchase). However, the analysis would be made within an environmental framework that considered these internal factors in relation to external factors affecting the SMB's ability to market its product effectively. The externa 1 environment wou 1d inc 1ude, among others, eye 1i ca 1 and seasona 1 changes, economic infrastructure, soc i a 1 and political factors, and government involvement. It was hypothesized that the effects of the environment on marketing decisions of the firm would be reflected in the firm's choice of marketing system. Accordingly, the pr inc i pal working hypothesis suggested to the teams was: "The correct choice of a marketing system is crucial to the success fu 1 marketing of a product or product group. Conversely, a major reason why SMBs fail is because of an incorrect choice of marketing system." six distinct A priori, identified. These were: (1)

marketing

systems

were

Direct Sales The producer sells directly to the market. He relies on his own marketing network and information. He also does his own marketing campaign.

(2)

Subcontracting The producer produces and se 11 s There is a marketing firm which to manufacture products according tions. The marketing firm may and know-how.

on a contract basis. hires small producers to certain specificaalso supply materials

Overview

5

(3)

System The producer sells products wholesale to a brokerdistributor.

(4)

Joint Investment Several producers of the same product co-invest in a marketing firm, which usually carries out the final stage of production before selling to the market. The producers/investors would sell products in semiProfit finished form to the joint investment firm. from the joint investment would be divided pro rata.

(5)

Purchase Agreement The producer enters into a long-term agreement with a marketing finn to purchase a certain amount of output for him.

The marketing firm is not responsible for

other aspects of operation. (6)

Integrated Operation The producer is a part of a group of companies which divides production allocation according to different stages. All products are sold to the marketing arm of Firms may concentrate on the procurement of raw materia 1s, or the manufacturing of semi -processed materials or finished products. the group.

The research teams were of course free to formulate their own hypotheses according to their more intimate understanding of the respective country environments. The Malaysian team, for instance, surmised that marketing best examined according to the hypothesis: SMBs in Malaysia are significantly different from large businesses in their strategies and practices .. , with specific factors

were

11

differences listed as sub-hypotheses to be tested against the survey data.

6 Kenneth James Internal Factors Product Considerations Although a wide range of industries were represented in the respective surveys (see Appendix) with a corresponding multiplicity of goods, some broad patterns could be perceived. Finished consumer items made up the bulk of goods produced, with the proportion of SMBs ranging from almost 60 per cent for Thailand to about 75 per cent for Indonesia. Industries predominantly involved were food processing, wood and paper products, and wearing apparel. Industrial ~ods (including intermediate products), which made up the rest, included some wood, paper and printing products, and metal and chemical products. Most SMBs had multiple product lines. Malaysia was typical, with about two-thirds of all respondents having three or more products. However, this meant that about onethird depended on one or two products, thus running higherthan-norma 1 risks from production change and obso 1escence. As expected, a wider mix of products was highly correlated with size of firm. Questions on quality of product, as perceived by the SMBs themselves, brought an interesting range of responses, with a substantial proportion voicing doubts about the quality of their goods. In Malaysia, where more than half considered product quality decisions as slightly to very difficult, modifications to products were infrequent and followed those of their competitors rather than from any perception of customers• needs. Quality was perceived to be particularly problematic in village-based goods in Thailand, although the main issue was not low quality but rather a lack of standardization. An exception was Indonesia, where respondents appeared satisfied with the quality of their products, with about three-quarters rating their products as of medium quality,

Overview 7 and 19 per cent as of high quality. This was attributed to a rise in standards of production with economic development, although a partial explanation might be found in the perception (see later subsection on "Economic Factors") that seasonal demand was great enough to offset other considerations. Locational Considerations Destination of products varied considerably by country, with SMBs producing for export ranging from 3. 6 per cent for Indonesia to as much as 67 per cent (inc 1ud i ng 9 per cent exclusively export-oriented) for Singapore. Internal distribution patterns, however, showed a substantial mobi 1i ty by SMB products. Thus, almost 43 per cent of Indonesian SMBs reported that their products were distributed nation-wide, compared with 33 per cent within the locality and 20 per cent within the region. Similarly, Thai SMBs, whether vi 11 age-, town-, or Bangkok- based, had their products distributed outside as well as within the locality. Understandably, Bangkok-based SMB products were most w1dely distributed. Pricing Strategies Pricing decisions appeared to be highly centralized; in Malaysia, for instance, this was the exclusive realm of owners or senior managers in 94 per cent of SMBs. Another significant finding related to price-setting. In general, mark-up over cost was the most prevalent method applied, with about 70 per cent (Indonesia and Philippines) to more than 90 per cent (Malaysia) practising mark-up pricing. However, this was not the sole method applied in most firms; other methods included demand-oriented pricing, competition-oriented pricing, and "customary" pricing. One c011111on finding, however, was a general fear that a wrong pricing strategy might trigger off a price war or non-

8

Kenneth James

price retaliation. effects

of

the

section).

This may have been exacerbated by the recession

Philippine

sophisticated in

SMBs

the

to

appeared

be

following the

most

with more than half citing profit

pri~ing,

maximization as the main objective. discovery was

in

(discussed

Another interesting

that more than one-fifth (22 per cent) of

Singaporean SMBs considered their prices to be higher than their competitors•, a probable reflection of the influence of the external factor of high production costs. Who Buys? The main customers of SMB products were individuals (the general public) and other firms, although which predominate varies with countries. predominate

in

Individual purchases were found to

Indonesia

(79

Philippines (75 per cent),

per

cent

of

SMBs),

the

and Thailand (58-95 per cent,

depending on the industry), whereas other firms were the major buyers in the case of Ma 1ays i a and Singapore. contrast,

purchases

by

government

corporations were negligible. inability

to

specifications;

meet

departments

simply be

rigid

quota

many SMBs would the

and/or

also

be

preference of

technical

unfamiliar

through an

with

Another reason

government

buyers

purchase from 1arger and better- known corporations. who wish to tap

and

Possible reasons include the

tender and other bureaucratic requirements. might

In

to

SMBs

into substantial market generally do so

intermediary more familiar

with the necessary

procedures. In general, the bulk of SMB sales was fragmented, that is,

SMBs

customers.

tended

to

rely

on

a

large

number

of

small

The exception is Singapore, where the proportion

of firms in which the two largest customers accounted for 60-80 per cent of the business was a high 27 per cent. Dependence on a few customers is, however, a daub le-edged sword.

While 1arge orders ease production schedu 1es, the

Overview 9 sma 11 producer is at the mercy of the 1arge buyer in many respects, such as arbitrary changes in quota or price, or delays in payments which might seriously affect the cash flow needs of small enterprises. Promotional Activities In every country, the great majority of SMBs allocated little or no finance to formal promotional activities -a finding striking for its unanimity. Expenses for advertising, for instance, were negligible in Indonesia and Thailand, and under 1 per cent for three-fourths of respondents in Malaysia. SMBs in Singapore and the Philippines were more prepared to pay for media advertising -- in newspapers and trade journals, the Yellow Pages, and even radio and television spots. However, the amount allocated as a proportion of total cost remained very sma 11. Nevertheless, to the extent that promotion did not entail the outlay of a substantial amount of money, it was prevalent. For Malaysia and the Philippines the promotional method of choice was personal selling, principally door-toMore popular in Indonesia and door, and free samples. Thailand were price and quantity discounts, and sale on credit. In Singapore direct selling was practised together with advertising in the Yellow Pages and trade journals and magazines. External Factors Economic Factors In all countries, respondents were unanimous in citing changes in the economic climate as the biggest constraint to marketing. Except for Singapore, all mentioned seasonal and cyclical changes as the major factor affecting sales. Effects could be positive or negative, although of course personal perceptions could be dramatically different

10 Kenneth James depending on whether one took the peak or off-season as the norm! Seasonal demand peaked during holidays, harvesting, the new schoo 1 year and, in the Indonesian study, during the tourist season of June to September. For the Phi 1i ppi nes, where seasona 1 changes were the overriding concern of 78 per cent of respondents, peak periods were May-June (summer) and November-December (the Christmas season). During the lean months, often coinciding with natural disasters like typhoons and floods, income could fall to as much as 26-75 per cent of peak income, with the food industry traditionally being the hardest hit. Of almost equal concern was the economic recession, which appeared to affect Malaysian and Singaporean SMBs most. For Malaysia, there was the calamitous fall in the price of petroleum and other primary products like rubber, tin, and palm oil, plus the mass repatriation of Malaysian workers from Singapore, among other prob 1ems. Singapore, being the most vulnerable because of its open economy, was also finding itself unable to compete because of high domestic costs. For these two countries and Indonesia, the global recession showed up in the lack of effective demand among domestic consumers. Thailand, on the other hand, appears to have ridden out the recession better than its other ASEAN neighbours, and the SMBs' concern for the and international economy was accordingly national subordinated to seasonal and cyclical shifts. The Philippines provides a fascinating exception. Although the country was as hard hit as any other by the recession, SMBs attributed dissatisfaction over sales performance more to seasonal variations than to the economy. This was in sharp contrast to the survey carried out a year earlier, when economic woes of SMBs were attributed by them to the collapse of the national economy. This time, firms appeared to have responded well to the changes, and applied

Overview 11 in their business transactions, stricter conditions particularly terms of sale. Additionally, the devaluation of the peso had pushed up the prices of most corrmodities, thus swelling the revenues of most SMBs. Other External Factors In general, SMBs professed to be less concerned about political, government, and legal problems than the economic In Malaysia, for instance, the factors outlined above. major disruptions within the Malaysian Chinese Association, the country • s second 1arges t po 1it i ca 1 party, appeared to have left small entrepreneurs relatively unperturbed, perhaps because the effects were not invnediately evident. Problems of finance, technological changes, suppliers, and distributors rated more highly on a Worry scale", with A good financial factors coming in for much comment. proportion of SMBs (34 per cent) also complained about government rules and regulations on duties, taxes and licences, quotas, and standards requirements. Nevertheless, all were subordinated under worries about the general 11

economy. On a more immediate level, competition with other firms was an important concern of SMBs. In both the Philippines and Malaysia this was perceived to be the principal threat to sales, along with the unpredictable demand situation. However, Malaysian SMBs appeared to perceive the threat of competition as coming from its local rivals (considered serious by 60.3 per cent of SMBs) rather than foreign imports. Singapore, on the other hand, considered foreign competition serious enough to be a principal agendum for the the government-formed Economic Sub-Committee on Local Businesses. Compared with sales effort, lack local markets, and wPre considered far

these, other factors like unsystematic of market information, poor access to the inability to adapt to local needs, less urgent.

12

Kenneth James

Marketing Systems Given the internal character istics of ASEAN SMBs and the external factors impinging on and influencin g them, as outlined in the previo,us sections, the choice of marketing systems by SMBs in the various industries is more readily understan dable. Table 1.1 summarizes the distributi on of marketing systems among the ASEAN countries studied. In most cases, the figures represent the dominant marketing system adopted by the particular SMB, since it is common to have a smaller portion of production distribute d through different marketing systems, according to need. By far the most predominant marketing system was the simplest one, that of direct sales, which is used by 45 per cent to almost 80 per cent of SMBs. The broker-di stributor system was the most prevalent after direct sales, followed by subcontra cting and purchase agreement s. Conspicuous by their absence or negligible presence were marketing through joint agreements or as part of an integrated operation . The Indonesian study identified eleven patterns of production distributi on, six of which could be subsumed T.ABLE 1.1 Type of Marketing System, by Proportion of Firms

Type of Marketing System Direct sales Subcontracti ng Broker-dist ributor JoInt Investment Purchase agreement Integrated operation Others

Proportion of Respondent Firms Indonesia

Malaysia

Phi llpplnes Singaporea Thai land

50.4 4.0 25.6

62.0 2.1 23.9

77.6 15.8

78.0 25.0 24.0

20.0

0.7

4.1 2.5

9.0 8.0

11.3b

45.3 21.4 33.3

a Figures are percentages of firms responding "frequently/ only method used" when asked the extent to which they made use of the different marketing b systems; the numbers thus do not add up to 100. Commission agent.

Overview

13

under the broker-distributor category, two as purchase agree.ents and two as subcontracts, thus giving rise to four Marketing through direct sales was major categories. predominant in all industrial groupings, with finns in the food, and building and related materials industries, Subcontracting utilizing this marketing system most. arrangements and purchase agreements were both found in the hide and clothing industry (for example, batik, leather handbags, and belts) as well as in the metals industry. Direct sales predominated in all industrial categories In addition, the broker-distributor in Malaysia as well. system could be seen in industries producing food, beverages, and tobacco; and chemical-petroleum, rubber products, plastic products, and non-metallic products. The degree of direct selling among Philippine SMBs was found to be among the highest in the region, since the other categories (subcontracting, purchase agreement, integrated operation) were all practised in addition to some degree of direct sales. Singapore SMBs followed the norm of direct sales dominating all industries, but showed a higher degree of subcontracting arrangements than all other countries with the possible exception of Thailand. Subcontracting had been practised at least occasionally by about half of all firms interviewed. 41 per cent of these firms said they obtained contracts from other 1oca 1 SMBs, 31 per cent from 1a rge local firms, and 20 per cent from foreign firms operating in Singapore. Rather surprisingly, practically none of the SMBs in the four countries expressed a desire to change to an alternative marketing system for their respective products. An obvious explanation would be that market forces had resulted in generally optimal marketing systems for the majority of firms, but this is unlikely given that most firms also felt some degree of dhsatisfaction with their

14 Kenneth James sales. It is more probable that these SMBs had simply not considered in any depth the possibility of an alternative marketing system as a solution to their marketing problems. This is all the more likely when considered together with the generally unanimous finding that most SMBs had little notion of marketing strategy beyond price competition. In contrast, some Thai SMBs indicated that they intended to switch to marketing systems that they perceived would serve the characteristics of their respective products better. These subjective judgements were only one of several criteria followed in the Thai study in order- to determine optimal marketing arrangements for specific product types. The market performance of firms in the same industry grouping but practising different market systems was compared, and the physical and economic characteristics of the respective products were a1so considered. It was found that the main factors influencing the choice of marketing were product characteristics, market locations, and the production process. Location of firm was found to be not a significant factor. Accordingly, products were matched with optimal marketing systems as follows: Product Processed food

Textiles Wood products Construction materials Farm implements Ceramics

Marketing System Broker distribution (for standardized product) Direct sales (for perishables) Subcontracting Broker distribution Direct sales Direct sales Broker distribution

Conclusions and Recommendations With respect to marketing practices of SMBs, probably the

Overview

15

single most important finding was the narrow perception that most respondents had about the marketing process. For most SMBs, marketing strategy was confined to price adjustments, while aspects of product selection and adaptation, alternative distribution channels, promotional techniques, market segmentation, and so forth, were generally ignored. This resulted in an absence of a coherent, co-ordinated marketing strategy. Among the external factors, undesirable changes in the economy were the principal cause for worry. Nevertheless, economic malaise, whether in a recession or off-season period, was perceived as being "beyond control". Closer to home, competition with other firms was cited by SMBs themselves as the major marketing problem experienced. How might these problem areas be best approached? The question was put to researchers and senior officials of the private and public sectors at a workshop to discuss the Their recomendations fall into findings outlined above. of dissemination teaching, categories: broad three information, and assistance. The teaching function would essentially acquaint entrepreneurs with marketing principles -- from anticipating consumer demand to selecting target markets and optimal marketing systems -- that would enable them to develop strategies. marketing practical and comprehensive Successful prograRI!Ies of this nature already exist in all the countries studied; those conducted by the University of Institute of Small-Scale Industries and Philippines' Thailand's Department of Industrial Promotion merit special mention. Information dissemination is a two-way process. On the one hand, potential customers need to know about the SMBs On the other, there is a wealth of market themselves. information-- on changes in consumer tastes and demands, potential new markets, general economic data -- that could

16 Kenneth James assist the SMB operator in making informed market decisions. Assistance could take many forms, from financial assistance to promotional aids like trade fairs to guidance through the bureaucratic maze to professional consultations. Ideally such assistance would be designed to ensure an ultimate level of self-dependence. Who would best perform these functions? The government possesses the best machinery, and indeed every ASEAN government already has departments or sections specially set up to assist SMBs. It is recommended in the strongest terms that 5MB-assisting functions be focused in one high-level centre in each country. (This has already been achieved, at least in form, for most ASEAN countries.) The involvement of the private sector is also strongly encouraged. The Philippine study noted such involvement by organizations like the Philippine Chamber of Commerce and Industry and Philippine Exporters Foundation, Inc. Such mutual help could only be beneficial to the participants and the general economy. ASEAN Co-operation The same principles enunciated above could be voiced at the regional level. Researchers and practitioners alike were unanimous in a call for the establishment of a regional institute servicing the larger needs of ASEAN SMBs. Such an institute would certainly aid in enlarging the marketing horizons of small and medium businesses in ASEAN.

Overview 17

Appendix Type of Industries Studied

Indonesia

Food processing, hide and clothing, fibre products, metal products, building and related materials

Malaysia

Food, beverages, tobacco, wood, furniture and fixtures, metal products, rubber, plastic, non-metallic products, texti 1e, paper, printing, publishing, electronics, others

Philippines

Food processing, wearing apparel, wood and wood products , paper and paper products, chemical products, non-metallic minerals, metal products, other manufacturing

Singapore

Food, garments, timber and wood, furniture and fixtures, printing and publishing, plastic products, fabricated metals, industrial machinery, electrical machinery and appliances, electrical products, transport equipment, other manufacturing

18 Kenneth James REFERENCES American Marketing Assocl11tlon. Marketing Definitions: A Glossary for Marketing Terms. Chlc11go, 1960. Australia, Department of Industry, Technology and Commerce. Marketing for Smal I Bus I ness. Canberra: Austral 111 Government Pub I lshlng Service, 1985. Chee Peng Lim. operation".

"Small Enterprises In ASEAN: Need for Reglonl!l CoASEAN Economic Bulletin 1, no. 2, November 1984.

James, Kenneth. "fiscal and Financial Factors Affecting Srnal I and Medl~.~n Business Improvement In the ASEAN Region". ASEAN Economic Bulletin 2, no. 3, March 1986. del Val, Edgar P. Marketing Management In the Phi I lpplne Setting. Ateneo de Manila University Press, 1983.

~nl

111:

Yoshino, M.Y. The Japanese Marketing System: Ad11ptatlons and Innovations. Chicago: Massachussetts Institute of Technology Press, 1971.

II

MARKETING PROBLEMS OF SMALL AND MEDIUM BUSINESSES IN INDONESIA

M. Dawam Rahardjo*

Introduction Objectives of Study It is almost a truism that a company which wishes to market its products successfully must be customer-oriented. For the company's products to be acceptable in the market, such products should meet consumers' tastes in, for instance, form/shape, design and quality, at a price affordable to the consumers. This is no less true of the small company as it is of A principal objective of this study of the large one. factors affecting the marketing activities of Indonesian SMBs, the ref ore, wi 11 be to gauge the ex tent to which the present marketing strategies of these SMBs have been effective, and the relation of such effectiveness to the principle of customer-orientation. More generally, this study aims, through an analysis of a survey of representative SMBs and relevant secondary material, to obtain an understanding of (1) the conditions of marketing in small industries; (2) the extent to which the marketing strategy of such small industries has been effective; (3) the policies utilized in marketing; (4) the mass media needed in marketing; and (5) the factors supporting or hindering marketing activities in small industries.

20 M. Dawam Rahardjo Methodology Selection of Sample and Compilation of Data Samples in the province of the Special Territory of Yogyakarta, Daerah Istimewah Yogyakarta (DIY), were selected through proportional random sampling, on the basis of consultations with the Regional Industrial Office of DIY and information received from community representatives and other secondary data. By regional division, the sample in this survey comprised 74 companies (29.6 per cent) in the city of Yogyakarta, 50 companies (20.0 per cent) in the regency of Slemen, 39 companies (15.2 per cent) i~ the regency of Kulon Progo, and 38 companies (15.2 per cent) in the regency of Gunong Kidul -- all totalling 250 companies. Classification of the industrial sector in Indonesia differs significantly from one government department to another. For this survey, the classification utilized by the Department of Industry will be taken as a guideline. In this case, the Department of Industry has divided the industrial sector into multifarious industries, basic metal industries, basic chemical industries, and small-scale industries. Therefore, the samples comprise a greater part of small industrial companies and these are grouped according to types (processing of food, hide and clothing, fibres, metals, and building materials and related goods). The data were compiled from primary and secondary sources. Primary data were compiled by observation and interviews with the management staff of small industrial companies (utilizing questionnaires). Sources of secondary data were announcements of government policies/regulations, newspaper clippings, bulletins, and books considered relevant in this study. Data processing included cross tabulation according to sector of industry, pattern of distribution, type of goods, nature of product, and scale ·of company. It is hoped that such cross tabulation may provide a description of produ.c t characteristics in each small industrial company.

Indonesia

21

TABLE 2.1 DevelopMent of Industry In Deerah lstlmewah Yogyakarta, 1979/80 to 1983/84 Product Ion Value ( 1 000 Rp)

Number of Companies

Number of Workers

1979/80

81 ,243

181,746

152,051,560

61,698,610

1980/81

85,569

193,457

281,015,890

98,258,750

1981/82

96,063

228,491

362,312,130

138.541,210

1983/84

55,476

192,410

294,969,270

109,692,274

Various Industries 71 Basic ~~~etal Industries Basic chemical 1ndustr 1es Smell-scale Industries 2,652 Licensed Reg lstered 52,751

11,292 640 125

29,736,107 1,206,557 356,507

19,824,071 887,605 201,218

11,859 168,494

116,979,030 146,418,070

40,337,410 48,411,970

SOURCE:

Value Added < •ooo Rp>

Prepared by LP3£S from the Regional Office/Industrial Service province of the Special Territory of Yogyakarta, 1984.

Overview of Small-Scale Industries in the Province of Daerah Istimewah Yogyakarta General Economic Situation Daerah Istimewah Yogyakarta (DIY) is one of twenty-seven provinces in Indonesia and comprises the city of Yogyakarta (capital of the pro vi nee) and the regencies of Bantul, Sleman, Kulon Progo, and Gunung Kidul. Based on the 1980 census, the number of inhabitants of DIY province was about 2,750,000 with a population density of 868 persons per sq. km. in the province. In 1983, the gross regi ona 1 domestic product of the province was Rp682,418.7 million (based on current prices). The contribution of the agricultural sector was 32.52 per cent, with trade contributing 17.37 per cent, administration and defence 15.10 per cent, the industrial sector 8.26 per cent, and transportation and communication 8.3 per cent.

22

M. Dawam Rahardjo

The share of agriculture had been falling steadily from 41.7 ' per cent in 1979 to 32.52 per cent in 1983.

The share of

industry, however, had not gained correspondingly; in fact it contracted slightly, from 9.13 per cent in 1979 to 8.26 per cent in 1983. less

maintained

The trade and services sectors more or their

shares

of

17

and

5

per

cent,

respectively. Condition and Development of Small-Scale Industries Industry data

collected

in the

covered 55,467 companies. 99.9

per

cent,

were

DIY

province

for

1983/84

Of these, 55,403 companies.., or

small-scale

industries,

employing a

total of 180,353 persons or 93.7 per cent of all workers in the province's industries.

The gross value produced by all

these companies was Rp236,397.1 million, which was 89.4 per cent of tot a 1 gross va 1 ue.

Further va 1 ue added by all com-

panies was Rp106,692.3 million, of which Rp88,779.4 million (80.9 per cent) was from small-scale industries. A useful distinction may be made between registered and licensed industries.

Licensing indicates the government's

recognition that a company has satisfied certain industrial standards. registered

Most but

of

not

the

small-scale

licensed

small-scale/handicraft

yet.

Up

industries

were

1983/84 licensed small-scale industrial

industries to

1979/80

licensed.

are no By

companies made up

4.8 per cent of a total of 55,403 companies

(Table 2.2).

The increase of licensed small-scale/handicraft industries indicates industries

that have

companies a 1 ready

in

the

shown

small-scale/handicraft

an

improvement

in

the

industria 1 standards fixed by the government, even though the proportion is still small. an important strategy.

factor

in

Further improvement would be

ensuring

a

successful

marketing

Most investment in the small industries is short-term capita 1 investment. This is in accordance with the non-

Indonesia

23

TABLE 2.2 NUIIIbe r of Licensed end Registered Slnell - Scele/Handlcreft Industria l Businesses In Oeereh lstlmeweh Yogyekerte, 1979/ 80 to 1983/ 84 Smeli-Scele/Hendlcreft lndu!ltrles

1980/81

1981/82

1982/83

1983/84

2,572 (3.0)

2,930 (3.1)

3,178 (3.6)

2,652 (4.9)

< lOO.Ol

82,910 (97.0)

93,04' (96.9)

84,907 (96.4)

52,75 1 (95.2)

79,505 ( 100.0)

85,482 ( 100.0)

95,97' ( 100.0)

88,085 ( 100.0)

55,403 ( 100.0)

1979/80

L1cen!led

79,505

Registered

Total

figures within parentheses ere In percentages.

Note : SOt.R::E :

As tor Table 2.1.

capital-intensive nature of small

industries.

this often leads to a shortage of capital.

Of course

Therefore, the

small-scale industries are often trapped by "black" capital loans from creditors ~hose level of interest is very high. Because of this problem the government tries to give capital loans

in

the

Small

form of

Investment Credit

(KIK)

and

Permanent Working Capital Credit (KMKP), in order to support the activities of the small entrepreneur. The provision of KIK for the industrial sector in DIY province in 1977 amounted to 29g clients with a credit value of Rp3.116 million (Table 2.3). There was a large increase in loans under KIK in 1977-83, both in number of clients as well as in value of the credit granted to small industries. The increase in the number of clients was 185.3 per cent and the increase in credit value 197.3 per cent, giving an annua 1 average increase in borrowers of 20.4 per cent and credit value of 37.7 per cent. The progress of

the KMKP scheme has been even more

impressive (Table 2.4) .

Thus in the period of five years

24 M. Dawam Rahardjo TABLE 2.3 Provision of Smal I InvestMent Credit