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However desperate the situation and circumstances, dont despair. When there is everything to fear, be unafraid. When surrounded by dangers, fear none of them. When without resources, depend on resourcefulness. When surprised, take the enemy itself by surprise.
Sun-Tzu. The Art of War (fourth century B.C.)
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2006 was a special year for PT Serasi Autoraya (SERA). In its 20 year anniversary, its bid to reduce its dependence on its car rental business, TRAC-Astra Rent a Car, SERA has completed establishing and launching new complementary transportation services and business units to its portfolio, namely TRAC Driver Services (driver that accompanies the rental vehicles - establishment in 2003), TREMOTRAC Motorental (long term motorcycle rental services establishment in 2004), O-RENZ Taxi in Surabaya (retail taxi services establishment in 2005), Toyofuji Serasi Indonesia (TFSI, a shipping company establishment in 2005) and Mobil88 (used car trading acquisition in 2006). These new businesses have significantly contributed towards SERAs IDR1.12 trillion revenues and IDR187 billion operating incomes, which have been rising since the last several years (78% and 37% higher respectively compared to its 2005s figures). A few years earlier, an optimistic note of market growth was shared by one of TRACs senior personnel, "Our market has grown by an average of between 15 percent and 20 percent since the market started to pick up in 2000. This is reflected in the growth of our fleet from 3000 cars in 1998-1999 to 7500 in October this year," SERAs marketing director Edi Gunawan, late 2003 (Rudijanto, 2003). But this was just one side of the story. SERA was in fact having serious competitive challenges in its core car rental business. Its selling boxes business model of providing a car with a driver to its retail and corporate customers, were generating good returns to SERA, so good that it had induced many new players to enter the market with lower priced offerings. Thanks to a combination of unsustainable price wars, low level of differentiation in selling boxes, fierce competition, highly fragmented market segments and high level of product switching to its competitors lower product specifications, SERA was increasingly operating in a Red Ocean (read loss-making) strategy. The result: SERAs net profit margin had been steadily falling since its 2001 years high of 17.9% to its lowest at 1.84% in 2006. The nature of the industry also requires continuous high investments in order to purchase more cars for rental. Hence to meet its fleets growth requirements, SERA had to seek funds from the financial markets by means of issuing a 5-year Medium Term Notes (MTNs) in 2003, at a fixed initial interest rate of 13.88% per annum (AAA Securities, 2006). Despite SERAs favorable and growing fleet profile, dominant market position in the industry, and strong cash flow protection there were market concerns regarding its high dependency on a few main customers and high financial leverage (Pefindo, 2005). These led to the weak rating of SERAs MTN of initially idBBB+ (ADB, 2005). The falling margins validated the analysts concerns: SERA almost breached its LER covenants of 5.5 times and 6 times in the years 2005 and 2006 respectively (SERA, 2011).
To add salt to the wound, SERA was internally also experiencing an increasing level of staff turn over from year to year at strategic level starting from 2005,at an alarming rate, almost doubling annually. At strategic level of staff, middle managers and managers, the trend were 1.6%, 2.3%, 3.9% and 6.1% for the same period. The figures for total staff turnover were even worse: 5.6%, 7.4%, 10.2% and 11.6% for the years 2005 to 2008 (SERA, 2011). Therefore, with SERA completely surrounded by dangers: the perfect combination of external market competitions as well as internal decreasing organizational productivity and limited resources, a set of serious dilemmas needs to be resolved quickly by SERAs top management: How can it transforms it self out of this dire circumstances ? Is there a resourceful or innovative solution that SERA can take, to not only turn it around but also grow? What priority should SERAs top management take in handling these issues?
SERA's Business Model Transformation Journey PT Serasi Autoraya (SERA) was established in 1986 as a wholly owned car rental unit of PT Astra International Tbk. Starting with a small group of 5 vehicles in Jakarta, throughout its 25 years history, SERA has evolved into a fully integrated transportation services both for corporate and retail
segments. By the end of 2010, its total fleet size has reached over 25,000 cars and trucks, supported by its growing national geographic presence of 33 leasing branches, 53 outlets and 359 professional workshops. Today it is Indonesias biggest vehicle rental company, covering Operating Lease / Rental Services (car as well as motorcycle rental - TRAC), used-car sales operation (Mobil88), General Transportation (O-Renz taxi) and Logistics Operation (Selog). Its motorcycle rental units grew from 650 units in 2005, to over 5,000 units by 2011. Its decision to enter the used-car sales market with Mobil88 has raised the business units sales from 4,500 cars in 2006 to almost 17,000 units by 2010. Seeing the need for intra island shipping transportation opportunities, its newly established shipping unit with Toyofuji, TFSI, has grown the number of sea vessels from 1 ship in 2005 to 4 ships by 2011. (See Exhibits 2 and 3 for SERAs business evolution and business structure respectively). So how did SERA overcame its crisis period of 2006 and grew its operations to be so expansive ? This was largely thanks to the resourcefulness and leadership of SERAs top management team.
A Blue Ocean Strategy To achieve this, SERA had decided to take radical steps, the first of which was implementing a total Business Process Reengineering in key areas of the group, starting in the year 2007. It updated its company objectives and 5 year strategy, followed by a review of its Porter's 5 forces environmental factors (Strength Weakness Opportunity Threats - SWOT analysis), cascading this down to a clear new set of Strategic Objectives. SERA also prioritized its efforts by considering the amount of efforts required and the business impacts that would be generated by each strategic options using a "Business Impact - Current Effort" Matrix. The matrix indicated that it would be better off to take upon a "Blue Ocean Strategy" as opposed to its current "Red Ocean Strategy". As defined by Kim & Mauborgne (2005), red oceans represent all industries in existence today, hence generating extreme levels of competition, notably price. Whilst blue oceans denote all industries not in existence today, the unknown market space that provides untapped demand and opportunity for highly profitable growth. SERA also had to subsequently update its strategic maps, notably its "internal perspective" towards exercising new business portfolio (ie. Mobil88, TFSI), and adding further emphasis in the "Learning & Growth" perspective of Advanced Quality Management, Enhancing I.T. system and the
provision of sufficient infrastructure to facilitate operational activities (See Exhibit 6 for illustration of SERAs Strategic Maps). In developing the new concepts and looking to its own 20+ years experience of fleet management, SERA also identified key problems that its potential blue ocean TMS clients faced in their transportation management namely unit utilization, driver management, control of operational expenditures (OPEX) as well as process improvements. These areas contributed the most to high costs borne by such clients. On Unit utilization, most firms fleet would only managed to achieve between 60 to 70%, rendering high level of idle non productive units. This issue was further made worse by seasonal peak activities (such as lebaran periods) where high demand for vehicles occurred, but nowhere else along the year, resulting in overstock. On Driver Management, typically client firms consistently found poor drivers behavior, low productivity as well as uncontrolled overtime. OPEX costs on the other hand had resulted in uncontrolled fuel costs as well as poor utilization and mileage management. The last issue of undedicated human resources in transportation / cost management, complemented by often invalid transportation data and undefined SOP/ policy, would mandate the client to conduct significant, time consuming and costly process improvements.
Execution Challenges
Having set the principles right internally, SERA then went about in integrating its two core revenue generating units, namely TRAC and Mobil88. The challenge was: how to generate synergies between the two seemingly different business areas of car rental and second hand car sales? Mobil88s large client based is perfect target markets for TRACs old vehicles that are no longer fit for operational usage. However, the need for a more transparent pricing bidding mechanism was required to ensure the smooth transfer of Mobil88s and subsequently TRACs resale vehicles. To do this, in 2007 parallel with the group BPR activities, SERA decided establish PT Balai Lelang Serasi, also known as iBid, an auction service provider for cars and motorcycles sales. iBid, therefore, increased SERAs commitment to the market to be the preferred supplier of integrated transportation solutions provider. iBid provided the missing gaps that were present at TRAC: the auction component. The idea was having this additional unique service, would encourage better market participants in bidding for used
vehicles, and thereafter increasing the flow of inventory and stocks of both TRACs and Mobil88s cars. iBids vision was set as To become a trusted auction house and a choice for partners and customers, while its mission were as follows, 1 Provide large-scale marketing channels, and saving cost and time of partners who want to sell the asset 2 Providing auction items with good service quality and a transparent auction process 3 Maintain the customers trust during auction transactions Having established iBid, SERA thus were able to leverage its market share and generate additional revenues. The next step was to integrate iBid to TRAC and Mobil88. To achieve this, the three different operations of wholesale, retail used vehicle operations and the newly established auction hall, were linked in a three way supply and sales process, whereby TRAC supplies used vehicles to Mobil88s whole operations. The vehicles are then resupplied to Mobil88s retail operation for reselling to other re-sellers and end users. iBid is also supplied by Mobil88 as well as by other independent suppliers, for reselling to a much larger sales channel, again covering both end users and re-sellers. (See Exhibit 9 for SERAs Mobil88-iBid business model). The next key question here: How about the funding of all these great ideas?
179.8 billion in 2009. The revenue contribution of the newly integrated Mobil88 unit also rose from 39% in 2007 to 41.9% in 2008 (See Exhibits 10 and 11 for SERAs financials and Group Revenue contributions respectively). Within the same four year period, SERA also managed to increase its asset turnover ratio from 0.60 to 0.88, as well as the Return on Equity (ROE) from a previous low of 5.3% in 2006 to almost a staggering 25.5% in 2009! In parallel, SERA also secured favourable market rates for its funding requirements: its previously weak MTN ratings at idBBB+ in 2003, were upgraded to a strong idA- by 2006, and further up to idA+ by 2009 (KSEI, 2010). This had positive financial implications to SERA as its borrowing rates were significantly reduced from a high 13.88% in 2003, to a lower 11.5% by 2009. Hence, being able to hedge significant portions of its total debt at such lower interest rate, helped SERA survived volatile market conditions in 2008.
Market Recognition
Apart from having a successful and innovative business model transformation that led SERA to its improved financial performance, it also achieved significant market recognition for its efforts. From 2006 to 2009, SERAs units were awarded no less than 6 (six) times by independent consultants as well as its core clients. These included Indonesia Best Brand Awards in 2007, Sampoerna supplier award for Best Supplier in Logistics Category, Superbrands in 2008 and Service Quality Award in 2009 (See Exhibit 12 for SERAs Group awards). Having gone through such tumultuous challenge, the next steps for SERAs top management would be to further increase its resourcefulness and develop new, innovative business models in conquering new blue ocean markets, and perhaps not only entering from land to sea transportation, but covering the air as well. Hence, an appropriate note could be gained from an old military generals insight, To conquer is nothing. One must profit from ones success. Napoleon Bonaparte (1769-1821)
2006 WBWAI What Business We Are In Avanza TRAC Tunas RC Adira Rental fee (IDR k) 3,525 3,500 3,375 Gap 25 150
Exhibits Exhibit 1. Product price comparison - Avanza car rental. SERA vs key
competitors Asperkindo Association of Rental Car Company of Indonesia CAGR Compounded Annual Growth Rate DER Debt to Equity Ratio iBid Auction service provider IDR Indonesian Rupiah MTN Medium Term Notes OPEX Operational expenditures ROE Return on Equity RSP Rental Services Provider SERA PT Serasi Autoraya TFSI Toyofuji Serasi Indonesia Source: Research & Development data (2011) TMS SERAsTransportation Management System TRAC Astra Rent a Car
2008 Exhibit 2. SERAs 2006 business evolution - 1986 to 2010 Avanza TRAC Tunas RC Adira Indorent Rental fee (IDR k) 3,525 3,500 3,375 3,275
Old: Pre2006 What Business Are We In Land transportation provider focusing on vehicle rental services & driver management To be the world class company in land transportation services
Vision
To satisfy our customers by providing good quality services with the highest standard of customer & Mission employee satisfaction, & strive to increase Exhibit 3. SERAs business structure 2010 shareholder value.
Source: SERA (2011) Exhibit 5. SERAs Corporate Philosophy: WBWAI, Vision & Mission Before and After Asperkindo CAGR DER iBid IDR MTN OPEX ROE RSP SERA TFSI TMS TRAC SERA Source: Association of Rental Car Company of Indonesia Compounded Annual Growth Rate Debt to Equity Ratio Auction service provider Indonesian Rupiah Medium Term Notes Operational expenditures Return on Equity Rental Services Provider PT Serasi Autoraya Toyofuji Serasi Indonesia Transportation Management System Astra Rent a Car (2011)
Old: Pre2006 What Business Are We In Land transportation provider focusing on vehicle rental services & driver management
To be the world class company in land Vision Source: SERA (2011) transportation services To satisfy our customers by providing good quality services with the highest standard of customer & employee satisfaction, & strive to increase shareholder value.
Mission
Exhibit 10. SERAs financials Group Revenue, Net income & Net income margin
SERA (2011)
Source:
Bibliography
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3. Asperkindo (2011) Website access: 20th May 2011 Web: www.asperkindo.or.id. 4. Chandler, David G. (1996) The Campaigns of Napoleon. New York: Macmillan 5. Kim , W. Chan Kim & Mauborgne Rene (2005) Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business School Press. 6. KSEI (2010) Interest Payment Schedule of MTN Serasi Autoraya I Tahun 2009. Announcement. 24th November. 7. Pefindo (2005) Rating Release: Serasi Autoraya. 12th September. 8. Rudijanto (2003) Rent-a-car firms reap windfall from outsourcing. The Jakarta Post. Sun, 26th Oct2003, Jakarta Web: www.thejakartapost.com/news/2003/10/26/rentacar-firms-reap-windfalloutsorucing.html 9. SERA (2011) A journey. Operating lease / Rental Services, Used Car Sales Operation, Logistics Operation, Public Transportation. Presentation file. 10. Sun-tzu (1993) The Art of Warfare. Translated and with commentary by Roger T.Ames. New York: Ballantine Books 11. Wiradji, Sudibyo M. (2002) Many companies turn to rental cars to reduce costs. The Jakarta Post. 20th October.