Formulating strategyfor dong a paint in the period 2012 - 2016

The necessity of new strategy Dong A Paint company got the license for establishment in late 2006 but actually started its operation since 2008 when the overall economy of Vietnam was d

CAPSTONE PROJECT REPORT

FORMULATING STRATEGY FOR DONG A PAINT IN THE PERIOD

2012 - 2016

Group 8

2 NGUYEN VAN THANH

3 MAI ANH TAM

4 PHAN THI VINH

5 VU TRONG KHIEM

CLASS: GaMBA X0409

H A N O I 2 0 1 1

TABLE OF CONTENT PAGE

1 The necessity of new strategy 1

2 Objective and scope of the study 1

3 Methodology of the study 2

4 Structure of the capstone 2

Chapter 1 THEORY OF STRATEGY MANAGEMENT 4

1.1 CONCEPT AND CLASSIFICATION 4

1.1.1 Concept of strategy management 4

1.1.2 Roles of strategy management 4

1.1.3 Basic characteristics of strategy management 4

1.1.4 Superior returns model 5

1.1.5 Several types of strategy in a company 6

1.2 FACTORS IMPACT ON BUSINESS STRATEGY 8

1.2.1 Analyze external environment 8

1.2.1.1 Macro environment (PEST ++ ) 8 1.2.1.2 Industry environment (five forces model) 9

1.2.2 Analyze internal environment 11

1.2.2.1 Tangible (fixed assets, finance capital, technology,

etc.)

11

1.2.2.2 Intangible (knowhow, competitive advantages, etc.) 11

1.3 BUILDING MATRIX TO SELECT BUSINESS STRATEGY 11 1.3.1 External Factor Evaluation Matrix (EFE) 11 1.3.2 Internal Factor Evaluation Matrix (IFE) 12 1.3.3 Competitive Profile Matrix 13 1.3.4 SWOT Matrix 13 1.4 IMPLEMENTION OF BUSINESS STRATEGY 15 1.4.1 Organization and implementation 15 1.4.2 Evaluate the effectiveness 16 1.4.3 Adjust if it is necessary 16 Chapter 2 ANALYZING REAL SITUATION OF DONGA PAINT 17 2.1 INTRODUCTION OF DONGA PAINT 17 2.1.1 The process of establishment, organization structure and

it’s speciality

18

2.1.2 Situation and business performance from 2008 to 2010 19 2.2 ANALYZING SITUATION AND BUSINESS SITUATION OF DONGA PAINT

19

2.2.1 Analyze external environment 19

2.2.1.2 Paint Industry environment (five forces model) 25

2.2.2 Analyze internal environment 31

2.2.2.1 Human Resources & Human Policy 31 2.2.2.2 Financial Status 2008 - 2010 31 2.2.2.3 Technology and production management 38 2.2.2.4 Distribution range and marketing policy 40 2.2.2.5 Other factors (trade mark, firm culture, … ) 42

2.2.3 Matrix to select business strategy 42

2.2.3.1 External-Internal factor evaluation matrix 42

2.2.3.3 Competitive Profile Matrix 55

Chapter 3 IMPLEMENTATING STRATEGIES AND SOLUTIONS 57 3.1 TARGET, STRATRGY AND VISION OF DONGA PAINT 57 3.1.1 Targets in 2 years (2011-1013) 60 3.1.2 Strategy in 5 years (2011-1016) 60 3.1.3 Vision in 10 years by 2021 60 3.2 PROPOSAL FOR SELECTING STRATEGY IN DONGA PAINT 61

(business strategy and/or corporate strategy)

3.2.2 Determination of business strategy 62

3.3.1.2 Technology and Researching new products 66

3.3.1.4 Safe Management (Fire, Pollution,…) 68

3.3.2 Solutions on marketing management

(advantages and disadvantages, conditions to apply)

3.3.3 Solutions on human resource management

(advantages and disadvantages, conditions to apply)

73

3.3.3.1 Non-Financial Solutions 73

3.3.3.3 Salary Regulations and Human Policy 74

3.3.4 Solutions on financial management

(advantages and disadvantages, conditions to apply)

In addition, we highly appreciate the enthusiastic assistance of the Management Board and key members of DongA Paint in facilitating us to explore the company’s relevant data We would like to thank our colleges, friends and relatives for their direct and indirect assistance during our completion of this capstone report

We wish everybody good health, success and happiness

With our sincere thanks

Group 8, Class X0409, Griggs

LIST OF TABLES PAGE

Table 2.2.1.2b Consumption Index of Processing Industry in each

month

27

LIST OF GRAPH AND FIGURES

INTRODUCTION

1 The necessity of new strategy

Dong A Paint company got the license for establishment in late 2006 but actually started its operation since 2008 when the overall economy of Vietnam was depressed with high inflation and overheated growth of credit Thanks to some advantages, DongA Paint has developed successfully with revenue growth rate of more than 200%/year and its profit in 2010 was 3.3 times higher than it in 2009 Its relative market share in comparison with the biggest competitor in the market is estimated to expand from 3.3% in 2010 to 6% in 2011

However, currently DongA Paint is operating spontaneously, all staff is working based on their own ideas Being a new and small-scale company financed by leaders and their close friends and partners, the company is maintaining a very strong internal solidarity However, when DongA Paint grow to a certain level, a clear, proper and flexible strategy is needed to ensure all staff work and move toward a same direction The divergence of directions in the company may lead to the undermining the strength of available resources, failure to take advantage of market opportunities and running into undeserved troubles

Five years is an important time to evaluate the course of establishment and operation of the company, define its position in the market and design a strategy for the next stage In the Shareholder meeting in May 2011, many shareholders raised the need of an explicit strategy to help them to consider their decision of further investment

2 Objective and scope of the study

The same as many other Vietnamese companies, DongA Paint has never analyzed its resources, internal and external environments to set up a development strategy professionally Perhaps, to make some important decisions, DongA Paint has based

on some special factors but never reach an overview of the company’s position Through this capstone, we expect to offer DongA Paint an effective and feasible strategy for its professional development during the next five year and the vision for

10 years and more in condition of changeable world with globalization trend

3 Methodology of the study

To analyze the world economy, Vietnamese economy and the paint industry we use secondary data, published on websites then make the estimation based on statistic methodologies

To analyze the company’s internal environment, we use primary data of DongA Paint including Financial Statement and Management Statements then use statistic mythologies to estimate

4 Structure of the capstone report

Introduction

Chapter 1: THEORY OF STRATEGY MANAGEMENT

Chapter 1 focuses on basic theories on strategy formulation such as the analysis framework of macro environment (PEST ++), industry environment (five forces model), internal environment The Chapter also explains the concept of IF, EF, I_E Competitive Profile, SWOT matrixes to serve as the theoretical background to build strategy in reality

Chapter 2: ANALYZING REAL SITUATION OF DONGA PAINT

This is the most important chapter which provides comprehensive and concise description and analysis of the external and internal environments of the company Many historical and current issues that have strong effects on the existence and development of the company have been illustrated and analyzed by historical data and particular forecast such as economic growth, inflation, exchange rate and interest rate fluctuation, population and income change Besides, the Chapter also provide time-series industry data such as the industry’s production output, inventory consumption, industry’s entry and growth The internal factors affecting the business potential of the company have been also comprehensive described and analyzed, ranging from basic and conventional issues such as finance management, production management to sensitive issues such as marketing management, human resource management and corporate culture The analysis results then were put into relevant matrixes to reflect the overall picture of the company, to position the company in the market and to find out the appropriate direction of the company

Chapter 3: RECOMMENDATIONS AND SOLUTIONS

Based on the theoretical background and the practical analysis of the real conditions

of the company, the group of authors have worked out the most feasible strategy (in our opinion) accompanied by a series of consistent solutions for strategy implementation, pointing out advantage, disadvantage, estimated cost and applicable conditions of each solution The matter of time has been also considered, however, the strategy can be implemented effectively only if all relevant departments and units are put together to organize the coordination of implementation, so we will not propose the fixed time line for strategy implementation within the scope of this capstone report

Conclusion

CHAPTER 1 THEORY OF STRATEGY MANAGEMENT

1.1.1 Concept of strategic management

Strategy is "a complex series of actions to mobilize the entire resources of

organization / individual to achieve a certain goal." (Lesson 1, slide 1, Strategic management, Griggs)

Business strategy is "a series of commitments and actions that a company uses to gain a competitive advantage by exploiting core competencies in a certain market"

(Lesson 3, slide 2, Strategic management, Griggs)

Management includes Planning, Leading, Organizing and Controlling

1.1.2 Role of strategic management

Real role of business strategy receives much discussion, which can be generalized

in several main points as follow:

 Forcing managers to analyze and predict conditions in near and distant future

pursuing organization’s general purpose

1.1.3 Basic characteristics of strategic management

 Strategy is the right combinations of factors This requires not only the isolation of the components of the situation, but also an evaluation of their relative importance

 Strategy relates the business organization to its environment Strategy decisions are primarily concerned with external, rather than internal, problems of the organization

 Strategy is relative It is an action to meet a particular conditions, to solve a

certain problem or to attain a desired objective It may take many forms, for almost every situation varies and, therefore, requires a somewhat different approach

action today and revises or retraces his steps tomorrow because of changes in situations

 Strategy is forward looking, it has to do orientation towards the future Strategy is required in a new situation Nothing new requiring solution can exist

in the past, so strategy is relevant only to the future

(Source: Characteristics of Strategy http://www.freemba.in/articlesread.php)

1.1.4 Superior returns model (table 1.1.4)

INDUSTRY ORGANISATION MODEL RESOURCES BASED MODEL

(Slide 12, lesson 1, Strategic Management, Griggs)

The sector organization model reveals return on average of any enterprises is

determined by external factors This model mainly focuses on the sector structure or external environment rather than internal features of the company It is necessary to

study external environment, especially the industry environment, identify potential sectors to achieve return on average and formulate strategy; then mobilize essential assets and skills to implement the chosen strategy and uphold it to overcome all competitors

Resource-based high profit shows that the return on average of company is due to their internal features This focuses on developing and attaining value resources and competences that opponents cannot copy

To follow this resource-based superior return model, the company needs to:

weaknesses

competitive advantage

effectively correlative with opportunities in the sector

According to the resource-based model, core competences are foundation for competitive advantage, strategic competitive advantage and ability to gain return on average of a company

It depends much on company's position to select a suitable model to reach the highest and most sustainable profit

1.1.5 Several types of strategy for development in a company

1.1.5.1 Business strategy

 Differentiation

Is a series of necessary actions to create products and services (at the acceptable lowest cost) considered different by customers, which is important to customers

 Cost leadership

Is a series of actions to create products or services with acceptable characteristics to customers at lowest cost, which is equal to competitors’ cost with acceptable characteristics

 Products with characteristics accepted by majority of customers

Measures to save cost:

 Market focus (Centralization)

Is a series of necessary measures to create products and services meeting demand of

a particular competitive market segment

 Different segments of a product line – professional craftsmen and product self-makers

1.1.5.2 Corporate strategy

Is particular measures implemented by a company to gain competitive advantage by selecting and managing a group of different businesses competing in numbers of specific product industries and markets

 Product diversification

Diversification strategies play a major role in the behavior of large firms New products also offer additional revenue sources and spread risks across multiple products Brands that have a strong recognition and presence are able to use established brand reputation as part of delivering the message about new product offerings However, companies that have established expertise in producing and selling specific products are not automatically as good at producing and selling other types of products Taking on a well-established product provider in a new market is especially challenging given that company's expertise in delivering their product to a particular market

Product diversification regarding:

 How managers buy, create and sell different business products to connect skills and strengths with opportunities of the company

 Market diversification

Market diversification means extending your business offering to new market segments not previously targeted Along with general growth objectives, companies use market diversification to find additional income sources and to challenge a competitor Spreading business risks across multiple market segments lowers the potential of major failure if a market dries up or becomes less fruitful over time Moving into a market well occupied by a competitor often makes sense because the market is familiar with the offering and you just need to market your better value However, some common concerns expressed by companies considering market diversification involve the high costs of entering a new market, the differences in cultures and the existence of unknown problems The costs of entering new markets include research and planning, marketing and advertising, and other activities needed to sell to a new segment

(Source: http://www.ehow.com, Market-diversification-vs-product-diversification)

1.2 FACTORS IMPACT ON BUSINESS STRATEGY

1.2.1 Analyze external environment

1.2.1.1 Macro environment (PEST analysis plus Global)

Economic environment is illustrated by factors i.e growth rate, inflation rate,

interest rate, exchange rate to show economy’s health Economic environment

always have impacts on industries and more specific enterprises in those industries Impacts caused by the economy on a company can change its ability to create value and incomes

Technology environment (including product technology and managing

technology) is actions relating to creation of new knowledge, transfer new

knowledge to outputs: products, new process and materials Technology change includes creation and destruction, opportunity and threat Technology change can affect the height of entry barrier and reshape industry structure radically In the global space, technological opportunities and threats affect every business via purchasing from outside or self-created technology

Socio-culture environment relates to social attitudes and cultural values Cultural

values create foundation for the society, changes and conditions on technology, legal-political, economy and population Social change creates opportunities and threats

Demographic environment includes demographic segments in macro environment

related to population, age structure, geographic allocation, ethnics’ communities and income allocations

Legal-political environment legal and political factors have significant impacts on

frequent of opportunities and threats from environment The main feature is interactions between businesses and the government Frequent changes in the segment enormously affect competition New theories, policies related to government management are fundamentally analyzed Industries select to prioritize

or adjust antitrust law, tax law, labor law and areas in which state management policies can affect activities and profitability of the industry or businesses On global scale, businesses have to face a range of issues on legal political, trade policies, country’s protective barriers

Global environment includes related global markets, on-changing markets, and

important international political events, cultural and institutional characteristics on global market Business market globalization creates opportunities and threats Socio-cultural differences and global market institutional differences need high awareness

1.2.1.2 Industry environment (Five Forces Competition Model)

 Competitive pressure from suppliers

Number and scale of suppliers: number of providers determines competitive

pressure; negotiate power toward the industry and businesses

Ability to replace supplier’s product: the ability to replace input materials provided

by suppliers and cost of switching suppliers

Information on suppliers: in the current era, information is promoting factor in

trade development, information on suppliers significantly affects input supplier selection for businesses

 Competitive pressure from customers:

Customers are a competitive pressure affect thoroughly the system of production and business activities of the industry Customers are divided into two groups of individuals and distributors Both of the groups have pressures on businesses about price, attached services, product and services quality They themselves control competition via their purchasing decision

Similar to supplier pressure, when considering impacts on customers’ pressure toward the industry, it is necessary to analyze the scale, importance, cost of switch customers, customers’ information Particularly when analyzing distributors, their importance is remarkable and noticed as they are able to directly dig into and menace inside the business

 Competitive pressure from potential competitors:

According to M Porter, potential competitors are non-present in the industry but

will affect the industry in the future The number of potential competitors and how they will affect the industry are dependent to factors i.e industry attraction (profitability ratio, number of customers, number of businesses in the industry) The industry is attractive if there are many entry barriers (technology, capital, distribution system, brand, government’s protection, etc), where high profit and sustainability will be achieved

 Competitive pressure from substitute products

Replace products are products, services can satisfy demands similar to products and services in the industry

 Competitive pressure from internal industry:

Businesses in the industry directly compete with each other, creating back pressure

to the industry to establish a competitive frequency Factors contribute to internal

pressure are demands, growth rate, number of competitors Industrial structure (focus or distributed) also affects internal competitive pressure Similar to entry barriers, exit barriers make it difficult for businesses to leave the industry i.e investment, relations with employees, relations with the government and stakeholders

1.2.2 Analysis of internal environment

1.2.2.1 Tangible (fixed assets, finance capital, technology, etc.)

Financial condition is considered the best evaluation on competitive status of a business, which is the condition to attract investors To establish effective business strategy, it is fundamental to analyze business’ financial strengths and weaknesses, which are shown in company’s annual financial analyze

Some rates and indicators of concern are growth of gross asset, solvency index, leverage index, performance index, and profitability index

Buildings, infrastructure, machinery and equipment, etc… are indispensable in the operation of enterprises For manufacturing enterprises, facilities factors are important, determining the birth and success of products

Technology is increasingly important to influence strategies and competitive advantage of a company It not only saves time but also enables the systematic coordination of the departments in the company (via an effective information

system)

1.2.2.2 Intangible (know-how, competitive advantages, etc.)

Analysis of Intangible factors includes the right of trade mark, know-how, competitive advantages, capability of management, relationships that can create income In the closed economy, these factors were not expressed but the more the society develops the more these factors are paid attention to

1.3 BUILDING MATRIX TO SELECT BUSINESS STRATEGY

1.3.1 External Factor Evaluation Matrix (EFE)

EFE Matrix evaluates external factors, synthesizes and summarizes the opportunities and major risks of external environment affecting the operation of the business Thereby helping managers correctly assess the level of corporate response

to the opportunities, threats and make judgments on the external impact factors are favorable or difficult for the company To build this matrix the following five steps are necessary:

to affect your business’ success in the industry/ business sector

important) The importance of each factor depending on its influence on branch/ industry that company is working on The total importance value must be 1.0

 Step 3: determine weights from 1 to 4 for each factor, factor’s weight depends on the response of each business toward the factor, whereas 4 is the best response, 3 is over average response, 2 is average and 1 is weak response

 Step 4: multiple the importance of each factor with its weight to determine the grade of each factor

Evaluation: the total of matrix does not depend on number of factors in the matrix, the maximum digit is 4 and minimum is 1

If the total is 4, the business has positive response to opportunities and threats; if the total is 2.5 the company has average response to opportunities and threats If the total is 1, the business has weak response to opportunities and threats

1.3.2 Internal Factor Evaluation Matrix (IFE)

Internal factors are considered important in every business strategy and business objectives that were set after considering internal factors, the strategic managers need to make the matrix elements to consider the possibility to response to and recognize the strengths and weaknesses Whereas, the business takes advantage of strengths to exploit and prepare internal forces to face weaknesses and find measures to improve these weaknesses In order to establish an IFE matrix, the following five steps are necessary:

affecting company and targets set out by company

 Step 2: classify importance from 0.0 (unimportant) to 1.0 (very important) for each factor The importance of these factors depends on factor’s influence on success of the company

in the industry The sum up value of all factors’ importance must be 1.0

 Step 3: determine each factor’s weight based on the scale from 1 to 4, whereas 4 is very strong, 3 is relatively strong, 3 is strong, 2 is weak, 4 is very weak

 Step 4: multiple each factor’s importance with its weight to have its grade

 Step 5: sum up all the factors to determine the total value of the matrix

Evaluation: the total value of the matrix varies from 1 to 4, which is not dependent to number

of factors in the matrix If the total is under 2.5, the company is internally weak If the total is above 2.5 the company is internally strong

1.3.3 Competitive Profile Matrix

Is the matrix where major criteria are selected to compare the company with its competitors on the market, graded via importance and sum up the value to recognize competitors, their advantages and disadvantages

This matrix can use some criteria i.e.:

1.3.4 SWOT Matrix

Matrix of strengths – weaknesses, opportunities – threats (SWOT) The important

combine tool can help managers develop the following four strategies: Strength – opportunities (SO), Strengths – Weaknesses (SW), Strengths – Threats (ST) and Weaknesses – Threats (WT) The combination of internal and external important factors is the most difficult mission in developing a SWOT matrix, which needs good prediction, and gives no best combination

SO strategies use internal strengths of a company to take advantage of external opportunities Every manager wants their organization to be in the position where internal strengths can take advantage of trends and changes of external environment Normally, organizations follow WO, ST or WT strategy to be in the position able to apply SO When a company has weaker factors, they will be surpassed to be strong factors When an organization has to face important threats,

it will try to avoid them to focus on opportunities

WO strategies aim at improving internal weaknesses by exploiting external opportunities Significant external opportunities sometimes present right in front of the company with internal weaknesses that hinder it to exploit these opportunities

ST strategies use a company’s strengths to avoid or reduce the influence of external threats This does not mean the strong organization always face threats from external environment

WT strategies are defendant to reduce the internal weaknesses to avoid external threats

In order to establish a SWOT matrix, the following eight steps are necessary:

Step 1: list major internal strengths

Step 2: list internal factor

Step 3: list major external opportunities

Step 4: list major external threats

Step 5: combine internal strengths and external opportunities then write down the result of SO strategy in the suitable cell

Step 6: combine internal weaknesses and external opportunities then write down the result of WO strategy

Step 7: combine internal strengths and external threats then write down the result of

ST strategy

Step 8: combine internal weaknesses and external threats to write down the result

of WT strategy

Table 1.3.4 SWOT Matrix

1.4 STRATEGY IMPLEMENTATION, EVALUATION AND ADJUSTMENT 1.4.1 Strategy Implementation

A proper strategy is effective only when it is performed logically and all personnel involved have deep comprehension and great effort Steps to perform the strategy include:

- Set annual targets: actually divide the strategy into specific annual targets to control by distributing resources, defining priorities of the organization and departments for each year, and then controlling and timely correcting it to ensure the strategy going the right way Publish the annual targets in the form of ability to increase profit, growth rate, market share of each business departments, groups of customer and product

- Distribute resources (finance, human resource, technology, assets) logically to guarantee the set orientation and strategy Distribute resources in accordance with the priorities set by annual targets basing on political factors

- Issue policies to support the strategy of the company and targets of departments For instance, all personnel work 1 hour overtime from April 1st to July 30th (to ensure product supply on seasonal basis)

The strategy will not be successful if issues relating to marketing, finance and accounting, R &

D and information system development are not operated well and synchronously

In the performance, the company needs to pay attention to conflict control, attach structure to strategy, attach achievements and salary, bonus to strategy, anti-change control and create a cultural supporting the strategy performance

1.4.2 Strategy Evaluation

This is a very necessary step because it is never assured the set strategy be proper

and the performance go the right direction Evaluating the strategy includes: (1) control basis of the strategy, (2) compare expected results to real ones, (3) adapt appropriate activities to ensure the performance progressing as planned

The evaluation results show:

 Properness of the strategy: whether the strategy is appropriate, internal and external environment changes have enormous influence that leads to regulate the strategy or not

 Performance effectiveness If it is not effective, what (step, department, personnel ) is the problem and why?

1.4.3 Strategy Adjustment (if necessary)

Based on the results from evaluation of strategy, the company needs to adjust timely and appropriately, for instance, changing the structure, key members, policies or some processes

All companies in this changing economy should adjust its 3-5 year plan quite frequently They cannot survive and develop without frequently adjusting their strategy in order to enable themselves to quickly and timely respond to changes in their business environment, actively seizing opportunities and properly overcoming threats and difficulties

CHAPTER 2: ANALYZING REAL SITUATION OF DONGA PAINT

2.1 INTRODUCTION OF DONGA PAINT

2.1.1 The process of establishment, organization structure and its specialty

DongA Paint is a listed company in Hanoi Stock Exchange (www.hnx.vn) under the code of HDA Its current price is around VND 14,000 per share

DongA paint was established in Nov 2006, but actually operated in 2008 Its charter capital until 2010 was 22 billion VND (about 1.1 million USD) Its relative market share in comparison with the biggest competitor in the market is estimated to expand from 3.3% in 2010 to 6% in 2011

Investors highly appreciate management and relationship of BOD and Executive Board There is totally 183 staff in the company It has 3 production factories in the North (Hanoi), the Central (Danang) and the South (Hochiminh City) with productivity of 5.5 million liters/year (about 7,000 tons) It distributed products all over the nation with 358 level-1 agents (2010)

DongA Paint’s major business areas are:

materials, paint construction materials

materials;

Main products are:

2 Super alkali resistant water base interior and exterior;

4 Interior paint, economic paint, emulsion paint, gloss paint and high gloss;

6 Exterior paint, emulsion paint, gloss paint and high gloss;

VISION - MISSION OF THE COMPANY

Slogan: DongA Paint - The beauty products of life

Mission:

To shareholders, DongA Paint's mission is a transparent operation which

brings the maximum profit to shareholders and ensures sustainable development

To its partners, the mission is creating sustainable values for all members in

the distribution chain by defending partners' interests

Long term goal and strategy: at present, the company has not written any official documents to develop a long term plan and strategy Only a target is set to reach

500 billion VND revenue in 2014

Chart 2.1.1 ORGANIZATION CHART OF DONGA PAINT

2.1.2 Overview of business performance from 2008 to 2010

Despite globally depressed economy, DongA Paint is still developing rapidly in terms of revenue and profit, that gradually defines the company's status in the local market

In 2008, the revenue was 10.3 billion VND, then 21.8 in 2009 and 60.5 in 2010 Relatively, the profit also increased considerably; net income was 0.8 billion in

2009, 2.4 in 2009 and 8.1 in 2010 In this period, the shareholders' equity went up too, 9.2 billion VND in 2008, 15,1 in 2009 and 29.5 in 2010

Chart 2.1.2 below describes DongA Paint's growth until 2010

2.2 ANALYZING SITUATION OF DONGA PAINT IN 2008-2010 AND PREDICTION

2.2.1 Analysis of external environment

2.2.1.1 Macro environment

 Political factors: the government is regulating laws and regulations to

promote non-government business This policy results in restructuring of economic sectors:

Table 2.2.1.1a Industrial production value by economic sectors

Structure ( % )

TOTAL 100,0 100,0 100,0 100,0 State-owned economy 49,6 34,2 27,4 18,5

Vietnam is integrating into the world economy and became one member in WTO (11th Jan 2007) and ASEAN As itinerary committed from now to ., the government will gradually reduce and then remove tariff barriers for other countries Thus, it would be easier for Vietnam products exported to other markets and for foreign products imported to Vietnam

Additionally, nowadays and within 5 years, the Vietnam government is issuing policies to promote institutes, colleges and universities conducting researches in association with the reality, and to appreciate researches applied in the reality Some enterprises take advantage of available intelligence and facilities with low cost to develop new products, diversify products and widen the market

5.06

4.31

5.48 -5.12 -3.04 -1.19

-INDUSTRIAL GROWTH, pct, y/y

Saving interest rate (real interest rate) in VND went up very high at the end of

2008 (about 18%-20%/year), then went down to 7%/year (in 2009) and increased at the end of 2010, that keeps the position (18%-20%/year) to May 2011 and no signs

to decrease Deposit rate of all banks is very high that leads to interest rate is from 20%-24%/year Although the rate is high, companies can hardly access to credit sources This is the obstacle which almost small and medium enterprises in Vietnam are facing

Graph 2.2.1.1 Foreign Exchange Rate

(Source: Reuters)

Table 2.2.1.1c shows that the exchange rate of VND/USD also increased from

16.005VND/USD on 2nd Jan, 2008 to 20,610VND/USD on 27th May 2011, equivalent to a growth rate of 29% (Figure source: Reuters) This trend is obviously unfavorable for importing materials, machinery for production, and confuses foreign investors to invest in their decisions to continue investing or withdraw money from Vietnamese market

The VND devalues against the USD while USD devalues against the international market, so foreign investors in Vietnam lose 2 times although actually rate of return

in VND is high when exchanging to transfer profit back home but it is not as effective as investing domestically This challenges foreign-invested firms in lowering cost in Vietnam for their less advantage over domestic firms

According to many economists, Vietnam economy can hardly recover within next 3-5 years, especially from end of 2011 - early 2013 many enterprises would go bankrupt or merger and acquisition, that would make a new economy

 Socio-cultural factors:

The Vietnamese cares much about their appearance especially who are from the North and Central On any special occasions/celebrations, the people usually redecorate their houses with new hope for better life

The Vietnamese is very flexible and changeable (especially the youth) They trend

to a brand today but forget it tomorrow Now they are less and less product and pay more attention to the real value and products made in Vietnam due

pro-foreign-to the campaign "Vietnamese use Vietnamese products"

They now care more for the living environment and their health Many products are made popularly to protect the human but environment-friendly

Vietnam population in 2010 was 86.9 million people living in Red river Delta (932 people/km2), South East (597 people/km2) and Mekong Delta (425 people/km2) People moving to urban areas have been increasing remarkably, from 19.5% in

1990 up to 24.1% in 2000 and 29.6% in 2009 Similar to so other Asian countries, Vietnam population is changing its structure in term of gender, male from 48.78%

in 1990 up to 49.16% in 2000 and 49.52% in 2009 This is because the baby girl rate is 10% higher than baby boy

Table 2.2.1.1c Vietnam Population and Urban Unemployment

Source: Reuters - 15:51 25May11 RTRS-Vietnam's economic indicators - May25 Amazingly, Vietnamese women get higher and higher income that define their social status They no longer depend too much on men like before According to General Statistics Office (GSO), woman-headed households with higher income than man-headed ones are about 25-32% and woman-head household rate rose from

2002 - 2008 (Source: GSO Vietnam and Reuters)

In 2008 monthly average income per capita across the country in current prices hit VND 995,000.00 an increase of 56,4% compared to 2006 If we control for the price changes, the annual increase in real income of the period 2006-2008 was 7.6% higher than the period 2004-2006 (6.2%) yet lower than real income growth the period 2002-2004 at 10.7% (…) Nationally, average monthly expenditure per capita in current price in 2008 rose to VND 793,000.00, increasing 55% in

comparison to 2006 and annual increase was 24.5%” Source: Result of the survey

of household living standard 2008, GSO

 Technological factors include product and management technologies which

are paid more and more attention in Vietnam and all over the world Technology is developing globally and extraordinarily It is easy to infringe copyright with "copy technology" of China Life cycle of products tends to be shorter and shorter although they are diversifying and trying to be different R&D should diverse and differ more to survive in the market

 Natural factors: Vietnam is a tropical country with 4 seasons spring, winter,

autumn and winter It stretches along the East Sea and locates near the equator, thus the weather in the North, Central and South differ All in all, any areas have both wet and dry seasons which affects much on machinery, materials and chemical in production

 Global factors Globalization became gradually popular in Vietnam since

1990s The world economy has domino effect, for instance, the credit system of the United States collapsed, that had bad influence on the securities, gold and foreign exchange market, and then real estate market, production and consumption in Vietnam

2.2.1.2 Paint industry environment (5 forces model)

Overview of paint industry in Vietnam (source: VPIA - Asian paint conference

2007 and 2009)

- Period 1914 - 1954: 3 paint companies in Hanoi, Haiphong, Saigon

- Period 1954 - 1975 (when the country was separated North - South with different politics) There were 3 state paint factories in the North with backward technology, undiversified products while 16 in the South with various paint products

- Period 1976 - 1989 (economic subsidy until 1986) There were totally 12 paint companies in Vietnam Productivity less than 10,000 tons/year did not meet demand

of the market

- Period 1990 - 2008 (Doi moi, integration): there were 20 foreign paint firms (90 million USD invested) cooperating with Vietnamese companies or 100% famous foreign capital invested firms such as ICI, Nippon, Juton, Toa Thailand Current well-known Vietnam paint companies originated from 9 firms/factories operating in

1976 - 1986 (3 were disbanded or merged) The average development in 1990-1999 was 15 - 20%/year and in 2000-2008 25%/year

The number of paint firm increased rapidly, 60 firms in 2002, 120 firms in 2004,

168 firms in 2006, 187 firms in 2008, 252 firms in 2009 and around 300 firms in

2010

All firms focus on expanding or rebuilding factories, investing in new technology, diversifying products and higher quality to master the market and compete with other rivals The overview of market share and market split shows that until 2010 foreign-invested firms (more than 30) account for 80% market share, the rest 20%

of Vietnamese firms (Source: Ministry of Construction)

The table below shows the fact that in 2008, when the economic crisis started, paint productivity increased while consumption decreased in comparison with that in

2005 To the end of 2010, the paint consumption rose sharply so that in the year, the consumption reached 21% compared with 2009 Particularly in the first 4 months it went up 1.5 times the same period in 2010

Table 2.2.1.2a Monthly development index of industrial production (each industry)

Unit: %

Year Details

compari son with the previous year Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

The whole industry 119 123 137 137 139 142 146 146 147 148 151 156 107

Paint, ink and mastics

production (Code

2422)

86 129 117 114 115 116 130 129 141 141 128 146 102

2010

The whole industry 152 122 152 151 157 157 162 161 156 167 170 167 109

Paint, ink and mastics

production (Code

2422)

157 104 117 123 115 136 168 171 143 195 226 216 128

Table 2.2.1.2b CONSUMPTION INDEX OF PROCESSING INDUSTRY IN EACH MONTH

Months in 2008 in comparison with 2005 In

compa-rison the previous year

In rison with the first 4 months

2008

Paint, ink and mastics

production (Code 2422) 88 56 75 82 70 78 85 70 72 68 66 71

2009

Paint, ink and mastics

production (Code 2422) 47 71 86 64 74 64 68 68 72 78 72 86

2010

Paint, ink and mastics

production (Code 2422) 86 53 56 68 65 74 118 117 86 101 105 107 121

2011

Paint, ink and mastics

Inventory in 2010 increased by 24% compared to that in 2009 and lowered than the industrial average 28% In the first 4 months in 2011, there was an increase of 20%

in inventory compared to the same period in 2010; this was 15% higher than the average inventory growth of the whole processing industry It is predicted that if there is no special demand stimulus policies, paint consumption will not go up, that leads to low production in at least 2-5 years until the market is regulated Increasing inventory puts pressure on the companies to consume it, which may lead to a decrease in price and profit

Five forces Competition model (Porter)

Threat of entrants: entrants rose very rapidly, 20-50 paint firms each year (+ 10% to 20%) Every firm born has some certain resources and expectations, none of them want to go bankrupt Growth rate of the industry is high but it will not be enough market shares for all firms if there were too many companies

The figure shows the paint industry and DongA Paint are in the Stage 2 - Growth, there would be many potential competitors

Graph 2.2.1.2 Life Cycle of DongA Paint

Entry barriers are available but not significant, for example:

• Scale: marginal efficiency increases but not significantly (under 5%) when the scale increases to some certain level The efficiency depends heavily on input material price and management cost including depreciation on a unit However, when it reaches a certain level, more cost on a unit may occur that reduce the marginal efficiency

• Product difference: various kinds of paint, and different color Some international paint firms have better quality and color paints than those of domestic ones but normal consumers cannot realize Manufacturing paint technology is very easy to copy up to 90% the same, for instance, a firm launches a product popular-to-

be colored, one month later, a similar product will then launched to the market

land are needed to establish a paint factory In comparison with other industries, this

is so small investment that many individuals can invest in

their machinery so cost to leave the industry is lower than other forms of production This will reduce competition in paint industry Every year many enterprises go out of business, especially small and little-known firms

• Access to distribution channel: building distribution channel costs much in terms of time and money Moreover, there are many risks relating to this channel This is a significant challenge for DongA Paint because a firm with reliable and wide distribution channel almost pays no initial cost Even despite being a big company, it is rather difficult for it to enter the channel

• Policies of the Government: it is easy to get the establishing license just by satisfying business conditions like other normal firm

The weapon against entrants fiercely competing with DongA Paint is creating

production differences and developing the distribution channel

Suppliers' bargaining power: Main material for Paint is titanium and stone

powder Additives of 30 common kinds are available in the domestic and international market There are many local and international (particularly Asian) paint material suppliers in big/small scale that is a great advantage for paint enterprises Material importing rate into Vietnam is around 40-70%, thus, it is not easy to change the suppliers because variety of issues need to be carefully considered before placing an order Usually, new/small firms place an order through

a big one to have more power over suppliers In general, the suppliers in this case

do not have much power They may easily lose their customers if they make small

competitive mistake However, while Vietnam has not integrated totally, it should

be careful to change suppliers so they are more power

In the case of DongA Paint, 60-65% material imported directly from Singapore, Indonesia and Malaysia includes mainly titanium powder and some additives Another main material is stone powder from domestic source From establishment

to early 2010, the company imported materials meeting DongA Paint's standard through two local commercial companies From Aug 2010, DongA Paint has imported materials from international well-known suppliers by itself to ensure the quality and delivery schedule However, the suppliers have power because DongA Paint is not a big material consumer for them Thus, DongA Paint has little chance

to negotiate the price

Buyers' bargaining power: Customers are individuals/organizations putting up/repairing buildings or houses They are not big consumers but big in term of number Contractors have great power but they accounts for few consumers The buyers' power increases because of low changing product cost and easy to change Information of the product is easily accessed through internet, flyers or advertisement at agencies Generally, it is difficult to diversify and build up loyal distribution channel in the industry, but if it is done, this would be a superior advantage over business rivals

DongA Paint has those kinds of customer Number of consumer for big buildings is increasing, estimated 20% of profit reached by DongA Paint in 2015

Threats from substitute products: there are very few substitutes for interior and exterior paints (less than 10%), including wallpaper, wood veneer, ceramic tile, stone veneer and some future materials

However, technology is developing amazingly, wallpaper would be a big substitute for paint Nowadays it is not popular in Vietnam because of unstable wet and dry weather but maybe in the next 5 years, wallpaper could be applied new technology

to adjust to this problem Additionally, this is becoming very popular to teenagers who will soon be main consumers

Because of changing weather, customers are likely to protect their house from harmful sunlight Then paint with its features may be no longer suitable for houses

Rivalry Intensity in the industry: the competition is strong but not fierce in paint industry There are rivals in the market (Dulux, Nippon, Levis, Kova, Hanoi Paint, Dongnai Paint ) and peer business rivals This industry is growing rapidly (about 20%) There are opportunities to make differences due to low fixed cost and little trouble to leave the industry

In general, currently paint is still an attractive and potential industry promising great profit despite entrance barrier:

has rather firm status) Besides, if a company Vietnam registers as monopoly agency of those suppliers, DongA Paint will be affected until it could negotiate with the agency or find other suppliers

• Competition in this industry is less serious than construction material and interior design

Since paint is a rather attractive industry with few barriers, in the future, the competition would be much fiercer

KFS (Key factors to success) in this field is technique and additives to make differences and diversification, strong wholesale network

2.2.2 Internal Environment

2.2.2.1 Human resources and policy

The average number of staff of DongA Paint was 180 in 2010, of which 15 were in charge of production management and 48 were in charge of sales management, who get fixed salary and variable bonus based on their degree of work fulfillment During the period of 2008-2010, the turnover rate in DongA Paint was below 5% and in gradual declining trend thanks to greater cohesiveness between staff and their work and satisfactory compensation payable to them There were 3 persons that were sacked due to their violation of work discipline

Strength of DongA Paint’s human resource:

• Young (at the average age of 27), confident, dynamic, creative, devoted, have interests convergent with the company’s interest

• The Board of Leaders has a very closed relationship The Chairman has good prestige, experience and good relationship with local government and major partners Director and Deputy Director have good understanding of technical issues and markets, good working relationship Technicians are highly skilled and creative

opportunities to develop in line with their strength and desire Especially, the

company never get new employee just based on relations

Limitations of human resource:

ambition to self-actualize but difficulty in recognizing others

with objectives, patience and have the nature of caring and satisfying customers’ demands

2.2.2.2 Financial conditions during 2008-2010

advantages in mobilizing funds from various sources such as bank loans, stocks issued for common shareholders or strategic shareholders thanks to the higher appreciation of the prestige of the Board of Leaders as well as the management quality of the company in comparison with other enterprises at the same size In addition, the development trend of the company also gives it an advantage in applying credit lines at banks

in its large account receivable which accounts for 22,5% of its revenue (2010), triggering the potential risks of non-performing debts or bad debts, therefore may badly affect the business results of the company in the current context of too high capital cost (~20%-25%/year)

 The company has to pay 100% of LC to the sellers in minimum 2 months advance to get its supply

Overview of DongA Paint’s financial conditions is manifested in Table 2.2.2.2 a - Balance Sheet and Table 2.2.2.2 b - Income Statement over recent years as followings:

Table 2.2.2.2a BALANCE SHEET

DONGA PAINT JSC., Unit: million VND

Period Ending Dec 31,

Other current assets 1,473 2,593 5,812

LONG -TERM ASSETS 34,912 38,603 10,654 Fixed assets 3,707 7,497 8,930

Long-term investment 28,874 28,874 -