The Previous Rubber Industry

The car industry in the early 1900s spurred the establishment of vast rubber plantations in Malaysia (Malaya then). Rubber companies with names of British towns were floated on the London Stock Exchange to fund the planting of rubber trees. Till the 1960s, rubber exports were the main source of revenue for the country. Smoked rubber sheets were sold by large British-owned companies to manufacturers in Britain, Germany and the US to produce a variety of rubber products, such as tires and conveyor belts. A city in Ohio, US, Akron, became the main beneficiary of the major demand for tires. It was called the “rubber capital of the world” until the 1950s, where large tire manufacturers established factories in Akron to supply booming car companies in Detroit, Michigan.

Today, Akron is no longer a rubber bustling city. The city is now encouraging new companies that could develop new products based on the knowledge of the rubber technology.

Throughout the period, Malaysia remained as the largest exporter of smoked rubber sheets. In the 1970s and 1980s the Malaysian government encouraged local firms to establish tire manufacturing plants to supply both local and export markets. As tires are bulky products, they need to be closed to car companies. As Malaysia did not have a large car industry, these tire companies are mainly servicing the local car companies as well as for the replacement market.  Thus, Malaysia did not take advantage of its rubber to establish a rubber product industry. One bright spot is that Malaysia has managed to become the largest exporter of rubber latex gloves, albeit most of the rubber latex comes from Thailand.

A Different Path for the Palm Oil Industry

Unlike the rubber industry, Malaysia had succeeded in taking advantage of its palm oil resource. We have conducted a PhD-level research on the key factors that allow the palm oil industry to innovate, from the planting of oil palm trees to the processing and development of new products for food and industrial applications. Various products were derived from palm oil such as substitute for chocolate, and washing powders. If we analyse the list of ingredients in our favourite consumer products, such as KitKat and Nutella, we will note that they contain at least one or two ingredients from palm oil. These ingredients are manufactured by large Malaysian palm oil multinationals, which have operations in many countries (See our book, The Palm Oil Multinationals from Malaysia: How they control a global Industry that started from four humble seeds. It is available from Amazon.com.)

The Presence of Institutional Networks for Knowledge Generation, Sharing and Adoption in Palm Oil Industry 

The study had identified a close network that facilitates knowledge generation, knowledge sharing and knowledge absorption in the Malaysian palm industry. The close network was formed as a result of historical contexts and on-going interactions promoted by focal institutions with responsibilities to develop the palm oil industry. This close network, which we term the palm oil institutional network, links an industry-funded R&D institute with palm oil firms, governmental institutions, industry associations and groups of technical and scientific experts. The inputs from on-going and close interactions are utilized by the industry-funded R&D institute to develop its R&D programmes, especially medium- and long-term R&D efforts, which are avoided by commercial interests of palm oil firms.

Five types of network, which collectively create the palm oil institutional network, are; (1) government-mandated technological networks, (2) industry associational network, (3) institutional policy network, (4) government-linked corporate networks, and (5) expert informational networks.

The government-mandated technological networks (GTN) were formed by government legislation to formulate and undertake R&D activities for the palm oil industry. The main components of the GTN are a government R&D institute, the Malaysian Palm Oil Board (The MPOB), important industry associations, major palm oil firms, and technical expert communities. The MPOB is funded through a collection of levies paid by palm oil firms. The MPOB formulates its research activities through inputs obtained from industry associations, technical expert communities and members of industry associations on board of the research institute.

The MPOB actively shares its R&D findings with palm oil firms through technology bulletins, conferences, workshops and technology licensing. It is the main generator of new knowledge for the palm oil industry over the last thirty years. This new knowledge is widely discussed among palm oil firms. As example was that the discovery of an African weevil for the pollination of oil palm by a private palm oil was quickly adopted by other palm oil firms, thereby increasing the overall productivity of the palm oil industry.

The industry associations are the earliest business networks in the palm oil industry. Initially these industry associations acted as social organizations for members and planters. As the palm oil industry expanded, these associations were invited by government to be involved in policy-making committees. These industry associations are a key component in the dissemination of information among its members. An important industry association is the Incorporated Society of Planters (ISP), whose members are managers of the plantation industry. The ISP helps, formally and informally, in the sharing of industry best-practices over many decades since its incorporation in 1919.

The industry associations help to create institutional routines, which are represented by regular interactions among various institutions. Firms in the palm oil industry are involved in guiding the direction of the palm oil industry through industry associations.

Institutional policy networks are linkages used by governmental units to formulate policies affecting the palm oil industry. The main objectives if the governmental policies had been to facilitate the business environment for the palm oil industry. The institutional policy network links public institutions with palm oil firms and industry associations for exchanging information, expertise, trust and other political resources.

Many governmental ministries are involved in institutional policy networks within the palm oil industry. Industry associations are involved in discussions, annual industry dialogues and sit on various governmental committees for inputs on policy-making. Common industry problems are regularly discussed and a united stance is arrived at to address these common industry problems.

Government-linked corporate networks are linkages among firms in which the government has significant direct ownership. These government-owned firms are often provided with incentives to undertake projects or activities that can strengthen the palm oil industry through technology acquisition and infrastructure development. Moreover, government-linked palm oil firms own substantial acreage of plantation lands

Government-owned companies, which are large palm oil firms, are instrumental in the generation and sharing of knowledge, with collaboration being an important R&D strategy.

Our research shows the long-term nature of research for a crop like oil palm requires palm oil firms to collaborate with other firms and governmental institutions to reduce costs and risks. As an example, the research to develop a new high-yielding oil palm can take over thirty years before a successful variety is commercialized for planting. Thus, the nature of the oil palm research provides strong motivation to collaborate, which leads to a permanent need of an institutional network.

The palm oil institutional network is supported by an informal personal network, which has been nurtured through a long history of social interactions and personnel transfers between companies. This informal societies and communities within the palm oil industry form a strong informal network for knowledge sharing.

The expert informational network (EIN) is a new type of network which is formally used by the Malaysian palm oil industry to search for new information and planning R&D activities. The EIN is set-up by the MPOB since its establishment thirty years ago, by the appointment well-known local and foreign experts to sit on a number of technical committees, named Programme Advisory Committees (PACs). The formal EIN allows the MPOB to consider independent inputs to plan its R&D activities as well seeking inputs of palm oil firms. As at April 2013, the PAC had sixty four members of experts from industry and academia.

 Conclusion

Despite the African origin of oil palm, Malaysia first developed the palm oil industry from a small base to become the leading producer through technology accumulation processes. In order to generate new knowledge, the government established new institutions to undertake industry research and commercialize new technologies to benefit the palm oil industry. A tax was imposed on palm oil firms to fund the operation of an industry-focused R&D institute, and, in return, the palm oil firms are involved in guiding the direction of the R&D activities of the MPOB. The inputs for its R&D activities are drawn and refined through continuous and close interactions between palm oil firms, the MPOB, industry associations, governmental units and industry experts. The results of the R&D findings are disseminated in various codified and non-codified knowledge through various mechanisms. The MPOB also taps the knowledge of a global network of experts to search for new information and technology directions, which we call expert informational network (EIN), and is unique to the Malaysian palm oil industry for generation of new knowledge. These formal institutional relationships are reinforced by informal linkages among institutions and individuals in the Malaysian palm oil industry, which norms of relationships have been propagated by generations of industry executives, industry leaders and institutional heads.

Introduction

My hard-working wife uses only a specific brand of toothpaste, Colgate. She has been long exposed to the advertisements of the toothpaste since she was small. These days, to a Malaysian child of 5-years old and above, nice foods mean McDonald’s, snacks mean Shell petrol stations and holidays means Tivago.

In fact, my wife told me that a 5-year old granddaughter of her friend already equates Tivago with  holidays when the advertisement of Tivago appears on television.

Tivago is a well-known online travel agent. What is the business model of online travel agent? What is the sweet spot of online travel agent?

Tivago and other online travel agents have become the main channel to book hotels worldwide. In return, hotels secure room bookings and improve their occupancy rates. Less well-known hotels and lodgings also use online travel agents to market their facilities to consumers worldwide. The power of online agents is disliked by major hotel groups, as by using online travel agents they forgo a considerable income through paying commission fees to online travel agents.

At the same time, these hotels would lose market share to other hotels that work with online travel agents. As hotel rooms are perishable goods and cannot be reserved for future use, hotels must make a trade-off between potentially higher revenue from selling their rooms by themselves or lower revenue by selling the rooms by online travel agents.

The Business Model of Online Travel Agents

The online travel agent practices a number of business models , which are as follows:

1. The merchant model,
2. Hotel collect/Agency model,
3. Flexible/Opaque model

The Merchant Model

The merchant model involves the online travel agent purchasing a given quantity of rooms from a hotel at a wholesale price or rate. Then, the online travel agent will mark-up the price and offer the rooms to their online customers. Under the merchant model, the online travel agent bears the risk of unsold rooms.

Extensive use of online travel agents under the merchant model has resulted in erosion of unified pricing plans that are favoured by major hotel groups.

The Hotel Collect/Agency Model

The hotel collect/Agency model involves the online travel agent agreeing to distribute the rooms at an agreed-price with the hotels. The online travel agent receives a commission on each of the room when the guest leaves.

Flexible/Opaque Model

Under the flexible/opaque model, the online travel agent distributes rooms at an agreed price set by the hotel. Then, the online travel agent matches the bids of customers with the lowest price offered by the hotels. The online travel agent makes a profit through the price difference once the hotels accept the transactions. In the opaque model, customers purchase rooms on the online travel agent’s website without knowing the hotel brand before they make payment.

The three business models used by online travel agents involve having information about the buyers of rooms that is not available to the sellers of rooms and information about the sellers that the buyers of rooms do not know.

The Online Travel Agent Industry

The online travel agency is made-up of only a few firms. Although there are frequently new entrants, they tend to be gobbled-up by existing firms. The major companies own many different websites, some of which offer different services. Most of the websites function as metasearch engines that pull prices and offerings from their own networks. The term metasearch is used, since each provider’s website is  a search engine that shows listing from only that company across times location, or services.

Revenue Streams

Revenues of travel online agents are derived from three main sources.

The first revenue is agency revenue where the online travel agent’s website is simply an intermediary that connects a customer with a provider of travel services. The costs of transactions are not borne by the online travel agent. There would be no costs of revenue and costs of goods sold associated with these transactions.

The second revenue is merchant’s revenue where the online travel agent is the merchant of record, and costs associated with the transactions are borne by the online travel agents. These costs include credit card processing fees, costs associated with securing a package or deal and any other fees that might be associated with the transactions.

The third revenue is from advertising. Advertising does not have associated costs since the advertisements are displayed on company-owned websites.

Conclusion

The online travel agent industry is one of intermediaries that is insulated from and tends to benefit from the intense competition among travel service providers like hotels and airlines. It is also at a stage of consolidation that direct competitors tend to be swallowed up. The cost of entering the industry Is low, simply requiring a website infrastructure and a search algorithms. New entrants that curve out a customer base are acquired, but the websites brand is usually maintained.

Many of the well-known websites are owned by Priceline or Expedia, as shown below:

The travel online agent industry is enjoying a sweet spot and this is driven by the wealthy consumers in China, Japan, Europe, US and emerging countries who want to enjoy travel experiences.

Reference:

1. The Henry Fund, February 10^th, 2016. Online travel agencies
2. Paper submitted by my DBA students, Rajiv Mangruwa and Rosalind Sinnappan

                                    Congratulation to All DBA Students

A hard working pair

Internet travel expert from Indonesia

Eliana and two handsome guys from Middle East

 A clever group with great future ahead of them 

The lady’s man with his class mates

Not in the pictures are Dr Barraa, Dr Daniel and Dr Shazleena

Introduction

Previously, locals and foreign tourists to London and New York would head to Harrods, Barneys, Bloomingdale’s when they were in town. Lately, lesser number of tourists is shopping at these grand department stores as they have been buying luxury handbags and cloths online.

The grand department stores are fighting back with an array of initiatives to draw customers in and engage them longer, according to an article in Financial Times, How to Spent  It, published on October 7th, 2017.

They have been troubling times for department stores in London and Manhattan, New York, where competition from internet shopping is merely one of the challenges facing the grand old department stores. In their heyday they and their global counterparts encapsulated the spirit of their age, but that age is no more. What is left are vats edifices, which if they are to survive, have to reinvent themselves for the new times we are lining in and keep on their toes as their customers’ tastes and habits continue to evolve.

As Trevor Hardy, CEO of trend-forecasting agency The Future Laboratory, puts it, “ The department-store concept was invented for an era when consumption was inspired to-in had cultural currency. Today, the mere act of consumption is not much aspired to; the new breed of entrepreneurs notably spends very differently for the way earlier wealthy individuals used to spend, but that does not mean there is not still a lot of spending going on.”

If the reason of a department store is to sell, then it must sell those things that today’s consumers want to buy. It must also re-imagine the way it uses its space.

Mortimer Singer, president and CEO of business development and strategic consultancy firm, Marvin Traub Associates, identifies several “headwinds” that the US stores are struggling with.  Firstly, there is what he calls the “new Davids”-lesser-known brands , well over 200 of them, that were born online and in many cases may only be doing about US$10 of business a year each, but collectively “are taking some US$4.2 billion out of the more established retail sector”.

Then there is the clothing and accessories rental business, which he says is booming in New York. This new business has saved consumers a lot of money a year.

Thirdly, what Singer calls the “aftermarket” is also affecting the department stores, with more and more women buying second-hand or “pre-loved” clothing and accessories from luxury websites such as Therearreal.com. Finally, Singer points to the mega-growth of the health and wellness industry, which is also taking huge sums of money that might in the past have been spent in traditional department stores.

In addition, to all that there is Amazon, which is expected to overtake Bloomingdale’s owner Macy’s this year as the seller of what in the US is known as “apparel”. Many grand department stores in New York are using new technology as one way to tackle the “headwinds”. Neiman Marcus, for instance, added features to its app that mean a friend could paragraph a pair of shoes and ask Neiman Marcus whether it stocks them or a similar design. On top of that, its stores now have “Memory Mirrors”, which offer customers 360 degree views of exactly how they look in the chosen garment.

Re-imagining Department Stores

Several department stores are beginning to offer food, while there is a recognition that their stores  had not kept pace will all technology has to offer. Seamless omni-channel service is now mandatory.

Marigay McKee, former chef merchant at Harrods and former president of Saks Fifth  Avenue, who now runs strategic business development company, MM Luxe Consulting, believes, “We have to bring the love and the humanity back into the experience of shopping. Stores need to concentrate on what I call ‘the three Es” – emotion, environment and experience-if they are to appeal to today’s customers.”

This means doing things like ringing up customers when an item comes in that the assistant feels the customer would like, letting people buy a dress in Chicago and change it in New York, or allowing them to buy online and return to a store ( or vice versa).

Hardy, of The Future Laboratory, identifies one of the key problems for modern-day department stored as the dramatic decline in the time customers spend in stores. “Managers need to work out how to get shoppers to stay longer, “ he says. “ They need to bring popular culture back into stores.”

One area with significant growth potential is wellness, health and beauty, and what Hardy call “self- transformation”.    Saks Fifth Avenue offers skiing lessons. There are also boot-camp-style exercise classes and therapy treatments, from the natural to the high tech. Customers can also buy a Peleton exercise bicycle and follow spinning classes from home on a screen attached to the handle bars.

In London, department store, Harvey Nichols, is enticing customers into its stores and keeping them longer. It has invested a great deal in beauty and wellness, opening a new beauty lounge. As well as offering treatments such as LED facial, cryotherapy and vitamin and nutrient injections, the beauty lounge offer make-up masterclasses. It also makes a [pint of always having something exceptional to offer connected with these events.

The Future

Meanwhile a buying director of Liberty, which struggled for many years but is now trading profitability believes firmly  that department stores are here to stay, but says they have to offer a compelling reason for customers to visit. “I try to enhance all the things that you cannot get online-this means we offer advice and in-depth knowledge about our products. It is all about eccentricity and the story behind a product. “I also see us as neighbourhood store.”

McKee, with her experience of managing retailers on both UK and US, is a believer in the future of department stores, but says they need to remember that they “have to become the host or hostess, while the customer is the guest”.

What is indisputable is that no stores can expect to survive if, as The Future Laboratory’s Hardy puts it, “all they do is to try to sell us more stuff”.

Reference: Lucia van der Post, Retail of two cities, Financial Times, How to spend it, October 7 2017.

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