Part I: Environmental and Industry Analysis Report
Porter's Five-Force Model
Suppliers (Bargaining power of suppliers)
Suppliers of SCG Cement consist of four parties: raw material suppliers, energy suppliers, cement bag suppliers and distribution suppliers. In the overall picture, the company has more bargaining power over suppliers as follows:
Raw Material Suppliers: the fundamental raw materials in producing cement are limestone, shale, laterite and fly ash, which are under government control. In other words, SCG Cement is more dependent on the government to issue licenses and permits. The company has an official license to do mining of limestone and shale in its all plant premises in Saraburi, Nakorn Sri Thammarat and Lampang province. Therefore, the suppliers of laterite and fly ash are lesser important than the government.
Energy Suppliers: Cement manufacturing is energy intensive, especially coal and lignite which are one of the most important production costs. Therefore, SCG Cement has used alternative fuels and waste heat recovery power at all plants to reduce the consumption of coal and lignite. Although only two main suppliers of coal and lignite in Thailand (Banpu Pcl and Lanna Resources Pcl) are available, SCG Cement seems to have higher negotiation power over these two suppliers since it is a leading cement manufacturer in Thailand with five cement plants nationwide. SCG Cement is considered a large-volume customer to suppliers. In addition, a long term strategic plan, SCG Group established coal trading company in Indonesia to supply the energy to Thailand. Moreover, the government controls the price of coal and lignite. So, these two suppliers have limited negotiation power.
Cement Bag: As SCG Group has its own paper and pulp business called SCG Paper Pcl, SCG Cement can benefit from this subsidiary to supply cement bags.
Cement Distribution: As SCG Group has its own logistic business which is SCG Logistics Management Co. Ltd.; SCG Cement can use this company for its cement distribution.
Customers (Bargaining power of buyers)
Normally, cement manufacturers have more bargaining power than customers. Although cement has low product differentiation as well as a low switching cost for customers to use competitors' products, cement is still considered as an essential material for them. Moreover, as cement industry is a capital intensive business, a chance for general customers to use the threat to force cement manufacturers to reduce the price is very slim. Customers of SCG Cement can be categorized into three groups as follows:
Business to Government (B2G): The government is the most valuable customer (MVC) of SCG Cement and the cement industry is heavily dependent on governmental mega projects for basic infrastructure development such as roads, airports, etc. Although the margin when dealing with the government is quite low, the company can still take advantage from the economies of scale. In addition, (the patronage system plays an important role in doing a business in Thailand, so the company can't afford to ignore B2G. It must retain, reward, and provide the highest level of service.
Business to Business (B2B) such as land and property business, modern trades such as Home Pro: It falls into the MVC category as well. The main distribution channel to serve this group is Home Mart, SCG authorized dealers who sell SCG cement and SCG building materials only throughout the country. Generally, many well-established companies are heavily relied on the brand reputation, so they usually select high quality products such as SCG Cement to gain the confidence of their customers and the customer loyalty. It's remarkable that some big companies may be quite powerful due to the large amount of purchase.
Business to Customer (B2C): The company gains more negotiation power over this group of customers because normally they purchase a small amount of cement. As cement is a standard product, customers usually make a decision based on price and can easily switch to other products, the company must increase their loyalty to the company b adding increasing perceived values to its features and branding. The strategy for SCG Cement is how to turn the small time customers into the most growable customers in the near future.
New Entrants (Threat of potential new competitors): there are high barriers for new entrants as follows.
High Market Share: Currently there are eight cement manufacturers in Thailand shown on Table 1 and Figure 1. According to Thai Cement Manufacturer Association, the main players or the Big Three are SCG Cement (40 % market share), Siam City Cement Pcl (27 % market share), and TPI Polene (17 % market share). So, the company has the major market share in Thailand.
High Brand Loyalty: Although cement products are commodities and the switching costs are low, customers have high brand loyalty to SCG Cement as it was the first cement manufacturer in Thailand (founded in 1913 ) and enjoyed a cement monopoly for almost a half of a century before the market liberalization. Thus, the company has fostered a strong relationship with customers and the government as well as creating alliances with its dealers by supporting authorized dealers nationwide to sell products from its companies only. Therefore, it is difficult for new entrants to win over loyal customers and acquire market share.
High Start-up costs: Cement production requires an intensive capital investment.
Knowledge Requirements: Expertise is needed for cement production because there are much equipment and facilities to operate and carry out maintenance. Severe technical problems can lead to operation shut down, affecting the business operation of the whole company.
Low Cement Price: The Department of the Internal Trade under the Ministry of Commerce controls a domestic cement selling price (, e.g. 125 Baht/ one 50-kg bagged mixed cement). It was claimed that local cement prices have stayed unchanged for the past ten years in spite of the incremental costs of fuel, coal, electricity and wages. Moreover, referring to the world cement price survey, it is found that cement prices in Thailand are among the lowest in 80 countries. Therefore, it is not attractive for new entrants.
Good Distribution Channel: SCG Cement is the only cement producer in Thailand that owns logistics and has plants in Central, North and South, so it can serve customers nationwide with low logistic costs.
Substitute Products (Threat of substitute products or service): Cement has low substitute products such as timber. Without cement, it is unlikely to provide strength to buildings.
Industry Competitors (Rivalry among competing firms):
Market Leader: Although there are eight cement producers in Thailand, only two companies (Siam City Cement Pcl and TPI Polene) are considered as major competitors to SCG Cement. The company has ranked no.1 as the market leader since it was established due to competitive advantages mentioned earlier.
Market Growth: Cement domestic market continues to grow. After the economic crisis in 2007-2008, the growth rate increased rapidly to 10% in 2010 due to the demand recovery from the commercial sector and the expansion of residential and infrastructure sectors, particularly in the government spending on "Thailand Strong" Economic Stimulus Project initiated by the government since 2009 to boost Thailand's economy. In addition, it was forecasted the domestic growth of at least 5% in 2011.
Low Fixed Cost: To reduce fixed costs in electricity and coal, SCG Cement was the first cement company in Thailand that initiates the utilization of heat from the process to turn stream turbines for generation of electricity (called Waste Heat Recovery) and alternative fuel from co-processing of wastes such as solvents in cement kilns. So, it can minimize cost in production.
High Brand Loyalty (See item no. 3.2)
Good Distribution Channel (See item no. 3.6)
Macro Environment
Political and Legal Forces: SCG Cement has a close interrelationship with the government and governmental agencies as follows:
Licenses and Certificates: The company has to deal with many governmental agencies to acquire important licenses and certificates such as
Mineral mine concession certificate to do shale and limestone mining from the Royal Forest Department under the Ministry of Natural Resources and Environment
Plant licenses from Department of Industrial Works under the Ministry of Industry
Environment Impact Assessment (EIA) approval documents from Pollution Control Department under the Ministry of Natural Resources and Environment
Controlled Domestic Cement Prices by the Department of the Internal Trade under the Ministry of Commerce
Political Stability: A stable government can improve the private investment in the property projects as well as increasing the government spending on infrastructure development projects.
Taxation: The government can give tax incentives that benefit the company such as tax exemption for importing equipment that helps energy efficiency. In addition, the tax reduction on housing purchase will benefit the cement industry.
Legislation and Policies: The company must strictly comply with related legislation and policies such as labor laws, environmental laws
Government Bureaucracy: Delay or inability in obtaining approvals from authorities
Economic Forces
Interest Rates: The Bank of Thailand decides the interest rates in Thailand. The interest rates will have an impact on the whole domestic housing market. If the loan rate is low, many people will apply for housing loans creating a great number of property projects and increasing demands in the domestic cement industry.
Fossil Fuel Prices and Energy Prices: Oil prices, coal prices and electricity prices directly affect the cost of cement production. SCG Cement has tried to look for alternative fuels such as from waste co-processing and Waste Heat Recovery to cushion the impacts.
Fluctuations in the Currency Exchange Rate: From Figure 2, it shows that cement manufacturers produce the excessive amount of cement for domestic consumption, so the rest needs to be exported. For example, in 2010, the total cement production was 56 million tons, so 14 million tons of cement was exported. Almost a half (7.3 million tons in Figure 3) was exported by SCG Cement. Therefore, the fluctuation in USD exchange rate will affect the profitability of the company.
Global Economic Forces: Trade barriers such as cement tariffs on import and non-trade barriers, the study shows that Thailand has a cement tariff at 10%, Vietnam 40%, The Philippines 0%. The company must take account of consideration to decide the business strategy, whether to export or to invest money on a cement company there.
Technological Forces: As mentioned above, alternative energy sources play an important role to reduce costs in cement production, so SCG Cement must use technologies to reduce energy costs. In addition, the cement industry is a product-based organization in low volatility. It means cement is an undifferentiated product, so it is difficult for cement manufacturers to compete on only based on the products. Therefore, proper technologies are needed to gain competitive advantages and enable companies to provide better service to customers. This topic will be discussed in details in Part 2.
Social Forces: Cement manufacturing is a high polluted industry, particularly air pollution and Coâ‚‚ emission created global warming problems. The company has pressures from stakeholders such as customers, the government, and communities for commitment toward sustainability. Failures to meet sustainability objectives may harm the company's brand reputation. This topic will be discussed in details in Part 2.
PART II: Internal Analysis and Strategy Formulation Report
I: Internal Resources
Resources
Tangible
SCG Cement has five plants locations from the north to the south of Thailand with 14 cement kilns, so the amount of its cement production capacity per year is almost a half of the domestic industry capacity.
Strong distribution channel from nationwide authorized dealers, known as Home Mart: Sell only products from SCG Cement and SCG Groups
Strong logistics from SCG Logistics Management Co. Ltd (SCG Group's subsidiary) for cement transportation, this company uses GPS for more efficient routing and other software for better cube utilization and truck utilization.
SCG Experience: A flagship store that SCG Groups invested 400 million baht to provide as a one-stop service center to provide all solutions for all your home such as XP Library (shortened from Experience), XP Virtual Room, XP Consultant (free of charge), XP Product and Service, and so on.
Intangible: close relationships with customers and supplies
Human: Figure 3 shows that the corporate R&D team consists of 43 PhD holders out of 973 team members. In addition, SCG Cement's employees have sound knowledge, skills and abilities because the company has high standard recruitment policies such as 3.75 GPA for Master's Degree holders.
Capability
Distribution: Effective use of logistic management and product distribution channel
HR: Core competency development, transformation to the innovative organization
Manufacturing: Lean and green manufacturing by using alternative energy for sustainability, it uses SCG Eco-Value for eco process and eco product.
R&D: Innovation on High Value Added (HVA) products such as Tiger Mortar: Color Render Cement
Core Competencies
Distribution as explained above
R&D: Besides the corporate R&D, SCG Cement also has the central lab called Siam Research and Innovation (SRI) at Thailand Science Park for all Portland cements and raw materials used in the cement. So, Siam Cement has tried to expand its product lines from traditional cements to HVA cements.
II: Business Strategies
Matching or SWOT Analysis
Type of Business-level Strategies
As cement is a commodity product and fuel prices and energy prices are the main costs for cement production, SCG cement implements integrate cost leadership and product differentiation as shown on the value chain as follows.
This strategy allows SCG Cement to minimize production cost from technologies, economies of scale and learning effects, especially on fuels and energies and create values/ utility. Although cement prices is strictly controlled by the government, SCG can set the prices to the baseline because of its strong brand image and better quality on customers' perception. For example, the Department of the Internal Trade set the current price of one 50-kg bagged mixed cement at 125 baht. Based on the price availability from the Internet, SCG Cement quoted almost125 baht, whereas major competitors like SCCC quoted about120 baht and TPI Polene about 110 baht respectively. It means the company can be profitable despite surging fuel costs and energy costs; however, the competitors may choose the cost leadership strategy due to the community products. So, their profit margins should be very slim.
Cement is undifferentiated; customers are price sensitive and can switch to competitors' products easily. SCG Cement, as the pioneer and the market leader, has tried to reposition its cement branding to innovative and high quality products. Thus, the company has invested a big sum of investment on R&D, innovative organization, SCG Experience, Home Mart, etc. to emphasize customers on its superior products and services that are difficult for competitors to imitate. One example of the product innovation, known as a high value added product or HVA, is Tiger Mortar: Color Render Cement. This color cement is easy to use because it needs to mix with water only, so customers will save money from color painting.
In addition, SCG Cement can effectively communicate to its customers and stakeholders, known as stakeholder engagement, by using various kinds of media, especially advertisements and TV commercials. Currently, one TV commercial on SCG's superior cement quality is broadcasting daily, whereas it is rarely to find competitors' products on TV commercials due to the expensive advertising costs. SCG Cement can spend on advertising and media because it has a huge capital investment. Thus, this is another way for the company to increase the value and its product differentiation on the perception of customers.
Industry Analysis
Industry
Market
Market Segment
Product Segment
Geographic Market
Building and construction
Cement
B2G, B2B, B2C
Grey cement, Ready-mixed concrete, White cement, Dry mortar, Refractory products
Central, North, South, East, West, Northeastern
Building materials
B2G, B2B, B2C
Roof tiles, Ceramic tiles, Paving blocks, Sanitary wares, , Facets, Ceiling & walls
Central, North, South, East, West, Northeastern
Industry Life Cycle
Cement industry in Thailand is in the Shakeout stage life cycle that the demand reaches saturation, and the rivalries intensify with the emergence of excess productive capacity. Table 1 shows that within 10 years, there were three new entrants from Thai Pride Cement, Cemex and Samukkee Cement. From Figure 5 cement capacity and demand by country, it can be estimated the proportion of cement export from Thailand is more than 40% due to the excessive production capacity, which is related to the shakeout stage.
Attack Strategies
SCG Cement uses the first mover strategy as follows.
Characteristics
It has high spending on R&D (See figure 4) with three laboratories: corporate R&D in Bangkok, cement central lab known Siam Research and Innovation (SRI) in Pathumthani province, and laboratories at each plant site. This allows SCG Cement to produce new cement high value added products. The company can develop and market the innovation itself as it has enough resources. Thus, it is difficult for competitors to follow because it is capital intensive.
Under the umbrella of SCG Group, the company has liquid resources that can be allocated to support the innovation.
SCG Competitive Advantages: According to customers' perception, the brand image of SCG Cement is very good with innovation and quality (from media and advertising). The company can establish significant brand loyalty and achieve economies of scale and learning effects to produce products with low costs, but good quality.
Examples of First Mover's Attack Strategies
Waste heat recovery: SCG Cement was the first cement company in Thailand that initiated to use the heat from the production process from stream turbines for generating electricity in 2006. Then in 2008, SCCC decided to invest in the waste-heat power generation at its plant. Currently, there are only two cement manufacturers who use the waste heat recovery.
Premium cement: In February 2003, SCG Cement launched a new product under the brand Tiger Masonry Cement, a premium cement that is specially formulated for plastering and bricklaying works. However, one month later (in March 2003), SCCC launched INSEE Tong Masonry Cement as the first follower.
SCG Cement Business and Corporate Strategies
Business Strategies: The company has set the business strategies as follows:
Old Strategies
New Strategies
Territory
Domestic
ASEAN
Product/ Service
Commodity-based
High value added (HVA)
Focus
Cost leadership
Integrated CL/ Differentiation: Brand, Technology, Initiative
SCG Cement aims to expand its business to ASEAN countries due to the limited demand in Thailand and opportunities in emerging markets such as Laos, Myanmar, Cambodia, the Philippines, Singapore (See Figure 5). In terms of a product, although cement is the commodity-based product, and it is difficult to differentiate the products, SCG, as a first mover, has tried to value/ utility by using technologies and innovations such as cement strength, color cement and so on. By doing so, it enables the company to shift the focus from the cost leadership to the integrated one with the highlight of its brand, technology and initiatives.
Competitive Strategies
Strategic plant location: strategically located production facilities, so it can reduce transportation costs.
Unmatched distribution: more than 500 experienced dealers nationwide
Strong image: well established corporate and brand image
Regional player: established sales and marketing operations in neighboring countries
Globally competitive cost: one of the lowest cost producers in the world
GO Regional Strategy: To meet the new strategy to serve the ASEAN countries, SCG Cement does the following:
Export to study market
Set up the operation after the established market
Study market to understand the customer's need
Build Trust with local partners/ Build Brand with customers
Increase competitiveness with CRM, R&D, etc.
Human resource preparation
Sustainable Development and Corporate Governance
Strategic Alliances: SCG Cement chose Majority Joint Venture according to the host country's regulations; however the company still holds the majority share.
Camdodia: Kampot Co., Ltd. is the first cement company in Cambodia as well as the first SCG's cement plant in overseas. It is an equity-based collaboration between SCG (90% share) Cement and Khaou Chuly Group (10% share), Cambodia's top construction and engineering firm. It was established in 2005 with production capacity 950,000 tons/year.
Indonesia: In 2010, SCG Cement (95% share) established the joint venture with a local company (5% share). It is the second SCG's cement plant. The plant construction was expected to be completed by 2013.
As SCG Cement chose Majority Joint Venture, the level of control is high, and it can avoid opportunistic problems.
Appendix
Table 1: Cement Manufacturers in Thailand
Company Name
Year of Establishment
No. of Years
No. of Plant Locations
Region
No. of Kilns
Capacity (Tons/Years)
%
SCG Cement
1913
98
5
Central (3), North (1), South (1)
14
23,232,000
41.23
Siam City Cement
1969
42
1
Central
6
14,784,000
26.24
TPI Polene
1990
21
1
Central
3
9,074,000
16.1
Asia Cement
1989
22
1
Central
2
4,992,000
8.86
Jalaprathan Cement
1956
55
2
Central (1), West (1)
3
14,066,000
4.16
Thai Pride Cement
2003
8
1
Central
1
960,000
1.7
Cemex
2006
5
1
Central
2
844,800
1.5
Samukkee Cement
2002
9
1
Northeast
1
122,880
0.22
Source: Thai Cement Manufacturer Association
Figure 1: Cement Capacity Production in Thailand in 2010
Source: Thai Cement Manufacturer Association
Figure 2: Domestic Cement Industry in 2010
Source: Thai Cement Manufacturer Association
Figure 3: SCG Cement Exports in 2010
Source: Siam Cement Group
Figure 4: Corporate R&D Spending
Source: Siam Cement Group
Figure 5: Cement Demand and Capacity by Country in 2003
Source: ASEAN Cement Producers'AMITY Club Cement Summary (2003 Prospect)
