UNIVERSITI PUTRA MALAYSIA

A CORPORATE STRATEGY FOR AIROD SENDIRIAN BERHAD (1988 - 1994)

Muhamed Ghazali bin Taib

FEP 1988 1

It is hereby certified that we have read this project entitled 'Syarikat Airod Sdn. Bhd. by Muhamed Ghazali bin Taib, and in our opinion it is satisfactory in terms of the scope, quality, and presentation as partial fulfilment of the requirements for the degree of Master of Business Administration

��t-. . . ... . . . .. . . . . . . . . . .

MOHD. ARIFF HUSSEIN, Ph.D. Professor/Dean

Faculty of Economics and Management Universiti Pertanian Malaysia (Chairman Board of Examiners)

�---

�-' ZAINAL ABIDIN KIDAM Associate Professor

Faculty of Economics and Management Universiti Pertanian Malaysia

(First Reader/Supervisor)

/W. LU .. . . . . . . . . . . . . . . . . . . .

MD. ZABID ABDUL RASHID Faculty of Economics and Management

Universiti Pertanian Malaysia (Second Reader)

This thesis was submitted to the Senate of Universiti Pertanian Malaysia and was accepted as partial fulfilment of the requirements for the Degree of Master of Business Administration •

Date: 2 t J�. Q t t88 . ��;&f . . � .. . . . SULAlMAN M. YASSIN, Ph.D. Professor and Dean of Graduate Studies

A CORPORATE STRATEGY FOR

AIROO SENOIRIAN BERHAO ( 1 9 8 8 - 1 9 9 �)

by

Muhamed Ghazali bin Taib

A case study submitted in partial fulfilment of the requirements for the degree of Master of

BUsiness Administration 1n the Faculty of Economics and Management, Universiti Pertanian Malaysia.

April 19 8 8

PREFACE

The privatization of the RMAF Aircraft Overhaul Depot

(AIROD) in 1985 into a commercial, profit-oriented organiza­

tion called AIROD Sendlrian Berhad (ASB) have seen a reduc­

tion of personnel from 1,412 to an initial workforce of 283.

This gives rise to much speculation on the future perform­

ance of the young aerospace industry in this country. This

case study attempts to analyze the performance of this

company from the time it was privatized to date.

One of the long-term goals of this company is to esta­

blish itself as the leading centre of aeronautical excel­

lence in the region. It Is interesting to see how well the

company can achieve the stated objective with strong compe­

tition from a string of aerospace maintenance companies in

this region.

In the course of completing this report, the writer had

encountered several constraints. One of the major con­

straints is that most of the data are confidential in

nature. Thus, there were some difficulties in obtaining

essential data. Further, most of the people interviewed were

quite hostile or suspicious of the writer's intention. Lack

of industrial data is another constraining factor, especial­

ly information on key competitors. Due to confidentiality,

the names and figures in this report have been deliberately

disguised as long as it does not distort the true picture.

ii

The text of this report is organized into five (5)

chapters. Chapter 1 introduces the facts about the company's

background and the eX�Enal environment in which the company

is operating. Chapter 2 discusses the internal and external

environmental factors aimed at highlighting the strengths,

weaknesses, opportunitles, and threats. With this, the com­

pany can identify its strengths and improve on its weakness­

es and capitalize on the opportunities as well as minimize

the possible threats. Chapter 3 covers the review of alter­

native optionsl solutions available to the company. Chapter

4 suggests the recommendation and outlines the implementa­

tion plan. This is followed by the suggestion on the proper

review and control method to ensure the successful strategy

implementation. Chapter 5 summarizes the report.

The writer is indebted to Brigadier General (Rtd) Oatuk

Arman bin Awang, the General Kaftaq� of ASS for allowing him

to conduct a case study of the company and for granting an

interview on the subject. The writer is also indebted to

Lieutenant General (Rtd) Datuk Mohamed bin Talib, the

President of AIM for his kind assistance and suggestion on

the conduct of this case study. The writer also wants to

acknowledge the valuable assistance of the Chairman of the

Board of Directors, Datuk Mohamed Azmi bin Talib in

generating ideas on the prospects and problems faced by ASB.

Profesor Madya Haji Zainal Abidin bin Kidam deserves the

iil

writer's praise in offering excellent aovice and supervision

1n completlnq t � case study. The writer's overriding debt

1s to his wife, Rohaya, who provided him the time, support,

and inspiration needed to complete this case study.

iv

TABLE OF CONTENTS

PREFACE

Page

11

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

LIST OF APPENDICES

ABSTRACT

v

x

xii

xiii

xiv

CHAPTER 1 INTRODUCTION 1

Board Chairman's Dilemma . 1

Aerospace Industry In Malaysia 2

The Beginning 2

Present State of Industry 4

The Formation of Aerospace Industries

Malaysia Sdn Bhd 8

Aerospace Industry in Other Countries 9

Singapore's Aerospace Industry 9

Indonesia's Aerospace Industry 13

Major Aerospace Companies in the Region 13

Company's Background 14

History 14

Organization Structure 14

The Present AIROD Sdn Bhd 14

Joint Venture Agreement 14

Board of Directors 16

Principal Activities 17

v

Objectives

Near-term and Longer-term Goals

Organization structure

Strategic Planning

Financial Statement .

Pricing Council

Managing Director

General Manager

Engineering Department

Product Development Department

Production Control Department

Marketing Department

Quality Assurance Department

Administration and Human Resources

Department

Finance Department

Basic Issues

CHAPTER 2 ANALYSIS

17

18

18

19

26

26

31

31

32

35

36

37

40

41

43

44

45

General 45

Problem statement 45

Symptoms 45

Problems 47

Case Analysis Method 48

Company's Mission 49

Principal Activities Rather than Mission 49

Aim Rather then Mission 49

vi

Clear Mission statement 50

Review of the Company's strategies and Goals 50

Definition of strategy 50

Past strategy 51

Present Strategy 51

Identification of Goals 57

Assessment of Strategic Capabilities 58

Financial Performance 58

Company Capability 60

Classifying Capabilities . 60

Listing Key Vulnerability 65

The Broad Environment Analysis 66

Economlc sector 66

Political Sector 68

Technological Sector 70

Competitive Environment Analysis 71

Competitive Forces 71

Suppliers . 71

Buyers 73

Potential Entrants 78

Substitutes 79

Key Competitors 79

SWOT Analysis 80

General 80

Strengths . 80

Weaknesses 80

Opportunlties 81

vii

Threats 82

CHAPTER 3 STATEMENT AND EVALUATION OF ALTERNATIVES 84

statement of Alternatives 84

Evaluation of Alternatives 85

Improvement of Company's Capabilities 85

Mission Statement 85

Goals 86

Restructuring of Organization . 88

Strategic Management 90

Functional Area Standard of Excellence 92

Marketing Management 95

Financial Management . 101

Human Resource Development . 103

Acquisition of Civil Work Certification 105

In Search of New Capabilities . . 105

Upgrading of A-4 Aircraft . 106

Adding New Lines of Business . 109

CHAPTER 4 RECOMMENDATIONS AND IMPLEMENTATION 112

General

Recommendations

Summary of Management Key Goals

Summary of Strategies

Impact of Recommendation .

Implementation .

Action Plan

Review and Control Method

viii

· 112

· 112

· 112

· 114

· 119

· 120

· 120

· 123

CHAPTER 5 CONCLUSION

ENDNOTES AND REFERENCES

APPENDICES

ix

. 126

128-130

131-152

LIST OF TABLES

Page I. AIROD's Organization structure (Before

Privatization) 5

19 II .

I 11.

ASS'S Organization Structure

Organization structure of

Engineering Department 34

IV. Organization structure of Production

Control Department 36

V. Organization Structure of Marketing Department 39

VI. Organization structure of Quality Assurance

Department 41

VII. Organization Structure of Administration

and Human Resources Department 4 2

43 VIII.

IX.

Organization Structure of Finance Department

Common Problems in Malaysian Manufacturing

Industries 49

X. Identifying strategic Alternatives that

XI.

XII.

XII I.

XIV.

XV.

XVI.

VIr.

Fit a Firm's Market Circumstances 52

Marketing Strategy and Implementation 55

ASS Capablllty Profile 61-62

Action Capability Relationships 64

Gross Domestic Product by Sectors, 1983 - 1986 68

Prices of Selected Commodlties, 1983 - 1986 69

Gross Domestic Product at Current

Prices, 1983 - 1986

Proposed Organization Structure

x

69

89

XVIII.

XIX.

The strategic Management Process

Ana l ysis o f Competit o r Mar ket St reng ths

xl

9 1

10 1

1.

2.

3.

LIST OF FIGURES

Comparative Labor Rates

Balance Sheet as at 31 December 1986

Profit and Loss Account Year Ended

31 December 1986

4. statement of Financial Position Year Ended

31 December 1986

5. Unaudited Profit and Loss Account Ending

31 October 1987

6.

7 .

Annual Manufacturing Workload (LASI's

Responsibility)

Sales and Profit Goals of ASB (1988 - 1994)

xii

Page

1 2

2 7

2 8

2 9

30

39

120

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

ll.

12.

13.

14.

LIST OF APPENDICES

RMAF Current anu Projected Aircraft Inventory

Malaysia Airlines System (MAS) Maintenance

Capability

The Primary Objectives of Aerospace Industries

Malaysia Sdn Bhd

Major Aerospace Companies in the Region

AIROD's Objectives

Near-term and Longer-term Goals of ASB

Budgeted Statement of Operations (1985 - 1994)

Notes on Balance Sheet

Notes on Profit and Loss Account

Financial Ratio Analysis

MAS Current and Projected Aircraft Inventory

Domestic Aircraft Operators

Regional Air Forces Assets

Regional Airlines

15. Criteria for the Evaluation of

Corporate Strategy

xlii

Page

131

132

133

134

135

137

140

141

143

146

147

148

149

151

152

ABSTRACT

AIROD Sendlrian Berhad (ASB) was incorporated in early

1985 as a business firm,

to be privatlzed. Its

providing overhaul and

being the first Government project

principal activities range from

repair services of military and

commercial

components.

goals and

aircrafts and its related equipment and

ASB clearly set its short-term and long-term

are made known to all its emplQyees. Its

oLyanization structure is based on seven formal departments

under the overall direction of the Managing Director, an

expatriate from Lockheed Aircraft Services International

(LASI).

The main problems faced by this company are: its

inability to penetrate open market; high overhead costs; and

inadequate skill and expertise to keep in pace with the

rapidly changing environment of aircraft maintenance

services.

The case is analyzed using the framework suggested by

Leslie Rue and �hyllls Holland. Thus, the following are

analyzed: mission, strategies and objectives, strategic

capabilities, the broad environment, the competitive

environment, and the SWOT analysis.

The alternative options/ solutions to overcome the

stated problems are presented in two-fold: the improvement

of current capabilities, and the search for new

xiv

capabilities. In the former, the options avallable are to:

redefine mission statement,

restructure the organization,

set functional area standard

refine corporate goals,

adopt strategic management,

of excellence, improve

marketing and financial management, develop human resource,

and acquire civil work certification. In the latter

alternative, the options available are to: upgrade A-4

aircraft, and add new lines of business which include

manufacturing aircraft parts and flight data recorders,

developing capability in ground communication systems,

servicing of cathodic protection device, undertaking sub­

contract work, negotiating with aircraft manuf acturers to

become the licensed assembler and/ or manuf acturer of

aircraft and aircraft parts, and establishing the

Aeronautical Training School.

In recommendation, the summary of strategies to be

adopted are presented according to short-term and long-term

implementation. Then the--�.pact of these strategies are

summarized by proposing the two management key goals: to

expand sales at a growth rate of 1 0% per year, and to

achieve an annual net proflt margin of 1 0\. Then the

projected sales and profit f or the perlod 1 9 8 8 to 1 9 9 4 is

proposed based on the actual results of the past three years

of operations. The implementation plan and review and

control method are then presented to allow the company to

translate the strategies into plan and action; and to review

xv

the plan when environmental changes affect the attainment of

goals. The three types of control techniques proposed are:

stz ategic control,

control.

management contzol, and operational

The newly formulated corporate goals for the next seven

years ( 1 9 8 8 - 1 9 9 4) will hopefully bring ASB towards another

phase of organizational development.

xvi

CHAPTER 1: INTRODUCTION

BOARD CHAIRMAN'S DILEMMA

Immediately after the interim board meeting of AIROD

Sdn Bhd (ASB) to study the performance of the company up to

October 1967, Datuk Mohamed Azmi bin T�lib, the Chairman of

the Board of Directors lamented that something was not right

with the overall performance of the company. He commented to

another director who represented Malaysia Airline System,

Datuk Hamid Rahman that: " ... the company is not growing." He

further commented that at present money are coming in from

basically one source, i.e. Ministry of Defense. "How can a

company grow when our customer is only onel What happened to

the joint venture agreementl," he further emphasized.

Another director representing United Motor Works, Datuk

Thomas Chia suggested that a consultancy firm be engaged to

study the problems that the company is facing and to look

into the long-term--iaplication of the present company's

performance. In addition, he suggested that the fir. be

asked to look into the aerospace industry as a whole, with

an emphasis on this region. Datuk Azmi fully supported the

proposal and agreed to bring the matter up in the next board

meeting scheduled in January 1988.

This case is not designed to illustrate either correct or incorrect handling of administrative problems.

1

On 11 January 1988 board meeting, Datuk Azmi suggested

to the board members that there is a real need to study the

company performance in view of the unexpected performance so

far. He proposed that a consultancy firm be engaged and

commisioned to carry out a study on the ovt£all performance

and to suggest possible solutions to overcome the problems.

Having discussed this matter at length, the board then

agreed on the proposal. The board then directed the Managing

Director to engage a firm to carry out a study with a view

to recommend a new corporate strategy for the company for

the current period until 1 9 9 4 , and to submit their report by

the second week of April 1988.

When the officer from HGT Consult, the consultancy firm

engaged by the company to do a study, .first approached Datuk

Azmi, he began by tracing the beginning of aerospace

industry in Malaysia.

AEROSPACE INDUSTRY IN HALAYSIA

THE BEGINNING

Datuk Azmi began the interview by saying, "As a de­

veloping country embarking on industrialization for greater

economic resilience, Malaysia 1s not unique in her aspira­

tions. All developing countries whose economies are heavily

dependent on primary products, are particularly aware of the

urgent need for diversification into technology-based

2

industrIes. The aerospace industry by virtue of the wIde­

ranging tech nologies inv olved, h as a great potential to meet

the economi c and i ndustrial needs of a developi ng country.

Faced wi th the uncerta inties of price f lu ctua tions of

pri mary commodi ti es, Malaysi a ha s placed empha sis on i ndus­

trialization ba sed on the twin-prong strategi es �f priv ati­

za ti on of government-owned i nst i t u t i ons and i ncrea si ng i n­

vestment i n la unching of h ea v y indu st ries. Wh ile t h ere h as

b een mu ch speculati on on t he economi c v i a b i l i t y of such

ventu res, it is prematu re to a ssess th ei r su ccess at th e

present sta ge i n v i ew of t h e current economi c sl owdown tha t

th e cou ntry is facing. Th us, such government emph asis h as

neverth eless gi v en necessary i mpet us to t he est ab l i sh ment of

an a erospace industry in Malaysia."

Dat u k Azmi mentioned tha t t h e dev el opment of av i a t i on

i ndustry i n th i s country can be tra ced ba ck to the formati on

of M al a yan Ai rways L i mi ted i n 194 7 , t h en Mal a ysi a -Si nga pore

Ai rl i nes (M SA), u nt i l M al aysian and Si ngaporean government s

declded to split MBA to form t h ei r respect i v e na t i onal

ai rl i nes, na mely M al aysia Airl ine System (MAS) a nd Si ngapore

I nt ernat i onal A i rline (SI A) . I n t h e di v i si on of asset s, most

of t h e f ixed assets inclu ding th e tech ni ca l fa ciliti es lo­

cated i n Singapo�e h ad to b e al l ocat ed to Si ngapore since

t h ey were in t h e i sla nd sta te. Th is move h ad su bsequently

proved to prov i de a slgni fi cant competi t i ve adva ntage to

Si ngapore's aviati on and aerospa ce indu stri es ov er t h at of

3

Ma la ysia .

He furth er explained th at the Roy al Ma lay sian Air Forc e

(RMAF) c a me int o t h e forefront wh en B rit ish dec ided to

with draw th eir forc es from th e Far East in early sev enties.

R apid Mala ysianiza tion of th e a ir forc e t ook pla c e wh en new

bases and maintenanc e facilities were establish ed u p to th e

sec ond line level. A sig nific a nt dev elopment in t h e R KAF

t ook plac e 1n 1972 when the projec t to set u p a n a irc raft

overh au l depot wa s a pproved under th e Sec ond Ha la ysia Pla n.

PR ESENT STATE O F I N DU STR Y

Oa tu k Az mi felt that apart from Aerospac e I ndustries

Malaysia (AI M) and it s newly priva t ized subsidia ry ASB, t he

aerospa c e indu st ry in Ma laysia c onsists basic ally of th e

foll owing bodies a nd t h eir ma int ena nc e fac il it ies:

a . R oyal Malaysian Air Forc e .

b. Ma la ysia Airline Sy st em.

c . Ma lay sian H elic opter Servic es.

d. Pelangi A i r.

e. R oyal Malaysian Polic e.

f. R oya l Ma laysian Na v y.

g . Oth er airc raft opera tors.

h . Ma int ena nc e and overhaul c ompa nies.

The aerospa c e indu st ry enc ompasses qu it e a wide field

of a c t ivit ies ra ng ing from air t ra nsport t o spac e resea rc h

4

and exploration. However he felt that at present, in the

Ma l a y sia n c on t ext , it

research and exploration.

is n ot rea l ist ic t o inc l ud e spa ce

He then discussed the development

of a erospac e ind u st ry in Ma l a ysia , begin n in g wit h t h e RMAF,

t h en HAS , Ma l a ysia H el ic op t er S erv ic es, a n d ot h er a irc ra f t

opera t ors.

Roya l Ma l a ysia n Air Forc e. Wit h t ot a l st rengt h of

a bou t 10,000 personnel a nd a n a sset of over 2 5 0 a irc ra ft ,

the RMAF is a rel a t iv el y young a ir forc e . Wit h t h e priva t i­

za t ion of it s overha u l d epot in 198 5 , it s engin eering ca pa ­

bilities a re n ow ma in l y c on f in ed t o the first and sec ond

lin e ma in t ena n c e of it s a irc ra ft . S ome l imit ed ca pa bil it ies

for the salvag e and repa ir of aircraft have been retained.

The R M AF p resent and projec t ed a irc ra ft in vent ory is sh own

a s App en dix 1 . Oa t u k Azmi added "Th ere is n o rel ia b l e

sourc e f or t h e ma in t ena n c e c ost s of it s a irc ra f t . H owever,

it s a n n ua l c ost s in servic in g t h e oversea s overha u l

c on t ra c t s is est imat ed t o be a round $ 5 0 t o $70 mil l ion." The

t ec h n ica l work f orce of a bou t 5 ,000 person n e l is we l l trained

wit h it s t echnica l t ra in in g cond uc t ed bot h l oca l l y and ov er­

sea s. Th e RHAF In st it u t e of Tec h n ol ogy in Kin ra ra ha s a

ca pa c it y t o t ra in a bout 3 0 0 t ec h n ic ia n s a yea r, t h ough t his

ma y be supplemented by training facilities in Australia,

Un it ed Kingd om, a nd t he Un it ed sta t es of America .

Ma la ysia Airl in e System . S inc e it s inc orp ora t ion in

197 1 a s t h e na t iona l ca rrier, HAS ha s dev el oped a n d expanded

5

its assets and facilities to become a viable international

airline . With a paid-up capital of $500 million, an asset of

38 aircraft and a total employment of over 10,000 personnel,

it operates on both domestic and international routes with a

credible average load factor of 70 \ . with heavy investments

In its main base in Subang, it has developed and expanded

its engineering facilities and capabilities to include com­

plete airframe maintenance on its fleet except D-checks of

its wide-bodied aircraft. Some of the maintenance facilities

recently completed include the engine and component work­

shop, engine test cell rated up to 100,000 pounds thrust and

the $ 6 8 million hangar workshop complex capable of doing

corrosion control inspection program (CCIP). Its current

maintenance capabilities are listed in Appendix 2. Its tech­

nical workforce consists of about 2,000 aircraft engineers

and technicians including about 50 professional engineers

and 300 licensed aircraft engineers (LAEs). Besides conduct­

Ing technical courses on all its aircraft types, its train­

ing school in Subang has a capacity to train about 150

artisans, apprentice engineers and cadet flight engineers at

any one time.

Malaysian Helicopter Services. The Malaysian Heli-

copter Services (HHS) was launched in early 1983, and

currently operates a total of twelve helicopters and three

fixed wing aircraft mainly to provide air transport for the

off-shore oil drilling facilities. It employs a total of

6