SWOT Analysis Of Hai O

In the healthcare business environment today, organizations are facing a diversity of competitive and changing environmental demands. This situation requires a serious strategic thinking as these demands occurs according to actual circumstances, unlike as always illustrated in a lot of business textbooks. There are four main characters in this market; a buyer, who obtain services from a supplier, whose fees are paid by a provider (health plan), who obtain insurance premium from an employer.

Each of these resulting submarkets has a diverse pricing unit of its own. Furthermore, the seller’s price will determine the purchaser’s buying behavior in every submarket, which then will determine the interaction among other characteristics of the healthcare structure. The combination of market forces, environmental demands, and system interactions suggests that all healthcare companies must think extra carefully about the opportunities and challenges that they are presented with, and combine that evaluation with a study of their capability to develop suitable strategic reactions.

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A strategy formulation usually comprises of a SWOT analysis or an evaluation of the internal strengths and weaknesses (SW) coupled with analysis on environmental opportunities and threats (OT). As an instrument for organizations to review the industry and to build up approaches and strategies to stay competitive, it is an easy method to focus characteristics of the organizations and business segment and to systematize the results to assess the present situation of the business, potential outlook and the economic environment. A SWOT analysis helps a critical thinking to improve objectives and strategic plan. It has been adopted as a business concept since back in the 1960s due to its proven effectiveness.

However a SWOT analysis can be subjective and concise. Over analysis and generalizations can be a setback as it may limit the significance in organizing a strategic perspective. The aspects in SWOT analysis must replicate the real internal position of a business and its outlook, as well as external forces within the industry in order to be prepared with an action plan. Porter’s 5 Forces Analysis is complementary tool support information in a SWOT analysis.

Internal Factor – Strengths

As a big player in the Malaysian market which comprise of Bumiputra domination, Hai-O has a very strong MLM structure that suited the Bumiputra market. Nearly 95% of Hai-O’s agency force comprises of the Bumiputra ethnic group (mainly women), which predominantly targets the Bumiputra population segment. Targeting Bumiputra population has been the key growth driver for its MLM division over the last 6 to 7 years. This is largely attributed to its consumables traditional medicines being Halal certified as well as the easy funding available among Bumiputra, where they are (especially civil servants) are eligible for consumer loan financing from a cooperative bank, known as Bank Rakyat for the purchase of its higher valued products. Consequently, Hai-O does away with bearing the cost of easy financing schemes while all purchases are on cash terms.

Hai-O’s MLM division is a growing active agency force, remunerated by a class leading reward scheme. Its generous commission scheme of 65% as compared to market average of 40-60% is deemed the most attractive amongst MLM companies in the country. With a strong payout and continuous focus on training and development, Hai-O has the strength to retain and continue to grow with the help of its MLM agency force.

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Hai-O introduces new products every year in consequent to the strong distribution force. The management has guided for 1 to 2 new products to be introduced per annum in order to spur growth for the MLM division. Its infamous water purifiers under the high-end Bio Aura range (purifying water while maintaining minerals) contributed relatively high revenue. Although the MLM division has a huge array of consumable and non-consumable products, it is highly common that a few key products account for bulk of revenue. This is evident in Amway (Nutralite; nutrition & wellness supplements) and Artistry (skincare & cosmetics), CNI (Ginseng coffee), Zhulian (jewellery and nutritional) and Liqua Health.

Another important strength of the Group is having its own pharmaceutical manufacturing capacity. This creates the opportunity to position its products at a very competitive price range. The Group is also enjoying margin enhancement as its beauty products, water filters, Pu-er tea command high margin and high revenue growth. Easy access to its products is also seen as strength to the Group. Aside from MLM agents, they are also available at Hai-O’s 54 outlets and wholesale across Malaysia.

The Group’s strong foothold in China is also strength to the company. It offers the opportunity to outsource new products directly, for example the traditional medicine, teas and herbal products. Other than the fact that the Group is based on an altruistic socialist trait which has motivated its MLM members to sell harder and recruit more members, Hai-O’s 34 years of experience in traditional medicine industry is a definite strength for the company to stay resilient in the market.

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Internal Factor – Weaknesses

Although riding in a very promising basis, Hai-O does face a few challenges. One of it is the uninformed and negative scepticisms for the traditional medicine. Speculation on the negative side effects of the traditional medicine and healthcare products surely cause a stir in the consumer confidence. As this might not be a huge hindrance to the business, Hai-O definitely is taking cautions in every step of the way.

Another challenge is lacking new exciting products. TCM products are homogenous and often lack differentiation. As a result the Group tried to diversify through its principal products most notably, its inner beauty wear and water filters which generated more than 50% of the Group revenue. These could be severely affected by any future changes in consumer preference and demand. Likewise the lack of either saleable or new products could also put a dent to the growth rates.

External Factor – Opportunities

Malaysia’s traditional and herbal industry is growing at 15% to 20%, driven by the demands by local and international consumers. The country is set to lead the herbal market with its rich biological heritage, cultural background and trade links. As government sees the potential of further development in herbal market, numerous incentives such as research grants are being offered to local companies for them to involve in herbal market and expand their R&D activities.

Being one of the leading manufacturing companies in traditional medicine, Hai-O certainly has an opportunity to take advantage of upon this growth. Aside from dominating the local market, the Group also sees opportunity to expand into new overseas market. Given that its products have the Halal certification, some of them are able to be exported to the Middle East market. Recently, Hai-O indicated that it would tap the China and Hong Kong markets, where it intends to export its own local brand products such as Tongkat Ali Coffee and bird’s nest. In addition, Hai-O also plans to introduce a vitamin supplement known as ‘Tri-E’ (a form of vitamin E capsule) for which it has been granted exclusive sales and distribution rights by Golden Hope Plantations Bhd unit of Golden Hope Bioganic Sdn Bhd, the registered user for the product in Malaysia. It would involve only a minimal capital outlays and operating costs due to the ability to tap into its existing suppliers’ distribution channels.

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Hai-O also replicated its successful MLM business model in Indonesia. This is a result of the market potential over there being nearly 10 times that of Malaysia due to its huge population, and furthermore they share similar demographics and taste. This adds high opportunity for the Group’s growth.

The Group also sees opportunity in new innovative products to enhance group earnings. The Group is in a joint venture with two Chinese TCM clinic services companies namely Tong Ren Tang which is listed in Hong Kong and Shanghai and Sanjiu Enterprise Group, listed in Hong Kong and Shenzhen to provide Chinese herbal medicines, acupuncture and massage (often known as ‘Qigong’) treatment. Despite minimal revenue contribution from this division, the JVs have seen to widen Hai-O’s reach to end users while creating greater brand and TCM recognition.

External Factor – Threats

Similar to any other industry, organizations in the traditional medicine business also face a few threats. Since Malaysia is a free market, the intense price competition among the participants will affect the Group’s profit margins. Thus, the revenue growth will be affected. The country’s free market also attracts new entries which increase competitions which as a result will present bargaining power to the consumers.

Among other threats available would be product loses among consumers as some new market entries would offer substitute products. Economic downturn and negative consumer sentiments is always a tough threat to the traditional medicine sector. Weaker ringgit also may impact earnings for the Group as its imported products account for 60-70% of its total group purchases.

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Summary of SWOT Analysis

Based on the analysis, below is the summary of the SWOT analysis:

Table 7: Summary of SWOT Analysis on Hai-O Enterprise Berhad

INTERNAL

Factors

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Concerns

Strength

Strong MLM marketing structure that suited the Bumiputra market

Own pharmaceutical manufacturing capacity

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Easy access to products

Strong foothold in China

Market leader in TCM

Weakness

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Negative side effect of traditional medication

Lack of new exciting products

Future changes in consumer preference and demand

will impact inventory

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EXTERNAL

Factors

Concerns

Opportunity

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Growing demands for traditional and herbal medicine

Government incentives and research grants for R&D

Expansion into new overseas markets

New innovative products to enhance group earnings

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Threat

New market entrance

Product loses among consumers

Economic downturn and negative consumer sentiments

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Weaker RM impact earnings as Hai-O products are 60-70% imported

SWOT Internal-External (IE) Matrix

To further evaluate the current strategic condition of Hai-O Group and its strategies in the traditional medicine business, the findings in the SWOT analysis is put into the Internal-External (IE) Matrix. The matrix will combined all the internal and external factors into one suggestive model.

Table 8: Internal-External (IE) Matrix of Hai-O Enterprise Berhad

Strength

W

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(%)

R

WS

Weakness

W

(%)

R

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WS

Opportunity

W

(%)

R

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WS

Threats

W

(%)

R

WS

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1. Strong MLM marketing structure in Bumiputra market

20

3

0.6

1. Negative side effect of traditional medication

15

1

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0.15

1. Growing demands for traditional and herbal medicine

20

4

0.8

1. New market entrance

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5

2

0.1

2. Own pharmaceutical manufacturing capacity

25

4

1

2. Lack of new exciting products

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5

2

0.1

2. Government incentives and grants for R&D

10

3

0.3

2. Product loses among consumer

5

2

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0.1

3. Easy access to products

5

3

0.15

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3. Future changes in consumer preference impact inventory

5

1

0.05

3. Expansion into new overseas markets

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15

3

0.45

3.Economic downturn and negative consumer sentiment

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20

1

0.2

4. Strong foothold in China

20

4

0.8

4. New innovative products

5

2

0.1

4. Weaker ringgit impact earnings

20

1

0.2

5. Market leader in TCM

5

3

0.15

Total Internal Factors (IFE)

100

3

Total External Factors (EFE)

100

2.25

Weights (W) are industry based (0% = least important, 100% = most important)

Ratings (R) are company based (4 = major strengths, 3 = minor strength, 2 = minor weakness, 1 = major weakness)

Ratings (R) of external factors (4 = superior response, 3 = above average response, 2 = average response, 1 = poor response)

IFE Score = 3 EFE Score = 2.25

From the IE scores on the Table 7 above, they can be mapped into the below IE matrix:

Figure 4: SWOT IE Matrix on Hai-O Enterprise Berhad

From Figure 4 above, one can see that the intersection between the IFE and EFE is right in the middle between cells no V and VI which suggests the “Hold and Maintain” strategy. Hai-O’s IFE score is at the lower part of average and its EFE score is in medium range. This suggests that while the current strategy can be considered adequate to drive the business, the Group still have to look into more intensive and tactical strategies as its external environment quite strongly influence the business. From marketing and product perspective, Hai-O Group should employ market penetration and product development strategies. The Group should also focus on market development, riding on the inviting fact that traditional medicine is getting more acceptance as a complementary medication. From the operational and corporate perspective, Hai-O should maintain its current backward integration where it’s having a good control of the relationships with the suppliers, while vertical integration can be among the strategies to consider since traditional medicine business often face regulation and tax issues, considering the fact that 60% to 70% of Hai-O’s purchases are imports. The Group is currently doing well with its joint venture strategy with esteemed companies in the TCM business, however the Group should have a good control over this strategy as it may dilute the image of Hai-O exclusivity.

Diagnosis of Hai-O Enterprise Berhad

Based on the previous discussion and findings on the SWOT Analysis, PEST Analysis, below is the general diagnosis of Hai-O Enterprise Berhad:

Hai-O has a very strong MLM structure that well-matched the Bumiputra market. Although its MLM division continues to be the key driver for its growth, Hai-O’s MLM division is still not a market leader in terms of the MLM industry, falling at the back of Amway (Malaysia) Holdings. However, marketing its products through MLM has been a phenomenal strategy as it has able Hai-O to break the barrier of being perceived as only Chinese consumable brand. Hai-O should continue to prosper its strategy in the MLM division in order to accelerate more earnings for the Group.

On the other hand, Hai-O’s strong foothold in China has helped the Group maintain its competitive pricing and has been one of the reasons that the Group able to open up its own manufacturing plant and pharmaceutical lab. Hai-O’s backward integration has managed a good control with its suppliers over the years and the business has benefited from the good relationship. The only setback would be that China has the bargaining power of supply and since Hai-O is in the TCM business, the Group has relatively next to zero option but to import its herbs, Ginseng and other raw products from China.

In terms of product offerings, the negative impact on the speculation that traditional medicine causes negative side effect could affect the Group’s business. As this matter of predicament is still very subjective, the Group has taken every necessary measure to lessen the threat. One of it was complying with the DCA and also the GMP code for its manufactured products. But taking the fact that TCM is homogenous products, such threat to one particular Chinese herb could relatively put a bad image for the Group’s products as a whole. Consequently, Hai-O should consider expanding its product mix.

Current market situation of the healthcare industry saw a growing demand on the traditional and herbal medicine. This presents a positive outlook for Hai-O business as it allows expansion to overseas market. Such expansion is possible taking into accounts the Group strong branding over the last 34 years and its technology capability to manufacture in high capacity and volume. However, competing with China manufacturers would be a challenge considering the fact that the numbers of TCM providers in China are overflowing.

Strong support from the Government in the R&D activities will help Hai-O’s future product innovation. This might help to stimulate new exciting products for its MLM division and retail division. However, Government incentives and grants will promote competition and new entries by a lot of market followers.

Hai-O’s strong reliant on imports from China is relatively bad in terms of currency. Weaker RM will affect the business earnings as evident in 2009 global economic recession where its year on year growth rate dropped to 16% from a high 97% in 2008.

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