Rise of E-tailing In Indonesia:

An External Analysis

Suryo Ariyanto Nugroho Middlesex University Business School

Rise of E-tailing in Indonesia: An External Analysis

Table of Content

Executive Summary .................................................................................2 Introduction ..............................................................................................3 Industry Overview....................................................................................4 Country Overview ....................................................................................5 Macro Environment Analysis .................................................................9 Industry Analysis....................................................................................11 Recommendations ..................................................................................15 Conclusion ...............................................................................................17 Reference .................................................................................................17

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 Rise of E-tailing in Indonesia: An External Analysis

Executive Summary
An external analysis is the main thing that the author wants to provide in this report. There are two aspects of external analysis that will be elaborated deeper, such as macro-economic and industry. Before going to the external analysis the author wants to present the overview of the e-tailing (retail e-commerce) and also the overview of Indonesia. For doing the analysis in the macro-economic aspect, PESTEL framework will be used and the analysis in the industry and sector will be done by Porters five forces framework. From the analysis, the author finds out that Indonesia has a lot of potential for e-tailing market, however on the other hand the regulation in Indonesia cannot support the rapid growth of e-tailing market there. By knowing those findings, a recommendation is made and it is divided into two, first is for new entrants that want to enter the industry and second is for the incumbents that have been in the industry. This report concludes with a recap from the overview of the industry, overview of the country, analysis, and strategic recommendation.

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Rise of E-tailing in Indonesia: An External Analysis

Introduction
The rapid growth of Internets development has made businesses can be done in many ways without any limitations and make the world seems like it is flat by just sitting in front of a computer. One of the businesses that are developing swiftly right now is ecommerce, basically e-commerce can enable or provide people with buy and sell activity, and it also allows supplier and customer to exchange information and product, the difference is this activity takes place in an interactive virtual environment rather than in a real world store or market place (Gunasekaran and Ngai 2005). Nowadays e-commerce has become one of the most promising businesses and its revenue is forecasted to reach $963 billion by 2013 (Rao 2011) and it has changed the rule of the game in retail industry by making it more convenient for the customers to shop only by the tip of their finger. In emerging market like Indonesia, e-commerce is also growing rapidly, with the estimated business value of $500 million in 2013 and expected exponential growth of 60 70 percent within the next three years (Ika 2013). Although the market size of Indonesia is only 0.023 percent of global market size, while global market size for ecommerce was estimated at roughly $2.2 trillion (Jay Lin 2008), it will not make Indonesian e-commerce market unattractive, in fact that condition makes Indonesia has a lot of room-for-growing for e-commerce business. This report aims to provide the insight of retail e-commerce (e-tailing) industry in Indonesia by exploring these areas: 1. What are the macro-environments and how can it affect the retail e-commerce (e-tailing) industry in Indonesia? 2. What will be the challenges to exist or to enter this industry? How to identify the competition within this e-commerce industry in Indonesia? 3. What will be the opportunities and threats to enter this industry? 4. How to survive or enter this industry in Indonesia?

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 Rise of E-tailing in Indonesia: An External Analysis For answering those questions above, some external environment analysis tools will be used. They are: 1. The PESTEL Framework to analyze the macro environment; 2. Porters five forces framework to analyze the industry and the competition

Industry Overview
E-commerce becomes one of the biggest industry sectors in the world because of its ability to do commercial transactions faster and cheaper than the other traditional retail business because it is done electronically through Internet (Gunasekaran and Ngai 2005). According to (Pentina and Hasty 2009) the rapid development of in-home broadband connectivity makes many customers can easily access Internet and prefer to shop online than going to the store to buy something, this condition is also enhanced by the improvement of search engine technology that make the customers can search for their needs in the internet easily and swiftly. (Mahadevan 2000) divided e-commerce into three broad structures, they are: 1. Portal This type of e-commerce provides their users with information about product and services that the users need and also they can funnel their users to a specific targeted website that has been in partnership with them. 2. Market Maker Basically market maker has the same role as portal in building a community of customers and/or community of suppliers for the information of the product and service. However the difference is market makers, instead of only funneling the consumers to the suppliers website, create a place where consumers and suppliers can do the buy / sell activity directly inside the market makers website and they also guarantee the security of the business transaction that is happened in their website, so both consumers and suppliers can get additional value of easier buying / selling process and also safety when it comes to payment.

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Rise of E-tailing in Indonesia: An External Analysis 3. Product / service providers (e-tailing) Product / service provider e-commerce (e-tailing) deals directly with the customers without any suppliers involvement. It is basically a retail business / business to consumers (B2C) inside the Internet. This type of e-commerce will be explained below. The growth of pure e-tailing companies nowadays has gone beyond imagination. It has even exceeded other industrys growth, which is why wherever there is a high growth there must be also a high competition within this industry. In order to survive and succeed in this highly competitive environment an e-tailer has to develop its own competitive advantage, a competitive advantage is the unique resources and core competencies that a company has in order to survive the competition and get a prosperity by winning the competition (Johnson, Whittington and Scholes 2011). Many successful e-tailers, like Amazon.com, have created their own competitive advantage and leading the competition in the e-commerce business.

Country Overview
Indonesia is a country in South East Asia that has the fourth largest population in the world. (Internet world stats 2012) reports that the number of population in 2013 has reached 243 Million people with the annual population growth of 5.9% and it is positioned below China (1.34 billion people), India (1.2 billion people), and United States (314 million people). Indonesia is ranked as number 16 in the actual top 20 global economies ranking with the Gross Domestic Products of $1.131 billion, and Indonesias economy also projected to climb up the ranking becoming number 8 in 2050 with the Gross Domestic Product of $6.346 billion (Hawksworth and Chan 2013).

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 Rise of E-tailing in Indonesia: An External Analysis Table 1. Actual and projected top 20 economies ranked based on GDP in PPP* terms

Source: (Hawksworth and Chan 2013) *PPP stands for Purchasing Power Parity

According to (Hawksworth and Chan 2013) Indonesia has a strong growth in its economy, it is reflected by an annual GDP growth of 4 - 5%. The analysis also shown that the strong economy growth of Indonesia is caused by Indonesias own momentum of growth and it is also affected by the Chinese huge economy. The momentum of growth in Indonesia is happened because Indonesia is experiencing a rapid growth in the middle-class people that has helped to transform Indonesias 6 M Middlesex University Business School

Rise of E-tailing in Indonesia: An External Analysis consumer market and business nowadays in Indonesia can expect to capitalize on both strong purchasing power and high labor skills of the middle class (Hodgson 2012).

Figure 1. Number of Households with Annual Disposable Income over US$10,000 (Constant) and Household Disposable Income Real Growth in Indonesia: 2006-2020

Source: (Hodgson 2012)

The above figure shows about the rise in consumer expenditure which means also the rise of the middle class, in 2006 there were only 6.6 million households that have an annual income of over $10.000, however in 2011 the number has increased to become 13.7 million households. And also in 2011, per household annual disposable income stood at Rp60.6 million (US$6,901), representing an average growth rate of 5.0% per year in real terms during 2006-2011 while consumer expenditure is also growing fast, at an average rate of 4.7% per year in real terms during 2006-2011 to reach Rp57.7 million (US$6,569) per household (Hodgson 2012).

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 Rise of E-tailing in Indonesia: An External Analysis

According to the research that has been done by (Utoyo and Ramda 2012), there are some facts about the e-commerce condition in Indonesia: 1. The total number of internet users in Indonesia is 55 million people, which means 23% of the population of Indonesia and with the annual growth of 3% for the people that go for online shopping 2. 25% of Internet users in Indonesia (it equals to 13.75 million Indonesian people) spend over 30 hours per week to access the internet 3. The e-commerce market size in Indonesia is $900 million and its only 0.7% of the total retail sales in Indonesia which is $134 billion 4. The most popular products / services that the Internet users search is fashion products and after that followed by online travel booking, music, video, games, electronics, and books

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Rise of E-tailing in Indonesia: An External Analysis 5. The most popular destination for online shoppers to buy something is Facebook.com and after that followed by kaskus.com, disdus.com, tokobagus.com, dealkeren.com, amazon.com, ebay.com, bhinneka.com, multiply.com, and tokopedia.com

Macro Environment Analysis

According to (Johnson, Whittington and Scholes 2011), in order to survive an organization has to be sensitive about the external environment, because it can comprehend both opportunities and threats. One of the external environment aspects that will be analyzed in this report is macro-environment and for doing the analysis on this macro-environment, a PESTEL framework will be used. PESTEL stands for political, economy, social, technology, environment, and legal. Those aspects will be analyzed in detail specifically for Indonesia. Political aspect. According to (Nurhadryani, Maslow and Yamamoto 2009), after the crumbling of Suharto regime (new order) in 1998, Indonesia had started to open itself to Internet until nowadays the government is more open with Internet development. The government in Indonesia is enhancing the development of ICT infrastructure to support the access of the Internet for its citizens through IPTEKnet (government research institution for ICT development), this institution makes a cooperation with some Indonesias leading research based university (like ITB, UI, UGM) to develop the ICT infrastructure and also since 2009 the government had started to implement the e-governance which is the government system / process that provide a digital interactions between government and its citizens (Nurhadryani, Maslow and Yamamoto 2009). According to Jakarta Globe (2010) government has made a budget of $590 million to build 50.000 kilometers fiber optic cable across the Indonesian archipelago Economic aspect. Indonesia has a strong growth in economy; it has a growth in GDP of 4 5% per year according to (Hawksworth and Chan 2013). It is ranked as number 16 in PwC Economics actual top 20 global economies ranking with the GDP of Middlesex University Business School 9

 Rise of E-tailing in Indonesia: An External Analysis $1.131 billion and it is also projected for climbing the ranking to become number 11 in 2030 with the GDP of $2.912 billion, then to become number 8 in 2050 with the GDP of $6.346 billion. While in terms of consumer expenditure, there is also a rapid growing at an average 4.7% annually (Hodgson 2012). Social aspect. The rise of middle class is becoming a big issue right now in Indonesia and most of the people that included in the middle class are the frequent users of Internet and they also have a deep understanding of the benefits of accessing internet, it happens because most of them are well-educated people and some of them also have gone abroad for studying (Hodgson 2012). According to (Utoyo and Ramda 2012), the number of Internet users right now in Indonesia is 55 million people, which means 23% of the total population in Indonesia and 25% of this Internet users spend around 30 hours per week to access the Internet which means around 4 hours a day. Technological aspect. (Economist Intelligence Unit 2007) stated that there was an investment of $1.5 billion from Jakarta based PT NAP Info Lintas Nusa for a development of a new 1350 kilometers submarine fiber optic link with Singapore. The construction itself had been finished by 2008 and it has improved the Internet connections speed in Indonesia. And the government also has made a budget for $590 million for the construction of 50.000 kilometers fiber optic across the Indonesian archipelago, by 2012 the government had finished building the fiber optic for west Indonesian and middle Indonesian region, and now they are building the fiber optic in East Indonesia region (Indah 2012). Environmental aspect. According to (Fichter 2003), there are three environmental effects that can be caused by e-commerce, such as: 1. First order effects. Material flows, use of hazardous substances, and lead to energy consumption and electronic waste 2. Second order effects. The logistic process of e-tailing will use a lot transportation, resource productivity, and use of the land 3. Third order effects. Higher lifestyle and consumption patterns and in the end will increase the production of ICT infrastructures

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Rise of E-tailing in Indonesia: An External Analysis Legal aspect. According to (Endeshaw 2002), Indonesia only has a light touch Internet access control law and no law has been made regarding to these subjects, such as Internet content control, e-commerce, security, privacy, consumer protection, intellectual property, and dispute resolution. Figure 2. PESTEL framework

Industry Analysis
To analyze the attractiveness of e-tailing industry in Indonesia, Porter five forces framework will be used. There are five competitive forces that will be analyzed in this report, such as the threat of entry, the threat of substitutes, the power of buyers, the power buyers, the power of suppliers, and the competitive rivalry. This report will analyze the degree of competition in this industry, if those five forces will be high, this industry is not attractive to be entered / competed or it can be the other way around.

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 Rise of E-tailing in Indonesia: An External Analysis Figure 3. Porters five forces framework
Threat of entrants 5 4 3 Competitive rivalry 2 1 Threat of subsitute

Power of Supplier

Power of buyers

Note: 1=Low, 2=Slightly low, 3=Moderate, 4=Slightly high, 5=High

Threat of new entrants (moderate) Economies of scale and experiences (moderate). The economies scale and experiences play a big role in maintaining low price. Existing e-tailers, like bhinneka.com, blibli.com, lazada.co.id, and zalora.co.id, have already had high traffic of users visiting their website, for instance, bhinneka.com has 100.000 people visiting their website per day and with business transaction value of $520.000 per month (Rostiyani 2012). With this high traffic and transaction, the existing e-tailers have got the economies of scale by getting a bulk discount from the suppliers or get consignment term so they dont have to pay advance cash to the suppliers like in direct purchasing term. While for experiences, the existing e-tailers have modified their logistic system by creating their own logistic model or building a partnership with logistic company so they can also reduce the cost of logistic which leads to a maintained low price of their product / services. However new entrants can also tap the opportunity to outsource logistic partners for starting up their etailing business for maintaining a competitive price for the existing e-tailers.

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Rise of E-tailing in Indonesia: An External Analysis Access to supply or distribution channels (high). New entrants can easily get access to the suppliers since the incumbents do not have control over the suppliers or distribution channels. However new entrants can not ask for a consignment terms or bulk discount from the suppliers since their traffic and transaction is not really high Legislation and government action (low). As stated by (Endeshaw 2002), Indonesian government only has no regulation over e-commerce, so there is no protection for e-tailing business nor the customers if they face any kind of cyber crimes Capital requirement (moderate). Initial investment for starting an e-tailing business can be vary, it can be high if the new entrants decide to invest in their own logistic system and also warehouse but it can improve their delivery time to the customer while it can be also low because the new entrants decide to outsource their logistic to third party and do the purchase on customers order in order to minimize the shipping cost from suppliers, inventory cost, and handling cost, however it contains the risk of long delivery time to the customers Differentiation (moderate). There are some aspects that can be differentiated by the incumbents for keeping the customers loyalty, like product bundling, discount, faster delivery time, longer return policy time, free delivery, and so on, so the threat of new entrants can be reduced Threat of substitutes (high) The threat of substitutes comes from some aspects, like customers can easily turn to a traditional brick-and-mortars retail store because they can immediately get the products that they want unlike buying products in e-tailers that will cost them some days for getting the products shipped to the customers home. And a market maker business like Ebay, Kaskus, Toko Bagus, Berniaga, Tokopedia, and Multiply can also be the substitution for etailing industry, because there are many personal sellers in those market maker websites that might offer the same product

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 Rise of E-tailing in Indonesia: An External Analysis Power of buyers (high) The customer can easily go from one to another e-tailers website because there is no switching cost for the customers and they only have to click from their PC if they want to search for another cheaper items instead of going around for one retail store to another. So whoever offers a lower price will become the customers choice Power of Suppliers (moderate) For e-tailers that offer service the power of the suppliers will be low, while for the e-tailers that offer products they will rely heavily on their supplier. However if the e-tailers have a big amount of customers (like the Lazada, Bhinneka, blibli, and Zalora) the power of the supplier is reduced, because the suppliers will need the access to the e-tailers customer to make profit. In general the power of suppliers is moderate in this industry Competitive Rivalry (moderate) There are only top four e-tailers in Indonesia, such as Bhinneka, Lazada, Blibli, and Zalora. It means that the intensity of rivalry is low because not many players compete in this industry. While from industry growth, the etailing will experience an annual growth of 3% (Utoyo and Ramda 2012) and it means that there will be an increase in the rivalry intensity in the future because there will be more opportunity to gain profit by exploiting the annual growth

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Recommendations
Figure 5 Opportunities-threats matrix

After analyzing the opportunities and also the threats that exist in e-tailing industry, there are some recommendations of strategy both for new entrants and incumbents in this industry, such as: New entrants There is a huge opportunity for establishing a new e-tailing start up, it has to be done quickly to avoid the intensity of rivalry in this industry Entering the industry with a low initial investment is possible, outsources the logistic to the third party will reduce the cost of logistic. And for the problem of the longer delivery time, it can be solved by renting a small warehouse, Middlesex University Business School 15

 Rise of E-tailing in Indonesia: An External Analysis however it will need an accurate stock forecasting and excellent inventory management, because the stock turnover has to be quick, otherwise the inventory will have no place to be kept. If those things can be done the customer acquisition automatically will happen by offering faster delivery and low price because logistic cost, inventory cost, and delivery time have been reduced Acquire and maintain the customer loyalty by creating some differentiation with the technology and user-friendliness of the website. And segmentation strategy can also be done by selling specialized product for some specific market segments Managing the risk of cyber crime by preventing the crime itself, it can be done by asking the users to sign up and provide their detail data, then after that the e-tailers can do a cross checking to the Indonesian Civil Registry to make sure the data is valid Incumbents (existing e-tailers) Acquire and maintain the customer loyalty by creating some differentiation with the technology and user-friendliness of the website, it can reduce the threat of substitutions Investment to improve the logistic performance by expanding the logistic business model and also the fleet or implementing the vertical integration strategy by acquiring one logistic company. If it works it can the other revenue stream by providing the new entrants or the other incumbents with logistic third party Managing the risk of cyber crime by preventing the crime itself, it can be done by asking the users to sign up and provide their detail data, then after that the e-tailers can do a cross checking to the Indonesian Civil Registry to make sure the data is valid. And also invest to do a research and development to make or to search right partner for a more secure payment transaction, the concern for the customers when they want to shop online is the security of their privacy data, credit card data, and cyber fraud, so by making a development in secure payment transaction will make the customers feel safer and becoming loyal

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Conclusion
The swift and vast development of home broadband connectivity makes many people can easily access the internet and prefer to buy something online through e-tailers website. Indonesia is one of the countries that greatly affected by this Internet development, with the population of 243 million people, annual GDP growth of 4-5%, annual consumer expenditure growth of 4,7%, and annual internet user growth of 3%, this country is very promising for e-tailing development. The external analysis, which is presented in this report, aims to provide some insights about opportunities and threats that lie ahead for developing e-tailing in Indonesia, while the recommendation is made for guiding both new entrants and incumbents to survive the business. For instance, it is possible to use this report for a further purpose.

Reference
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 Rise of E-tailing in Indonesia: An External Analysis Ika, Aprilia. E-Commerce Grows Significantly. February 13, 2013. http://en.indonesiafinancetoday.com/read/29171/E-Commerce-Grows-Significantly (accessed March 1, 2013). Indah, Wiwiw Dwi. Fiber Optic Telkom: Di Seluruh Sulawesi Tuntas, Kini Fokus Ke Ambon & Papua. August 6, 2012. http://www.bisnis.com/articles/fiber-optic-telkomdi-seluruh-sulawesi-tuntas-kini-fokus-ke-ambon-and-papua (accessed Feburary 28, 2013). Internet world stats. The World Population and The Top Ten Countries With The Highest Population. June 30, 2012. http://www.internetworldstats.com/stats8.htm (accessed February 28, 2013). Hawksworth, John , and Danny Chan. "The BRICs and beyond: prospects, challenges and opportunities." www.pwc.com. January 15, 2013. http://www.pwc.com/en_GX/gx/world-2050/the-brics-and-beyond-prospectschallenges-and-opportunities.jhtml (accessed February 27, 2013). Hodgson, An. Indonesias Rising Middle Class to Transform the Countrys Consumer Market. July 3, 2012. http://blog.euromonitor.com/2012/07/indonesias-rising-middleclass-to-transform-the-countrys-consumer-market.html (accessed February 27, 2013). Jay Lin, Kwei. "E-Commerce Technology Back to a Prominent Future." Edited by Kwei Jay Lin and Yan Wang. IEEE Internet Computing (IEEE Computer Society), January 2008: 60-65. Johnson, Gerry, Richard Whittington, and Kevan Scholes. Exploring Strategy. Vol. 9. 9 vols. Essex: Pearson Education Limited, 2011. Nurhadryani, Yani, Sebastian Maslow, and Hiraku Yamamoto. "Democracy 1.0 Meets Web 2.0: E-Campaigning and the Role of ICTs in Indonesias Political Reform Process since 1998." Interdisciplinary Information Sciences (Graduate School of Information Sciences, Tohoku University) 15, no. 2 (June 2009): 211-222. Mahadevan, B. "Business Models for Internet-Based E-Commerce: An Anatomy." California Management Review 42, no. 4 (2000): 55-69. Pentina, Iryna, and Ronald W. Hasty. "Effects of multichannel coordination and ecommerce outsourcing on online retail performance." Journal of Marketing Channels (Taylor & Francis Group) 16 (2009): 359-374. Rao, Leena. J.P. Morgan: Global E-Commerce Revenue To Grow By 19 Percent In 2011 To $680B. January 3, 2011. http://techcrunch.com/2011/01/03/j-p-morganglobal-e-commerce-revenue-to-grow-by-19-percent-in-2011-to-680b/ (accessed February 26, 2013). Rostiyani, Yeyen. E-commerce is booming in Indonesia. January 31, 2012. http://www.republika.co.id/berita/en/national-politics/12/01/31/lynzlx-ecommerce-isbooming-in-indonesia (accessed March 1, 2013).

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