Table of Contents

INTRODUCTION ................................................................................................................................... 3
PESTEL ................................................................................................................................................. 4
POLITICAL and LEGAL ............................................................................................................... 4
ECONOMIC ................................................................................................................................... 5
TECHNOLOGY and ENVIRONMENT ........................................................................................ 5
MARKET CHARACTERISTICS ................................................................................................................ 7
SIZE ................................................................................................................................................ 7
MARKET SHARE.......................................................................................................................... 8
GROWTH ....................................................................................................................................... 9
INDUSTRY AND COMPETITIVE ENVIRONMENT................................................................................. 10
Buyers Power:.............................................................................................................................. 10
Suppliers Power: .......................................................................................................................... 10
Threat of New Entrants: ................................................................................................................ 10
Rivalry among Existing Firms: ..................................................................................................... 11
Threat of Substitutes: .................................................................................................................... 11
FIRM SPECIFIC ISSUES ....................................................................................................................... 13
MAJOR INVESTMENT............................................................................................................... 13
OBJECTIVE ................................................................................................................................. 13
PROFITABILITY ......................................................................................................................... 13
CAPABILITIES ............................................................................................................................ 14
COMPETENCES.......................................................................................................................... 14
TRENDS ....................................................................................................................................... 14
LONG-TERM COMPETITIVENESS .......................................................................................... 14
SWOT ANALYSIS .......................................................................................................................... 15
RESOURCE AUDIT .................................................................................................................... 16
FINANCIAL RATIOS .................................................................................................................. 16

CONCLUSION..................................................................................................................................... 19
REFERENCES ...................................................................................................................................... 20
APPENDIX 1 .................................................................................................................................... 28
OTHER APPENDICES .................................................................................................................... 31

INTRODUCTION

In laymans term, a strategy is a carefully constructed plan in helping to achieve a particular

set of objectives or goals. The role of strategy within an organisation is said to be the main
determinant of its success or failure. According to strategic management theory, a firm must
be able to change their strategies in relation to the conditions of their external environment
(Parker, Storey, van Witteloostuijn, 2010). Through strategic analysis, firms can examine
their external and internal environment in identifying whether their current strategies are
effective. First step is to scan the macro-environment through PESTEL, a tool used to
evaluate external variables such as politics, economics, sociocultural, technological,
environmental, and legal factors (Huiru, 2011). Next, the industry which the firm operates in
is examined through factors such as size, growth, and market share. The competitiveness of
the industry is also evaluated by using Porters Five Forces. Finally, we scan the internal
environment of the firm through financial ratios, SWOT analysis, and resource audit to
determine their capabilities and long-term competitiveness. Strategic analysis is important
because it allows strategic decision makers to modify their expectations and take corrective
actions in relation to the changes in the environment. Regular strategic analysis helps a firm
in achieving its long-term goals. For this report, we have chosen to analyse Ann Joo
Resources Berhad (AJRB) by using the steps mentioned previously. AJRB is a group that
specialises in manufacturing and trading steel products. They are considered to be the most
trusted and reliable provider of steel products and services in Malaysia (Ann Joo Resources
Berhad, 2014).

PESTEL

POLITICAL and LEGAL

In 2012, Asian firms from China, Hong Kong, Japan and Australia faced a steep decline in
stock prices due to the Greek political crisis baring to the fact that Asian firms are a major
market player in Greece (Sampson, 2012; Papaconstantinou, Tsagkanos & Siriopoulos,
2013). AJRB will indirectly face the effect of the instability in Greece as 50% of their
production is exported, especially into Australia, which is one of the countries where they
have managed to establish their presence (Tan, 2010). Furthermore, AJRBs presence in the
Middle East is another risk that they face from unresolved issues such as the Iranian nuclear
program that faces threats from the United States and Israel and the Syrian political turmoil
(Sengupta, 2012). In addition, the Malaysian political situation is very tense due to the
general elections which are going to be held in the near future causing AJRB to face a
dampened market share due to investors being extra cautious of investing in Malaysia
(Ramasamy, 2012). Appendix 1 shows that many Middle Eastern and certain other countries
have increased their import duty on steel since 2008 and 2009, which increases costs for
AJRB for exporting their product. Moreover, in November 2008 the Malaysian government
implemented new technical regulations on 57 steel products for which it requires certificates
of approval to ensure companies follow the Malaysian standards set by them (OECD, 2009).
This requirement therefore heightens the import barrier and helps domestic steel firms reduce
competition from overseas firms. In addition, the anti-dumping policy will further help in
protecting the interest of local firms such as AJRB.

ECONOMIC
China implemented a dumping policy on their steel industry, which had severely impacted
the global price of steel due to oversupply of steel product in the market (Metal Bulletin
Daily, 2012). Malaysian steel industry also suffers due to this policy enacted by china (Wire
Journal International, 2013). One of Malaysias leading steel companies, AJRB had
experience a drop in revenue from RM2, 237,230,000 in 2011 to RM2, 080,237,000 in 2012
(Ann Joo Annual Report, 2012). Therefore, the Malaysian government announced an antidumping tax policy for Chinese and Turkish steel firms beginnings from 20th February 2013
in order to safeguard local firms from further loses (China daily, 2013). Moreover, the
industry faced another problem where the market was silenced due to the Euro-zone crisis
causing AJRB which was focused on exporting 50% of their production to deal with a weaker
export market (Ann Joo Annual Report, 2012).

Government initiated the Economic Transformation Programme (ETP) plan which focuses on
building major infrastructure such as Penang bridge 2, Ipoh-Padang Besar Double- Track
Railway, Mass Rapid Transit (MRT), KLIA 2 and the extension of the Kelana Jaya and
Ampang LRT(Govind, 2014). The constructions of these infrastructures requires a vast
amount of steel, which provides a domestic business opportunity for AJRB to alleviate their
losses caused due to a sluggish international market (Economic transformation program,
2012).

TECHNOLOGY and ENVIRONMENT

Aligning with todays requirements of greener technology, AJRB has invested in the latest
blast furnace technology and the first modern and environmentally friendly furnace in

Malaysia. The advantage of this is that AJRB will not have to worry about the increase in the
electricity tariff, (Star Property.my, 2013), as their new Burning Furnace technology will
consume lesser energy without sacrificing the product purity and quality (Ann Joo Resources
Berhad, 2014). To maintain AJRBs competitive advantage they have made an agreement
with one of Chinas largest steel firms thus benefiting from the technology transfer. Another
competitive advantage for AJRB is that it is the first steel firm to gain three international
certificates. First certification is (ISO 14001:2004), representing their concern towards the
environment and reflecting a good socially responsible corporate image (ivkovi & Taki,
2013). Second certification is (ISO 9001:2000) that shows their product quality, which meets
international standards, therefore giving customers confidence in the product that they want
to buy (Psomas, Pantouvakis & Kafetzopoulos, 2013).

The third certification is the

Occupational Safety and Health (OHSAS 8001:2007), which shows their concern for the
labor force and helps attract potential labor to work for their company (Abad, Lafuente &
Vilajosana, 2013)

MARKET CHARACTERISTICS

SIZE
The attractiveness of a market can be evaluated through a number of factors. One of the
factors is the markets size. The steel industry plays a huge role in Malaysias infrastructure
and economic development. The rapid pace of globalization has led firms to enter foreign
markets through exporting since it requires minimal financial and human resources (Reis and
Forte, 2014). Malaysias steel industry is not confined exclusively to a domestic market as
our steel products are exported to countries such as Australia, Singapore, China, Vietnam,
and Thailand. The exports value of metal products has improved from RM 1.4 billion in
January 2012 to RM 2 billion in January 2013 (Ministry of International Trade and Industry,
2014). Despite their presence in the international market, Malaysia produces 0.00029 % of
the worlds steel production in 2010 which is minuscule compared to other major producers
such as China and India (Mason, 2011). This shows that Malaysia has little to no influence in
the worlds steel production. The industry now focuses more on being the primary supplier to
the domestic consumption as influx in infrastructure projects fuels demand in steel production
(Oxford Business Group, 2012). The local steel industry is rather oligopolistic as it consists
of few but big players. AJRB and its competitors such as Lion Industries, Kinsteel Bhd,
Malaysia Steel Works (Masteel) Bhd, Perwaja Holdings Bhd, and Southern Steel Bhd are the
top steelmakers in the country.

MARKET SHARE
The competitive environment of an industry is reflected by the market share. Many
companies place a great emphasis on capturing a large segment of the market because relative
market share is said to offer opportunities for mass production with consequent economies of
scale (Karlof and Loevingsson, 2005). In the local steel industry, the market share shows that
Lion Industries is the leading company. The market share represented by the following pie
chart is based on the total revenue of AJRB and its competitors in 2013. The reason why Lion
Industries has higher total revenue compared to the rest is because it operates in business
segments other than those related to steel production. On the other hand, AJRB is more
focused on the manufacturing and trading of their steel products. Even though they engage in
investment holding and property management, those segments are closely related to their
primary activities.

Market Share of Domestic Steel Industry

According to Revenue in 2013
Lion

Ann joo

Perwaja

Masteel

Kinsteel

Southern Steel

21%
36%
10%
10%
7%

16%

(Source: Financial Times, 2014)

GROWTH
An industrys life phase influences the growth of its market. According to Michael Porters
concept of industry life cycle, the factors that determine a firms survival and development
within its industry are its properties, strategies, and competitive advantage. This makes the
industry itself as the most integral aspect of a firm in reaching its objectives (Sabol, ander,
and Fukan, 2011). Malaysias steel industry is at its maturity stage of the industry life cycle.
This is proven by a number of trends in the industry. For example, the profitability of the
industry is decreasing due to numerous macroeconomic factors. Most local steelmakers with
the exception of Masteel reported losses on the third quarter of 2013 (The Edge, 2013).
Another trend is that the rise of global competition forces Malaysia to rely on foreign
steelmakers as well for supplies. Although we export steel to other countries, Malaysia is a
net importer of steel (Mason, 2011). Data shows that the overall production of steel in
Malaysia stagnates as production in first half of 2013 is lower than that of last year. In
addition to that, import of steel is increasing 24 per cent year-over-year (Yong, 2013). Due to
this issue, AJRB exports 50 per cent of their total production to capture the market share of
foreign markets (Tan, 2010). The combination of slower industry growth and greater
technological maturity means that firms would focus more on the pricing of their respective
products. For example, the domestic steel industry is burdened by the recent increase in
electricity tariff. This results in an additional cost of approximately RM 200 million to the
local steelmakers (The Borneo Post, 2013). However, AJRBs past performance shows that
cost can be reduced through successful execution of the product stabilization and
optimization through the blast furnace (Ann Joo Resources Berhad, 2012). Overall, it is
difficult for a firm to sustain their competitive advantage in a volatile industry such as the
steel industry. We will further explore the intensity of the steel industry through our
discussion of Porters Five Forces.

INDUSTRY AND COMPETITIVE ENVIRONMENT

Threat of
New
Entrants
(High)

Suppliers'
Power

Rivalry In
the Industry

(Medium)

(High)

Buyers'
Power
(High)

Threat of
Substitues
(Low)

Porter's 5 forces for Malaysian Steel Industry

Buyers Power:

Increase in demand for steel (Misif.org.my, 2012)

Cheaper imports Options (Doyle, 2012)

Low product differentiation

Suppliers Power:

Scarce suppliers for raw materials (Tse, 2013)

Raw material prices on a decline (Insider Asia, 2013)

Threat of New Entrants:

High raw material costs (Doyle, 2012)

Cheaper Imports (Doyle, 2012)

10

High Production Costs (Tse, 2013)

Rivalry among Existing Firms:

Approximately 22 domestic competitors (Bursamalaysia.com, n.d.)

Product Differentiation is low

Growing Import Penetration (Doyle, 2012)

Threat of Substitutes:

No primary substitute

Growing demand for steel (Misif.org.my, 2012)

With the high power of domestic buyers and increasing imports, Ann Joo has invested in a
first of its kind Blast Furnace in Malaysia to increase its capacity and quality of steel products
and also unlike other firms, exports nearly half of its products into foreign markets (Tan,
2010) which can help it to compensate for the pressures posed by oversaturation and import
penetration in the local market.
Moreover, this move to vertically integrate backwards through the construction of their own
blast furnace has allowed Ann Joo to reduce the intermediaries in its supply chain as they can
now produce their own iron for manufacturing their steel products and have greater control
over their operations. This move to backward integrate has allowed them to source their raw
material locally at cheaper rates and also allowed end a 20 year contract with international
resource giant BHP Billiton (New Strait Times, 2011).
Furthermore, in an industry with low differentiation between products of different producers,
Ann Joo is trying to differentiate itself on the basis of better quality and purer steel products
of engineering grade. Also, in an industry plagued by high operation costs mainly on account

11

of the raw materials, which amount to nearly 70 percent of the total cost (Tse, 2013), the
move to integrate the iron and steel production, through the hybrid Blast Furnace (BF) and
Electrical-Arc-Furnace (EAF) technology doesnt only make them the first firm to do so in
Malaysia but also allows them to reduce their costs and improve their efficiency by
effectively allocating raw materials (Bursa Malaysia, 2011).
Overall given the sheer number of firms in the industry and the capital intensive nature
(Doyle, 2012) of doing business in such an industry as of now, it is highly unattractive for
new firms to venture into. That being said, the number of firms operating within the industry
provides ample incentive and opportunity for Merger and Acquisition in the Steel Industry in
Malaysia.

12

FIRM SPECIFIC ISSUES

MAJOR INVESTMENT
One of the major investments of Ann Joo Resources Bhd (AJRB) is the subscription of the
Redeemable Unrated Bonds of RM 500 million by Affin Investment Bank, Affin Bank,
Alliance Bank, OCBC and United Overseas Bank. The proceeds of the bond subscription are
being used to finance the modern blast furnace project. This blast furnace technology also
happens to be an environmental friendly technology (Financial Daily, 2010).

OBJECTIVE
Firstly, the main objective of AJRB is to develop and encourage a positive affiliation with all
stakeholders through an active two-way communication. Another objective of AJRB is to
invest in new and innovative machinery technologies to increase the productivity of the
company. AJRB also wants to reduce its operational cost and increase their profitability at the
same time. Furthermore, AJRB manufacturers its products as internationally-acclaimed
quality, environmental and product certified standards. Last but not least, AJRB desires to be
positioned first in the Malaysian market as the most favoured provider of steel products.
PROFITABILITY
Overall the profitability of the AJRB has decreased over the years because during these years
AJRB had foreign exchange losses due to the weak Malaysian Ringgit against the US Dollar.
Although in 2010, AJRB made a high profit of

RM 139,848,000 but since then the profits

have decreased drastically until it made a loss of RM 37,131,000 in the year 2012. However,
in the year 2013 AJRB was able to generate a small amount profit which amounted RM
4,480,000.

13

CAPABILITIES
As for the capabilities, AJRB is furnished with the modern shearing machines and slitting
machines which are the forefront of the steel industrys machinery. AJRB was able to expand
its exports to other countries through upgrading its steel manufacturing plant so that AJRB is
able to produce double its production rate efficiently. Therefore, it has more finished goods to
export overseas and to penetrate new markets.
COMPETENCES
AJRB is widely regarded and reputed in the steel industry in Malaysia due to its many years
of experience in the steel business. Another reason being that AJRB produces a variety range
of high grade steel products which consist of a diverse of long products and flat products.
This is because AJRB wants to satisfy their local and regional market customer needs. And
all of these steel products are kept in their well-organized warehouses which is equipped with
hi-tech logistic facilities.
TRENDS
AJRB have a trend of acquiring steel companies such as Anshin Steel Processor Sdn Bhd.
This shows that AJRB would not hesitate to acquire or merge with other companies to
increase its profitability and increase the demand for their products domestically and
internationally and to also develop business growth.
LONG-TERM COMPETITIVENESS
AJRB is planning to establish and operational base in the Southeast Asia as it intends to be
the number one steel manufacturing company in the region. AJSB also has signed a five year
contract to purchase 450,000 tonnes of iron ore each year from an Australian company which
should satisfy AJRBs long term demand for iron ore (Bloomberg, 2008). This way would

14

help AJRB stay competitive in the steel industry as it would not have any problem in
acquiring iron ore which is an essential product in the steel industry.

SWOT ANALYSIS

We conducted a swot analysis for AJRB for this strategic management assignment.
The first strength of AJRB is its efficiency in producing steel products. This is because
AJRBs plants and rolling mills concentrate more on the manufacturing side of the steel
products. Secondly, AJRB integrates its manufacturing of iron and steel. As a result, the
consumption of electricity in AJRBs steel manufacturing plant has decreased by more than
40%. Moving on, AJRB also has introduced the modern blast furnace for the purpose of
manufacturing steel products efficiently and effectively.
As for the weakness, AJRB would have to reduce their production or temporarily stop their
production if the demand of steel and the price of steel declined (Joanne Nayagam, 2012).
When that happens, AJRB would experience a restricted working capital scenario and they
would also have problems with their cash flows which includes both cash inflow and cash
outflow.
As for opportunity, there is demand for steel products in India, Middle East and Australia.
Therefore, AJRB can seize this opportunity to export their products to these regions and
established their presence there besides increasing their brand recognition worldwide
(Bloomberg, 2008).
One of the threats of AJRB is the dumping of steel products by Chinese steel mills from
China to the world including Malaysia (Hanim Adnan, 2013). This leads to increase in steel

15

production capacity worldwide which cause an excess of steel supply in Malaysia (Borneo
Post Online, 2012). As a result, steel prices worldwide and in Malaysia are reduced
drastically. The next threat is the increase in raw materials prices. This subsequently will
affect the production quantity and cost reduction of steel products of AJRB.
RESOURCE AUDIT
From the point of view of financial resources, AJRB has had cash and cash equivalents of
RM 47,400,000 at the end of 2012 and RM 48,045,000 at the end of 2013. As for the noncurrent assets of AJRB, in 2012, AJRB had a total non-current assets amounting to RM
1,218,498,000 and in 2013, AJRB had non-current assets amounting to RM 1,201,468,000.
This resources were acquired through the proceeds from the issue of shares to common
shareholders.
In 2012, the equity that was attributable to owners of AJRB was RM 1,036,763,000. In 2013,
the equity amount was RM 1,049,195,000. AJRB made a profit of RM 4,480,000 during the
year 2013. Besides that, AJRB has a total of 588 employees working for them.
FINANCIAL RATIOS
(1) Gross profit margin = Gross profit / Sales
= RM 197,598 / RM 2,155,373
= 9.17%
The ratio is not good because the company can only generate less than 10% of profit from
their sales.
(2) Working capital = Current assets - current liabilities
= RM 1,896,641,000 - RM 1,722,102,000

16

= RM 174,53
The working capital is good because it is positive which means there is more cash inflow than
cash outflow.

(3) Current ratio = Current assets / Current liabilities

= RM 1,896,641,000 / RM 1,722,102,000
= 1.10
The current ratio is good because it is more than 1 which means current assets mostly consist
of inventory.
(4) Acid test ratio = (Cash + Cash equivalents + Marketable securities + Accounts
Receivable) / Current liabilities
= (RM 52,805 + RM 387,249) / RM 1,722,102
= 0.26
This ratio is not good because it is less than 1 meaning there is not enough cash to manage
their debts.
(5)

Return

on

stockholders'

equity

= Net income /Average stockholders' equity

= RM 12, 268 / (RM 1,049,195 + RM 1,041,437)/2
= 1.17%

17

The ratio is bad because the return is less than 2% meaning high incomes cannot be
generated.
(6) Accounts receivable turnover = Sales / Average accounts receivable
= RM 2,155,373 / (RM 387,249 + RM 284,286)/2
= 6.42 times
This ratio is good because the company is able to turn accounts receivable to cash quickly.
(7) Inventory turnover = Cost of goods sold /Average inventory
= RM 1,957,785 / (RM 1,449,827 + RM 1,339,427)/2
= 1.40 times
This ratio is not good because the company is not able to turn inventory into sales often.

18

CONCLUSION

In conclusion, for this report we carried out certain analysis to justify our findings for
this strategic management assignment. Firstly, examined Ann Joos external and internal
using strategic analysis. We had to justify the AJRBs performance and strategy by analysing
the macro-environment of Malaysia using PESTEL. We also analyse the shares, growth and
size of the steel industry in Malaysia and its characteristics. Next, we assessed the industrys
competitiveness by exercising Porters Five Forces to analyse which factors influence the
Ann Joos strategies. Then,we also analysed Ann Joos internal environment using SWOT
analysis, resource audit and financial ratios to examine Ann Joos specific issues.

19

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APPENDIX 1

Ann Joo Resources Berhad, listed on the Main Market of Bursa Malaysia Securities
Bhd since 26 November 1996, is an investment holding company. The Group is primarily
engaged in the manufacturing and trading of steel and steel related products.Ann Joo started
out primarily as a scrap metal dealer in 1946 by the late Mr. Lim Kah Seng, its founder,
whose vision and strong entrepreneurial spirit have brought much success to the Group.
Today, the Ann Joo Group has grown to become one of the most efficient and reputable steel
28

groups in Malaysia.
Ann Joo committed in providing steel products and services, whose uncompromising
standards and quality are among the industrys highest, to their customers. Ann Joos highly
regarded reputation in the steel business as one of the countrys most prominent steel experts,
with its wealth of experience and unparalleled expertise, has assured Ann Joos position as
the most trusted and reliable total business solution provider of steel products and services in
Malaysia.
Company vision in 2020 :
-To excel as the leading steel Group in Southeast Asia, by manufacturing and trading a wide
range of steel products, achieving long term growth and lasting value for all stakeholders
-To fulfill this aspiration through prudent investment, modern technology and world-class
performance
-As a caring corporate citizen, we are committed to serving the well-being of the community,
promoting public interest and the conservation of the environment

In terms of manufacturing, through its steel-making plant and rolling mills, focuses on
the production of steel product ranging from billets, bars to wire rods serving mainly the
construction and engineering sectors. Our upstream expansion into the iron and steel-making
business, which enhances efficiency, further enables the Group to excel as the leading steel
group and the most cost effective producer not only in Malaysia but also in Southeast Asia.
These activities complement our well-diversified downstream steel business.
Manufacturing Division Mission Statement:

29

-To excel as the leading steel producer in the region, operating the best performing blast
furnace and electric arc furnace in Southeast Asia, producing products of the highest quality
at the most competitive prices:-To invest in technology to increase productivity, lower costs and enhance profitability
-To manufacture to internationally-acclaimed quality, environmental and product certified
standards
-To produce engineering grade of steel products at the most competitive cost
-To expand the Groups operational presence across Southeast Asia
In terms of tradingThe trading division deals with a broadly diversified product
portfolio comprising of a variety of flat and long steels for supply to a wide array of
economic sectors such as oil and gas, petrochemical, palm oil and oleochemical, food and
beverage, consumer electronics, automotive, engineering-fabrication intensive sectors,
constructions and infrastructure. In fact, our trading division is one of the leading suppliers in
the infrastructure and engineering-fabrication intensive sectors In addition. In short, we also
can be said that Ann Joo specialise in the slitting and shearing of steel coils into plates and
sheets of various shapes, sizes and dimensions as well as the supply of precision metal
pressed and metal stamped parts to our customers and maintains a commanding presence as
one of the countrys top distributors of a diverse range of high grade steel products.
Trading Division Mission Statement:
-To be positioned first in the Malaysian market as the most preferred stockist and supplier
-To field a dedicated and resourceful sales and marketing team delivering exceptional service
to customers

30

-To extend downstream services to create more value in the steel industry
-To expand the Groups market presence in Southeast Asia through effective business
collaboration with partners and associates, creating a comprehensive distribution network

OTHER APPENDICES

Appendix 2

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http://www.oecd.org/sti/ind/43312347.pdf
Appendix 3

http://www.misif.org.my/index.php?option=com_content&view=category&layout=blog&id=
79&Itemid

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