Hyflux - Business Strategy

Table of Contents Question 1 .................................................................................................................................. 2 Question 2a ................................................................................................................................ 6 Question 2b ................................................................................................................................ 9 Question 3a .............................................................................................................................. 11 Question 3b .............................................................................................................................. 13 Question 4 ................................................................................................................................ 16 Question 5 ................................................................................................................................ 19 Works Cited ............................................................................................................................. 20

Page | 1

Question 1 The external environment presents both opportunities and threats for Hyflux Limited (Hyflux). It consists of the macro and industry environment, to which PESTEL and Porter’s 5 Forces will be applied respectively to identify their potential influences on the group’s strategic competitiveness and its ability to earn above-average returns (Johnson, Whittington, Angwin, Regnr, & Scholes, 2014).

Macro-environment (PESTEL Analysis) Political-Legal Factors Globally, water scarcity as a consequence of environmental pollution and rapid economic and population growth offers greater opportunities for firms to expand into foreign markets. The potential for growth is further enhanced with government imposition of anti-pollution standards for wastewater treatment internationally, along with strong financial support from the same in local R&D and municipal projects to develop sustainable water supply (Buche, Kroll, Wee, & Chua, 2012, p. 9 & 18).

Economic Factors The global industrial and municipal water/wastewater markets continue to drive the industry with a higher proportion from China, India and the MENA region as they represent those countries that are most affected by the water crisis. Of particular interest is in the area of water desalination, where the economic potential is enormous. That being said, an economic downturn can easily dampen the expansion of the water treatment industry. This is evident in the 2008 global credit squeeze, when many firms were forced to liquidate their assets as a result of cash flow issue. Typically, only those on municipal projects were spared of the predicaments (Buche, Kroll, Wee, & Chua, 2012, pp. 3, 4 & 18).

Sociocultural Factors While the rapid growth in global population and industrialisation has helped fuel the growth in the municipal and industrial water markets, the drawbacks are also significant, with associated social costs such as severe water shortages as well as the environmental effects of pollution affecting numerous cities (Buche, Kroll, Wee, & Chua, 2012, p. 4 & 18). On the positive side, the fast-growing tertiary sector in China has produced an abundance of qualified and low-cost engineering talents, providing the necessary resources required to support companies in their market expansion plans. Page | 2

Technological Factors The cost and scope of applying membrane filtration technology for municipal and industrial use have been greatly improved over the years due largely to technological innovations. Likewise, alternative innovative methods have also been developed for similar purpose. Also, while generous R&D budgets are vital to creating innovations, small start-ups often lack the financial capacity to conduct such activities. Accordingly, the government is providing strong financial support for local industrial R&D to subsidise costly outlays (Buche, Kroll, Wee, & Chua, 2012, p. 9).

Conclusion From the above findings, Hyflux operates in a highly lucrative environment endowed with abundance of business opportunities. The economic potential is enormous, with high industrial and municipal demand along with strong government support. Following this, the subsequent analysis will be to understand the water treatment industry, and it shall be focused on the Porter’s 5 Forces to determine its overall attractiveness. Industry Environment (Porter’s 5 Forces)

Threat of New Entrants Threat of New Entrants is LOW when: Economies of scale are: Product differentiation is: Capital requirements are: Switching costs are: Ease of access to distribution channels is: Cost disadvantages are: Government policies creating barriers are:

High       

Low       

The threat of new entrants is low as there are high entry barriers from scale economies, capital requirements and high switching costs. Essentially, large incumbent firms are able to exploit large-scale production to produce at lower unit costs which new entrants find hard to match. Moreover, the start-up costs are high because of the capital-intensive nature of the industry and this serves to discourage small scale entrants from entering.

Page | 3

Bargaining Power of Suppliers Power of Suppliers is LOW when: Concentration of suppliers relative to buyer industry is: Availability of substitute products is: Importance of customer to the suppliers is: Differentiation of the supplier’s products and services is: Switching costs of the buyer are: Threat of forward integration by the supplier is:

High      

Low      

The bargaining power of suppliers is low due largely to the vast number of suppliers with little differentiation available. Consequently, the switching cost is also low for the same reason as buyers are able to readily switch their purchasing preference from one supplier to another.

Bargaining Power of Buyers Power of Buyers is HIGH when: Concentration of buyers relative to suppliers is: Switching costs are: Product differentiation of suppliers is: Threat of backward integration by buyers is: Extent of buyer’s profits is: Importance of supplier’s input to quality of buyer’s final product is:

High      

Low      

While switching costs are high, the bargaining power of buyers remains high as there are likely to be high buyers’ concentration. Moreover, their purchases account for the majority of total sales, and this automatically accords them with high bargaining power.

Threat of Substitutes Threat of Substitute Products is LOW when: The differentiation of the substitute product is: Rate of improvement in price-performance relationship of substitute product is:

High  

Low  

Alternative methods of water treatment are available at higher prices and this makes them unattractive options. Besides, the higher prices are possibly the result of higher production

Page | 4

costs as they offer no significant advantages. Viewed in this light, the threat of substitutes is deemed to be low.

Intensity of Competitive Rivalry Intensity of Competitive Rivalry is HIGH when: Number of competitors is: Industry growth rate is: Fixed costs are: Storage costs are: Product differentiation is: Switching costs are: Exit barriers are: Strategic stakes are:

High        

Low        

Rivalry is high with the presence of many competitors. Moreover, the intensity is further accentuated with the associated high costs that dramatically raise the strategic stakes for the incumbent firms. The only relief stems from the high industry growth rate which helps lower the level of intensity.

Conclusion The overall industry for water treatment remains attractive with huge economic potential. Nevertheless, there are concerns over the high bargaining power of the buyers and the high intensity of competitive rivalry, as they are likely to have an impact on the firm in the distant future.

Environmental Analysis The external environment that Hyflux operates in offers a good mix of challenges and opportunities. As the industry continues to be highly economically viable, the company should seek to avert those threats while capitalising on the market opportunities to increase its bottom line. In the following analysis, the focus will be to assess Hyflux’s internal environment to identify those core competencies that will provide it with competitive advantages over its rivals.

Page | 5

Question 2a Strategic capabilities are those unique combinations of Hyflux’s resources and competences which may provide it with competitive advantages over its competitors. To identify these strategic capabilities, the focus is on the firm’s portfolio of resources and competences that will form the dimensions in which they are configured. Also, to qualify as core competences, these capabilities will have to fulfil a four criteria test which will be illustrated below in the VRIO framework. Resources: what we have (nouns)

Type

Water-related infrastructure assets

Physical

State-of-the-art infrastructure and

Threshold

facilities

Human Resource Management

Physical

Human

Competences: what we do well (verbs) 

Owns and operates several water and wastewater treatment plants under BOT and/or TOT agreements globally



Facilitate conduct of activities in R&D, design, fabrication and assembly



Access to human resources with both technical and managerial expertise necessary for global expansion



Conducts regular trainings and job rotations to equip employees with critical knowledge, skills, and competencies necessary for company’s growth strategy

Government grants and fundings

Sound financial performance

Financial



Access to government grants and fundings to subsidise R&D activitie



Protects companies on municipal projects against tough economic climates



Maintains high profitability through securing lucrative industrial and municipal

Financial

projects 

Low gearing through acquiring funds from mainboard listings and HWT

Page | 6

Branding

Physical



Creates high brand awareness through numerous successful large-scale highvalue industrial and municipal projects



Conducts in-house R&D activities along with designing and manufacturing of own proprietary filtration membrane products to better control raw materials,

Distinctive

In-house product development and manufacturing

manufacturing costs, product quality and project turnaround time Human



R&D alliances with research bodies and tertiary institutions to tap to complementary firms’ research expertise and facilities to accelerate growth in membrane technology

Culture and leadership

Proprietary products and patents

Human

 

Ability to customise solutions to suit clients’ diverse needs Visionary and enterprising leadership with global mind-set



Strong culture of excellence that encourages teamwork, learning, and innovation

Intellectual 

Wide range of proprietary filtration membrane products

Table 1: Components of strategic capabilities

Table 1 highlights Hyflux’s components of strategic capabilities. From the above analysis, we have identified several of the firm’s qualities that qualify as its strategic capabilities. In the following section, we will put them through the four criteria test of the VIRO framework to determine their ability to provide the firm with sustainable competitive advantages.

Page | 7

Valuable?

Rare?

Inimitable?

Supported by the organisation?

Yes

Yes

No

Yes

Temporary competitive advantage

Yes

Yes

No

Yes

Temporary competitive advantage

Human Resource Management

Yes

Yes

No

Yes

Temporary competitive advantage

Government grants and fundings

Yes

No

No

Yes

Competitive parity

Sound financial performance

Yes

No

No

Yes

Competitive parity

Branding

Yes

Yes

Yes

Yes

Sustained competitive advantage

In-house product development and manufacturing

Yes

Yes

Yes

Yes

Sustained competitive advantage

Culture and leadership

Yes

Yes

Yes

Yes

Sustained competitive advantage

Proprietary products and patents

Yes

Yes

Yes

Yes

Sustained competitive advantage

Competence Water-related infrastructure assets State-of-the-art infrastructure and facilities

Competitive implications

Table 2: The VRIO framework

Table 2 illustrates the use of the VIRO framework to assess Hyflux’s level of competitiveness sustained in its strategic resources. As observed from the above, branding, in-house product development and manufacturing, culture and leadership, and proprietary products and patents form the strategic competencies that have satisfied the four criteria test. Hyflux’s ability to capitalise on these strengths has provided it with sustainable competitive advantages over its rivals. That being said, the others are equally important to the company’s success, but they are unable to provide sustainable advantages over the rest.

Page | 8

Question 2b The SWOT analysis offers a summary of the preceding analyses of Hyflux’s external and internal environment. Essentially, it highlights its key strengths, weaknesses, opportunities and threats, which are useful in generating strategic options and assessing future courses of action. SWOT Analysis Strengths  

Weaknesses

Visionary and enterprising leader with 

Small

global mind-set

domestic market resulting in intense

Strong culture of excellence that

rivalry

encourages teamwork, learning, and



innovation 

Possesses wide range of proprietary

In-house product development and

size

and

saturated

Aggressive market expansion strategies outpace internal organisation growth



filtration membrane products 

market

Capital-intensive BOT/TOT market segment present great risk



Human resource issues in international

manufacturing allow better control of raw

ventures due to language barriers and

materials, manufacturing costs, product

cultural differences

quality and project turnaround time 

Ability to customise solutions to suit clients’ diverse needs



High brand awareness through numerous successful large-scale high-value industrial and municipal projects

Opportunities

Threats





Government imposition of anti-pollution standards and rapid economic and population growth drive up demand for



Global economic crisis hurts demand for water and waste management



Substitute products (General Electric &

water and waste management

UV pure) offering alternative filtration

internationally

solutions present threats to incumbent

Emerging countries such as China, India

firms in industry

and the MENA region provide greatest opportunities for water treatment industry



Currency risk which is prevalent in international business undertakings Page | 9



Availability of large pool of engineering talents from China



Strong government support and funding for local R&D and municipal projects Table 3: SWOT Analysis

Based on the above findings, developing economies such as China, India and the MENA region offer immense potential for growth. Nevertheless, Hyflux will have to address the human resource issues along with currency risk for effective expansion into these culturally and politically diverse regions. With this understanding, the next section will focus on evaluating its corporate strategy as we attempt to identify the strategic options where Hyflux has capitalised its strengths on.

Page | 10

Question 3a A corporate strategy represents a firm’s strategic directions in consideration to diversify its product and services into new markets, products or services (Johnson, Whittington, Angwin, Regnr, & Scholes, 2014). For Hyflux, it pursued 3 pathways to growth during its lifetime: market penetration, market development and product development.

Market Penetration In 1992, Hydrochem (later renamed Hyflux) established its foothold in Singapore and the neighbouring markets by growing its market share through providing water treatments with traditional membrane technology (MT) brought in from overseas. While it attained reasonable success in Singapore, it was constrained by the country’s small market size along with facing considerable competition from several MNCs for the same customer base. Confronted with domestic saturation within the country, Hydrochem set out to expand its operations overseas with eyes first set on the China market.

Market Development In 1993, Hydrochem ventured into China with its existing MT. Through this, the company was able to enjoy scale economies in its operations. Its business particularly took off when the Chinese authorities stipulated the compulsory installation of water recycling facilities for all foreign-owned factories within the country. Along with time, Hydrochem was able to garner a sizeable client base in China as it began to lay eyes on the municipal water market. Renamed Hyflux, its first stop was Singapore, as it banked on its MT to leverage on the government’s initiative towards sustainable water supply. Consequently, with its huge success in municipal projects in Singapore, it paved way for more opportunities into the overseas market as it went on to secure other municipal projects in China as well as in new markets such as the MENA region.

Product Development Hyflux is able to achieve success via its design capabilities in developing its MT for innovative applications. Through in-house R&D activities and alliances, the company has developed numerous proprietary filtration membrane systems, which are installed in plants all over the world. Besides membrane filtration, Hyflux has also acquired new strategic capabilities through M&E, which allows it to undertake the whole value chain of the waterrelated infrastructure. Nonetheless, as project magnitudes and scope grew, the company will Page | 11

have to be mindful of the project management risk, as new undertakings of large scale and new ventures regularly run the risk of cost over-runs and delays.

Conclusion In summary, Hyflux based its corporate strategy to suit its growth needs. However, it is noteworthy that the company only seeks to expand its business within the boundaries of related diversification, and not some unfamiliar territory. Consequently, the company is highly profitable as a result, with its businesses revolving around its capability of being a provider of integrated solutions.

Page | 12

Question 3b As earlier discussed, Hyflux’s decision to expand its business globally stems vastly from a saturated domestic market. Inferring from the case, the company is likely to have pursued transnational strategy as its international entry mode and the focus is to assess its level of effectiveness and success.

International Strategy Transnational strategy involves companies seeking to maximise both local responsiveness and global integration (Johnson, Whittington, Angwin, Regnr, & Scholes, 2014). For Hyflux, the high need for local responsiveness stems from the need to tailor solutions to the specific requirements of customers from different countries along with an understanding of the host countries’ macro-environment conditions. Conversely, the high need for global integration is observed through its exploitation of scale economies by locating majority of its facilities in China while organising its value-chain activities on a global scale.

Market Selection For market selection, Hyflux targets those countries with high growth potential based on their relative attractiveness in relation to the macro environment, competitive threats as well as multidimensional measures of distance. Accordingly, China was chosen for its similarities in language, history, culture and interests, as well as economic potential. India and the MENA region, on the other hand, were likely selected for their economic viability.

Mode of Entry Hyflux’s entry into the international arena occurred predominantly through a staged expansion process. Essentially, it entered into the new markets gradually and sequentially to acquire the necessary knowledge and expertise whilst effectively diffused its risk exposure. Through licensing, which represented the first step to its business venture, the firm was able to obtain some local knowledge when it secured the rights to distribute membranes and membrane filtration plants in Singapore and the neighbouring markets. Accordingly, it also provided it with the lowest degree of resource commitment.

As Hyflux’s knowledge and experience grew, it began to set its sight on the municipal water market. However, due to the large project scale, most would only allow firms with robust financial standings and records to make the tender offer. Hence, Hyflux went around looking Page | 13

for partners to form joint ventures. Aside from increasing its likelihood of securing the municipal contracts, it also allowed the complementary firms to tap to each other’s labour, finance, technology and management expertise. Hyflux entered into China’s municipal water market through wholly-owned subsidiary, which allowed for full integration of activities across different countries. While it exposed the firm to tax and currency risk, it was able to effectively transfer them to the investors through its strategic launch of the Hyflux Water Trust (HWT).

Figure 4: Net Profit Overview

Level of Success In terms of its level of success, the growth of Hyflux between 2000 and 2008 was phenomenal. The company had scored high in net profit between year 2000 and 2005 due to its rapid expansion into China. While the figures plummeted considerably in 2006, it was largely the result of huge investments in infrastructure in the MENA region which saw a tremendous increase in its expenses. Nonetheless, its net profit continued to rise sequentially, reaching a total of $62 million, an impressive increase of 1260% from year 2000.

Conclusion In summary, Hyflux had performed tremendously well in its international ventures. Through effective use of its core competencies, the firm was able to offer usage of wide services to the global markets at attractive prices. Nevertheless, while the overseas markets offered Page | 14

expansive opportunities, the economic and political risks were unforeseeable, and this may affect it adversely. That being said, Hyflux was able to understand the geographical markets through alliances with its various partners, and this formed an essential constituent to making strategic actions during times of tough economic climate.

Page | 15

Question 4 Innovation and entrepreneurship play an important role in driving the process of economic development. Indeed, the society would often benefit from synergies between the two. For Hyflux, its commitment towards environmental innovation has been instrumental in bringing cost efficiency and innovation to the water treatment industry.

Market Pull Hyflux identified alternative use for the traditional membrane technology (MT) in environmental applications. This prompted the company to conduct extensive R&D which gave rise to the development of a wide range of proprietary filtration membrane products.

Product Innovation The traditional MT was limited in its applications when Hyflux first brought it into Singapore. Consequently, the firm focused extensively on product innovation to improve its quality and expanded its application to other usage.

Process Innovation Hyflux located its research and manufacturing facilities in China to take advantage of scale economies. This indicates that the dominant design had already been established and Hyflux was shifting its focus towards process innovation.

Open Innovation R&D alliances with research bodies and tertiary institutions were formed to tap to complementary firms’ research expertise and facilities to accelerate growth in MT and at the same time, minimised risky research investments and lengthy development processes.

Closed Innovation Aside from open innovation, Hyflux also invested in closed innovation. Through in-house R&D, acquisition of proprietary technology (CEPAration) and technology collaboration (STW), the company was able to protect its intellectual property and avoid the issue of free riding from competitors.

Page | 16

Innovation Diffusion Supply side affecting diffusion 

Experimentation – conducted pilot plant trials to demonstrate capability and effectiveness of MT to encourage consumer adoption



Degree of improvement – developed in-house membrane which were significantly better and cheaper than existing ones in the market

Demand side affecting diffusion 

Market awareness – created high brand awareness through numerous successful largescale high-value industrial and municipal projects

Diffusion S-Curve 

Timing of the tipping point – secured orders for larger membrane filtration systems from industrial clients in 1998 due to pilot plant trials and its first integrated water treatment system project for an MNC joint venture manufacturing facility in Singapore

First Mover Advantage (FMA) 

Experience curve benefits accrued to Hyflux in the form of greater expertise accumulated through experience



Scale benefits in the form of scale economies as a consequence of mass production and bulk purchasing



Reputation and credibility enhanced through numerous successful large-scale high-value industrial and municipal projects

Stages of Entrepreneurial Growth 

Start-up – Hyflux began as a small trading company distributing water treatment equipment in Singapore and the neighbouring markets. Its fortune turned in 1993 when it decided to venture into China as a result of a domestic saturation in the local market.



Growth – while in China, the company was able to leverage on the country’s locational advantages of low labour and production cost. Additionally, the potential for growth is enormous, due mainly to its population size. To add on, the lack of water treatment facilities and expertise within the country had allowed Hyflux to enjoy FMA. Hence, when the Chinese authorities imposed anti-pollution standards for wastewater treatment Page | 17

for all foreign companies operating within the country, Hyflux was in a particularly favourable position as it was already there to take full advantage of the opportunity. 

Maturity – Hyflux continued to develop new competences around its proprietary MT. Accordingly, the firm was able to improvise their membrane structure and customised them to suit the customer’s requirement. Besides MT, Hyflux also expanded into other areas of related diversification. Some of which include waste oil recycling as well as production of specialty materials and energy.



Exit – To free up funds to further expand its operations, Hyflux announced an initial public offering (IPO) of the HWT. Through its launch, the firm was able to diversify part of the asset ownership risk to the investors as well as obtain funds for acquiring waterrelated infrastructure assets and other business undertakings.

Conclusion Hyflux's ability to identify and capitalise on the MT has vested it with many FMAs. As the company continues to enhance on the quality, features and deliverability of its MT to differentiate itself, it is set to enjoy continued success and accelerated growth in the industry.

Page | 18

Question 5 Hyflux's earlier successes were very much hinged on its design capabilities to develop leading edge MT for innovative water treatment application. Nevertheless, as it continues its aggressive expansionary policy, it should also review its internal procedures to ensure its overall robustness to keep pace with the company's strategic direction.

As highlighted in the earlier SWOT analysis, Hyflux is faced with the challenge of having to develop its internal organisation to keep pace with its expansion. In this sense, the company may wish to re-examine its internal processes to identify those activities that are not delivering values. One way is to set up work improvement teams to regularly review the various workflows and to implement business process reengineering (BPR) wherever necessary. This will not only help in cost reduction but also aid in eliminating inefficiencies or redundancies.

Besides re-examining its internal processes, the company should also strengthen its human resource functions, particularly in its recruitment. Stringent criteria must be set to ensure that only those with the requisite competencies to meet the demands of the company be selected. In terms of retention, Hyflux could revise its pay structure as well as explore the option of incentivising those who have contributed positively and who are still with the company. Incentives may range from stock options to gainsharing to motivate and reward these incumbent.

Hyflux is facing intense rivalry in its home country. To resolve this, the company can consider acquiring some of its rivals. Besides eliminating competition, it can also acquire their accompanying competencies as well as water treatment projects which effectively expands its business portfolio.

Finally, to resolve the currency risk inherent in internationalisation, Hyflux should look into hedging its funds to smoothen out the fluctuations which may ultimately hurt its profit.

Page | 19

Works Cited 1. Buche, I., Kroll, M., Timothy, C., & Wee, B. (2012). Hyflux Limited and Water Sustainability: threading blue oceans. The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, 1-26. 2. Johnson, G., Whittington, R., Angwin, D., Regnr, P., & Scholes, K. (2014). Exploring Strategy. United Kingdom: Pearson Education, Limited.

Page | 20