Question 1. Using appropriate tool(s), undertake an internal

analysis of Proton Motors to appraise the extent to which the

company is able to sustain its competitiveness as an

automobile manufacturer in Malaysia.

To kick-start the internal analysis of Proton Motors, the

resources, both tangible and intangibles, are identified and

extracted out from the case study as follow:

Tangible ResourcesFinancial a. The company has strong financial backing from

the government in the form of R&D grants andsubsidies.

b. The company is a state-owned company withKhazanah Nasional Berhad, the government’sinvestment agency owning 42.74% shares, theEmployee Provident Fund Board owning 10.72%shares and Petronas, a wholly state-ownedcompany, owning 7.85% shares.

Organisational

a. Former Prime Minister, Mahathir is an advisorto the board of Proton and has substantialinfluence on the company’s strategy.

Physical a. The company has attractive major productionfacilities in Tanjung Malim.

b. Proton Motors was the biggest domesticautomobile manufacturer until 2004 and stillable to hold on to 26% market share in 2010.Coupled with the government’s backing, it isquite evident that Proton Motors has strongdomestic distribution channel in Malaysia.

Technological

a. Early joint venture with Mitsubishi MotorCorporation had achieved technology transferresulting in Proton and it’s alliancesdeveloping capabilities to produce some carcomponents.

b. Acquisition of UK based Lotus resulting inProton able to launch PUTRA, a two-door coupe,in 1996 and Gen-2, a hatchback with Lotus’modern design and a locally built engine, theCampro 16V-four pot, in 2004

c. Mitsubishi agreed to form another alliance withthe company on project basis.

Intangible ResourcesHuman a. Subjected to the Industrial Coordination Act

(ICA), the company should employ a minimum of 30% bumiputera and there should be bumiputera amongthe senior executives.

b. Former Prime Minister, Mahathir is an advisorto the board of Proton and have substantialinfluence on the company’s strategy.

Reputational

a. The company is the first National manufacturerand it is also the country’s National CarProject.

b. The vehicles co-produced with Mitsubishi wereperceived to be better quality.

To determine the capabilities of the company, the above stated

resources are combined and grouped into the respective

functional areas as shown in the table below.

Functional Areas Capabilities

Is the capability ...Valuable

Rare Costly toimitate

Non-substitut

able

Distribution

With strong government’sbacking and past records of

yes yes no noTemporary competitive advantage

sales, Proton Motors appearsto be having a relativelystrong distribution channel inMalaysia.

Average returns to above-average returns

Management

Proton Motor was establishedunder Malaysia’s National CarProject and thus the companyreceives financial support andprotections from thegovernment. Above that, thecompany has a strong leaderwith vast political experienceand strong politicalinfluence, Dr Mahathirservicing as the advisor tothe company’s board.

yes yes no yes/no

Temporary competitive advantageAverage returns to above-

average returns

Manufacturing

The major productionfacilities in Tanjung Malimcoupled with the new allianceformed with Mitsubishi enabledthe company to produce the1.8L to 2.0L executive model,Inspira.

yes no no no

Competitive parityAverage returns

So far, the analysis has revealed that Proton Motor has strong

management and distribution capabilities that will give the

company temporary competitive advantages and should be able to

achieve average returns to above-average returns for the

company. Therefore, these 2 capabilities can be considered as

Proton Motor’s core competencies. However, I do consider the

strong management core competency to be a double-edge sword.

On one hand the strong management can is able to garner strong

support from the government and provide strategic guidance to

the company, on the other hand, the company will have to

adhere to the industrial directives under Malaysia’s National

Economic Policy, which may put the company in a disadvantage

position. An example will be company’s vendor system that

constraints the company purchasing supplies only from

bumiputera suppliers despite the fact that their prices are

50% higher than non-bumiputera suppliers.

The 3rd capability, manufacturing, only yields competitive

parity to help the company earn average returns. This

capability would have yield competitive disadvantage for the

company if Mitsubishi has not agreed form new alliance with

Proton Motor on a project basis. This is evident from the

customer’s perception that quality of the Proton products

dropped after Mitsubishi dissolves its joint venture with

Proton and was also reported that the company had been

producing out-dated car models without basic safety features

for most of its domestic models..

In conclusion, Proton Motors only has a strong management team

and a good distribution channels to help sustain its

competitiveness as an automobile manufacturer in Malaysia.

Question 2. Use appropriate external analysis tool(s) to

evaluate Proton’s operating environment in Malaysia. Support

your discussion with case evidences. From your analysis,

conclude the attractiveness of Proton’s operating environment.

Using the PESTL analysis, the general environment, or threats

and opportunities, for automobile industry in Malaysia can be

concluded from the table below.

PESTL AnalysisPositive

(Opportuni

ties)

Negati

ve

(Threa

ts)Demographi

c

a.Middle-income country with a

median income of USD950.

b.Young population of about 28

million with a median age of

25.

c.Mainly from 4 ethnic

backgrounds with the Malay

(50%), Chinese (24%),

Indigenous (11%) and Indian

(7%) with the Malay and

Indigenous being grouped as

bumiputera.

✔ ✔

Conclusion: The relatively big and young population

with median income of USD 950 means there will be

enough demands for vehicles since the population

will still have an average 40 working years

remaining. However, the median suggests that

majority of the population can only afford smaller

cars or relatively cheaper cars. This is an

opportunity for carmakers who can sell their cars

at a relatively cheaper rate but a threat for those

who can’t.Economic a.GDP per capita of US$7,775

but a per capita GDP of

US$14,800 on a PPP basis.

b.Low interest rate for car

loans – only applicable to

purchasing national brand

cars

c.Global financial crisis in

later part of 2009

✔ ✔

Conclusion: The threat for the automotive industry

comes from the reduced demands for new, and

particularly the more expensive vehicles as the

people will be recovering from the global financial

crisis and will tend to tighten their pockets.

However, the low interest rate for car loans that

is only applicable to buying national brand cars

creates good opportunities for the national brand

automakers and at the same time, threats for non-

national brand carmakers.Politic/ a.Malaysia Industrial Master

Plan to elevate Malaysia’s

✔ ✔

Legal status to industrialised

nations.

b.Government heavily subsidise

gasoline supply.

c.Sporadic urban planning

resulting in long distance

between city centres.

d.Invested in highway networks

connecting all inland cities

and neighbouring countries.

e.National Automotive Policy

that give preferential

treatments to the bumiputera

and banned the import of used

automotive parts and

components.

f.Foreign automakers are

allowed to build 100% owned

factories in Malaysia to

produce expensive luxury car

priced above USD50,000 and

with an engine capacity of

1,800 c.c. and above.

g.Temporary exemption of excise

tax on hybrid and electric

vehicles under 2000 c.c. till

Jul 2011.

h.National Car Project creating

unlevelled playing field for

foreign brand cars in

Malaysia.

Conclusion: The highways, sporadic urban planning

and lack of mass public transport system within the

country created the needs for private vehicles

thereby creating an opportunity for carmakers.

While the National Car Project and National

Automotive Policy posted some threats to the

foreign brand automakers, it did offer some

opportunities to these automakers by allowing them

access to the Malaysia automotive market within the

specified market segments.Sociocultu

ral

a. About ¼ of the population

owns a vehicle in Malaysia.

b. Private vehicle is the

preferred transportation

means.

c. Changing trend to hybrid

cars.

✔ ✔

Conclusion: While private vehicle transport is

preferred, the domestic automotive market is

relatively saturated. With the changing trend of

the Malaysians to be more environmentally friendly,

there is an opportunity for automakers who have the

technologies and products to penetrate this new

market segment.

Technologi

cal

a. Eco-friendly vehicle engines

like hybrid vehicles or

electric vehicles✔

Conclusion: Technological advancement in vehicle

engine has reduced the need for fuel and thereby

creating a new market segment in the automotive

industry.Global a. ASEAN created the AFTA in

1992 to establish a

completely free-trade area

within ASEAN countries within

15 years.

✔

✔

Conclusion: The complete rectification of the ASEAN

AFTA will attract FDI into ASEAN by completely

eliminating import tariff for most manufactured

goods within the member countries of ASEAN and

lowering import tariffs for non-member countries.

This created opportunities for carmakers who have

competitive advantages to compete for the whole

ASEAN automotive market share but at the same time

posted a threat to those lacking competitive

advantages to even lose their own domestic

automotive market share.Physical

Environmen

t

a. Reducing fuel consumption

with small eco-cars and

hybrid/electric cars.✔

Conclusion: The increasing need to be environmental

friendly has created a new market for eco-friendly

cars.

To further analyse the profit potential of automotive industry

in Malaysia, the Porter’s 5 forces tool is used.

Threat of New Entrants: The automotive industry in Malaysia

has high economies of scales basing on the numbers of vehicles

the country produced in a year. For Proton Motors, the models

they offered are either outdated or just a remake model of

Mitsubishi Lancer. As such there is very little product

differentiation. The capital required to set up new

manufacturing facilities for automobile and is relatively

high. The existing distribution channels in Malaysia mainly

serve the 2 national brands and it will not be easy for

foreign brands to gain access to these distribution channels.

With Malaysia government’s protection over the their National

Car Project, the National Automotive Policy still created

unlevelled playing field for foreign brand automakers to

penetrate into the same market segment of Proton Motors. With

all these in mind, it is assessed that the barriers to entry

into the Malaysia Automotive market is high, or the threat of

new entrants is low.

Bargaining Power of Suppliers: There were about 350 companies

supplying components for vehicles in Malaysia as a result of

the government’s push for industrialisation. The large number

of suppliers indicates that there isn’t a concentration of

suppliers and satisfactory substitute products should be

available to Proton Motors. Most of these suppliers

established their business because of the National Car Project

and thus the company is a significant customer for the

supplier group. As Proton Motors is a country owned company,

it is unlikely to face any forward integration threats from

the suppliers. However, for the same reason, Proton has

restriction that limits their choice of suppliers to

bumiputera. As such, the bargaining power of suppliers is

deemed as medium to low for Proton Motors.

Bargaining Power of Buyers: In 2005, there were closed to

2,000 car dealers in Malaysia and majority of them sell

national brand vehicles. For Proton Motors, the concentration

of buyers relative to the company is low. To the car dealers,

there should be little or no cost incurred if they were to

switch supplier. However, these car dealers are unlikely to

switch supplier as Proton Motors is a government owned company

and these suppliers wouldn’t want to be black listed by the

government. For the same reason, the threat of backward

integration will be low. Overall, the bargaining power of

buyers is assessed to be low.

Threat of Substitute Products: There are a few substitute

products for private motorcars in Malaysia like motorcycles,

public transport such as trains, buses and cabs. While the

cost of switching is relatively low for customers to switch to

other forms of transportation, the comfort and convenience

level offered by these substitute products are low. In other

words, the quality and performance capabilities of substitute

products are deemed inferior to private motorcars. Overall,

the threat of substitute products is low.

Intensity of Rivalry among Competitors: The numbers of

competitors for Proton Motors is relatively low with the other

national brand as the main competitor. However, the domestic

market for the company is almost saturated with one in every

four Malaysians owning a vehicle. i.e. the industry growth

rate will be slow. The fixed costs and storage costs for

automakers are assessed to be high and that may increase the

intensity of competition. Proton Motors products generally

lack differentiation and were deemed to be inferior to other

brands in terms of safety and quality. Coupled with relatively

low switching costs for customers to switch to the other

national brand, it is likely to fuel the intensity of rivalry.

Lastly, as a national car project and a government owned

company, the exit barriers for Protons Motors are high.

Overall, the intensity of rivalry among competitors for Proton

Motors is high.

From both the general environment and industry analysis, the

overall attractiveness of Proton’s operating environment in

Malaysia does not appear to be good if the company continues

to do things the same way it did.

Question 3a. Based on your findings in Q1 and 2, assess

Proton’s SWOT.

From the internal analysis, Proton’s strengths comprise its

core competencies like the strong management team and strong

distribution channels. The manufacturing can be considered one

of its strength since the company has attractive manufacturing

facilities. However, these strengths are easily offset by

their weaknesses like lack of R&D and over-reliance on

technology transfer from others via joint venture or

acquisition. This has resulted in inferior quality products

that lack differentiation being produced and it further led to

their key weakness, an inferior brand name. From all these

weaknesses, it is evident that Proton does not understand the

needs of customers in the respective domestic automotive

market segments therefore was unable to satisfy their

customers’ needs.

From the external analysis, the threats facing Protons are the

close to saturation domestic market for motorcars, the

populations still recovering from the financial crisis in

2009, strong competition from the other national brand,

Perodua, and if they government face further pressure from the

ASEAN to lower their overall tariff on car imports. For the

opportunity side, the company continues to enjoy some level of

protection from the government that ban the import of used

vehicles and only allowing other foreign carmakers to supply

vehicles catering to a different market segment from Proton.

However this opportunity is shared by the other national brand

automaker as well. The biggest opportunity for Proton in the

local domestic market is perhaps the changing trend to eco-

friendly vehicles whereby the foreign brand automakers are

only able to enjoy the tax-free incentives till July 2011.

After that, there maybe a void in supplies of eco-friendly car

that can fit the budget of the general population. This is due

to the hefty taxation imposed by the government on foreign

brands automakers thereby causing the car price to increase.

Question 3b. Using the preceding analysis, appraise Proton’s

business-level strategy. Conclude with supporting reasons,

whether Proton continue to adopt the same business level

strategy for the future?

From the case study, it was shown that the market segment that

Proton initially focused on is the sub-compact passenger

vehicles and specifically on engine size from 1,300 to 1,600

c.c. Subsequently, with the renew alliance formed with

Mitsubishi, the company ventured into the 1.8 to 2.0l segment

and also in the MPV segment. This shows that the company is

targeting at the broad market segment. The case study also

indicated that Proton’s car price is the lower than the

market, or the other national brand automaker. Overall, the

business-level strategy of Proton is more akin to the cost

leadership strategy.

In order for cost leadership strategy to work, there must be

some forms of competitive levels of differentiation that

creates values for their customers. The reason why Proton was

able to keep the cost of their vehicles low was probably due

to little or non-investment into R&D and obtaining grants from

the government. The company had relied on forming alliance

with existing carmaker and acquisition of automotive company

to gain technology capabilities. As such the company wasn’t

able to innovate when Mitsubishi exited the joint venture. In

fact, the vehicles produced by Proton were deemed inferior to

other brands with lack of safety features and of poor quality.

While the company was able to sell their vehicles at a lower

price, the quality of their products wasn’t able to match up

with the customer’s needs.

It was stated that Proton had to get their supplies from

bumiputera suppliers and sometimes the prices charged by these

suppliers are 50% higher than others and this in turn resulted

in unnecessary higher cost. Also, the main competitor of

Proton, Perodua’s strength lies in their ability to streamline

their manufacturing and inventory system, which means they

have an efficient manufacturing and inventory system that will

help to cut costs better than Proton. Even with better cost

efficiency, Perodua was able to sell their cars at a higher

price than Proton as their products quality surpassed Proton

and were able to better meet the customers’ needs.

Ultimately, manufacturing is not the core competency of Proton

and that does not favour cost leadership strategy. If Proton

wishes to continue with the current strategy, they must start

to develop new core competencies in manufacturing and

management information systems.

Question 4. Assess the competitive rivalry of Proton and its

rivals by analysing both market commonalities and resource

similarities. Conclude by discussing the factors affecting the

likelihood that Proton’s competitors will take competitive

actions in the industry.

The main competitor for Proton is Perodua and it was stated in

the case study that while both companies share the same sub-

compact passenger vehicle market segment, Perodua avoided

direct competition by focusing on a lower engine capacity

vehicle sub-segment. However, this sub-segment will still

affect the overall segment of sub-compact passenger vehicle

whereby Proton is focusing on. In terms of market commonality

for Proton and Perodua, it is deemed to be medium to low.

From the resources similarity perspective, both companies have

some overlapping resources like the list of government

policies that benefits only the national car brands stated

earlier, the manufacturing facilities and also the

distribution network in the domestic market. This suggest that

both companies have medium to high resource similarity. In

this situation, they fit the 4th quadrant of the framework of

competitor analysis whereby there is low market commonality

and high resource similarity.

To analyse the factors affecting the likelihood that Proton’s

competitors will take competitive actions in the industry, the

drivers of competitive actions and responses are first

examined. For the first driver, both Proton and its competitor

should be aware that they are in the 4th quadrant of the

competitor framework and they both compete with similar

resources but overall, Perodua has stronger technological

resources due to its partnership with Daihatsu and therefore

resulted in stronger reputational resource that their product

quality is superior to Proton’s. For the next driver, the low

market commonality between the 2 companies will motivate

Proton to attack the rival since the company would perceive

the response from the rival will not affect the rest of the

market segment that Proton currently have a hands on. On the

other hand, Perodua’s motivation to respond to Proton’s attack

depended, to a large extend, how they perceive the attack will

affect their sales. There may be a non-response from Perodua

if they perceive the attack as non-consequential to his market

position. Finally, the abilities of both companies will be

taken into considerations when analysing the competitive

behaviour. While both firms have similar resources, it was

discussed earlier that Perodua has competitive advantages over

Proton in terms of manufacturing, management information

systems and marketing, which means it has stronger abilities

to launch or respond to competitive action as compared to

Proton.

The first factor affecting the likelihood of Perodua taking

competitive actions in the industry is the first-mover

incentives. As of 2010, Perodua was the biggest domestic

automobile manufacturer in Malaysia and it led the market with

a 31.2% share. However, the domestic market for conventional

passenger car is closing to saturation and there is a need for

Perodua to explore new market segments in the domestic market

to continue to be profitable. From the good response to the

eco-friendly cars launched by Toyota and Honda in 2011, Proton

announced that it would launch a hybrid model in about two

years time. In order not to lose the first-mover incentives of

launching a hybrid model under the flagship of national car

brand, coupled with the strong technological support from

Daihatu, it is very likely for Perodua to initiate the

competitive action by beating Proton to launch a hybrid model

first.

The next factor to consider is the organizational size of

Perodua and also the slack resources it held. Perodua’s

business partner is Daihatu and Daihatu’s parent company is

Toyota. Toyota had existing technologies and expertise to

manufacture hybrid cars and it is likely that Perodua will be

able to tap on its business partner’s linkage to gain

technology transfer from Toyota. This will in turn help to

build on their core competency of manufacturing and marketing

in terms of products. With its organizational size and

resources, it is likely that Perodua will press on with the

competitive action.

Lastly, the quality of the hybrid car produced by Perodua is

the last factor affecting the likelihood of competitive action

launched by Perodua. Perodua had done relatively well in the

marketing aspect by ensuring that the cars they produced are

of superior quality and thus build up its positive branding

image. If the company is unable to produce a hybrid model that

will commensurate with its reputation and brand image, they

will not be likely to launch the competitive actions against

Proton, and the reverse is true. With the support from its

partner, it is likely that Perodua will be able to achieve the

product quality for the hybrid model it produces and therefore

will be likely to initiate the competitive action against

Proton.

Question 5. Using only preceding analysis identify 5 key

issues that will weigh into the future strategic decision of

Proton and formulate corresponding strategies that will help

the company regain its market leader position.

From the analysis thus far, the 5 key issues that will weigh

into the future strategic decision of Proton are (1)

constantly understanding the needs and expectations of the

customers; (2) need to enhance its manufacturing capabilities

to become one of its core competencies; (3) need to constantly

acquire new technologies; (4) seizing new opportunities in the

saturated domestic market; and (5) recover from the bad brand

name.

From the SWOT analysis, it is observed that Proton did not

understand what are the needs and expectation of the

customers, in particular, the sub-compact passenger market

segment. The company might have assumed that as long as they

are able to keep the price of their vehicles relatively lower

than competitors, they do not need to worry about other

aspects of the customers’ needs and expectations. This had led

the company to produce vehicles that couldn’t satisfy the

customer’s needs and expectations and subsequently resulted

sales decline over the years. To set the fundamentals right,

after Proton had identified the target market segments that it

will compete in, the company should conduct market research to

determine what are the respective targeted market segments’

needs. Based on the findings, the company will then determine

which customers’ needs they want to satisfy.

Once these have been established, Proton will need to develop

certain core competencies in order to satisfy their customers’

needs. In this case study, it appeared that cost was not the

only consideration to the customers but also the quality and

safety aspects of the car when deciding which brand to buy.

Therefore, Proton will need to develop its manufacturing

capabilities and management information systems to be able to

build cars at lower cost and can still satisfy quality and

safety needs.

As the needs are ever evolving over time, there is a need for

Proton to constantly keep track and keep up to fulfil these

changes. Thus, there is a need for the company to constantly

acquire new technologies either by R&D efforts or technology-

transfer from established automakers. A good illustration

featured in the case study is the new opportunity of eco-

friendly vehicles gaining good response from the already

saturated domestic automotive market. If Proton had keep track

of the global green initiatives, it would have invested to

gain the hybrid technologies and launched a hybrid model

vehicle and enjoy the first mover incentives.

While hybrid cars presents a new opportunity in the saturated

domestic market, the new market segment is still relatively

small to sustain the business in the long term. The main

casual factor for market saturation lies in the system whereby

there is no life-span restriction imposed on vehicles. That

means one can drive the car for as long as 15-20 years or

until the vehicle is totally unserviceable. With the

government’s backing and strong management team of Proton, the

company may request the government to regulate the life span

of vehicles in Malaysia.

The last key issue will be solved when the first 4 issues are

addressed. It will be a matter of time for Proton to recover

its brand name. A good marketing campaign will shorten the

time required for Proton to recover its brand name.

Finally, determine which business level strategy to adopt,

Proton needs to consider the market size required to sustain

its business and the fact that the majority of the population

has only medium income. With these considerations, it is

recommended that Proton continue to target the broad market

and lowest cost. i.e. to continue to adopt cost leadership

strategies. However, it must be noted that this strategy will

only work when the key issues above are addressed.