Thhe Asian Journal of Technology Management Vol. 7 No. 1 (2014): 9-18

Linking Technology Capabilities to Marketing Requirements: Case of Indonesian Aircraft Industry

Yulianto Suharto1* 1School of Business and Maanagement Institute of Technology, .

Abstract. The relationship between strategic technology planning and the overall business strategy has been one of the growing fields that attract much interest both from academics and industrials point of view. The increasingly important role that technology plays in today’s business success is well established. Strategic technology planning activities--within a corporate level--are often implemented by applying integrated planning instrument, which allow firms to consider both technology-oriented and product-oriented aspects. This paper is an attempt to explore the role of strategic planning in the high tech industry using a specific case of aerospace industry in Indonesia. In order to compete effectively in the open global market place, the company must learn to integrate technology management with strategic plana ning. In other words, all top managers have to link their technology capabilities to marketing requirements.

Keywords: technology planning; business strategy; technology capability; marketing requirement; strategic mix

1. Introduction transpportation and sea, so as to support the mobility of business activities and citizens Aircraft industry is considered one of the who need a quick means of transportation. most important and the most strategic Aircraft industryy is also very strategic for industry for Indonesia. It became so Indonesia as an industrry-based high important to the economic development of technology; it could lead Indonesia in line Indonesia since the country has a wide area with other developed countries. It also and is naturally composed of thousands of showed how a nationalist rhetoricshapes islands with difficult and different the symbolic and physical construction of geographical conditions and thus requires technology (Amir, 2007). Based on these adequate transportation. The airplane has views, the Indonesian government develops the advantage in speed and power to this industry as a means for technology achieve when compared with land transfer process.

*Corresponding author. Email: [email protected]

DOI: http://dx.doi.org/10.12695/ajtm.2014.7.1.2 Print ISSN: 1978-6956; Online ISSN: 2089-791X. Copyright@2014. Published by Unit Research and Knowledge School of Business and Management-Institut Teknologi Bandung.

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The Asian Journal of Technology Management Vol. 7 No.1 (2014): 9-18

Dirgantara Indonesia is the only aircraft flights with a range of 800 miles. The team industry in Indonesia, which assumed all the learned that many of Indonesian airlines missions that have been mentioned above. were still using Fokker 27, an aircraft type Dirgantara Indonesia is the name that was that soon will be phased out. A moderate inaugurated by the 4th President of the estimate suggested 400 mid-range airplanes, Republic of Indonesia, Abdurrahman with possibly a higher number in foreign Wahid in , on August 24, 2000 for markets. In the early stage, the new project the aircraft industry in Indonesia, which sought to design a 30-seat aircraft, hence the replaces the name of IPTN (Nusantara title N230 and renamed it later to N250. Aircraft Industry) that have been pioneered Further study revealed that the market since about 25 years ago. wanted a 50- seat aircraft. At the 1989 Paris Air Show, Habibie publicly announced the 2. Business Strategy of Dirgantara N250 project to the international aviation Indonesia community (Amir, 2007).

Dr. Habibie (long-time minister for The N250 is a propeller aircraft that cruises research and technology and a former at speeds up to 330 knots, the fastest president of the Republic of Indonesia) propeller airplane in the subsonic class. It himself started the Indonesia Aircraft relies on a fly-by-wire flight control system Industry (it used to be PT. IPTN and then that provides fully powered, electrically changed its name to PT Dirgantara controlled hydraulic service for both Indonesia) and promoted a concept of primary and secondary control surfaces of four stages of technological an airplane. The N250’s fly-by-wire covers transformation with a very catchy phrase: three axes—directional, lateral, and “begin at the end and end at the beginning,“ longitudinal—a great innovation encompassing four distinct stages- considering similar systems covered only assembling final products, manufacturing one or two axes. IPTN engineers later components for assembly, designing extended the N250’s structure to product components, and producing new accommodate 70 seats without additional systems. Although he did not disclose the engine power, making it more attractive in strategic mix explicitly, it is apparent that the market (Angkasa, 1995). the commuter aircraft production history of Dirgantara Indonesia: CN-212 (12 seater) At that time, Habibie was so confident that assembling in 1976, CN-235 (35 seater) the N250 would be competitive in the world manufacturing in 1983, CN-250 (50 market (Berita Buana, 1994). Habibie and seater) design and manufacturing in 1989, team sensed the need to expand its market and the plan to produce a completely to the North America. The company began new aircraft (around 100 seater) by 1995. its debut by opened a branch office in The company is already producing parts Seattle. It also planned to build a through subcontracting for Boeing (USA) manufacturing plant in Mobile, Alabama and undertaking high-level design activities (Republika Daily, 1995). Obviously, for a for CASA (Spain). developing country such as Indonesia, the superiority of the N250’s technical features In 1987, inspired by the emerging market of became a source of pride for the whole an 800 mid-range airplanes, a small team of country. Claimed to be entirely created by engineers conducted a technology-based Indonesian engineers, the N250 marked survey on the emerging market in regional what Habibie called the ‘‘stage of

10 , Linking Technology Capabilities to Marketing Requirements: Case of Indonesian Aircraft Industry technological independence’’ (Republika strategies in developing country, there is Daily, 1995), which proved that Dirgantara also a lack of clear understanding of option Indonesia had the capability to master and opportunities. For example (Sharif, sophisticated technologies and move 1994), in the foreseeable future, existing forward in the development of new ones. Indonesian industries will have to attempt The N250 was the symbol of technological the difficult task of survival in an open nationalism that Habibie and his engineers economy on the basis of upgrading their at Dirgantara Indonesia had relentlessly production facilities through imports. But advocated. they found out that, exporting raw-materials and primary goods to pay for imported 2.1. Technology Development machinery and process know-how, is a MIT Commission (MIT Press, 1989) losing business, because the purchasing conducted a research on industrial power of these commodities have steadily productivity in USA and states that --for fallen while that of machinery has continued success in world trade, new continuously risen over the last two ideas generated in the United States and decades. Furthermore, state-of-the-art elsewhere must be converted into machinery, which can give true competitive products and processes that world-wide edge in the international market, is normally customers want, when they want them, not sold but can only be exchanged for and before competitors can provide something equally valuable (Pavitt, 1990). them-and those must be produced efficiently and well--. This statement is Sharif (1994) proposed his attempt to equally valid for developing countries such integrate technological considerations into as USA, since they accept the free market overall business strategies of an enterprise concept and inspire to join the global for successful competition in the economy. Therefore, to compete effectively international market, under the current in the open global market place, a company circumstances in developing countries. It is must learn to integrate technology found useful to begin the desired integration management with strategic planning. In process by considering presently practiced other words, all top managers have to link business strategies, which give, rise to technology capabilities to marketing comparative advantage in the market place. requirements (Sharif, 1994). Dirgantara The business strategies can be categorized Indonesia, as a state-owned enterprise is as striving for: under a strong pressure to be more • Price leadership through producer cost internationally competitive and to improve minimization; its productivity. Top managers of • Quality leadership through user value Dirgantara Indonesia are fully aware on the maximization; pressure of integrating their business and • Niche leadership through segment technology strategies. However a feature specialization; and methodology for doing so is still lacking. In • Image leadership through customer addition to the lack of methodology of prestige creation integrating business and technology

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Figure1. Integrating Strategic Mixes to Market (Sharif, 1994).

The shaded area in Figure 1 indicates that as the technology leader in small commuter although strategic emphasis may shift but segment of civilian airline. earlier stages are not ignored. Different combinations of the business and 2.2. The Company technology strategies may be utilized for Dirgantara Indonesia or Indonesian different segments of the market that give Aerospace (IAe) is one of the indigenous different values to the customers and profit aerospace comppanies in Asia with core to the enterprise. However, it may be noted competence in aircraft design, development that success and failures of technology and manufacturing of civilian and military strategy progression depends to a large regioonal commuter aircraft. Since being extent on the intensity and nature of established in 1976, the company has interactions among the elements of the successfully exploited its ability as industry system structure (Sharif, 1994). of manufacture and has diversified its product not only in the field of aircraft but In the context of Dirgantara Indonesia, the also other area such as Information company currently focuses on follower Technology, Automotive, Maritime, strategy. If Dirgantara Indonesia could Simulation Technology, Industrial Turbine, integrate its technology strategy with and Engineering Services (Indonesian business strategy that specialize in niche Aerospace, 2010). Until the year of 2009, market and come up with reactive strategy Dirgantara Indonesia has delivered more to create segment superiority in its niche than 300 units of aircraft & helicopters, market, it will result in high value market as defence system, aircraft components and described on the Figure1. Its possible that in other services. another decades, the company could emerge

12 Suharto, Linking Technology Capabilities to Marketing Requirements: Case of Indonesian Aircraft Industry

Figure 2. Products and Services of Dirgantara Indonesia (, 2010).

3. Strategic Business Unit (SBU) in felt thhe necessity to have a suitable strategy Helicopter Products that could guide them in this harsh environment. Helicopter business unit at Dirgantara Indonesia is a special case. Since 1976, when 3.1. Economic Crisis in 1998 Dirgantara Indonesia was established, this As a result of the economic crisis in 1998, SBU has enjoyed monopolistic privilege in the government was forced to stop when Indonesia due to the Inpres No.1 1980 the addditional investment needed for further (Presidential Instruction; 1980) that exclude development of the Dirgantara Indonesia, competitor by prohibiting importing especially in relation to the N250 aircraft helicopter that similar in size with its development innvestment that is very products. Dirgantara Indonesia holds expensive. It should also be recognized that licenses to produce and market 3 types of in thhe earlier level of the development, the helicopter: light-class helicopter BO-105 cost of development and operations of (Euro copter), medium-class helicopter Bell- Dirgantara Indonesia was considered to be 412 (Bell Helicopter Textron) and heavy- very wasteful in the form of purchase of class helicopter Super Puma-332 expensive equipment. During Habibie's (Eurocopter) (Sriyanto, 2001). leadership, somee economists said that the company implementing many inefficiencies When the economic crisis hit most of the policy and considered Dirgantara Indonesia Asian countries including Indonesia in 1998, as an expensive industry (high-cost aircraft the government was under strong pressure industry), which is not sensitive to market not only to invalidate the presidential demand. In fact in many cases, other instruction and to legislate anti monopoly counntries that also have aviation industry regulation but also to invalidate tariff working with the principles of efficiency exemption for aircraft/helicopters’ material and competitive cost structure as the aircraft and component that eventually increases the industry in China, India, South Korea, production cost of the helicopters. In Brazil, etc. addition to that, the SBU also faced the reality that their technology has reached its Dirgantara Indonesia continued to mature level. The productivity has decreased experience liquidity problems and working and it operates inefficiently. So the company capital which affects the company's

13 The Asian Journal of Technology Management Vol. 7 No.1 (2014): 9-18 operations during the year of 1998 until the Dirgantara Indonesia will only be end of 1999. The government at that time is entering a period of further working hard to find a solution to save development. During this time, the Dirgantara Indonesia. One option is the team start to formulate a business closure as recommended by the IMF reorientation, restructuring of human (Stackhouse, 1998). But some analyst during resources, financial restructuring and that time though that it would be huge improving corporate performance. financial losses for the country if the company would shut down not mentioned a 2. In order to reorient the company's heavy investment in the form of tens of business during the period of thousands of employees who are well consolidation, Dirgantara Indonesia educated and have the expertise will be lost was asked to be more focus on the in vain. In addition, the vast archipelago production of spare parts and such as the Republic of Indonesia clearly components for world corporate requires a good and solid aviation and giants like Boeing, , British maritime industries as long as it is Aerospace, etc since at that time, competitive and in accordance with market Dirgantara Indonesia was already well demand. known for its competitive parts and components production. Another 4. The Rescue Program production is limited only to the production of helicopters, CN-235 With such considerations, the government aircraft and weapons support formed a special task force under the equipment. authority of ministry of economic. They decided to keep Dirgantara Indonesia with 3. Structural changed of directors and paradigm shift from high-cost aircraft commissioners with the criteria of industry to be competitive-cost aircraft integrity, leadership, technical skills, industry (competitive airline industry). and must be well-known among the Product development should not be made world aviation industry. The last on the basis of State power or influence criterion is necessary because during (power approach). Technology push the redemption period, management strategy changed to market pull strategy. must be able to get a job order from Production should be determined based on Boeing, Airbus, British Aerospace. In analysis of market demand and competitive addition, the number of directors be ability not determined by the taste of reduced from 9 to 5 people, and management on certain kind of technology appointed Chief of Staff of the Air that they like the most. Force as the Commissioner (Ex- officio). Paradigm shift is needed in order Dirgantara Indonesia can survive and grow in the 4. The company also audited. Financial future. Some dramatic changing was taken audit conducted by Ernst & Young, place at that time (Ramli, 2003): while the prospects for future audits 1. The team decided that the period conducted by Deloitte Touche. 2000-2003 as a period of Deloitte Touche audit conclusion is consolidation and survival for that the Dirgantara Indonesia has Dirgantara Indonesia. If this period capital in form of: infrastructure, safely passed, then after the year 2004 machinery and products that can be

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made of capital to build the future of 3. Business diversification had generate Dirgantara Indonesia better. new market segments such as engineering services business and 5. Debt restructuring and reduction of aircraft engineering (Engineering & financial burden. Based on the results Technology Services) of 3%, making of due diligence process of Ernst & the software services space systems Young and Deloitte Touche, and and information technology as much commitment to the New Board of as 5% and business aircraft interior Directors to restructure the company. engineering 0.5%. The special task force also decided to lead a debt restructuring program, 4. Decrease in production costs as with a pattern of "debt to equity shown by the increased efficiency of swap", To improve the traffic labor. The ratio of sales per labor efficiency of raw materials and force increased from IDR 66 million components, as well as to reduce in 2000 to IDR 137 million in 2001. production costs for aircraft and helicopters, the Minister of Finance 5. Consumer confidence increased, gives the status of Bonded Zones to marked by the success of the sales Dirgantara Indonesia. contract of 2 pieces CN235 aircraft for VVIP version used by the 4.1. Result of The Rescue Program President of South Korea, 2 aircraft In May 2002, Ernst & Young's financial CN235 VIP version that will be used audit reports issued Dirgantara Indonesia for Ministry of Defense and Air Force for fiscal year 2001 to 2002, with of Malaysia, and 2 CN-235 aircraft to unqualified status. Based on Ernst & Young Pakistan Air Force. In addition, audit, the proven performance of Dirgantara Indonesia obtained long- Dirgantara Indonesia showed encouraging term contracts for 10 years making results, among others(Ramli, 2003): wing components for the world's largest passenger super jumbo Airbus 1. Sales increased from IDR. 508 billion A380 from British Aerospace. In in 1999 toIDR. 689 billion in 2000 addition Turkish Air Force also has and rose again to IDR. 1.4 trillion year appointed a consortium consist of in 2001. Dirgantara Indonesia and Thales of France to develop the type of aircraft 2. The company was able to change its CN235 maritime patrol. The losses to a profit state. In 1999 the Government of Iran gave credence to company suffered losses of IDR. 75 experts of Dirgantara Indonesia to billion, while losses in 2000 decreased work on the conversion project of to IDR. 73 billion and in 2001 losses Russian aircraft into cargo aircraft for turned into profits of IDR. 11 billion. military operations.

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Sales Profit/loss from operation net/loss income (Billion IDR) (billionIDR) (Billion IDR)

Figure 3. Performa of Dirgantara Indonesia in 1999 – 2001 (Ramli,, 2003; Ernest&Young, 2001).

5. Discussion than US$ 2 billion in Dirgantara Indonesia, an enormous amount for a developing In many countries, the aircraft industry is counntry with a GNP per capita under US$ strongly regarded as a source of technology 1000 (Amir, 2007). Until the year 2000, renewal and economic development. Over Dirgantara Indoonesia has been relatively the last few decades, Indonesia, a successful in the area of technology developing country with a mainly relied transformation, aerospace technology and heavily on agricultural economy, has been mastered in aircraft design, development, investing in the aircraft manufacturing and produce small regional commuter industry in an enormous amount. aircraft-being. Dirgantara Indonesia has become one of the leading aircraft By 1995, the industry employed 16,000 industries in the region in Asia with core skilled workers and hired hundreds of competence in aircraft design, development Indonesia’s best scientists and engineers, and production of aircraft carriers, small to especially those with doctoral degrees from mediium size for both civilian and military. prominent universities in Europe and North Analysis shows that this industry has America. Over the course of the next two successfully moved from an exploiter decades, the government invested more strategy to the present level of follower

16 Suharto, Linking Technology Capabilities to Marketing Requirements: Case of Indonesian Aircraft Industry strategy, and hopes to move into the human resources based on competency-- leader strategy. were conducted. However, external conditions were changing rapidly in the mid However, technological capabilities that of 90's. The economic crises in Indonesia have been mastered through the learning during 1997-2000 worsen the condition of process are not coupled with management Dirgantara Indonesia. capabilities, including the ability to anticipate the growing world market fast 6. Conclusion enough. Weaknesses in the managerial side were compounded by mid-1998 economic The pride of being able to create its own crisis and political instability that has shaken aircraft industry has its consequence. The Indonesia's economic capabilities. It status establishment of Dirgantara Indonesia has of the original company --fully government been the largest and most ambitious owned-- in 2000 turned into a full limited investment by the Indonesian government liability company in which PT Bahana to promote technology development in the Pengelola Industri Strategis (BPIS) as its country. Despite the heavy investments in shareholder. engineering and production facilities and various technology achievements to its These conditions lead to the shrinking of credit, the company has had limited the company. Therefore Dirgantara commercial success. Indonesia changed the paradigm of the organization of technology-oriented The case of Dirgantara Indonesia indicates industries with the total support of the that technology strategy that did government towards a more industry- accompanied by the right business strategy oriented business. Although from the can lead the company into serious economic point of view (cash flow problems. However, there is a hope that economics) has not contributed much yet, Dirgantara Indonesia will change to its but it is believed that this industry has optimal organizational transformation. The become a national asset and has contributed transformation in question is the ability to in the mastery of technology (technology leave the past that are less good (the process cash flow). of learning how to relearn and learning how to unlearn), and then find the future of The next thing that the company did was Dirgantara Indonesia (the process of business reorientation, HR & learning how to learn), especially in the Organizational restructuring, financial context of the transformation of character restructuring and capital and corporate of a leader and visionary that is pivotal for the company. performance improvement programs: performance marketing, business restructuring, and operational efficiency.

Grouping it business to core and non-core and the establishment of business units were done as a part of business re- orientation. Human resources re- arrangement program such as-- implementing an early retirement program to employees, and the arrangement of

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