OSCILLATING BETWEEN A RELATIONSHIP-BASED AND A MARKET-BASED MODEL THE SALIM GROUP
Written on 15.17 by Dimas Sugeng Rachmadi
JOURNAL DIELEMAN & SACH
OSCILLATING BETWEEN A RELATIONSHIP-BASED AND A MARKET-BASED MODEL THE SALIM GROUP
(REF : PUBLISED ONLINE : 13 DECEMBER 2006 # SPRINGER SCIENCE + BUSINESS MEDIA, LLC 2006 BY MARLEEN DIELEMAN & VLADIMIR SACH)
1. Salim Group philosophy :
[Liem’s] philosophy was the right one. He already knew what I learnt much later: You need to have a company with a continuous positive cash flow. With this you can borrow 3 times as much. He started with cement, and was the only cement-maker for the first 10 years. He had a monopoly in cement and also in [flour] milling with Bogasari. He was very smart to see this. With the cash-flow from these businesses he built up the rest. BCA [Bank Central Asia], the bank, helped in this. BCA was created early on
This is his biggest strength: he could foresee what others could not.
Suharto had a group of favourite ethnic Chinese businessmen, but none of them became as successful as Liem, whose Salim Group developed into the largest diversified group in Indonesia. The Group earned the reputation of one of the most professionally run conglomerates in the country. It is likely that this crony model facilitated the development of professional management skills that enabled the Salim Group to grow beyond a typical Chinese Family Business and surpass its peers.
2. Institutionalising the business
Rapid growth also offered opportunities for the group to distance itself from the profitable but risky Indonesian alliances into the international business arena. In the words of Anthony Salim: From 1972 that’s when the crossover occurred. When we start to become much more by design rather than opportunity driven. Design in the selection of the business opportunity. (..) We still have the contacts and contracts with the government. From 1979 we started to sort of elevate ourselves from government to market based enterprise. We do understand a lot of political implications, because we try to choose that it is much more on business directions rather than government related business— which is still good. Another characteristic is that of course we start to balance our portfolio. We have no pretension to hide that we have started to invest outside Indonesia since 1975, when we created our Singapore and Hong Kong companies.
Although Liem in his time perceived the opportunities of a relationship-based model for his emerging conglomerate, his son and heir Anthony Salim foresaw that another model, independent of personal relationships, was necessary. But even though Anthony Salim claims that the pendulum swung in the direction of market-based strategy in 1972, there is plenty of evidence that the relationship-based model continued simultaneously.3 Sato (1993) suggests numerous links to the government in her study of the Salim Group. Telling examples are the 30% ownership of the Suharto family in Bank Central Asia,4 and government support to Indocement in 1985 (Dick 1985). Yet what Anthony Salim called the “designed” or market-based strategy also took off, in the form of rapid internationalisation. Anthony Salim, with his UK education and international experience, probably triggered this transition. In 1995 as much as 26% of the group activities were located outside Indonesia, mostly in Hong Kong, The Netherlands, Singapore and China (Salim Group brochure, 1995–1996). With earnings of over USD 20 billion, and a large geographical scope, the Salim Group could now be considered a substantial “dragon multinational” in the region (Mathews, 2006). In the 1990s the group placed non-core businesses under trusted professional managers, whereas the traditional cash cows in Indonesia, in particular Indocement, Bogasari and Indofood, remained under direct leadership of the Salim family and their associates. Thus while business diversified the soul of the now impressive Salim Group remained in their Indonesian (quasi) monopolies, which were strongly associated with preferential treatment by the Suharto government.
In conclusion, the case study of the Salim Group suggests the existence of two different strategic forces: the pull of the relationship-based model and the push to the market-based model. This empirical research, one of the first longitudinal studies on this topic, strongly supports theoretical work on the transitions from a relationship-based to a rule-based model (Peng, 2003; Peng & Zhou, 2005). It further clarifies how internal factors, such as generational change, and external factors, such as regime change, influence the strategic model of the Salim Group over time. In addition to finding evidence for a one-directional
transition we note that external and internal stimuli give rise to an oscillatory pattern. As
such, this paper supports existing theory but also proposes a new and rich method of
studying how these transitions take place.
