Industrial Mapping in Capital City District of Jakarta by using Analytic Hierarchy Process and Strategic Management Approach

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1 Industrial Mapping in Capital City District of Jakarta by using Analytic Hierarchy Process and Strategic Management Approach Anna Felicia Kusumaningtyas 1,a, Andri Wijaya 2,b, and Arian Dhini 3,c 1,2 Industrial Engineering, Universitas Indonesia, Depok. a anna.felicia@ui.ac.id, b andri.wijaya91@ui.ac.id 3 Industrial Engineering, Universitas Indonesia, Depok. c arian@ie.ui.ac.id Regional development is important for the existence of an area. One method to develop a region can be applied by focusing on its core competence. This study discusses the core competencies of DKI Jakarta as a way for empowering the area. The method consists of Analytic Hierarchy Process and Strategic Management Approach. The result stated that the core competencies of DKI Jakarta are transportation and textile industries. Then, a strategic roadmap is made to expand those industries. Keyword : core competence, Analytic Hierarchy Process (AHP), strategic management 1. Introduction Development of a region is necessary for enhancing public welfare and its existence. However, every region has its strength and weakness to be developed, including human resources, material resources, infrastructure support, and governmental support. Nowadays, industrial sector becomes the main aspect to be empowered as the competitive advantage of a region. It is considered as an essential factor to create a new job employment and increase regional revenue. The concept of core competency was introduced by Prahalad and Hamel (1990) as a competitive advantage for future competition. Core competency is defined as an integrated bundle of skills and technologies that delivers value to the company and customer. In some counties, core competency could be used as a development foundation, since it states the competitive advantage of those counties. Markides, Prahalad, and Hamel (1990) stated that core competency must have these characteristics : offer a real value for customers, should be difficult for competitors to imitate, and provide potential access to wide variety of markets. From regional economy perspective, core competency is a group of integrated skills that could be used to build regional competitive advantages by exploiting the uniqueness of it (Depperin, 2007). Radiah and Rosli (2009) stated that Japan applies One Village One Product concept, while Malaysia does One District One Industry policy. In Indonesia, we have a similar program, named Satu Kabupaten Satu Kompetensi Inti (Sakasakti). Vol. 21 No. 1, Juni

2 However, there are some regions who have not found their local competencies, yet. Capital City District of Jakarta, abbreviated in Indonesian to DKI Jakarta, is an example of a region that has not recognized and mapped its core competencies. Therefore, this research focuses to help Capital City District of Jakarta to discover its potencies. The output will form an industrial map generated by Analytic Hierarchy Process (AHP) and Strategic Management approach. 2. Research Methodology Regional core competencies can be determined by reviewing some internal and external factors, based on a region s industrial sector and subsector. These required data, which could be found in Badan Pusat Statistik (BPS), will be learned thoroughly so that it could interprete the prime industry from Capital City District of Jakarta. After choosing the prime sector, the subsector can be appointed. Prime subsector is set by learning the BPS data as before, then we can get an industry that has the biggest added value. This subsector will be determined as the core competency of Capital City District of Jakarta. The determination of Jakarta s core competency implements AHP (Analytic Hierarchy Process) method. AHP could be used to analyze quantitative or qualitative data. Mostly, AHP is utilized to solve multi objective and multi criteria problems based on preferences ratio of each element. Weighing in AHP process eases us to make a decision, since the decision maker has cognitive and thought inadequacy. AHP offers a problem solving way that involves all of complexity sources with many criteria (Latifah, 2005). Core industrial subsector must be based on some criteria. These criteria are chosen by Dinas Perindustrian dan Energi DKI Jakarta and enriched by literature study. Besides, we also arrange interview with four experts, who come from an academician and three industrial practicians. According to the interview results, we determine the weight for each criteria. To point the main industrial sector, we collect various secondary data of each sector that meet those criteria. Meanwhile, deciding the subsector is just based on existing subsector in Jakarta. Verification and validation are necessary by interviewing experts. When core industry of Jakarta was established, the next step is formulating strategies for each subsector by using strategic management approach. Strategic management approach involves three stages of strategy arrangements, which are input stage, matching stage, and decision stage. Input stage is a step to collect data to recognize actual condition of an industry. By using tools of Internal Factor Evaluation Matrix and External Factor Evaluation Matrix, internal and external condition of an industry could be explained. Internal Factor Evaluation (IFE) is a strategic management tool for auditing or evaluating major strengths and weaknesses in functional areas of a business. The IFE matrix can be created using the following five steps: 1. Identify both strengths and weaknesses in all industrial sector. It is suggested to identify 5-10 internal factors, but the more, the better. 2. Assign a weight that ranges from 0.00 to 1.00 to each factor. The weight assigned to a given factor indicates the relative importance of the factor. Make sure the sum of all weights is Assign a 1 to X rating to each factor. Rating captures whether the factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). 4. Multiply each factor s weight by its rating. This will give a weighted score for each factor. 5. Sum the weighted scores for each factor. This provides the total weighted score for an industrial subsector. Total weighted scores well below 2.5 point to internally weak business. Scores significantly above 2.5 indicate a strong internal position. External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing. The EFE matrix is very similar to the IFE matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors. External factors assessed in the EFE matrix are the ones that are subjected to Vol. 21 No. 1, Juni

3 the will of social, economic, political, legal, and other external forces. Matching stage has a goal to generate suitable strategy for developing a business unit. Tools that are often used in this stage are SWOT Matrix and BCG Matrix. However, only SWOT Matrix that will be used in this research. SWOT Matrix, stands for Strength-Weakness- Opportunity-Threat, provides information that is helpful in matching the firm s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. Involving four cells in two rows and two columns, it records the strategies from internal and external factors stated in input stage. The top left cell contains Strength-Opportunity Strategies, which pursue opportunities that are good fit to the company s strength. Weakness-Opportunity Strategies, located on top right cell, overcome weaknesses to pursue opportunities. The bottom left cell, named Strength- Threat Strategies, identify ways that the firm can use its strength to reduce its vulnerability to external threats. The last one, Weakness-Threat Strategies, establish a defensive plan to prevent the firm s weaknesses from making it highly susceptible to external threats. The final stage, named decision stage, aims to choose a feasible strategy to be implemented. By considering both external and internal factors as stated in input stage, industries could pick an appropriate strategy for their sustainability. Common tool to evaluate and pick a trategy is Internal-External Matrix. The Internal-External (IE) matrix is another strategic management tool used to analyze working conditions and strategic position of a business. The Internal External Matrix or IE matrix is based on an analysis of internal and external business factors which are combined into one suggestive model. The IE matrix is a continuation of the EFE matrix and IFE matrix models. The IE matrix is based on the following two criteria: 1. Score from the EFE matrix -- this score is plotted on Y-axis 2. Score from the IFE matrix this score is plotted on X-axis The IE matrix works in a way that we plot the total weighted score from the EFE matrix on the Y axis and draw a horizontal line across the plane. Then take the score calculated in the IFE matrix, plot it on the X axis, and draw a vertical line across the plane. The point where horizontal line meets vertical line is the determinant of the strategy. This point shows the strategy that a company should follow. On the X axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal position. A score of 2.0 to 2.99 is considered average. A score of 3.0 to 4.0 is strong. On the y axis, an EFE total weighted score of 1.0 to 1.99 is considered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to 4.0 is high. These strategies would be a base for composing an industrial development road map of Jakarta. 3. Results Capital City District of Jakarta has an important role as the capital of Indonesia, so that various business sectors are centralized there. According to Badan Pusat Statistik (2011), manufacturing industry gives the largest contribution for Gross Regional Domestic Product (GRDP) of Jakarta. During 2011, industrial sector contributed 15,81% of Jakarta s GRDP. Meanwhile, this sector was growing for about 4,06% from 2010 to 2011, above the average growth of national industries. For establishing the main industrial sector, AHP is applied during process initiation. In this case, there are 3 levels considered, shown in the following diagram. Fig. 1. Hierarchy of core competency determination The first level, named Level 0, is the main goal of this research, which aims to decide a core competency for Capital City District of Jakarta. The next level, called Level 1, there are 9 criteria that are divided into sociocultural criteria and economical criteria. Sociocultural criteria involves human resource examination, environmental effect, supports from goverment policies, and contribution to GDRP. Economical one include the quantity of a business unit, supply chain management, added value, investment Vol. 21 No. 1, Juni

4 rate, and export value. The last level, named Level 2, is used to list the examined industrial sectors. Fig. 1 shows the hierarchy of core competency determination process. This process involves 4 experts as our respondents, whose judgments would be analyzed by using pairwise comparison matrix in Expert Choice 2000 software. These opinions must be validated by calculating their inconsistency ratio, based on each eigen value. Those expert judgments consist of 1 to 9 ratio between two criteria, which shows the significancy of a criteria, compared to the other. A criteria that has larger value is considered to have stronger potency. Scoring 1 = equal, 3 = slightly favors, 5 = strongly favors, 7 = very strongly favors, 9 = extreme favors. Further details could be seen in the following figure. After composing criteria s weight by using AHP matrix, decision for core competencies of Jakarta could be decided by comparing two industries in each criteria. Data used for this comparison are gotten from various articles. Thus, it can be concluded that automotive and textile industry have the largest core competencies among the others. Automotive industry, which scores of 1.00, consists of 2 main subsectors : motor vehicles, trailers, and semi trailers; and other transport equipments. Textile industry, which scores of 1.00, are divided into textiles, wearing apparel, also tanning and dressing of leather. These subsectors are determined by reviewing their existence in Jakarta in Figures However, only automotive industry, who has the biggest impact to Jakarta, would be examined further to compose some strategies for their development. Motor vehicles, trailers, and semitrailers subsector employs employees on its 35 business units throughout Jakarta.With added value of Rp in 2011, this industry could contribute 7,78% to GDRP of Jakarta. However, it affected environment so badly by consuming 16,6% of total fossil fuel used at Jakarta in Other transport equipments subsector, has 16 business units throughout Jakarta with about employees. Having export value of 19,66% of total export from Jakarta, it contributes 7,78% to GDRP of Jakarta. However, the investment rate for this industry seems to be low, just 5,69% of total investment in Jakarta. Besides weaknesses and strengths, they also face some opportunities and threats. Jakarta s population that grew 1,41% per year would create a potential market for these subsectors. Moreover, population growth in Jakarta could provide a big amount of human resources to be employed. Consumer index, which gains 110,4 point in 2012, seems increasing by 1,04 point per year. It means that people s purchasing power is getting higher from year to year. Indonesian International Motor Show, raw material availability, and government policy have to be considered as opportunity, too. In other hand, inflation rate reaching 4,12% (year-to-year) must be noted to be its biggest threats. According to those actual conditions, IFE and EFE Matrix for each subsector can be composed Fig. 2. Pairwise comparison among criteria Vol. 21 No. 1, Juni

5 distinctively as a base for further examination. Motor vehicles, trailers, and semitrailers subsector scores 3.37 out of 4.00 in IFE Matrix, whereas other transport equipment scores 2.97 out of Generally, they can be concluded as having a strong internal position. Their opportunities and threats are used for arranging EFE Matrix, which scores 2.43 for motor vehicles, trailers, and semitrailers then scores 2 for other transportation equipment. It can be inferred that they have a weak external position. Fig. 3. IFE Matrix for Motor Vehicles, Trailers, and Semitrailers Industry Fig. 4. IFE Matrix for Other Transportation Equipments Industry Fig. 5. EFE Matrix for Motor Vehicles, Trailers, and Semitrailers Vol. 21 No. 1, Juni

6 Fig. 6. EFE Matrix for Other Transportation Equipments Industry Fig. 7. SWOT Matrix for Motor Vehicles, Trailers, and Semitrailers Industry Fig. 8. SWOT Matrix for Other Transportation Equipments Industry Those factors, which are listed in IFE and EFE Matrix, would be used to compose SWOT Matrix for both of them. These following SWOT matrixes will contain various strategies that could be applied for each subsector. After arranging SWOT Matrix for strategy generation stage, we can decide the best strategy by using IE Matrix. Mapping IE Matrix is not as difficult as composing EFE and IFE Matrix. As stated in previous chapter, IE Matrix shows a firm s position based on its internal and external position. Motor vehicles, trailers, and semitrailers industry (number 1) has a significant strength in its internal factors. However, it can not handle external factors properly, which makes it placed on the left-middle cell. Subsector of other transportation equipments does not have internal strength as strong as the previous subsector, so it is just placed on Average cell. In addition, its external factors make it located on Medium cell. According to the literature, a firm that has strong IFE score with medium EFE score must grow and expand its business process. It is able to be realized by differentiation and opening a large number of business unit. Thus, it is better for motor vehicles, trailers, and semitrailers industries to expand their business process horizontally. Integrating SWOT and IE matrix will result the best strategies for this industry are expanding Vol. 21 No. 1, Juni

7 distribution network and adding business unit by empowering human resources and goverment support. Meanwhile, other transportation equipment, who has average score for both IFE and EFE, must take a stabilization strategy, which aims to maintain its business process. The real strategy would tend to increase efficiency by utilizing effective human resources and apply a better investment regulation for attracting investor. In the long term, they can reach a stabilized position that enables them to grow and expand their business units. 4. Conclusion Fig. 9. IE matrix for both industries Core competencies of Capital City District of Jakarta was determined from the largest GDRP contribution, those who gives the biggest economic contribution in Jakarta. Based on Analytic Hierarchy Process, automotive industry has been chosen as the main competency in Jakarta, with score of Automotive industry is the most potential sector based on 9 criteria, which are human resource, environmental effect, supports from goverment policies, contribution to GDRP, number of establishment, supply chain management, added value, investment rate, and export value. It is divided into two subsectors : motor vehicles, trailers, and semitrailers; and other transport equipments. Each subsector would be analyzed further to create a development roadmap, based on IFE-EFE Matrix, SWOT Matrix, and IE Matrix. IE Matrix has shown that the most appropriate strategy for motor vehicles, trailers, and semitrailers industry is expansion, which is related to grow or build firm s business. Meanwhile, other transportation equipments subsector must hold and maintain the existing business units. Acknowledgement We are indebted to Fauzia Dianawati who has given us this project and Rahmat Nurcahyo-Farizal for their pioneering work in analyzing the core competency of Kabupaten Bekasi. We thank Sri Bintang Pamungkas and Romadhani Ardi of their advices in the criteria selection and weighing; Teuku Y. Zagloel, Akhmad Hidayatno, and Dana Santoso of being our experts; and Parulian Tambunan of his time to give our required data. This work was supported by Dinas Perindustrian dan Energi Provinsi DKI Jakarta. References Badan Pusat Statistik Provinsi Jakarta Jakarta Dalam Angka (Jakarta in Figures). Bradford, Robert W., Peter J. Duncan, and Brian Tarcy. Simplified Strategic Planning : A No-Nonsense Guide for Busy People Who Want Results Fast! Departemen Perindustrian Republik Indonesia Peta Jalan Pengembangan Kompetensi Inti Industri Daerah. Jakarta. Latifah, S., Prinsip-prinsip Dasar Analytic Hierarchy Process. Sumatera Utara: e-usu Reposritory. Nurcahyo, Rahmat, Farizal, Edwin Setiadi, and Saparudin. February Penentuan dan Pengembangan Kompetensi Inti Kabupaten Bekasi. Jurnal Teknik Industri, Vol. 13, No. 1, page: Prahalad, C.K. and Hamel, G., The Core Competence of the Corporation. Harvard Business Review, May- June. Prahalad, C.K. and Hamel, G., Competing for the Future. Boston MA: Harvard Business School Press. Radiah, A.K. and Rosli, Success Factor for Small Rural Entrepreneurs under One District One Industry Programme in Malaysia. International Journal of OVOP. Vol 5, No. 2, pp Vol. 21 No. 1, Juni