Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7
Household-Based Food Processing Industry: Lessons Learned from Dodol Garut Viverita, Ratih Dyah Kusumastuti and Riani Rachmawati This study aims to investigate the success factors and problems facing by the household-based food processing industry in the city of Garut, West Java, Indonesia. By applying a qualitative research method, we seek information from the players as well as from the government officers whose role as regulator for the entrepreneurs. We conducted a focus group discussion (FGD) with five business owners and managers, and in-depth interview (IDI) with three government officers in August 2014. Based on our analysis, we can conclude that both parties agree that abundant amounts of good quality raw materials and in fact that dodol (A kind of sweets with main ingredients consists of a mix of glutinous rice flour, sugar and coconut milk) is the traditional sweets which was introduced for the first time in the 1920s, are among important factors of the success story. Furthermore, they both also admit that support from the government and SOEs gives them opportunity to develop new products and markets. However, there are also some obstacles to maintain the success of the industry and that may prevent them to grow beyond current condition. The establishment of new manufacturers which offer higher wages in the area reduces the supply of worker for the industry. In addition, limited access and high cost of capital and price fluctuation of sugar, as well as land aberration from agriculture to manufacturing activities are also factors that may halt the continuity of the industry.
Keywords: Household-Based, Food Industry, Qualitative Method, SME Field of Research: Management
1. Introduction The Regency of Garut locates near of Bandung (About75 KM South East Bandung) as the provincial capital of West Java, and has a role as a buffer city in developing the area. Therefore, it plays a strategic role in providing the needs of people in the city as well as the Regency of Bandung. This area lays on the 717 m (dpl) which characterize by fertile soils due to its strategic location which surrounding by four high mountains, i.e: Karacak (1838 m), Cikuray (2821 m), Papandayan (2622 m) and Guntur (2249 m). In general, this area categorizes as humid tropical climate type Af to Am from Koppen classification. The average rainfall around the city of Garut is in the range of 2.589 mm for 9 wet months and 3 dry months, while in the area surrounding by the mountains the average rainfall is between 3500 to 4000 mm. The monthly temperature varies between 24° C - 27° C (BPS Garut, 2014). Due to the weather and climate conditions, the economy of this area is supported mainly by the agricultural sector. This sector contributes 44.21 percent to the Regional Gross Domestic Product (Produk Domestik Regional Bruto/PDRB) in 2012. The value added of this sector contributes almost half to the regency’s economy. ____________________________________________________________________________ Viverita, Ratih Dyah Kusumastuti and Riani Rachmawati, Department of Management, Faculty of Economics and Business, Universitas Indonesia, Email:
[email protected];
[email protected];
[email protected], Tel: +6221 7272425, Fax: +6262 7863556
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 The performance of the agricultural sector mainly comes from grains, which significantly increase by 8.14 percent during the period between 2010 and 2012, with outputs range from 918.73 thousand tones to 993.55 thousand tones. Besides grains and other agricultural products, this regency is also well-known as a producer of a famous “dodol”; i.e: a sweet cake which is used agricultural products as main ingredient.
Figure 1: The Map of Garut
The production of Dodol Garut initiated by a woman entrepreneur in 1926, name Ms. Karsinah with a very simple production process as a household-based food seller. The success story of Dodol Karsinah have inspired other households to produce the same sweets, since they have all the ingredients need for the production processes in their own yards. Until now, there is a lot variety and flavors of Dodol Garut have been invented by those entrepreneurs. Besides the original version, they also produce fruits dodol which only used fruits and brown sugar as the main ingridients. Table 1 presents current development of the industry.
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 Table 1: The current development of Dodol Garut industry
Description No of business unit (Unit) Employees (People) Investment (000, IDR) Production value (000, IDR) Ingredients
No Formal SMEs
No of Non Formal SMEs
Total
43 1245 617200
58 1257 415150
101 2502 1032350
25849330 17460600 43309930 Glutinous rice, nuts, milk, sesame's seeds, fruits Java island, Borneo, Sumatera, Brunei, Malaysia, UEA, Market Singapore, UK Source: The Ministry of Industry, Trade and Cooperative and SMES, Garut, 2013
Data in the Table shows that until 2013, there are 101 producers of dodol Garut, including 43 non-formal SMEs and 58 formal SMEs respectively. This industry invests more than 40 billion rupiah and employs a total of 2502 workers. From the Table we also know that the main ingredients for producing dodol Garut are comes from agricultural sector that can be found and planted in the area. Furthermore, dodol Garut not only consumed by the people of Garut and the surrounding areas, but also has been traded and consumed by people in neighboring island and countries such as Sumatera, Borneo, Brunei, Malaysia and Singapore even in the UEA and the UK.
One of important economic structure and performance indicators is per capita Regional Gross Domestic Product (PDRB per capita), which reflects people productivity of the region. Based on data from the Statistics Indonesia (Badan Pusat Statistik/BPS), the economy of regency of Garut heavily relies on agricultural sector, which contributes more than 40 percent to the PDRB (BPS Garut, 2014). However, due to current rapid development of other sectors such as manufacturing and services there are significant shifting in the structure of the economy. This phenomenon causes a decreasing contribution of agricultural sector by 3.69 percent in 2012. Meanwhile, the contribution from trade, hotels&restaurants and processing industries were increasing by 26.7 percent and 7.26 percent respectively. In addition, the existence of non-agricultural based manufacturing companies also causes a shifting in labor market.
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 The regency of Garut has the largest population in East Priangan area, which has also the greater contribution to the PDRB of the province. For example, in 2012 it contribution to the province’ economy was 3.18 percent. However, when we compare its economic growth and human development index, the numbers shows insignificant different from other cities and regencies. Unlike those two indexes, the level of poverty in regency of Garut is the second highest (12.70 percent) following the city of Tasikmalaya (18.92 percent). In addition, the economic growth was ranged from 4.32 (Tasikmalaya regency) percent to 5.89 percent (City of Tasikmalaya), while in the regency of Garut only 4.61 percent. This indicates although the regency of Garut has a quiet high of PDRB, the economic growth and poverty level is still higher than the average cities and regencies (See Table 2 for the detail). Table 2: Economics and Wealth Indicators No
1 2
Regency/City
Garut Tasikmalaya
Human Development Index 72.12 72.84
3 Ciamis 72.14 4 City of Tasikmalaya 75.35 5 City of Banjar 72.10 Source: Garut in Numbers (Statistics Indonesia, 2013)
Economic Growth
Poverty
4.61 4.32
12.70 11.75
4.99 5.89 5.20
9.61 18.92 7.78
Considering current economic deterioration of Garut regency compared to other regency and cities in West Java, there must be serious efforts to catch-up the economic condition to prevent increasing number of poverty. To resolve this problem, one attempt can be done is by supporting the continuity of the SMEs which produce dodol Garut, by investigating key factors affecting its success and failures. Therefore, this paper aims to examine key factors affecting the success of the dodol Garut SMEs as well as possible problems that may lead to its failure.
The remainder of the paper is organized as follow. Section 2 reviews the relevant studies on factors affecting the success and failure of SMEs. Section 3, presents the research method, while Section 4 presents the findings. Finally, Section 5 summaries and concludes the study.
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7
2. Relevant Literature of the Key Success and Failure of SMEs There is no doubt of the important contributions of SMEs in the development of a nation’s economy. In most cases, SMEs are acting as significant contributor to a nation’s economy which stands still in the crisis periods. However, there are also factors contribute significantly to the success and failure of SMEs.
Some key success of the SMEs in Singapore is found by Gosh et al., (2001). Factors such as a committed, supportive, and strong management team, and a strong, visionary, and capable leadership, adopting the correct strategic approach, ability to identify and focus on market, ability to develop and sustain capability, and a good customer and client relationship. A study of SMEs in Botswana by Temtime and Pansiri (2004) found that the performance of SMEs are significantly affected by factors like marketing activities, market research and demand forecasting. However, a short-term managerial decision and socio economic related problem are factors considering as obstacles to their success. Theng and Boon (1996) divided critical factors of the SMEs performance into endogenous and exogenous factors. By doing survey to SMEs’ owners and managers in manufacturing sector in Singapore Theng and Boon (1996), they found lack of managerial experience skills as critical factors for SMEs failure. They categorized these as endogenous factors that have more impact than exogenous factors such as competition and government regulation. In addition, Okpara (2011) revealed that the key factors of growth and survival of SMEs in Nigeria are lack of financial support and lack of training and experience as addition to poor management, poor infrastructure, and low demand for products and services. Keats and Bracker (1988) suggested that small firm performance is affected by some construct, i.e: Entrepreneurial Intensity, Task Motivation, Perceived Strength of Environmental Influences, Behavioral Strategic Sophistication, Cognitive Strategic Sophistication, and Task Environment Factors. These factors are believed to better explain the owners’ characteristics and behavior that may affect small business performance. Furthermore, Ihua (2009) comapared ten key factors to SMEs failure in the UK and Nigeria. The results reveal different factors affecting the failure. In the UK, the most significant factors affecting the SMEs’ failure was a poor management, while
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 poor economic conditions and infrastructural inadequacy were the most critical factors apply in Nigeria.
3. Research Methodology This study is conducted to obtain information about dodol Garut, its success story and challenges facing by the industry. In order to get the information, this study applies a qualitative research method by conducting two research instruments, i.e: focus group discussion (FGD) and in-depth interview (IDI). We conduct a focus group discussion (FGD) with five business owners and managers, and in-depth interview (IDI) with three government officers in August 2014. The informants in the IDI are including a business manager of a large and well known dodol producer, and the rest are business owners of the household-based dodol Garut. Furthermore, the IDI was conducted involving the Deputy Head of Local Government officer in economics, and the representatives from the division of the Ministry of Industrial and trade at the district level (Dinas Perindustrian dan Perdagangan) including the officers from agro-industry department and head of small business division. 4. Findings Based on FGD to the owners and a manager of household-based dodol Garut, and IDI with the regulators, we can describe the current condition of the dodol Garut industry. The informants agree that the market for dodol Garut is segmented into one or two market leaders and small firms. Currently, there are about 13 thousand micro producers, 1300 small firms, and 45 medium dodol firms in the regency of Garut. Totally, this industry employs 1250 workers and scatter in seven districts. The significant different between large and small firms (SMEs) is their focus. While the market leaders focus on marketing their products, the small ones still are struggling with production processes. This situation in general, is caused by the fact that market leaders are large firms with strong capital sources so they can finance their activities easily, while, small firms are much more depend on their-owned equity capital and have limited sources access to capital market. This finding consistent with Gosh et al., (2001) which suggested that capital or financial support is one of important factors for superbs performance of Singaporean SMEs. However, since dodol is a 5
Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 kind of heritage sweets from Garut and well-known by people outside the regency small firms able to keep their sustainability and survivability. Results from FGD also revealed that all informants agree that some factors that affecting the success of the household-based dodol are (1) the government supports (2) support from stateowned enterprises (SOEs), (3) production technology, (4) access to the market, and (5) the history of the industry itself. The continuous government support received by the SMEs including mentoring and training activities on production and marketing skills, which finding is consistent with Temtime and Pansiri (2004). They suggested that human resource development is one important factor affecting the performance of SMEs. In addition, the SOEs offer significant support for the SMEs in the form of low cost of capital which cannot be afforded by them if they borrow from commercial banks. This type of soft loan scheme can be done since the SOEs use their CSR funds for helping the SMEs to access the capital. The informants also affirm that advanced production technology such as electrical dough mixer and automatic wrapping machine may also help the household-based SMEs elevating their success. However, such technology is too expensive for the SMEs to afford. Access to the market is one of important success factor for the household-based dodol Garut. Current situation indicates the important of the government support to access potential customers. For example, in order to expand the market outside Garut, SMEs need education of e-marketing so they can advertise and sell their products on-line. Furthermore, support from market leader and networking and collaboration with other SMEs to sell their each other products also benefitted them to enter a new market. This indicates such trust between the SMEs, in which Hoffmann and Schlosser (2001) stated as important factors in alliance success.
The managers and owners of dodol Garut SMEs also agree that government support in commercialization and packaging will improve their ability to sell their products. Last but not least, another important factor for success story of the household-based dodol Garut industry is the history of the industry itself. Since dodol is a heritage sweet cake in Garut and its surrounding cities and regencies, there will be always a market for the products.
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 Besides key success factors of the household-based dodol Garut SMEs, we also ask our informants about factors that may cause them to fail. One of them is the shortcoming of personals or workers. Theng and Boon (1996) categorized it as endogenous factors along with competition. Furthermore, our informants also agree that high cost of financing may also affect their business performance and prevent them to expand their businesses. This finding in line with Peterson and Ridgway (1983) and Ibrahim and Goodwin (1986). They found a high interest rate as one of key factors of SMEs’ failure. In addition they also agree that unstandardized product quality, shortcoming of raw materials due to diversion of land use, high price of fuels, and labor cost are also among significant factors that may affect the continuity of the SMEs. In order to confirm our findings from the FGD, we also conducted in-depth interview (IDI) with three officers as representative of the regulator. In line with findings from the FGD, our informants also agree that one key success factors of household-based dodol Garut SMEs is the history of the sweet itself, that their product is a heritage food. They also agree that collaboration and networking among the SMEs in selling their products also help the SMEs sustain. This phenomenon support the theory of interfirm alliances objective that create synergies between firms (Heiko Haase, 2013). Our informant form the related government offices also acknowledge the important of government and SOEs supports in terms of access to low cost capital, collaboration between SMEs as well as training and development to enhance managerial and operational skills of the management and workers of the dodol Garut SMEs. In addition to the government support, they also suggested such aids from SOEs in providing soft and low cost financing will help the continuity of the industry. 5. Conclusion and Policy Implications This study aims to investigate key success factors and obstacles facing by household-based SMEs which produce dodol Garut in the regency of Garut, West Java. We employed two qualitative methods, i.e: FGD and IDI and conducted the study in August 2014. In searching for key success and failure factors of the industry, we conducted FGD to one manager and 5 owners of the SMEs, as well as 3 government officers to confirm the FGD results. 7
Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7
This study can conclude some key success factors of dodol Garut SMEs are including: the government supports, support from state-owned enterprises (SOEs), production technology, access to the market, and the history of the industry itself. Moreover, endogenous factors such as limited number of worker, high capital cost, high fuel price and diversion of land use from agricultural sites to manufacturing are among important obstacle for the household-based SMEs in Garut. Based on the findings, some attempt can be done to keep the household-based dodol Garut survive and competitive, as well as developing a new generation of hosehold-based SME industry. First, the government needs to regularly provide education to enhance the managerial and operational skills of the SMEs’ managers and workers. Second, it is also important by the government to develop a regulation on public private partnership (PPP) scheme between the government and private firms to help financing the SMEs with low cost.
Reference Gosh, BC, TW Liang, TT Meng, and B Chan, 2001. The key success factors, distinctive capabilities, and strategic thrusts of top SMEs in Singapore. Journal of Business Research 51 (2001) 209 – 221 Heiko Haase, Mário Franco, 2013. Interfirm Alliances: A Taxonomy for SMEs. Long Range Planning, 1-14 Hoffmann, Werner H and Roman Schlosser, 2001. Success Factors of Strategic Alliances in Small and Medium-sized Enterprises - An Empirical Survey. Long Range Planning 34 (2001) 357-381. Ibrahim, A B and Goodwin, J R, 1986, Perceived causes of success in small business, American Journal of Small Business, October, 41-9. Ihua, Ugwushi Bellema, 2009. SMEs Key Failure-Factors: A Comparison between the United Kingdom and Nigeria. J Soc Sci, 18(3): 199-207. Keats, Barbara W. and Jeffrey S. Bracker, 1988. Toward a Theory of Small Firm Performance: A Conceptual Model. The University of Baltimore Educational Foundation Peterson, R, Kozmetsky, G and Ridgeway, N, 1983, Perceived causes of small business failures: A research note, American Journal of Small Business, July.
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Proceedings of 10th Asian Business Research Conference 6 - 7 October 2014, Novotel Bangkok on Siam Square, Bangkok, Thailand, ISBN: 978-1-922069-62-7 Temtime, ZT and J Pansiri, 2004. Small business critical success/failure factors in developing countries: some evidences from Botswana. American Journal of Applied Science 1 (1): 18-25, 2004. Theng, Lau Geok and Jasmine Lim Wang Boon, 1996. An exploratory study of factors affecting the failure of local small and medium enterprises. Asia Pacific Journal of Management Volume 13, Issue 2, pp 47-61. The Ministry of Industry, Trade and Cooperative and SMES, Garut, 2013. Statistics Indonesia. Garut Dalam Angka 2013 (Garut in Numbers).
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