The background of Hai-O in Malaysia

Background of the Company

Hai-O is one of the leading traditional healthcare companies in Malaysia, competing in the niche of traditional Chinese medicine. In the first chapter, this paper will discuss the background of the company in general to further illustrate the business nature of the company. This will provide the basis for the further discussion of Hai-O’s business strategy.

Introduction

Hai-O is a local group of companies that operates in the business of traditional Chinese medicine. Hai-O Group of Companies’ (“the Group”) comprise of a few business divisions in the corporate structure. All of these divisions operate in the core business of Chinese healthcare products that include herbal medicines, pharmaceutical products as well as health food. Hai-O divisions include multi-level marketing (“MLM”) wholesaling, retail stores, as well as manufacturing. The Group has also diversified into a few other industries such as advertising services and leasing of machinery.

Problem Statement

For thousands of years, traditional medicine has been used in some communities for health cures and remedies. As it has been re-introduced in the modern world, there has been a growing debate on its effectiveness and potential side effects. This causes a rough ride for Hai-O as a traditional medicine provider.

One of the challenges arise is the lack of international standards and evaluation methods for the efficiency of traditional medication because of international diversity of cultures and regions. As a result, many countries do not have national policies and regulations for traditional medicines. And there is also an issue of disparity in definition and classification for traditional medicine therapies. Some countries may define an herbal product as food supplement while others may accept it as herbal medicine, making international access and global product distributions a challenge to abide for Hai-O Group.

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There is also limitation for traditional medicines in terms of safety and quality. This is due to the complex nature of the methods for research and evaluation. For example, the safety and quality of finished herbal medicine products require tests on their resources which at one point can comprise hundreds of natural constituents. And the handling of these elements also needs to be evaluated.

Products of traditional medicine are produced form natural elements which mostly are collected from wild plants. Scarcity of resources could also be an issue for business practices, not to mention the social threat they might face because of destructing of natural resources.

Aside from growing competitions from other extension of healthcare business, Hai-O Enterprise Berhad needs to address these challenges and issues in its strategy to exhilarate growth and expansion.

Problem Questions

Writing this case will aim to answer a few questions that arise in the problem statement above. Some of the questions are:

What is Hai-O’s strategy to tackle the negative aspects of TCM?

Why does Hai-O employ its current business strategies?

How does Hai-O plan to expand into international market?

How does Hai-O sustain its growth despite the challenges and threats?

Case Study Objectives

Objective of this case study is to critically analyse the:

Business strategy;

Strategy formulation; and the

Issues and challenges faced by Hai-O Group in its business strategy

Upon completion, this study will help to understand and clearly identify the business strategy of Hai-O Group. Through the case analysis, Hai-O’s strategy formulation will be carefully examined and this will guide the finding of the critical issues and challenges of its business strategy.

Company’s Overview

Hai-O was established in 1975, and has become a famous household name in Malaysia ever since. Originally, the Company offered an assortment of Chinese medicines and healthcare products. Much later, the business expanded and grew into Hai-O Group of Companies. It first made its way to Bursa Malaysia Securities Berhad in the year 1996, by being listed in the second board of Bursa Malaysia. The Group has 5 principal business that are multi-level marketing, wholesaling, retailing, manufacturing and medicinal clinics. The Group was the first traditional healthcare company listed on the stock exchange. It was listed into the main board of Bursa Malaysia on 2007. Expert in its niche, Hai-O has managed to build extensive and efficient distribution network for the past three decades.

As part of its services, the Group is also practising integrated health services which combine the traditional Chinese medicine clinic services and non-decocted Chinese herbal consultation in their retail stores. These services were collaboration with its joint venture partner, Beijing Tongrentang Co Ltd, a big TCM provider in China.

History of Hai-O

Hai-O Enterprise Bhd was founded by Mr. Tan Kai Hee in 1975. He was an assistant secretary-general of the Labour Party in 1960s and was arrested under the Internal Security Act (“ISA”) from 1965 to 1973. Only 28 years old at the time, Tan was optimistic despite the unfortunate circumstances. Finding job after the detention was not easy, and this leads him to the idea of organising other ex-comrades to venture into China trade. And so they set up Hai-O in 1975 and started operation in Klang. The business was soon became a word of mouth among friends and supporters. Due to a lot of hard work and high optimism, the Group was able to break even within the first year and all of the key historical and inspirational accomplishment took place itself in the first year it was introduced.

Throughout many years of operation, the Group has earned a lot of awards for their remarkable performance. Such recognitions are awarded to all the top performing companies within the Group. The Group take pride in its achievements which have help instil good confidence among its investors and customers. Awards and recognitions received by Hai-O Group are:

Hai-O Enterprise: ‘Best Small Capitalisation Company (Malaysian Corporate Governance Index 2009)’ – by Minority Shareholder Watchdog Group (MSWG)

Hai-O Enterprise: ‘Best Return to Shareholder Category First Runner Up Award’ – by Malaysian Business CIMA Enterprise Governance 2009

Hai-O Enterprise: ‘Best Under a Billion Award’ – by Forbes Asia 2009

Hai-O Enterprise: Ranked no. 6 in Top 100 Listed Company In Terms of Shareholder Values Creations 2008 – by KPMG and The Edge

Hai-O Enterprise: ‘Best Under a Billion Award’ – by Forbes Asia 2008

Hai-O Raya: ‘The Brand Laureate 2008-2009’ – under the Product Branding for Traditional Chinese Medicine category

Hai-O Marketing: ‘Malaysian Business Ethics Excellence 2008’ – recognition certificate by Ministry of Domestic Trade and Consumer Affairs

Hai-O Raya: ‘Malaysian Business Ethics Excellence 200’ – recognition certificate by Ministry of Domestic Trade and Consumer Affairs

Hai-O Enterprise: ‘Best Under a Billion Award’ – by Forbes Asia 2007

Hai-O Marketing: ‘Outstanding Contribution Towards Developing Bumiputra Entrepreneurs 2007’ – recognition certificate by MECD

Hai-O Raya: ‘Superbrand’ – 2003/2004

Hai-O Raya: ‘Malaysian Book of Records: Greatest Number of Traditional Healthcare Chain Stores in Malaysia 2001’

Hai-O Raya: ‘Golden Bull Award: Malaysia’s Top 100 Outstanding SMEs 2003’

Hai-O Raya: ‘Enterprise 50’ – by SMIDEC and Deloitte 2003

‘Top Malaysian Small Cap Companies (100 Jewels 2007)’ – by OSK Investment Bank Bhd

Hai-O Marketing: ’13 Years Membership with Direct Selling Association Malaysia 2007′

‘Diamond Club Award’ – for Excellent Performance 2002, 2003, 2006

GMP Status and ISO: 9001certification by SG Global Biotech Sdn Bhd

U.S. FDA Facility Registration certificate by SG Global Biotech Sdn Bhd

Source: http://en.hai-o.com.my

Vision, Mission and Corporate Values

The Group ultimate goal is to become a premiere healthcare company in Malaysia. Focusing on it, its vision reads: ‘We aim to become the premier healthcare company in Malaysia and thereby bringing the greatest value and pride to our customers, business partners, employees and shareholders’. This explained that their vision of being the leading healthcare company are much focused on delivering value to each key element that make up their business, internally and externally.

Hai-O has strived over 35 years to take the brand name beyond the image of Chinese medicine. The Group genuine interests in healthy culture boost their spirit to promote human’s well-being with the mission statement that reads: ‘We are committed to promoting healthcare culture and improving human’s well-being’.

Such vision and mission is incorporated into the Group’s corporate value. Hai-O means seagull in Mandarin. It is a metaphor that the Group will soar high and the Group incorporated its corporate values in the word ‘seagull’ itself and the image of a seagull is embedded in the Group’s company logo. Their 7 core values are:

Social responsibility; Hai-O strives to repay society by helping those in needs through actions and monetary support.

Excellent service; Hai-O strives beyond customers expectations to give excellent quality products and superior service.

Attitude; Hai-O strives to sustain a positive attitude in every dimensions of the business at any circumstances it faces.

Unity; Hai-O strives to unite its organization as one big family in Malaysian culture of different races to achieve its goals in the challenging business world.

Growing; Hai-O strives to capitalise on its competitive advantage and knowledge to ensure continuous improvement and growth.

Loyalty; Hai-O strives to be loyal to its business partners and its commitment to convey good results to the customers as well as the shareholders.

Learning; Hai-O strives to build a knowledge-based working environment by collecting its resources together to achieve goals to educate consumers on healthcare and to contribute to the research and development in the biotechnology and pharmaceutical science.

Figure 1: Hai-O’s Company Logo

Image source: Adapted from http://en.hai-o.com.my

Strategy

One of the obvious strategies to market its product was the Group formation of Hai-O Marketing Sdn. Bhd. in 1992. This subsidiary company is targeted to market Hai-O’s products through multilevel marketing. Products that are sold through this company are health food, wellness and beauty products. This strategy of has boosted the Group’s business substantially and has brought a huge exposure for Hai-O’s brand into the consumer market. Although the business move has brought a giant impact, the Group fundamental strategies still remain in three main criteria; choosing the right product, targeting the Bumiputra segment and venturing abroad.

Hai-O sources raw materials for its product from the main land China. TCM market in China is saturated and the products are variety. But Hai-O is devoted to solitary select the right ones to bring into its product line. Only importing patented products that are approved by the Ministry of Health, the Group built its clients’ trust by selling genuine quality products at a fair price with Hai-O branding. In 2002, links to China were further consolidated in a partnership with Peking Tongrentang, a renowned company with a 338-years history and is famous for working for the emperor during the Qing dynasty. Other than that, the Group also signed a sole distributorship agreement in 2007, with Yunnan Baiyao Group Co Ltd.

Since the setting of its MLM division, Malay consumers have constituted a large segment of its market as well as its sales force, which has result in a remarkable transformation for Hai-O as a group. The concept of MLM suited the Bumiptra market very well. Famous product among the Malay consumer is the ‘Pur Er’ tea which is considered as a wonder tonic with abundant health benefits ranging from removing toxins to improving blood circulation. Achieving reputation among Malay consumers has changed the Group’s image from previously a mainly Malaysian Chinese trade. As a result, the brand is more accessible and well received by other citizen in Malaysia.

As the power of traditional medicine is showing evident results in today’s healthcare industry, the Group decided to take the business abroad by penetrating the lucrative markets of China and Indonesia. A joint venture company has been set up in Jakarta and has started business in August 2009. As for China, the Group is in the midst of obtaining the necessary rights and licences to promote Malaysia’s traditional medicines and health products such as Tongkat Ali, and Kacip Fatimah in its local market. Venturing into the international market is a strategy that the Group hope will help to expose their brand even further as well as promote traditional Chinese medicine to a higher level.

Corporate Structure

Figure 2: Hai-O’s Corporate Structure

Source: http://en.hai-o.com.my

Wholesale Division

As a second largest contributor to the Group, the wholesale division have secured exclusive agency rights for importing and distributing of more than 200 branded products from China under the company names Hai-O Medicine Sdn. Bhd., Kinds Resources Sdn. Bhd., Grand Brands (M) Sdn. Bhd., Chop Aik Seng Sdn. Bhd. and Vintage Wine Sdn. Bhd. These products include a wide range of traditional Chinese medicines, teas and wines that are distributed through Hai-O’s multi-distribution channels. These channels offer a broad access to Chinese medical halls, hyper/ supermarkets, convenience stores, retail outlets and restaurants.

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Direct Selling Division

The direct selling division, also known as the MLM division has been the Group’s fastest growing segment since it is first introduced in 1992. Operating under the company name Hai-O Marketing Sdn. Bhd., the division has a strong distribution force that helped the company to emerge as a leading local direct selling company. Hai-O Marketing Sdn. Bhd. is now serving over 34,000 distributorships, through more than 50 distribution centres throughout Malaysia. With the product mix ranging from healthcare to household products, Hai-O Marketing Sdn. Bhd. also owns a subsidiary company, PT Hai-O Indonesia which took up a 60% stake in a joint-venture company with an Indonesian partner. The company has started business in August 2009, selling products manufactured from Malaysia.

Retail Division

The Group has over 60 chain stores in major cities and towns across Malaysia. These chain stores carry an extensive range of traditional Chinese medicines, teas, wines and other healthcare products. Operating under the company name Hai-O Raya Berhad, the Group also owns retail counters in some of major supermarkets namely Carrefour and AEON Jusco. These outlets provide consultations on herbs and TCMs by professional herb masters. Hai-O Raya Berhad also provides a franchise program for entrepreneurs who are interested in operating a professional TCM store. In 2002, the Group expanded to also offer integrated clinical service under the company name, Peking Tongrentang (M) Sdn. Bhd. This integrated clinic is a joint-venture between Hai-O and Beijing Tongrentang Co Ltd, the largest producer of traditional Chinese medicine in China. Besides that, the Group also owns another subsidiary company that offers extensive traditional Chinese medicine products and service, Hai-O Polaris (M) Sdn. Bhd.

Manufacturing Division

Realizing the importance and the fast growing demand of traditional Chinese medicine in the country, the Group made a decision to open up its own pharmaceutical manufacturing plant in 1994. Operating under the name SG Global Biotech Sdn. Bhd., it was the first traditional medicinal manufacturer that complies with the Good Manufacturing Practice (“GMP”) standards in the country. The company’s obligation to quality assurance has obtained the qualification under ISO 9002 in 1999 and ISO9001: 2000 in 2002.

Its core businesses is producing and processing of herbal and other health products and SG Global is also active in a lot of research and development activities. The company shared the technology and expertise with China and several local counterparts in Malaysia. Riding on the potential growth of the research and development area in herbal and traditional medicine in Malaysia, the Group extended its operation into another subsidiary that focuses on laboratory research to increase product innovation. QIS Research Laboratory Sdn. Bhd. is established to offer a full service in analytical laboratory, microbiology and chemical analysis of traditional medicine. QIS Lab is accredited to ISO 17025 by the Department of Standard Malaysia (“DSM”) of the Ministry of Science and Technology.

In the past years, the Group has also ventured in several other business segments. Other subsidiary companies include Seagull Advertising Sdn. Bhd., Hai-O Credit and Leasing Sdn. Bhd., Sri Pangkor Credit and Leasing Sdn. Bhd., Hai-O Energy (M) Sdn. Bhd. and Hai-O Properties Sdn. Bhd. The Group other supporting businesses involved the leasing of machinery and equipment, advertising services, investment holding as well as insurance agency.

Corporate Governance

The Board of Directors of Hai-O Enterprise Berhad (“the Board”) embraces the value of the Malaysian Code of Corporate Governance which outlines the ethics and the best practices on corporate governance. In regards, the Board is dedicated to make sure that the corporate governance principles are well practiced and well observed throughout the operation of Hai-O Group in order to ensure integrity and professionalism within the organization to safeguard shareholders’ investment and value.

Composition of the Board

The Board of Hai-O Group is consists of 8 members, comprising of 3 Executive Directors and 5 Non-Executive Directors. 4 of these Non-Executive Directors are Independent Directors who act as independent advisors. This composition meets the terms with the Listing Requirements of Bursa Malaysia Securities Bhd which requires one-third (1/3) of the Board to be Independent Directors.

The Executive and Non-Executive Directors functions are defined clearly. The Executive Directors capacity is to administer the Group’s operations and execute the operational and corporate decisions while the Non-Executive Directors offer the Company with necessary opinions and decisions.

Formulation of the Group’s strategies and policies are shaped from the combination between the expertise of the Independent Non-Executive Directors and the skill and wisdom of the Executive Directors. If a conflict of interest is likely to arise, it is the obligation for the director concerned to declare his interest and withdraw from the process of the decision making.

The same formula is tailored to the responsibilities between the Chairman and the Managing Director in order to maintain a balance of authority and accountability. The Chairman provides a general leadership to the Board without restricting the principle of collective responsibility for Board’s decisions. And the Managing Director’s principal responsibility is to formulate the business strategies and to employ the corporate decisions as well as to administer the overall business operations. The Board’s composition represents a mix of skill, knowledge and expertise that are significant to the activities of the Group.

The Board meeting is held once every 3 months. The Board entrusted the Nomination Committee with the necessary responsibilities to appoint and re-elect the directors. This committee is comprises of Independent and Non-Executive Directors and is responsible to recognize and pick potential new directors and propose nominations to the Board.

The Board also recognizes that constant learning is critical for its members in order to gain insights into the state of economy, technological advances, regulatory updates and management strategies. Thus all the Directors of the Company have to complete the Mandatory Accreditation Programme (“MAP”) which is compulsory for the Listing Requirements of the Bursa Malaysia Securities Bhd. The Directors will continue to undertake other significant training programmes and the Continuing Education Programmes (“CEP”) to supplement and maximize knowledge in the latest statutory and regulatory developments. This is also to assist them in keeping abreast with developments in the business environment in order to enable them to uphold their responsibilities more effectively.

Directors’ Remunerations

A remuneration Committee was set up by the Board to manage the Executive Directors’ remuneration package. The committee members are majority consisting of the Non-Executive Directors. This remuneration package is based on the Group’s results apart from the individual director’s performance. The committee meeting is held frequently as required to resolve all aspect of remuneration as well as terms and conditions of service of the Executive Directors. Level of the remuneration is structured as such to motivate and encourage the Directors to run the Group at the top of their performances. And the compensation for the Non-Executive Directors is subjected to the Board’s decision as a whole. The fees for both the Executive and Non-Executive Directors are approved by the shareholders at the Annual General Meeting (“AGM”).

Shareholders and Investors

It is important to public listed organizations to inform the current status of the Group to the shareholders, stakeholders as well as the general public. Hence, the Group has been keeping up a constructive and active communication policy which enables the management and the Board to communicate effectively with its shareholders. The Group’s website, ‘www.hai-o.com.my’ is one of the channels available for corporate information to assist shareholders and investors to assess their investment decisions.

The Group’s AGM proceedings are open to all shareholders to promote transparency. Shareholders are also invited to attend any Extraordinary General Meetings which are announced through circulars and notice of meeting whenever it occurs.

Accountability and Audit

An Audit Committee is set up to manage the annual financial statements of the Group. This committee is responsible to ensure that the statements are complied with the requirements in the valid accounting standards in Malaysia under the Companies Act, 1965 as well as the Listing Requirements of Bursa Malaysia Securities Bhd.

The committee is also accountable to establish an appropriate and transparent relationship with the Group’s internal and external auditors. The Board also recognizes the significant of financial controls, operational and compliance controls as well as risk management. Hence, the internal control system is designed to administer the risk of failure to accomplish business objectives.

Board of Directors

The names and positions of Hai-O Enterprise Berhad’s executive officers (as of February 17, 2010) are listed below:

Table 1: Hai-O’s Board of Directors

Name

Position

Y. Bhg. Tan Sri Osman S. Cassim

Chairman, Independent & Non- Executive Director

Tan Kai Hee

Managing Director, Non-Independent Director

Datin Sunita Mei-Lin Rajakumar

Independent & Non-Executive Director

Tan Keng Song

Executive Director, Non-Independent Director

Chia Kuo Wui

Executive Director, Non-Independent Director

Y. Bhg. Dato’ Abdul Rani Bin Mohd Razalli

Non-Independent & Non-Executive Director

Lim Chin Luen

Independent & Non-Executive Director

Quek Ah Ba

Independent & Non-Executive Director

Source: Adapted from http://en.hai-o.com.my

Profile of the Board of Directors

Y. Bhg. Tan Sri Osman S. Cassim

(Chairman, Independent & Non-Executive Director)

Tan Sri Osman graduated from University of Malaya, Singapore with an Honors Degree in Arts. He later attended the Advanced Management Programmes by Harvard Business School, Boston in 1984. During his 30 years career in public sector, Tan Sri Osman used to serve as Secretary General in the Ministry of Labour, the Ministry of Information, and Ministry of Home Affairs. He was elected as the Director General of the Public Services Department Malaysia in 1980. Later in 1988, he was appointed as the National Advisor to the General Electric International (USA)

Currently he is the Vice President in the Court of Fellows of Malaysia Institute of Management. Tan Sri Osman was also the Chairman of Southern Bank Berhad from 1990 to 2005. He joined Hai-O Group and become the Chairman on 31 January 2005. Tan Sri Osman is also the Chairman of the Remuneration and Nomination Committee of Hai-O Group.

Tan Kai Hee

(Managing Director, Non-Independent Director)

Mr. Tan Kai Hee is one of the founders of the Group. He is also the main policy and decision-maker. Mr. Tan has more than 33 years of experience in the trading business. In August 2006, he attended China Market Study Tour Program which was carried out by Beijing International MBA, Peking University. Mr. Tan is also an avid social worker for the past 35 years. As also a founder of Malaysia-China Friendship Association (“PMC”), Mr. Tan acts as the Secretary-General. He is also the founder of Malaysia-China Medicine & Health Product Association (“MCMHPA”), Malaysia-China Chamber of Commerce (“MCCC”) and Malaysia Ru-Shang Social Association. Among others, Mr. Tan is also the Chairman in the Trading Services of the Malaysia China Business Council (“MCBC”) and the Advisor for the Federation of Chinese Physicians and Medicine Dealers Association of Malaysia (“FCPMDAM”). Mr. Tan holds directorship in Hai-O Raya Bhd. as well as a few other private limited companies. He was selected to the Group’s Board on 30 August 1975 and is also a member in the Remuneration and Investment Committee. Mr. Tan is the father of Ms. Tan Keng Song, who is the Executive Director of Hai-O Enterprise Bhd.

Datin Sunita Mei-Lin Rajakumar

(Independent & Non-Executive Director)

Graduated from University Bristol, United Kingdom, Datin Sunita holds a Bachelor Degree in Law. She is the Member of Institute of Chartered Accountants of England and Wales, earning her qualification certificate in 1994. She used to work for Ernst & Young, London as the Audit Manager. She also used to be the Manager in RHB Sakura Merchant Bank, Kuala Lumpur. In addition, she used to work in Corporate Finance as the Vice President at Petra Technologies and was appointed as the Director of Corporate Finance at Southern Plastic. She also used to work for MIMOS Berhad as the Venture Capital Consultant before joining the Group’s Board on January 2009. Datin Sunita is also a member of the Group’s Audit Committee.

Tan Keng Song

(Executive Director, Non-Independent Director)

Ms. Tan Keng Song holds a Bachelor Degree in Commerce from University of Western Australia. Majoring in Marketing and Management, she used to work for UMW Group. She joined Hai-O Group in 2000 as the MIS Executive at Hai-O Raya Bhd. Later she was promoted to the head of the Group’s IT and MIS division. Currently she is leading the Business Administration, MIS and Human Resources Department and is a member of the Investment Committee. Ms. Tan joined the Board on 2001. She is the daughter of Mr. Tan Kai Hee, the Managing Director of Hai-O Enterprise Bhd.

Chia Kuo Wui

(Executive Director, Non-Independent Director)

Mr. Chia Kuo Wui obtained his Bachelor Degree in Accounting at Curtin University, Australia. Later he continued to earn his study MBA from Charles Stuart University at Help University College Kuala Lumpur. Mr. Chia joined Hai-O Group in the Corporate Planning and the Investor Relation Department. Holding key positions in some of Hai-O Groups, he also holds the directorships in a few other private limited companies. Mr. Chia Kuo Wui was appointed to the Group’s Board on 14 November 2008.

Y. Bhg. Dato’ Abdul Rani Bin Mohd Razalli

(Non Independent & Non Executive Director)

Dato’ Abdul Rani obtained his Senior Cambridge Certificate in 1952. He used to serve the Government Royal Custom & Excise, Malaysia as the Deputy Director General. He later ventured into commercial business in the fields of shipments, transportation, warehousing, and manufacturing. Dato’ Abdul Rani joined Hai-O Group on 1995 as the Executive Director. He was also a member of the Investment Committee of Hai-O Group and was re-designated as Non Executive and Non Independent Director in 2003.

Lim Chin Luen

(Independent & Non-Executive Director)

Mr. Lim Chin Luen has been involved with the trading of Chinese traditional medicine and herbal products for over 15 years. He also owns a nourishing food and noodles stores in Singapore. Mr. Lim joined the Group’s Board in December 1997. He was also a member of the Audit, Remuneration and Nomination Committee of Hai-O Group.

Quek Ah Ba

(Independent & Non-Executive Director)

Mr. Quek Ah Ba served as an Accountant and Operational Manager in many companies. He also served two of the Securities firms, Noone & Co Sdn Bhd from 1980 to 1983, and C.S. Securities Sdn Bhd from 1986 to 1989. Mr. Quek was a member of Australia Society of Accountants (“A.S.A.”) and CPA (Australia). He joined Hai-O on 2001 and became the Chairman of the Audit Committee. In addition, Mr. Quek is also a member of the Nomination Committee.