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Table of Contents
INTRODUCTION......................................................................................1
ANALYSIS...............................................................................................2
A.

INSTITUTION-BASED VIEW....................................................................................... 2

B.

PORTERS INDUSTRY-BASED (FIVE FORCES).................................................................3

Supplier Power.................................................................................................... 3
Buyer Power........................................................................................................ 4
Threat of Substitute Products.............................................................................. 5
Threat of New Entrants....................................................................................... 5
Intensity of Rivalry.............................................................................................. 6

C.

RESOURCE-BASED APPROACH: IDENTIFY A FIRMS UNIQUE NICHE OR COMPETITIVE..............7

RECCOMENDATION.................................................................................8
CONCLUSION..........................................................................................9
APPENDICES.........................................................................................10

Introduction
Berkshire Hathaway was a textile company with roots in the 1800s, created in a merger of
the Hathaway Company with Berkshire Fine Spinning Associates Inc. in 1985, company began
to diversify into insurance because at that time it is considered as safe industry with the idea of
using plenty of available cash from premium paid for other investment vehicles.

Nowadayas, Berkshire Hathaway is a holding company based in the United States, having
interests in non-life insurance, railroad industry, energy, publishing, financial services,
manufacturing as well as retailing. The Company primary focus is on insurance businesses on
both a primary basis and a reinsurance basis,. With Warren Buffet, as the second richest man in
the united states, being the Chairman and CEO of the company, Berkshire over the years has
grown through a number of acquisitions. It is placed on number 5 on the 2013 Fortune 500
listing. The company also well-known for selling the most incredible stock price in the world
which surpassed $200.000 per share. Berkshire Hathaway used to be a failing textile firm. Now
its one of the largest companies in the world (The Wall Street Journal, 2015).

Analysis
a. Institution-based view

Institution-based theory has been well known as the third leg in the business strategy
management (the other two being industry based and resource based as in appendix 1). This view
will determine the existing risk as well as potential risk in the targeted country which is
Indonesia. Scott (1995) defines institutions as regulative, normative, and cognitive structure and
activities that provide stability and meaning to social behavior, this will include formal and
informal institutions. Burgees (2003) argues that it is impossible to do business in emerging
economies without understanding how formal and informal institution affect firms. Formal
institution will include risks such as laws and regulation while informal institution will cover
cultural issues including norms and cognitions.

Indonesia is still at the very young age of democracy. Current Indonesias president, Joko
Widodo, is only the fifth democratic president and only the second that is directly elected by
Indonesians. Since their independence declaration in 1945, Indonesia has to deal with many
political crises. Not only because of the huge population, it is also derived from the lack of
general education or knowledge of good institutional practice (World Policy, 2015).
Demonstrations, which are a hallmark of a democratic society, take place every day in Indonesia.
Mostly done by university students and labour which are protest on a range of political,
economic issues and social issues. However now, in the presidential era of Jokowi, Indonesia
started to get better. Indonesia is considered as Asias next big opportunity, economy is
growing at 6% in average in terms of GDP. Which means indonesia is now getting better better

in terms of its economy as well as politic which is good for foreign company to enter at this
stage.

In terms of regulation, over the last 2 years, the pace of regulation to the Indonesia Insurance
market has increased significantly the single presence policy, commission limits, domestic reinsurance requirements, tariffs and capital requirements. The current law allows foreign company
to own up to 80% of local insurance companies throught acquisition or incorporation (OJK,
2014). This is relatively high compared to other economic activities and also higher than in most
other emerging economies, including Malaysia and Thailand which makes it attractive for
Berkshire to enter. Moreover, foreign participation can exceed the 80% limit after the company
has commenced operations, provided that existing local participation is not decreased other than
by way of dilution. In addition to that, the government has set the minimal capital requirement
for insurance companies to operate in indonesia. For general insurers, 100 billion IDR is required
since 2015 (Hadiputranto, Hadinoto & Partners, 2014).

b. Porters industry-based (five forces)

Supplier Power
As a company that is mainly operates in insurance service, there are no real suppliers for
their main industry. Of course insurers need office supplies such as office supplies (pens, paper,
etc.), and usually this will be supplied by large supplier, and when it comes to computer and
peripherals these are normally leased from large hardware providers. Having said that, for
general office stuff, company within this industry will usually use the same suppliers as other

large companies, and usually the suppliers have no other option but to accept the deal with less
bargaining power. When it comes to the claims side of this business, company rather have
different option from which provider they are going to use such as restoration companies,
engineers, doctors. Sometimes,
On the other hand, as a holding company in general, Berkshire Hathaway diversify their
investment into many industries ranging from property, restaurant, food processing, media,
automotive, sporting goods, and also consumer products. Hence it is fair to say that they have
flexibility to choose from many different industries. Moreover, Indonesia has abundant natural
resources and its strategic geography location as a global maritime axis whereby around 20
percent of global sea trade is carried through its waters. Once again, the bargaining power of
supplier is relatively weak within the marketplace for Berkshire Hathaways industries.

Buyer Power
When there are few buyer, they often force the company to adjust. In other word, buyer
control the market. Powerful buyer gives the company less bargaining power to have control
over the price or in this case the premium that the company charge for the insurance service.
Indonesia continues to be seen as the most attractive market in Southeast Asia. Low penetration
rates and a growing, large population make Indonesia the market with the most potential in
Southeast Asia (Wake, 2016). First that needs to be determined is how many buyers are there in
the market. Indonesias consumer spending, at 57 percent of GDP, this is significantly higher
than the corresponding figures for neighboring, largely export-driven nations such as China,
Malaysia and Thailand. This shows the consumption level in indonesia is high. But how is this
related to buying power. Insurance company usually charge a monthly premium for their services

and invest the money to various investment instruments, such as real estate, bond, and that is the
secret of how Berkshire very successful on their business. The job of insurance company is to
manage risk; the risk is always associated with continious usage of a product or possesion of a
property. Indonesia is found to be the country where most of its people is in the consumption
stage, with more than fifty percent of the population under the age of 30 according to findings,
Indonesia boasts a large pool of labor and an ambitious generation of new consumers. While the
consumption level is high, there is likely more consumer to make use of insurance service to
cover the potential risk. Its large and young population with increasing affluence, robust
economic growth and relatively permissive foreign investment laws, Indonesia will continue to
be one of the most coveted markets for the global insurance industry (Global Business Guide
Indonesia, 2015). Hence, it can be concluded that as there are many consumer, the bargaining
power of buyer is relatively weak.

Threat of Substitute Products

Threat of subsitute in insurance company would mean the threat of choosing other insurance
service because the only product insurance company offers is only covering the risk with a
certain premium. A substitute product is one that may offer the same or similar benefits to a
company as a product from another industry. Threat of substituion in insurance company is high
due to the substitute product is of equal and the only thing that is differing the product is only the
premium that company charge which also can be fairly standardized. This means the consumer
switching cost are low which increase the level of threat. The focus in this is on expertise,
customer service, and added value.

Threat of New Entrants

Threat of new entrants refers to new competitors pose to existing competitor. Indonesia is
the most attractive life insurance market with high profitability and growth, but not everyone
wins in this market. This is basically implying that insurance industry in indonesia is promising,
which make this market attractive. Because of that, there must be some threats of new entrants.
Nevertheless, the real question is how easy it is for new entrants to enter the market. As
mentioned earlier, not everyone wins in this market. A high threat makes an industry more
competitive nonetheless. Highly differentiated products or well-known brand names are both
barriers to entry that can lower the threat of new entrants (Willkinson, 2013). There are already
big players in indonesias insurance market namely Jiwasraya, Indolife Pensiontama, Adisarana
Wanaartha as privately-owned insurers and Prudential, Manulife, AXA, AIA being the joint
ventures which have an asset of 30 trillion IDR in average as can be seen in the appendix 2.
Willkinson (2013) also added, business can lower the threat by having significant upfront capital
which seems not to be a problem for big company like Berkshire. Threat of new entrants seems
to be at around low to moderate because of the high requirement of capital, and the need of a
well-known brand names which lowering the threat, on the other hand, the consumer switching
cost for this industry is fairly low due to a competitive environment, and also the
product(service) are undifferentiated.

Intensity of Rivalry
Porters intensity of rivalry in an industry affects the competitive environment and
influences the ability of existing firms to achieve profitability (Dalken, 2014). There are several
factor that makes rivalry becoming more intense. First determinant is to see how is the growth

for insurance industry. It is found that insurance industry in indonesia is at its fastest growh
among other neighbouring countries (appendix 3). Fast growth would loosen the intensity of
rivalry. The industrys success has been supported by a healthy domestic economy and stable
market. Indonesias economy has grown by 5 percent a year or more for most of the past decade,
reaching 6.3 percent growth in 2007 (World Bank, 2016). Second is, if the industrys product is
undifferentiated or similar, rivalry will be intense which already mentioned in previous
discussion, insurance company have similar product offering. Competitors in indonesia market
are numerous according to the appendix 2, which increase the level of rivalry. Hence, it can be
concluded that intensity of rivalry in indonesia is relatively high despite the high growth of
industry due to the existence of some big players in the market that has already taking over the
market share.

c. Resource-based approach: firms unique niche or competitive

advantage

In Berkshire Hathway, Buffett has lead the company to work to escape the industrys
commodity economics in two ways. First, the company is well known as having a strong
financial strength and arguably the top notch of the insurance industry. However, one can argue
that this would mean nothing since in the personal insurance field as the buyer of an auto or
homeowners is going to get his claim paid even if his insurer fails. But then it could also be
argued that having a strength financial would be one of the competitive advantage at least in the
future where many major corporate purchaser of insurance pay attention to the insurers ability to
perform under more adverse condition that may exist. Having strong financial also give the

company a good image and brand recognition, and it is proved by Berkshire Hathaway to
become one of the top insurance company. In addition to that, berkshire hathaway also has the
highest shares on the New York Stock Exchange accounted over $110.000 (Investopedia, 2016).

Second is is the total volume which the firm maintains, this is due to it financial strength.
Back in 1989, Berkshire would be willing to write five times as much business as the previous
year (Gurufocus, 2012). The same resource also added that Berkshire Hathaway followed the
price-based-on-exposure, not on competition policy because it does make sense for its
shareholders. Many other insurers follow what he called the in-and-out approach. When they
are out because of large losses, lack of capital, etc. Berkshire Hathaway would be
available

Recommendation
There are lots of possibilities where Berkshire could try to enter to Indonesia including
joint venture, ownership, and licensing by providing services under companys name. However,
the law in indonesia only allow joint venture. Foreign investors can operate in the insurance
sector through the establishment of a Joint Venture Insurance Company with an existing
Indonesian insurance company (Hadiputranto, Hadinoto & Partners, 2014). Hence, it is clear that
the selection of entry mode will be straight away to JV due to the circumstances.

It is also found that most of big foreign players in insurance industry in indonesia is also forming
a joint venture and most of it is a joint venture with banks. Having this in mind, Berkshire would
then be suggested to forming a joint venture with the available banks in indonesia. Joint Venture

give possibilty for berkshire to learn culture easly from local company, JV also will make
companies to share costs and burden of operation while profiting equally.

Conclusion
When it comes to entering to a new country, it is very important to fully understand the
method and theories related to strategy formulation. Every expansion need a research and
understanding whether or not it is going to be profitable in the end because every country is
different in terms of legal, culture, and any other aspects that will affecting the operation of
international firm in host country. Many corporations failed because of lack research, and
sometimes many of said companies do not adapt to the foreign environment which why strategy
formulation is very important. Indonesia for example, it is very important to know that only joint
venture is allowed for insurance company. To sum up, strategy formulation is essential for every
companies that wants to enter to a new market, not only internationally but also when it comes to
expansion to domestic market, strategy formulation is also plays an important role to eliminate
all the possible risk and cultural blunder that might affecting the future of the investment.
Word counts : 2187

Appendices
Appendix 1

Appendix 2

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