LUẬN văn THẠC sĩ an investigation in building business strategy the case of nam a company

LIST OF CHART Chart 2.1: Market share in uPVC doors and windows industry .... ABSTRACT AN INVESTIGATION IN BUILDING BUSINESS STRATEGY – THE CASE OF NAM A COMPANY Trinh Lan Huong The p

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

TRINH LAN HUONG

AN INVESTIGATION IN BUILDING BUSINESS STRATEGY

– THE CASE OF NAM A COMPANY

Major: Business Administration Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisors: Tran Doan Kim, PhD

Ha Nguyen, MBA

Hanoi - 2012

TABLE OF CONTENT

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENT vi

LIST OF TABLE ix

LIST OF FIGURE x

LIST OF CHART xi

INTRODUCTION 1

1 Problem statement 1

2 Paper objectives 1

3 Research question 2

4 Methodology 2

5 Significance 2

6 Limitation 3

7 Thesis structure 3

CHAPTER 1: THEORETIC FOUNDATION 4

1.1 Strategy and strategic management 4

1.1.1 Definition and levels of strategy 4

1.1.2 Business strategies 5

1.1.3 Strategic management process 9

1.1.4 The role of strategic management 10

1.1.5 Strategic decision making 11

1.2 Analysis models 12

1.2.1 PESTLE model 12

1.2.2 Five-force model 14

1.2.3 Value chain model 17

1.2.4 SWOT model 18

CHAPTER 2: INTERNAL AND EXTERNAL ANALYSIS 20

2.1 External analysis 20

2.1.1 Background information 20

2.1.2 Environmental scanning and forecasting – PESTLE analysis 27

2.1.3 Industry analysis – Five-Force model 40

2.2 Internal analysis 46

2.2.1 Nam A Company profile 46

2.2.2 Value chain analysis 48

2.3 External and internal analysis summary – SWOT analysis 58

CHAPTER 3: STRATEGY RECOMMENDATION 61

3.1 Strategy formulation 61

3.2 Strategy implementation 63

3.2.1 Cost leadership by cutting organization structure 65

3.2.2 Cost leadership by improving material using efficiency 67

3.2.3 Cost leadership by improving stage transfer efficiency 68

3.2.4 Cost leadership by improving asset utilization 70

3.2.5 Cost leadership by gaining access to lower-cost materials 71

3.2.6 Cost leadership by maintaining low warehousing and marketing costs 72

CONCLUSION 73

REFERENCE 74

LIST OF TABLE

Table 2.1: Construction growth in percentage from 2005 to 2012 32

Table 2.2: Comparison of doors and windows’ characteristics 42

Table 2.3: SWOT analysis of Nam A Company 60

Table 3.1: Comparison of typical strategies in the case of Nam A Company 62

Table 3.2: Function strategies for Nam A Company 64

LIST OF FIGURE

Figure 1.1: Porter’s Generic Competitive Strategies 6

Figure 1.2: Strategic management process 9

Figure 1.3: PESTLE model 13

Figure 1.4: Five-force model 15

Figure 1.5: Value chain model 17

Figure 1.6: SWOT model 19

Figure 2.1: Vietnam uPVC doors and windows industry life cycle 21

Figure 2.2: Correlation between product quality and price of fragmentation group in the industry 27

Figure 2.3: UPVC door and window production process 50

Figure 2.4: Organization structure 54

LIST OF CHART

Chart 2.1: Market share in uPVC doors and windows industry 25

Chart 2.2: FDI registered capital 2000-2006 28

Chart 2.3: Division of FDI 1988-2007 (billion USD 29

Chart 2.4: Vietnam population 34

Chart 2.5: Vietnam population structure in 2009 35

Chart 2.6: Five forces in uPVC doors and windows industry 46

Chart 2.7: Human resource distribution 55

Chart 2.8: Proportion of employee groups with different qualification 57

ABSTRACT

AN INVESTIGATION IN BUILDING BUSINESS STRATEGY –

THE CASE OF NAM A COMPANY

Trinh Lan Huong

The purpose of this thesis is to build appropriate business strategy for Nam A Company concentrating on their main activities of producing and assembling uPVC doors and windows in order to instruct the firm to overcome this hard phase of the market

The study indicates that cost leadership is the most suitable business strategy for Nam A Company This is the method assisting the firm to earn more competitiveness by reducing the costs of manufacture and management The construction of this suggestion

is in accordance with the strengths and weaknesses of the company aiming at catching opportunities and avoiding threats in current industry

Then, six functional strategies are developed base on general business strategy as well as the company characteristics to give Nam A Company further suggestions in the way they should implement business strategy Included in there are cost leadership by cutting organization structure, cost leadership by improving material using efficiency, cost leadership by improving stage transfer efficiency, cost leadership by improving asset utilization, cost leadership by gaining access to lower-cost materials, and cost leadership by maintaining low warehousing and marketing costs

Key words: strategy, strategic management, uPVC door and window industry

INTRODUCTION

This chapter presents an introduction of the research Included in this part, problem setting, objectives of this report, research questions, methodology, significance, limitation and thesis structure will be displayed in order to provide an overview of this paper for the readers

1 Problem statement

Strategic management is a necessary job of all managers In business operation, strategy is a tool to support the corporation in gaining its objects, mission, and vision Especially in competition, strategic management even keeps an important role in conducting the companies It has a main effect on existence, growing, and developing of an enterprise A company can win lots of success, if it has right strategy for its situation

Nam A Construction and Production Joint Stock Company is an enterprise manufacturing uPVC doors and windows At the time, it is facing to a hard period

of time, due to the difficulty in economy and construction industry and fierce competition between uPVC companies It is necessary to build up a business strategy for Nam A Company to direct the existence and development of the firm in Vietnamese uPVC doors and windows industry Therefore, I decided to work on this topic in my thesis

2 Paper objectives

To build an appropriate business strategy for Nam A Company for the next years, following objectives are focused on

- The first objective is to provide a better understanding of theoretical foundation

in constructing business strategy for enterprises

- Next, during the application of these theories into the case of Nam A Company, the report aims at figure out the company opportunities, threats, strengths and weaknesses as the foundation to form the business strategy for Nam A Company

- The final objective is to create implications for strategy implementation from general business strategy in Nam A Company

3 Research question

In order to reach the objectives of this paper, these questions below have been developed

- What is the method used to form business strategy for an enterprise?

- What is appropriate business strategy for Nam A Company to apply in the next years?

- How to implement the general strategy in daily operation of the company?

4 Methodology

The research focuses on Nam A Company as a case study to make an in-depth investigation within their real-life context Multiple sources of information have been used in this thesis First, the documentation of both theories and company profile has been collected through public sources as books, articles, company annual reports and company capacity record Then, open-ended interviews have been launched aiming at Nam A Company’s directors and employees All the information related to company operations has been achieved through these interviews These data has been analyzed and compared with the data of other companies in the same industry to understand the position of Nam A Company in the whole market

5 Significance

Both the economy and Nam A Company has been significantly contributed from this research

To the economy: The report provides better understanding of business strategy

construction framework for enterprises in Vietnamese uPVC door and window industry

To Nam A Company: The study finds out business context, opportunities, threats,

strengths, weaknesses, and suitable business strategy for the company Moreover, the specific functional strategies are also illustrated for the process of strategy implementation in practical situation of current market

6 Limitation

There are certain limitations in this study The report focuses on Nam A Company only, so the findings of it cannot be applied to other firms Furthermore, available data of the company’s competitors is limited making the analysis process appear several weaknesses

7 Thesis structure

There are five parts in this thesis, namely introduction, theoretic foundation, internal and external analysis, strategy recommendation and conclusion Among three main chapters, the chapter of theoretic foundation will review all the theories related to strategic management and analysis tools for internal and external investigation The next chapter will show the process of examination of factors that influence Nam A Company operation in the market through the application of PESTLE, Five-force, Value chain and SWOT model The final chapter of paper body concentrates on the formulation and implementation of strategies for Nam A Company The conclusion summarizes the entire paper and its findings, so the readers can revise the information that they have read earlier

CHAPTER 1: THEORETIC FOUNDATION

This chapter provides necessary theories used in information analysis and solution proposal for the investigation of Nam A Company strategic management It contains definition, role and main contents of concepts, alternatives as well as models related to strategic management This case relies on these theoretic foundations to expand the general research into particular application

1.1 Strategy and strategic management

Below presents the main concepts that go through this thesis from very beginning to the end With these basics, further theories are developed to create important elements to examine the case

1.1.1 Definition and levels of strategy

Defined in Exploring Corporate Strategy of Johnson and Scholes, strategy "is the

direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations" In other words, strategy of a business is the orientation on how it can achieve its objectives by maximizing the strengths and minimizing the weaknesses

in order to salvage the opportunities and overcome the threats

There are three levels of strategy in a typical company Each level deals with different characteristics and ranges of operational activities

- Corporate strategy is the overall business orientation that forms the attitude of a

corporate to management and development It reflects specific core features of each organization, puts forward the frame for growth and has the decisive effect on the position in the market of this company, especially in long-term

- Business strategy is applied to management of each business line to adjust the

general direction into suitable plans and visions for a defined market segment It is concerned more with product level where strategies are connected closely to business units The attitude towards competition also is influenced by this level of strategy

including competitive and cooperative strategies A company can choose to either

develop its own products and services to have stronger competitive advantages over its competitors or form alliance with other corporates in the same market

- Functional strategy describes proposals for maximizing resource productivity in

each area in the organization It is designed distinctly depending on the particular type of activities to improve and combine organizational resources so that the advantage can be created in order to become competitive in comparison with functional processes of other corporates

Three types of strategies are utilized and combined concurrently to have the best effectiveness It means that all strategies applied should support one another and should be corresponding to corporates’ objectives

1.1.2 Business strategies

Concentrating in the competitive advantage to improve company position in a particular market, managers can decide whether they want to take competitive or cooperative strategies

The goal of competitive strategy is to outperform competitors by building up a

defendable position To do so, there are four basic strategies introduced by Michael Porter These strategies can be applied for organizations of all types and sizes

Source: The Competitive Advantage of Nations by Michael

E Porter Copyright © 1990 by Michael E Porter, p 39

Cost Leadership

This strategy aims at being the lowest cost producer within an industry The firm can provide goods and services either below the average price to gain market share by attracting price-sensitive customers or at average price to enjoy the higher profitability of lower costs in relation to other competitors When an industry matures making the price decline or when a price war happens, the low cost firms can still maintain some profit since they produce goods more cheaply To achieve the objective of operating at lower cost than their rivals, three main ways are usually used

The first dimension is achieving a high asset turnover making fixed costs be spread over high volumes of goods or services provided The firm therefore can take advantage of economies of scale and experience curve effects The second approach

is achieving low direct and indirect operating costs The firms can produce large

Figure 1.1 Porter’s Generic Competitive Strategies

number of units of standardized products at certain level of quality Using simple production process and standardized components, the firms can reduce both production and overhead costs The last dimension is controlling over supply chain

to enjoy discounts and keep inventories at low levels All these approaches empathize the efficiency of operating process

The risks of applying this strategy include low customer loyalty for customers are easy to switch for a lower cost provider, low reputation for quality that usually comes along with low costs, and the existence of other low cost competitors Also, when technology improves, the advantage can be eliminated if competitors are able

to increase production capacity In addition, firms who concentrate in costs often pay little attention to other factors like marketing, customer requirements and so on, which can lead to bad decisions

Differentiation

This strategy focuses on the development of products or services that are unique and valued by the customers, so the firm can charge a premium price for them The firm hopes that the higher price can cover the costs of adding unique attribute to these products In addition, because of product’s unique characteristics, if the costs incurred in production process increase, the firms can pass them along to the customers who cannot find similar products for replacement

The main idea of this strategy is that the company will seek competitive advantages by gaining brand loyalty from the customers who have specific needs that cannot be satisfied easily by other products Usually, this strategy requires the firm to have strong abilities and resources of researching, marketing, product design and engineering

The firm may face several risks using this strategy First, there is a large price distance between the products of the firm and other products made by low cost providers in the same industry, which can make the customer unwilling to pay premium price Second, the taste of customers towards these unique products may change and the need for differentiation may reduce Last but not least, the existence

of imitations and fake products can have a high impact on customers’ awareness of differentiation as well as their willingness to buy the products, therefore reducing the profitability from the unique attribute of the products

Cost Focus and Differentiation Focus They are both generally called Focus strategy Focus strategy intends to serve just a

narrow market segment, whether it is specific group of customer or geographic market or particular product line, but trying to outperform competitors who serve a broader market

Cost focus concentrates in lowering the costs of producing products in the chosen

segment in order to provide goods or services that satisfied the needs in that segment with better quality or lower price than its rivals The firm can produce similar products to the ones of market leaders and provide them with lower price to the customers who find the quality of products acceptable and their price more reasonable These products are often called "me-too’s"

Differentiation focus aims at differentiating within a small market segment Because

the firm tries to satisfy specific customers, their needs will be defined more clearly

Therefore, the products will be more focused and different It is important to empathize that there is a valid basis for differentiation if the firm want to adopt this strategy It means the firm has to ensure that customers really have different needs and those needs have not been satisfied

Some risks companies may face adopting these strategies include the possibility that the difference between broad market and narrow market may reduce by time

Furthermore, if a broad-market cost leader adapts its products, they can compete directly with narrow-market cost producers

1.1.3 Strategic management process

Strategic management is the management of actions and decisions related to organizational orientation and performance in long-term There are four main elements in strategic management process, which is showed in the figure below

The first step of this process, environmental scanning deals with information

recapitulation of the context where the organization exists and operates It includes

the work of supervising, measuring and transferring data related to both external environment and internal environment External environment consists of

opportunities and threats that come from outside the organization These variables which can be social or industrial trends and forces cannot be controlled by top

managers in short-run On the other hand, internal environment refers to the features

inside a corporate like culture, resources and structures Also, top managers are usually out of short-run control at these factors

Next, strategy formulation uses information from the previous stage in analysis to

develop long-range plans Defining mission – the purpose for the existence of the organization - and creating objectives – the expecting effects of planned activities - are parts of it In addition, managers also develop strategies and set policy directions based on the results of internal and external factor analysis

Strategy implementation is the process of transferring overall strategy into action

Through this stage forms and develops programs, budgets and procedures Different from other steps, people who actually implement strategies are middle and first-line managers while top managers only supervise and review Daily choice of resource allocation is also involved

Figure 1.2 Strategic management process

Performance of planning and executing is monitored and measured in evaluation and control stage when actual results is compared to expected objectives Then, if

the deviation is not acceptable, managerial action will be taken to correct performance and resolve problem The strategic management process is completed

by evaluation and control Depending on the effectiveness and efficiency of the performance, strategies and the way they are implemented will be adjusted

1.1.4 The role of strategic management

Both small and large organizations need to carefully consider their strategic management since this process strongly affects the position of organizations in the market After research, many experts concludes that small companies applying strategic management in the right way will achieve better results over the ones operating without strategies

Moreover, this process brings chances for all levels of management to be involved

in decisive planning of the company Low-level managers can propose suggestions and participate in decision-making process helping them understand more about the organization where they work as well as motivating them to be more active in their jobs Therefore, the work of setting strategies does not need to be formal because it may have positive effects when the strategies can be adjusted through application period based on the feedback of managers However, in a large corporate, this process can be more complicated, so these corporates should build up a system in which the strategies are formed and implemented reasonably to ensure the practice

of application

To carry out strategic management, it is required to be aware of both external and internal factors which influence the business environment Consequently, managers who know these information will have an overall view of the organization’s position allowing them to see further in the future instead of sticking with day-to-day activities only Hence, the company becomes more adapt and flexible towards changes, which is more and more necessary in uncertain environment nowadays

Strategic management hence creates the visionary thinking in the company Since managers have a clear idea about expected place where they want to go, their current position and the path that connects the two places, they can build up mission, vision, objectives, strategies and plans so that these ideas can spread to reach all employees in the company As a result, different units can work towards a consentient purpose preventing benefit conflict among those ones

Because strategic management helps strategies, structure and processes used in a corporate match with environment changes, it creates propitious conditions for the company to maximize its advantages achieving positive growth High impacts on organizational performance are made through strategic management process, so it plays an important role in effectiveness and efficiency of the company, especially company with limited resources

1.1.5 Strategic decision making

Strategic decision making is an important and distinguishing characteristic of strategic management Different from daily decisions, strategic decisions deal with long-run future of the whole organization, which means their range of influence is very large towards organizational development They have three features that

normal decisions do not have First, they are rare, so there is no precedent for

managers to follow in the situation that they need to make a strategic decision

Second, they are consequential, which means they create huge impacts and require much commitment Finally, they are directive and precedents for lesser decisions

and activities in the future can be built up based on them

Strategic decisions can be made in different ways According to Mintzberg and Quinn, there are four modes of this process

- Entrepreneurial mode is the approach in which strategy is created by an

individual This person is powerful and has the authority to decide important issues

in the organization Therefore, vision and thinking of the founder influences

company strategy In this mode, strategy usually concentrates in opportunities, not problems

- On the contrary, adaptive mode looks for the solutions to existing problems

instead of considering new opportunities Strategy is set for the company to develop through incremental steps

- Information is collected first in planning mode Then these data will be analyzed

to build up alternative strategies from which the most appropriate strategy will be chosen Both new opportunities and solutions for existing problems will be examined in this approach

- Logical incrementalism is the mode added by Quinn after three modes above were

introduced by Mintzberg In this approach, though top managers has clear idea of mission and objectives of the organization, strategies will be developed through experiments and a series of partial commitment instead of using general formulations

In changing environment, this mode will be suitable and useful when the resources and consensus need to be prepared before informing a specific strategy

Over the two next decades, many management practitioners tried to add other factors to the model Through the 1980s, environmental issues gained more and more attention resulting in the emergence of it as the fifth letter After that, legal matters were recognized by the business world that these problems also directly

affected the firm operation Therefore, the adequate version of PESTLE has come into macro environmental analysis

Source: www.dineshbakshi.com

Political factors talk about how the government intervenes in the economy In this

area usually include tax policy, labor law, environmental law, trade restrictions, tariffs and political stability

Economic factors refer to the growth rate of economic, interest rates, exchange

rates, inflation rate and other macro-economic issues existing in local, national and global economy

Social factors contain culture aspects as well as development trend in the society in

which the company exists The value, attitude and demographic characteristics of the firm’s customers are also included in these factors

In technological factors, the development of technology, method, process, product,

etc is mentioned These factors usually influence the operation of research and development activities and automation of the company

Figure 1.3 PESTLE model

All matters related to weather and climate changing are analyzed under

environmental factors The impacts of production as well as people’s awareness of

environmental protection will help the company to create the plan of their operation

Finally, legal factors include all changes in the law such as discrimination law,

consumer law, antitrust law, employment law, etc These changes may affect the activities of the company, their costs and the demand for their products

1.2.2 Five-force model

This model, developed by Michael Porter of Havard Business School in 1979, has been used to examine the industry environment In other words, it helps management to dig into micro environment which is contrast with macro environmental factors in PESTLE model With this tool, the management can have insight version of (1) competitive dynamics of the industry, (2) the way each force affects company operations and (3) how to counter these forces As stated in the model’s name, there are five forces to investigate using this tool Each of them respectively is threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of customers and competitive rivalry within the industry

Source: Lloyd L Byars, Leslie W Rue, and Shaker A

Zahra, Strategic Management, Irwin Press, USA, 1996

Threat of new entrants

This threat is affected by the possibility that new companies enter the market In the process of analysing this factor, barriers to entry and response of existing company

to a new comer are the most important issues that need to put into consideration In cases that a small amount of time and money is required to break into the market and effectively compete, that the production technologies are not protected against other people’s knowledge, that there is small economies of scales, that customers have low brand loyalty or that inputs and customers can be accessed easily, then it

is very possible for new competitors to quickly penetrate the industry and threaten company’s position On the contrary, if the market has strong and durable barriers, existing companies can take advantages of favourable position in the market

Besides, there is little chance to join the industry when existing firms have the trend

to quickly and sturdily react with the changes in the market They may reduce price, implement new marketing plan or develop new product in order to gain more competitiveness

Figure 1.4 Five-force model

Bargaining power of suppliers

This force is about the position of suppliers in contracting negotiation It affects how easy it is for them to drive prices up This force will have most power in case few suppliers are available, the uniqueness of their product or service is absolute, the costs of switching from one to another are expensive, suppliers can integrate forward, suppliers can sell their product directly to final customers, and the company do not have a full understanding of the suppliers’ market

Bargaining power of customers

In contrast to bargaining power of suppliers, this force impacts which power customers have in contraction negotiation to drive prices down The factors that can make this force more powerful includes few number of buyers, the existence of substitutes, low customer loyalty, small costs for switching suppliers, and easy level

of adequate market information collection

Competitive rivalry within the industry

This force focuses on the level of competition in the market The most important features which affect this force are the number and capability of competitors The rivalry will be most intense if there are numerous companies in the industry, industry growth rate is low, products are not unique, customers can easily switch among suppliers, and the products are perishable and need to be sold quickly

1.2.3 Value chain model

This tool helps the managers to draw an overall picture of the company in order to realize their strengths and weaknesses The result of the investigation base on this model can indicate which competitive advantages that managers should concentrated on to create value-added to products

Source: Adapt from Farhad Analous and Azhar Karami, Strategic Management in Small and Medium Enterprise, Thomson 2003

Value chain is divided into two types of activities, namely primary and supporting activities Primary activities directly deal with the process of creating product value

Figure 1.5 Value chain model

while supporting activities are the ones assisting primary activities so that these activities can be performed better

Primary activities

Included in these activities, inbound logistic focuses on the receiving and warehousing of raw materials Operations refer to the process of transforming the inputs into outputs Outbound logistic considers the efficiency of warehousing and distribution of finished products to customers Marketing and sales talks about the activities to catch customers’ needs, broadcast the company products and generate sales volume Service activity indicates the interaction between the company and customers in order to provide more support for them after the products are sold

Supporting activities

The infrastructure of the firms may contain organization structure, control systems, working systems and company culture Human resource management includes all the activities related to recruitment, training and paying of the company towards their employees Technology development refers to the application of technology in the process of developing the products, manufacture process and working facilities

Procurement focuses on the searching and acquiring of inputs including materials, supplies and equipment

1.2.4 SWOT model

SWOT analysis is used to examine both external and internal factors of the company

There are four factors indicating company characteristics as well as market situation in this model, namely strength, weakness, opportunity and threat This tool helps the company to summary the most important point in their operation

Source: © 2012 Alyssa Gregory

Internal elements in SWOT include strengths and weaknesses The strengths are the advantages - helpful features - that the company has over their competitors while the weaknesses refer to disadvantages - harmful features - of the company compared to their rivals

There are also two elements in external factors, namely opportunities and threats

The opportunities are the current external trends that the company can take advantage of, so they present a helpful feature for the firm The threats are external movements which may negatively influence the company Threats are considered to

be harmful for the company

Figure 1.6 SWOT model

CHAPTER 2: INTERNAL AND EXTERNAL ANALYSIS

This chapter provides information on the environment within which Nam A Company operates Using those data, the process of matter dissection will be carried out, divided into internal and external analysis The aim of this step is to bring forward an overall picture of the situation where the company is dealing with, its position in the industry and remarkable points of company’s strengths and weaknesses

2.1 External analysis

In this part, there are two smaller sessions First, the data on market background will

be summarized Then, an analysis of market situation by PESTLE and five forces is carried out base on the industry information with the objective of presenting an overall view of the outside environment where Nam A Company exists

2.1.1 Background information

Information on Vietnam uPVC doors and windows industry will be presented shortly here These data will be the fundamental element for the development of further business analysis in this chapter

2.1.1.1 The development of Vietnam uPVC doors and windows industry

In the previous century, among other improvements in construction goods all over the world lay the emergence of uPVC doors and windows for the first time in 1967

This kind of product was invented as a substitute with more advantages for traditional iron and wooden doors It is made of uPVC plastic which has several strong key characteristics such as heatproof, anti-aging and anti-oxidizing Through many years of development, current uPVC doors and windows have been upgraded

to enhance their advantages and become a common product used in building projects nowadays

The uPVC doors and windows were used in Southeast Asia from the 1990s but it only went into manufacture in Vietnam by Eurowindow (European Plastics Window Company Ltd) in 2002 With the establishment of Eurowindow, Vietnam uPVC doors and windows industry started though it still was very quiet for the next four years From 2006, there were some more companies formed or jumped into this field of production The industry became really effervescent in 2008 and reached its peak in 2010 Afterwards, it began to slope down The following figure shows this industry life cycle

Due to the increase of the living standards as well as the development of construction industry in the new century, the demand for doors and windows went

up not only for quantity but also for diversification, which gave the chance for uPVC doors and windows to break into Vietnamese market in early 2000s

However, since Vietnamese still attached to the old-fashioned doors and windows made of iron and wood, uPVC products could not bloom for the introduction period from 2002 to 2006 After four years, the citizen got more familiar with this kind of

doors and windows, there were customers, especially building contractors, who wanted to switch from outdated products to this new design As a consequence, new suppliers also came into the industry, which lead this industry to go into growth phase of its life cycle

The common feature of manufacturers who started their business early in this industry is that they all have high capital invested by foreign companies in both aspects of finance and technology Those firms, for example, Eurowindow and EBM (European Building Material Joint Stock Company), dominated the whole industry for years until 2008 when two factors occurred encouraging other companies to enter the market First, China started to mass produce machines and materials used in uPVC doors and windows manufacture This supplying source was cheaper and easier to obtain than the one from Germany that large producers used Input products that China exported favored medium and small firms with limited resources who could not support German goods, which helped these firms meet all the input requirements to manufacture uPVC products Second, Vietnamese market of construction projects boomed with a great number of licensed plans for new urban area as well as modern skyscraper These plans were designed in up-to-date style, so many of them required uPVC doors and windows instead of iron or wooden ones At the same time, bank credit for the purchase and building of houses was easier to achieve leading to a housing craze These all made the demand for uPVC doors and windows go up rapidly, and then the suppliers also appeared to respond with the same speed The uPVC industry developed quickly from 2008 and was the most eventful in 2010 with numerous suppliers and customers

Nevertheless, Vietnamese government’s monetary tightening policy in 2011 has heavily affected the industry When public spending has been cut down, large projects funded by state budget have suffered from the lack of money Many plans have been stagnated, which results in a huge reduction in the sources of work In addition, the market growth has been weaker than the increase in the quantity of suppliers making the competition become higher and higher The uPVC doors and windows industry has

come to its maturity The environment of the industry has turned so tricky that several

of uPVC companies have stopped their operation in 2012

2.1.1.2 Common business characteristics in the industry

Each industry has its own feature, so does the industry of uPVC doors and windows manufacture There are four key characteristics in this field that define the environment within which every uPVC companies operate Each of them will be respectively presented below

First, most of the work force employed in this industry is unskilled Since manufacturing as well as assembling processes being simple and invariable do not require high accuracy and regulation, the labors are low cost with little requirements

of skills and experiences The average period for new manpower training to immediately work in production lines is one month These workers are usually young; most of them are under 35 They are in charge of simple operation processes which can be easily assigned to anybody to take The industry favors from these labors the advantage of low cost workforce but also sustains a high level of worker turnover since there is a high chance that these staff switches to other industries

Out of the whole workforce, there is only approximately 10% who has high level of competence They are chief mechanics and engineers who have been carefully trained for quite a long time at both class and work They are experienced and expert at their specialty of uPVC product manufacture and assembling These skilled workers, in spite of the minor in number, are the key of uPVC firms, which results in the important positions as well as long staying they take in the industry

Second, all the uPVC doors and windows companies use the same manufacturing technology coming from German – the country in which uPVC products is invented There is no difference in working processes among these firms, so the product quality is influenced by materials and assembling technical skills only

Next, machines and materials are two factors that decide finished product standard

There are two main countries that provide equipment and materials to manufacture

uPVC doors and windows, namely Germany and China Germany supply grade goods with more expensive prices while the products of China stay at average quality with softer prices Consequently, the firms, usually top enterprises in the industry who can support high costs, get better product quality with the use of either Germany machines or materials or both over other companies with Chinese input

high-Finally, uPVC doors and windows production is an industry with little product differentiation Because of the technical structure of the product which is assembled from Profile bars with some metal accessories, the products’ designs heavily depend

on the type of Profile bars which themself are very limited in diversification Also, uPVC doors and windows are restricted in several categories such as sliding, perpendicular opening or top hung windows and doors There are about fifteen designs of product form made from more than ten kinds of Profile bars

Furthermore, for the firms that manufacture doors and windows for construction projects, the assembling of uPVC products has to exactly follow the project designs,

so the need for uncommon forms is not emerged

2.1.1.3 Industry fragmentation

The division of market shares in uPVC doors and windows industry is fairly equal among different groups of enterprise There are mainly four groups which are distinguished by their size, target market, product quality and prices The following chart will give a clear view about the groups’ market share in this industry

The group of market leaders including several top companies like Eurowindow and EBM accounts for about 20% of the market share They are foreign-invested enterprises with high financial capability Their production machines as well as materials are imported from Germany guaranteeing the best quality of final products They are also the first firms entering this industry, so their names are famous for all the customers Moreover, with many years of operation in the industry, their workforce is experienced and their understanding of the whole market is high The advantages brought by these factors permit them to enjoy the highest setting prices in the industry which is about VND 4 million per square meter

of doors or windows The target market at which they aim is construction projects funded by state budget, high-grade villas and certain luxury private houses

The second group also includes well-known firms with slightly lower reputation such as Smartdoor and Smartwindow The market share that this group holds is approximately 30% Though the companies in this group use Chinese machines, the materials for production are mixed between German and Chinese ones When customers order high-quality products sold with higher prices, German materials are

required in production Otherwise, Chinese materials are used in the manufacture of normal uPVC doors and windows The prices of this group’s products waver from VND 2.5 million to VND 3 million per square meter of door or window depending

on the product quality These companies usually accept contracts for both state and private construction projects

For the third-ranking firms including Nam A Company, most of their features are similar to the second group’s characteristics except their reputation These enterprises use both Chinese machines and materials in manufacture process, so all the final products are average-rank Comparing these goods to non-high-quality products of the second group, there is no difference in quality between them, which

is the result of similar production lines, similar quality management and similar labors’ skills The third-ranking companies, however, set a lower price for their products, about VND 2 million per square meter of door or window, which means a cheaper price of VND 5 hundred thousand per square meter The main reason for this is that the third group is defeated by the previous one in term of well-known brand The target market for this group is also both state and private construction projects

In the final group are small businesses with no brand name They use Chinese supplying for the manufacture of ordinary products with selling price of VND 1.5 million per square meter of door or window They only aim at individual customers who want to buy furniture for their own houses

The chart below summaries the product quality as well as setting prices of all four business groups in the industry

2.1.2 Environmental scanning and forecasting – PESTLE analysis

The six aspects that can heavily influence company operation will be carefully listed and analyzed below Looking at these features will help the company understand market situation in order to predict future trend, which creates a vision for preparation to quickly adapt and timely respond to these possible changes

2.1.2.1 Political factors

Over the past 6 years, though Vietnamese government has not proposed any policy directly related to uPVC doors and windows industry, there have been several policies aiming at other factors in the economy but still having huge influence in this market

The ones with biggest impacts have been brought forward in 2006 and 2011

FDI attraction

In the third quarter of 2006, the government gave directions to attract foreign direct investment (FDI) making that index significantly increase, especially in industry and construction There were some investors who directly put their money in uPVC

doors and windows companies, which resulted in the establishment of large uPVC firms like EBM The acceleration of FDI in 2006 as a consequence of government policy is presented in the chart below

Source: Vietpartners

Direct foreign investment put in uPVC companies was not very considerable, but this industry still enjoyed another benefit that FDI brought According to the statistic, a great proportion of FDI had been invested in construction, which had been the status quo for a long time back from 1988 The following chart presents the comparison of FDI placed in different economic sectors, which shows how industry and construction benefited over agriculture and services from the rise of FDI

Source: www.saga.vn

As can be seen from the graph, FDI used in industry and construction was approximately two times higher than the investment in services and ten times higher than the one in agriculture and forestry Therefore, construction also enjoyed great positive effect when FDI increased whereas uPVC doors and windows industry had covariant relationship with construction If construction strongly grows, the demand for doors and windows will also go up with more and more customers, which results in the expansion of this industry

Moreover, apart from the benefit of FDI increase, Vietnamese government also had the policy to encourage individual investors to join the building market at the same time with the objective of infrastructure development and house construction for worker selling or renting The need of uPVC doors and windows shot up accordingly beginning the eventful period of the industry

Monetary tightening policy

UPVC industry grew in succession for nearly five years until early 2011 when other policies came into effect The government’s investment reduction policy as well as

state bank’s credit tightening policy was enforced in order to restrain inflation It then showed the effectiveness in term of its primary objective, but also making construction and real estate indus narrow down With the restriction of public spending fund and bank credit, money deficiency lead to the stagnation of many construction projects which required cash to perform Without building, there was

no demand for uPVC doors and windows driving the whole industry to the dead end Manufacturing companies have struggled from then

For nearly two-year period from 2011 to 2012, these policies have not been loosened, which has caused construction and, as a consequence, uPVC doors and windows industry going backward Although state bank has reduced loan interest in 2012, lending conditions have stayed the same Hence, those businesses who, in the past, could not borrow money due to requirement un-satisfaction still have not had the chance to get the loan now, so the benefit from this rate decrease has been very limited Up to this day, the government has not brought any draft policy to save construction from this stagnation situation, along with uPVC doors and windows industry

Like this, all enterprises in the industry have to face a great challenge from the freeze of the whole market Small demand of the products results in little work available preventing the companies from continuing their normal operations While

no or little income is earned, these firms still have to bear certain costs to keep the business alive, which may result in a huge loss The priority of all companies must

be to survive the industry crisis before thinking about anything else

Nevertheless, this situation also provides a slight opportunity for long-term development Since staying in the current market is difficult, many businesses may retreat from the industry leaving more available positions in the market For those companies who can stand firm, the industry after recovery will be more comfortable with lower competition In other words, once enterprises can overcome this difficult phase, their potentiality for expansion will be fairly high

Because economic recovery has not reached the expectation in 2009, with the objective of promoting economic growth, the progress of many major construction projects has been hastened in 2010 to complete the plan before deadline Moreover, local building investments all around the country have been considerably developed, so the construction value in 2010 has been about VND 545.2 thousand billion, an increase of 23.1% compared to the figure of previous year Covered in this, there is VND 184.7 thousand billion, rising by 23.4%, that has come from state area; VND 245.5 thousand billion, rising by 23.0%, that has come from non-state and other areas; and finally VND 15 thousand billion, rising by 22.7%, that has come from foreign-invested area This thriving of construction has brought about the emergence of uPVC doors and windows industry to reach its wonderful development

Nevertheless, this beautiful period has not lasted for long Since economic crisis has not been radically treated and intrinsic difficulties within Vietnamese economy such

as macroeconomic imbalances, high inflation, etc have become huge threats, there are several solutions carried out in order to remove difficulties and ensure macroeconomic stability Construction industry has suffered the most negative impact of this implementation For example, the government has decided on February 24, 2011 in 11/NQ-CP resolution to reduce and transfer VND 81.5 thousand billion of the fund in state development investment area to solve the problems in other sectors Furthermore, credit tightening conditions are the worst scenario for building industry, as it is analyzed earlier in this chapter