Proposal of competitive strategy for SCE consultants (Indo China) LTD. in the period of 2011 to 2015

The study will apply theories of competitive strategy by Michael Porter, differentiation management and customer satisfaction.. Methodology and framework of the study This study will be

HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL

(PART-TIME)

Ho Chi Minh City

(2011)

Acknowledgement

I wish to express my loving thanks to my parents and wife for their spiritual support and encouragement during my study

I wish to extend my gratitude to Dr Nguyen Quyet Thang for his valuable advice and help

Finally, thanks to all friends who share with me joy, happiness and sadness

Declaration

This thesis is a presentation of my own study Wherever contributions of others are involved, every effort is made to indicate this clearly, with due reference to the literature, and acknowledgement of collaborative research and discussions

The work was done under the guidance of Dr Nguyen Quyet Thang, under the framework of the Master program in Business Administration – The join Master Program between Solvay Brussels School (Belgium) and Ho Chi Minh City Open University (Vietnam)

The work was completed in February 2011, in Ho Chi Minh City – Vietnam

(candidate’s name and signature)

DANG HOANG TUNG

In my capacity as supervisor of the candidate’s thesis, I certify that the above statements are true to the best of my knowledge

(tutor’s name and signature)

Dr NGUYEN QUYET THANG

Date:

Abstract

Positioning in consultancy of high-rise building segment, in recent years SCE Consultants (Indo-China) Ltd is considered a successful company in terms of high growth rate Nevertheless, as other consultant companies, SCE Consultants (Indo-China) Ltd is facing the question of how to develop in the environment with fiercer and fiercer competition Hence, the purpose of this study, designing a competitive strategy for the company, becomes more necessary and crucial

In this study, based on the general process of strategy formulation, the most appropriate strategy for the company to develop will be found out Firstly, an external scanning relied on macro environment and industry environment analysis to identify opportunities and threats for the company is carried out Secondly, the company’s factors such as organizational structure, human resource and business activities… are examined to reveal strengths and weaknesses of the company Thirdly, derived from the determined strengths, weaknesses, opportunities and threats, the most appropriate competitive strategy for the company is developed Finally, recommendations that the company should pay attention to in order to successfully implement the proposed strategy are presented

Table of Content

CHAPTER 1: INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Problem statement 1

1.3 Objectives 2

1.4 Scope and limitation of study 2

1.5 Methodology and framework of the study 2

1.6 Structure of the study 4

CHAPTER 2: LITERATURE REVIEW 6

2.1 Competitive advantage 6

2.1.1 Definition 6

2.1.2 Generic building blocks of competitive advantage 7

2.2 Competitive strategy 8

2.2.1 Definition 8

2.2.2 Three levels of strategy 10

2.3 Process of strategic management 12

2.4 Strategy formulation process 13

2.4.1 Vision, mission and goals 13

2.4.2 External analysis 13

2.4.3 Internal analysis 17

2.4.4 Strategy formulation and strategic choice 18

CHAPTER 3: EXTERNAL ENVIRONMENT ANALYSIS 20

3.1 Vietnam construction industry overview 20

3.1.1 Housing construction 20

3.1.2 Infrastructure construction 20

3.1.3 Commercial construction 22

3.1.4 Retail and industry construction 22

3.2 Macro environment analysis 23

3.2.1 Political and regulatory factors 23

3.2.2 Economic factors 24

3.2.3 Social, culture and demographic factors 29

3.2.4 Technological factors 31

3.2.5 International factors 32

3.3 Industry environment analysis 33

3.3.1 Definition 34

3.3.2 Porter’s five force analysis 34

3.3.3 Conclusion 37

CHAPTER 4: INTERNAL ENVIRONMENT ANALYSIS 39

4.1 Introduction of SCE Consultants (Indo-China) Ltd 39

4.2 Company’s Vision, Mission and Core values 40

4.3 Organizational structure 41

4.4 Human resource management 43

4.5 Business activities 44

4.5.1 Current services 44

4.5.2 Core clients 49

4.5.3 Pricing strategy 50

4.5.4 Business achievement 51

4.6 SWOT analysis 51

4.6.1 Opportunities 52

4.6.2 Threats 53

4.6.3 Strength 53

4.6.4 Weakness 53

4.6.5 SWOT matrix 54

CHAPTER 5: FORMULATION COMPETITIVE STRATEGY 55

5.1 Foundation of the strategy 55

5.1.1 What is to be satisfied? (Customer needs and product differentiation) 55

5.1.2 Who is to be satisfied? (Customer groups and market segmentation) 55

5.1.3 How customer needs are to be satisfied? (Distinctive competences) 56

5.2 Competitive strategy for SCE 56

5.2.1 Generic competitive strategy 56

5.2.2 Proposed competitive strategy in the period of 2011 – 2015 59

CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS 68

6.1 Conclusions 68

6.2 Recommendations 69

6.3 Limitation of the project 70APPENDIX 71Appendix A: Questionnaires for direct interview with directors and managers of SCE Consultants (Indo-China) Ltd Company 71Appendix B: Questionnaires for direct interview with directors and managers of key clients of SCE Consultants (Indo-China) Ltd Company 73Appendix C: Questionnaires for direct interview with directors and managers of partners of SCE Consultants (Indo-China) Ltd Company 75REFERENCES 77

List of Figures

Figure 1.1 Frame work of study 3

Figure 2.1 Value creation to consumer and producer 6

Figure 2.2 Strategic planning process 12

Figure 2.3 Porter’s five force model for industry analysis 15

Figure 3.1 GDP and GDP per capita in the period of 2005-2015 25

Figure 3.2 Inflation in the period of 2005-2015 26

Figure 3.3 FDI in the period of 2005-2015 27

Figure 3.4 Top 10 FDI investors in the period of 2005-2015 28

Figure 3.5 Exchange rates (at year-end) in the period of 2005-2015 29

Figure 3.6 Rising urbanization level 30

Figure 3.7 Porter’s model applied to the case of SCE 38

Figure 4.1 Manpower of SCE (at year-end) in the period of 2005-2010 41

Figure 4.2 SCE’s organizational chart in 2010 42

Figure 4.3 SCE’s service line _ Service line 1 (SL1) 45

Figure 4.4 SCE’s service line _ Service line 2 (SL2) 47

Figure 5.1 SCE’s generic strategy 59

Figure 5.2 Proposed competitive strategy for SCE 59

List of Tables

Table 2.1 Generic competitive strategies and required competencies 19

Table 3.1 Top 10 major apartment building projects in HCMC in the period of 2007-2010 20

Table 3.2 Top 10 priority projects in the period 2005-2010 21

Table 3.3 Top 10 major office developments in HCMC 22

Table 3.4 Top 10 major industrial developments in the period 2007-2010 23

Table 3.5 Top 10 highest buildings in Vietnam 32

Table 4.1 Corporate milestones 39

Table 4.2 SWOT matrix of SCE 54

Abbreviations

(In order of appearance)

C&S Civil and Structural

SCE SCE Consultants (Indo-China) Ltd (Vietnamese branch)

FDI Foreign direct investment

CRM Customer relationship management

HCMC Ho Chi Minh City

R&D Research and development

CAGR Compound annual growth rate

CBRE CB Richard Ellis Co Ltd

ASEAN Association of South East Asian Nations

WTO World Trade Organization

IMF International Monetary Fund

GDP Gross domestic product

CFIS Center for Foreign Investment Studies (University of Economics Ho Chi Minh City)

MOC Ministry of Construction

MPI Ministry of Planning and Investment

SL2 Service line 2 (refer to figure 4.4)

ODA Official development assistance

CHAPTER 1: INTRODUCTION

1.1 Rationale of the study

Since the 1960s, the construction industry has contributed a great part to the national economic development; it accounted for 9.0% of GDP annually over the period of 2005

- 2009 [8].Civil and Structural (C&S) works in general as well as C&S consultancy in particular are integral parts of any construction project and their performance have been greatly affecting overall project quality Moreover, it can be realized that most of big and important projects with foreign investment capital have been designed and built

by foreign enterprises and such kind of projects is rapidly increasing

Despite of owning competitive advantages in quality manpower, technology knowledge, professional experiences and modern equipments several foreign consultants including C&S ones are facing losses and have no choice but to exit the market due to fiercer and fiercer competitions Therefore, all players are forced to enhance their competences and plan properly for survival and development

SCE Consultants (Indo-China) Ltd, hereafter called SCE, was established in 2005 as an entry strategy of its mother company headquartered in Singapore, SCE Consultant (Pte) Ltd, into Vietnam-Laos-Cambodia market SCE is providing services on C&S consultancy, specializing on high-rise buildings segment, which is believed blooming now and future Like others, SCE is standing in front of tough competition, thus an appropriate strategy is so necessary and vital

1.2 Problem statement

Recent years has recorded strong flows of FDI into the country, especially in real estate sector, and improvement on economic environment both which create plentiful opportunities for developers, constructors and consultant firms Although SCE has been achieving faster and faster growth thanks to the company’s own professional capability,

good reputation and expertise support of SCE Singapore, the Vietnamese branch has not been well known and still accounts for a limited market share How to enhance its current position and exploit superior chances for long term sustainable development has become strategic issue

The thesis aims to build up a competitive strategy as a recommendation for the company to move forward in the period of 2011 to 2015 The study will apply theories

of competitive strategy by Michael Porter, differentiation management and customer satisfaction Study methodology is also including a qualitative research on customer satisfaction and an in-depth analysis on information found

CRM-1.3 Objectives

This study targets to find out proper answers to below questions:

1 How is company’s service quality in assessments of SCE’s clients and partners?

2 What should the company do to satisfy expectations of its’s clients?

3 How to improve company’s competitive advantages?

1.4 Scope and limitation of study

This study is about the SCE, specifically about C&S consultancy, the main service of the company It focuses on formulate the competitive strategy for the company in the medium term

The depth of this study depends partly on the availability of the key data of the Vietnamese economy and the construction industry in general, especially of SCE It also depends on cooperation from the company and faces resources constraints

1.5 Methodology and framework of the study

This study will begin with a review of literature which concerns the strategic management process, particularly the process of strategy formulation It also mentions

to the concepts and principles of the Porter’s model to analyze the competitive environment of the industry

The framework of this study can be illustrated by figure 1.1

Figure 1.1: Framework of the study

Necessary data for this study were collected from 2 main sources:

GENERATION, EVALUATION, AND SELECTION OF

THE BEST STRATEGY

CONCLUSIONS AND RECOMMENDATIONS

Scan internal environment

Opportunities

Threats

Strengths Weaknesses

Analyze the competitive environment

LITERATURE REVIEW

• Primary data: Interviews in-depth with 12 directors and top managers of SCE Vietnam, SCE Singapore, SCE’s clients and partners And other relevant data were also collected

• Secondary data: Relevant data about the construction industry and the country’s economy will be collected from the General Statistics Office of Vietnam, Statistics Office, Ministry of Construction, Ho Chi Minh City (HCMC) Department of Construction as well as from newspapers, media, internet, etc

1.6 Structure of the study

The study is organized as follows:

Chapter 1 provides an introduction including the rationale of the study, identification of

the problem, the objectives, the scope and limitations as well as the methodology and framework of the study

Chapter 2 shows the literature review of the topic being considered This will

encompass the fundamental ideas on strategy, strategic management and strategy formulation process as well as the Porter’s model for analyzing industry

Chapter 3 provides an analysis of external factors that help indicate the company’s

strategic position The main contents of the chapter will deal with the current situation and strategic orientation for the construction industry in the future It also mentions about the structural analysis of the construction industry, the main area of competition

of SCE

Chapter 4 deals with the current analysis of SCE in terms of organizational structure,

human resource, business activities… The ultimate goal of the chapter is to identify strengths and weaknesses of the company in order to locate its present competitive position

Chapter 5 is devoted to the expected outcome of the study to develop the strategic

alternatives based on the analysis from previous parts that will help the company achieve outstanding performance in the coming years

Finally, Chapter 6 deals with practical recommendations on the implementation of the

selected strategy

CHAPTER 2: LITERATURE REVIEW

This definition uses profit rate as a measurement to rate the competitive advantage In other view, we can say that a product has competitive advantage when it was chosen by

a customer after his or her comparing among several similar products This definition is constructed in a competition context It can give us better idea about competitive advantage in a competitive environment

Figure 2.1: Value creation to consumer and producer

The key point of competitive advantage lies in the concept of value creation The value

of a product to a consumer may be V, the price that company can charge under competitive pressure may be P, and the cost of producing that product is C The

V

V = Value to consumer

P = Price

C = Cost of production V-P = Consumer surplus P-C = Profit margin

company profit is equal to P-C while the consumer benefit equal to V-P For two similar products with the same price P1 = P2, product 1 has competitive advantage if V1>V2 In other words, product 1 has competitive advantage because it brings greater value to customer This will be the focal point for us to formulate strategy and implementation plan

2.1.2 Generic building blocks of competitive advantage

Many factors contribute to competitive advantage of a company But in general, they can be classified into four generic categories:

• Efficiency: is the ratio between a company’s outputs to its input The more

efficient the company, the more outputs it can produce from certain units of input

or in other words, it can produce the same amount of outputs from less inputs, thus efficiency helps company achieve low cost competitive advantage The most important component of efficiency for a company is employees’ productivity With other factors hold constant, the company with its highest employee productivity typically has the lowest cost of production

• Quality: high quality of a product or service has strong contribution to company’s

competitive advantage First, high product quality give positive perception of customer about product, increase customer preference thus company can charge higher price for higher quality Second, high quality comes from greater efficiency and lower defective rate Low defective rate requires less time to fix substandard product and reduce the labor cost for fixing it These two effects combined bring company higher profit rate

• Innovation: innovation can be defined as new way company manufacture

product Innovation can be in the form of process, product design, management system, organization structure or even in the business practice of the company According to Hill and Jones [1], innovation can be the most important component

of competitive advantage It is the single most important to the differentiation of product or process that the competitors do not have Uniqueness can allow company to charge higher price for its products Example of product innovation is Apple for Iphone, Hewllet Packard for lazer printer They are the poineer company in each kind of product When competitor immitate the product, Apple and HP have established leader position in the market and strong customer loyalty which is hard for competitors to attack

• Customer responsiveness: to be viable, any company must find their customer

and satisfy their needs The process of adjusting, tailoring product features to market will be crucial to company competitiveness Another aspect of customer responsiveness is customer respond-time, which is the time require company to bring a product to customer hand For manufacturing company, customer responseveness is the time needed to fill an order; for a bank, it is the time to process the loan; and for a supermerket, it is the time customer have to wait in check out line

Besides, the quality of aftersales service and support also affect customer satisfaction and consequently company competitiveness

Chandler (1962) has defined strategy as “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals” The main idea in Chandler’s

definition is that strategy involves a rational planning process The organization is depicted as choosing its goals, identifying courses of action (or strategy) that best enable it to achieve its goals, and allocating resources accordingly Similarly, James B

Quinn (1980) defined strategy as “the pattern or plan that integrates an organization’s major goals, policies and action sequences into a cohesive whole” Then, William F Glueck (1980) defined strategy as “a unified, comprehensive, and integrated plan designed to ensure that the basic objectives of the enterprise are achieved” [1]

However, definitions of strategy based on planning have been criticized Hill and Jones

indicated a new approach based on Henry Mintzberg’s definition of strategy as “a pattern in a stream of decisions or actions” [1], the pattern being a product of whatever

intended (planned) strategies are actually realized and of any emergent (unplanned) strategies Mintzberg’s concept of strategy suggests that strategy involves more than just planning a course of action

In the decades of 1980s and 1990s, “strategy” becomes more and more essential in business domain Thereby, the concept of strategy has received a great attention by various authors By 1991, Hax and Majluf pointed out that strategy can be seen as a multidimensional concept that involves all of the critical activities of the firm, providing

it with a sense of unity, direction, and purpose, as well as facilitating the necessary

change caused by its environment In 1993, Johnson and Schole have stated the nature

of corporate strategy by the characteristics usually associated with the word “strategy”

or “strategy decision”

In summary, according to them, strategy is a unified, comprehensive, and integrated plan that relates the strategic advantages of the firm to the challenges of the environment and that is designed to ensure that the basic objectives of the enterprise

are achieved through proper execution by the organization [3]

The concept of strategy has become one of the everyday words of managers during the past decades, and the practice of strategic planning is now widespread among large and medium-sized companies This interest in strategy was caused by growing realization that the company’s environment has become progressively changeable and discontinuous from the past and that, as a result, objectives alone are insufficient as decisions rules for guiding the company’s strategic reorientation as it adapts to changing challenges, threats and opportunities

Any firm can consider three levels of strategy: corporate strategy, business or competitive strategy, and functional strategy

2.2.2 Three levels of strategy

2.2.2.1 Corporate strategy:

Corporate strategy is primarily about the strategic choice of direction for the company

as a whole It raises three key issues facing the corporation:

• The firm’s overall strategy toward growth, stability or retrenchment (directional strategy);

• The industries or market in which the firm competes through its products and business unit (portfolio strategy);

• The manner in which management coordinates activities and transfer resource and cultivates capabilities among product lines and business units

2.2.2.2 Business strategy:

Business strategy or competitive strategy refers to the plan of actions that management adopts to use a company’s resource and its distinctive ability to gain a competitive advantage over its rivals in a market or industry Michael Porter (1985) proposed three generic strategies company can pursuit to outperform its competitors in the market:

• Low cost strategy, strategy to design, produce and market a comparable product

more efficiently and thus cheaper than its competitors do Cost leadership strategy aims at the mass market and require aggressive construction of low cost structure including efficient scale facilities, vigorous pursuit of cost reduction, tight control

of overhead cost and cost minimization in areas like R&D, service, salesforce, advertising and so on Low cost structure allows company to charge lower price and thus allow company to compete when fierce competition exist with a quite reasonable good profit

• Differentiation strategy refers to strategy to deliver uniqueness and superior

value to buyers in terms of product quality, special feature, or after sales services Differentiation focus also at the broad market and involves the creation of a product or service that is perceived through the industry as unique Uquine product enables firms to charge higher price for its product The specialty can come from brand image, technology, features, dealers or dealer network Differentiation is viable for above-average profit The research of Caves and Ghemawat [7] shows that differentiation generate higher profit than low cost strategy because it creates higher entry barrier

• Focus strategy, focus strategy can be cost focus or differentiation focus This

strategy focuses to serve only specific needs of a market segment Usually, this strategy is pursued by small company to a market niche, while mass market has been well dominated by other larger companies

2.2.2.3 Functional strategy:

Functional strategy is the lowest level and it is clearly must comply to business strategy Functional strategy is taken by a functional area to achieve corporate and business objective and strategy by maximizing resource utilization It is concern with developing and nurturing distinctive competency From distinctive competency, firm can transform them to any of four building blocks of competitive advantage e.g quality, innovation,

customer responsiveness and efficiency and then to low cost advantage or differentiation

2.3 Process of strategic management

Strategic management is a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives The strategic management process is the way in which strategists determine objectives and make strategic decisions

However, strategic management is not simply the management of the process of strategic decision making According to Chakrvarthy (1986), strategic management is the process through which managers ensure the long-term adaptation of their firm to its environment It should be also emphasized that strategic management process is continuous - it never really stops within the organization Certo and Peter (1990)

defined strategic management as “a continuous, integrative process aimed at keeping an organization as a whole appropriately matched to its environment”

Figure 2.2: Strategic planning process

The process of strategic management involves 3 basic stages as shown in figure 2.2

Based on the context of this study, the focus will be on the strategy formulation process

STRATEGY FORMULATION

STRATEGY IMPLEMENTATION

EVALUATION &

CONTROL

2.4 Strategy formulation process

Strategy formulation is often referred to as strategic planning or long-range planning Regardless of the term used, the process is primarily analytical, not action-oriented The formulation process is concerned with developing a corporation’s vision, mission, objectives, strategy and policies In order to do this, corporate strategy makers must scan both the external and internal environments for needed information on strategic factors

2.4.1 Vision, mission and goals

A vision is an attempt to articulate, as clearly and vividly as possible, the desired future state of the organization A mission sets out the reason why the organization exists, whose benefit it serve and what it should do For instance, the vision of Walt Disney is

“… to be the preeminent leader in the field of family entertainment”; whilst its mission is

“… to make people happy” [4]

Major goals are the targets that an organization wants to fulfill in long or medium term Most profit-seeking organizations place maximization of profit near the top of their goals Other possible goals are to get the largest share in the market that a company currently competes in two years for example, or to get annual sale growth of 17% etc Goals should be specific and measurable within a time frame

threat is a trend or event that will result in the absence of strategic move, in a significant reduction in sales and profit figures External analysis including the following analysis:

1 Customer analysis includes identifying the organization’s customer segments and each customer’s motivations and unmet needs Segment identification defines alternative product markets and thus structure the strategic investment decision (what investment levels assigned to each market segment) The analysis of customer motivation provides information needed to decide whether the firm can and should attempt to gain or maintain sustainable competitive advantage An unmet needs, the need that currently not being met by existing products, can be strategically important because it may represent a way that entrenched competitors can be dislodged

2 Industry analysis, firstly introduced by Michael Porter (1980) [5] with the force model, identifies the important impact of five elements to the performance

five-of an enterprise The five forces are: threat five-of new entrants, rivalry among existing firms, threat of substitute product, bargaining power of buyers and bargaining power of suppliers

• Threat of new entrants: New entrants to an industry typically bring to it new

capacity, a desire to gain market share and substantial resource New entrants thus are a threat to established corporations The threat of entry depends on the entry barrier of the existing companies in the industry An entry barrier is an obstruction that makes it difficult for new entrants to enter and compete in an industry Entry barrier can be economic of scale, product differentiation, capital requirement, switching cost, assess to distribution channel and government policy

• Rivalry among existing firms: firms operating in competing market are mutual

dependent to each other One firm’s move can have impact on it competitor thus lead to retaliation and counter effect According to Michael Porter (1980) intense

rivalry resulted from several factors including: number of firms, rate of industry growth, product or service characteristic, amount of fixed cost, capacity and height

of exit barrier

Figure 2.3: Porter’s five force model for industry analysis

When developing strategy, Aaker (1995) [2] suggested what we need to understand about the competitors include:

_ Performance: sales, sales growth and profitability signal how healthy and formidable is a competitor?

_ Image and personality: how is the competitor positioned and perceived?

_ Objectives: what does competitor commit resources to, for high growth or differentiation strategy?

_ Current and past strategies, what are the implications for future strategic move?

COMPETITIVE RIVALRY

POTENTIAL ENTRANTS

Threat of Entrants

SUBSTITUTES

Threat of Substitutes

_ Culture: what is the most important to the organization - cost control, entrepreneurship or the customers?

_ Cost structure: does the competitor have cost advantage?

_ Strength and weakness: is the brand image, distribution or R&D strength or weakness?

• Threat of substitute products or service: substitute products are those products

that appear to be different but can satisfy the same needs as another product Tea can be considered a substitute for coffee To the extent that switching cost is low, substitute product can have strong effect on an industry Substitute products can put a ceiling price that firm within the industry can profitable charge

• Bargaining power of buyers: Buyers in an industry can affect firm’s profitability

through their ability to force price down, bargain for higher quality or more services and play competitor against each other A buyer or group of buyers is powerful if some of following factors hold true:

_ A buyer purchase a large proportion of seller’s product or service,

_ A buyer has the potential to integrate backward by producing the product itself, _ Product is standard and there are plentiful of supplier,

_ Buyer is sensitive to price and service difference, or

_ The purchased product represents high percentage of buyer’s cost so it is worth

to shop around for a lower price

• Bargaining power of suppliers: suppliers can affect industry through ability to

raise price or reduce the quality of goods or services purchased A supplier or group of suppliers is powerful if some of the following hold true:

_ The supplier industry is dominated by a few companies but sell to many,

_ Its product or service is unique or it has built up high switching cost,

_ Substitute products are not readily available,

_ Supplier can go forward and compete directly with current customers (like Intel company can produce computers), or

_ The purchasing industry buys only a small proportion of the supplier group’s goods and services thus unimportant to the supplier

3 Societal environment: the strategists must also be aware of societal factors that do not have short-run impact in firm’s performance but they usually influence firm's long run decision Four important categories of societal are:

• Economic forces that regulate the exchange of material, money, energy and information

• Technological forces that generate problem solving inventions

• Political forces that allocate power and provide constraining and protecting law and regulation

• Socio-cultural forces regulate values, custom of society

Hill and Jones [1] urge that the Porter’s five force model has its own limitation The model (1) presents a static picture of competition that slights role of innovation and (2) de-emphasizes the significant of individual company differences while over emphasize the important of industry structure as determinant of company profit rates They argue that innovation and company differences play a vital role in competitive position of a company and then its profit rate

2.4.3 Internal analysis

The third step in strategic formulation process involves finding out firm’s strength and weakness Sales, sales growth and profitability are major measurements of business performance and past strategy The analysis covers resources, capability that is vital to build and sustain competitive advantage Resource and capability are distinctive competencies lying in different functional departments like marketing, manufacturing, manager or employee’s skills etc Company strength leads to superior performance in

quality, efficiency, innovation and customer responsiveness while weakness leads to inferior performance

2.4.4 Strategy formulation and strategic choice

The next step involves generating a series of strategy alternatives given company internal strength and weakness; and its external opportunities and threats The comparison of strength, weakness, opportunities, threats (SWOT analysis) is to identify strategy that align, fit a company’s resource and capabilities to the demand of the market in which the company operates Within the specified alternatives, managers should choose the best one to follow

For business strategy, each of three generic strategies can be pursued given certain resource and capability as described in table 2.1 below

Strategy evaluation having developed alternative strategies, we need to evaluate their

suitability and feasibility A strategy can be valued through three criteria dimensions:

• Criteria of suitability which attempt to measure how far the proposed strategy fit the situation in strategic analysis Does strategy capitalize on company’s strength, overcome its weakness and counter environment threats?

• Criteria of feasibility that assess how a strategy might work in practice For example, whether strategy is achievable in resource term

• Criteria of acceptability that assess whether the consequences of proceeding with

a strategy are acceptable For instance, will it be sufficiently generate profit or growth expected by management or the risk involved in every strategy

Table 2.1 Generic competitive strategies and required competencies

Commonly

required skills

and resources

Substantial capital investment and access to capital

Process engineering skills Intensive supervision of labor

Products designed for ease

in manufacture Low cost distribution system

Strong marketing abilities Product engineering Creative flair

Strong capability in basic research

Corporate reputation for quality or technological leadership

Long tradition in the industry or unique combination of skills drawn from other businesses

Strong cooperation from channels

Combination of common skills directed at the particular strategic market

Common

Organization

requirement

Tight cost control

Frequent, detailed control reports

Structure organization and responsibilities

Incentives based on meeting strict quantitative targets

Strong coordination among functions in R&D, product development, and

marketing

Subjective measurement and incentives instead of quantitative measure Amenities to attract highly skilled labor, scientists, or creative people

Combination of the common organizational requirement directed at the particular strategic market

CHAPTER 3: EXTERNAL ENVIRONMENT ANALYSIS

3.1 Vietnam construction industry overview

3.1.1 Housing construction

From 2000 to 2010, total housing area in Vietnam increased dramatically, from 700sqm million to 1,430sqm million [12] The average annual increase in supply was 58sqm million which represented a CAGR of 7.2% During that period, new housing construction was six times the total new supply of the previous decade It is expected housing construction will accelerate in the coming years, especially in big cities like Ha Noi, Da Nang and HCM

Table 3.1 Top 10 major apartment building projects in HCMC in the period of

2007-2010 (Source: CBRE, Horizon Securities)

(sqm)

1 Saigon Castle (Korean & Vietnam JV.) 2,500 240,000

6 New Saigon Hoang Anh Gia Lai Group 1,000 96,000

7 Tan Kien 584 high-rise

building

Investment-Construction

Co 584

978 93,888

10 Phu Thanh - Cienco 5 Investment-Construction

industrial sector, and experts have warned that Vietnam may experience severe shortage of energy in the next few years, if nothing is done immediately

Table 3.2 Top 10 priority projects in the period of 2005-2010

(Source: CBRE, Horizon Securities)

investment (USD mil)

1 Thanh Khe Mining &

Metallurgy Project Ha Tinh tons/year4.5 mil 2007-2012 3,437.50

2 Dung Quat No.1 Oil

Refinery Plant Quang Ngai tons/year6.5 mil 2001-2008 2,484.38

32 km 2008-2012 750.00

9 Phu My No.2

Fertilizer Plant

Ba Ria – Vung Tau

800 mil tons/year

2006-2008 637.50

10 Nghi Son No.1

Thermoelectric Plant Thanh Hoa 600 MW 2007-2011 627.38

Hanoi has put infrastructure development on its priority list The government reported that during the period of 2005-2010, Vietnam’s road system was increased by 105,000km, up 52% as compared to the 69,000km of new supply which was built during the previous five-year period Consequently, it could be observed a pickup of infrastructure spending in the economy, driven by strong political and ease of project financing An urgency to ensure commercial viability is now apparent throughout state policies and is being reflected across sector

In addition to these projects, there are three important projects that should be noted: the North-South Highway Project, the Ha Noi-Ho Chi Minh Express Railway, and Long Thanh International Airport in Dong Nai Province; which all are estimated USD 42 billion

3.1.3 Commercial construction

The commercial property market has also seen a significant expansion in Vietnam since the Asian financial crisis In 2005, office supply in HCMC and Ha Noi stood at 439,000sqm and 118,000sqm, respectively Up till now, it is estimated that total office supply has tripled in HCMC to 1,249,000sqm and doubled in Ha Noi to almost 447,000sqm By 2020, with the completion of the Thu Thiem New Urban area in HCMC, and the Tay Ho Tay New Urban area in Ha Noi, total supply is expected to reach double the current supply

Table 3.3 Top 10 major office developments in HCMC

(Source: CBRE, Horizon Securities)

3 Vietcombank Tower Vietcombank – Bonday

- Ben Thanh

77,000

3.1.4 Retail and industry construction

Since 2005, together with more than 200,000sqm of retail space constructed and 33 industrial projects approved by the Prime Minister, totaling USD 440 million, the retail and industry construction has been seen significant expansion

Table 3.4 Top 10 major industrial developments in the period of 2007-2010

(Source: Horizon Securities)

(ha)

Total investment (USD mil)

1 Duc Hoa III Industrial zone Long An 987 123.38

2 My Yen – Tan Buu – Long Hiep

4 Thuan Dao Industrial zone

5 Tan Kim Industrial zone (expansion) Long An 300 37.50

6 Tan Duc Industrial zone (expansion) Long An 296 37.00

3.2 Macro environment analysis

3.2.1 Political and regulatory factors

Political and legal factors have a major effect on the level of opportunities and threats

in the environment Vietnam is considered a peaceful and stable politic environment Implementing the “renovation and open door policy”, Vietnam has expanded and consolidated its political and economic relations with many countries in the world Along with this, the participation of Vietnam in ASEAN and especially in WTO as 150thmember in 2007 has improved the restoration and development the economy in Vietnam to be more favorable This also facilitates the Vietnam’s international trade, encourages foreign and domestic investors as well as creates chances and challenges for domestic businesses

To support the economic liberalization and encourage the private sector, the government has promulgated a series of economic laws such as Law of Foreign

Investment, Company Law, Law of Private Business, etc This has formed a quite positive environment for doing business

With regards to the construction industry, the investment environment is now more auspicious and attractive to both domestic and foreign investors The legal system is now much refined, procedures are simplified, the level of knowledge of the management organizations and officers in charge of investment are now improved Various laws aim at planning and development of construction projects such as Construction Law in 2003, Housing Law in 2005 and Real Estate Law in 2006 created clear framework for the sector and helped the industry realize strong growth over last years Within this year the government has issued some regulations such as Decree 71/2010/ND-CP and Circular 16/2010/TT-BXD both of which are expected to have positive impacts on residential market in terms of market transparency and development quality, according to CBRE [9] It also helps lessens the threat of price bubbles, limits speculative forces

Such government policies will create a favorable environment for construction industry

in general and real estate sector in particular, thereby increasing expenditures in the residential and nonresidential segment in upcoming years

3.2.2 Economic factors

3.2.2.1 Economic growth

The economic growth rate also has a direct impact on the level of opportunities and threats companies face Even in the face of recession last year, the country reported a robust GDP growth of 6.8% higher than a target for 2010 at 6.5% With the annual growth rate of 7.3% in the period of 2005-2010, it enables Vietnam to be ranked in the group of countries that achieved the highest growth rate in the world According to International Monetary Fund (IMF), the Vietnamese economy still grows highly in years ahead; the growth rate of GDP is predicted from 7.0%-8.0% [14]

Figure 3.1 GDP and GDP per capita in the period of 2005-2015

(Source: General Statistics Office of Vietnam, and 2011-2015: IMF forecast)

Together with the country’s strong economic growth, the recent infrastructural developments and increase in standard of living make the industries, especially the construction industry grow faster By 2015, average GDP per capita is estimated USD 1,800 and this of big cities like Ha Noi and HCM is over USD 4,300 Consequently, rising affluence has led to an increasing demand for residential, commercial, office building and public infrastructure which is fuelling a boom in the national construction and real estate industry In only 210, the construction industry grew by a record 23.1%, which was driven by increased public spending and private sector investments and brings the 5-year CAGR to 21% [11]

It is believed that all of these will definitely create opportunities for the construction industry, a core industry to provide the impetus for growth of the entire economy

3.2.2.2 Inflation rate

Inflation can destabilize the economy, producing slower economic growth, higher interest rates and volatile currency movements The key characteristic of inflation is that it makes the future less predictable [1] In Vietnam, inflation was double-digit in

2005 2006 2007 2008 2009 2010 2011-2015fGDP growth (%) 8.4% 8.2% 8.5% 6.3% 5.3% 6.8% 7.4%

GDP per capita (USD) $637 $723 $829 $1,047 $1,068 $1,160 $1,502

2008 with 23% and this year with 11.7% This is showing that although gained high growth rate, Vietnam economy has not been stable actually In an inflationary environment, it may be impossible to predict with any accuracy the real value of returns that can be earned from business As a net result, such uncertainty makes companies less willing to invest Thus high inflation creates threats to businessmen in general and developers in particular

Figure 3.2 Inflation in the period of 2005-2015

(Source: General Statistics Office of Vietnam, and 2011-2015: IMF forecast)

3.2.2.3 Interest rate

Interest rates also determine the cost of capital for a company This cost can be a major factor in deciding whether a given strategy is feasible [1] In recent years, the interest rates are quite high, the lending rate is over 12% in the period last five years In 2010, the interest rate is 14% and real interest rate is 3% which is one of the highest interest rate in the world [15] These so high interest rates cause difficulties to companies and investors, especially construction entities such as developers and contractors who often have large and long term loans from banks to afford their businesses requiring significant capital

2005 2006 2007 2008 2009 2010 2011-2015fInflation (%) 8.4% 7.5% 8.3% 23.0% 6.9% 11.7% 6.0%

0%

10%

20%

30%

3.2.2.4 Foreign direct investment (FDI)

The last five years has seen a healthy flow of funds from FDI as well as an increment of ratio of implemented and committed investment According to a survey conducted by the Asian Business Council, Vietnam is ranked the third for investment attraction among Asian nations in the 2007-2010 periods, after China and India Moreover, Vietnam is ranked the fourth most preferred emerging market for Investment in 2011

by AFIRE, the Association for Foreign Investors in Real Estate, just behind Brazil (1st), China (2nd) and India (3rd) Reuters also reported that Vietnam is one of three "frontier" markets, while Franklin Templeton expects to place its biggest bets on in 2011 [10]

Although a number of the huge foreign invested projects in real estate sector have been revoked because of financial issues, the FDI in residential and nonresidential segment will be increasing in coming years thanks to country’s political stability, high GDP growth, improved living conditions and high turnover, said Mr Phan Huu Thang, director of Center for Foreign Investment Studies (CFIS)

Figure 3.3 FDI in the period of 2005-2015

(Source: General Statistics Office of Vietnam, and 2011-2015: CFIS forecast)

2005 2006 2007 2008 2009 2010 2011-2015fFDI (Committed) 6.8 12.0 21.3 71.7 21.5 22.0 30 pa.FDI (Implemented) 3.3 4.1 8.0 11.7 10.0 11.0 15 pa

020406080

As per the summary report of Ministry of Construction (MOC), FDI in real estate and construction industry represents only a small part of total FDI capital and slowed down this year However, FDI capital has a great impact on local construction industry development Experiences by project administrators show that a large proportion of FDI capital goes to construction activities (about 30%-40%), including expenses for communications and public works constructions It is believed that FDI is providing plentiful of opportunities to the residential and nonresidential construction projects

Figure 3.4 Top 10 FDI investors in the period of 1988-2009

(Source: General Statistics Office of Vietnam)

Additionally, among top five FDI investors in Vietnam Singapore has been considered the most potential partner so far In this year, Singapore has become the largest investor with 88 new projects, significantly in the real estate sector, amounting to USD 4.4 million twice of the second, Korea, with USD 2.3 million It is presenting favorable chances to construction companies as well as consultancies; particularly firms that have Singaporean ownership or track records

United States British Virgin

3.2.2.5 Exchange rate

It could be realized the trend of increasing exchange rate during recent years In 2010, Dong was devalued another 5.0% year-on-year, which should be higher if the free market rate is taken into account In the immature market like Vietnam, the competitive advantage is simply eliminated by a few percentage of fluctuation of exchange rate, said Mr Michael Porter [16] In addition, high fluctuated exchange rate puts significant pressure on price of import raw material, including construction material

For large construction projects which rely on pre-sale launches are exposed to the rising construction costs and overhead expenses over construction period As building material prices have increased considerably, it could be recognized pressure on margins while developers and contractors may not able to raise their price

It can be said that the current depreciation of Dong is generating obstructions to stakeholders in real estate sectors and construction industry as well

Figure 3.5 Exchange rates (at year-end) in the period of 2005-2010

(Source: General Statistics Office of Vietnam)

3.2.3 Social, culture and demographic factors

under 35 years old now; then current labor force is estimated at 40 million people According to a recent study, Vietnam is going to have one of the highest populations at working age in Asia by 2020 As a result this abundant, young and cheap labor force is providing plentiful chances to the economy as well as construction industry

3.2.3.2 Social and culture

Figure 3.6 Rising urbanization level

(Source: General Statistics Office of Vietnam, and 2020: MPI forecast)

Urbanization in Vietnam has significant effect on housing demand Vietnam’s urban population as a percentage of total population has grown from 24.1% in 2000 up to 30.0% this year to 26 million people as shown in figure 3.6 This represents an expansion of over 7 million urbanites compared to the year of 2000 According to the Ministry of Planning and Investment (MPI), the city-dwellers likely reach 50% of national population by 2020 Therefore, the steady rise in population and the rapid urbanization level will drive demand for development of residential, commercial sector and infrastructure, especially in HCMC, Ha Noi and Da Nang

Although Vietnam has been integrating into global culture, the traditional value is being preserved and extended, principally family culture Any person matured often nurses a desire to own a house, an apartment or even a landed residence, which is fuelling

Total population 72.0 mil 77.6 mil 82.4 mil 86.9 mil 92.0 mil

Urban population 20.7% 24.1% 27.1% 30.0% 50.0%

10%30%50%70%

40 mil

60 mil

80 mil

100 mil