Competitive forces facing small and medium sized realty enterprises of Vietnam in the context of inflation and economic integration

The Five Competitive Forces Model of Porter was developed in 1985 with a view to analyzing fundamental competitive forces facing small and medium-sized enterprises (SMEs) in real estate industry (hereunder referred to as RSMEs for short). The paper also figures out that the competition derives from threats from internal factors, customers, suppliers, established rivals and the entry of new rivals.

1 Introduction

the realty industry is deemed as a driving

force behind the economic growth, especially in

newly emerging economies (united nations

Human settlements program, cited in trọng Hà,

2011) in vietnam, realty industry, although a new

economy, has reached a rapid growth over the

past few years as studied by Gso, the annual

av-erage growth of the realty industry in the period

2000-2007 is expressed by the fact that realty

en-terprises account for 42% of the whole economy,

holding 30% of capital employed and earning a

gross revenue of 24% However, such the growth

is mainly fostered by rsmes Counting to 2009,

approximately 88% of realty enterprises hold a capital of smaller than 50 billion dongs (table 1) like smes of other businesses, smes in realty industry belong to the private sector over the past time, rsmes are much dependent on capital available in the credit market and customers’ de-posits Yet, when the world economic integration becomes closer and the monetary policy is tighter

so as to curb inflation, the extant competitive edges of rsmes seem to be weaker and blander, exposing them to plenty of competitive forces such

as the entry of new fdi-supported rivals who pos-sess more edges in capital and state-of-the-art technologies, and a hunger for capital and borrow-ings (which is caused by macroeconomic goals and

The Five Competitive Forces Model of Porter was developed in 1985 with a view to an-alyzing fundamental competitive forces facing small and medium-sized enterprises (SMEs) in real estate industry (hereunder referred to as RSMEs for short) Findings have shown that the existence of RSMEs, previous to 2007, is thanks to open monetary policies, the collaboration with state-run enterprises and mobilization of citizens’ capital In the context of closer economic integration, RSMEs have been menaced by the harsh competi-tion of FDI-supported enterprises Besides, inflacompeti-tion seems to make the RSMEs go pale and drawn due to the fact that tight monetary policies have been employed, causing a rise in investment interest rate and a curb on the credit demand, and accordingly an im-pediment to the mobilization of deposits The paper also figures out that the competition derives from threats from internal factors, customers, suppliers, established rivals, and the entry of new rivals.

The origin of competitive forces facing RSMEs is from inefficiency of financial instru-ments in the realty industry, and the lack of collaboration among RSMEs and between RSMEs and large-sized enterprises Thus, in order to restrain adverse impacts of com-petitive forces on RSMEs, the government should establish a legal corridor that can fa-cilitate the birth of appropriate financial instruments for the sake of realty industry, and stimulate the collaboration between RSMEs and large-sized enterprises and other sectors.

Keywords: competitive forces, small and medium-sized enterprises in the realty industry (RSMEs), financial in-struments for the sake of realty industry.

inflation control as set forth in the resolution 11

of the vietnam’s political ministry, that is,

peg-ging the credit debts rate to 16% and credit

growth rate to 20% till the end of 2011 for the

sake of the realty industry)

this paper is to investigate competitive forces

menacing the efficient performance of rsmes and

propose some suggestions for the sake of rsmes

to overcome these threats However, it is needed

to identify criteria and an analysis framework at

first, then analyze the corporate structure in

terms of size so as to define the role of smes in

realty industry next, competitive forces of

rsmes will be taken into account on the ground

of aspects given within the analysis framework

finally, fundamental competitive forces

threaten-ing the performance of rsmes will be sorted out

and thereby imply some solutions to these threats

2 Analysis framework

the definition of smes is different among

countries, yet mainly based on the capital size and

workforce for vietnam, the definition of smes is

illuminated in the decree 56/2009/nÑ-Cp which

is regarding assistances in the development of

smes accordingly, any realty enterprises with

the capital size below vnd10bn are treated as

small-sized ones and those with the capital size

from vnd10bn-50bn are medium-sized ones such

the definition will be employed in the study

Competitive forces are usually identified by the

porter five forces model which was developed in

1985 in this paradigm, porter figures out five

competitive forces menacing enterprises, that is,

internal threats, suppliers, customers, established

rivals, and the entry of new rivals this model will

be employed in the research for the sake of

rsmes in the context of economic integration and

inflation as follows: (1) internal threats are to be

analyzed on the basis of capital size, workforce,

value chain, and administration proficiency of

rsmes managers; (2) threats from customers are due to the fact that the access to the customer’s realty investments is changeable and the cus-tomer confidence in rsmes after the world finan-cial crisis is going down; (3) threats from suppliers: the access to civil vacant lots and the supply of finished products from suppliers will be taken into account; (4) threats from established ri-vals: changes in the business strategy of large-sized enterprises can sharply influence rsmes;

(5) threats from new rivals: the entry of new fdi-supported realty enterprises imposes competitive forces on rsmes the analysis framework is sum-marized in figure 1

figure 1: Competitive forces analysis frame-work for the case of rsmes in vietnam

3 Database and research methodology the numerical data employed for analyzing five competitive forces in smes are collated from the consensus of Gso in 2000-2009, the housing de-velopment strategies till 2020 promulgated in march 2011 by the ministry of Construction, and the field research in HCmC-based realty enter-prises conducted in december 2010 the descrip-tive statistical method is employed so as to identify competitive forces facing rsmes in the context of closer world economic integration and inflation

4 Analyzing competitive forces of RSMEs in Vietnam

4.1 Internal threats

a enterprises’ structure in terms of capital size realty industry is a labor-intensive one

around 88% of realty enterprises hold the capital size smaller than vnd50bn as compared to the 95% of the whole economy (see figure 2a) ap-proximately 72% of realty enterprises just employ nine staff members as compared to the 55% of the whole economy have the same workforce size (see

<VND10bn 10bn – 50bnVND 50bn – 200bnVND 200bn – 500bn >VND500bnVND Total Number of realty

Table 1: The capital size of realty enterprises in 2009

Source: Ministry of Construction (2011)

figure 2b) With the workforce size of merely nine

staff members, such realty enterprises are just

able to operate as brokerage firms and cannot

par-ticipate in the supply chain of completed realty

products this also implies that around 72% of

re-alty enterprises take part in the process of

prod-ucts making

the capital size of enterprises shows an on-ward sign in the period 2004-2007, while the workforce size goes down figure 3a points out that the rate of large-sized enterprises in 2007 is more than that in 2004 Yet, the rate of enter-prises with small-size workforce in 2007 is more than that in 2004 (figure 3b)

Figure 2a: Number of enterprises as per the capital

size

Figure 2b: Number of enterprises as per workforce

size

Source: Enterprises survey in 2007 & GSO (2010)

b participation of rsmes in the value chain

of the realty industry

the business process of realty enterprises can

be divided into three stages, that is, (1) input

ac-tivities: seeking vacant lots for project

develop-ment and finished products for redistribution,

executing legal procedures; (2) production

activi-ties: seeking contractors, executing the

construc-tion and deeds so as to keep the project to

schedule, project quality and costs; and (3) output

activities: seeking customers these three stages

are generalized from viewpoints of porter (1985),

Krumm (2001), and Hans nelen (2008) this chain

is illustrated in figure 4

in the event that a realty enterprise would like

to cover these three stages, it is a must for it to

possess a capital size larger than vnd50bn let

us take following example into account to build a

10-storey building with the minimum area of

1,500m2, the construction density of 70%, and the

price per square meter of approximately vnd7m,

the gross construction cost is vnd63bn; and the

realty enterprise must have more than vnd63bn

on hand to complete this project this is to say, rsmes are just able to cover a part in this process (such as brokerage, dwelling house retailers, etc.) and hardly participate in the production of fin-ished products

in practice, many of rsmes have been partic-ipating in this production of finished products so far by employing capitalized capital from cus-tomers and the credit market Yet, when inflation takes place, this financial instrument is com-pletely paralyzed due to the tight monetary policy, the high interest rate, and non-production credits

rsmes are heavily dependent upon the credit

market due to the fact that instruments for mobi-lizing capital in the realty market are still limited

in developed realty markets, besides the credit market, there are other channels of mobilizing capital such as realty investment trusts, which are designed to reduce or eliminate the dependence of the realty market on the credit market in both supply and demand side

Figure 3a: Fluctuations in the capital size of

enterprises in 2004 and 2007

Figure 3b: Fluctuations in the workforce size of

enterprises in 2004 and 2007

Source: GSO, 2010

c professionalism of rsmes

due to lack of professionalism and proficiency,

the operation of rsmes still heavily depends on

subjective opinions administrators of rsmes are

often affected by the crowd psychology which can

expose the enterprises to high risks to restrain

this issue, the vietnam’s ministry of Construction

promulgated some circulars stipulating the

prac-tice of realtors; for example, brokerage

practition-ers must be certificated Counting to 2009, around

40,000 practitioners have been trained in

broker-age and realty price evaluation and around 12,000

practitioners are certificated in realty brokerage

these courses are designed in a hope of enhancing

skills and ethic of market participants but not

fun-damental principles of market When the

knowl-edge of participants in the realty market is still

poor and limited, it is very difficult for them to

foresee drawbacks in future as well as to work out

measures to deal with them

4.2 Threats from customers

the demand site of the realty market is very

diverse due to diversity in its products as Khai

(2011) put it, products of the realty market may

be divided into six groups, viz vacant lots,

dwelling houses, trade centers, offices for lease,

industrial infrastructures, and immovable

proper-ties used for amusement parks However,

cus-tomers of rsmes mainly buy low-value products

(such as vacant lots and dwelling houses) the

cap-ital employed to buy these products mostly comes

from the credit market Whilst, the system of

com-mercial banks in vietnam is quite thin and sparse,

and instruments that citizens use to access to

credit sources are not diverse (porter, 2010)

fur-thermore, in the context of inflation, the tight

monetary policy is established to increase the

op-portunity cost for unofficial investors in the realty market and the interest charges for realty produc-ers, and thereby forcing producers to keep on mo-bilizing capital from customers via a depreciation

of realty products the number of realty sellers who would like to sell their products quickly but fear the opportunity cost has been on the onward trend since the 2007 till now accordingly, the re-alty price decreases by 50% after three years, from

2007 to 2010 (marc townsend, 2011)

in addition, because the value of realty prod-ucts is very high, the prestige of realtors also af-fects customers’ decisions according to the research conducted in HCmC-based realty enter-prises in december 2010, the consumer confidence

is influenced by the capital size of realty enter-prises with the significance at 1% table 2 shows that the smaller the capital size, the lower the consumer confidence, and vice versa

4.3 Threats from suppliers

suppliers of realty enterprises are those who supply vacant lots, construction materials, and fin-ished products rsmes, due to lack of capital, often resort to small-area lots or those with large area but disadvantageous location for construc-tion materials suppliers, rsmes are not their strategic partners because the frequency of buying materials of rsmes is not high and rsmes rarely participate in the product-making process the re-lationship between material suppliers and rsmes

is looser in comparison with that between mate-rial suppliers and large-sized enterprises (see table 3)

for suppliers who provide rsmes with fin-ished products, they are large-sized investors and their major scope of business is not in realty the linkage between them and rsmes is just

tempo-Capital sizes Means Standard deviations Coefficients of variation

Statistical significance of the differences among the obtained means: 1%

Table 2: Consumer confidence in realty enterprises according to the capital size

Source: Author’s survey in December 2010

rary and to pave the way for the official

participa-tion in the market in future this can be proven

by the fact that in 2006, many large-sized

compa-nies of different sectors, including subsidiaries of

banks, did establish realty enterprises;

accord-ingly, the supply of realty products for rsmes has

been gradually restrained

4.4 Threats from extant rivals

rsmes primarily suffer competitions with

other rsmes and large-sized enterprises in

tribution and access to vacant lots in terms of

dis-tribution, rsmes are very dynamic and quickly

recognize the demand for realty products; yet their

network of distribution is quite limited it is also

a weakness of vietnam’s rsmes

advantages in accessing to vacant lots are

often biased against rsmes and in favor of

state-run enterprises, including those specializing and

not specializing in realty business (porter, 2010)

previous to 2007, major investors in realty market

were state-run companies who did not specialize

in realty business, and thus they needed to

collab-orate with rsmes to distribute their finished

products thanks to that, rsmes can exist and

ac-cumulate capital up till now, many of them have

established realty companies and need not

collab-orate with rsmes any more in distribution of

fin-ished products that is to say, partners have

turned into rivals of rsmes

4.5 threats from new rivals

according to unCtad, the ratio of fdi in the

gross capital investments of vietnam increases

from12% in 2006 up to 25.5% in 2007 and 24.1%

in 2008 (porter, 2010) in five recent years,

fdi-supported enterprises attend more to businesses that need products and services of the realty mar-ket, such as hospitality industry, restaurant, con-struction, retail, manufacture, etc (see figure 5)

this also explains why the large ratio of foreign investors in the realty market is placed second (around 33.8% of the total fdi capital in 2009) after the hospitality and restaurant industry

Besides, when the vietnam’s government al-lows piloting the decree 51/2009/nÑ-Cp which permits foreign individuals/organizations to ac-quire dwelling houses in vietnam, the number of fdi-supported enterprises keep going up in time

to come this is also a threat to the operation of rsmes

Figure 5: The ratio of FDI-supported enterprises in

some sectors in 2009

5 Implications Competitive forces facing rsmes in the con-text of inflation and integration are developed on the ground of the porter five forces model: (1) ternal threats: rsmes are mainly in charge of

in-Capital sizes Means deviations Standard Coefficients of variation

Statistical significance of the differences among the obtained means: 1%

Table 3: The relationship between realty enterprises and suppliers

Source: Author’s survey in December 2010

termediary roles and scarcely join the product

making process, and are dependent on the credit

market and customers’ advances their

profession-alism and proficiency is not good enough; (2)

threats from customers: the capital structure

can-not be kept dependent on customers’ deposits in

the context of inflation, and the consumer

confi-dence in rsmes is low; (3) threats from

suppli-ers: large-sized enterprises usually limit the

supply of finished products to rsmes who will

play as distributors; rsmes mainly resort to civic

vacant lots that have small area and a

disadvan-tageous location; (4) threats from extant rivals:

large-sized enterprises have more advantages in

accessing to vacant lots; the distribution network

is limited, hindering the competitive edges; (5)

threats from new rivals: economic integration

policies have enabled fdi-supported enterprises

to invest in the realty industry in large scale,

menacing the performance of rsmes

6 Recommendations

the competitive forces facing vietnam’s

rsmes in the context of inflation and economic

integration derive from two gaps, viz the

insuffi-ciency in capitalization instruments and the lack

of linkage among rsmes as well as between

rsmes and other businesses in the realty market

therefore, in order to work out appropriate

solu-tions to these forces, it is a must to close these two

gaps

the vietnam’s government had better

estab-lish a legal corridor that can facilitate the

forma-tion and development of financial instruments for

the sake of the realty industry in vietnam,

be-sides commercial banks, other channels of

capital-ization are still limited; thus, it is necessary to set

up channels to capitalize social capitals, such as

realty investment trusts which have been

em-ployed and work effectively in many developed

countries

in addition, it is also needed to facilitate the

linkage between foreign enterprises and local

ones By doing so, local enterprises, especially

rsmes, will be enabled to access to

state-of-the-art technologies and kept away from direct

com-petitions as well

eventually, a supportive mechanism for

rsmes must also be taken into account due to the

fact that the realty industry can make the

na-tional economy distinct from others and play as a springboard for the national economic growth the vietnam’s government, in 2009, did promulgate policies in favor of smes which were applicable

to every sectors the promulgation of policies in favor of rsmes alone is to illuminate characteris-tics of the realty industry, making it a “true” busi-ness that can generate jobs, income, and diverse products for the economyn

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