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.
Development of small & medium-siZed enterprises 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) 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 competition of FDI-supported enterprises Besides, inflation 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 impediment 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 instruments 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 competitive forces on RSMEs, the government should establish a legal corridor that can facilitate 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 instruments for the sake of realty industry 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 troïng Haø, 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 average growth of the realty industry in the period 2000-2007 is expressed by the fact that realty enterprises 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, Economic Development Review - April 2011 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’ deposits 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 possess more edges in capital and state-of-the-art technologies, and a hunger for capital and borrowings (which is caused by macroeconomic goals and * University of Economics - HCMC Development of small & medium-siZed enterprises Table 1: The capital size of realty enterprises in 2009 VND500bn 50bn – 200bn 200bn – 500bn Number of realty enterprises 1027 484 115 50 41 1717 As % 60% 28% 7% 3% 2% 100% Total Source: Ministry of Construction (2011) inflation control as set forth in the resolution 11 of the vietnam’s political ministry, that is, pegging 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 threatening the performance of rsmes will be sorted out and thereby imply some solutions to these threats 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 customer confidence in rsmes after the world financial 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 rivals: changes in the business strategy of largesized enterprises can sharply influence rsmes; (5) threats from new rivals: the entry of new fdisupported realty enterprises imposes competitive forces on rsmes the analysis framework is summarized in figure figure 1: Competitive forces analysis framework for the case of rsmes in vietnam 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 development strategies till 2020 promulgated in march 2011 by the ministry of Construction, and the field research in HCmC-based realty enterprises conducted in december 2010 the descriptive statistical method is employed so as to identify competitive forces facing rsmes in the context of closer world economic integration and inflation 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) approximately 72% of realty enterprises just employ nine staff members as compared to the 55% of the whole economy have the same workforce size (see Economic Development Review - April 2011 Development of small & medium-siZed enterprises figure 2b) With the workforce size of merely nine staff members, such realty enterprises are just able to operate as brokerage firms and cannot participate in the supply chain of completed realty products this also implies that around 72% of realty enterprises take part in the process of products making Figure 2a: Number of enterprises as per the capital size Source: Enterprises survey in 2007 & GSO (2010) Economic Development Review - April 2011 the capital size of enterprises shows an onward 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 enterprises with small-size workforce in 2007 is more than that in 2004 (figure 3b) Figure 2b: Number of enterprises as per workforce size Development of small & medium-siZed enterprises Figure 3a: Fluctuations in the capital size of enterprises in 2004 and 2007 Source: GSO, 2010 Figure 3b: Fluctuations in the workforce size of enterprises in 2004 and 2007 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 activities: seeking vacant lots for project development and finished products for redistribution, executing legal procedures; (2) production activities: seeking contractors, executing the construction 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 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 finished products in practice, many of rsmes have been participating in this production of finished products so far by employing capitalized capital from customers and the credit market Yet, when inflation takes place, this financial instrument is completely paralyzed due to the tight monetary policy, the high interest rate, and non-production credits rsmes are heavily dependent upon the credit 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 market due to the fact that instruments for mobilizing 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 Economic Development Review - April 2011 Development of small & medium-siZed enterprises 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 practice of realtors; for example, brokerage practitioners must be certificated Counting to 2009, around 40,000 practitioners have been trained in brokerage 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 fundamental principles of market When the knowledge 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 portunity cost for unofficial investors in the realty market and the interest charges for realty producers, and thereby forcing producers to keep on mobilizing 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 realty price decreases by 50% after three years, from 2007 to 2010 (marc townsend, 2011) in addition, because the value of realty products is very high, the prestige of realtors also affects customers’ decisions according to the research conducted in HCmC-based realty enterprises in december 2010, the consumer confidence is influenced by the capital size of realty enterprises with the significance at 1% table shows that the smaller the capital size, the lower the consumer confidence, and vice versa Table 2: Consumer confidence in realty enterprises according to the capital size Capital sizes Means Standard deviations Coefficients of variation Smaller than VND10bn 2.83 1.65 58% VND10bn - 50bn 2.69 1.25 46% VND 50bn - 200bn 3.6 1.58 44% Over VND200bn 5.04 1.44 29% Total 3.93 1.83 47% Statistical significance of the differences among the obtained means: 1% Source: Author’s survey in December 2010 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 properties used for amusement parks However, customers of rsmes mainly buy low-value products (such as vacant lots and dwelling houses) the capital employed to buy these products mostly comes from the credit market Whilst, the system of commercial banks in vietnam is quite thin and sparse, and instruments that citizens use to access to credit sources are not diverse (porter, 2010) furthermore, in the context of inflation, the tight monetary policy is established to increase the op- Economic Development Review - April 2011 4.3 Threats from suppliers suppliers of realty enterprises are those who supply vacant lots, construction materials, and finished products rsmes, due to lack of capital, often resort to small-area lots or those with large area but disadvantageous location for construction 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 relationship between material suppliers and rsmes is looser in comparison with that between material suppliers and large-sized enterprises (see table 3) for suppliers who provide rsmes with finished 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- Development of small & medium-siZed enterprises Table 3: The relationship between realty enterprises and suppliers Means Standard deviations Coefficients of variation Smaller than VND10bn 2.83 2.02 71% VND10bn - 50bn 2.69 1.61 60% VND 50bn - 200bn 3.6 1.89 53% Over VND200bn 4.73 1.29 27% Total 4.09 1.83 45% Capital sizes Statistical significance of the differences among the obtained means: 1% Source: Author’s survey in December 2010 rary and to pave the way for the official participation in the market in future this can be proven by the fact that in 2006, many large-sized companies of different sectors, including subsidiaries of banks, did establish realty enterprises; accordingly, 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 distribution and access to vacant lots in terms of distribution, 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 staterun 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 collaborate with rsmes to distribute their finished products thanks to that, rsmes can exist and accumulate capital up till now, many of them have established realty companies and need not collaborate with rsmes any more in distribution of finished 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 market, such as hospitality industry, restaurant, construction, 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 allows piloting the decree 51/2009/nÑ-Cp which permits foreign individuals/organizations to acquire 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 Implications Competitive forces facing rsmes in the context of inflation and integration are developed on the ground of the porter five forces model: (1) internal threats: rsmes are mainly in charge of in- Economic Development Review - April 2011 Development of small & medium-siZed enterprises termediary roles and scarcely join the product making process, and are dependent on the credit market and customers’ advances their professionalism and proficiency is not good enough; (2) threats from customers: the capital structure cannot be kept dependent on customers’ deposits in the context of inflation, and the consumer confidence in rsmes is low; (3) threats from suppliers: 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 disadvantageous 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 Recommendations the competitive forces facing vietnam’s rsmes in the context of inflation and economic integration derive from two gaps, viz the insufficiency 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 solutions to these forces, it is a must to close these two gaps the vietnam’s government had better establish a legal corridor that can facilitate the formation and development of financial instruments for the sake of the realty industry in vietnam, besides commercial banks, other channels of capitalization are still limited; thus, it is necessary to set up channels to capitalize social capitals, such as realty investment trusts which have been employed 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-theart technologies and kept away from direct competitions 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- Economic Development Review - April 2011 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 characteristics of the realty industry, making it a “true” business that can generate jobs, income, and diverse products for the economyn References Andreas Pfnuer, Christina Schaefer, Stefan Armonat, (2004), "Aligning Corporate Real Estate to Real Estate Investment Functions: Improved Property Decision Making Using a Real Option Approach", Journal of Corporate Real Estate, Vol.6 Iss.3, p.243-264 Hans Nelen, (2008), "Real Estate and Serious Forms of Crime", International Journal of Social Economics, Vol.35 Iss.10, p.751-762 Linda Too, Michael Harvey, Eric Too, (2010), "Globalization and Corporate Real Estate Strategies", Journal of Corporate Real Estate, Vol.12 Iss.4, p.234-248 Peter J.M.M Krumm, (2001), "History of Real Estate Management from a Corporate Perspective", Facilities, Vol.19 Iss.7/8, p.276 -286 Porter & CIEM of Vietnam, (2010), “Báo cáo đánh giá lực cạnh tranh quốc gia Việt Nam” (The evaluation of the national competitiveness of Vietnam), CIEM Trọng Hà, (2011), “Thò trường nhà kinh tế Việt Nam” (The housing market in Vietnam’s economy) Real Estate Magazine, No.85, p.22-27 Vietnam’s Ministry of Construction, (2011), “Chiến lược phát triển nhà Việt Nam” (Housing development strategies of Vietnam) Proceedings of the Ho Chi Minh City Real Estate Association ... fdi-supported enterprises to invest in the realty industry in large scale, menacing the performance of rsmes Recommendations the competitive forces facing vietnam s rsmes in the context of inflation and economic. .. to identify competitive forces facing rsmes in the context of closer world economic integration and inflation Analyzing competitive forces of RSMEs in Vietnam 4.1 Internal threats a enterprises ... Fluctuations in the workforce size of enterprises in 2004 and 2007 b participation of rsmes in the value chain of the realty industry the business process of realty enterprises can be divided into three