1. Part B
*The followingholdsanumberof presumptionsmade onABCcompany.*
Similartoowninga piece of candy,re-modifythe candyandthensellingthem.Property
developmentis,bydefinitionof collinsdictionary:
“The business of buyinglandandbuildings andthenmakingimprovements tothemsothat their
sellingprice exceedsthe price paidforthem.”
While insimplicity, we wouldgeneralize property developmentasa single industry buttoMichael E.
Porter, property developmentisnottruly anindustry. Itis an industry solarge that he regardssaid
industry asa whole sectorof the economy. Tofurtherunderstand the reasonwhy he claimssuch,
we can perhaps analyse afew company that isinvolved inproperty development.
From myresearch, I realizedthatmostlarge company donot purely work inthe industry of property
developmentalone. Theirprojects oftendiversify tootherindustries suchascommercial,
engineering, construction, orevenbiotechnology. Let’stake alook at a few examples:InYTL, the
company isfamous for itswide diversification of business industry. They controlled the value chain
of the construction industry byinvestingonactivitiessuchasutilities, construction contracting,
operation &maintenance onhighspeedrails, cementmanufacturingandcarbonconsulting. They
alsoownhotels& resortand evenincubate technology. ForSunway, onthe otherhand, isnotonly
Malaysia’s top ten property developer but alsoexpanded into hospitality, resort and spa, Water Park,
retail shoppingmall, medical centre, education group, construction industry, manufacturerof
vitrified claypipesandjackingpipesandquarry. Inanotherplace, we alsohave Gentingwhichhold
business forplantation, biotechnology, hotel andtheme park. Towhicheachof those firms have
theirownfundamental attractiveness basedonthe visionandmissionstatementthey devised
beforehand. Fromhere, Ihope youcanbriefly understand the scale of these companies Istatedas
well asthe industry of property development.
In orderto analyse the competitive advantageof ABCCompany againstpowerful competitors such
as YTL and Sunway, itisonly natural of me to use Michael E Porter’s Competitive five force model.
Before I beginwiththe analysis, Iwill needtobriefly explainthe fiveforce model. Inorderto
accurately understand the five forces, we will explainthe fiveforcesbasedonthe creator’s notes:
2. “The force determines the ability of firmsinanindustry toearn, on average, rate of returnon
investmentinexcess of the costof the capital... Itdetermines itsprofitability because they influence
the prices, costs and required investment firms in an industry, the elements of return oninvestment.”
Michael E. Porter, Competitiveadvantage:Creating and sustaining superiorperformance
The forcesinvolves;Threatof entry andexit, Bargainingpowerof buyers, Bargainingpowerof
suppliers, Threatof substitutes, Intensity of rivalry andtosome researcher, Complementors. Simply
speaking, the greateranyone of the force, the greaterthe threatwouldbe tothe firmwhile vice
versawould create opportunities. InPrincipals of Managers, Hill andMcShane explained thatthe use
of external environmentistoprimarily searchforopportunities andthreat. Itisessential to
understand the external environmentisnotentirely governed bythe five forcesbutmerely one of
the two subdivided partof the subject, the otherwhichisthe general environmentwhichconsists of
political andlegal forces, macroeconomicforces, demographicforces, sociocultural forces
technological forcesandinternational forceswould be mentionasitis critical tothe analysis of ABC
Company’s environment. Byfurtherevaluatingthe internal environmentof the company including
organization, resources andemployees, the manager,beingaffectedbythe internal environmentof
the company, will choose differenttype of actions andstrategy basedonit because itisbetterto
manage the company basedon itsstrengthand weakness inathreateningoropportunistic
environment. Therefore, bycombination of internal andexternal environmentof the firm, we will,
by the endof this analysis, evaluate the SWOT(strength, weakness, opportunity, threats)of the firm.
External Environment
Before the analysis, we mustfirstanswerif the property developmentliesinthe followingcentral
concerns. Isproperty developmentanattractive industry forlongtermprofitability? Whatare the
factors determiningit?Since notall industries offerthe same amountof opportunities forcontinual
3. profitability andthe permanentprofitability of property developmentisanimportantingredientin
definingthe profitability of afirm. Or perhaps, itisa determinantof relative competitive position
withinanindustry?Inmostbusiness, some firmsare basically more profitablethanothersregardless
of whatthe average profitability of the industry maybe.
Historicallyspeaking,the threatof entryislow of propertydevelopment.There aren’talotof
company that doespropertydevelopmentbackthenbecause Malaysiawasstill developing.Due to
that, mostcompanycan easilyenterthe industrywithoutthe needtocompete withothercompany.
Evenwhentheydoneedto,theyhave little tonoworrieswithlarge plotof landto invest.Itwasalso
a time where Malaysia’seconomyisrisingandthisincreasesthe expenditure rate of the buyerand
thuspeople canaffordto buyor investinlandproperties.
However,astime passes,the barrierof entryincreaseswithpowerfulpropertydeveloperssuchas
YTL, Sunwayand so onbeginto developimportantareassuchas Central regionof Malaysiaincluding
KualaLumpur andSelangor.Assuch,the initial costto compete againstlarge companysuchas these
will be higherespeciallyif ABCCompanyhope tobe as diverse asthe followingthe companies.Due
to this,ABCCompanywill notgaincost advantage againstthese competitorsandinfact,decreases
the economyof scale for ABCCompany.Notto forgetthat the currencyexchange rate alsoaffectthe
entryof companyina way where the reductioninthe value of MalaysianRinggitincreasesthe cost
of investinganddevelopinglandonothercountry.Onthe otherside of the coin,foreignerswill be
more interestedinbuyingalandin Malaysiawhichthe companysomehow ownbecause the
propertyismuch cheaper. Due tothe fact thatboth YTL andSunwayare propertydevelopment
industriesthathave highreputation,customerswill tendtochoose eitherone of the twoevenata
higherprice due tothe trusttheyhave observe overthe companyor have gainedfromthe company
whichwill create agreaterwall of entryto the propertydevelopmentworld. Conversely,shouldABC
Companysuccessfullyovercomethe barrierof entry,the companywill face lessercompetitorsince
the barrierof entryof the industryisconsiderablyhigh.
Assume thatABC Companyinvestinthe value chainof the industrysimilartothe scale of YTL, the
exitbarriersignificantlygreater.Thisisbecause the fixedcostof closingdowncapacitysuchas the
financial chargesthatmustbe takentoshut downa firmand layoff employee ishigh.The one easier
way to exit the competition, if ABC Company persists, is to sell their own company to other company.
That way,theycan converttheirbusinesswithoutheavyloss.
Tenantshave gainedpoweroverthe yearsaslivingstandardsincreases.Theyare beginningto
demandmore yetat a cheaperprice withoutworryingif theycan’tgetthe property.Evenbythe
4. yearof whichthe journal made byPorterregardingcompetitiveadvantage andproperty
developmentindustry,he foundoutthatbuyershave beensmarterandare gainingpower. In
principlesof managing,buyersare weakestwhen
1. They are plentiful andpurchase insmall quantities
2. They have little choice tochoose amongfirm
3. They cannotswitcheasilybetweenthe offeringsof differentfirms
Firstof all,there isindeedalotof land in Malaysiaand tenantscanonlybuy a few property.
Secondly,since propertydevelopment industrytendtofocusondifferentarea;if the tenanthasa
specificreasontochoose thatarea, theywouldhave onlyone firmtochoose from, otherwisethey
wouldneedtomove toanotherarea whichdecreasestheirpowersignificantlyonthispart.Finally,
the tenantswill needtosigncontractwiththe developerwhichinvolve owningthe landforaset
amountof yearswouldmeanthatthe contract formsswitchingcostsandlockedintenantsintothe
propertytheyboughtevenif otherenterprise offerabetterpropertyorbenefits,allowingcompany
to increase the price of the product. While switchingcostdoespromote customer’sloyaltyand
demote the act of change,it doesincrease the time of considerationneededbybuyers.When
buyers,psychologically, spendmore time thinkingaboutthe riskof buyingthe property,there isa
higherchance of change of mindcomparedto one withoutswitchingcost.
Most of the propertydevelopmentcompaniescontrol the powerof suppliersbycontrollingthe
value chainitself.Forexample,YTLcontrolledthe valuechainbyprovidingcementandalsotheir
constructioncontractsand Sunwaycontrollingthe value chainbycarryout theirquarry.A company
can avoidprovidingsuppliersby:
1. Purchasingthe productinlarge quality
2. Allowingfirmtochoose betweenmultiplesupplier
3. Cost of switchingbetweensupplierislow
4. Notdependentonanysingle supplierforimportantinputs
In comparisontowhat ABCCompanyisfacingnow,it may be costlyto purchase landinlarge area to
developbutitisdefinitelyanadvantageousacttodo so because astime passesmore landwouldbe
developedbyotherdevelopersleavingABCCompanylessergeographicadvantage toworkwith.ABC
Companyshouldalsoinvestgloballyandnotbe dependentonMalaysiaasa landsupplier,while due
to currencyrange itis quite impossible todoso butit isalsogeographicallyadvantageous.Exempli
gratia wouldbe YTL’s investmentinJapansuchas NisekoVillageof HokkaidoandMuse Saint-Tropez
5. of France.Notonlydoesthisdecrease the dependencyof asingle supplier,thisalsoincreases
differentiationwhichisagenericstrategythatpromotesthe company’suniqueness.
Propertydevelopersbasicallyhave nothingmuchtoworryaboutthe threatof substitution.There
are close tozero substitutionof landdevelopmentandthusmakingcompanieslike ABCCompany,
YTL and Sunwaychargingplotof landat a higherprice.
Porterinclude the intensityof rivalryisaffectedbyfourfactors;the nature of the product,demand
and supplyconditions,the coststructure of firmsandthe competitive structure of the industry.
Generallyspeaking,the propertydevelopmentindustrysufferscommoditylikeproduct.Due tothis,
mostof the developerwill needto bringthe price downinorderto lookattractive tothe tenants.
One of the methoddevelopersolve the problemwouldbe throughdifferentiationof propertywhich
couldabandonthe ideaof loweringcostto gaincost advantage (whichironicallyisthe disadvantage
of the competitivesituation).Differentiationcanperhapsbe gainedthroughthe facility
managementof the propertyorarchitectural design. WithMalaysianeconomy growthare dropping,
the expenditure of Malaysianwilldecrease especiallywiththe implicationof GovernmentService
Tax. Due to the decrease inexpenditure,there islessdemandforproperties. SinceABCCompany
wouldneedtospendanamountof fix costto reach the scale similartothat of YTL, the excess
capacityof the situationwill giveABCCompanyasignificantthreat.
A strategyrecommendedisthatABCCompanypushoff one of the fixedcosttoanother
organization.Forexample,YTLwill have lowerfixedcostif theyletanothercompanytomanufacture
cement. ABCCompanyalsosuffersafragmentedindustrywithinthe competitivestructure asmost
of the propertiesare commoditylike.Unlessastrategyisadopted,the one wayABCCompanycan do
isto reduce the price whichpost nofavourin profitability.
The final force to discuss wouldbe complementors.Thisforce isnotofficiallymentionedbyPorter
himself,itwasmentionedbyPrincipal of Management.Complimentorsare firmsthatprovide goods
or servicesthatare complementarytothe productproducedbyenterprise inthe industry.Inthis
case,utilitiessuchasfromSYABASandTNB are examplesof complimentorsforwaterandelectrical
supply.While itisnotsignificant,itdoesreduce the costof utilityforABCCompanyand thus
increasesopportunityforthe companytosell propertyasa package.
Internal Environment
A goodvisionandmissionstatementwouldbe able toprovide abetterinternalorganization.
Throughthe statementalone,notonlydoesitmotivatesemployeesbutalsoprovide adirectionof
howmanagersshouldleadtheiremployees.ABCCompanyencouragesandrewardhigh
6. opportunitiesandthreats,makingthe organizationthe company’sstrength. Thankstothe company
founder,ChongAhBeng,changedthe hierarchical andbureaucraticsystemtoameritocraticsystem
and successfullytransformaweaknesstostrengthof the company.
Employeesof the companyare interviewedandselectedtobe the mostknowledgeable,skilledand
capable.Most of themderive fromwell-knownuniversitiessuchasUTM andTaylor’sUniversityfor
the job.The employeesare giventrainingeveryweektoensure theygetthe workdone as
accordance to whatthe companyhope to achieve.Itisensuredthatnotonlythe employeesare
disciplinebutalsomotivatedandpassionate toworkforABC Company.
ABC Companyhassufficienttangibleresourcestocarryout the task needed.The propertytheysell
are usuallywelldesignedbyafamousarchitectandthe land theyownare geographicallystrategic
and receive appraisal fromthe famousFengShui professional,LilianToo.ProvidingABCCompanya
more inimitable,non-substitutable,rare andvaluable resource inthe list.
In conclusion,ABCCompanyisfacinganintense rivalrywithotherlarge companiesdespite having
the bestof theirinternal strengths.Howeveritisimportanttorememberthatthe environmentin
the businessworldisalwayschangingeitherforthe worstor the best.Anystrategicimplementation
may or may notchange the entire environmental force.Thisrequiresacareful andmore thorough
analysisbefore anystrategicactionbe taken.
Reference
1. Hill,C.,& McShane,S. (2008). Principles of Management (InternationalEdition2008 ed.).
McGraw-Hill International Edition.
2. Porter,M. (1985). Competitiveadvantage:Creating and sustaining superiorperformance.
NewYork:Free Press;.
3. Porter,M. (1980). Competitivestrategy:Techniquesforanalyzing industriesand competitors.
NewYork:Free Press.
4. Porter,M. (n.d.).COMPETITIVESTRATEGY ANDREAL ESTATE DEVELOPMENT. REMARKSTO
THE 1989 HARVARDBUSINESSSCHOOLREALESTATE SYMPOSIUM1.RetrievedOctober17,
2015, fromhttp://www.hbs.edu/faculty/Publication
Files/Porter_Strategy_Real_Estate1_456d5de5-a5af-4001-b439-789044972e6a.pdf
5. PropertyDevelopment.(n.d.).RetrievedOctober17, 2015.
6. YTL CORPORATION.(n.d.).RetrievedOctober17, 2015.
