Kjenny
Kjenny
MKAC401
Porters five forces of competition analysis is used to analyze five interacting factors
critical to understand the dynamics of competition within the industry that the company belongs.
The figure below shows the framework containing the key factors from Porters Five Forces of
Competition analysis which impacts Ayala Land, Inc.
THREAT OF NEW
ENTRANTS
THREAT OF
SUBSTITUTES/
COMPLEMENTS
SUMMARY:
Narrative
There are a lot of factors that make the competition in the real estate tough. One of these
is the large amount of initial capital needed to build a single unit. This leaves the industry to
large real estate development companies having adequate capital and are willing to risk the
required amount of money.Therefore, the level of rivalry among the real estate developers is
deemed to be strong.
a. High Number of Real Estate Developers in the Industry
The real estate industry in the Philippines consists of various small and large companies.
There are 8 major real estate developers in our country, and these are: Ayala Land, Inc.,
Megaworld, SMDC, DMCI, Filinvest Land, Robinsons Land, Rockwell Land and Vista Land.
They represent only 13% of the market share. Besides from these major real estate developers,
there are small scale construction companies who build medium rise buildings that function both
as a hotel and a condominium.
As stated above, the real estate industry is capital extensive. Investments must be made
both on land acquisition and building construction. In 2008 and 2009, Ayala Land, Inc. has spent
7.7 billion and 8.7 billion, respectively. This is for the development of Ayala Land Premier,
Alveo Land and Avida Land. Leaving the real estate industry will be very costly considering the
huge amount of fixed asset investment. The major real estate developers cannot just let go of
what they have invested in their ongoing projects.
In the real estate industry, most construction projects depend on almost the same
structural design. Usually, developers offer all their units bare, leaving the consumers with the
freewill to the arrangement and design of their home according to their preference.
d. Strategic Objectives
Rivalry is more intense when competitors are going through aggressive growth strategies.
The major companies in the real estate industry had strategized to prepare for Real Estate
Investment Trust listing. Meanwhile, the subsidiaries of a holdings company capitalizes on
synergies with other business interests of their parent company.
Threat of New Entrants: WEAK
Identifying the probability and possibility of new entrants in a certain industry is crucial
because they can interpose in the market share and profitability of existing competitors.
However, new entrants in the real estate industry are relatively weak in terms of competing
against the major industry giants. Although a lot of grand companies enter the real estate
industry, only a few make a name for themselves and leave lasting impression among the buyers.
a. Diseconomies of Scale
One of the advantages of major real estate companies is the economies of scale. These
provide them access to a larger market and allow them to operate with greater geographical
reach. However, this maybe a disadvantage for the new entrants. An increase in output triggers
an increase in production costs as well. This event results to a higher spending without being
assured of real-time growth in market penetration.
A huge amount of capital is needed to enter the real estate industry. This is vital for the
establishment and construction of high rise buildings and condominiums and purchase of land.
Major companies in the real estate industry allocate voluminous amount of money for capital and
development expenditures. In 2011, these are the budget allocation of some of the major real
estate developers: Avida Land of Ayala has a 15.18 billion capital expenditure allocated for
residential development alone; Megaworld has allotted 25 billion for the development of its
residential, office and retail space; Robinsons Land has announced 13.5 billion capital
expenditure for the expansion of its property portfolio which includes the development of
shopping malls and other office buildings, construction of residential condominiums and new
hotels, and acquisition of land; lastly, DMCI Homes has 8 billion worth of fund for all its
projects and ventures. On the average, a new entrant must have a capital of at least 15.42 billion
to be a material threat to the established companies.
Most of the time, organizations engage into strategies that demand high costs in order to
inhibit consumers from switching to the competitors. For example, most of the companies in the
real estate industry charge very high cancellation fees for cancelling a contract. They usually do
this because they believe that the costs involved with switching to a competitor will be high
enough to stop their customers from doing so. Therefore, it makes new entrants in the real estate
industry weak to struggle it out with competitors of established names and reputation.
In an industry, new entrants must establish their distribution in the market with
established distribution channels to secure a place for themselves. Even so, in the real estate
industry, major companies have already attained and boosted huge networks and channels of
distribution, which makes it difficult for new entrants to surpass the industry giants.
All companies in the real estate industry is mostly dependent on the availability of large
tracts of land competent for development. As new entrants and established companies strive to
look for sites for development, it may become harder to locate parcels of land with suitable size
in locations and at reasonable prices which the new entrants can afford.
g. Non-Absolute Cost Advantages
Companies with absolute advantages can manufacture something using even a smaller
number of inputs than another entity producing that product. Also, absolute advantage can
minimize costs and maximize profits. This may not be the case or new entrants. It is quite
impossible for them to be competitive in this aspect due to the huge amount of capital needed
allocated for the raw materials and construction contractors of a new project, as well as the costs
accredited to the people who will be hired for the completion of a project.
h. Government Policies
i. Expected Retaliation
Competition in the real estate industry has always been strong. All of the companies
devise various strategies and plans to defeat each other. Most of them can easily respond and
reciprocate whatever new gimmicks their competitors do to have advantage over the others. This
will be difficult for new entrants to penetrate the industry because they cannot easily jive into the
scenario wherein competitors have quick responses to turn over the situation. Most of the
industries are like in a game of chess, wherein players must outwit, outplay, outlast and dethrone
the notable players from their ranks.
Threat of Suppliers: MODERATE
Suppliers are very influential in a business if they are only a few of them, a large number
of customers, and significant costs of switching suppliers. The cost of items needed in the
construction of a building bought from suppliers can have a huge impact in the companys
profitability. If suppliers have a high bargaining power over a certain company, it can be inferred
that the companys industry is less appealing. In the real estate industry here in our country, the
threat of suppliers is moderate.
The major suppliers in the real estate industry are the construction contractors and raw
material suppliers. These suppliers consumer more than 50% of the industrys profits.
All construction companies need a large number materials to be use such as wood,
concrete, gravel, plastic, oil, steel, gasoline, and other raw materials. Unfortunately, the prices of
some of these materials are non-negotiable. However, since the supplier market in nature is
disruptive, all other construction supplier limits supplier power over real estate companies.
The prices of some raw materials needed in the construction of a building like steel and
cement are associated with the world prices. Local cement and steel prices are monitored by the
Department of Trade and Industry in the Philippines, but it cannot control them. The current
prices of raw materials are stable. Competition in the raw materials and construction services
industry is inflexible because of the voluminous amount of raw material providers and
construction contractors. Also, there are no substitutes for major raw materials and construction
services. In summary, the threat of suppliers is moderate in the real estate industry because of the
large amount of suppliers restrained by the lack of substitute to the essential inputs.
The threat of bargaining power of buyers in the real estate industry in the Philippines is
weak. This is due to the fact that the buyers have lesser power when they are disrupted, and when
companies develop huge amount of homes, condominiums and buildings, or if switching costs
are high. These aspects are relative to the status quo, which has a huge impact in the capacity of
consumers to bargain for prices that are at their advantage.
Real estate is a high ticket purchase. Most of the time, consumers can afford to buy one
home at a time. The buyers lack of ability to buy more than home at the same time hinders
significantly off the developers standard price. Also, individuals cannot purchase home and
other real estate properties in bulks because of the high capitalization needed to acquire those.
On an average basis, a real estate developer sells a single unit amounting 2 million. This
amount is materially significant and high, which makes consumers incapable to content the price
specified by the developers.
Since homes are significant and monumental investments, the cost for a consumer to
change or switch homes is normally prohibitive. Due to the fact that there are many buyers
competing for houses from a lot of developers, new home prices are relatively high and
consumers doesnt have time for more negotiation unless they choose to purchase existing
homes.
The real estate business has been escalating and boosting for the last seven years after a
recovery from the subprime crisis and recession that hit the United States. People nowadays get
to have money to buy their basic needs and commodities. Most of the time, homes are one of
everyones priorities.
There are only two substitutes available for buyers to choose from instead of purchasing a
condominium or a house. First, an individual can rent a property. Lastly, an individual can own a
residential house that is constructed from the ground by the owner himself. The first one is
sometimes an option; however, the last one has always been an intimidating choice. This results
to the threat of substitutes or complements strong in the real estate industry.
Owning a stable home is very important for everyone, especially for every Overseas
Filipino Worker abroad. OFWs are a new member of the roster of buyers and are more focused
to buying alternatives of luxury living. There are also those who belong to middle and low-
income segments that prefers renting more than owning.
When constructing a residential house from the ground, typically it amount more or less
than 3 million. This is close enough to the amount of owning up a unit in a high-rise residential
condominium. With that being said, consumers tend to choose settling in a residential type of
house in subdivisions and villages rather than those of high-rise residential condominium units.
For most of them, having your own house is a fulfilment because this serves as their long term
investment and they have the freewill to design their own homes base on their preference.
As stated above, another substitute is by renting properties. For a short term period,
renting is more affordable than that of buying a new home. The latter requires 10% - 30% down
payment and subsequent amortizations. There is a smaller cash outlay in renting properties.
In the perspective of the customers, owning a high-rise residential unit is almost the same
as owning a home in a subdivision or a village. The only aspect that makes a high-rise residential
condominiums different from a subdivision or village is its luxurious-type of facilities and the
quality of security service that it offers. Most of the time, high-rise condominiums are high-
fenced and have only two gate entrances. Meanwhile, residential subdivisions are more prone
and exposed to theft and burglary due to its large area that are often overlooked by the security
guards. Also, most of the time, they are not high-fenced. There are only few differences between
owning a high-rise condo unit and a residential home in a village or subdivision. They offer the
same services but they differ in quality and in how the developers package their project.
Ayala Land, Inc.: Competitive Profile Matrix (CPM)
The competitors to be benchmarked against Ayala Land, Inc. are SMDC, Megaworld and
DMCI Homes. These three real estate developers cater to the same market segments and targets
the same market of buyers as Ayala Land, Inc. They represent the four topmost companies in the
middle-income segment of the real estate industry.
The following are the profiles of the top three competitors of Ayala Land, Inc. These
three real estate developers cater to the same segment of buyers as ALI.
a. SM Development Corporation
b. Megaworld Corporation
c. DMCI Homes
David M. Consunji, Inc. (DMCI) Homes is the real estate arm of DMCI Holdings, Inc.
through its wholly owned subsidiary DMCI Project Developers, Inc.(PDI). It was incorporated
and registered with the Securities and Exchange Commission (SEC) on April 27, 1995.
The company is the countrys first Triple A builder/developer of premium quality, urban-
friendly, fully serviced communities for the underserved young families of modest income that
aspire to live comfortably near their place of work, of study and of leisure.
In 2015, DMCI Holdings Inc. grew its first quarter net profit by 18 percent year-on-year
to P3.1 billion driven by the robust performance of its power, real estate and water
businesses.DMCI Homes saw an 11-percent hike in net profit to P845 million and recognized
revenues from completed high-rise projects in the first quarter. Excluding the effect of a gain on
sale of undeveloped lot in the comparative period last year, the real estate firms net income
actually rose by 77 percent during the said period.
Critical Success Factors
The researcher had identified eight critical success factors for a real estate developer to
prosper and withstand in the real estate industry.
The following factors are considered to be a major concern both for the developer and its
target consumers. Particular weights were assigned to each critical success factors to find out the
importance of each in contributing to the success of the company.
a. Adequacy in Capitalization
It is evident that it is capital extensive in the real estate industry. A company needs more
than a million in capitalization to finance all the expenses to be incurred to establish and develop
a certain project.
This critical success factor was given a weight of 0.20.
b. Competitiveness in Pricing
One of the essential aspects that a consumer considers is how a unit is priced reasonably.
This critical success factor was given a weight of 0.20 due to the price sensitivity of the
consumers and how willing are they to buy a product that will give them the greatest value for
what they have paid.
Another vital aspect that consumers take into consideration is the proximity of their home
to hospitals, churches, commercial areas and educational institutions. It is very important that
consumers have easy access to anything.
This critical success factor was given a weight of 0.15.
d. Overall Project Quality
This critical success factor involves the quality of amenities, facilities and good property
design that the real estate developers offer to buyers. This gives lasting impression to consumers
and makes them consider if they would be willing to spend a huge amount of money to buy a
certain condominium unit.
This was given a weight of 0.15 because facilities is a value driver to the services that the
developers offer.
The reputation of the real estate developer is also being considered by the customers.
They tend to choose developers who are established in the industry over small scale developers
who are not known due to few projects and establishments.
This was given a weight of 0.10 because in the real estate industry, competition is
intense.
It is essential that companies advertise and market their developments through any forms
of media. Through this, they will be exposed to potential buyers and makes impact in their
minds. This is vital to increase brand awareness.
This critical success factor was given a weight of 0.05.
h. Market Share/Financial Position
A company must have a strong financial position because this indicates that it can
continue the operation of a business. It must be able to generate income and settle its obligation
on time.
This critical success factor was given a weight of 0.05.
From the identified critical success factors, Ayala Land, Inc. and its key competitors were
assigned the following ratings (from 1-5, with 5 being the highest). The table below shows the
Competitive Profile Matrix of Ayala Land, Inc. and its competitors based on the researchers
ratings.
1. Adequacy in
0.20 5 1 4 0.80 4 0.80 4 0.80
Capitalization
2. Competitiveness
0.20 2 0.40 3 0.60 3 0.60 4 0.80
in Pricing
3. Accessibility of
0.15 5 0.75 5 0.75 3 0.45 3 0.45
Site Locations
4. Overall Project
0.15 5 0.75 4 0.60 4 0.60 3 0.45
Quality
5. Scope of
Distribution 0.10 5 0.50 4 0.40 3 0.30 3 0.30
Work
6. Track Record of 0.10 5 0.50 3 0.30 3 0.30 2 0.20
Developer
7. Extent of
Marketing 0.05 5 0.20 4 0.20 3 0.15 3 0.20
Capability
8. Market Share or
Financial 0.05 4 0.20 4 0.20 4 0.20 4 0.20
Position
TOTAL 1.0 4.30 3.85 3.40 3.40
Megaworld
3
David M. Consunji, Inc. (DMCI)
Conclusion
Based on the critical success factors ratings, Ayala Land, Inc. has the competitive
advantage among its key competitors. Its competitive advantage made ALI to be the leader in
market share in the middle income segment.
ALIs strength over the rest of the companies is in the area of adequacy in capitalization,
overall project quality, scope of distribution work, track record of developer, and extent of
market share.It also has modest ratings in terms of competitiveness in pricing, accessibility of
site locations, and market share or financial position.