2 The Importance Of Michael Porter

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1. Introduction Goodwill Management Limited (”Goodwill”) is one of the largest property management company in Hong Kong. It is a wholly owned subsidiary of Henderson Land Development Company Limited (”Henderson”), which is one of the top four land developers in Hong Kong. The chairman Dr. Lee Shau Kee is one of the wealthiest man in the world. Goodwill, Hang Yick Properties Management Limited (”Hang Yick”) and Well Born Real Estate Management Limited (”Well Born”) are the three property management companies of Henderson. Goodwill is mainly responsible for the leased office tower and shopping arcade. Currently, there are 26 premises under our direct management and 7 premises under our indirect management. Most of the landlords of these premises are Henderson Real Estate Agency Limited, another subsidiary of Henderson. Therefore, Henderson will be our internal customer while the tenants of those premises will be our external customers. 2. The Importance of Michael Porter’s “Five Forces of Competition” in the Property Management Industry According to Michael Porter’s of Harvard Graduate School of Business, the state of competition in an industry depends on the following five basic forces. The collective strength of these forces determines the ultimate profit potential of an industry. Understanding these sources of competitive pressure, our company can formulate our strategies accordingly so as to achieve the highest efficiency and effectiveness. 2.1 Threat of New EntryFactors like economies of scale, product differentiation, capital requirement, etc., will determine how easy or hard it is for new competitors to enter an industry. In fact, the threat of new entry for the property management industry is quite little. On one hand, the whole property management market is monopolistic. There is merely no legislation or specific requirements for new entrant to get into the market. Notwithstanding, on the other hand, the market for the major market segment as well as the future trend are oligopoly. The new entrant can only take the management of some old or small premises. It is almost impossible for them to obtain the management of any premises of the major developers. The four largest land developers (Cheung Kong (Holdings) Ltd., Henderson Land Development Co. Ltd., New World Development Co. Ltd., and Sun Hung Kai Properties Ltd.) all set up its own property management company to take care of the management of its premises. A few famous independent property management companies like Guardian Property Management Ltd., and Jones Lang Wootton Management Services Ltd. also taken up a considerable share of the remaining market of independent premises without associated management company. Hence, the target market for new individual entrants is very limited and not profitable which hinder the growth of these new entrants. 2.1.1 Economies of ScaleApparently, large companies can realize the economies of scale which lower the average costs. The new entrant will definitely cannot enjoy this advantage since the market share is incomparable to the large company in the industry. 2.1.2 Product DifferentiationBrand identification also creates a barrier to the new entrants. No matter it is a commercial building or residential building, most owners/ tenants will spend more than half of their day in it. Moreover, many valuable assets are keeping there. It is therefore very important to choose a reliable property management company to do the management. New entrants will need to put extra effort in promoting itself, creating brand identification & customer loyalty, etc. 2.1.3 Capital RequirementProperty management can be described as a multidisciplinary profession with a comprehensive coverage across different professions to furnish quality service to the tenants. Therefore, the capital requirement is quite high for property management industry. The major costs include:l salary/wages, retirement & medical benefits of direct staff;l cleaning services;l security guard services;l public utility bills (e.g., water, electricity, telephone, fax, etc.)l repair & maintenance cost (e.g., lifts & escalators, air-conditioning system, public antenna, pumping & drainage, fire alarm system, security system, etc.)l insurance (e.g., property-all-risk, third party liability, employee compensation, machinery breakdown, money-all-risk, fidelity, etc.)l ratesl staff uniforml advertising (for the company & for recruitment of staff)In addition, the new entrants are difficult to achieve economies of scale as well as having better bargaining power & quantity discount. These new entrants will have a price disadvantage compared with the market leaders or competitor with large market share. 2.1.4 Access to Distribution ChannelsAs the major land developers all having its associated management company, the remaining market is small and extremely competitive. The new entrants will need to adopt extensive promotional activities and intensive selling to the landlords/ tenants. 2.1.5 Government PolicyBoth the previous Hong Kong Government and the existing Government of Hong Kong Special Administrative Region put no limits to the entry of new company into the industry. However, there are many laws & regulations that property management company has to comply with it. For example, Building (Administration) Regulations, Building Management Ordinance, Housing Ordinance, etc. 2.2 Bargaining Power of Suppliers/ContractorsFactors like the degree of supplier concentration and the availability of substitute inputs will determine the power that the suppliers/ contractors have over the companies in the industry. Fortunately, the bargaining power of suppliers/ contractors in property management industry is relatively low. The main suppliers that management company requires are security service company, cleaning service company, and some others companies for maintenance and repairing. As their markets are very competitive, the bargaining power of them is insignificant. 2.3 Bargaining Power of BuyersFactors like a buyer’s volume, buyer’s information, and the availability of substitute products will determine the amount of influence that buyers have in an industry. In fact, the bargaining power of buyers, (which could be the landlords, individual owners or tenants) are only moderate. Especially for those management companies which are affiliated with the land developers/ landlords, the bargaining power is almost not exist. Although it is the individual owners/ tenants who consume the service directly, it is the landlords of the premises who choose and pay the management company. The individual owners/ tenants have only little or even no influence on the decision in selecting the property management company of their building. 2.4 Threat of Substitute Products or ServicesFactors like switching costs and buyer loyalty will determine the degree to which customers are likely to switch their business to another competitors. For the property management industry, the threat of substitute services is minimal. Every building requires a certain level of management and care taking. Owing to the decreasing numbers of single or low-storey houses and increasing numbers of high density estate homes and high-rise buildings, the demand of much formal or professional management service is keep increasing so as to cope with the higher standard of living in Hong Kong. 2.5 Rivalry Among Existing CompetitorsFactors like industry growth and product differences will determine how intense rivalry among companies in the industry. Basically, the competition and rivalry for property management are not so keen just because the potential market is keep booming. There will be a continual demand for commercial premises, e.g., office tower, shopping arcade, etc., as the economic foundation of Hong Kong remains solid. The gradually lowering of inflation rate and implementation of large infrastructure projects now under way will likely continue to enhance the overall growth of the economy. Moreover, the demand for residential premises will continue to be strong due to the positive growth prospect of the Hong Kong population in the near term contributed in part by more than fifty thousand immigrants permitted from the People Republic of China each year. The government planning authorities have recently made known their view that Hong Kong will continue to encounter a sizable shortage of residential units for the first few years after the turn of the decade. With the limited housing supply and a growing housing demand in Hong Kong, the prospect for local residential property market is promising, too. Almost every premise, e.g., factory, shopping arcade, residential building, office building, club house, parking log, etc., needs a management company to look after the daily operation of the building. This huge and booming market is mainly shared by about 20 major companies. Every company has its share of potential market. There is no need to compete or rival intensively to gain market share. 3. The Sources of Competitive Advantages of Goodwill Management Limited – One of the Largest Companies in the Property Management Industry According to Michael Porter’s analysis, management must select a strategy that will give its company a competitive advantage. The selected strategy should be based upon the company’s strengths and competitors’ weaknesses. 3.1 Organizational Aspects 3.1.1 Economies of DiversityHenderson is practicing the economies of diversity and fully utilizes its resources with the three property management companies. These three companies of Henderson can manage different types of property. Goodwill takes care of the shopping arcade and office tower. Hang Yick is responsible for the factory and old residential building. Wellborn looks after the new residential building. Every company concentrates and specializes in a particular type of property.

3.1.2 FlexibilityThe three brotherhood companies, Goodwill, Hang Yick, and Wellborn, take up almost all the management work of the buildings of Henderson. Although they are individual company and there is some classification to determine the role of them, close and direct communications are carried out between them and other departments of Henderson. These companies are high cooperative. Ad hoc arrangement can be done by easy negotiation which provide a flexibility to the company to solve the immediate problems. Long term strategic decision can also be made within the three companies to cope with the situation faced by individual company. For instance, all the resources, such as work force, office equipment, knowledge & experience, office, etc., can be reallocate easily to make a better contribution to the group of companies. 3.1.3 Speed of ResponseGoodwill can have prompt response to the changing environment. Internally, staff of same level, e.g., centre officer, can be transferred to other management office due to shortage of work force, or requirement of particular skills, etc. Externally, sub-contractors can provide labour to our company by only a short notice. Even one contractor cannot meet our requirement, we can request another existing contractor. Also, the Landlord (normally, it will be the Leasing Department of the Henderson Real Estate Agency Limited), will give us valuable information about the tenants in whatever aspects that the landlord or our company will benefit from it. 3.1.4 Financial StrengthsHenderson is a public listed company. The rental income for the period July 1996 to July 1997 amounted to six billion and thirty-eight million Hong Kong dollars. As of 31 Dec 1996, its total capital is HK$66,734 million. The shareholder funds accounted for HK$40,875 million. According to Forbes Magazine, the net wealth of our chairman Dr. Lee as of July 1997 is estimated to be 1144 billion Hong Kong dollars, ranked fourth in the world. 3.1.5 ReputationAlthough Goodwill is only established in 1982, still a new company in the industry, and does not have much reputation, it can benefit from the good reputation of Henderson. Henderson is established in 1976 by the founder Doctor Lee Shau Kee, the existing chairman. Doctor Lee is famous in Hong Kong as well as the world. For example, the promotion slogan of Henderson is Henderson building – the most dependable building”. Moreover, since Goodwill does not need to find customer itself, the reputation is of less importance. The tenants just aware that they rented the premises from Henderson, and the most dependable building and the best services will be provided to them. 3.2 Departmental and Functional Aspects 3.2.1 Marketing Customer BaseThe customers of Goodwill are the tenants of all the building managed by Goodwill. These tenants are provided by the landlord, the Leasing Department of Henderson Real Estate Agency Ltd. Goodwill should have no worry about the source of customers. Customer KnowledgeThe property market of Hong Kong is always boiling. The property information is overflowed. Being one of the largest companies in the industry, news or articles about our company could be found in the public media almost every day. Free promotion and penetration to the general public are easily achieved. PricingAlthough Goodwill only receives its manager remuneration from the Landlord, the tenant needs to pay the management fee to the Landlord for the services provided by our company. This management fee will be based on our proposed budget. The manager remuneration can be seen as an internal arrangement within the same company. As the management fee is more price inelastic than the rent, Henderson will determine a composite charge with the adjustment of the rent and the management fee to get the balance which is more acceptable and appealing to the tenant/ potential tenant. Communication And AdvertisingSince the customers or tenants of Goodwill are naturally given by the landlord of the building, there is very little or even no advertising cost or labour cost incurred in marketing our service. It is an advantage of Goodwill compared with other independent companies which has to find customers themselves. For the cost of recruitment advertising, it is also low as we rely heavily on sub-contractors, the recruitment advertising cost is transferred to the sub-contractors. Goodwill can concentrate its resources on the management of the properties directly. 3.2.2 Reputation Product TechnologyGoodwill will adapt the most advanced and efficient way to provide the best services available to the tenants. In fact, most services are provided by the sub-contractors, we could make use of their research & development and keep our services up or evn above to the market standard. 3.2.3 Service TechnologyAs the company has a sound financial background, we can acquire the most advanced technology and equipment to increase our efficiency and productivity. The tenants will receive the most efficient services Their premises are also maintained with the most advanced technology. Process EfficiencyGoodwill is considering to apply the ISO 9000 certification. We have carried out two process reengineering program in 1997 to smoothen/ simplified the previous complex process. In addition, in December 1997, we invited Hong Kong Productivity Council to perform a review of our operation. By doing these, our working efficiency and morale has been improved substantially. Economies of ScaleAs we are directly managing 26 properties which accounts for more than 5 millions square feet at the moment, we can benefits from the economies of scale due to bulk purchase, quantity discount, high bargaining power, and specialization of work. Service/ Product QualityOur company is famous of having the highest control of services in the industry. All the equipment/ machines are under the maintenance program and tested regularly to ensure the best services could be given all the time. All the sub-contractors will suffer from payment deduction for any substandard service. An independent team of staff is also set up to the review the existing operation of the company. 3.2.4 Personnel Good Management-Worker RelationsThe employee benefits provided by Goodwill is rather competitive and comprehensive. The salary is reasonable in the market. The fringe benefits include: medical allowance, dental allowance, travel allowance, meal allowance, provident funds, life insurance, etc. Therefore, the staff are quite loyalty to the company and the turnover rate is relatively low. When the turnover rate is low, consistent standard and quality of services can be maintained. Workforce FlexibilityGoodwill employed about 250 staff for the operation of its head office and management offices of 26 properties with different size. Most of these 250 staffs are building attendant, center officer, and technician. The labour intensive works, like cleaning service, security guard service, and major maintenance service, are all made use of sub-contractors. Goodwill does not rely on any single sub-contractors for a particular type of service. Most contracts/ agreements are in yearly basis, and only one month notice is necessary for any amendment or termination of the service. Using sub-contractors for the most labour intensive works give Goodwill a lot of flexibility. Additional labour can be requested any time to cope with the short term or abrupt demand. 3.3 Relationship With External Bodies 3.3.1 Customer LoyaltyThe customer loyalty also provides some advantages to the Landlord and our company. As the chain stores are more popular then before, it is more likely they will open new stores in our new shopping arcades to cope with their expansion plan. 4. ConclusionsThe property management industry is keep prospering. The potential market is continual increasing. The five forces of cometition: (i) Threat of New Entry; (ii) Bargaining Power of Supplier/ Contractor; (iii) Bargaining Power of Buyers; (iv) Threat of Substitute of Products or Services; and (v) Rivalry Among Existing Competitors, will have direct effect on the state of competition in the industry. Moreover, the collective strength of these forces will determine the ultimate profit potential of the industry. Acquainted with the information on the sources of competitive pressure, our company can formulate our strategy accordingly so as to achieve the highest efficiency and effectiveness. On the other hand, based upon the company’s strengths and competitors’ weaknesses, the company will realize the sources of competitive advantage. These valuable information would help the company to determine its strategies that will give the company competitive advantages in return. For Goodwill, the main sources of competitive advantages are:1. Organizational Flexibility2. Speed of Response3. Financial Strengths4. Organizational Reputation5. Customer Base6. Process Efficiency7. Economies of Scale8. Service Quality9. Good Management – Worker Relations10. Workforce Flexibility 5. RecommendationsIn spite of the relatively stable industrial environment and the great opportunity available in the market, Goodwill should keep an eye on the five forces of competition: (i) Threat of New Entry; (ii) Bargaining Power of Supplier/ Contractor; (iii) Bargaining Power of Buyers; (iv) Threat of Substitute of Products or Services; and (v) Rivalry Among Existing Competitors, in order to maintain our leading position in the property management industry. Due to the importance and meaningful of these five factors, the company should assess its industrial attractiveness in terms of them. Comparatively, the sources of competitive advantages are more vital to the success of Goodwill. For our long-term success, we must make sure that these competitive advantages are always sustainable. We cannot become complacent. Rather, we should evaluate our competitive advantages on a regular basis and determine whatever strategies are essential to sustain or create a new competitive advantage so as to keep our company one step ahead of the competitors.