Phuket Post :: Article :: The Energizer Bunny and streets of gold

I remember an opening sentence to a book on strategy that began �Competition is moving so fast, even the Energizer Bunny can�t keep up�. This was a humorous start to the heavy but nonetheless critical subject of competitive strategy. Industry giants Energizer and Duracell were locked in fierce competition for market leadership.

The Energizer Bunny may be far removed from the quiet island of Phuket but competition is not. Like it or not, the Phuket real estate industry is facing increased competition in many segments. Just ask yourself how many condo projects have, are being or will be launched in the next 24 months?

So, during a rare moment of quiet reflection, my mind began wandering back to Harvard Business School guru, Michael Porter. Porter�s books were required reading and in the 1980�s he proposed a Competitive Analysis Model called Porter�s Five Forces.

Much of the Five Forces is still applicable today and at times I revert to the model to help structure my own thought process. It�s a useful tool and on a number of occasions Porter has brought home the bacon.

Let�s just assume you are a stakeholder in the real estate industry (although the model applies to all industries), you may be a developer, investor or even an agent. The fact is you have competition and right now you may be � in Frank Sinatra�s words � �on top of the heap� or you may be feeling the pinch.

Porter�s Five Forces can help you develop an edge and better understand your position within the industry. It may sound old and boring but, trust me, it�s very useful. The Five Forces that apply competitive pressure within any industry (keep the real estate market in mind) and therefore directly upon the business in terms of revenue, profit and market leadership come from the following five areas:

Internal rivalry or competition

A lovely term, but ignore it at your peril, especially when competition can be described as cut-throat, aggressive, intense, moderate or weak. I have spoken with people in the past who say they don�t have competition. They do, they either just choose to ignore it or don�t really understand it. Ask yourself these questions in the context of your business to better understand your position in the market and the competitive pressures you may have on the revenue and profit line. Are there an increasing number of companies operating in your sector with a comparable product? The more companies operating in the market intensifies competition as companies seek to attract the same customers.

Is the sector experiencing slow market growth?
Slow market growth in the sector causes an increase in competition. In fast growth markets, revenues can temporarily expand with the market growth. The problem occurs when the market contracts.

Does the sector have high fixed costs?
High fixed costs in the sector mean that everyone must sell a higher quantity of product to cover the costs and this intensifies competition.

Are there low switching costs?
If customers can easily move between products, then competition will increase to attract customers already committed to another competitor�s offer.

Is there low product differentiation in the sector?
If your product is not truly different from the competition�s, then competition will be more intense to sell like products.

Are the strategic stakes high in the sector?
If key companies are losing market share or have declining revenues and profits, then this forces competition to a new level.

Are there high exit barriers in the sector?
The cost associated with exiting a project may be so high that a company must compete and therefore competition steps up another notch as it seeks to secure customers at almost any cost.

Is there an increase in market entrants?
In a growing market with potential for good revenues and profits, more new companies seize the opportunity to enter the market. At some point, market saturation may take place when there are too many companies competing for too few customers, especially during a downturn. The net result can be an industry shakeout and the exit of some weaker companies.

Threat of substitutes

Substitute products are alternative products that threaten your market from other industries or sectors. By way of example, the fax machine versus snail mail and now e-mail substituting much of what the fax does.

How can you have a substitute product for a new condo development?

It is very easy � it is called the secondary market. As more re-sales come on the market, this will affect primary sales (buyers do not have to wait to move in, the product is finished so the quality can be seen, the risk of non-completion is zero). With any increase in secondary market sales there could be some pressure on pricing. Increased time share product is also a substitute for the full ownership model and in all cases competition will hot up to find the buyers for the product.

The power of buyers

The buyer is powerful and exerts pressure on pricing and margins when there are fewer buyers in the market and a significant amount of product is available. This places pressure on pricing and profitability as suppliers cut prices or offer deals to maintain sales volumes. Buyers can influence some other areas but we will leave it at supply and demand.

The power of suppliers

The real estate industry from a developer perspective is a production industry. It requires raw materials to produce units. The power of suppliers can be strong and exert pressure on developers through higher raw material costs and services that may not be readily available or cannot be easily substituted. If suppliers are limited then they can demand a premium from the sector. Sound familiar?

The threat of new entrants

Have you seen an increase in competitors in the last 12 months? New projects or new start-ups? Have you seen new offices
opening? Welcome to the New Entrants.

Companies that see the same opportunities that you do are after a share of the same pie. In a free market economy such as Thailand there are few barriers to entry for real estate, except maybe the availability of adequate capital. New entrants can take customers, disrupt pricing and unfavourably influence profits.

The problem here can be compounded as new entrants, not fully understanding the market, perceive that the streets are made of gold and enter the market with a disruptive strategy. New entrants who work diligently are more likely to be successful. New entrants who do not, will exit but not before pressuring the margins of the established companies.

So, like the Energizer Bunny, the real question is: can you keep up?

Staying ahead of the curve in the real estate market requires a clear strategy and a well executed plan. By very clearly differentiating your product with features that are not easily replicated and expanding your international sales and marketing efforts to reach new international buyers are just two critical ways to stay ahead of the increasing competition in Phuket.

Martin Phillips is managing director of Engel & Voelkers Thailand.
Tel: 076-279 280-1
www.engelvoelkers.co.th