Sample STRAMA Final Paper2

Ateneo Graduate School of Business

Strategic Management Paper on

Submitted to: Professor Surtida STRAMA G06

Submitted by: Ryan Carlo Santos MBA Candidate 12 December 2009

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Table of Contents Executive Summary I. II.

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Introduction

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Research Design and Methodology

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1. Research Design 2. Scope and Limitation III.

External Analysis

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1. Economic Performance and Forecast 2. Political and Government Aspects 3. Environmental Factors IV.

Industry and Competitor Analysis

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1. Industry and Market Segments i. Residential Housing Product Categories ii. Market Size and Growth iii. Market Segments and Trends iv. Pricing v. Distribution Channels vi. Advertising and Promotion 2. Porter’s Five Forces of Competitive Analysis 3. Competitive Profile Matrix 4. External Factor Evaluation Matrix 5. Strategic Issues based on External Factors V.

Company Analysis

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1. Vision Mission of the Company 2. Internal Audit 3. McKinsey 7 S Framework 4. Strategic Issues based on Internal Factors VI.

Strategy Formulation

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1. SWOT Matrix 2. SPACE Matrix 3. Internal-External Matrix 4. GRAND Strategy Matrix 5. Summary of Strategies 6. Quantitative Strategic Planning Matrix

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VII.

Strategic Objectives and Recommended Strategies

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1. Strategic Objectives 2. Recommended Business Strategies 3. Recommended Organizational Strategies. 4. Financial Projections VIII.

Departmental Actions and Functional Strategies

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1. Strategy Map 2. Departmental Actions and Functional Strategies IX.

Strategy Evaluation and Performance Metrics

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1. Balanced Scorecard 2. Contingency Planning X.

References

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XI.

Appendix

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EXECUTIVE SUMMARY

DMCI Homes is the property development arm of DMCI Holdings, a diversified corporation with interests in construction, mining, power generation, water distribution, infrastructure and property development. The property developer envisions being the leading builder of residential communities for the middle income market.

The property industry is recovering from the economic down turn through the growth of key customer segments such as the OFW and BPO market as well as the emergence of a new business district. The industry has now settled as reflected by a modest year-on-year growth rate of 2% and stable raw materials and housing prices. Other external factors property developers face include the projected rise of the interest rates and the impact of climate change.

Overall responsiveness of DMCI to its external

environment is modest. Its 2.70 EFE rating is due to its lackluster response to the growth of alternative markets (BPO and retirement industry) moderated by its average response to the economic recovery and continued growth of the OFW sector.

The real estate industry is led by three major players each dominating in a specific income segment. In the middle income segment, Megaworld is a clear market leader both based on CSF rating and market share. DMCI has a modest competitive position with a CSF rating of 2.30 given its weak capitalization and poor accessibility of its location moderated by its price competitiveness. An opportunity exists for DMCI to be a clear second given that the market followers have relatively similar market shares.

Internally, most of the company’s strengths are owed to its synergy with DMCI’s construction subsidiaries. The operational synergy has allowed DMCI to pursue an overall cost leadership – best value strategy. Despite this, DMCI is given a modest IFE rating of 2.35 due to its financial weakness caused by

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its poor capitalization and slower inventory turnover. The latter is a symptom of an inadequate distribution network which is not able to absorb the significant buildup in inventory.

Market Development and Market Penetration strategies will be most appropriate strategy for the company to achieve its strategic objective to be a strong market follower. Market development strategies will be geared to address emerging markets by (1) offering innovative housing solutions to the BPO market and (2) strengthening international market presence in countries with a large and growing OFW population. Market penetration strategies includes (1) launching an integrated marketing communications plan (2) upgrading the company’s website to be e-commerce capable (3) enticing existing homeowners to provide referrals and (4) strategic land banking initiatives around the BGC area. Intensive strategies will be complemented by a (1) robust sales and operations planning to have leaner inventory levels and (2) capital build up to resolve solvency issues, funding gaps and high financing costs.

Through these strategies, DMCI’s vision to be a clear #2 in terms of market share will be realized with revenues reaching 9.3B by 2012. The operations strategy of introducing S&O planning will align the company’s turnover of inventory closer to the industry standard. Owing to its financing strategy, DMCI will not only be more solvent but cost of financing will also be reduced. This is a prudent measure given an expected high interest environment. Increase in revenues, better control of inventory and financing cost will allow DMCI’s net income to grow further to 1.5B by 2012 from 916M this year.

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I.

INTRODUCTION

In 1954, David Consunji formed DM Consunji. The construction company won the bid to construct chicken houses for the Bureau of Animal Industry. From its earlier projects, DM Consunji has earned a reputation of on time delivery, quality work and a pioneer of advanced construction technology. Today, DMCI is acknowledged as the first triple A rated Philippine construction company and an industry leader. It has built over 500 projects including major landmarks such as Mactan Shangri-la Hotel, Manila Hotel, Westin Philippine Plaza, Asian Hospital, Manila Doctor’s Hospital and the New Istana Palace in Brunei.

From its construction ventures, DM Consunji evolved into DMCI Holdings. DMCI Holdings is a multibillion peso conglomerate majority owned by the Consunji family1. DMCI Holdings has a diverse business interests such as mining (Semirara Mining), power (DMCI Power), water (Maynilad and Subic Water) and infrastructure (Tarlac La Union Express Way). In 1999, DMCI Holdings formed its housing division – DMCI Project Developers under the brand name DMCI Homes.2 DMCI Homes capitalizes on its synergy with DM Consunji (construction) to control the quality and cost of its developments.3

DMCI Businesses:

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As of 31 December 2008, DMCI Holdings is 51% owned by Dacon Corporation which is a holding company for the business interests of the Consunji family. 2 DMCI Homes is a wholly owned marketing subsidiary of DMCI Project Developer. For this paper, DMCI Project Developers Inc and DMCI Homes will be synonymously referred to as DMCI Homes. 3 http://www.dmcihomes.com/company_history.php

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For ten years, DMCI Homes has been offering residential communities to modest income families and has since built 25 projects mostly concentrated in the Mega Manila area. The developer began with Lake View Manors (1999) followed with Hampstead Gardens (2001). In 2003, it was more aggressive by building bigger developments with more amenities through its East Ortigas Mansions, Villa Alegre and Mayfield Park developments. DMCI Homes’ current subdivision and condominium projects include Cypress Towers in Fort Bonifacio Global City (BGC), Magnolia Place in Quezon City and Dansalan Gardens in Mandaluyong. Its developments are identified with resort-type amenities and large open spaces. DMCI has also entered into residential leisure estate development through its Alta Vista project in Boracay.

The company currently targets young middle income families and distributes its products through its inhouse sales and external brokers both locally and abroad. The company formed partnerships with foreign brokers in 12 countries in Asia, Europe and United States to capitalize on the emerging OFW market.

DMCI Homes is contributing a larger part of DMCI Holding’s revenues and income. In 2008, its revenue contribution increased from 13% to 19% of DMCI holdings Php 21.1B consolidated revenue. Property development is the third largest income contributor next to construction and mining (top contributor). DMCI Homes also contributes to 26% of the conglomerate’s Php 2.0 B consolidated net income4.

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2008 DMCI Holdings Annual report.

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DMCI Homes Revenue Contribution5

DMCI Homes Income Contribution6

Revenues as of 2nd quarter of 2009 has reached 1.87 billion (2% higher from last year) with sales volume of 679 residential and 212 parking units with half of the sales coming from existing projects such as Dansalan Gardens, Riverfront residences and Raya gardens. The remaining revenues are coming from newer projects such as Cypress Towers and Tivoli Gardens. 5

Total Revenues in millions of Pesos. For DMCI Homes, includes real estate sales, finance income, fx gains, dividends and other income . 6 Net Income in millions of Pesos.

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The company’s head office is located in Bangkal, Makati though it has several sales and property management offices across Metro Manila. Isidro Consunji resides as the president of DMCI Homes. He is also the president and CEO of DMCI Holdings. The day to day operations of DMCI Homes is being done by its managing director – Alfredo Austria7. As of end of September 2009, the company has around 300 probationary and permanent employees8.

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2007 DMCI Holdings Annual Report. Interview with Teresa Tiongson (DMCI Homes Senior HR Manager)

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II. RESEARCH DESIGN AND METHODOLOGY

Research Design Macro economic data used in the external analysis was gathered from the websites of various government offices such as the Bangko Sentral ng Pilipinas and the National Statistics Office. These government offices also have projections on macro economic growth which was collaborated by projections from the Economist and other private research institutions.

Industry data was gathered from the research done by real estate consultants such as Jones Lang Lasalle and Colliers International as well as data from Housing and Land Use Regulatory Board (HLURB). This was supplemented from industry news from the websites of respected media outlets such as Philippine Daily Inquirer, ABS-CBN and Business World.

To be able to assess DMCI’s performance relative to its competitors, audited financial statements were obtained from both DMCI Holdings and DMCI Homes as well as its key competitors from the Securities and Exchange Commission. Aside from providing financial data, the published annual reports also serves as a good source of internal and competitor information.

Statements from the corporate website of DMCI and its competitors are used to determine recent developments, marketing activities and other internal and competitor information. To be able to benchmark the pricing of the company relative to its competitors, various brokers were contacted online. Competitor prices were benchmarked based on similar projects i.e. projects are of similar nature (high rise residential), in close proximity to one another and will be completed within the same year.

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To provide a complete internal assessment of the company, a questionnaire was emailed to senior DMCI Homes managers last November 2009. Their opinions provided insight to the company’s internal environment.

Scope and Limitation This paper will be limited to DMCI Homes’ real estate ventures in the Philippines. The paper will focus on how the company can compete in the Philippine market and will no longer delve into the feasibility of developing real-estate projects outside the country. The paper will also concentrate on the primary real estate product of DMCI Homes i.e. high rise residential real estate. Its other products and services such as its resort project and its property management will no longer be focused on due to its marginal revenue contribution.

Due to the timing of the submission of this paper, only the 2006 to 3rd quarter 2009 audited financial statements were obtained from the Securities and Exchange Commission. Annual 2009 financial statements were projected based on the 2009 income and sales projection of DMCI. The strategies recommended in this paper will affect the financials of the company in 2010 onwards.

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III. EXTERNAL ANALYSIS 3.1 Economic Performance and Forecast 3.1.1 OFW remittances to grow by 6%

Remittances of Overseas Filipino Workers have experienced remarkable growth in the past years. In 2008, remittances were valued by the Bangko Sentral ng Pilipinas at $16.4B. This is 13.7% higher from last year. With the global economic downturn causing massive workforce downsizing in the United States and Europe, the BSP initially forecasted a flat growth for 20099. To cope with the global crisis, the government has aggressively marketed our Filipino workers abroad and forged hiring agreements with the Middle East, Japan, Canada, Korea and Australia. These measures were felt in the first months of the year as there was a 2.8% YOY increase as of May 2009 ($6.98B)10

The tenacity of the OFW remittances growth caused BSP to revise its figures to $17.1B or a 4% growth. Economic recovery is seen to happen in 2010. As the US and European labor market begins to recover, 2010 OFW remittances has also been upwardly revised to $18B or a 6% growth11.

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http://www.bsp.gov.ph/publications/media.asp?id=2119 http://www.bsp.gov.ph/publications/media.asp?id=2014&yr=2009 11 Chipongian, Lee. “BSP ups BOP forecast for 2010 to 5B”. 14 Oct 09. http://www.mb.com.ph/node/224721/ 10

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As of September 2009, the US remains the top destinations for OFWs though the number of OFWs deployed dropped by 10% due to the economic crisis. Among the fastest growing countries for OFW deployment are Canada, Japan, Germany and Norway12.

Relevance: Overseas Filipino Workers have been widely acknowledged as a major contributor to the Philippine economy. Remittances not only fuel consumer spending but also investments in real estate. OFWs and their families in the country are buying real estate not only for their primary residence but also as an investment. The BSP estimates 11.2% of OFW remittances go to real estate purchases13 or Php 91 B potential market (Refer to Appendix 2: Market Segmentation).

12 13

www.bsp.gov.ph http://www.bsp.gov.ph/publications/media.asp?id=2031

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DMCI is targeting OFWs both through its sales offices both locally and abroad. 15% of the company’s 2007 sales are from its international offices, most of which are OFWs. 14 This is lower compared to other real estate companies such as Ayala Land where 25% of sales are from OFWs15. In terms of market presence, DMCI has offices in 12 countries. DMCI has sales offices and broker partners in 7 out of 10 top OFW destinations.16

3.1.2 Global Economic Recovery from the Subprime crisis

From late 2008 to 2009, prices of mortgaged back securities crashed resulting in the collapse (and bailout) of major investment banks. The inaccessibility of credit caused US and European citizens to defer their housing spending. US residential home sales for June 2009 were down 21.3% compared to previous year17. European housing market is also expected to remain weak as evidenced by falling housing prices18.

The Philippines suffered to a less extent. GDP slowed down but remained positive to 0.5%19. According to Colliers International, the slowing economy slowed down office and residential markets although the commercial real estate market remains resilient.

Driven by the coordinated intervention of the government, continued growth of countries like China and renewed investor confidence, global recovery is seen at the latter part of the year.20. The pump priming activities of the government has positively affected the economy and the Philippines is expected to

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http://www.dmcihomes.com 2008 Ayala Land Annual Report. 16 www.bsp.gov.ph 17 http://www.census.gov/const/newressales.pdf 18 http://www.fxstreet.com/news/forex-news/article.aspx?StoryId =dc59446f-d563-41a9-947c-19ad8b3edd54 19 Murray, Dr Jane. “Asia Pacific Economy: Signs of a turnaround but outlook remains subdued”. 2nd quarter 20009. www.joneslanglasalle.com 20 http://business.inquirer.net/money/breakingnews/view/20090425-201415/Signs-of-recovery-seen 15

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gradually recover from the crisis this year. The gradual economic recovery has positively impacted the residential real estate sector at the 2nd quarter of 200921.

Relevance: DMCI has the opportunity to take advantage of a possible rebound of sales from crisis hit countries. 67% of 2007 international sales are from US and Europe, countries which are hit the hardest by the crisis. The company has tie-ups with real estate brokers in 11 countries around Asia, Europe and United States22.

3.1.3 Emergence of Bonifacio Global City as a new business center

After the government privatized the Bonifacio Global City (BGC) in Taguig, BGC experienced continuous growth. Colliers International mentioned that in the next three years, BGC’s residential supply will rise by 8,297 units and 25 major residential projects will be completed23. By 2012, BGC’s gross floor area will be at 2.6 million sq meters which is double the size this year. Residential units will reach 8,422 units, which is at par with Makati and exceeding Ortigas’ 7,000 units. The Taguig city government is also investing heavily to improve the business center’s infrastructure by upgrading its transport system,

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www.colliers.com http://www.dmcihomes.com 23 http://colliers.com/Content/Repositories/Base/Markets/Philippines/English/Market_Report/PDFs/Knowledge_1Q_ 2009.pdf 22

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building additional roads and creating additional amenities such as a science museum. Additional BGC landmarks will include the 6 star Shangri-la Hotel (to be completed 2012), St Lukes Medical Center and the country’s tallest tower24.

Relevance: Megaworld, one of DMCI’s key competitors, has recently won the bid over Robinsons Land for the 8.38 hectare northern area of the BGC at a cost of 80,000 per square meter. It intends to spend 15.6B over the next 20 years to develop this part of the BGC.

DMCI also has a development near the area. Cypress Towers, a 10,700 sq m. development located adjacent to BGC25. DMCI also has a large lot (around 80 hectares) along C5 road and adjacent to the BGC26 which the company can potentially use for future projects.

3.1.4 Continued growth of the BPO sector

The Business Process Outsourcing sector is composed of outsourced or off-shored back office, customer care and research functions. By 2010, Jones Lang La Salle projects the industry to grow tremendously and become a major contributor to the country’s economic growth. The Philippines will get 10% of the market share representing USD 13 B or 8.5% of our GDP (compared to $3.3B or 5% of the 2006 GDP). The sector will employ 900,000 employees in 2010 up from 285,000 in 200627.

Relevance: 24

Liu, Kristine Jane. “Bonifacio Global City expects to equal Makati Space by 2012.” Business World. 21 Sept 2009. http://www.abs-cbnnews.com/business/09/20/09/bonifacio-global-city-expects-equal-makati-space-2012 25 www.dmcihomes.com 26 Bworlsonline.com/online/property/inside.php?id=008 27 Marcelo, Kathy. What does the O&O roadmap say? May 2008. www.joneslanglasalleleechiu.com

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The BPO sector is a growing market of real estate companies. 82% of offices are located in Metro Manila. In terms of office spaces, the sector will need 5.2 million square meters in 2010. Only 2.5 million sq. meters are currently available and 1.7 million sq. meters are under construction. The scarce supply of 1 million sq. meters will be mostly in the Makati and Bonifacio Global City area.28 The demand for office spaces will also extend to the residential sector. With 900,000 employees earning an average of $3,600 annually and spending 13.2% of that income on housing, the industry can potentially gain Php 20.4 B in property sales (see Appendix 2: Market Segment Sizes).

3.1.5 Construction Raw Materials Prices to remain stable In the previous years, there was a sharp rise in the global prices of construction materials such as cement and steel due to the construction boom in China. By 2009, prices have stabilized due to the economic downturn.

To measure the inflation of construction raw materials, the NSO prepares an index containing the prices of major construction raw materials such as cement, steel, wood, pvc, glass etc in the National Capital Region (NCR). The index has a base figure of 100 for 1985 prices.

In 2009, the index has been stable at the 458 to 465 range29. There is an expected temporary uptick in the last quarter of 2009 due to the reconstruction of typhoon affected houses in the NCR. By 2010, prices are expected to remain stable due to a modest economic recovery causing benign inflation of 3.5% to 5.5% per government forecast30.

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Marcelo, Kathy. What does the O&O roadmap say? May 2008. www.joneslanglasalleleechiu.com www.census.gov.ph 30 Remo, Michelle. “Inflation Outlook Still Benign.” 2 November 2009. www.inq7.net 29

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Relevance: 57% of company’s revenues are allocated to cost of construction. The cost includes cost of construction and raw materials. Housing prices are heavily influenced by the cost of raw materials. Last year for instance, when the CMWP Index shot up from 393 at the start of the year to 465.1 by the end of the year, DMCI Homes had to increase its selling prices by 12% to recoup costs.

3.1.6 Interest Rates are projected to rise As projected by The Economist, average lending rate will increase from 8.5% in 2009 to 9.6% in 2013. Higher interest rates are mainly due to the inflationary impacts of increased spending in a recovering economy31.

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3 July 09 .http://www.economist.com/countries/Philippines/

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Projected Lending Rate:

Relevance: Bank lending rate is the base rate which housing loan interest rates are based. A higher lending rate will mean a higher housing loan rate to potential home buyers. As clients would normally buy homes on credit, stable home loan rates will encourage buying activity and be an opportunity for both the industry and company.

3.2 Political and Government Aspects

3.2.1 Potential Charter Change House Speaker Prospero Nograles has set in Congress’ agenda House Resolution No 737 which opens land ownership to foreigners. Despite hesitations from the public, charter change will be at the top of the legislative agenda of the house for the current session.

Protests are mainly against the political

amendments to the constitution and less on the opening of land ownership32.

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Cabacungan, Gil C. Jr. “Nograles: Charter change train back on track. “18 July 2009. http://www.inquirer.net/specialfeatures/charterchange/view.php?db=1&article=20090718-216018

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Relevance:

The passage of the law will allow the company to sell titled developments such as subdivision lots to foreigners. It will also remove the maximum number of condominium units that can be sold to foreigners. Currently, DMCI can only sell 40% of condominium certificates to foreigners33.

Opening of land

ownership can generate potential sales for DMCI especially if DMCI will strengthen the operations of its international offices in 12 countries.

3.2.2 Continued promotion of the Philippines as a retirement haven The Philippine Retirement Authority (PRA) is implementing the Special Resident Retiree’s Visa (SRRV) Program to promote the country as a major destination for foreign retirees34. Continued patronage of the new administration come 2010 will benefit the real estate sector. According to Philippine Retirement Authority Chairman, Edgar Aglipay, there are 20,000 retirees who have registered with the agency in 2008. The figure is expected to grow to 24,000 retirees this year35. These 24,000 retirees have registered with the agency to avail of tax perks if they buy real estate in the country.

Relevance: Potential sales can come from condominium purchases from foreign retirees. Foreign retirees are allowed by the current law to buy condominium developments. These represent potential sales to DMCI especially since DMCI’s projects are resort themed with substantial land area being used for recreational facilities. These are features foreign retirees are considering when buying a second home.

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http://www.bcphilippineslawyers.com/foreign-ownership-of-land-in-the-philippines/371/ Fajardo, Fernando.” Can foreigner-retirees buy land here?” 22 Oct 2008. http://globalnation.inquirer.net/cebudailynews/opinion/view/20081022-167846/Can_foreignerretirees_buy_land_here%3F 35 Ho, Abigail. 25 Aug 2009. US European Firms Eye RP retirement industry. www. Inq7.net 34

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3.3 Environmental Factors 3.3.1 Heightened risk of flooding due to climate change Last September 2009, the country was devastated by one of the worst typhoons to hit the country. One month worth of rain fell in 6 hours when Typhoon Ondoy hit Metro Manila. This caused 5 meter high floods and devastated houses in Cainta, Pasig and Marikina area36.

The UN notes that the intensified typhoon causing massive flooding is expected to continue as the Philippines suffer the effects of climate change37. Floods will severely affect real estate developments located low lying areas.

Relevance: With the recent events, a growing consideration of home buyers is the risk of flooding in a development. After being heavily hit by typhoon Ondoy, real estate projects in low lying areas such as Marikina, Pasig and Cainta have suffered falling property values and experienced a drop in demand.

DMCI’s East Raya Gardens in Pasig was not severely affected by the flooding due to good drainage in the area. Other DMCI developments were also spared38. Other industry players were not as fortunate. Provident Securities, the developer of Provident Village in Marikina, is not only faced with a drop in housing prices but bad publicity and law suits from its residents.

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Ramos, Marlon. “Too much rain too soon.” 27 Sept 2009. www.inq7.net Abbugao, Martin. “Floods a wake up call for climate change.” 29 Sept 2009. www.inq7.net 38 www.dmcihomes.com 37

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IV. Industry and Competitor Analysis 4.1 Industry and Market Segments 4.1.1 Residential Housing Product Categories HLURB is a government agency that issues housing licenses needed before a developer can sell a unit. It classifies residential developments into four categories (1) high rise residential condominium (2) low cost (3) socialized housing (4) medium cost & open market house and lot.

Condominium House Bill 398 defines a condominium as “an interest in a real property consisting of a separate interest in a unit in a … residential building and an undivided interest in common areas of the building ...”39

In 2007, HLURB recorded 77 projects that applied for licenses40. These projects had a total inventory of 19,369 units available for sale. By 2008, the number of condominium units being sold jumped by 150% to 49,459 units41. At an average price of Php 3M (See Appendix 3: Competitor Pricing Survey), total size of the high rise condominium market is at Php 148B – growing by Php 90B from last year.

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http://erbl.pids.gov.ph/listbills.phtml?id=167 www.hlurb.com 41 http://colliers.com/ 40

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This housing type is one of the key products of DMCI as 16 out of its 25 developments belong to this category.

House and Lot House and Lot developments refer to a housing project where the land title is transferred to the buyer. HLURB classifies these further as open market and middle income housing. Both types are not being sold as socialized or low income housing. They’re being targeted to middle income and high end market. House and lot can be sold as an independent unit or part of a subdivision development.

In 2007, there were 262 projects registered under this category42. These projects have an inventory of 58,943 units in 2007 which dropped by 9% to 53,513 units in 2008. This product category is valued at Php 160B.

DMCI has 9 out of 25 projects belonging to this category.

Low Cost and Socialized Housing Under the law, the socialized housing projects are high density developments worth Php 300,000 or below. Low cost housing projects are worth between Php 300,000 to Php 1,250,000. Both are geared towards low income families. This product category enjoys government perks such as tax incentives and subsidies.

There were 345 developments as of 2007 in both of these sectors which are composed of 91,655 units. In 2008, this product category grew by 49% to 118,576. 14% of which is from the socialized housing and the rest for low cost housing. Total market size given the prices is at Php 109 B.

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www.hlurb.com

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DMCI is currently not offering products belonging in this category.

4.1.2 Market Size and Growth (Value and Volume)

As of 2008, the total Philippine residential market is valued at 418B comprised of 221,548 units. In value, the biggest contributor is medium cost and open market house and lots (38% on the industry). However, this sector contracted by 9%. High rise residential condominiums are increasingly becoming a bigger part of the market growing by 155% to contribute to 35% of the industry value. The low cost/socialized

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housing products have the most number of units but because of the lower selling price, contribute only 26% of the industry value.

The Philippine housing sector has grown by 35% in 2008 with the high rise residential developments contributing to most of the growth (155%). Year on year, the industry contracted by 3% during the second quarter of 2009 as there was a 28% drop in the low cost housing sector. In the next 3 years, there will be 20,420 new units launched to the market most of them in the Bonifacio Global City where 25 new condominium units will be completed (see external analysis).

4.1.3 Market Segments and Trends

4.1.3.1 Segmentation through Economic classification

The real estate market has been traditionally segmented based on economic classification as measured by the budget of the buyer for a house. Given this criteria, the market can be segmented according to luxury, affordable and low-cost buyers.

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Luxury buyers are individuals belonging in the upper A market with an annual family income of above 2,000,00043. According to Colliers International, average price of homes being targeted for this group is Php 129K/sq m as of 1Q 200944. Aside from having a high price per square meter, units are traditionally bigger. Average size of a unit is around 140 sq meters for a 2 to 3 bedroom unit and costs an average of Php 17 million (See Appendix 3: Competitor Pricing Survey). Luxury homes are also grander and are centrally located within a business or a recreational area. Major real estate players that are tapping this sector are Ayala Land Premier and Rockwell Land.

According to Colliers international, there are 5,420 units being sold to the luxury segment. Given the price and size of the unit, this translates to Php 97 billion in market size or 23% of the industry (See Appendix 2: Market Segment Size). According to Colliers international, growth rates for the luxury segment will be flat as indicated by lower capital values of prime 3 bedroom units45.

43

Definition per NSCB. Cabralez, Aizl. “ The growing significance of the middle class.” 3 July 09. www.bworld.com.ph 44 www.colliers.com 45 www.colliers.com

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The middle income segment, also called the affordable segment, is catered to modest income buyers with an annual family income ranging from Php 500,000 to Php 2,000,00046. Prices of these homes are higher than 1.25 million but lower than the prices of luxury buyers. The segment is being targeted by numerous firms including DMCI because of its size. The segment valued at 211M represents half of the industry value (See Appendix 2: Market Segment Size).

The low cost segment is being catered to the CDE market with an annual family income of less than Php 500,00047. These buyers have a housing budget of less than Php 1,250,000. Buyers of this segment can access financing from Pag-ibig. In 2007, there were 345 projects being launched for this sector bringing in a total of 109B market size. The value of this segment grew by 58% in 2008.

4.1.3.2 Segmentation through source of income

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Definition per NSCB. Cabralez, Aizl. “ The growing significance of the middle class.” 3 July 09. www.bworld.com.ph 47 Definition per NSCB. Cabralez, Aizl. “ The growing significance of the middle class.” 3 July 09. www.bworld.com.ph

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The residential real estate market can be further segmented to highlight the emerging sectors of the economy. The two major drivers of the Philippine economy are the continued growth of OFW and BPO sector. As indicated in the external analysis, they are potential growth drivers of the industry.

11.2% of the projected $17.1 B worth of OFW remittances will go to housing. This provides potential revenues worth 91B to the industry. With the 4% growth this year and 6% growth next year, real estate companies are devoting more resources to cater to this segment. DMCI for instance has 15% of revenues coming from OFWs while 24% of Ayala Land’s real estate sales are also from that sector.

Another segment to watch is the BPO segment. Since 2006, the sector more than doubled (215%) in the number of workers it employs. By 2010, the sector will have 900,000 employees.48 At an average annual compensation of $3,60049 and 13.2% of this income is spent on housing50, the sector is expected to be worth Php 20B or 5% of the total industry.

4.1.3.3 Market Volume of Segments Below is the summary of the number of units per market segment which was calculated based on segment value and average price. The middle income segment was further categorized according to source of income.

48

See external analysis http://www.magellan-solutions.com/call-center-industry_people.htm 50 www.census.gov.ph. 2006 data of family expenditure of upper 70% income group. 49

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4.1.4 Pricing Pricing strategy will depend on the economic classification being targeted by the firm. Pricing groups can be classified by luxury, affordable and low cost pricing schemes. Affordable pricing is targeted to middle income buyers. The price of a development can depend on the price per square meter and the unit size. Unit size will also depend on the economic group the developer is targeting.

DMCI is currently marking its developments in the affordable pricing scheme similar to its key competitors – Megaworld, Robinsons Land and Avida Land. (See Appendix 3: Competitor Pricing Survey for a detailed list of prices per project)

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4.1.5 Distribution Channels

The developer can choose to either distribute their products via in-house sales or external brokers.

In house Sales Real estate companies have their own sales personnel to distribute their products. In house sales can be located within or outside the country. Aside from a fixed salary, real estate companies also compensates its in-house sales agents via commission over sales.

83% of DMCI’s sales are from in house sales.

External Brokers Developers can opt to form brokering agreements with external firms. The commissions paid to external brokers are much higher compared to commission paid to in-house sales. Commission rate of the industry averages at 6% of listed price. Commissions are shared by the sales agent and the brokerage firm. External brokers can be contracted to exclusively distribute the project of a single developer.

17% of DMCI’s sales are coursed via brokers.

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Re-sellers Buyers can also act as alternative distribution channel. There are investors who acquire properties for the purpose of re-selling the property once the prices have appreciated. This distribution channel acts both as a distribution channel and as a competitor since they can capture demand that could otherwise have gone to the developer.

4.1.6 Advertising and Promotion To stimulate demand, developers use several media types. Outdoor advertising is the most popular media type being used. Outdoor ads are being placed along major thorough fares in Metro Manila such as EDSA. Companies are also utilizing television, radio and print ads in their brand building activities. Increasingly, companies are using its websites to inform clients of new projects and construction updates of existing projects. Companies such as Ayala Land are also making their websites e-commerce capable by creating the infrastructure to allow online reservations. Property developers are also using public relations by contracting writers to discuss its property offerings.

Promotion spending has been increasing at an average rate of 27%51 primarily through the promotion of the company’s high rise development. As discussed in the external analysis, high rise developments jumped by 150%. To stimulate demand from the increasing supply, companies have increased their promotion activities.

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Based from the 2007 and 2008 marketing and advertising expenses of key competitors.

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4.2 Porter’s 5 Forces of Competitive Analysis The residential real estate industry is composed of numerous small and large players. The 9 major players enumerated below represent only 13% of the market share. There are numerous market players all over the country with most of the major players servicing key Philippine cities like Metro Manila. The scope of the industry does not include rental properties although this is an important substitute.

The following are the major market players with industry orientation and their 2007 vs 2008 residential real estate revenues.

Ayala Land, Megaworld and Vista Land have the largest market share representing 3.7%, 3.0% and 2.5% of the residential industry. Each of these companies leads in the a different market segment. Ayala Land’s Ayala Land Premier and Alveo Land dominates the high rise industry. Ayala Land also has ventures in the middle income segment through Avida Land and is venturing into the low cost housing. Megaworld is the leader of the middle income segment while Vista Land through Camella Homes leads the low cost segment.

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Concentrating in the middle income segment, there is a large disparity in revenue share of Megaworld with the market followers (DMCI, Robinsons, Avida, SM, Filinvest). However, the market followers have the same level of sales (2 to 4 Billion).

4.2.1 Threat of Competition - Strong Competitive rivalry is intense due to the numerous players in the real estate market, flat prices, industry growth and high exit barriers.

Numerous players in the industry According to HLURB, in the first half of 2008 alone, there were already 937 housing projects registered with the agency. Out of this, there were 63 condominium projects being built in the Philippines52.

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www.hlurb.com

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Housing prices will remain flat Nominal and real housing prices will have a near flat growth rate from a height of 10-15% in mid 2007.53 The drop came from the impact of the subprime crisis where buyers especially OFWs deferred their housing purchases.

High Exit Barriers Residential condominium industry is capital intensive. Investments have to be made in land acquisition and building construction. For instance, Ayala Land has spent Php 7.7 B in 2008 and 8.7 B in 2009 to develop its residential real estate businesses (Ayala Land Premier, Alveo Land and Avida Land)54. Exiting the industry will be costly given the large amount of fixed asset investment.

4.2.2 Threat of New Entrants – Weak Entry Barrier – High Capital Requirement

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http://colliers.com/Content/Repositories/Base/Markets/Philippines/English/Market_Report/PDFs/Knowledge_1Q_2009.pdf 2008 Ayala Land Annual Report.

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Sizeable capital is needed to enter the industry. Large capital is needed for the construction of high rise residential projects and purchase of land. Based from published reports55, the key players have an average CAPEX budget of 8.3B. A new entrant should have this amount of capital to pose a significant threat to the company.

Entry Barrier – Land Availability Another important barrier is the high cost and limited availability of good locations. Prices of Makati CBD and Ortigas Area for instance, are steadily increasing at .6% to .9% per year56. A new entrant must also obtain a large area of land. Land area of a typical DMCI property is around 8000 square meters57. A new entrant must obtain a single track of land close to that size to compete with a developer the size of DMCI.

Recent New Entrant A new entrant should overcome the strong entry barriers of capital and land requirements. One new entrant is Eton Properties of the Lucio Tan group. Eton Properties used the massive land bank of other Lucio Tan subsidiaries such as Philippine Airlines, Philippine National Bank and Allied Bank to overcome the barrier of entry of land availability. Being a member of the Lucio Tan group of companies

2008 Annual Reports of Key Competitors. http://colliers.com/Content/Repositories/Base/Markets/Philippines/English/Market_Report/PDFs/Knowledge_1Q_ 2009.pdf 57 DMCI Holdings SEC Disclosure Form 17-Q.1st Quarter 2009. 55

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also allowed it access to capital. Despite these advantages, Eton Properties has negligibly affected the industry with only 90M in sales or a 0.02% market share58.

4.2.3 Bargaining Power of Suppliers – Moderate Major suppliers of the industry are the construction contractors and raw material suppliers. Major raw materials in building construction are cement and steel. Raw material suppliers, construction contractors and other suppliers consume 57% of the industry’s revenues (See Financial Statement Analysis).

Prices of raw materials such as steel and cement are correlated with world prices. Local cement and steel prices are being monitored but not being controlled by the DTI. Current raw materials prices have stabilized (see external analysis). Competition in the raw material and construction services industry is stiff due to the numerous raw material providers and construction contractors. In terms of substitutes, there are no substitutes for major raw materials and construction services.

Overall, bargaining power of suppliers is moderate due to the numerous suppliers tempered by the lack of substitute to these key inputs.

4.2.4 Bargaining Power of Buyers – Weak Real estate is a high ticket purchase and buyers usually can only afford to buy one home at a time. Buyer’s lack of ability to buy in bulk prevents buyers from bargaining significantly off the developer’s standard price. Aside from lack of economies of scale, bargaining power of buyers is also weakened by the fact that housing is a primary human need.

4.2.5 Potential for Substitutes - Strong

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http://etonpropertiesphilippines.com

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Substitutes are residential houses that are constructed from the ground up by the owner of the property. House design is more customized compared to the standard property offerings of residential developers. However, location of the property is farther from commercial business districts.

Another major substitute are properties for rent. In the near term, renting is cheaper compared to buying a new home. Unlike buying a home which requires 10%-30% down payment and subsequent amortizations, there is a smaller cash outlay in renting a house.

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4.3 COMPETETIVE PROFILE MATRIX The choice of competitors was limited to three – Robinsons Land, Avida Land and Megaworld Corporation. These companies were chosen on the basis of the similarity pricing and level of quality. Quality was defined on the basis of property design, amenities and property maintenance. Prices per square meter were bench marked across different companies for completed projects within Metro Manila. These properties deliver the same level of quality and their prices range from Php 80,000 to 100,000 per square meter. These companies are in the affordable segment or companies targeting middle income families. Given these categories, the Rockwell land, Alveo Land, Ayala land Premier and Camella Homes were excluded since they are not competing in the same income segment as DMCI homes.

4.3.1 Key competitors of DMCI Competitor #1 Robinsons Land Robinson’s Land is the property arm of JGB holdings which is owned by the Gokongwei family. Robinson’s Land is engaged in various sectors of the property market. It develops and markets commercial spaces, office spaces and residential comes. In 2008, its sales from its residential division reached Php 4.4 Billion and its second quarter 2009 sales have already reached Php 1.887 Billion. Its existing developments include Trion Tower (Fort) and Gateway Regency (Pioneer).

Robinson’s Land targets the middle income group similar to DMCI as exemplified by its USP “Great Homes, great value”. Price range of a typical development is at Php 90 thousand per square meter which is close to DMCI’s properties priced at Php 81 thousand per square meter. Quality of development is also similar to DMCI.

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Competitor # 2 Megaworld Megaworld, a property development firm founded by Andrew Tan, is engaged in residential, office and commercial development. It is considered as the market leader in the middle income residential segment with developments priced at Php 90,000 per square meter59. Full year residential revenue is Php 12.43 B out of its total 15.4B 2008 revenues.

Megaworld is known for its township developments which follows its USP, “Live, work and play”. Township developments combine residential, commercial and office buildings in an area. Its most notable development is Eastwood City.

Competitor #3 Avida Land Ayala Company is a diversified conglomerate with interest in telecommunications (Globe), banking (BPI), semi-conductors (Integrated Microelectronics) and water distribution (Manila Water). Ayala Land, its property arm, is the country’s most experienced property developer.

Ayala land is further divided into commercial properties (Ayala Malls), corporate businesses (Laguna Technopark and Ayala businesscapes), geographic businesses (Cebu Holdings) and residential development. Its residential area is segmented by target market. Ayala Land Premier and Alveo Land caters to the luxury sector with developments such Serendra, while Avida Land caters to the affordable segment with projects such as Avida Towers.

Among the Ayala subsidiaries, Avida land is DMCI’s direct competitor. Price per square meters for Avida Towers is at Php 100 thousand per square meter similar to DMCI. Quality of property design and 59

2008 Megaworld Annual Report.

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amenities is also similar to DMCI Homes. Avida and DMCI both target the same market. Avida’s target market is mentioned in its USP (“Affordable living at its best”) and its mission statement (“We are the recognized leader and the most preferred provider of quality shelters and communities for the average Filipino family”)60.

4.3.2 Critical Success Factors CSF # 1 Adequate Capitalization Capitalization can be measured by the equity value in its balance sheet and through a leverage ratio(debt to assets ratio). Higher debt would limit future borrowings or attract capital to fund future projects. The parent company’s capitalization should also be considered since the company can finance projects through its parent company.

Importance Weight: 30% Large capital is needed to be able to purchase land, develop properties and fund other strategies..

CSF # 2 Price Competitiveness To compare on the basis of price, newly constructed projects of a company were chosen based on their proximity to one another and the stage of completion of the project. Prices were scanned for new developments located around the same area.

Importance Weight: 20% Real estate is a big ticket purchase. Middle market buyers will do their due diligence to get the best value for their money. The price sensitivity of buyers makes the price of the development a key component in

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http://www.avidaland.com/about_us1.php

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their buying decisions. Customers will be looking at a product that offers them the greatest value for money.

Real estate developers will need to address the competitiveness of the pricing of their product while protecting their margins. Players that are targeting the middle market (such as DMCI Homes) are focusing on the affordability of their homes.

CSF # 3 Accessibility of Location Proximity of a location to a business or commercial district

Importance Weight: 20% Buyers consider the location of the development in the purchase decisions. The area should be wide enough to accommodate a high rise building and amenities. It should also be in proximity to business centers or schools. Thus, acquisition of large lots in areas with high population densities is a key factor to the success of a player in the industry.

CSF # 4 Wide distribution network Adequate number of internal and external sales personnel is necessary to move inventory. Reach of distribution should be both local and international buyers. This can be measured through number of international and local offices sales offices.

Importance Weight: 10% To be successful in the industry, a developer should have a wide distribution network. Distribution includes in house sales and external brokers both inside and outside the country. Sale of real estate requires long sales effort since it’s a high ticket item. Thus, the company should have adequate number of sales people to build relationships with prospects and turn them to potential sales.

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CSF # 5 Number and quality of amenities in the development A survey was done where two of DMCI’s and its key competitor’s developments was visited to assess the quality and number of amenities of a project. The allocated area for the amenities was also evaluated against the total land area of a project.

Importance Weight: 5% Good property design and amenities draws clients to purchase a property. Common amenities such as swimming pool, gardens and recreational areas add value to the development.

CSF # 6 Size of Unit The size of a unit is measured as number of Square Meters of a standard 2 bedroom unit

Importance Weight: 5% Buyers are looking at the size of the unit. The unit should be big enough for the occupants to live comfortably.

CSF #7 Track record of developer This is measured by the reputation of projects the developer has successfully completed.

Importance Weight: 5% The track record of the developer is an important consideration for the buyer. Condominium projects are usually sold on a pre-selling basis. In pre-selling, the buyer will not see the actual development but only a model of it. The buyer has to trust the developer to deliver the quality it promised. For trust to be established, the buyer will consider the track record of the firm.

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CSF#8 Marketing Capability This can be measured through the marketing spend of the company for 2008. The importance of promotions activities to the company can be quantified by the budget allocated to it.

Importance Weight: 5% For companies to compete well, it has to allocate a budget for marketing activities such as product promotion to increase brand awareness and recall.

4.3.3 DMCI Homes CSF ratings CSF#1 DMCI’s Capitalization61 (1) DMCI Homes has a total capital of Php 3.9 B as of 2008 bringing its debt to assets ratio of 0.67 which is higher than the industry average of 0.45. DMCI is the most heavily leveraged among the four companies.

CSF#2 DMCI’s Price Competitiveness (4) Based from the price scanning done on the recent developments of the key competitors, DMCI’s current development (Cypress Towers in Taguig) is currently selling at Php 81,034 per sq meter. This is the lowest among the four companies.

In its annual statement, DMCI noted that its pricing 10-15% better than competitors owing to its operational synergy with DMCI’s Triple A construction subsidiary.

CSF#3 DMCI’s Accessibility of Developments (1)

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See Comparative Financial Ratio

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DMCI intentionally locates its developments outside of a Central Business District to lower unit cost. For instance, Cypress Tower is built adjacent to the Fort (near C5). DMCI’s Dansalan Gardens is built outside Pioneer area in Boni while Tivoli Gardens, is built outside the Makati Business area.

CSF#4 DMCI’s Distribution Network (2) DMCI has international sales offices in 12 countries fewer than Megaworld and Avida Land. Its local reach is also limited compared to Avida and Megaworld and at par with Robinsons Land.

CSF#5 DMCI’s Number and Quality of Amenities (4) DMCI projects follow a resort living theme. Surveying the four sample developments, DMCI has the most number and best quality amenities. It also allocates larger land area to common facilities.

CSF#6 DMCI’s Size of Unit (4) A typical two bedroom unit is 58 sq meter (Cypress Tower). This is at par with Robinsons Land.

CSF#7 DMCI’s Track Record (3) DMCI is only 5 years in the industry and has completed 11 developments. Despite being relatively new in the industry, a higher rating was given owing to its affiliation with its sister company, DM Consunji which is a triple A builder and has built landmarks such as Mactan Shangrila-Hotel, Manila Hotel, Westin Philippine Plaza, Asian Hospital, Manila Doctor’s Hospital and the New Istana Palace in Brunei.

CSF#8 Marketing Capability (4) It has the largest marketing budget of 228M for 2008. Promotion activities include TV and outdoor advertisements.

4.3.4 Robinsons Land CSF Rating

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CSF#1 Robinsons’ Capitalization (3) Robinsons Land has a total capital of Php 22 B as of 2008 bringing its debt to assets ratio of 0.43. Robinsons Land is also a publicly listed company which allows it access to additional capital through the stock market.

CSF#2 Robinsons’ Price Competitiveness (3) Robinsons’ current development, Trion Tower in the Fort, Taguig is currently selling at Php 90,439 per sq unit (as of 20 Aug 09) based on quotes of an online seller.

CSF#3 Robinsons’ Accessibility of Developments (4) Developments are built within the business districts. Its developments (Gateway, Trion Tower) are within the business districts of Fort Bonifacio and Pioneer.

Some of its developments are also placed

strategically near Robinsons Malls.

CSF#4 Robinsons’ Distribution Network (3) Robinsons distribution network locally and abroad which is at par with DMCI.

CSF#5 Robinsons’ Number and Quality of Amenities (3) From the survey done, Robinsons Land projects have good but limited number of amenities compared to DMCI. In terms of quality of its common areas, its at par with Avida and Megaworld.

CSF#6 Robinson’s unit size (3) A typical two bedroom unit is sized at 57 sq. m. (Trion towers)

CSF#7 Robinson’s Land Track Record (3)

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Robinsons land has 6 major residential developments aside from the commercial and office spaces it has built. Most notable developments include the various Robinsons Malls dotting the country.

CSF#8 Marketing Capability (3) Robinson’s marketing spend is at par with Megaworld at 103M for 2008. Outdoor advertisements focus on the affordability of Robinsons Land developments.

4.3.5 Megaworld’s CSF Rating CSF#1 Megaworld’s Capitalization (4) Megaworld has a total capital of Php 24 B as of 2008 and is the least leveraged with a leverage ratio of 0.40. Megaworld is also a publicly listed company allowing it to directly access funds from the stock market to fund its investments.

CSF#2 Megaworld’s Price Competitiveness (3) Megaworld’s current development, Mckinley Hill in Fort, Taguig is currently selling at Php 87,179 per sq unit (as of 10 Aug 09) based on quotes of an online seller.

CSF#3 Megaworld’s Accessibility of developments (4) Megaworld’s residential developments are in close proximity with office spaces and commercial districts. It pioneered the concept of townships embodying its USP, “Live-work-play-learn”. Eastwood City for instance has a mix of residential condominiums, malls and office

CSF#4 Megaworld’s Distribution Network (3) Megaworld has a large distribution network abroad. It has market leadership over major OFW destinations such as the Middle East. It also has a respectable distribution network locally which is at par with DMCI and Robinsons Land.

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CSF#5 Megaworld’s Number and Quality of Amenities (2) From the survey done, Megaworld has the least number of amenities from the four companies. Its developments also have the smallest allocated land area devoted for amenities.

CSF#6 Megaworld’s Unit Size (4) A typical two bedroom unit has a size of 92 sq. m. (McKinley hill)

CSF#7 Megaworld’s Track Record (3) Megaworld has built 6 townships which contains a mix of residential, commercial and office spaces. Its most popular development is Eastwood city. One township will have several condominium, office and commercial buildings.

CSF#8 Megaworld’s Marketing Capability (3) Megaworld’s marketing spend is at par with Megaworld at 118M for 2008.

4.3.6 Avida’s CSF Ratings

CSF#1 Avida’s Capitalization (3) Avida has a total capital of Php 2.9 B as of 2008 and with a total debt to assets ratio of 0.52. However, its affiliation with Ayala Land should be taken into account. Ayala Land is a publicly listed real estate company and is the most well capitalized property developer with a total equity of 55B. Ayala Land’s capitalization offsets the capitalization of its subsidiary, Avida.

CSF#2 Avida’s Price Competitiveness (2)

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Avida Land’s current development (Avida Towers Makati West in Makati62 is currently selling at Php 100,040 per sq unit (as of 20 Aug 09). Avida’s developments are the most expensive among the four companies.

CSF#3 Avida’s Accessibility of developments (3) Avida’s developments are situated near but not within a business area. Its development in Makati for instance is a close drive to the Central Business District but is still outside the CBD.

CSF#4 Avida’s Distribution Network (4) Avida Land has a wide distribution network both locally and abroad owing to its affiliation with Ayala Land, the country’s largest real estate developer.

CSF#5 Avida’s Number and Quality of Amenities (3) Based from the survey conducted, Avida Land has adequate number of amenities comparable to Robinson’s Land.

CSF#6 Avida’s Unit Size (2) A typical two bedroom unit has a size of 50 sq. m. (Avida Towers – Makati West)

CSF#7 Avida’s Track Record (4) Aside from the 27 projects for Avida Land, it also leverages off the experience of its parent company Ayala Land. Ayala Land claims that its its the largest and most experience property developer in the Philippines.

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Avida has no development in Taguig to compare with Megaworld, DMCI and Robinson Land.

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CSF#8 Avida’s Marketing Capability (3) Avida Land’s marketing spend is the smallest among the four companies at 74M last 2008.

4.3.7 Competitive Profile Matrix (CPM) Ratings From the identified critical success factors, DMCI and its key competitors are assigned the following ratings.

Based from CSF ratings, Megaworld has the competitive advantage over DMCI and other key competitors. Its competitive advantage has also allowed Megaworld to be the leader in market share in the middle income segment. Megaworld’s strength over the rest of the companies is in the area of capitalization, accessibility of location and unit size. Megaworld also has modest ratings in terms of price competitiveness, distribution network, track record and marketing capability.

In terms of market share, there is no clear market follower. In terms of CSF rating, Robinsons Land is ahead of DMCI and Avida through its more accessible developments and its modest ratings in other areas. Avida Land leads in distribution network and track record owing to its affiliation with Ayala Land. DMCI lags in CSF rating which is also reflected in its market share. Despite being the price leader with a strong marketing capability, its overall CSF rating was lower due to its weak capitalization and lower accessibility of location.

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4.4 External Factor Evaluation External Factor Evaluation (EFE) Matrix summarizes and evaluates various external factors including environmental and competitive factors facilitate strategy formulation. (David, 2009).

There are many factors that affect DMCI but a set of priority factors that has the greatest impact to DMCI Homes’ success were selected and importance is given based on its potential impact to its bottom line.

4.4.1 Opportunities and DMCI Homes’ responsiveness O1 - OFW remittances to grow by 6% [see Environmental Analysis – Economic] Rating 3 - DMCI initially lessened its exposure to the overseas market when the economic crisis hit and the BSP initially forecasted a flat OFW remittance growth. When remittances became more resilient, DMCI continued to hire more overseas agents and has been launching road shows in countries like Tokyo to entice international clients to choose DMCI Homes. DMCI also launched a website specifically for the overseas market.

Despite having more aggressive marketing efforts, a 3 rating was given since the company has less international offices compared to Ayala/Avida and Megaworld. 24% of the units Avida sells was distributed to the overseas market compared to DMCI of only 15%.

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Weight of 15% was given to the factor since the OFW segment contributes to 29% of the industry’s revenues or 91B annually.

O2 - Global Economic Recovery from the Subprime crisis [see Environmental Analysis – Economic] Rating 3 - DMCI has used its price competitiveness to draw customers to buy its existing project launches (Dansalan Gardens, Tivoli Gardens and Cypress Towers) despite the subprime crisis this year. DMCI lowered its markup and retained its 10-15% price advantage over key competitors. Impact of DMCI’s responsiveness to the crisis is evidenced by DMCI’s 61% jump in unit sales.

DMCI is also positioning for the global economic recovery projected in the latter part of the year by launching several new projects next year such as Magnolia Place in Quezon City and East Raya in Paranaque.

Weight of 15% was given due to the domino effect the recovery has on both housing prices and demand. Housing prices for instance have remained flat when the crisis hit. With the recovery of the economy, revenues can grow further with rising prices and greater demand.

O3 - Emergence of Bonifacio Global City as a new business center [see Environmental Analysis – Economic] Rating 3 - DMCI’s key competitors have developments within the growing Bonifacio Global City (BGC). Avida Land’s sister company Ayala Land Premier and Alveo Land developed Serendra, a known BGC landmark. Megaworld and Robinsons also launched Mckinley Hill and Trion tower, both in the center of the BGC business district.

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In contrast, DMCI’s strategy is to build in close proximity but outside a business district like BGC. DMCI’s Cypress Towers along C-5 highway which is close but outside BGC. DMCI Home’s landbank does not include lots within BGC.

O4 - Continued growth of the BPO sector [see Environmental Analysis – Economic] Rating 1 – DMCI is currently not targeting this sector. Unlike companies such as Robinsons Land and Megaworld, DMCI does not have a commercial real estate arm. Robinsons and Megaworld strategically build BPO offices near their condominium projects to be able to fully capture the BPO market.

O5 - Construction Raw Materials Prices to remain stable Rating 4 – DMCI has an advantage in sourcing its raw materials by using its steel fabrication subsidiary (AG&P) to source steel raw materials at a lower rate. Through AG&P, DMCI is also able to lock-in steel prices. With its construction arm – DM Consunji, it is able to integrate other raw material requirements with that of DM Consunji to command lower prices.

O6 – Potential Sales due to continued promotion of the Philippines as a retirement haven and relaxing of constitutional limitations on land ownership [see Environmental Analysis – Political] Rating 1 - DMCI is not specifically targeting retirees. In its vision statement, DMCI targets young families with modest income. Compared to competitors such as Avida Land and Megaworld, the company also has less sales offices abroad.

Importance of the opportunity is given a lower weight (10%) given the less likelihood of the potential charter change to happen with the political noise generated by the upcoming elections.

O7 - Falling market share of Megaworld (market leader) [see market analysis]

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Rating 2 - Megaworld is the clear market leader of the middle income residential sector. However, its market share has fallen from 3.5% to 3%. Market share of Avida has remained stable while Robinsons and DMCI market share is increasing. The falling market share of the industry leader presents as an opportunity for DMCI and other players to gain additional market share. A 2 rating was given since DMCI does not have enough capital to launch an aggressive direct attack over the market leader/

O8- 2% growth rate of high rise residential segment [see market analysis] Rating 3 – High rise residential developments are on the rise. The sector grew by 155% in 2008 followed by a more modest 2% year on year growth in the second half of 2009. DMCI has responded to a modest growth in the sector by increasing its real estate available for sale.

4.4.2 Threat and DMCI Homes’ responsiveness T1 - Interest Rates are projected to rise [see Environmental Analysis – Economic] Rating 1 – DMCI is poorly positioned for a rise of interest rates due to its heavy reliance on short term debt. (see financial analysis). 54% of its liabilities are maturing in less than 1 year. These will need to be re-priced at a higher interest rate leading to higher financing costs.

T2 - Heightened risk of flooding due to climate change [see Environmental Analysis – Environmental] Rating 4 – During the recent flooding, none of DMCI’s developments were severely affected. DMCI had the foresight to choose less flood prone areas and invest in a good drainage system for all its developments.

T3 - Strong Rivalry of competition [see 5 forces] Rating 3 – DMCI increased its marketing budget by 22% in 2008. This has caused an increase in market share unlike Avida and Megaworld whose market shares either remained stagnant or contracted. In terms of marketing budget, DMCI has the largest marketing budget among the key players.

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4.4.3 EFE Matrix

4.4.4 Strategic Issues based on External Factors A major opportunity the company should take advantage of positioning for the global economic recovery projected in the last quarter of 2009. By timing the completion of its future developments by 2010, allows the company to weather out the economic downturn while preparing for its expected recovery next year. This strategy is similar to the actions of the other firms as there was a general drop of project releases this year in favor of a 2010-2012 release.

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It should also look into the growing markets such as OFWs, BPOs and retirement market. Market development strategies can be used to target these market segments.

Based from the CPM, the company is behind its key competitors due to its lower capitalization. Despite this, its market share is growing faster than the growth in market value due to its price competitiveness. DMCI should find ways to improve its capital base to be able to fund its expansionary activities.

V. COMPANY ANALYSIS 5.1 Vision and Mission of the Company 5.1.1 Vision Statement and Evaluation DMCI Homes does not have its own vision separate from DMCI Holdings. However, it has strategic objectives that upon examination are actually the property subsidiary’s vision.

DMCI Homes •

DMCI Homes is committed to be the best provider of residential communities designed to create a quality lifestyle and to be responsive to the changing needs and preferences of the market we serve.

•

In so doing, we are committed: a. to ensure customer satisfaction, b. to achieve a sustainable growth on our shareholders’ investment, c. to maintain a mutually beneficial relationship with

our partners in the business,

d. to care for the environment we work in, e. to promote the growth of our people.

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Vision Statement Evaluation

5.1.2 Mission Statement Analysis and Evaluation The mission statement of DMCI Homes is:

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“DMCI Homes is the country’s 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 so doing, we are committed… to ensure customer satisfaction, to achieve a sustainable growth on our shareholders’ investment, to maintain a mutually beneficial relationship with our partners in the business, to care for the environment we work in, to promote the growth of our people… while building an organization that espouses Integrity, Excellence and

Interdependence.”

Mission Statement Evaluation

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5.1.3 Recommendations Recommended Vision •

By 2015, DMCI Homes is committed to be a strong second in the middle income residential market and be in a position to challenge the market leader by providing quality residential communities responsive to the changing needs and preferences of the market we serve.

The new vision now indicates the measure of DMCI’s success i.e. to be the second biggest middle income residential real estate provider in terms of market share. The second section of the original vision discussing what the company is committed to was removed so as not to be redundant with its mission statement.

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The new vision is attainable yet apparitional given the time table and its current position in the market. There is a clear market leader in the different income segments of the residential real estate market. Ayala, Megaworld and Vista Land dominate the luxury, middle income and low cost segment respectively. Ayala Land and Vista Land have interests in all income segments but leads in only one. Megaworld has residential real estate sales of 12B while the rest of the players have sales hovering in the 3-4B level. Given the time constraints, it’s unrealistic for DMCI to quadruple its sales in three years to be the leader. Aiming to be a clear number 2 in the middle income sector is already a challenging and rewarding goal for the next five years.

Recommended Mission

“As the country’s first Triple A developer, DMCI Homes creates premium quality, urban-friendly, fully serviced communities for the modest income families that aspire to live comfortably near their place of work, of study and of leisure.

In so doing, we are committed… to find new ways to delight our customers to achieve a sustainable growth on our shareholders’ investment, to maintain a mutually beneficial relationship with our partners in the business, to care for the environment we work in, to have an energized, capable and customer focused workforce while building an organization that espouses Integrity, Excellence and Teamwork.”

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Rather than just mentioning that it’s the country’s first triple A builder, the mission now discusses on how it affects the level of quality it provides i.e. through the creation of premium quality communities. The new mission also now emphasizes innovation as a way to satisfy customers.

The statement of promoting employee growth was revised. The new mission statement states that it workforce should be highly motivated and customer driven. The company will also place a premium in developing its employees.

5.2 INTERNAL AUDIT 5.2.1 Management Audit Strategic Management Concept

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A business plan is being done and implemented for both DMCI Homes and DMCI Holdings. To fully capitalize on the synergy between DMCI Homes and its parent company, strategies of DMCI Homes are aligned to that of DMCI Holdings.

“Company goals are communicated as early as the on-boarding stages or upon hiring of new employees through manuals and an employee orientation program. Likewise, company goals, its vision, mission, core values and other organizational information are communicated through an internal website or Intranet. Strategies are communicated down the line by each group’s respective Department or Division Head.”63 The company could further improve the communication of its objectives through its vision given the deficiencies of the company’s vision (see vision analysis).

There is a top to bottom decision structure in DMCI. Major decisions are made by the upper management given the recommendations and information provided by lower level managers. Lower level managers get involved in the decision making process through business planning sessions done twice a year involving all levels of management. Action points from and departmental goals from the meeting are delegated to specific departments and managers, which are held accountable through their performance appraisals.

Motivational Factors

Job descriptions are well defined showing both the knowledge and skills needed as well as the specific duties of a particular role. To measure the achievements of the individual, annual performance appraisals are given for managers to have the opportunity to direct the behavior of the employee towards the execution of the company’s objectives.

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Tiongson, Teresa. DMCI Homes Senior HR manager.

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The company’s retention strategy involves employee development, recognition, compensation and managing company culture. Employees are trained based on their annual development plans. Employee development includes classroom training and on the job mentoring and coaching. High potential employees are also recognized through service excellence awards.

DMCI provides above industry total compensation package to attract and retain talent. The company also considers the working environment as a key motivational factor for employees. The working environment is being managed through several activities such as company sponsored events to encourage team work and to espouse work-life balance.

These measures have been effective in retaining talent as the overall attrition rate of DMCI is at 14% as of September 2009. Based from the 2008 Watson Wyatt Real Estate Compensation and Benefits Survey, this figure is lower from the real estate industry standard of 19%

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.

5.2.2 Marketing Audit Segmentation of Markets DMCI Homes segments the industry via income group and focuses on the middle income segment. This mode of segmentation is similar to the first level segmentation recommended in this paper.

From this initial segmentation, players such as DMCI further segments the market further via local and international sales. For DMCI, international sales (mostly from OFWs) represent 15% of its sales. This is smaller compared to Ayala where 25% of sales are from OFWs. The biggest contributor in the international segment is sales coming from Europe (54% of international sales) followed by the middle east (22%), USA (13%) and Pan Asia (11%). This mode of segmentation is coherent to the segmentation

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Tiongson, Teresa. DMCI Homes Senior HR manager.

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via source of income described in the earlier section of this paper. DMCI is not targeting alternative segments such as the BPO and retirement markets.

Positioning DMCI Homes is not as well positioned compared to its competitors. It has a lower CSF compared to its key competitors owing to the lower accessibility of its developments. Its weaker position relative to other players is also reflected in its lower market share (described further in the next section). In both market share and CSF ratings, DMCI is number four.

It also has an average position relative to its external environment as quantified by its EFE rating of 2.70 mainly due to its lack of response to the growing BPO segment and its failure to fully capitalize on the falling market share of the market leader.

Market Shares

The company’s market share has been steadily increasing. Its market share grew by 33% from last 2007 to be at par with Avida Land. As noted in the market analysis section, there is a clear market leader for the middle income industry i.e. Megaworld. However, market followers such as DMCI Homes, Robinsons Land and Avida Land have similar market shares.

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Sales and Distribution Systems The company is distributing its products via internal and external brokers within and outside the country. The company is compensating its external brokers to be at par with its competitors. External brokers receive a 6% commission over selling price. Half of the commission goes to the broker firm and half goes to the sales personnel. Commissions expense doubled to 201 M in 2008 compared to 100M last 2007.

2008 sales and reservations grew by 31% from last year. Despite declining from last year due to the unfavorable economic conditions, sales volume is well above the planned target. Initially, DMCI targeted 2,600 units in 200965 but sales volume has already exceeded 3,700 units in the third quarter of 200966 due to a surge in third quarter sales. Unit sales are projected to reach 5,095 units.

Product Compared to its key competitors, DMCI boast greater control over product quality through its synergy with DM Consunji, which is a triple A rated construction company with 50 years in construction experience. By using the latest construction technology, DM Consunji ensures durability of developments and full compliance with UBC 1997 and HLURB guidelines.

DMCI developments are also turned over to buyers at a faster rate of 3 years compared to the industry at 5 years.

In terms of construction design, individual units are larger than Avida and Robinsons Land. DMCI’s developments are resort living themed. Differentiating itself key competitors, DMCI developments have more areas allocated to amenities such as gardens, swimming pools and common areas (see CPM).

65 66

www.bloomberg.com 3rd quarter 2009 DMCI SEC filing.

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Pricing DMCI is pricing its products appropriately. The company is targeting the middle income or affordable segment. This segment is not as price sensitive as the low cost segment but price is still a primary consideration in a consumer’s buying decision. DMCI responds to this by pricing its developments 1015% lower compared to the average industry price67. Among its key competitors, DMCI is the price leader.

Promotions Capability Due to the continued promotion activities of DMCI, market share grew by 33%. Budget was better utilized in relations for revenues gained. For every peso spent in advertising, 17 pesos of sales are generate (compared to 10 pesos last year).

Promotions activities include outdoor advertising. The company has several billboards along high traffic areas such as EDSA. The message of the outdoor advertisements is that DMCI developments offer a relaxing living environment with a great view where buyers can retreat from the busy city life.

DMCI also recently launched a TV commercial for its subdivision development. The 30 second commercial features celebrity endorser Marc Nelson with an advertising message that DMCI offers a modern and comfortable living environment.

5.2.3 Financial Audit68

67 68

2nd Quarter 2009 DMC SEC Filing. See Appendix 4: Financial Statements

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GROWTH Sales Volume Growth Sale volume is projected to be at 5095 units in 2009 down from 5732 units in the previous year. Units sold include both residential and parking units. Historically, 23.1% of units sold are parking units69. Year on year, the number of sold units (both residential and parking units) has fallen 11% during the third quarter. Full year 2009 volume growth is assumed at that rate.

Revenue Growth Revenues are recognized by the company when the unit is fully complete and 20% of its contract price has been collected. This complies with International Accounting Standards of full accrual or completed contract method of real estate revenue recognition. This is different from the percentage completion method adopted by other real estate companies. There is a delay in realizing DMCI’s revenues. In 2008 for instance, total reservations reached 9.8 Billion compared of recognized revenue of only 3.9 Billion70 or 40% of the total reservation sales. By the 3rd quarter of 2009, out of the 6.4 Billion in sales and reservations, 3.5B of which will be reported as the recognized sales. Full Year 2009 Recognized sales against sales reservation is assumed to follow the same ratio as 3rd quarter 2009 (55%). 69

Ratio of Parking units to total Units sold is 212:891 in 2nd quarter of 2009 and 229:1016 in 2nd quarter of 2008. Thus, average of 23.1% of total units sold is parking 70 DMCI 2008 Annual Report.

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By the third quarter of 2009, recognized revenues grew by 6% while sales reservations dropped by 11%. Recognized revenues are mostly coming from high rise units, which take longer to complete thus the large discrepancy between recognized revenues and sales reservations. Recognized revenues rose due to new projects such as Royal Palm Residences in Taguig and Tivoli Gardens in Mandaluyong, and from existing projects such as Dansalan Gardens and Raya Gardens. There was a drop in revenues from two existing projects – Rosewood Park and Bonifacio Residences.

The increment in price was relatively lower to the increase in cost given the thrust of the company to be price competitive (10-15% lower than the industry) in order to maintain sales velocity and gain market share. Lower sales reservations were due to the economic downturn and reduced sales from OFWs. Sales are expected to recover due to the easing of these threats. Consequently, the company projects net income to grow by 74% to Php 916 million by 2009.

Comparative growth rate

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Comparing to the industry71, DMCI homes is growing at a faster rate in both residential real estate sales and net income. Residential real estate sales doubled in 2008 compared to the 41% average growth rate of its key competitors. The market leader in the middle market segment grew the slowest at 18%. DMCI Homes’ net income also grew much faster (233% growth) compared to its key competitors average of 39%.

Profitability Margin Growth There was a drop of gross profit margin in 2008 from 58% to 43% due to increase in construction cost particularly on the cost of raw materials (see external analysis). Despite the rise in cost of sales, the company decided to minimally increase its price and retain its 10-15% price advantage over competitors.

Operating margin likewise fell from 29% to 22% due to increased commission and marketing expenses. Net income margin nearly doubled to 15% in 2008 due to a one-off write-off in 2007.

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Comparative revenues are done through the company’s and its competitor’s recognized revenues.

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Significant portion of the company’s gross profit is being allocated to marketing, selling and financing activities. Financing cost which grew to 149% was mainly due to the 179% growth in bank loans.

Comparative Margins DMCI Homes’ gross profit margin is higher compared to the industry due to its lower build cost owing to its synergy with DMCI’s Triple A construction subsidiary. Both operating and net income margin are lower compared to the industry due to DMCI’s higher marketing, commission and finance expenses relative to its sales.

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Return on Assets Return on Assets improved from 2% in 2007 to 5% in 2008. Despite this, the company generates less income out of its assets compared to its key competitors. A factor of the lower ROA is the lower net income margin of the company compared to the competitor average owing to its higher operating and financing costs. DMCI also has highest inventory level (at 6.5 B in 2008) among its competitors.

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Given these factors, the company should aggressively reduce its inventory levels. The liquidation of its inventory will also generate cash to reduce its debt and lower financing cost. Lower inventory levels and financing cost will improve its ROA.

Return on Equity DMCI’s ROE was up from 6% to 15% in 2008. DMCI’s ROE is almost at par with the key competitor average. 2007 ROE was lower due to a one time write off. 2008 Return on Equity of the four players are similar to one another (within the 14% to 17% range).

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Activity and Efficiency Inventory Turnover

On an average, the industry is able to convert inventory to sales within 6 months (inventory ratio of 2.04) Robinson’s Land is the most efficient in selling its inventory. Despite improving from 2007, DMCI’s 2008 inventory is still the worst in the industry at 0.34 owing to its having the largest available inventory (6.5 B). DMCI has been building up its inventory but its distribution channel is not large enough to offload inventory in a slow economy. DMCI should thus be more aggressive in selling its existing inventory especially in an improved 2010 macro economic environment.

Accounts Receivable Turnover

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DMCI is able to collect its accounts receivable at a faster rate compared to Megaworld and Avida. DMCI is next to Robinsons Land as having the fastest AR turnover (1.75).

Ahead of the market leader

(Megaworld with an AR turnover at 1.20), DMCI’s turnover rate slightly improved from 2007 which was at 1.72.

Asset Turnover

Asset Turnover has been improving due to the faster rise of sales compared to assets. This is a positive indicator of how DMCI Homes is utilizing its assets to generate sales. Its asset turnover is slightly lower compared to key competitors but higher compared to Megaworld and Robinsons Land. Avida Land has the highest asset turnover at 0.58 mainly due to its lower total assets compared to the rest of the players.

Liquidity DMCI is second to Megaworld as the most liquid in terms of current ratio. However, DMCI has a lower than competitor average quick ratio. The large gap between its 2.23 current ratio versus its 0.60 quick ratio is mainly due to its high inventory level of 6.5 B.

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Despite its poorer quick ratio, DMCI Homes’ has improved its liquidity compared to last year. This was due to the company’s increasing cash and accounts receivable owing to a marked increase in its sales for 2008.

Cash Flow The company’s cash is mainly being provided by financing activities. There has been a marked increase in cash provided by bank loans. Cash is mostly being invested in properties as part of the company’s

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strategic land banking initiatives. The company is net cash outflow in its operations due to the increase in the real estate available for sale and development.

Based on the company’s cash flow, the company is on a growth mode. The company is aggressively financing through debt its strategic land banking and inventory build-up activities. Working Capital

DMCI has more than doubled its working capital last 2008. This is mostly due to the drastic inventory build up of the company last year. The company has more than enough current assets to cover its current liabilities and has a surplus of 4.9 B.

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Solvency Leverage Ratio DMCI is the most highly leveraged compared to its key competitors. 2/3 of the company’s assets are being funded via debt compared to the industry at only 0.45. This has increased the company’s financing cost and has significantly reduced profits. Higher debt will also limit the company’s ability to fund its expansion and strategies.

DMCI’s debt to equity ratio is also higher at 2.07, an increase from 1.84 last 2007. To reduce the risk of insolvency, the company should raise its capital via equity.

Funding Gap 54% of DMCI’s debt is funded through the rediscounting of its contracts receivable. This instrument has a maximum tenor of 120 days and bears an interest between 8.75% to 10%. It dependency to less than 1 year debt leaves DMCI Homes prone to liquidity risks. Given the nature of the real estate business,

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property development takes a long time to recoup the cash invested. By funding a long term investment with short term debt, DMCI bears the risk of not being able to continuously fund its operations.

With increasing interest rates (see external analysis), DMCI’s financing cost will increase further if it does not reduce its reliance to short term debt.

Capital Budgeting DMCI’s planned capital expenditure of Php 8 billion in 2009. Its CAPEX budget is comparable to the industry average of Php 8.3 Billion. Based from the company’s cash flow, the company allocates its capital budget through strategic land banking initiatives and real estate development.

5.2.4 Production Audit DMCI has a greater control over product quality compared to its competitors owing to its synergy with DM Consunji, DMCI Holdings’ construction arm. DM Consunji has over 50 years in the construction industry and is a Triple A rated construction firm. In the area of technical competency, DM Consunji also

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boasts of using the latest construction technology in all of its developments including its projects with DMCI Homes72. This also allows faster turnover of its developments. It can complete a high rise condominium at a lead time of three years compared to the industry average of 5 years73.

Steel, a primary raw material, is also sourced from another subsidiary, AG&P. These synergies have enabled the company not only to save on build cost, but also control the quality of its property developments.

DMCI developments are fully compliant with UBC 1997 which is an international standard for high rise developments that certifies that the building can withstand an earthquake with a 7-8 richter scale magnitude74. DMCI is also compliant with HLURB policies on maximum number of units that can be sold given a land area and the minimum amount of common areas per a development. Critical features such as sewerage systems, utilities and safety features are being fully complied with.

5.2.5 Information Systems Structure Currently, there’s no Chief Information Officer for DMCI Homes. Also, Information Systems forms part of the administration division. Functions of the IT include the introduction and maintenance of various systems used by DMCI Homes and the management of the company’s website. DMCI outsources its systems maintenance to a third party contractor.

Utilization of Information Systems

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www.dmcihomes.com 2007 Annual Report.

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A major information system being used by the firm is an online tracking tool for its inventory. Available sold units are being encoded in a project’s sales office and linked to the company’s head office and the company’s intranet site.

The company’s internet site is being used to inform the public, buyers, employees and other shareholders. The website does not have any e-commerce capability. DMCI maintains two websites, a main site and another specifically targeted to its international clientele. The website also publishes financial information for investors, new projects for buyers, hiring requirements for job seekers and sales performance for brokers. The website is being maintained for the current projects however, information regarding the firm’s financial information and hiring requirements have not been updated.

Information security Systems are protected using alphanumeric passwords. For instance, accessing broker information via the net requires a 6 digit password given only to intended users. These measures are meant to limit information flow to authorized personnel.

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5.3 McKinsey 7S Framework

5.3.1 Strategy DMCI Homes is a forward integration of DM Consunji Inc. Despite being a relatively new player in the real-estate industry, DMCI Homes was able to quickly grow by taking advantage of DM Consunji’s 50 year construction experience. This allowed DMCI Homes to be a significant player in an industry whose customers value the track record of the developer (see key success factor).

The integration strategy also allows DMCI homes greater control of the quality of their developments. In terms of turnover rate, DMCI homes can deliver a high rise development in three years from groundbreaking unlike other industry players which take five years. Its construction experience has also allowed it to deliver a design concept DMCI in now being recognized for, which its labels as a resort themed community. For a development offered to the middle income group, it has more areas devoted for amenities compared to its competitors.

Based from Porter’s strategies, the company uses Overall Cost leadership – Best Value strategy. One of the key selling propositions of the company is that it offers the greatest value for money. DMCI Homes offers 10%-15% lower selling price compared to its key competitors while offering the same level of quality (measure by amenities and unit size). The company’s cost structure allows this strategy through the company’s integration strategy with DMCI’s triple A rated construction arm. By eliminating additional layers from construction to developer, DMCI Home’s per unit construction cost is lower compared to other players in the industry. To lower its prices further, DMCI projects are positioning outside main business and commercial districts.

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Evaluation: Effective Capitalizing on its construction company’s track record and offering the lowest price per square meter (both key success factors), allowed DMCI to nearly double its market share (92% 2008 growth) and grow faster than the industry.

These are made possible by the company’s integration and overall cost

leadership strategies.

Its overall cost leadership strategy is aligned with its values. Its current mission statement specifically targets families with modest income and its cost leadership strategy provides the greatest value for money to its middle income clients. However, its not being centrally located is against its mission to build communities near the family’s place of work, study or leisure.

The company’s integration strategy is also in line with its core value of interdependence which is also stated in the company’s mission statement.

5.3.2 Shared Values

Based from its mission statement, the company espouses these core values: Integrity, Excellence, Interdependence and customer focus.

Its mission statement focuses the company’s effort to build

communities for modest income families

Evaluation: Effective

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Shared values are effective since they are in line with the current strategy of the firm. The firm chooses to concentrate on modest income families as stated in its mission statement. To realize this mission, the company utilizes a cost leadership strategy. One of the company’s core values is interdependence. This value capitalizes on the synergies of the other business lines of DMCI.

5.3.3 Structure

The Company’s organization structure is mainly hierarchical with a functional structure. The division of labor is grouped by the main activity or function that needs to be performed in the organization. Accounting, finance and human resources are under administration group. Aside from in-house sales, the sales group also manages the company’s relationship with external brokers both locally and abroad. A separate customer care group was established to ensure the delivery of after sales customers to the existing residents of a DMCI homes community. Design and construction is involved in building of developments. Business development handles long term investments such as strategic land banking initiatives. These refer to acquisition of land with the intention of resale or used in project development.

In relation to its parent company, DMCI Homes is the primary real estate arm of DMCI Holdings but DM Consunji (its construction arm) also has housing projects.

Evaluation: Needs Improvement

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The ownership of DMCI group’s housing arm is not clearly delegated. While most of the housing products are with DMCI Homes, DM Consunji (construction) also offers housing products. As further elaborated in the organizational strategies, all of DMCI’s property businesses should be concentrated in DMCI Homes.

5.3.4 Systems A business plan is being prepared on an annual basis and implemented throughout the year. Departmental goals are included in the business plan which can be tweaked given an internal or external development. The plan is being discussed during the annual organizational and budget meetings set twice a year.

To generate information needed to plan sales activities, sales data is being uploaded by internal and external brokers via the company’s website. The actual sales are being measured against the sales forecast to tweak strategies further. The business development division will also look at the profitability of a development to determine if a new project is still viable.

The company’s performance management system is also being utilized to align employee performance with the company’s strategy. The measurement which includes both qualitative and quantitative objectives is geared towards the overall direction of the company.

Evaluation: Helpful Systems are being used to plan strategies and implement them. In the area of implementation, performance of goals are being monitored systematically mainly through sales targets. Employees are being rewarded through meeting goals and drive strategies through a performance management system.

5.3.5 Style

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Work Life Balance DMCI espouses a work life balance program targeted to strengthen the morale of its employees and improve teamwork within the organization. It has launched several activities such as company sponsored retreats, birthday celebrations, sports fest with other DMCI subsidiaries and an annual employees’ day.

Rewards Program DMCI recognizes teams and individuals whose contributions led in the achievement of DMCI’s business strategy. A “customer care champion” award is given to any employee that demonstrated outstanding service to the customer. A results oriented culture is also being espoused by giving recognition and monetary rewards to teams who have exceeded the target given to them such as an award to the in house sales for delivering sales above their budget.

Evaluation: Effective The work-life balance and rewards program has motivated employees to be customer oriented while creating a fun team-based culture. This is in line with the company’s shared value of interdependence and customer focus. The program has also increased the employee’s morale and reduced the company’s attrition rate. As of end of September 2009 our overall attrition rate is at 14% versus industry experience of 19% (Source: 2008 Watson Wyatt Real Estate Compensation & Benefits Survey).75 The company’s style has positively contributed in aligning the culture of the company with the company’s strategy and shared values (interdependence and customer focus).

5.3.6 Staff

Employee growth is being espoused through training, coaching and mentoring activities. Through the development plan, the competency need of an employee is being discussed annually between the 75

Tiongson, Teresa. DMCI Homes Senior HR Manager.

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employee and his supervisor. The supervisor and the employee will then agree on how this need can be best addressed through classroom training, coaching or mentoring programs.

Classroom courses include trainings on skills required for the job (such as sales training for in-house agents). A sample training plan would be company orientation, sales documentation, turnover process and price calculations for members of the sales team. Classroom trainings are done in a class room size of 20 to 40 people. Hands-on training is being carried out with regular coaching and mentoring from the supervisor76.

Evaluation: Effective

Development plans are aligned to the skills needed for the company to achieve its chosen strategy. The periodic review of the development plans allows the manager to assign the relevant training, coaching or mentoring program needed to close the skill gap of the employee. This allows the employee to fully contribute in attaining the goals of the organization.

5.3.7 Skills Real estate is a very client driven business. To be successful in the real estate business, the employees should have the necessary skills to fully service its clients. As stated in the company’s vision statement, DMCI should be responsive to the ever changing needs of the customer. Employees should thus have the skill to manage customer relationships and be attuned to their needs. Various training programs are given to employees for them to develop this skill set.

Evaluation: Good

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Tiongson, Teresa. DMCI Senior HR Manager.

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The skill focus is in line with the shared values (as stated in the company’s mission statement). The company places a monetary reward and recognition to clients who exemplify this skill through its “customer is king” reward program.

5.4 IFE MATRIX 5.4.1 Strengths Greater control of quality due to synergy with a Triple A construction subsidiary Rating 4 -The company has an advantage of being affiliated with a triple A construction company. Raw material (steel) and construction services are being sourced within the DMCI Holdings group. This allows the company to have greater control over the quality of its projects.

Faster lead time in construction of projects Rating 4 - DMCI Homes can deliver a high rise project in 3 years compared to the industry average of 5 years. This has allowed DMCI to build up its inventory at a faster pace and can be more responsive to a changing market environment.

Resort Living Concept in its developments (more amenities compared to competitors) Rating 4 -DMCI Homes’ has a resort living theme in its projects. It projects DMCI developments as a retreat against the hustle and bustle of the city. Its developments have more amenities and have more land area allocated to common areas.

Ability to price 10-15% lower compared to competitors due to lower construction cost Rating 4 - The synergy with DM Consunji has also allowed DMCI Homes to control the cost of its developments. This has given the company the ability to price its developments at a 10-15% cost advantage compared to its competitors.

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14% attrition rate compared to the industry at 19% Rating 3 – There is a lower turnover of its employees compared to the industry accounted for by more motivated employees. This has allowed DMCI Homes to retain talent and provide continuity in strategy implementation.

5.4.2 Weaknesses Less Solvent with a debt to assets ratio of 0.67 compared to the industry at 0.45 Rating 1 - DMCI Homes is the most highly leveraged among its key competitors. 67% of its assets are being funded by debt versus the industry average of 0.45. It is also more leveraged in 2008 compared to last year. Also, there is a funding gap since most of the company’s liabilities are being funded via short to medium term debt that are used to fund long term property investments.

Fewer distribution channels locally and abroad Rating 2 - DMCI Homes has a smaller distribution channel compared to its key competitors. Its key competitors have more sales offices and partnerships with external brokers both in the country and outside the country.

Slower inventory turnover of .34 vs industry of 2.04 due to distribution network not able to cope with inventory buildup Rating 2 – DMCI’s weak distribution channels impacted its ability to convert its inventory into sales. When DMCI built up its inventory on 2008, its distribution network was not able to cope with the increase in inventory.

Developments are not centrally located

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Rating 1 - Unlike its key competitors, DMCI Homes projects are not centrally located. This is a strategic choice of the company to lower its production cost without sacrificing the quality of the development. The downside of this is that the accessibility of the location is a key decision factor of a buyer (see CPM).

Robinsons Land and Megaworld for instance locates its developments within a business area. Furthermore, they also construct office and commercial areas.

Projects limited to residential developments. No experience in other types of real estate projects. Rating 1 - Unlike its key competitors, DMCI is limited in developing only to residential market. It has no experience to develop commercial and office real estate. Avida Land’s parent company Ayala Land develops commercial real estate through Ayala Malls and has a vast experience developing office projects. Robinson’s and Megaworld also has office and commercial developments. Their projects combine office and commercial spaces or what Megaworld coins as township developments. These give its developments better accessibility. In contrast, DMCI on the has no experience in building office spaces or malls.

5.4.3 IFE Matrix

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5.5 Strategic Issues based on Internal Factors DMCI delivers high quality products at a reasonable price owing to its operational synergy with DMCI’s construction subsidiaries. Despite the quality of its products and competitive pricing, inventory is being converted to sales at a slower rate compared to its competitors. Its limited distribution network compared to its key competitors prevents the company from fully taking advantage of its strengths in product and pricing. A possible strategy the firm can employ is to strengthen its distribution network both locally and abroad.

Another important weakness is the company’s limited capitalization. Its limited capital prevents it from aggressively competing in the industry. DMCI should increase its capital base and rely less on short term debt to finance its operations to lower its financing cost and improve its long term viability.

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VI. STRATEGY FORMULATION The information gathered through the CPM, EFE and IFE matrices will be used to develop strategies for DMCI Homes. SWOT Matrix, SPACE, Internal-External (IE) matrix, Grand Strategy, Summary of Strategies and Quantitative Strategic Planning Matrix (QSPM) will be utilized in strategy formulation.

6.1 SWOT MATRIX The SWOT matrix helps develop four types of strategies: Strengths – Opportunities, WeaknessOpportunities, Strength-Threats and Weaknesses-Threats.

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Market Development Strategies: W2 & O4 - Partner with BPOs for DMCI to provide housing solutions to BPO workers W2 & O3 - Strengthen international presence especially in untapped countries by partnering with external brokers S1 & S2 & O3 - Pursue an integrated marketing communications plan to strengthen brand awareness among OFWs. (impacting T3)

Market Penetration strategies: O2 & S5 - Develop and expand BGC property through strategic land banking initiatives W2 & O3 - Enhance website to include e-commerce capability and promote it as an alternative distribution channel W5, O6 & O7 Establish Sales and Operations Planning to keep demand and supply in balance. S1 & T3 - Launch incentive program for satisfied home owners to refer family and friends to DMCI Homes (affects W2)

Product Development strategies: W3, O2 & O4 - Combine BPO office buildings with residential developments for land outside BGC (also affects W4) S3 & O5 - Redesign developments to make them fully service communities designed for second home investors such as retirees O1 & T3 - Use construction experience to pioneer green buildings O1 & T3 - Update design of buildings and locate developments to lessen the risk of flooding and emphasize this feature as one of its USPs.

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Integration strategy: T2, T3, S1 & S2 - Strengthen synergy with construction arm to lower construction services to maintain price advantage

Other strategy: W1 & T1 - Do an IPO as soon as the economy has recovered in 2010. (impacted by O1)

6.2 SPACE MATRIX The Strategic Position and Action Evaluation (SPACE) matrix allows for the company to choose the most appropriate set of strategies. The four possible sets of strategies in the SPACE Matrix can be conservative, aggressive, defensive or competitive strategy. As an input, internal factors pertaining to financial strength and competitive advantage are selected along with external factors pertaining to environmental stability and industry strength.

a. Financial Strength (FS) Ratings: For FS use +1 (worst) to +6 (best) DMCI’s low capitalization is a main hindrance to its continued growth as it prevents the funding of expansionary strategies and can affect the long term viability of the company. This has been given a +1 rating. Slow inventory turnover (given a +2) is also a concern since it has affected the operating cash flow of the firm. DMCI has not been able to move inventory as fast as its competitors due to its weaker distribution channel.

b. Industry Strength (IS) Ratings: For IS use +1 (worst) to +6 (best) The high rise residential real estate market is growing modestly at 2% year on year. A +5 rating was given to this factor as the company has several current and future projects belonging in this category. A 5 rating is also given to the falling market share of Megaworld which presents an

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opportunity for Megaworld to capture Megaworld’s lost market share. A +5 rating is given to the stable price of construction materials since this will stabilize the industry. A +1 rating is given to the intense competitive rivalry since this will pose a hindrance to DMCI to gain market share. The intense competitive rivalry mentioned in the 5 forces section of this paper attributes this intense rivalry to the industry’s high exist barriers, flat housing prices and numerous competitors.

c. Environmental Stability (ES) Ratings: For ES use -1 (best) to -6 (worst) The global economic recovery from the subprime crisis is a key environmental stabilizing factor since this will bring back the local demand for housing. OFW remittances are also an important stabilizing factor for the company and the industry. The industry and the company are becoming increasingly reliant on OFW remittances for the continued growth of the residential real estate market. Both of these factors were given a -1.

The growth of the outsourcing sector and the retirement industry stabilizes the industry but they are given less weight since the company is currently not targeting them. These factors were given a rating of -2 and -3 respectively.

The continued development of BGC is an opportunity for the industry and the firm to create developments within the area. For DMCI, this is a direct opportunity since it has a development adjacent to this area. This factor is given a -2 rating.

The threats to the industry include the rising interest rates and the impact of climate change. Rising interest rates will be a deterrent for both home buyers and the industry players to finance their real estate purchases and expansion. This is given a -5 rating. Climate change is also given a -4 rating given its impact to current and future developments but DMCI is well positioned to meet this threat (see EFE).

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d. Competitive Advantage (CA) Ratings: For CA use -1 (best) to -6 (worst) DMCI Homes synergy with its Triple A rated construction arm has allowed it to control the delivery time of its products and profitably price 10 to 15% lower than its competitors through its lower production cost. These are key success factors in the industry and are the company’s key USPs. Thus, they were assigned a -1 rating. Its lower attrition rate compared to the industry is also an advantage though the attrition is still high. So, a -3 rating was given to this factor. DMCI’s greater number of amenities compared to other players was assigned a rating of -2 since this is one of the industry’s key success factor.

Its key disadvantages are its limited distribution network compared to its key competitors and its developments not being centrally located. These are also key success factors to the industry thus a -6 rating was assigned. Its limited experience in the other fields of real estate is also a hindrance in delivering full real estate solutions to its clients.

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SPACE Matrix:

Based from the strategic management tool, the company belongs in the competitive quadrant. It should pursue market penetration, market development, product development and integration strategies77.

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6.3 INTERNAL-EXTERNAL MATRIX The internal-external matrix assigns positions to the firm in a nine cell display based on its IFE and EFE scores. If the firm falls in cell 1,2 and 4, grow and build strategies are recommended. Hold and Maintain strategies are advised for firms falling in cells 3, 5 and 7. Firms should consider harvest or divest strategies if they fall in cells 6, 8 and 9.

Based on the IE matrix, DMCI Homes falls in cell 5. Hold and maintain strategies are recommended under this group. Intensive strategies such as market penetration and product development can be used.

6.4 GRAND STRATEGY MATRIX Using the grand strategy matrix, firms are grouped into four quadrants depending on the firms competitive position and the industry’s growth.

Market Growth Rate – Faster than GDP

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GDP is expected to be at 0.5%. In contrast, the total real estate industry is expected to grow by 36% driven by high rise residential real estate (155% growth) to which DMCI belongs to. The continued growth of OFW remittances and potential industry sales coming from the BPO sector and the retirement market will further spur growth.

Competitive Position – Moderately Weak DMCI Homes has a weak competitive position brought about by its lack of adequate capital and limited distribution network. Although market share is gradually increasing, it still lags behind key competitors CPM ratings.

DMCI falls under the second quadrant in the grand strategy matrix. Under this quadrant, market development, market penetration, product development and horizontal integration are available. Divestiture and liquidation is not attractive given the improving competitive position of DMCI.

6.5 SUMMARY OF STRATEGIES

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The various recommended strategies of the SPACE, IE and Grand matrices are tallied to determine the most common strategy options available to the firm.

Among the strategy options, market penetration, market development and product development are consistently recommended by SPACE, IE and GRAND matrices.

6.6 QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM) The Quantitative Strategic Planning Matrix is a tool to determine the relative attractiveness of feasible alternative actions. Based from the summary of strategies, product development, market development and market penetration are the three strategies to consider.

On Opportunities:

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Market penetration is effective when the market shares of major competitors are declining while total industry sales have been increasing78. Thus, market penetration is highly applicable for the opportunities of global economic recovery, industry growth and declining market share of Avida and Megaworld. With increased marketing effort of present products, sales volume can be quickly achieved in a growing market. A 4 rating is given to these two opportunities. A 3 rating was given to market development as alternative markets will also grow along with the overall growth in the industry. The attractiveness of product development will be possibly acceptable if there is a need for a new variety of residential real estate in the growing market.

Market penetration is highly applicable to take advantage of the continued growth of the BGC. DMCI has an existing project and significant land bank adjacent to the BGC area. This can be marketed to the growing number of office workers in the BGC area which is already an existing market of the company. Product development’s applicability to this strategy is rated a 3 since this gives DMCI an opportunity to delve in other types of developments such as office and commercial real estate within BGC. Market development can possibly be applied since DMCI can opt to niche in specific types of BGC workers such as the BPO workers whose sector is one of the major drivers of growth in the BGC.

Market development is most applicable to take advantage of the growth of niche markets such as BPO sector, OFW and retirees. A 3 rating was given to product development since this can be a supplementary strategy to market development. DMCI can tailor fit its developments to match the needs of its target market. Market penetration is given a 1 rating since DMCI does not directly target these niche markets.

On Threats Product development can be best applied to the threat of climate change. DMCI can opt to build new type of projects that has adopted to the threat of climate change (such as using flood prevention technology) 78

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and being more responsive to it (such as green buildings). Market development is given a 3 rating since it can supplement the product development strategy by marketing the new type of development to home buyers concerned with climate change. Market penetration is not applicable to this threat.

Market development can be best applied to answer the threat of higher raw material costs. DMCI can opt to market to less price sensitive segments such as the luxury segment. Product development will supplement this strategy (thus given a 3) since DMCI would need to redesign its developments if it wants to tap a high end market. Market penetration is minimally applicable.

Weaker housing prices and intensive competitive rivalry can be best responded by market penetration. DMCI has a cost advantage over its competitors through its synergy with its construction arm. DMCI can reinforce this through its more aggressive marketing campaigns to aggressively compete in an increasingly competitive price sensitive market. Market development is given a 3 rating since DMCI can opt to target less price sensitive and less competitive markets such as the luxury segment. A 2 rating is given to product development since it will supplement the market development strategy (given a 3 rating).

On Strengths The synergy of DMCI Homes with the construction subsidiary of its parent company can best be applied through a market penetration strategy. The ability of DMCI to deliver its units faster and a higher quality can be emphasized through an aggressive marketing campaign. Product Development, which is given a 3 rating, can also utilize the strength of control of its construction operations. The company can easily execute new designs of projects through the technological advantage of its construction arm. The introduction of a new product can be supplemented by a market development strategy thus its given a 2 rating.

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Market Penetration can be best used to take advantage of DMCI’s cost advantage (thus a 4 rating). DMCI can reinforce its value proposition through a more aggressive marketing strategy to its existing market. A 2 rating is given to market development since price competitiveness can be possibly be used to capture a new market such as the young BPO workers just starting in their career. The strength of price competitiveness is not acceptable in a product development strategy.

On Weaknesses The weakness of limited distribution network can be addressed either by strengthening the distribution channels through a market penetration strategy, which was given a 4 rating. A possible alternative is to develop new distribution channels to tap newer markets such as delving into online sales. Product development is given a 1 rating since adding new products will add to the strain of an already weak distribution network.

A product development strategy (rated a 4) can best counter the weakness of having developments that are not centrally located. By developing townships for instance or a combination of residential, commercial and office real estate, its residential spaces will be in closer proximity to the buyer’s place of work and leisure. The product development strategy is supplemented by a market development strategy (rated a 3) since a new market should be developed if DMCI seeks to expand to commercial and office real estate. Market penetration strategy is minimally applicable.

A product development strategy will also be the best strategy to consider to address DMCI’s limited product line. By developing new products such as office spaces, DMCI can gain the experience it needs in this area. Market development and market penetration will just concentrate on selling existing residential real estate products without broadening the product offering of the company.

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VII.

STRATEGIC OBJECTIVES AND RECOMMENDED STRATEGIES

7.1 Strategic Objectives

The strategic objective of DMCI homes is to be the clear second in the middle market residential industry.

From the market analysis, there is a wide lead of the big three real estate companies (Ayala, Megaworld and Vista Land) versus the lower tier companies. The big three companies have competencies in different segments of the market. Ayala Land through Ayala Land Premier and Alveo Land is dominant in the luxury real estate market although it also has interest in the middle income segment (Avida) and is entering the low cost segment. Megaworld is the market leader in the middle income segment. Vista Land prevails in the low cost segment through its subsidiary Camella Homes although it also has interest in the high end and middle income segment (Brittany and Crown Asia).

Megaworld dominates the middle income segment with sales reaching 12 Billion but there is no clear second. Robinsons Land, DMCI and Avida are all within the 2-4 Billion sales level. The large disparity between the market leader and followers makes it unlikely for players like DMCI to aim for the market leader position within a three year horizon. However, given that the market followers have equal position, DMCI can best succeed if it can become the strong number 2 within the next 3 years. Aiming to be the number two both a challenging and rewarding goal as having a 2.1% market share will increase its profits by 66% over a three year time period.

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Having a market share of 2.1% of the total industry or a 4.1% market share over the middle income segment will make DMCI a strong market follower in the middle income market segment. After securing its place as a strong contender against Megaworld, a further study will be needed on DMCI’s next steps to eventually lead the market.

The company will endeavor improving its IFE (at 2.35) and CPM rating (2.30 versus other market followers of 2.85 and 3.20) to be more competitive against Avida and Robinsons and improve its market share. The strategies will make the company more responsive to its external environment (Current EFE rating is at 2.70).

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7.2 Recommended Business Strategies 7.2.1 Market Development W2 & O4 - Partner with BPOs for DMCI to provide housing solutions to BPO workers

One of the concerns of the BPO industry is its high turnover rate. DMCI can offer a solution by partnering with BPOs and banks to provide housing to BPO workers. DMCI can offer discounts to employees of corporate accounts. BPO workers can enjoy lower rates provided a bond with the BPO company. 1 bedroom and 2 bedroom units can be marketed directly to these employees. Additionally, DMCI can approach BPO companies to buy several units that which the companies can allow their employees to live in as part of their benefits.

A corporate account manager under the sales division will study this segment in detail and propose the best solution to the housing requirements of the BPO sector.

W2 & O1 & O3 - Strengthen international presence especially in untapped countries by partnering with external brokers

DMCI should increase the number of external brokers it’s partnering with outside the country to widen its distribution network to the growing OFW market. Currently, DMCI only covers 12 countries but this can be increased by partnering with external brokers in countries like the Saudi Arabia, Germany and Norway. Saudi Arabia is the third most popular destination for OFWs with year on year increasing by 5%. Along with its Dubai office, this will strengthen DMCI’s presence in the Middle East which currently only constitutes 22% of DMCI’s total international sales. The Middle East is the area where Megaworld, the leader in the middle market segment, sources most of its international sales from.

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Germany and Norway are also potential countries where DMCI can venture into through a partnership with a local broker. It is currently the 9th and 10th most popular destination for OFW with deployment jumping at a rate of 48% and 80% year on year. Along with its UK, France, Italy, Austria and Greece offices, will further strengthen DMCI’s hold on the European housing market (54% of its international sales) which is already recovering from the subprime crisis.

To entice external brokers from carrying DMCI products, the commission rate will be increased to 10% from DMCI’s current 6% which is also the industry standard. The business development along with the company’s legal team will look into the viability of venturing into other countries and ensuring that all regulations to enter the country are complied with.

This strategy will be supplemented by an Integrated Marketing Communications strategy (described later) that will build brand equity to both local and international markets. For the international market, DMCI will join real estate trade fairs and hosts property conferences to build brand awareness for both potential buyers and broker partners.

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Contribution of Market Development strategy:

Out of the 91.3B OFW market, a total amount of 15.3B is attributed to middle income buyers. By 2012, 42% of the company’s revenues will be from OFWs up from the current 15%. This is higher compared to Ayala at 25% of their sales. DMCI will capture 15% of the Middle Income OFW market by 2012.

By 2010, an additional 577 units will be sold to OFWs in addition to the existing 459 units. The figure will increase by 1480 in 2012 to bring the total volume sold to OFWs to 1939 units. By 2012, the strategy to develop its OFW market will bring in 5.6 B in revenues and 2.4B in income.

The market development strategy to provide housing solution to the BPO market will allow DMCI to tap the Php 20 billion BPO housing market. Isolating the middle market, this segment has 3,429 potential units of demand.

In three years, this strategy will generate 583 units worth of sales. By 2012, 5% of the company’s sales volume will be coming from this sector. By 2010, 2% of the middle income BPO sector will be captured

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by DMCI. This is a reasonable estimate given that few real estate companies that specifically targets BPO segment.

Market Penetration strategies:

S1 & S2 & T3 - Pursue an integrated marketing communications plan to strengthen brand awareness among OFWs

DMCI shall use Integrated Marketing Communication (IMC) to build brand awareness especially to OFWs. IMC is a marketing communication plan that combines a variety of communications discipline to provide clarity, consistency and maximum impact through seamless integration of discrete messages79 To build brand awareness, a mix of market communication modes will be used.

Advertising through local and OFW channels will be used to build up a long term image of the DMCI Homes brand as a provider of high quality homes at a good value. Public relations such as sponsorship of articles and blogs will be used to re-enforce the DMCI brand further as a quality property developer. Events such as real estate conferences and participation in overseas trade fairs will be used to promote specific projects. Lastly, personal selling done by external brokers will be used to build up buyer preference, conviction and deliver actual sales.

W2 & O3 - Enhance website to include e-commerce capability and promote it as an alternative distribution channel

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improved to allow for an interactive open house that will allow users to explore in 3D a selected property. The website will also build its e-commerce capability by allowing for online reservations that will allow for real time inventory monitoring and online payment of reservations.

By enhancing its website, DMCI can strengthen its limited distribution network and tap tech savvy buyers both locally and abroad.

S1 & T3 - Launch incentive program for satisfied home owners to refer family and friends to DMCI Homes

Use of word of mouth advertising would be an effective strategy to penetrate the market further. Existing home buyers will get either a cash incentive or a discount in the selling price if they refer their family members and friends. This will be especially effective given tightly knit family ties of Filipinos as buyers may want to live close to their extended family members.

To be able to effectively promote the referral program, DMCI will need to intensify its Customer Relationship Management. DMCI should continue to promote the DMCI brand and products to its existing customers. A relationship manager from customer care group should be assigned to maintain and strengthen its relationships with existing home buyers and will introduce the referral program to them. An intensive database will also be kept to determine if existing buyers have relatives or friends to refer to.

W5, O6 & O7 Establish Sales and Operations Planning to keep demand and supply in balance. Sales and Operations Planning (SOP) refers to the cross functional process aimed to keep demand and supply in balance80. Through SOP, general management, sales, construction and finance will be all involved in the planning process. Sales and marketing shall forecast demand for specific projects for the 80

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next 1 to 2 years which shall be coordinated to construction for output delivery and finance for funding. The team based approach will ensure that scarce capital will be properly allocated and there is no unnecessary build up of inventory. Inventory levels will be established by the operations in coordination with the sales forecast.

O2 & S5 - Develop and expand BGC property through strategic land banking initiatives DMCI has an existing 80 hectare lot in a property adjacent to BGC. DMCI can expand this further towards the fort area. From the external analysis, the BGC area is expected to grow further. DMCI should be forward thinking in strategically buying lots closer to the emerging business district. DMCI can aim to have 9B in property investments mostly in the BGC area. This is similar to the capex spending of Megaworld of 15B to buy a lot in BGC.

Impact of Market penetration strategy The referral program will target participation of 1% of DMCI residents. By 2010, there will be 10,496 families (new and existing home owners). This translates to 105 referrals which will grow up to 188 referrals by 2012. By 2012, total revenue contribution of this strategy is 545M with gross profit of 234M. To entice buyers to refer, a generous referral fee will be given to existing buyers worth PhP 100,000. In 2012, this will translate to 19M additional cost bringing total benefit for this strategy to be at 216M.

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The integrated marketing communication strategy will provide a boost to both local and international businesses. For the international businesses, this is already accounted for by the market development strategy on OFWs. For the local businesses, the sales target of its brokers and in house sales will be increased by 500 units with the launch of this program. Gross profit provided by the increased sales will offset the additional marketing cost entailed. The budget will be increased from 242 in 2009 to 500M in the next three years.

The S&O Planning will enable the more efficient use of the company’s inventory.

Through the

coordination of sales and construction, the strategy will allow the company to meet an inventory policy of 5B units for the next three years.

The strategic land banking initiative is a foundation for future growth. Investments to acquire land will be increased to 6B in 2010 to 9B in 2012. Income from this initiative will be recognized in the future when the Sales and Operations Planning committee decides to develop these properties.

Finance Strategies W1 & T1 - Do an IPO as soon as the economy has recovered in 2010. (impacted by O1)

This will increase the company's capitalization for expansion activities while reducing the dependency for short term debt. Though not specifically tied to any strategy, capital raising activities is an integral part to implement changes in the organization. A major competitive disadvantage of DMCI is its lack of capital

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compared to its competitors. The company’s dependence in short to medium term debt to finance long term investments has hindered its ability to finance new projects and strategies. Doing an IPO will raise equity to fund its capital intensive market development and market penetration strategies. This will also align its debt to equity ratio with the industry.

To fulfill one of DMCI’s mission which is to reward its shareholders, a dividend policy of 500M pesos annually will be paid starting 2011.

Equity Impact of Strategy: The strategy will provide additional 3B in equity to the company on top of its 5B equity base.

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7.3 Recommended Organizational Strategies

The current functional organization lends itself to the market penetration and market development strategy. The first level of the organization can be retained but additional department within the functional divisions can be added to promote the market development strategy. Additional roles will be added to existing departments.

Market penetration strategies will be implemented by the marketing, sales and customer care divisions. Market development strategies will be implemented by the business development, marketing and sales divisions.

A total of 50 additional personnel will be added to the organization to man the different strategy. Most of the personnel will go to additional sales personnel to strengthen the distribution network of DMCI Homes.

1) Additional personnel to support international sales divisions This is in line with market penetration strategy to extend further its presence to the OFW market.

W2 & O3 - Increase international presence by adding in house sales and partnering with external brokers abroad.

Additional personnel will be used to manage and support the operations of the different international offices. Personnel will be used to develop partnerships with brokers abroad and to help DMCI comply with foreign regulations in establishing sales offices.

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2) Additional personnel to institutional sales A corporate sales unit will be added to form partnerships with BPO companies in line with the market development strategy to target BPO workers: W2 & O4 - Partner with BPOs for DMCI to provide housing solutions to BPO workers The new unit will forge partnerships with corporate institutions to provide housing solutions to their employees. The

3) Additional positions for relationship managers S1 & T3 - Launch incentive program for satisfied home owners to refer family and friends to DMCI Homes For the incentive program strategy to be implemented, existing clients should be satisfied. A relationship manager will be used to market the incentive program to the DMCI Home owners. An important duty will also to strengthen the company’s CRM. Relationship managers would determine potential home owners that would have possible referrals.

4) Concentrate DMCI’s real estate business to DMCI Homes To reduce operating cost and increase business focus, DMCI Holdings should concentrate all of its property businesses to DMCI Homes. Currently, there is a small portion of its housing business belonging to its construction arm. These projects should be transferred to DMCI Homes to fully utilize the infrastructure and property development experience of DMCI Homes.

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7.4 Financial Projections 7.4.1 Basis and Assumptions

2009 Specific FS Assumptions 2009 Financial Statements are projected assuming the firm is status quo on its strategy. Given the timing of this paper, strategies recommended will be implemented starting 2010. •

2009 Full Year Volume and Sales and Reservations follow the same growth as 3rd quarter year on year growth:

Table 1

•

2009 Full Year Net Income was projected by the company to be 916M81

•

2009 Income Tax is the balancing figure to obtain 916M Net Income.

•

No Change in Capital Stock, Paid in Capital and Dividend Accounts

•

No Change in Bank Loan Account

Industry Assumptions: •

Market size will grow 2%. This is the 2nd quarter 2009 year on year growth rate of the high rise residential industry (see market analysis) to which most of the company’s products are aligned.

•

Middle Income BPO and OFW volume are from the market segmentation section of this paper.

•

Middle Income OFW will grow by 6% in 2010 (BSP forecast) and will continue to grow at 6% in 2011 and 2012.

•

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Middle Income BPO market will remain stable.

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Revenue Assumptions: •

Base figure will be 2009 sales. This assumes that sales will not go down further given the improvement in macro economic factors (see external analysis) and continued industry growth (see market analysis)

•

2006 to 2008 total units was provided in the annual reports but this is a mixture of residential units and parking units. To determine the historic sales volume of residential units only, a sample of 3 projects was chosen with a given breakdown of total sales per project and total residential and parking unit sales. From the sample, parking unit sales account for an average of 40% of total sales volume. Thus, for every 3 residential units being sold, there are 2 parking slots also sold.

Table 2

•

An assumption was made that all residential unit buyers will also avail of the parking slot to simplify calculations.

•

Average price per unit is at PhP 2.9M. The data is coming from the total sales of the three sample projects over the residential unit sales and rounded off to the nearest 100,000 (see table 2). Under this assumption, prices of studio type, one bedroom, two bedroom and other unit layouts for various projects in different locations were averaged out.

•

Assumed average price per unit will not change in the next three years. This assumption can be justified by the flat growth in the housing prices (see external analysis) and that DMCI Homes would want to still be the price leader in the middle income segment given the intense rivalry in the industry (see 5 forces).

•

Total Sales and Reservation is the average selling price multiplied by the projected volume of residential units.

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•

The company will continue to adopt the International Accounting standard of completed contract method where revenues are recognized by the company when the unit is fully complete and 20% of its contract price has been collected. An assumption was made that 55% of total sales and reservations will be recognized as revenue. This is the ratio of recognized revenue to sales and reservation in the third quarter of 2009 (see table 1).

•

2009 sales distribution between local and international sales will follow the 2007 data (15% of sales are from international sales).

•

Finance income will rise in proportion to sales. This account refers to the interest received from installment contracts receivables which will also rise in proportion to sales.

•

No bad debts write off.

•

Other income will remain constant.

Expense Assumptions •

Cost of Sales will follow the ratio of 2008 (57%). There are no specific strategies geared towards further lowering production cost. Current production setup where there exists an operational synergy between DMCI Homes and its construction sister company will be retained.

•

Salaries will increase at a rate of 7% per annum. This is the projected increase mentioned in the company’s notes to its financial statements.

•

Finance cost is 11% of bank loans. This is the average borrowing rate for bank loans the company pays82.

•

Corporate tax rate is at 35% of net income83.

•

Other expenses will remain constant. This pertains to the one time write off of investments due to legal proceedings.

•

82 83

The following operational costs will remain constant:

2008 DMCI Annual Report. 2008 DMCI Annual Report.

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Taxes and licenses Management Fees Depreciation and Amortization Supplies Outside Services Communication, light and water Pension Expense Entertainment, amusement and recreation Professional Fees Fuel and oil Association Dues Rent Transportation and Travel Repairs and maintenance Insurance Other Operating Expenses

Balance Sheet Assumptions • Accounts Receivable will grow in proportion to sales. • Available for sale investment and Investment in Subsidiaries accounts have been historically constant and will continue to do so until 2012. • Investment in Properties, Property and Equipment and Other Assets will remain constant until 2012. • Accounts and Other Payables will grow in proportion to cost of sales. • Customer Deposit Liabilities will grow in proportion to sales. • Subscriptions Payable has been historically constant and will continue to do so until 2012. • Deferred Tax Liability, Pension Liability and Payable to related party accounts will remain constant until 2012. • Cash is the balancing figure to match assets with liabilities plus equity.

Sales Targets from Strategies

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•

DMCI will capture 6%, 10% and 15% of the middle income OFW segment market from 2010 to 2012. This will be done through its market development and market penetration strategies geared towards OFWs.

•

DMCI will capture 2%, 5% and 10% of the middle income BPO segment market from 2010 to 2012. This will be done through its market development strategy geared towards BPO workers.

•

At the start of 2008, DMCI served 4,000 families84. Given the number of residential unit sales, DMCI now serves 10,496 families. 1% of these families will refer their relatives and friends through the company’s referral program.

The percentage will grow to 3% and 5% in the

succeeding years as the effectively of the drive strengthens.

Expenses Incurred from Strategies

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2007 Annual Report.

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•

Marketing and advertising will increase from 242M in 2009 to 400M annually in 2010 to 2012. This is to fund market development and penetration strategies to intensify promotion company’s products to existing and new clients.

•

Commission will increase from 6% to 8% of sales in 2010 to 2012. This is to support market penetration strategy of widening its distribution network by increasing the number of external brokers carrying DMCI projects. Additional external brokers will be lured by the higher commission rate which is above market standard.

•

Workforce will grow from 300 to 350 employees in 2010 to 2012. Additional 50 employees will be primarily utilized in sales as part of its market penetration strategy of widening its distribution network through additional sales.

•

Additional referral cost of Php 50,000 for every new buyer will be incurred as part of the market penetration strategy of launching a referral program.

Changes in Equity due to Financing Strategy •

IPO will proceed in 2010 and will generate Php 3B in funds. It was assumed to calculate for the Paid in capital and capital stock that the selling price is at P2 for a P1 par value.

•

To compensate shareholders, a dividend policy of 1B per year will be implemented starting 2011.

Balance Sheet Targets •

Ending inventory levels will be targeted at 10B to improve inventory turnover ratio.

•

Bank Loans will drop to 1B in 2010 and 500M in 2011 to 2012. Bank loans will be paid using proceeds from the IPO and internally generated funds to lower the leverage of the company and reduce financing costs.

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7.4.2 Projected Income Statement85:

85

Values in millions of pesos unless volume is indicated.

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Through the market penetration and market development strategies, sales will grow by 87% in 2010 and will stabilize to 13-14% in the subsequent years. The revenues gained from these strategies will more than offset the expenses incurred to widen its distribution network and launch an integrated marketing communications program. Net income is projected to grow further by 14% to 19% with total return on stockholder’s equity to be at 14% by 2012.

Solvency of the company will drastically improve to a healthier 50% debt to asset ratio. Proceeds of the planned IPO will be used to reduce the loans of the company. This will be a prudent measure given that the interest rates are projected to rise (see external analysis). This measure has paid off as it the reduction of interest will positively impact the company’s bottom line.

Balance sheet management will also be more prudent by setting an inventory policy. Maintaining a set inventory level is done through the strategy on having a more robust sales and operations planning. This will positively impact the turnover of company’s inventory which is one of the company’s financial weakness.

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VIII.

DEPARTMENTAL PROGRAMS

8.1 Strategy Map

A strategy map is a “visual representation of the cause and effect relationship among the components of an organization’s strategy.”86

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8.2 Departmental Programs The implementation of the market penetration and development strategies will rely on division and their functional programs and action plans.

Marketing Integrated Marketing Communications Marketing will lead in the planning and execution of the integrated marketing communications plan of the company to raise brand awareness (S1 & S2 & T3 - Pursue an integrated marketing communications plan to strengthen brand awareness among OFWs). The IMC plan’s target audience will be middle income OFWs looking to settle in the Philippines or provide homes to their families. The communication objective is to build brand awareness87 or the ability to identify the DMCI brand among OFWs in the housing category.

Overall advertising message will be that DMCI Homes delivers their dreams for their families to have a quality house they can call home. The marketing department will contract an advertising company to propose and execute the ad campaign based on this ad message. Aggregate communications budget for both local and international campaigns will be 400M annually.

Given the Integrated Marketing approach, DMCI will utilize several communications mode to deliver a coherent and effective message and promote brand awareness. TV advertisements will focus on the DMCI brand (as opposed to a specific project) as a property developer that offers optimal quality and value for money to their families in the Philippines. Events will also be organized to inform both external brokers and buyers of the features and Unique Selling Propositions of specific developments. DMCI will participate in real estate fairs and organize buyer conventions. Detailed product information will also be

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published in the company’s enhanced website. Publicity will be used by sponsoring magazine articles and property blogs to write about specific projects.

Referral Program Marketing will support customer care in the referral program. Marketing will provide the needed printed materials to properly communicate the message of the referral program. The material should not only emphasize the possible monetary rewards of referring a family member to DMCI developments but the chance to be close to your extended family and friends.

Sales Online Sales Strategy The sales division will lead in the execution of the e-commerce strategy (W2 & O3 - Enhance website to include e-commerce capability and promote it as an alternative distribution channel). The Sales team will develop the infrastructure to be able to handle the logistics of an e-commerce capable website. Sales will link their inventory management system to the enhanced website so both buyers and brokers are made aware of specific units that are still available in real time. Sales will also assign sales personnel to handle the reservations coming online and ensure that adequate follow-ups are made to convert the reservations into actual sales.

The sales team will coordinate with the other departments for the other components of the website. Marketing will provide the sales team the ad content of the website. The content will be in line with the integrated marketing communications plan of marketing. Construction will provide pictures and updates of current projects to be able to update buyers of the status of their investment and to emphasize a key strength of DMCI which is its fast delivery time. Design will provide the look of a particular development. This will be uploaded in the website as a part of the 3D Open House feature of the website.

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Sales will outsource the actual development of the website to a third party vendor. By June 2010, the new website will be launched complete with e-commerce capabilities (online reservation).

Development of the BPO Market As indicated in the SWOT matrix, BPO workers will be targeted as a possible new market to tap, (W2 & O4 - Partner with BPOs for DMCI to provide housing to BPO workers). To be able to innovate a housing solution to BPO workers, the key accounts unit under sales will lead this initiative. Together with marketing, finance and construction, they will formulate a corporate housing package specifically geared toward BPO workers. A comprehensive product offering is expected to be available by the March 2010 and sales activities to begin by April 2010.

Development of the OFW Market Another market development strategy is to tap the OFW segment (W2 & O1 & O3 - Strengthen international presence especially in untapped countries by partnering with external brokers). The sales department will lead this initiative by forging partnerships with various external brokers in countries DMCI has no presence in. An external broker will be employed to market DMCI in Saudi Arabia, whose OFW deployment is growing at 5%. Germany and Norway are also among the top destinations of OFWS but DMCI does not have presence. The sales team will also partner with external brokers in these European countries. Aside from widening DMCI’s presence in popular OFW destinations, DMCI will also strengthen its hold over Canada and Japan which also has an increasing number of OFW deployments.

Customer Care Customer care will lead in the market penetration strategy to tap the more than 10,000 existing home owners of DMCI (S1 & T3 - Launch incentive program for satisfied home owners to refer family and

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friends to DMCI Homes). For the referral program to work, existing home owners should continue to remain satisfied. The relationship manager within the customer care department will be in charge of this. A more important duty of the customer care group is to update the CRM of DMCI not just for prospective clients but for existing home owners. In satisfying the current needs of the home owners, customer care will also data mine for possible referrals that can be obtained from existing home owners. The relationship manager will then concentrate his/her efforts in these identified customers and introduce the existing products of DMCI as well as the financial incentive of referring someone to the program.

Construction Construction will lead in the Sales and Operations Planning strategy (W5, O6 & O7 Establish Sales and Operations Planning to keep demand and supply in balance). Operations will chair monthly meetings with sales to determine forecasted demand for units. Sales will provide indication as to the type of units that are on demand (studio type, 1 bedroom, 2 bedrooms). Construction will design its developments based on the projection provided by sales. Through S&O planning, inventory levels will be monitored by the construction department. By Jan 2010, the construction group through the regular coordination with sales team, will maintain inventory levels at 5B and eventually quicken inventory turnover to 1.79 in 2012 from its current 0.54.

Operational synergy with DMCI group will also be strengthened to reduce cost and manage quality better. All of the construction and steel fabrication requirements of DMCI Homes will be coursed through DM Consunji (construction) and AG&P (Steel fabrication). Additionally, DMCI Homes’ purchases will be priced lower since it is an internal counterparty of these DMCI subsidiaries.

DMCI Homes’ raw material requirements will be integrated to DMCI Group’s requirements. This will give DMCI additional bargaining power to lower the acquisition price of its raw materials and reduce DMCI Homes’ build cost.

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Business Development The Business Development division will lead in the company’s expansionary strategy in the BGC area (O2 & S5 - Develop and expand BGC property through strategic land banking initiatives). The business development will approach the BGC administration and other realtors to acquire new tracts of land such as the newly opened Northern BGC area. Expansionary activities will occur within three years after the planned IPO. Investment in properties will grow from the current 1.7B to 9B by 2012 or by 7.2B in 3 years. At the current price of 8,000 per square meter, DMCI aims to gain 90,475 additional square meters out of the total 2.6M available area in BGC. Additional properties will be utilized for additional mid and high rise developments.

Finance Finance will own the IPO strategy. (W1 & O1 - Do an IPO as soon as the economy has recovered in 2010.) Within 2010, tt will coordinate with the underwriters to raise the needed capital to fund new projects and the new strategies. Finance will target total proceeds of 3 B pesos. If the IPO is well received, the remaining capital requirement can be sourced via a re-launch of the stocks. If not, the remaining capital raising can be either deferred until market conditions improve or it can be funded via debt. To compensate its existing and new stockholders, a dividend policy of 500M annually start 2011.

Finance will use the proceeds of the IPO not only to fund expansionary strategies (such as strategic land banking strategy) but also to pay off its short term debt. Bulk of the company’s debt are short term debt (see financial analysis). Given that interest rates are expected to rise further (see external analysis), paying off the short term debt of DMCI will save on finance cost and improve the company’s profitability. Success in lowering its leverage will be measured by its improving debt to asset ratio which will move from .68 to .50 by 2012.

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Human Resources Human resources will need to hire and train 50 additional personnel to man the different strategies of DMCI such as the improvement of its distribution channel. As a motivational tool for its employees, DMCI will send high performing sales personnel to international sales offices. HR will also launch training to prepare new hires for the real estate licensure exam which is a requirement by the government.

To encourage partnerships with external brokers, HR will increase the commission rate of brokers from 6% to 10%. This will support the strategy to attract additional brokers by compensating them higher than other property developers.

HR will also review the performance appraisal system to include customer service to both new and existing customers as a key performance indicator to sales and customer care personnel. Sales quotas indicated in the performance appraisal system will be revised to focus more on sales coming from OFWs and BPOs to align it with the market development strategies.

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IX. Strategy Evaluation and Performance Metrics 9.1 Balanced Scorecard Balanced scorecard is an important strategy evaluation tool that allows firms to evaluate strategy from a financial, customer knowledge, internal business processes and learning and growth.

Financial Perspective Objectives

Growth in Net previous year)

Goals – Dashboard Meets expectation Alert Below Expectation Income

(vs

2010: ● ≥ 14% ● 5-14% ●