The Future of the Building and Construction Industry in Mexico City - Term Paper Example

SUBJECT NAME: BUSINESS FUTURES: Mexico City Building SUBJECT NO.: LECTURER: TUTORIAL: TUTOR: STUDENT NAME: STUDENT ID: Overall word count: 2650 words Executive Summary This research paper develops an evaluation on the future of the building and construction industry in Mexico City, capital to Mexico. The analysis seeks to analyze and establish the existing industry situations and their likely change trends in the future. On one hand an external industry environment using the PESTL analysis establishes that in the future increased political support is bound to increase industry attractiveness through deregulations as well as incentives offering. Moreover, the analysis establishes that increased economic growth and elevating social and living standards will increase industry demand. Finally, under the external analysis the analysis establishes that technology use, though minimal currently is bound to gain increased use popularity in the future. On the other hand, a porters five forces analysis establishes changes such as increased buyers bargaining power, threat of new market entrants as well as substitute alternatives of green building and construction technology adoption are among the forecasted industry changes. Consequently, the research analysis concludes that the industry represents a viable investment opportunity through increased use of technology as well as through the application of the green building and construction techniques. Table of Contents Executive Summary 2 1.0 Background 4 2.0 PESTL Analysis 4 2.1 Political Factors Evaluation 5 2.2 Economic Influence Analysis 5 2.3 Socio-cultural Analysis 6 2.4 Technology Influence Analysis 7 2.5 Legal Factors Analysis 8 3.0 Porters Five Forces Analysis 9 3.1 Suppliers Bargaining Power 9 3.2 Buyers Bargaining Power 10 3.3 Industry Competition Rivalry and Threat of New Entrants 10 3.4 Threat of Substitutes 12 4.0 Conclusion 12 References 14 Appendices 16 Appendix 1: Mexico GDP and Purchasing Power Parity 16 1.0 Background The Mexican building and construction industries are one among the emerging industries in the nation as well as in Southern America. Statistics indicate that although the building and construction faced a major decline in 2008, during the global financial crisis, the industry is on the rise, depicting positive growth rates in the recent years. For instance, statistics demonstrate that despite the -6.3% growth in 2009, the industry has stabilized to 3.9% and 3.3% in 2012 and 2013 respectively. This serves as an indication of the growing nature of the building and construction industry (Statistical Portal, 2014). Basically, the industry comprises of a range of segments and sub-sectors that constitute to it as a whole. Among them include the residential housing sector, infrastructure construction sector such as roads and bridges as well as the commercial buildings construction sector. This report offers an evaluation of the Mexican building and construction industry as a template and evaluation tool for both existing and potential investors. As such, the analysis evaluates both the external and industry environment. In this regard, the study conducts both the PESTL and Porters five forces model analysis on the industry and finally develops conclusion. 2.0 PESTL Analysis In order to conducts an external environment analysis on the Mexican building and construction industry, the research paper adopted a PESTL (Political, economic, social, technology and legal) factors analysis tool. The relevance and applicability of this evaluation tool can be cited in Cheverton (2004, p.71) argument. The authors argued that through PESTL analysis, evaluators develop comprehensive external environment audits enabling them formulate rational and informed evaluation conclusions and recommendations. Therefore, it is based on this tool applicability that the research adopted it in evaluating the Mexican building and construction industry. 2.1 Political Factors Evaluation A political factors analysis represents an evaluation of the support and perception of the existing political factors and systems on an industry development. As such, such an evaluation reviews on the nature through which the systems advocate for growth in an industry or not. Based on this background, an evaluation of the Mexican political system demonstrates an existing political goodwill in support of the industry growth and elevation onto global status. This can be evidenced in the government’s involvement in the housing plan initiatives. The Mexican President, Calderon initiatives are bound to positively implicate on the industry housing sector both in the medium and long term periods. In this regard, the government seeks to offers support to a large proportion of workers who are not affiliated with the two major housing funds in Mexico namely the Infonavit and Fovissste. Through this approach, the government has pledged to offers support through a series of approaches such as offering subsidiaries for all houses worth US$12,000 and US$25,000 as well as more subsidies of up to 20% mortgage subsidies for green house project initiatives. Based on this political involvement analysis on the Mexican building and construction industry, it is apparent that the industry faces an existing political goodwill, bound to expand and propel its increased expansion into the future. As Greve (2008, p.493) in a case study of the healthcare industry growth across the globe argued, positive political goodwill serves as a vital commodity and tool in the enhancement and facilitation of increased industry growth as well as profit increments. 2.2 Economic Influence Analysis A nation’s economic status represents its overall GDP values and growth rate, existing per capita income and the expected increments as well as the disposable income amounts. On one hand, a positive evaluation of all these factors represents the probability for positive industrial support growth both in the present and into the future. However, a negative evaluation of these factors indicates a declining ability of the economy to support industries development. Therefore, in order to assess on the ability of the Mexican economy to support the building and construction industry growth, the assessment evaluated on its GDP trend as well as per capita income rates. On one hand, an evaluation of the nations GDP by Marthinsen (2014, p.610) indicates a growing economy since 2010 after the effects of the global financial crisis. In this regard, a positive GDP implies increasing individual income levels in the society. Consequently these changes are bound to increase overall demands for improved infrastructure. For instance, with increased GDP growth, the Mexican government will have increased funds to venture and inject into infrastructural development agendas. In turn, such government injections and infrastructural development plans will increase the building industry earnings making it increasingly attractive to existing and new investors. Therefore, in general, an economic evaluation of the Mexican economy demonstrates a forecasted growth with inclination of a majority of the government projects being on infrastructural development, a component of the building and construction industry. 2.3 Socio-cultural Analysis A socio-cultural analysis on a society incorporates the evaluation of changing lifestyle as well as living standards in a society overtime. Based on this description, an evaluation of the Mexican society establishes a standards and social status rising trend. In this regard, with continued economic growth and increased earnings and disposable incomes, the societal standards have improved. Consequently, the demand for the society needs have evolved with a significant proportion of the Mexican workforce evolving from poor and below the poverty line to average and middle class earners. This can be evidenced by the increased enrolment and membership onto the nation’s two housing funds in a bid to acquire their own residential houses as well as increasing investment rates on commercial buildings construction. Therefore, this research concludes that as the society living standards improve, the society is bound to demand for better housing and infrastructure. Thus, this will in turn expand development opportunities for the Mexican building and construction industry. 2.4 Technology Influence Analysis An ancient analysis by Jamieson and Szeto (1989, p.147) argued on the merits of technology involvement and incorporation in industries operations and development. In this case, the study established that through technology incorporation, industrial efficiency levels were imperatively improved. Moreover, the review established that through technology incorporation, industries and ventures significantly reduced on their production costs. Therefore, the study concluded with a recommendation for technology application across all economic industries. Although technology incorporation in the Mexican building and construction industry would improve efficiency and reduce on production costs, this dream is yet to be realized. The only extent of technology application is in templates development, while other areas of the industry such as the City buildings designs and actual construction rely on manual approaches and practices. Consequently, this has played a significant role in the slow industry growth rates as well as reducing profit margins. Unless overcome in the future, this challenge is bound to increase ventures production costs and consequently reduce their profitability and the overall industry attractiveness for new ventures in the long run. 2.5 Legal Factors Analysis Legal factors in a society represent the existing legal frameworks governing an economy and industry operations both in the short and long run periods. In this regard, legal and regulatory frameworks greatly implicate on the overall industry operations. Legal frameworks guide the nature and extent to which stakeholders in an industry can engage and participate in their respective operational activities. Therefore, while as favourable legal frameworks favour industries growth, unfavourable legal frameworks reduce on the respective industries growth. An evaluation of the Mexican building and construction industry establishes an increasing rate of positive government regulations. For instance, the government initiated the private public partnership projects through which it liaises with the private sector and developers in a bid to boost and enhance infrastructural development in Mexico City. Through the partnerships, the private sector acquires increased legal control in the industry through not only serving as investors, but also through playing significant regulatory role on the industry operations, a virtue enhancing the development of industry and investors favourable laws and policies. In addition, a legal review of the industry establishes the establishment of the construction Industries Licensing Act, NMSA 1978 has continues to serve as a key industry regulator (New Mexico Regulation and Licensing Department, 2014). Through the Act provisions, any venture or investors interested in the industry ought to register as such, subsequently reducing on unscrupulous ventures and investors in the industry, a virtue that has over the decades increased and nurtured public confidence on the industry operations. 3.0 Porters Five Forces Analysis In order to sufficiently evaluate the building and construction industry specific to Mexico City, the capital city of the Mexico nation, the research study developed a critical industry analysis using the porters five forces model. The model as Karagiannopoulos, Georgopoulos and Nikolopoulos (2005, p.68) in an evaluation the model’s relevance in the internet era, stated, has five key aspects through which an industry operations are evaluated. The respective aspects include suppliers bargaining power, buyers bargaining power, industry competitive rivalry, threat of new entrants and threat of industry substitution respectively. This research section evaluates each of the aspects in relation to the Mexico City building and construction industry. 3.1 Suppliers Bargaining Power A supplier bargaining power is influenced and characterized by the nature and extent to which the supplies influence the market. Such influence varies from prices to offered quality. On one hand, if the suppliers have a great bargaining power, they dictate on offered products quality as well as the supplied at prices. However, if they have no high bargaining power in an industry, they take up market prices and often supply and produce quality to fit the market demands. Siaw and Yu (2004, p.515) argued that a major determinant of suppliers bargaining power levels is their numbers as well as financial capabilities. If few and with sophisticated infrastructure, the posses a high bargaining power, while is many and minimal capital base, they posses low bargaining powers. An evaluation of building and construction organisations serving the Mexico City industry establishes their high numbers as well as low capital bases. For instance, the industry, although relatively small, is served by supplies such as Sare, Urbi, Ara, Homex, Ica and Geo house developers among others. The relatively low capital bases in these organisations reduce the overall bargaining powers in the market, and as such they pursue and follow up on the market demand needs and buildings and construction quality and design needs. 3.2 Buyers Bargaining Power Similar to the suppliers bargaining power, the buyers bargaining power in an industry is influenced by a range of external factors. On one hand, the number of buyers determines their influence. On one hand, if the buyers’ number is relatively low as compared to a high suppliers number, their bargaining power is relatively high, while if they are many as compared to few suppliers their bargaining power is reduced. Moreover, the financial muscles of the buyers play a crucial role in their bargaining power determination. On one hand, if the buyers have an increased large and stable financial base, their bargaining power is high while as if their financial base is minimal their bargaining power is similarly minimal (Export.gov, 2014). Based on the above theoretical aspects, a review of the Mexico City building and construction industry buyers bargaining power establishes a moderate and average bargaining power. On one hand, the buyers increase their bargaining power through the formation of housing funds such as the already discussed Fovissste and Infonavit funds that increase their capital base against the market suppliers. However, despite the existence of these funds, a majority of the buyers in the city remain individual households. Consequently, this places them at a financial disadvantage against the suppliers’ capital bases. Nevertheless, this research asserts that the buyers bargaining power in the city building and construction industry is bound to increase with the developing associations and building groups development trends. 3.3 Industry Competition Rivalry and Threat of New Entrants An additional aspect and industry evaluation measure of the porters five forces model is based on the establishment and development of the existing industry competition as well as the risk for increased future competition from new industry entrants. On one hand, an evaluation of the Mexican City building and construction industry establishes an existing high competition between existing market suppliers. As already discussed, the suppliers have low bargaining power against the buyers. As such, they have to compete with each other t develop sustainable competitive edges through which to attract an increased high number of the buyers consumer base. In this regard, the organisations have resulted to increased expert services offering through which they offer low cost or free consultation services to interested developers in the industry. Such, the suppliers increase their market reputation in bid to oust competition. Moreover, organisations in the Mexico City building and construction industry have resulted to the establishment of unique structural designs through the growing trend on technology use and incorporation in the development of buildings and infrastructure designs and templates development (“Export.gov”, 2014). On the other hand, an evaluation of the treat of new market entrants establishes that the risk is minimal in the medium term but likely to increase in the long run. In this regard, the regard establishes that in order to venture into the industry and especially to the status of services and products required in the City industry, organisations require high capital investments as well as a relatively lengthy registration process, thus reducing entry likelihood in the short run. However, the increased government involvement in the industry through private public partnerships is likely t support small ventures into venturing into the market through cooperation and support in critical aspects such as finances and technical expertise required in the city building and construction industry. Therefore, this is likely to increase the industry’s threat of new entrants in the long run period. 3.4 Threat of Substitutes An evaluation of the Mexico building and construction industry establishes a gradual shift in regulations and demand. For instance, the government supports and advocates for the development and establishment of green building technology and structures as evidenced by the governments various initiatives to support the industry shift (Watson, 2002, p.37). On one hand, the government offers an up to 20% subsidy on mortgages for green residential house. On the other hand, the government has joined other global nations such as membership in the World Green Building Council (WGBC). This illustrates the government’s desire to shift the industry current products from the current building and construction technology to an alternative substitute friendlier to the environment. Therefore, organisations operating in the industry face the risk of increased green house and building technology. As such, in order to remain afloat in the long run, the ventures should focus on shifting their building and construction approaches and techniques to cater for the city and national environmental concerns. 4.0 Conclusion In summary, this research paper evaluates the Mexican building and construction industry, with a special focus of the industry in the nation’s capital city Mexico City. In this regard, in a bid to develop a comprehensive industry analysis, the research evaluates the external environment affecting the entire Mexican building and construction industry, prior to conducting a porters five forces analysis specific on the Mexico City industry. In its external environment analysis, the research establishes favourable political, economic, social and legal factors. However, it establishes a major challenge in the lack of technology application in the system. Moreover, an industry analysis establishes a low suppliers bargaining power and a buyers average bargain power, expected to rise in the future. Further, the research establishes that the industry has a high competitive rivalry but a low new entrant’s threat in the medium run period. However, increased government support is likely to elevate the new entrants’ threat as well as threat of substitutes in the long run. Based on this analysis, the research paper establishes that the Mexico City building and construction industry, through almost saturated has investment opportunities through the application of technology and green building and construction technologies. References Cheverton, P, 2004, Key Marketing Skills 2: Strategies, Tools and Techniques for Marketing Success, Kogan Page, London. Export.gov, 2014, Mexico: Housing and Construction Sector. [Online] Available at < http://www.export.gov/mexico/leadingindustrysectors/eg_mx_043214.asp> [Accessed September 1, 2014]. Greve, J. 2008, "Healthcare in developing countries and the role of business: a global governance framework to enhance the accountability of pharmaceutical companies", Corporate Governance, vol. 8, no. 4, pp. 490-505. Jamieson, R. & Szeto, R. 1989, "Impact of Knowledge Based Information Systems on Organisations", Journal of Information Technology, vol. 4, no. 3, pp. 145-158. Karagiannopoulos, G.D., Georgopoulos, N. & Nikolopoulos, K. 2005, "Fathoming Porter's five forces model in the internet era", Info : the Journal of Policy, Regulation and Strategy for Telecommunications, Information and Media, vol. 7, no. 6, pp. 66-76. Marthinsen, J. E., 2014, Managing in a global economy: Demystifying international macroeconomics, Cengage Learning, London New Mexico Regulation and Licensing Department, 2014, Construction and Manufacturing Houses. [Online] Available at [Accessed September 1, 2014]. Siaw, I. & Yu, A. 2004, "An Analysis of the Impact of the Internet on Competition in the Banking Industry, using Porter's Five Forces Model", International Journal of Management, vol. 21, no. 4, pp. 514-523. Statistical Portal, 2014, Annual change in investment in Mexican construction between 2002 and 2013, [Online] Available at < http://www.statista.com/statistics/188882/investment-in-construction-and-housing-in-mexico-since-2002/> [Accessed September 1, 2014]. Watson, A. 2002, "The road ahead", Business Mexico, vol. 12, no. 11, pp. 36-39. Appendices Appendix 1: Mexico GDP and Purchasing Power Parity Read More