Before building homes,
Build a Value Proposition:
An Analysis of the Middle Income and
Residential Sector in Mexico
SAMIR BHOJWANI, ALEJANDRA IBARRA AND PERLA JIMENEZ, SINTEC
Follow us:
@Perspectiva Sintec
INTRODUCTION
Even the high-end developers we talk to have seen it with their own
eyes and shrink in their seats when the topic is raised. A part of them
knows that this could very well be their fate; Thousands of generically
built homes strewn across remote suburbs of Mexico with little to no
access to even basic amenities such as retail outlets. Millions invested
by developers in land acquisitions and development costs only for them
to find that the market for their product has been rendered obsolete and
that their constructions have gone unsold, or worse, abandoned. It is every
developer’s nightmare and now it has been brought to reality. Yet funnily
enough, the story told is not that of one, but several housing companies in
Mexico, who today face a market with greater competitive forces at play
than ever before.
The housing market in Mexico is seen as a fundamental pillar of the
economy, representing almost 20% of the country´s Nominal GDP1. Amidst
this pillar, studies show that the Middle to High-end housing segments
represent 29% of unit sales and are projected to grow to approximately
50% of the total market by 2020.2 The demographic trends to back this
are encouraging; with a median age of 27 years and a growing uppermiddle class, Mexico is currently one of the youngest countries in the
OECD.3 Furthermore, studies by BBVA Research reveal that over half of
the housing constructed at a national level occurs among only 59 of the
largest municipalities in the country,4 and that just under half of Mexico´s
population is concentrated within 55 cities.
Such demographic advantages coupled with a high degree of market
concentration are leading to the creation of separate competitive, but
potentially lucrative, growth clusters for Medium and Residential housing.
1
@Sintec_
Sintec predicts that for the foreseeable future, competition within these
growth clusters will most likely be severe, rendering generic models such
as the one mentioned above obsolete. Several players will most likely
be forced out and barriers to entering new markets or segments will be
raised. Yet despite the restrictive business environment and an influx of
competition that will most certainly disrupt the current status quo, the
opportunities to capitalize on an affluent, blossoming and increasingly
well-informed consumer base mean that developers will be required to
reflect deeply in developing an inherently distinct value proposition with
respect to their competitors, and subsequently tailor their value chain in
accordance to their unique and differentiated value proposition.
BEFORE BUILDING HOUSES, BUILD A VALUE PROPOSITION
Up until recently, developers of medium and residential housing in Mexico
have held a somewhat complacent stance to the market they serve. As
one adviser to some of Mexico´s biggest construction firms told us in an
interview, “Few Mexican developers till today have much of a site criteria
or an expansion plan for their projects. A lot of the times projects are built
using the land that the developer´s family owns. This is a tremendous
restriction since usually the lands are not adequate and you have to make
the best with the location you have.” This is just one example of how
developers need to start planning long-term strategies for growth by
anticipating market trends and understanding consumer behaviors or else
they run the risk of their project failing. The lack of long-term strategic
planning by many developers is alarming, especially as the cost of making
mistakes rises and competitive forces impose downward pressures on
margins.
INEGI, (INEGI, 2013) 09/11/13
Mexican Housing Overview, 2013, SOFTEC. By Middle to High-end Sintec refers to Vivienda Media, Residencial, Residencial Plus and Vacaciones
OECD, http://www.oecd.org/els/soc/societyataglance.htm#data
4
BBVA Real Estate Outlook, Mexico 2013
2
3
@PerspectivaSintec
2
BEFORE BUILDING HOMES, BUILD A VALUE PROPOSITION: AN ANALYSIS OF THE MIDDLE INCOME AND RESIDENTIAL SECTOR IN MEXICO
The importance of building a salient and unique value proposition is to
highlight the particular kind of value your company offers to the customer
and is shaped by the set of activities your company performs to offer this
particular kind of value.5 This value proposition is built around three key
questions that all organizations need to ask themselves when forming
their strategy:
1. Which customers will I target?
2. Which specific needs will I meet for this customer?
3. At what relative price will I provide both value for my customers
and profitability for my company?
The idea may sound deceivingly simple, yet most Mexican housing
developers too often overlook this first step. As Mexican consumers
mature, and the market for middle and residential housing booms, the need
to segment customers and understand their needs as well as their pricing
preferences will become far more important to maximize profitability and
command high profit margins. Sintec´s fieldwork has shown us that the
average purchaser of mid to high-end housing in Mexico is often a second
or even third time buyer, highly knowledgeable of market conditions, and
shows no loyalty to any brand in particular. Such consumer characteristics
make it critical to understand clients with greater accuracy now more so
than ever.
Yet our visits to development sites around high growth cities and their sales
rooms show us that few companies are even bothering to create unique
value by identifying consumer needs and understanding their customers
better, opting instead to stay within their comfort zone and develop
projects identical to that of their competitors in order to assure their place
in the market, a common phenomenon in business known as “memetic
isomorphism.”6 The projects often aim to attract as broad an array of
clients as possible, regardless of demographics or any other customer
attributes. It is no wonder then that even in the higher end segments,
where consumers are presumably most inelastic to price, competitors are
locked in price wars and end up doling out discount offerings. An analysis
of 5 key growth clusters in Mexico has shown us that year-on-year price
rises for housing from 2010 to 2013 has averaged a mere 4% for the
medium segment and 6% for the residential segment (Softec, 2013). Data
on demand for these housing segments suggests that the numbers should
be higher.
CONSTRUCTING A VALUE PROPOSITION
IN SEARCH OF UNIQUENESS
At first, the idea of seeking out smaller, more unique segments in order to
grow may seem counterintuitive. On the one hand the idea of diversifying
into new product areas and catering to as many clients as possible is what
is thought to drive growth. On the other, targeting specific client bases
through tailored value propositions would seem to narrow market scope.
However, our studies would seem to suggest otherwise; In a careful analysis
carried out by our team we found that among a sample of 35 Mexican
developers, the largest ones, in terms of number of developments, were
actively dedicated to only one segment of the industry, while diversified
players tended to be much smaller in the number of projects they had and
also less national in scope.
Constructing a solid value proposition that selectively targets the most
lucrative segments in the market is thus the key to escaping these selfdestructive price wars. It involves proactively going out into the field,
observing unmet needs, identifying unsatisfied customers and gauging
what each customer group values or what they are willing to pay a premium
for. Of all the interviews that Sintec held with companies involved in the
industry, only one admitted to holding focus groups of past customers in
order to improve on their future projects. Yet it is precisely these kinds of
practices, among others, that will allow developers to improve their service
offering to both current and future homebuyers.
5
6
ANALYSIS: DEVELOPER SIZE AND NUMBER OF SEGMENTS THEY OPERATE
Magretta Joan. Understanding Michael Porter: The Essential Guide to Competition
Follow the Leader: Mimetic Isomorphism and Entry Into New Markets. Heather A. Haveman. Administrative Science Quarterly. Vol. 38, No. 4 (Dec., 1993), pp. 593-627
Copyright Derechos Reservados Sistemas Interactivos de Consultoría, S.A. de C.V.
3
BEFORE BUILDING HOMES, BUILD A VALUE PROPOSITION: AN ANALYSIS OF THE MIDDLE INCOME AND RESIDENTIAL SECTOR IN MEXICO
Analysts in the field whom we interviewed seem to agree. “It is hard to
diversify too much in this industry. Specialization is important because
you need to use leading edge technologies for the projects you manage
nowadays and that is the value-add that highly specialized companies
offer.” The idea of carving out a unique competitive position rather than
catering to several market segments at once is not new and is in fact
practiced among many industries today. Examples of companies that
embrace uniqueness to maximize their profitability include IKEA, Southwest
Airlines, H&M and even Home Depot (Magretta, 2012). In fact, what all
these companies have in common is that they have spent a great deal of
time and effort in distinguishing their value propositions from competitors
through experience and thorough market analysis. The reward for them
has been sustained profitability and a clear competitive advantage in what
are otherwise low margin and highly competitive industries.
ANALYSIS DESARROLLOS S.A.
UNDERSTANDING THE HOMEBUYER
Traditionally, housing developers in Mexico have segmented their
customers along three basic lines: Purchasing power, geography and the
type of mortgage accessible (Softec, 2013). As the middle class in Mexico
expands and becomes more discerning in its demands, the need to further
segment along deeper client attributes in order to better understand
unmet needs and to capture latent demand in the market will be critical.
The opportunities to capitalize on this latent demand are manifold; In order
for Mexican housing developers to establish a unique value proposition,
it will be necessary for them to segment their clients along several
dimensions, not just one, in order to identify the products and services
that hold untapped market potential. Let us look at a hypothetical example
that we offer.
Desarrollos S.A. has found that its market for traditional homes in the
middle-income segment has stagnated, competition is rife and that it has
an urgent need to design new products that will cater to a growth market.
An initial analysis along demographic and income levels show that there
is a growing population of approximately 14.8 Million young Mexicans
(20-40 years) with a high disposable income.7 When deciding whether to
target this customer or not Desarrollos S.A. decides to carefully examine
their habits, routines and lifestyle choices in order to see how this potential
client pool can be further understood and thus, further segmented. A
subsequent analysis indicates that of these 14.8 Million young and affluent
citizens, 1.4 Million are small business owners- approximately 10%.8 This
is a substantial market with lucrative potential, but one that needs to be
carefully studied so that the needs of this segment are better understood.
So when further zooming in on this subsegment, the developer discovers
that 5% of this market works from home on a regular basis and has an
urgent need for spaces that offer a home and office experience without
compromising either, with high technology requirements where several
machines can operate at once without interruption, the temperature is
controlled, and facilities are available for both productive work as well as
recreation.
7
8
9
The insights gained from conducting a thorough analysis of the
homebuyer´s environment are thus invaluable tools to identify untapped
markets that determine which products to focus resources on and will
ultimately shape the company´s value proposition. Once the first two
aspects of which clients to serve and which specific customer needs
to be met have been answered, the challenge will be to appropriately
price the new product by quantifying how much clients are willing to
pay for its novelty and analyzing how much a client values the implicit
or explicit need that the product will fulfill for them. Classic tools such
as focus groups, anthropological surveys, competitor benchmarks, and
switching cost analyses - if executed correctly- will all help in arriving at
adequate pricing and positioning strategies and will reinforce the value
proposition that the company offers. Companies working in retail have
even adopted methods of tracking their customers with camera´s and
living in their homes with them for a given period of time with the aim of
gaining valuable insight to their habits and preferences.9
INEGI, 2013
Secretaría de Trabajo, 2013
The Economist, “The Adidas Method,” August 23rd 2013
Copyright Derechos Reservados Sistemas Interactivos de Consultoría, S.A. de C.V.
4
BEFORE BUILDING HOMES, BUILD A VALUE PROPOSITION: AN ANALYSIS OF THE MIDDLE INCOME AND RESIDENTIAL SECTOR IN MEXICO
value depends on the set of activities the company performs in designing, producing,
selling, delivering, and providing support to its products. Designing the value chain
around the value proposition in the case of Desarrollos S.A. would mean incorporating
these three values (efficiency, premium quality and dual-usage) in all stages into every
product sold without exceptions. For instance, to deliver premium quality and efficiency,
Desarrollos S.A. may have an in-house R&D department that seeks to stay ahead of the
competition with respect to innovation. In terms of dual usage, its developments may
have meeting rooms and 24 hour tech support along with an administrative unit that
offers additional benefits such as virtual secretaries and cleaning services. In terms of
pricing, the company may realize that the entrepreneur has aspirations to expand his
business and thus, may not wish to buy his home office. A leasing scheme could then be
proposed whereby the client pays on a monthly basis for the product.
Whatever the value offered may be, the takeaway from this exercise is to demonstrate
that every step of the value chain design must be intricately linked to the value proposition
espoused by the company and that failure to do so means that value proposition begins
to lose its significance. Moreover, each step in the value chain, no matter how trivial,
must seek to complement all the other activities undertaken in the value chain in order
to create synergies that will make the company´s offering uniquely distinctive and, most
importantly, non-replicable by competitors. Only once the value chain and the value
proposition are in sync can it be said that the company has a viable, long-term strategy.
VALUE PROPOSITION: DESARROLLOS S.A.
BUILD YOUR VALUE CHAIN AROUND YOUR VALUE
PROPOSITION
Ultimately, value propositions without robust and tailormade value chains revolving around them are merely words
without actions. In the world of strategy the value chain
is often seen as the counterpart to the value proposition:
While the value proposition focuses on the external world of
the customer, the value chain concentrates on the internal
operations of the company.10 Designing and executing an
efficient value chain that reinforces the company´s value
proposition is essential to offering unique value in all
phases of the customer experience.
Returning to the example of Desarrollos S.A. we witness
that the customer perceives value in the efficiency,
premium quality and dual-usage that the homes offer. It is
the company´s duty to consistently translate this perceived
value of the customer into tangible value, where tangible
10
DESARROLLOS S.A: INTEGRATING THE VALUE PROPOSITION WITH THE VALUE CHAIN
Porter, Michael (2010). “Estrategia competitiva: Técnicas para el análisis de la empresa y sus competidores.” Piramide.
Copyright Derechos Reservados Sistemas Interactivos de Consultoría, S.A. de C.V.
5
BEFORE BUILDING HOMES, BUILD A VALUE PROPOSITION: AN ANALYSIS OF THE MIDDLE INCOME AND RESIDENTIAL SECTOR IN MEXICO
CONCLUSION
The hyper-competitive pressures of today´s real estate business environment mean that developers can no longer afford to rest on their laurels and
enjoy a comfortable existence without unique value creation and/or product innovation. As the market for middle and residential housing in Mexico
expands and consumers become ever more discerning in their preferences
and informed about their decisions, developers will need to look for unique
market opportunities in order to avoid being locked in an ambit of savage price wars and stagnant growth. The antidote to a life condemned to
market mediocrity is to focus on building strong and differentiated value
propositions that will seek out those segments of the market that few other
competitors can reach with their current value chains. This will involve
building products that offer inherently unique customer experiences that
look beyond the hard data and statistics to observe the trends, behaviors,
attitudes as well as the needs that will shape the homes of tomorrow.
Samir Bhojwani
Customer Strategy Consultant - Bogota Office
[email protected]
Alejandra Ibarra
Customer Strategy Analyst Consultant - Monterrey Office
[email protected]
Perla Jimenez
Customer Strategy Analyst Consultant - Monterrey Office
[email protected]
MEXICO CITY
MONTERREY
BOGOTA
SAO PAULO
www.sintec.com
[email protected]
Copyright Derechos Reservados Sistemas Interactivos de Consultoría, S.A. de C.V.