ADVANCED STRATEGY

Introduction
Based on assignment 1 (AdvSM/8636403/July14/1), there is a clear need and business opportunity for senior housing
and elder care facilities project with the rise of Chinas aging population (Feng et al., 2011). A business model was
developed to show the viability and business potential in the high-end (Keppel Golden Jade) and mid-tier market
(Keppel Silver Blossom) in Chinas Tier-1 city (such as Shanghai, Beijing, etc.). As a start, we will be focusing to
build 1,000 units respectively for each project. Currently, the senior housing business in China is still at its infancy
stage due to several factors which we will look into and also because there is no right business model which this paper
is seeking to develop (Sun et al, 2011).
This paper will approach from a different perspective on how Keppel Land could further improve the viability of the
business model through addressing the challenges, issues and opportunities in the development of senior housing
(high-end and mid-tier) projects in Chinas competitive environment and under the managerial implications on
strategic planning as well as growth strategies via the possibilities of acquisitions or joint ventures (Grant, 2010). The
second part will look at the implementation strategies to compete in the China market and the management agenda for
the next five years.

Challenges, Issues and Opportunities

1

Chinas Real Estate Market Analysis

Despite the general reports on the challenging economic conditions faced by China real estate market with prices
falling at 2.6 percent in October 2014, analysts have explained that the current condition is that of a correction than
a crash (Source: China.Org.Cn, 2014: http://www.china.org.cn/business/2014-10/02/content_33668658.htm). This is
due to the rapid urbanization policies of the Chinese government initiatives which see very high supply of housing
stocks that was left unsold in tier 3 and 4 cities inclusive of sub-urban areas.
According to the World Bank, China could continue to sustain its real estate prices in line with the increasing trends of
urbanization and rising incomes and any risk of impending bubble was quelled by Chinas increasing efforts to raise
interest rates which saw the slow growth of China economy over the last three years (UN, 2011). However, the
economic slowdown with the continued falling of real estate prices would have far negative impacts on employment
and other associated industries; thus, the China government has introduced easing measures on mortgage lending rates
in
October
2014
(Source:
China.Org.Cn,
2014:
http://www.china.org.cn/business/201410/02/content_33668658.htm) . In contrast to US subprime lending crisis, Chinas practices are much more
conservative. Thus, the current situation of China real estate market is a phase of correction, albeit a critical one to
regulate, than heading towards a crash.
With the easing of mortgage lending rules, mortgages on a second home will be treated as a first mortgage if the buyer
has no other outstanding mortgages. This also implies that buyers will benefit similar 30% down-payment ratio
required of first-time home buyers, instead of the original 70% down-payment (Source: China.Org.Cn, 2014:
http://www.china.org.cn/business/2014-10/02/content_33668658.htm) .
In addition, buyers will also be allowed interest rates as low as 70% of the 6.55% benchmark mortgage rate, instead of
paying a 10-percent premium on top of the benchmark rate as required previously (Source: China.Org.Cn, 2014:
http://www.china.org.cn/business/2014-10/02/content_33668658.htm)

Porter Six Forces

Threat of Substitutes
Medium
(0.6)

Supplier Power
Low to Medium
(0.48)

Intensity of Rivalry
High
(0.7)

Buyer Power
High
(0.7)
Government Regulations
(Sixth Force)
High

Threat of New Entrants

(0.8)
High
Threat of substitutes (Medium) (0.6) Though (0.7)
there are other alternatives aside to senior housing projects, such as
nursing homes and community centres with eldercare beds, the specialized senior housing projects comes with an
integrated high-end facilities and services which caters to the different needs of the elder consumers and this is not
easily switch or comparable to other options (Li et al., 2011). Most importantly, location offers specific advantages
which is one of the key factors for the choice of property and this not easily replicated by other players (Grant,
Source:
Porter, 2008.
2010). Except
for pricing which Chinese consumers are highly sensitive to, this would be a major consideration to
consider alternative locations aside to property management service quality supported by advanced technologies
attached to Keppel Lands relatively strong brand name and reputation which are hard to emulate by other players
(Grant, 2010). The rating for this factor is given as medium at 0.6 (which 1 is maximum value) derived based on the
average of the following:

Number of Buyers (0.8)

Purchases large volumes (0.1)
Switching to another (competitive) product is simple (0.7)
The product is not extremely important to buyers; they can do without the product for a period of time (0.6)
Customers are price sensitive (0.8)

Intensity of rivalry (High) (0.7) Due to the rising aging population and economic growth of China, there is a
potential number of foreign investors aside to local developers entering the senior housing and eldercare facilities
market. State-owned enterprises (SOEs) are also a major factor in affecting the competitive structure of the real
estate market (L.E.K, 2013). This implies that there will be increased competition as China real estate market is huge
and residential housing investment is approximately 6 to 10% of Chinas GDP (Feng et al., 2011). The rating for this
factor is given as medium at 0.7 (which 1 is maximum value) derived based on the average of the following:

Similarity of substitutes i.e. the price of housing is high, consumer would likely source for other alternatives
(0.7)
Probability of New Entrants: If substitutes are similar, it implies high probability of new entrant (0.7)

Threat of New Competitors (High) (0.65) As similarity of substitutes are considered high and in view of the
government initiative to drive the pace of urbanisation, the threat of new competitors will be increased. However,
barriers to entry also depend on several factors (Grant, 2010):

High capital requirements (0.7)

Government policies/ incentives / tax benefits (0.7)
3
Complexity: In terms of various channels of authorities approval and difficulty due to complexity of the
project such as construction (0.7)
Customer Loyalty (0.3)
Cultural barriers (0.8)

Buyers bargaining power (High) (0.7) As economic growth of China rises, the disposable income per capita
of consumers has also increased. However, the income disparity between high income groups (which comes from
Tier-1 cities i.e. Shanghai, Beijing etc.) and lower income earners are mostly at the sub-urban are high and rural
areas. The business model of the senior housing project is targeted at the Tier-1 cities. It is expected the buyer
power in these cities are rated high and selective on premium furnishing, environment, location, service quality
and customization, price etc. The rating is given at 0.7 derived from the following factors:

There are very few suppliers of a particular product (0.5)

There are no substitutes (0.5)
Switching to another (competitive) product is very costly (0.9)
The product is extremely important to buyers (0.8)
The supplying industry has a higher profitability than the buying industry (0.8)

Suppliers bargaining power (Low to Medium) (0.48) As housing projects have abundant choices of suppliers
and competition is intense with high bargaining power of buyers (Grant, 2010), the suppliers bargaining power is
rated low to medium derived from the following factors:
Existing loyalty to major brands (0.2)
Incentives for using a particular buyer (such as promotions, discounts, etc.) (0.5)
High fixed costs (0.6)
Scarcity of resources (0.2)
High costs of switching companies (0.7)
Government restrictions or legislation (0.7)

Government Regulations and Initiatives (Sixth Force) (High) (0.7) In view of the rapid urbanization, the Chinese
government has encouraged investors to cater to the rising demands of the consumers and social needs. The
government acts as an important regulator to curb the rising housing price-to-income ratio by correcting it through
measures such as mortgage lending rates and when the economy is slowing down, the government again steps in to
ease the rates to spruce demand (Sun et al., 2011).
With the government initiatives on real estate, the business strategy for developers such as Keppel Land, though with
strong financial strength, could take this opportunity to adopt portfolio diversification with differentiation and
positioning in the senior housing and eldercare facilities projects (Grant, 2010) as a niche and specialized segment (in
terms of its location, smaller floor areas, affordable price and value propositions) in contrast to high-end luxury
residential projects which are currently facing slower growth and falling prices.
In the light of the Porters six forces, the key implications is that Keppel Land could adopt a business model with
highly differentiated offerings as part of its key value propositions to sustain its position in highly competitive real
estate market. It is important for Keppel Land to adopt differentiated leadership early to enhance its strong branding
and trustworthiness which is crucial to be successful in the China market (Porter, 2008).
Target/ Market Scope
Broad
(Industry Wide)
Narrow
(Market Segment)

Low Cost Advantage

Cost Leadership

Product/ Services Uniqueness

Differentiation Strategy

Focus Strategy
(Low Cost)

Focus Strategy
(Differentiation)

Another significant factor for Keppel Land as a foreign investor is to establish and sustain good relationships with key
Partnerships i.e. Government agencies. By aligning business strategy to government initiatives and understanding the
political and cultural sensitivity inherent throughout the Chinese government would expedite the approval process and
obtaining licenses etc. (Feng et al., 2011). This also extends to establishing strong local suppliers network to ensure
the housing project could be smoothly delivered.

Space Matrix (Corrected version) from Assignment 1

SPACE MATRIX ANALYSIS

Financial Strength
Competitive Advantage

+4

Industry Attractiveness
Aggressive

Conservative

+4

-2.5

Defensive

-2
Environment Stability

Competitive

Industry attractiveness is high at +4 due to increasing eldercare needs.

Environmental stability is at -2 indicating a relatively stable economy but with sluggish
growth rates in China due to the government measures on real estate. However, the
government has also recently steps in to ease mortgage lending rates to spruce demand.
Competitive advantage is corrected to -2.5 instead of -1 as a slew of government measures
on real estate has slowed demand for housings in general amidst tough competition and due
to a highly competitive real estate market in China.
Finance is at +4 is very strong as Keppel has strong capital resources.

Source: Assignment 1

Business Model Profitability Formula and Cost Structure

Another challenging aspect to the business model is good understanding of the cost drivers affecting key resources and
capabilities and hence its profitability (Osterwalder et al., 2008). By identifying the significant cost drives, Keppel
Land could find opportunities to seek economies of scale to drive costs down to establish cost-focused leadership
aside to emphasis on differentiation (Porter, 2008).
-

Cost Structure and Data

Based on the financial projection statement in Assignment 1, the following table shows a summary of key cost
structure:

Description
Size of development
Development Cost

Kepland Golden Jade

55,000 sqm
RMB2,167 psm
Or,
[RMB119.2 million /
55,000sqm]

Average Cost in Shanghai

(Tier-1 City)
RMB4,100 psm

Total no. of units

Average price per square meter (psm) per unit

Rental yield per unit (residential) per month

Rental yield per unit (Shop space) per month

1,000 units
[46.5 sqm per unit]
RMB11,828 psm
Or,
[RMB550,000/ 46.5 sqm]
RMB11,625 per month
Or,
[RMB250 x 46.5 sqm]
RMB8,300 per month
Or,
[RMB830 x 10 sqm]

RMB24,000 psm
[subject to location-specific
attributes]
RMB25,000 per month
Or,
[RMB250 X 100 sqm]
RMB12,210 per month
Or,
[RMB1,221 X 10 sqm]

Based on the data sources, the table above shows the comparative study of average cost of development in Shanghai
(Tier-1 city) and the average price per unit psm for Kepland Golden Jade (proposed high-end senior housing) to the
average high-end luxury residential apartment as well for the shop space rental.
From the above comparison, the average residential unit in Shanghai is at least twice the value of a high-end senior
housing project. Thus, the senior housing project is viable in terms of its affordability as a second asset long-term
investment with the attractive value proposition of asset transferability to the offspring as well as its integrated
solutions to serve eldercare needs relieving children the worries when they need to travel to other cities or China to
work. The asset can also be profitable for the owner in the resale market but its market valuation would be subject to
location-specific advantages as a key factor.
-

Profitability

Based on the business model as developed in assignment 1, the revenue streams come from the following sources:
a.
b.
c.
d.

Sales of Unit (25% of total units sold to breakeven)

Rental of Unit
Rental of Shop space
Monthly Service Charges

According to the financial statement projection in assignment 1, it is required to sell 25% of the total units (i.e. 1,000
units) to breakeven and our target at 60% of the units sold for the first year which is strongly supported by marketing
activities and network of property agents. The projected profit is RMB146.6 million for the first year due to the
attractiveness of the value propositions offered and 20% discount off for early purchasers in addition to 1 year waiver
of monthly service charges (Assignment 1).
One important point to note is that price discounts should be cautiously handled by assessing competitors financial
strengths in event if they are strong may tend to react in the same manner and thus, creating a price war (Grant, 2010).
The cumulative profits over the 5 years will slowly progress after first year sales as the revenue streams would derive
mainly from monthly service charges and other ancillary services i.e. nursing services, full assisted services etc. We
target to double the cumulative profits to RMB274.1 million by end of 5 years. Thus, the average profit per year is
RMB54.82 million. The ROI is estimated at twice the investment cost as shown in the table below:

Source: Assignment 1

Based on the cost structure as indicated below, the key cost drivers after the first year will be the rising labour costs
and necessary training and incentives to sustain service quality aside to continuous marketing activities to complete
the sales of the whole development by year 2 (Grant, 2010).
450
400
350
300
250
200
150
100
50
0

259.1

263.1

268.6

274.1

119.2

124.7

129.2

132.7

136.2

146.6

Kepland Golden Jade: Cumulative Profits (Red) vs Costs (Blue) over 5 years
It is important to consider Porters Value Chain to understand Cost drivers and the following table identifies
opportunities for cost reduction of the project (Porter, 2008):
8

1
.

Sequence of Activities
Identify Activities
Establish the basic framework of the value chain by
identifying the principal activities of Keppel Land

2
.

5
.

Purchase Land,
Materials,
Components etc.

Design &
Engineering

Identify Cost Drivers (see diagram)

Identify linkages
E.g. using local nationals for lower costs except
architect, interior designer and project consultant

Construction

Manpower costs 8%

Identify Opportunities for Cost Reduction

Testing and Quality

Control

Level of quality targets

(95%)
Frequency of
defects/repair (10%)
Predictability of Sales
(60%)
Completion time (100%)
Size of advertising budget
(100%)
Strength of Reputation
(100%)
Sales Volume (60%)
Number of Agents (100)
Sales per agent (10)

Inventories of Finished
Products
6
.

Projected Sales Closure at 60%

Remaining 40% to be leased

Sales and Marketing

7
.

Total no. of units = 1,000

Cost of Commission is 1% of purchase/ rental price
upon success
Significant costs

Channels & Agents

Support

8
.

Less Target cost reduction by another 15%

Adjusted additional cost incurred

Cost Driver

Allocate Total Costs

Estimated breakdowns of total costs by activity to
identify significant cost reductions

3
.
4
.

Value Chain

20%
15%
5% of total development
cost

Resources and Capabilities

One of the most important areas for strategic management is the use of Porters value chain to analyse and identify the
key resources and activities which enhance the competitive advantage of the business. As below, we map out the
relative strengths to the strategic importance (Grant, 2010) as follows:

10
Construction
Proprietary
Technology

Brand

Marketing
Marketing

Location
Relative Strengths

Key Strengths

Superflous Strengths

Zone of Irrelevance

Key Weaknesses

Government
networks

Cultural Barrier

Strategic Importance

10

The strategic implications for appraising the strengths and weaknesses is that they are context-specific subject to the
way the China real estates competitive environment is being defined i.e. proprietary technology becomes superfluous
strength when price is a major concern with buyers in the senior housing market (Grant, 2010) such as Kepland
Golden Jade.
To avoid trapped in the risk of resources and capabilities being limited by merely understanding Keppel Land, it is
crucial to consider the threats and opportunities from distant competitors i.e. foreign investors etc (Grant, 2010).
It also helps to understand which areas could be enhanced or outsourced where there are weaknesses. As mentioned
earlier, government networks and overcoming of the cultural barrier is imperative to win in the highly competitive real
estate in China (Sun et al., 2011).

External Growth Strategies

In view of the real estate market downturn, some local developers with weaker financial strengths are facing losses
with ghost-town projects where vacancy rates are high. This offers an opportunity for Keppel Land to consider
acquisitions of these companies at below market value (Grant, 2011).
Of course, it is important to consider that the motives and benefits of acquisitions should outweigh the price of such
acquisitions (Grant, 2010). The main considerations are:

Acquiring significant resources and capabilities;

Benefitting cost economies and market share;
Geographical expansion;
Acquiring new customer base.
10

Joint ventures or strategic alliances are good considerations (Grant, 2010) especially when Keppel Land is establishing
win-win relationships with developers that are state-owned enterprises. It not only helps Keppel Land to establish
strong market power and influence, it also positions itself competitively in the consumers mind.
However, there are often risks involved in both acquisitions and joint ventures. For acquisitions, incomplete due
diligences may hinder successful acquisition of the acquired company; whereas, joint ventures run the risk of
imitability of intellectual property and knowledge (Grant, 2010). Aside, there are also local regulations of acquisitions
and compliance which tends to render acquisitions difficult.
The implication of these challenges is to find the strategic fit for both acquisitions and alliances in order to be
successful.

Implementation Challenges

The most challenging issues facing the proposed senior housing project is implementation stage where leading and
managing the business model to achieve profitability, cost efficiency and overall strategic objective are difficult. As
the 7-S model has stated, it is critical for several factors to be linked up to sustain the competitive advantage (Peters,
2011).

7-S Model
Strategy

It is important that Keppel Land understands that successful business strategy requires the right alignment of
resources and capabilities to in order to secure the market (Peters, 2011). There are important considerations such
as:

a. Business/ Marketing Strategy The right approach such as differentiated-focus strategies are critical to
establish competitive advantage over its competitors. By understanding the cultural stigma as well as needs of
the Chinese consumers, Keppel Land could formulate the right marketing mix in terms of price, product or
service, place and people. This is to be in line with the proposed business model i.e. value propositions, key
partnerships, channels, activities and customer segments and relationships etc.

b. Financial/ Cost Strategies Through analyzing the value chain, it helps to identify the significant cost drivers
impacting profitability as shown earlier. For example, Keppel Land could look into outsourcing in high
technology if it is not in the core business.

11

Structure
It is important to consider the structure of organization in terms of clear definition of roles and responsibilities. A
highly complex and bureaucratic structure would not only dampen staffs morale and discouraging initiatives, it
also affects the long-term stability of the organization. Todays successful companies i.e. Google are attributed to
their high empowerment to staffs with flatter authoritative structure which encourages innovative solutions as well
as work-life balance.
Systems
A sustainable organization requires sound business system and infrastructure to ensure its stability and efficient
delivery of service and quality to customers (Grant, 2010). Keppel Land requires establishing clear business
processes to manage the daily operations of senior housing project. This is the business and technical
infrastructure that employees use on a day to day basis to accomplish their aims and goals (Peters, 2011).
Shared Values
Another important consideration is the proliferation of shared values throughout the organization which serves as
guiding principles for staffs to embrace and help them achieve the common objectives in line with the
organization (Grant, 2010). At the centre of shared values is the development of people with leadership and
talents. This motivates staffs to embrace shared values of the organization and increase productivity and capability
for the organization (Peters, 2011).
Corporate social responsibility of Keppel Land staffs also helps to contribute to the needs of elders and other
disadvantaged people in the society.
Style
Management style is significant as it reflects how decisions are being made and actions being carried out to
achieve the business objectives. Keppel Land needs to balance between financial controls and self-empowered
and risk taking mind sets to enhance staffs motivation and productivity as a source of intangible competitive
advantage (Grant, 2010).

Staff
Keppel Land needs to establish performance-based and feasible payout system according to agreed and set key
performance indicators. Balanced Scorecard could be used to assess staffs performance through four general
areas i.e. Financial, Customer, Business Process and Learning and Development (Peters, 2011). This implies a
need for well-trained and motivated staffs to deliver best results in line with the organizations objectives.
Skills
In line with the area of staff performance, it is important to identify the needed skills i.e. nursing and hospitality
management for senior housing projects as part of the intangible resource and capabilities (Grant, 2010). It is12
important also to identify staffs with leadership potentials and talent so as to nurture them towards a fulfilling
career with the organization.

Management Agenda
Years
Milestones
Resources & Cost Allocation
Implementation
Through the analysis and understanding of the challenges, issues and opportunities facing Keppel Land to venture
Team into
the
senior
housing
market
in
China,
it
is
critical
to
develop
the
Management
Agenda
to
enhance
its
competitive
6 months Market Penetration
advantage
its growth strategies over the five year period as listed in the table below:
to Year 1 andsustain
Setting up a satellite office as a base to Cost of setting up the satelite Appointed Keppel
carry out marketing surveys to gather
office is minimal but
Architect
and
detailed customer profiles and data
exhaustive surveys would
Consultant
relating to senior housing market so as to
require higher financial
develop the right product and service
commitment to ensure data
package to serve the needs of the senior
collection is precise and
market.
detailed this is a sunk cost
Establishing government networks and
as part of the marketing
expenditures budgeted at
channels i.e. property agents
RMB6 Million in the
financial projection.
Year 2

Year 3 & 4

Year 5

Product/ Service Development

After market penetration details are
completed within a year, we will then go
through a phase of idea generation,
screening and testing based on the
collected data on the finalized product/
service package in terms of its pricing
and marketability;
Finalize quality management
Operational meeting set up to interface
with Architect/ Design team and
Marketing team
Construction starts
Market Development
Once construction is completed, business
development team and marketing team
will liaise with all channels and tap on
the established property agents network
to market and sell the product/ service
package;
Utilise referral programs to target new
customers
Proliferate the value propositions
through seminars and social event to
expand market growth;
Source out competitors customers and
offer attractive loyalty programs and
incentives
Establish
Customer
Relationship
Management (CRM) to follow up and
monitor
Diversification: Acquisition/ Alliance
strategy to expand geographical growth
With the success of senior housing

Idea Generation/ Product

Testing/ Feasibility Study

Marketing programs, events

and seminars

Keppel
Lands
Product Team with
Architect/ Design
Team and Keppel
Land marketing
team
Keppel
Construction
Director

Keppel
Land
Marketing team

13

Market intelligence to set up

to gather more data on
acquisition or joint ventures

Keppel Strategic
Planning Team

FIVE-YEAR FINANCIAL PROJECTION

CUMULATIVE PROFITS Vs COSTS

KEPLAND GOLDEN JADE

KEPLAND SILVER BLOSSOM

14

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

240.6 353.1 357.1 362.6 368.1

113.2 118.7 123.2 126.7 130.2

1

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

136.45 196.75 197.65 199.85 202.05

56.55 59.25 61.35 62.95 64.55

1

Source: Assignment 1

References
Assignment 1: AdvSM_8636403_Jul14/1- Business Model for Senior Housing Market in China
Grant, Robert M. Contemporary strategy analysis and cases: text and cases. John Wiley & Sons, 2010.
World population report by United Nations, 2011.
Porter, Michael E. "The five competitive forces that shape strategy." Harvard business review 86.1 (2008): 25-40.
China.Org.Cn, 2014: http://www.china.org.cn/business/2014-10/02/content_33668658.htm
Li, Bin, and Sheying Chen. "Aging, living arrangements, and housing in China." Ageing International 36.4 (2011):
463-474.
Sun, Xiaojie, et al. "Associations between living arrangements and health-related quality of life of urban elderly
people: a study from China." Quality of Life Research 20.3 (2011): 359-369.
Feng, Zhanlian, et al. "An industry in the making: The emergence of institutional elder care in urban China." Journal
of the American Geriatrics Society 59.4 (2011): 738-744.
L.E.K consulting report (2013): http://alumni.lek.com/content/demographic-investing-coming-senior-housing-boom
Osterwalder, Alexander, and Yves Pigneur. "Business Model Generation: A Handbook For Visionaries, Game
Changers, And Challengers Author: Alexander Osterwalder, Yves." (2010): 288.
Peters, T. "McKinsey 7S model: It continues to benefit leaders." Leadership Excellence 7 (2011).

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