SM Prime Holdings (SMPH): Internal and External Analysis

SM Prime Holdings (SMPH): Internal and External Analysis Introduction Organizations are dynamic nowadays. One reason for this is the complexity of the environment they belong to and the need to constantly respond to this intricacy. Environment consists of various factors that affect how organization operates. These components include both internal and external factors that can either make or break the companys success. In addition to this, they have to react to various trends in which they are subject, for example the emerging environmental awareness of the public. To put all of these into perspective, one company will be used to illustrate how these factors influence the operations of the company. SM Prime Holdings (SMPH) is the mall operations arm of SM Investments Corporation which is todays one of the Philippines biggest conglomerates, occupying a dominant position in most of its lines of business, namely shopping malls; retail merchandising; banking and finance; and property. It all started with a simple vision of its founder and chairman, Mr. Henry Sy, to sell shoes to every Filipino (SMIC, 2009). Today, SMPH is the Philippines largest mall operator that owns and runs world-class malls over the country, providing millions of square meters of floor area for a fully integrated shopping, dining, and entertainment experience (SMIC, 2009). Moreover, it manages the parking area and the amusement facilities of the mall such as SM Cinemas, SM Ice Skating and SM Science Discovery Center. As of December 2008, there are 36 SMPH malls 33 here in the Philippines and 3 in China and this year it is expected that three new SM malls are opening. By the end of 2009 the total gross floor area (GFA) of all SM malls would total to 4.5 million square meters, a 5% increase from 2008s GFA. Above all, SMPH recorded a good financial performance year last year as it delivered a seven percent increase in net profit to Php6.4 billion, from a 12% growth in revenues worth Php17.8 billion (SMPH, 2008). Overview of the Internal Environment Every organization differs from one another. Each has its own unique characteristics that contribute to the over-all success of the company. These unique characteristics are often called the internal environment, which is composed of elements within the organization. These elements include employees, management, and corporate culture (Cliffs Notes, 2009). Out of all of these elements, there are two distinctive attributes that are vital to a company and these are its structure and culture. These two provides background on how the company operates. SMPHs Internal Environment For SMPH, understanding how their internal structure and culture operates allows them to organize, to take advantage of their strengths, to improve their weaknesses, and to develop an environment that breeds and encourages success among its employees (Organizational Culture 101, 2007). Moreover the success of the whole SM Group is attributed to its founder, Mr. Sy, whose determination and passion is considered exceptional. His influence has remained strong and visible both in its organizational structure and culture. Organizational Structure According to Drucker it is the correct design of structure which is of the most significant in determining organizational performance (Mullins, 2005. p. 597). In SMPH, they made sure that the structure is well-defined so that it will lessen confusion for their employees as it limits and controls what they do, for the organization is structured around high levels of formalization and specialization. Also the company has a strict adherence to chain of command that helps employees to identify their position in the company. Lastly, it is highly centralized wherein all decisions have to be made by higher ranking officials (Robbins, 2003, p. 575). In other words, the organizational structure of SMPH describes the management philosophy of Mr. Sy which is conservative yet with fine tuned instincts. Organizational Culture Like every individual, organizations also have their own personality that set them apart from others. In case of SMPH, their work ethics is prominent. For them everything is a serious business. Furthermore, they are guided by traditional Confucian values which are highly influenced by Mr. Sy who is an immigrant from mainland China. Hard work, frugality, discipline, love of study, self-sacrifice for the family welfare and harmonious social relationships are the Confucian values integrated to the company. These are the anchor values of SM Group which are the building blocks of their success (Flores, W. L., 2007). Overview of the External Environment Aside from managing its resources, organizations operate in a larger scale called the external environment. But unlike their internal resources wherein they have a full control of, the external environment suggests otherwise and in some cases may be considered as a threat. The number of the external environment factors is virtually unlimited for there are many macro factors that could impact organizations productivity. The only distinction between these factors is the degree of its impact to the company (NetMBA, 2007). SMPHs External Environment: PESTLE Analysis of SMPH SMPH, being the number one mall operator in the Philippines, regularly reviews its external environment. In their perspective, understanding the environment they belong is vital to the planning function of management for it influences the companys success rate. They identify and analyze the key trends, forces, and phenomena having a potential impact on the formulation and implementation of their strategies. In effect, the environmental assessment attempts to prepare the organization to acclimatize to environmental changes to take advantage of opportunities and to minimize the adverse effects of threats (Appelbaum, 1991). (P)olitics The Philippines is a democratic republic with an elected bicameral legislature, and a multiparty system. Filipinos exercised their right to vote every three years and despite the rumors to the contrary that the current President, Ms. Arroyo would not step down from office; there would be an election next year (US Department of State, 2007). This issue is important for the business sector as the next countrys leader may affect the operations of their organizations. This can influence them due to the reforms the new public officials would take. For SMPH, the results of the upcoming election would greatly affect them because it may affect the stability of the country and may undermine their confidence in their expansion plans. (E)conomics The countrys economic system is mixed economy wherein most of the companies are owned privately; however, government can control when the need for it arises. One of the features of the Philippine economy, it is consumer driven and the sales at the countrys biggest malls have been a gauge of trends in consumer spending. Almost 70% of the countrys gross domestic product (GDP) is contributed by consumer spending. Moreover the 30% of this total consumer spending happens inside malls, and two-thirds of this slice of the pie is accounted to SM alone (Balea, 2009). But according to the Fitch Ratings Inc. the countrys GDP is predicted to be at its lowest at 2.5%, which is lower than the 1998 Asian Crisis (Burgonio, 2009). Given this forecast, this can predict how SMPH would perform this year. This economic downturn will most probably affect the company and would be visible in its financial statements. (S)ocial-Cultural One social-cultural factor that affects organizations is the consumer buying behavior. Consumers are the source of profit of the company and that is why they are researching in great detail to learn the buying behavior of their consumers in order to track consumer trends and respond to it. Understanding the purchasing patterns answers what consumers buy, where they buy, how much they buy, when they buy and why they buy (Kotler Armstrong 2007. p. 129). In a recent survey conducted by the global market research firm Synovate, it revealed that during the six month stretch of December 2008 to April 2009, 92% of residents in Metro Manila, which is comprised of all social brackets and where malls are concentrated, have cut their spending, while 61% did less impulsive buying. Moreover 55% said theyve focused on food and other necessities and spent less on recreation as well as luxury items. In short, Filipinos are still spending but they are spending for the cheaper and basic things (Balea, 2009). Although SMPH may not be directly affected by this buyer behavior, this may affect its tenants total sales. Since tenants rental fees are determined through a percentage of their income or through a fixed monthly rent basis, SMPHs total revenue may squeeze (Narciso, 2009). (T)echnology The continuous improvement of technology has dramatically changed every organizations process; for example new marketing channels were introduced like the internet. Here in the country, internet penetration is still low. As of 2008, only 14.6% of the Philippine population is internet users; however it is forecasted to record a 23% growth annually. If this trend continues it will revolutionize the way Filipinos live. A good example of this is e-commerce, wherein markets, which were once unreachable because of distance and costs, are now open through cyberspace (Internet World Stats, 2009). Although e-commerce is still an unfamiliar territory here in the country wherein only 3% in National Urban Philippines made online purchase, it has a strong promise especially in the coming years due to the increasing accessibility of the internet, greater PC penetration and enactment by the government of appropriately strong e-commerce legislation (Internet World Stats, 2009). With this implication SMPH may find a new competitor by means of the so-called e-malls. This can be a serious threat for the company since this brings many advantages to consumers such as convenience, accessibility, interactivity and immediate response. (L)egal The current legal system of the Philippines is based on the 1987 Constitution but there is an on-going movement that is aimed to revise the current system. According to several lawmakers the business sector would be the number one beneficiary of the constitutional change as the proposed amendments include creation of a more efficient and competitive business environment among others (Rubio, 2009). SMPH is highly subjected to this change. If this would push through, all corporate laws may be altered which would affect how the SMPH operates taxes may rise, new labor codes may be enacted, ownership act may be amended. (E)co-Environment The Philippines is a developing company and as a result of this is the degradation of the natural environment. That is why theres environmental legislation and provision that protects welfare of the environment. Hence these should be followed strictly by both the private and public business sectors. For SMPH, this is very much applicable since they are mall developers. They have to be in compliance with the rules and standards or else they would be penalized (Kirk, 1998, p. 83). A particular example of an environmental legislation that should be followed by SMPH is to secure an Environmental Compliance Certificate (ECC) during the conceptualization stage of their expansion plans. Getting an ECC certifies that the project under consideration will not bring about an unacceptable environmental impact and the proponent has complied with all of the environmental legislation preventing and controlling water, air and land pollution. Securing an ECC is important for SMPH because if they fail to do so all their expansion plans will be put on a halt (Kirk, 1998, p. 83). Competition Here in the Philippines, malls have become a huge phenomenon in the country. Most often than not, whether for recreational, dining or shopping purposes, Filipinos go to mall. With this high demand for shopping malls, this translates competition for SMPH and as of now there are three primary players in the shopping mall industry and these are Ayala Land, Robinsons Land and of course SMPH. Although the industry seems attractive with only 2 competitors for SMPH, the rivalry is still high since both Ayala Land and Robinsons Land are also expanding and has its own loyal customers. But an advantage being in the mall operations business is that it has high barriers to entry due to the huge capital needed to start up a mall, to find strategic locations and to attract reputable anchor tenants. With regards to SMPHs stand against its competitors, SMPH, with a 51 year experience under its belt, is still the mall of choice for tenants since they can enjoy heavy consumer traffic with almost 2.5 million foot traffic. This enormous number of SMPHs customers is due to their malls convenience, affordability and diversity, and these translate to high customer power. But theres also threat for substitutes like no-fuss shopping complexes (e.g. Tutuban Centermall, Greenhills) that is becoming a serious peril due to its cheaper prices. Knowledge Management In our daily lives, knowledge is considered as power. Same goes in businesses. But knowledge management is not merely gathering all the data, for it is more involved in processing all these information into a cohesive knowledge. Being efficient with the sourcing, analyzing, dissemination and storage of knowledge can be a source of competitive advantage for a company. With the case of SMPH, knowledge management is essential especially during times of expansion wherein they gather all information demographics of the area, spending capacity, competitive environment level of commercial and retail activities in the surrounding area and distance from other SM malls that will aid them in decision-making (SMPH, 2008). Financial Management The entire worlds economic system depends upon the exchange rate. The currency exchange rates effect global businesses like a thermometer, it measures the health of global economics (JD Files, 2009). Last year the Philippine Peso (php) was one of the worst performing currencies in Asia, closing at 47.52 php to a dollar. This is a 15% decline from the 2007s 41.29 php. (James, 2008) This can affect SMPH, since most of the Overseas Filipino Workers remittances are spent by their beneficiaries in shopping malls, tourism and entertainment. If the peso weakens, it increases the value of dollar remittances and this translates to more OFW beneficiaries spending in their malls. International Market Entry Many companies successfully operate in a niche market without ever expanding into new markets. However, some businesses could achieve increased sales, brand awareness and business stability by entering a new market (My Business, 2009). For instance, the company could review new geographical market to serve and at this time of globalization, many companies try to penetrate the international market as a source of their growth. Relating this to SMPH, the company expanded internationally through an acquisition of three SM shopping malls in China through a share swap agreement. This move allowed SMPH to gain a foothold in Chinas fast-growing economy and use this as a platform for long-term growth outside the Philippines where it is clearly the dominant player in the mall business (SMPH, 2007). Ecology According to Cary Institute of Ecosystem Studies, ecology means the scientific study of the processes influencing the distribution and abundance of organisms, the interactions among organisms, and the interactions between organisms and the transformation and flux of energy and matter. (n.d) In other words, ecology is about environmentalism. Today, one of the biggest issues in ecology is the increasing effect of global warming. Global warming as its name suggest is the gradual increase in the temperature here in earth. This is caused by carbon dioxide (CO2) and other air pollution that is collecting in the atmosphere like a thickening blanket, trapping the suns heat and causing the planet to warm up (NRDC, 2009). Major sources of CO2 emissions are deforestation and burning of fossil fuels. This global concern is alarming for it may bring about natural disasters that may affect peoples health, bring ecological imbalance, rise in sea levels and change in crop and food supply. Here in the country, the effects of global warming are now being felt. According to World Wide Foundation (WWF), â€Å"The Philippines is extremely vulnerable to the ravages of climate change. Food and freshwater shortages, receding coastlines and an increase in political and economic turmoil are the bleak picture that climate change paints for the country.† (Burgonio, 2007) With these consequences organizations have taken additional measures to respond to these impending catastrophes since they have the leverage to start the change and besides they are also the biggest offenders. In addition to this, various pressure groups, like WWF, are negotiating the companies to adopt energy-efficient saving measures in their operations to help in the global effort to cut CO2 emissions, the leading cause of global warming. (Burgonio, 2007) Ecology and SMPH SM CARES aims to unify and integrate all SMPHs CSR initiatives that are geared towards caring their shoppers and nurturing Mother Earth. Under SM CARES, the company has therefore taken an aggressive stance in protecting the environment through four major initiatives: Solid Waste Management, Water Conservation, Energy Efficiency, and Air Quality Efficiency. Below are some of SM CARES programs (SMPH, 2008). SM Cares Activities Solid Waste Management SM Supermalls holds Trash to Cash, a recycling market every first Friday and Saturday of the month in all SM Prime malls in the country. Here, the public can convert their recyclable trash into cash. To date, Trash to Cash has generated over Php10 million in recyclable items and is estimated to have saved nearly 11,000 seven-year-old trees. Mall tenants are also educated on the benefits of waste segregation. As a result, solid waste in the malls garbage depots has been reduced by as much as 20% a month and two tons of garbage per mall is diverted away from landfills every week. Water Conservation Since its inception a few years back, SM Supermalls now saves about 2.4 billion liters of precious water every year through tertiary treatment plants that recycle water for use in the cooling towers of the malls air-conditioning systems, toilet flushing, and landscape irrigation. Add to that, the use of waterless urinals in mens toilets save another 315 million liters of water annually. Energy Efficiency SM malls control their air-conditioning systems through the Focus Enterprise Building Management System. This computerized process closely monitors the building temperature to optimally balance supply versus demand for cool air. As such, mall areas that are full of people are made cooler while those less congested are left a bit warmer. The system saves almost 50 million kilowatt hours of electricity per year. All tertiary treatment plants mentioned earlier utilize a device known as a sequential batch reactor that saves up to 500,000 kilowatt hours annually. To reduce the use of light bulbs during the day, the new SM malls are designed to have glass walls and ceilings to light up the mall with sunlight. Lighting has also been replaced from fluorescent to energy efficient bulbs and has saved the malls a considerable amount of kwh annually. SM CARES also avidly supports Earth Hour, an annual global movement that encourages households and establishments to shut down a ll power sources for an hour, thereby heightening awareness for energy conservation. Air Quality Efficiency SM strictly enforces the no-smoking policy inside the malls, and requires all public utility vehicles entering and parking in its mall terminals and depots to present certificates of having passed smoke emission testing. They also encourage the use of bicycles by providing safe parking spaces for them. Green Bags Pioneering efforts to promote eco-shopping in the Philippine retail industry, SM Supermalls recently unveiled the new SM Supermalls Greenbag. The SM Supermalls Greenbag enables shoppers to participate in the global cause to reduce the use of plastic shopping bags. The SM Supermalls Greenbag which is available in all SM malls is made from 100-percent polypropylene (PP) material. It is recyclable, non-toxic, allergy free and nonreactive to human skin. The Greenbags size is equivalent to two regular SM Supermarket shopping bags and has an estimated life span of two years. It is very light, handy and can be folded into a small pack. The SM Supermalls Greenbag comes in four exclusive designs by world-renowned artist Manuel Baldemor, turning this utility item into a prized art piece. Another contribution of SMPH to ecology is through green architecture. Early this year SMPH unveiled their first mall to turn â€Å"green†, the SM North EDSA via the Sky Garden. It uses roof gardens that help in neutralizing global warming for roof gardens are known to reduce the effects of ‘urban heat islands and are energy efficient that cut down up to 20% air-conditioning costs. It also catches rainwater, which will be released into a storm water infrastructure that is subsequently recycled for landscaping and car park maintenance. Lastly roof gardens also lessen the plumbing design and systems expenditure. With all of these green features, the Sky Garden is an example of how a large-scale property developer can contribute to the improvement of the environment (The Philippine Star, 2009). Policies and Decision Making Since SMPH is a mall developer, ecological factors like global warming are always part of their discussion. As a matter fact preserving the environment is part of SMPHs objectives and that is to ensure environmental sustainability through various programs on energy, water and air conservation. For them more than just complying with the legal standards (e.g. environment legislation), they also have the responsibility to the community since their company is in the position to make a difference (SMPH, 2008). The management regularly holds meetings to discuss their effect to the environment as well as to discuss the effectiveness of their programs and their up-and-coming activities. One situation wherein SMPH considers the environment in their decision-making is every time they expand and open new malls. During the conceptualization stage, SMPH constantly explores breakthrough architectural models for its malls that are environment-friendly. The Sky Garden at SM City North EDSA, which is a first in the Philippines, is a noteworthy showcase of the companys innovative thinking. Utilizing the latest in green architecture, the Sky Garden brings their customers closer to nature and at the same time contributes to environmental conservation (The Philippine Star, 2009). To stress even more SMPHs integration of ecology in its company, they held a conference on Sustainability, Energy, and Green Design Initiatives. The conference was aimed at providing a fresh view on how green design initiatives can influence sustainability and promote environmental preservation. Some of the countrys seasoned architects and engineers shared their views on the subject with SMs executives to bring more awareness on how these timely subjects can impact their mall operations (Manila Bulletin, 2008). Through this conference, the management reassessed its policies concerning the environment and recognized the link between a healthy economy and a healthy ecology. Evaluation and Recommendation With all these initiatives on responding to the ecological issues, it seems that SMPH is reacting well but actually they are kind of late already. Their competitor, Ayala Malls, has been the pioneer to this trend and is successful in incorporating ecology programs in their system. Ayala Malls was the first to retrofit the existing structure of their malls to a more eco-friendly one. Furthermore all of their malls show a close-to-nature effect; in contrast to SMPH wherein most of their malls look like a concrete jungle. As a recommendation, SMPH may restructure all of their malls. But this could be done little by little so it will not interrupt the malls activities. Another precaution is that this can be very costly but if SMPH is really determined to be environment-friendly in all their malls this is the best means to show it. An alternative method is to put more in-door plants and garden to make their malls at least appear as eco-friendly. Another first by Ayala Malls is their integration with its mall tenants by means of â€Å"Greenology† that bolsters the malls environment awareness campaign. Through Greenology, Ayala Malls mark the trend of being an eco-friendly and eco-chic establishment by showcasing remarkable events that aims to capture the hearts of concerned mall patrons and environmentalists (Ayala Land, 2008). Although SMPH also has their own mall-wide activities such as Trash to Cash and their Green bag, they do not have monthly activities like the Ayala Malls. In addition to this their tenants do not actively participate as much as those in the Ayala Malls. A likely proposal for SMPH is to create an earth-friendly philosophy encompassing all mall activities that are related to conservation of the environment. Then make an apt title to it so that it will create awareness to the people, like the Ayala Malls Greenology. SMPH should also communicate to its tenants to support and participate in the activities. Together they can brainstorm and come up with ideas that are appropriate with the objective. For example, every month all the mall tenants would feature a product that would help in preserving the environment or are made with environment-friendly materials. But the good news for SMPH is that even though they are not proactive in responding to ecological factors, what matters most is that they are trying to keep up and do all their best to preserve the environment. All of their programs are actually well-thought of and practical. Their advocacies for Solid Waste Management, Water Conservation, Energy Efficiency, and Air Quality Efficiency are properly executed. As a matter of fact, SMPH has received some accolades for these activities including an Outstanding Achievement in Energy Efficiency and Conservation from Don Emilio Abello Awards for Energy Efficiency and Conservation Best Practices for Buildings (SMI, 2008). However with all of these good strategies what is lacking to SMPH is publicity. They do not create so much buzz about their environmental concern and activities that makes the public think that they are not doing anything for the sake of the environment. That is why Ayala Malls remains to be the top of mind of the customers when it comes to being eco-friendly mall. To counter this SMPH should make use of public relations to show their plans in connection to greener lifestyle. They should utilize the different kinds of media to create awareness that they are good corporate citizen. Also they can sponsor events such as the yearly celebration of Earth Day to show their support for nature as well as to use this event to promote the earth-friendly facilities of their mall. All in all, SMPH has been sound with all its action plans towards the emerging environmental awareness and it would probably have a 65% marking since theres still a room for improvement. Conclusion Through the years, SM malls has become synonymous to the phrase one-stop shopping. You can ask any Filipino about what mall comes first into their minds and without batting an eyelash, they will respond and say SM. This is how great the impact SM has to the Filipinos. It is more than just the shopping, dining or entertainment experience it is part of the culture already. But before SM became an icon in the country, it started like any other rags to riches story. Its success can be traced back to its founder, Mr. Henry Sy. Even at his age, Mr. Sy is still very hands-on with the business. The countrys shopping mall magnate is a contrarian who not only survived but prospered after every political and economic crisis in the last five decades. This is because he studies the environment very well and handles every downturn as a challenge to seek new opportunities. These work ethics of Mr. Sy is visible in the company and are the main drivers for the continuous achievement of SM. (Tan-Co, 2001) Also contributing to the accomplishment of SM Group is its response to ecology. Although it is still lagging behind its competitors, SMPH is doing its share to conserve Mother Nature. They have opened their first green mall and have conducted various activities to counter their enormous carbon footprint. All these efforts towards being environment-friendly, shows the commitment of SMPH to be the mall of choice that cares to preserve the nature.