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Fractional Ownership: A Way Forward?

by: Ahmad Waleed Majidyar

1.0 Introduction
Today, macro environmental factors are influencing companies immensely and forcing firms to alter their strategic directions at different stages of their product life cycle. Political and legislative rules are becoming either more flexible in some parts or more restrictive in other parts. Economic turmoil has hit many regions around the world, and social trends are changing with advancement in technologies. Thus, companies need to be more flexible in replying to these macro-environmental factors. Meanwhile, with the world changing into a global market and many firms opting for an internationalization strategy, the global market is getting more competitive. Thus, firms need to formulate distinctive and unique strategies to survive in the competitive industries.
The fractional ownership model was developed in America, where it was highly successful. In Europe, it has recently been introduced as a new business concept. According to the Fractional Life website, fractional ownership is attracting many customers as people are now aware the advantages it offers in Europe. The A&R Baxter Company has decided to accelerate their fractional ownership projects across major parts of Europe and international markets. Thus, in this essay I aim to analyse the macro business environment surrounding the European market for the fractional property ownership industry.

2.0 Key Concepts Applied
Below are the key concepts used to analyse the condition of fractional ownership industry in Europe:

2.1 Strategic Management
In Prasad (2009), Tim Hannayan defines strategic management as the combination of actions and decisions that are aimed to formulate and implement strategies. This strategy brings superior competitive linkage to the organization with focus on achieving the organizational objectives. Thus, strategy is an important management function that is essential for an organization to move from its existing position to its target goal.

2.1.1 PEST Analysis
PEST analysis is an environmental scanning tool that helps organizations identify and monitor the weak signals in the pursuit of finding the discontinuities and fractures that shape the environment. It links both general and competitive environments such that changes in general environment can bring changes in competitive environment. (Henry, 2008).

PEST Analysis

2.1.2 SWOT Analysis
SWOT analysis is useful to match resources and capabilities to the competitive environment. It can be used as a tool for devising and choosing strategy and is applicable in any decision making situation if the objectives are clearly defined.

An external and internal analysis to identify the company’s strength, weaknesses, opportunities and threats are vital in the process. Whereas strength and weaknesses are related to the internal environment, opportunities and threats are considered external conditions that are not produced by company (Assen, Berg and Pietersma, 2009).

SWOT Analysis

2.1.3 Porter’s 5 Forces
According to Assen, Berg, and Pietersma (2009), Porter’s competitive analysis identifies five main competitive forces that shape the attractiveness of relative industry.

Porter's 5 Forces

New Entrants: while analysing the threat of new entrants, it is worth considering the level of barriers to entry that is shaped by the greater importance of economy of scales, competing with established competitors, high switching costs, legal restrictions, risky capital requirements, etc.

Substitutes: refers to the ease with which the customers can substitute with a different type of a product.

Buyers’ Bargaining Power: refers to the level of customers’ buying power that will affect the company’s pricing strategy.

Suppliers’ Bargaining Power: refers to the influence of the suppliers on the industry’s profitability. Thus, suppliers’ power is another factor that will influence the industry’s profitability as a whole, and also affects and pricing strategy of an individual firm.

Existing competitors: refers to the level of existing competitors that will affect the company’s tactics on pricing and promotion, battles for customers and channels, and increased level of services.

2.2 International Business
It is important for firms to expand their businesses internationally as it provides a stable platform on which the companies can expand their operations and markets. According to (Travis, 2007) no country can stand alone in terms of doing business; therefore, there should be trans-border transactions with the neighbouring and international countries. This will lead to expanded markets of goods, a source of raw materials for producing products, as well as manipulation of the economic and political stability of international countries.

2.2.1 The Nine Window Strategy Model
According to Hollensen (2007), this model discusses the conditions to determine whether a firm should stay at home or expand the business to international boundaries.

The Nine Window Strategy Model

Industry Globalism: International marketing environment determines the degree of globalism. Thus, the strategic actions and behaviour of firms depend on the structure of international competition in the related industry.

Preparedness for Internationalization: Firms have power to influence this dimension. It determines the preparedness of firms to expand their skills to international boundaries. These skills include personal skills and managerial skills. Furthermore, a well prepared company for internationalization has the capability of dominating the international market. On the other hand, a weak firm, according to Solberg (1997), should stay at the home market and improve its performance.

2.2.2 Porter’s Diamond
The model is a useful tool to show the determinants of national or home-based competitive advantage. The determinants are:

Factor Conditions: Factor conditions are related to ‘factors of production’ which are used in making the products or services, the advantages of which can benefit national firms in the international market. These include labour, land, raw materials, etc.

Demand Conditions: Refers to the nature of the home customers that can be a source of competitive advantage. Thus, companies dealing with sophisticated customers at home can better compete in international markets.

Related and Supporting Industries: Refers to local clusters of related and mutually supporting industries that are often regionally based. Making interaction easier can be an essential source of competitive advantage.

Firm Strategy, Structure, and Rivalry: Refers to the ways the companies opt to manage and compete, the goals the companies aim to attain, and the amount of domestic rivalry as well as the creation and persistence of competitive advantage in the respective industry (Johnson, Scholes and Whittington, 2006).

2.2.3 Ansoff’s Matrix
The matrix is concerned with two key factors of marketing, such as the product and the market. It gives alternatives for selling a new product in an existing market or a new market. The four categories of the matrix are as follows:

Ansoff’s Matrix

Market Penetration: increasing the present product in present the market to provide growth.

Product Development: offering or modifying a new product to an existing market.

Market Extension: taking present products to a new markets.

Diversification: taking new products to new markets that require diversification of the product (Stone, 2001).

3.0 Findings and Analysis
3.1 Strategic Management
To formulate strong strategic direction for the company, below are the key findings necessary to be taken into consideration for Parque Montana s.a.

3.1.1 PEST Analysis
Economic and social factors are the most important macro- environmental factors influencing the fractional business in Europe and are analysed as below.

Economic Factors: Changes in economic factors can positively or adversely affect the fractional property business in Europe and contribute either positively or negatively to the success of the Parque Montana s.a.

The credit crunch across Europe has brought little negative effect on the fractional business model since most of the customers are cash investors and do not rely heavily on loans. In addition, due to the recession, increased rates of properties and increased unemployment rate across Europe, people cannot afford to buy full properties (Nothcourse, 2009).

In an article by Gilani on the Metro newspaper website (17 August, 2012), it is stated that according to a report, the house prices in UK has increased three times higher than the salary increase during last 10 years. The report suggests that the average salary increase is 29% whereas the house prices have increased 94% ion average during the period.

Social Factors: According to a survey conducted by North Course (2009), 38% of the sample in Europe preferred owning a fractional property rather than renting an apartment, condo, or hotel during the holidays. Meanwhile, the survey also indicated that people do invest in lifestyle, despite the credit crunch across Europe. Moreover, trends have shown that people are now more cautious about buying new houses and do not appreciate the costs of buying a new house.

3.1.2 SWOT Analysis
Since the major area of concentration in this analysis is the effects of external environment, thus, opportunities and threats are analysed below.

Opportunities: According to the Property Showrooms website (2009), there will be substantial growth in the fractional industry in Europe and the most popular destinations will be Italy, France, Portugal, UK, Turkey and Spain.

Moreover, NorthCourse (2009) states that successful companies can either target the affluent market that can afford the whole ownership of an equivalent million dollar home, but finds it unnecessary because of the limited time they have to use the home. Or, in an alternative scenario, they can target the less affluent market who cannot afford to buy a new second home.

Threats: The unacceptability of the business model by the Europeans as a result of the cultural perspective is the major threat for the business. Besides, there is no European consumer financing available for the fractional yet. Also, the decrease in the price of the whole properties and increase in the incomes of the less affluent market customers can be a major threat for the success of the business model in Europe which is at its infancy (North course, 2009).

3.1.3 Competition Analysis
To analyse the competition level for fractional property ownership in Europe, Porter’s 5 forces model has been analysed; however, the bargaining power of customers, threat of new entrants and level of rivalry are the major forces affecting the company and are stated here:

Bargaining Power of Customers: The customers’ bargaining power has two dimensions: first, according to Vedrickas (2008) the concept of fractional ownership is new to the Europeans and the industry is small, as well as the fact that there is no mortgage scheme for the fractions. So, people would still prefer to own full properties, in which case customers can have the upper hand.

Threat of New Entrants and level of rivalry: There is a vast threat of new entrants since the barriers for real estate business across Europe are low and the fraction business is receiving fame across the continent.

The most vital trend in the fractional industry is the entrance of the famous and established brands from the hospitality industry. The major hospitality brands set to enter the fractional industry in Europe after their success in America are Fairmont Resorts, Ritz- Carlton, Conard Hilton, Raffles, Banyan Tree, and Four Seasons (NorthCourse, 2009).

3.2 International Business
3.2.1 Evaluation of Indian Market
India is one of the most famous and popular places in the world for Foreign Direct Investment because of its steadily and fast-growing economy. India’s vastly expanding markets, liberalization of trade policies, technological and telecommunication development, and decrease of barriers and restrictions for FDIs have all made it attractive for foreign investors to achieve more productive, profitable, and secure investment (Global Jurix).

In a survey by the United Nations Conference on Trade and Development (UNCTAD), analysed by Global Jurix, India has emerged as the second most desirable place in the world after China for being highly profitable for FDIs.

According to International Business Times (2011), India is expected to achieve higher growth rate in its economy than US by 2050. Besides its impressive growth in economy, the other advantageous factors for investing in India include a federal government system with clear power established between central government and state government, a liberal and friendly investment climate, clear policies for foreign direct investment, the government’s emphasis on developing the infrastructure, skilful and cheap labour, etc.

The country is fast growing in terms of economy, a skilful, educated and cheap labour force, favourable business climates, high demand conditions, availability of sufficient resources, and continuous efforts to make the FDI rules easier favours Parque Montana to expand its business in India.

3.2.2 Market Growth Strategy
To analyse the method of entry and market positioning, I aim to use Ansoff’s matrix.
Ansoff’s Matrix:

Market Growth Strategy

Fractional ownership business scheme is the existing product for the Parque Montana S.A that they run in London and Barcelona. Thus, India will be a new market for the company to enter as part of a strategic expansion. Therefore, as per the above model, they need to follow market development procedures to enter the Indian market. On the other hand, in London and Spain, the company can accelerate the business through a market penetration strategy.

Through the market development strategy the company can exploit the demanding market of India as well as use different pricing policy to attract different customers and create new segments.

3.2.3 Country Analysis:

To analyse the suitability of India for fractional ownership business, I aim to analyse Porter’s Diamond. I consider the factor conditions and demand conditions as the relevant factors that are analysed as below.

Factor Conditions
Physical Resources: According to Arun, et al. (2011) with the increase in shopping malls, and expansion of real estate industry, the cost and availability of land in major Indian cities is the major area of concern for the new businesses and foreign investors.

Human Resources: India has a large population with a lot of hard-working young people, and also have returning talents after studying abroad, thus it can be considered a Brain umpire and an apt country for foreign investors because of its cheap labour (Business Week).

Human Resources

According to a report by National Skill Development Corporation, there are 33 million workers in India’s building, construction and real estate industry, 30% of which are in real estate, making it one of the biggest in the world. The classification of the workers is shown in the below chart:

Thus, India is rich in terms of skilled and unskilled labour, and as 50% of the population is under 25 years age this is beneficial in terms of cost efficiency (Delfeld, 2007).

Demand Conditions
According to Property Report (2010), India’s natural and exquisite beauty along with favourable economic conditions provide a good platform for fractional property businesses to succeed. Radhika Shastri, Managing Director of Group RCI, India, stated that the concept of holiday homes is already a familiar one among Indians. Traditionally, Indians have owned farm houses or vacation homes in the past and today, and most of the high profile and super rich Indians will prefer fractional homes in favourable holiday destinations in the country.

She also said that there has been considerable interest shown by resort developers and hospitality companies to engage in the business model, and that there is a high consumer demand rate for fractional properties to escape the unnecessary challenges of maintaining a whole property that is used for only a limited amount of time during the year.

PEST Analysis: Political and legislative forces as well as the economic conditions of India are the major external factors affecting FDIs in India.

Political and Legislative Factors: the most important political rules are taxation policy, international trade regulations and political rules affecting construction. India’s tax policy has three tiers that include the Union government, State Government and the Urban and Rural Local Bodies that make it a developed tax structure. Each tier holds power for different aspects of taxation policies. According to Investing in India, the tax rate for foreign ventures in India is 40%. However, international trade regulations are made flexible day by day in India.

Permits and Documents that are essential to be obtained during different stages of construction of the structures and their sales are the major political factors affecting the construction or housing industry in India. These documentations are Floor Space Index, Occupation Certificate, etc. (Vora, 2009).

Economic Factors: Fluctuations in the prices of inputs, changes in demand due to the changing disposable income of customers and inflation rate, future growth and resale value and changes in stamp duty and registration that affect the construction business are the major economic forces influencing fractional ownership business in India (Vora, 2009).

Analysis of Indian market: The huge gap between India’s rich and poor allows the company to target just the high profile customers. In addition, India’s rich segment are known to be among the richest in the world, thus, having holiday homes as part of their luxurious life and culture would provide the platform for fractional ownership business to succeed in India.

Furthermore, India’s highly skilful yet cheap labour, strong technological basis, and favourable economic and natural resource conditions will be an opportunity for the Parque Montana s.a to grasp. However, despite the government’s efforts to make rules for FDIs to invest in the country more flexible, the lack of stability in political factors and increasing price of lands are major barriers for the company to overcome.

4.0 Proposed Plan of Action
Considering the problems of the company, supported by the findings and analysis in the previous section, below is the proposed plan of action suggested for the company.

4.1 Segmentation
The credit crunch has dampened Europe’s economy and the affordability of buying a full property has been affected. However, it has not prevented people from wanting to make in holiday and lifestyle investments; thus, to widen the range of its customers and expand its business of fractional ownership, Parque Montana s.a should target both the more affluent customers (those who have the potential to buy properties at high rates but want to buy fractional properties because of the limited amount of time that they will use the property) and less affluent customers (those who cannot afford to buy full properties as second homes, but do not compromise their lifestyle and holiday planning as a result of credit crunch).

Implementation: The strategy to position the fractional ownership properties for the two segments of customers are as follows:

Implementation

4.2 Competitive Positioning Strategy
To launch themselves at high level and to lead the competition in the fraction ownership market in Europe, the company should focus on 2 competitive strategies: First, for more affluent customers whom they are targeting in busier cities like London, Paris, Barcelona, etc., they should follow the differentiation focus strategy based on Porter’s Generic model.

Implementation: In this model, they should target the narrow market with a differentiated product. Thus, they can enhance the quality and bring a new concept of fractional property within relatively higher profit margins for more affluent customers who are able to pay for the fractional properties of high standards.

Alternative Scenario: The Company should target the less affluent customers, using a cost focus strategy where they target a narrow market with the fractional properties at a relatively lower cost.

Implementation: This could be achieved through targeting the European cities where the land, labour and manufacturing costs are low, but tourism attraction is high.

Thus, with the entrance of launched brands from American fractional property and tourism companies, Parque Montana s.a needs to focus on bringing focus differentiated strategy for more affluent customers and cost focus strategy for less affluent customers.

As stated in Stonehouse et al. (2004), according to Porter, competitive advantage can be gained through selecting the most appropriate generic strategy that could be a single or combination of strategies including cost leadership, differentiation, and focus. Below are the two strategies they should focus on while targeting the different segments of customers based on their economic condition:

4.3 International Business Strategy
The company has a very strong financial position and is backed by strong financial sources. And according to their ratio analysis, they expect their liquidity to get better and their profit margin to remain constant, that is comparatively high. Thus, the company’s liquidity ratio demonstrates that they are cash and asset rich and can afford to expand their business across the national boundaries. So, India would be an attractive target for them as the high class people of India are amongst the richest in the world, and having farm houses and timeshare properties that are quite similar to fractional ownership, indicatjng that fractional properties are in their culture and their heavy investment on luxurious life can lead fractional ownership businesses to a major success.

4.3.1 Target Cities
Due to the all-year-round hot weather conditions of India, the country is a hot spot for holiday makers. Cities like Mumbai, Delhi, Goa, Shimla, and Agra are amongst the most touristic places and are the most preferred for holiday makers (Sharma, 2003) despite the fact that the price of land is extremely high (Khan and Sharma, 2012). However, the affluent and high profile customers in India can afford to buy properties at high prices for their luxurious lifestyles; thus, despite the price of land, they can target the above mentioned cities, and can utilise the cheap labour and command over suppliers’ bargaining power.

4.3.2 Market Growth Strategy
As per the Ansoff’s matrix, it is suggested that the company should take their existing product, that is fractional ownership business, to India by creating a new market and targeting the high class and more affluent customers. On the other hand, the best way of entering India would be through a joint venture, which will also suit the company’s international expansion option, to cut down the unnecessary costs and avoid the legal procedures regarding FDIs and leasing lands.

Implementation: The company should join a local brand in the construction industry which will benefit them in terms of using their rich knowledge of Indian culture, local markets, competition and the customer buying behaviour. Moreover, joining a construction company to form a joint venture will also help them to come over other legislative rules like taxations, international trade regulations, and political factors in regard to construction of properties. Thus, Parque Montana s.a should research and find the most suitable construction brand that resembles their strategies and culture, to form a joint venture with.

The company should understand the Indian culture and familiarise themselves with the working condition of the local employees, workers, as well as the preference of the people towards the homes that can be manipulated through a joint venture.

References
Books

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Electronic Sources: Online Reports
13. Ernst and Young (2011) Doing Business in India. [Online]. Available at: http://www.ey.com/Publication/vwLUAssets/Doing_business_in_India_2011/$FILE/Doing_business_in_India_2011.pdf [Accessed on: 14th august, 2012] 14. National Skill Development Corporation (n.d) Human Resource Requirements in the Building. Construction and Real Estate Services. [Online]. Available at: http://www.nsdcindia.org/pdf/Bldg-Const-Real-Estate.pdf [ Accessed on: 1st August, 2012] 15. NorthCourse (2009) Trends in Fractional Real Estate 2009: Europe. Available at: http://www.rciventures.com/wp-content/uploads/2010/03/Trends-in-Fractional-Real-Estate-Europe-2009.pdf [Accessed on: 5th July, 2012]

Electronic Resources: Websites
16. Fractional Life (n.d) Fractional Real Estate- Fractional Property. [Online] Available at: http://www.fractionallife.com/fractional_property.asp [ accessed on: 20th June, 2012] 17. Gilani, N. (2012) House Price Rises ‘more than treble the rate of salary increases’. [Online]. Available at: http://www.metro.co.uk/news/908804-house-price-rises-more-than-treble-the-rate-of-salary-increases [Accessed on: 17th August, 2012] 18. Global Jurix (n.d) Foreign Direct Investment in India. Available at: http://www.globaljurix.com/foreign-direct-investment-india-fdi.php [ Accessed on: 8th July, 2012] 19. International Business Times (2011) Doing Business in India Has Advantages. Available at: http://www.ibtimes.com/articles/231390/20111014/doing-business-in-india-advantages.htm [ Accessed on:15th July, 2012] 20. Investing in India (n.d) Investing in India-A Ready Reckoner. Available at: http://www.investinginindia.in/investing.htm#8.%20Taxation%20in%20India [Accessed on: 25th July, 2012] 21. Khan, S. and Sharma, R. T. (2012) How Southern Estates Escaped the Real Estate Bubble. [Online]. Available at: http://articles.economictimes.indiatimes.com/2012-05-27/news/31860919_1_property-prices-realty-prices-realty-sales. [Accessed on: 30th July, 2012] 22. Kumar, K. (2009) Importance of International Business. [Online]. Available at: http://www.indiastudychannel.com/resources/92715-Importance-international-business.aspx [Accessed on: 22nd June, 2012] 23. NorthCourse (2009) Trends in Fractional Real Estate 2009: Europe. Available at: http://www.rciventures.com/wp-content/uploads/2010/03/Trends-in-Fractional-Real-Estate-Europe-2009.pdf [Accessed on: 5th July, 2012] 24. O’ Callaghan, A. (2008) Talent Management Review. [Online]. Available at: http://www.fasset.org.za/downloads/events/talent_man_sdf_long_article_website.pdf [Accessed on: 28th June, 2012] 25. Property Report (2010) Growing Demand for Fractional Property in India. [Online]. Available at: http://www.property-report.com/growing-demand-for-fractional-property-in-india-5033 [Accessed on: 20th July, 2012
26. Property Showrooms (2009) Fractional Ownership ‘will increase in popularity. [Online]. Available at: http://www.propertyshowrooms.com/bulgaria/property/news/fractional-ownership-will-increase-popularity_131073.html [Accessed on: 29th June, 2012] 27. Vedrickas, G. (2008) Fractional ownership: A property portfolio for all seasons? [Online]. Available at: http://www.telegraph.co.uk/property/overseasproperty/3360834/Fractional-ownership-A-property-portfolio-for-all-seasons.html [Accessed on: 5th July, 2012] 28. Vora, Y. (2009) PEST Analysis of Construction Industry. Available at: http://mgmtfunda.com/pest-analysis-of-construction-industry/ [Accessed on: 26th July, 2012].

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