Scope and Limitations of the Study

Chapter 1
Introduction
1.1 Introduction
Vietnam has always been primarily an agricultural country, with most of its population
residing in rural areas and living off rice planting, fishing and rubber. Yet from 1954, both
South and North Vietnam keyed on economic development through manufacturing. Despite
war and turmoil, by 1976, within a space of 20 years, manufacturing provided over one-quarter
of gross national product. But for the following decade, until “doimoi” liberalization, there were
problems for industry.
By 1986, most industry was under State control of various types and, having lost its war-
based direction and suffering under general instability as the reunited countries adapted to
each other, industry was negatively affected. Still, by the late 1980s, there were positive
indications that the country’s manufacturing sectors were progressing, having won back their
benchmark share of gross domestic product.
With the winds of change, business environment in Vietnam has been changing fast. As
long as opening the economy to the world, international relationship has been improved.
Government policies and regulations are amended to facilitate domestic businessmen and
encourage foreign investment.
The arrival of a free market economy created not only opportunities but also threats for
domestic companies. State enterprises were given much more freedom to choose their
market directions, but with less Government support. Also, selective privatization of State
industry was promulgated under the term “equitation” for example, by forming a company and
selling shares.
Foreign companies entered the market and occupied a significant market shares in
some industries. Machinery industry is one of them. Representing roughly 10 per cent of gross
national product, automobile and machinery manufacturing is poised in a delicate balance.
Vietnam is facing with the choice of either refurbishing and refining existing production
facilities through joint-venture participation, or leaving such machinery manufacture to other
countries, remaining a net importer of vehicles and machines to support its other industries.
For the developing countries like Vietnam, machinery industry remains to be a highly
important industry. The Government put great significance to the industry but a few years ago

it still was very poor. A lot of factories were closed, thousands of employees lost their jobs and
production could not meet domestic demand for industrial machinery while a few machine tool
which demanded for large capital investment was over capacity in the short-run. The reasons
might come from bureaucracy lasting year by year, lack of competence and experienced
managers that led to inability to compete successfully with foreign products.
Recent years, the situation is changing. Vietnam Machinery Industry is refurbishing more
and more. The high end machine tool market in the world (1994) is worth more than about US
$ 250 billions, ASIA has about 35% of the world machine tool market and is predicted to
increase to 50% before the year 2010. Besides Singapore and Thailand, Vietnam would be the
47
third country in ASEAN producing CNC machines commercially. This is an excellent
opportunity and a highly profitable one if it materialized.
Hanoi Mechanical Company is a very particular representative for the growth of Vietnam
Machinery Industry. The company is considered as one of the most successful companies in
the Machinery Industry nowadays. What is the strategy that the company used to overcome
the poverty in the past and compete successfully in domestic market? What should they do to
keep up the growing and develop strongly in the future?
1.2 Problem Statement
The research will focus directly on Hanoi Mechanic Company (HAMECO). Based on the
finding and analysis of company’s situation, external and internal environment impact, it is felt
interesting to find out the strategy that was adopted by this company to survive and compete
successfully in the domestic market. Foreseeing the future challenges and opportunities, the
study will also try to develop a strategy for HAMECO to keep up growth and be able to
compete successfully internationally.
1.3 Objectives of The Research
• To analyze the business environment (external and internal) and how it impacts on
company’s operation.
• To identify the industry structure through Porter’s five forces model.
• To identify the strengths and weaknesses as well as opportunities and threats that
HAMECO has been facing with.

• To find out the strategy used by company to compete successfully in domestic market.
• To strategic recommend to the company, what it should do in the following years to
maintain the leading position in Vietnam Machinery Industry and its contribution in the
world’s machinery market.
1.4 Research Methodology
Literature review:
The study comprehensively reviewed the available literature to build the rationale of the
strategic management in Vietnam Machinery Industry in general and the Hanoi Mechanical
Company in particular. In order to assess the company’s strengths and weaknesses, to
analyze the strategy used to survive and compete successfully in domestic market, Porter’s
framework, known as the five forces model, has been used. Materials were gathered from the
textbooks, journals and other publications which are related to strategic management.
Data collection:
48
The data was collected in Vietnam and details regarding primary and secondary data as
follow:
• Primary: This part of data collection consisted of in-depth interviews. The interviews were
targeted to General Director Senior Managers, Functional Managers. The personnel from
Ministry of Industry, Industrial Machinery and Equipment Corporation were interviewed
simultaneously.
• Secondary information: Relevant information as well as data about Vietnam economy in
general, about Machinery industry, and about Hanoi Mechanical Company were collected
from newspapers, journals, media etc. Moreover, the information was also be obtained
from sources such as Statistical Department of Vietnam, Department of Statistics and
Planning of the Ministry of Industry. The annual reports, profile report also were collected
during this process.
Following framework could give the tentative flows of the research methodology:
49
PROBLEM ANALYSIS
LITERATURE

REVIEW
SECONDARY &
PRIMARY
INFORMATION
• INDUSTRY ANALYSIS
• COMPANY ANALYSIS
ASSESSMENT OF SUCCESS
FACTORS
CONCLUSION
&
RECOMMENDATIONS
STRATEGY REVIEW &ANALYSIS
Figure 1.1: Framework of the study
1.5 Scope and Limitations of the Study
50
The study analyzed in general the present competitive situation in Vietnam Machinery
Industry. The case taken of Hanoi Mechanical Company was able to explain the up-downs in
the industry and strategy the company had used to become successful. The study basically
depended on the in-depth level of information that was supplied by the company and targeted
groups. Moreover, the study mainly considered that portion of overall effort, for strategy
development, in which the author remained in touch with the investigated company. The
unresponded portion was not be discussed in detail.
The major products are machine tools and industrial machines and equipment using in
almost industries, especially in Chemical and Foodstuff Industry.
The limitation of the study is that it depends partly on how supportive the company was
and its related departments. The data concerning to industrial financial ratios and indices is
not available in Vietnam. Thus, it is difficult to make the exact and clear comparison with other
companies within machinery industry.
51
Chapter 2

Literature Review
2.1. Strategy: An Introduction
2.1.1. The Definition of Strategy
What is strategy? There is no single, universally accepted definition. Different authors
and managers use the term differently; for example, some include goals and objectives as part
of strategy while others make firm distinction between them.
Reflecting the military roots of strategy, the American Heritage Dictionary defines
strategy as “the science and art of military command as applied to the prevail planning and
conduct of large-scale combat operations”. The planning theme remains an important
component of most management definitions of strategy. Strategy is “the determination of the
basic long-term goals and objectives of an enterprises, and the adoption of courses of action
and the allocation of resources necessary for carrying out these goals”. (Chandler,1989).
There is also the another definition of strategy as “the pattern or plan that integrates an
organization’s major goals, policies, and action sequences into a cohesive whole.” (Quinn,
1988). Along the same lines, Glueck defined strategy as “a unified, comprehensive, and
integrated plan designed to ensure that the basic objectives of the enterprise are achieved”.
(Hill/Jones, 1989)
According to Mintzberg, definitions of strategy that stress the role of planning ignore the
fact that strategies can emerge from within an organization without any formal plan. That is to
say, even in the absence of intent, strategies can emerge from the grassroots of an
organization. Mintzberg’s point is that strategy is more than what a company intends or plans
to do; it is also what it actually does. With this in mind, Mintzberg has defined strategy as “a
pattern in a stream of decisions or actions”, the pattern being a product of whatever intended
strategies.
Marketing has its 4P’s (product, price, place and promotion). So why can’t strategy do
likewise, even go one better? But these 4P’s pertain not to components of the field so much as
to its most central concept, that of the nature of strategy itself. Mintzberg defines strategy as
an plan, ploy, pattern, position and perspective. (Quin et al, 1988)
2.1.2. The Nature of Corporate Strategy
Definition

Corporate strategy is the pattern of decisions in a company that determines and reveals
its objectives, purposes, or goals, produces the principal policies and plans for achieving those
goals, and defines the range of business the company is to pursue, the kind of economic and
human organization it is or intends to be, and the nature of the economic and non-economic
contribution it intends to make to its shareholders, employees, customers and communities...
(Kenneth/Andrews, 1980)
Corporate Competitive Strategy
52
Companies compete in three ways. One is building core competencies that imbue
products and services with unique functionality. Secondly, they compete to build a worldwide
distribution and brand infrastructure, i.e. an ability to access and serve global market. An
important part of this competition for global market access is the race to build global corporate
brands and thereby capture economies of scope in creating the share of mind necessary to
ensure that customers have a pre-disposition to buy and that competitors are preempted. a
pre-disposition to buy and that competitors are preempted in the quest for global market
share. Thirdly, they compete to create product integrity disciplines-quality, time to market and
customer service, all the things that allow a company to do things faster, more cheaply and
more consistently.
Nowadays, every company of any size that is to have a chance of surviving in an
industry must have a global market-servicing capability. So more and more, competition is
shifting towards functionality-based competencies. Functionality competencies are about
giving the customers something unique, some unique benefit.
The thinking of corporate strategy has been focus on competition for competence, to
recognize that competence has these three different dimension, functionality, market access
and product integrity, and to understand that a core competence can be contained in any one
of these dimensions, though, distribution may become less ‘core’ in some industries.
(European Management Journal, Vol. 11 No. 2 June 1993)
Levels of strategy
Strategies will exist at a number of levels in an organization. An individual may say he
has a strategy-to do with his career, for example. This may be relevant when considering

influences on strategies adopted by organizations but it is not what is meant by corporate
strategy. There is the corporate level: here the strategy is concerned with what types of
business the company, as a whole, should be in and is therefore concerned with decisions of
scope.
The second level can be thought of more in terms of competitive or business strategy.
Here strategy is about how to compete in a particular market. So, whereas corporate strategy
involves decisions about the organization as a whole, competitive strategy is more likely to be
related to a unit within a whole.
The third level of strategy is at the operating end of the organization. Here there are
operational strategies which are concerned with how the different functions of the enterprise -
marketing, finance, manufacturing and so on - contribute to the other levels of strategy. Such
contributions will certainly be important in terms of how an organization seeks to be
competitive. Competitive strategy may depend to a large extent on, for example, decisions
about market entry, price, product offer, financing, manpower and investment in plant. In
themselves these are decisions of strategic importance but are male, or at least strongly
influenced, at operational levels. (Johnson/Scholes, 1988)
Formulation of strategy
The principal subactivities of strategy formulation as a logical activity include identifying
opportunities and threats in the company’s environment and attaching some estimate or risk
to the discernible alternative. Before a choice can be made, the company’s strengths and
weaknesses should be appraised together with the resources on hand and available. Its actual
or potential capacity to take advantage of perceived market needs or to cope with attendant
53
risks should be estimated as objectively as possible. The strategic alternative which results
from matching opportunity and corporate capability at an acceptable level of risk is what we
may call an economic strategy.
The determination of strategy also requires consideration of what alternatives are
preferred by chief executive and perhaps by is or her immediate associate as well, quite apart
from economic considerations. Personal values, aspirations, and ideals do, and in our
judgment quite properly should, influence the final choice of purposes. Thus what the

executives of a company want to do must be brought into the strategic decision.
(Quinn/Mintzberg/James, 1988)
The implementation of strategy
Since effective implementation can make a sound strategic decision ineffective or a
debatable choice successful, it is as an important to examine the processes of implementation
as to weigh the advantages of available strategic alternatives. The implementation of strategy
is comprised of a series if subactivities which are primarily administrative. If purpose is
determined, ten the resources of a company can be mobilized to accomplish it. An
organizational structure appropriate for the efficient performance of the required tasks must be
made effective by information systems and relationships permitting coordination of subdivided
activities. The organizational processes of performance measurement, compensation,
management development - all of them enmeshed in systems of incentives and controls -
must be directed toward the kind of behavior required by organizational purpose. The role of
personal leadership is important and sometimes decisive in the accomplishment of strategy.
(Quinn et al, 1988)
Implementation problems
Difficult as it may be to make good plans, the effort of making them is nothing compared
to what is necessary to actually implement them, implementation requires patience, tact,
perseverance and determination. The lack of people that can make plans come true cannot be
the only explanation for the fact that a large number of plans stay exactly what they are;
merely plans. One has to realize that some plans are just of no use anymore after some time.
The environment in which a company operates may have changed drastically since the plan
necessary. It needs no further argument that in such cases it is wise not to implement the
original plan. Not implementing a designed strategy may also have its roots in badly executed
design phase. Normally, strategies tend to be worded in more or less abstract terms.
Sometime they have not been formulated at all. In the case of turbulent and dynamic
environment the management of a company will have to be very careful when trying to make
the company’s strategic explicit. Management will have to see to it that a large enough degree
of freedom remains. Thus, making it possible to change the company’s course in case the
changes in the environment so demand. Putting the strategy into writing and communicating it

to the employees may be a risky undertaking. There is nothing so difficult as having to explain
that the circumstances have changed and that, therefore, the strategy has to be revised (once
more). (European Management Journal, Vol. 11, No 1., pp. 122-131, 1993)
Figure 2.1 may be useful in understanding the analysis of strategy as a pattern of
interrelated decisions:
54
FORMULATION
(Deciding what to do)
IMPLEMENTATION
(Achieving results)
1. Identification of
opportunity and risk
2. Determining the
company’s material,
technical, financial,
and mangerial
resources
3. Personal values and
aspirations of senior
management
4. Acknowledgement of
noneconomic
responsibility to
society
CORPORATE
STRATEGY:
Pattern of
purposes and
policies
defining the

company and
its business
1. Organisation structure and
relationships
Division of labor
Coordination of divided
responsibility
Information systems
2. Organisational process and
behavior
Standards and
measurement
Motivation and
incentive systems
Control systems
Recruitment and
development of
managers
3. Top leqadership
Strategic
Organisational
Personal
Figure 2.1: Analysis of Strategy as A Pattern of Interrelated Decisions
(Source: Quinn/Mintzberg/James, 1988)
2.1.3. Strategic Management Process
The easy answer is the management of the process of strategic decision making.
Strategic management is concerned with deciding on strategy and planning how that strategy
is to be put into effect. There is strategic analysis in which the strategist seeks to understand
the strategic position of the organization. There is strategic choice which is to do with the
formulation of possible courses of action, their evaluation and the choice between them.

Finally there is strategy implementation which is concerned with planning how the choice of
strategy can be put into effect. This three-part approach is summarized in figure 2.2
55
Strategic analysis
Strategic choice
Strategy
implementation
Expectation
objectives
& power
The
environment
Resources
Generation
of options
Evaluation
of options
Selection of
strategy
Resource
planning
Organisation
structure
People &
systems
Figure 2.2: A Summary Model of the Elements of Strategic Management
(Source: Johnson/Scholes, 1988)
2.2. Strategy Analysis
Analysis of industry and competitive conditions is the starting point in evaluating a
company's strategic situation and market position.

2.2.1. Identifying The Industry's Dominant Economic Characteristics
As a working definition, we use the word industry to mean a group of firms whose
products have so many of the same attributes that they compete for the same buyers. The
factors to consider in profiling an industry's economic features are fairly standard:
56
• Market size.
• Scope of competitive rivalry (local, regional, or global).
• Market growth rate and where the industry is in the growth cycle (early development, rapid
growth and takeoff, early maturity, late maturity and saturation, stagnant and aging,
decline and decay).
• Number of rivals and their relative sizes-is the industry fragmented with many small
companies or concentrated and dominated by a few large companies?
• The number of buyers and their relative sizes.
• The prevalence of backward and forward integration.
• Ease of entry and exit.
• The pace of technological change in both production processes and new product
introductions.
• Whether the product(s)/service(s) of rival firms are highly differentiated, weakly
differentiated, or essentially identical.
• Whether there are economies of scale in manufacturing, transportation, or mass
marketing.
• Whether high rates of capacity utilization are crucial to achieving low cost production
efficiency.
• Whether the industry has strong learning and experience curve such that average unit
cost declines as cumulative output (and thus the experience of "learning by doing") builds
up.
• Capital requirements.
• Whether industry profitability is above/below par.
(Source: Thompson/Strickland, 1992)
2.2.2. The Concept of Driving Forces: Why Industry Change?

Industry conditions change because important forces are driving industry participants
(competitors, customers, suppliers) to alter their actions; the driving forces in an industry are
the major underlying causes of changing industry and competitive conditions.
Most common driving forces:
• Changes in the long-term Industry Growth rate: Shifts in industry growth up or down are
force for industry change because they affect the balance between industry supplier and
buyer demand, entry and exit, and how hard it will be for a firm to capture additional sales.
• Changes in Who buys the Product and How They Use It: Shifts in buyer demographics and
the emergencies of new ways to use the product can force adjustments in customer
service offerings (credit, technical assistance, maintenance and repair), open the way to
market the industry's product through a different mix of dealers and retail outlets, prompt
producers to broaden/narrow their product lines, increase/decrease capital requirements,
and change sales and promotion approaches.
57
• Product Innovation: Product innovation can broaden an industry's customer base,
rejuvenate industry growth, and widen the degree of product differentiation among rival
sellers. Successful new product introductions strengthen a company's position, usually at
the expense of companies who stick with their old products or are slow to follow with their
own versions of the new product.
• Technological Change: Advances in technology can dramatically alter an industry’s
landscape, making it possible to produce new and/or better products at lower cost and
opening up whole new industry frontiers. Technological change can also change in capital
requirements, minimum efficient plant sizes, and desirability of vertical integration, and
learning or experience curve effects.
• Marketing Innovation: When firms are successful in introducing new ways to market their
products, they can spark a burst of buyer interest, widen industry demand, increase
product differentiation, and/or lower unit costs-any or all of which can alter the competitive
positions of rival firms and force strategy revisions.
• Entry or Exit of Major Firms: The entry of one or more foreign companies into a market
once dominated by domestic firms nearly always produces a big shakeup in industry

conditions. Likewise, when an established domestic firm in another industry attempts entry
either by acquisition or by launching its own start up venture, it usually intends to apply its
skills and resources, in some innovative fashion. Entry by a major firm often produces a
“new ballgame” not only with new key players but also with new rules for competing.
• Diffusion of Technical know-how: Diffusion of technical know-how occurs through scientific
journals, trade publications, on-site plant tours, word-of-mouth among suppliers and
customers, and the hiring away of knowledgeable employees. It can also occur when the
processors of technological know-how license others to use it for a fee or team up with a
company interested in turning the technology into a new business venture.
• Increasing Globalization of the Industry: Global competition usually changes patterns of
competitive advantage among key players. Globalization is most likely to be a driving force
in industries (a) based on natural resources, (b) where low-cost production is a critical
consideration (making it imperative to locate plant facilities in countries where the lowest
costs can be achieved), and (c) where one or more growth-oriented, market-seeking
companies are pushing hard to gain a significant competitive position in as many attractive
country market as they can.
• Changes in Costs and Efficiency: In industries where significant economies of scale are
emerging or strong learning curve effects are allowing firms with the most production
experience to undercut rivals’ prices, large market share becomes such a distinct
advantage that all firms are pressured to adopt volume-building strategies. Likewise,
sharply rising costs for a key input (either raw materials or labor) can cause a scramble to
either (a) line up reliable suppliers at affordable prices or (b) search out lower-cost
substitutes. Any time important changes in cost or efficiency take place, firms’ positions
can change radically concerning who has how big a cost advantage.
• Emerging Buyer Preferences for a Differentiated instead of a Commodity Product (or for a
more standardized product instead of strongly differentiated products): Sometimes growing
numbers of buyers decide that a standard product at a bargain price meets their needs as
effectively as premium priced brands offering ore features and options. These wings in
buyer demand can drive industry change by shifting patronage to sellers of cheaper
commodity products and creating a price-competitive market environment.

58
• Regulatory Influences and Government Policy Changes: Regulatory and governmental
actions can often force significant changes in industry practices and strategic approaches.
In international markets, newly-enacted regulations of host governments to open up their
domestic markets to foreign participation or to close off foreign participation to protect
domestic companies are major factor in shaping whether the competitive struggle between
foreign and domestic companies occurs on a level playing field or whether it is one-sided
(owing to government favoritism).
• Changing Societal Concerns, Attitudes, and Lifestyles: Emerging social issues and
changing attitudes and lifestyles can be powerful instigators of industry change.
• Reductions in Uncertainty and Business Risk: Overtime, however, if pioneering firms
succeed and uncertainty about the industry’s viability fades, more conservative firms are
usually enticed to enter the industry.
(Source: Thompson/Strickland, 1992)
2.2.3. Competition Analysis
Competitive strategy is the part of business strategy that deals with management’s plan
for competing successfully - how to build sustainable competitive advantage, how to
outmaneuver rivals, how to defend against competitive pressures, and how to strengthen the
firm’s market position.
As a rule, competition in an industry is a composite of five competitive forces:
The Rivalry among Competing Sellers:
The most powerful of the five competitive forces is usually the competitive battle among
rival firms. How vigorously sellers use the competitive weapons at their disposal to jockey for
a stronger market position and win a competitive edge over rivals shows the strength of this
competitive force. The big complication is that the success of any one firm’s strategy hinges
on what strategies its rivals employ and the resources rivals are willing and able to put behind
their strategies. Competitive battles among rival sellers can assume many forms and degrees
of intensity. The weapons used for competing include price, quality, features, services,
warranties and guarantees, advertising, better networks of wholesale distributors and retail
dealers, innovation, and so on. There are several factors that industry after industry, influence

the strength of rivalry among competing sellers:
a. Rivalry tends to intensify as the number of competitors increases and as they become
more equal in size and capability.
b. Rivalry is usually stronger when demand for the product is growing slowly.
c. Rivalry is more intense when industry conditions tempt competitors to use price cuts of
other competitive weapons to boost unit volume.
d. Rivalry is stronger when the costs incurred by customers to switch their purchases from
one brand to another are low.
e. Rivalry is stronger when one or more competitors is dissatisfied with its market position
and launches moves to bolster its standing at the expense of rivals.
f. Rivalry increases in proportion to the size of the payoff from a successful strategic move.
59
g. Rivalry tends to be more vigorous when it costs more to get out of a business than to stay
in and compete.
h. Rivalry becomes more volatile and unpredictable the more diverse competition are in
terms of their strategies, personalities, corporate priorities, resources, and countries of
origin.
i. Rivalry increases when strong companies outside the industry acquire weak firms in the
industry and launch aggressive, wee-funded moves to transform their newly-acquired firms
into market contenders.
(Source: Thompson/Strickland, 1992)
Regarding to Vietnam’s Machinery Industry, the competition among domestic
manufacturers is not fierce. Most of domestic mechanical companies possess the very poor
production system with obsolete technology and equipment. Thus, in general, domestic
products could not attract customers while foreign products overwhelm the domestic market.
The Competitive Force of Potential Entry:
How serious the threat of entry is in a particular market depends on two factors: barriers
to entry and the expected reaction of incumbent firms to new entry. A barrier to entry exists
whenever it is hard for a newcomer to break into a market and/or economic factors put a
potential entrant at a disadvantage relative to its competitors. There are several types of entry

barriers:
• Economies of scale
• Inability to gain access technology and specialized know-how
• Learning and experience curve effects
• Brand preferences and customer loyalty
• Capital requirements
• Cost disadvantages independent of size
• Access to distribution channels
• Regulatory policies
• Tariffs and international trade restrictions
(Source: Thomlson/Strickland, 1992)
Machinery Industry is a industry needs a lot of capital to invest but slow in bringing
benefits. Therefore, threat of potential entry is not so strong because they are not sure for the
success in the future, afraid of taking risk. There are very few in number of foreign countries
invest as well as enter the Vietnam’s machinery industry’s market.
The Competitive Force of Substitute Products:
The competitive threat posed by substitute products is strong when prices of substitutes
are attractive, buyers’ switching costs are low, and buyers believe substitutes have equal or
better features
60
As a rule, then, the lower the price of substitutes, the higher the quality and the
performance, and the lower the user’s switching costs, the more intense are the competitive
pressures posed by substitute products.
For Vietnam’s machinery industry, foreign products became a rather important threat of
substitute products thanks to their much higher quality products. Foreign products overcame
the domestic ones long back and is continuing to increase their reputation in Vietnam’s market
if the domestic production can not catch the pace of technological development and
modernization in the world.
The power of suppliers:
Whether the suppliers to an industry are a weak or strong competitive force depends on

market conditions in the supplier industry and the significance of the item they supply. The
competitive fore of suppliers is greatly diminished whenever the item they provide is a
standard commodity available on the open market from a large number of suppliers with
ample ability to fill orders.
On the other hand, powerful suppliers can put an industry in a profit squeeze with price
increases that can not be fully passed on to the industry’s own customers. Suppliers become
a strong competitive force when their product makes up a sizable fraction of the costs of an
industry’s product, it is crucial to the industry’s production process, and/or significantly affects
the quality of the industry’s product.
Suppliers are also more powerful when they can supply a component cheaper than
industry members can make it themselves. (Thompson/Strickland, 1992).
In the past, most of raw material is imported in a very strict and complicated import
procedure. At that time, suppliers was quite strong and there are a lot of difficulties for
domestic companies to buy raw materials from abroad. Since the economic reform, the
situation is changing. Import and export procedures are not so strict and it is much easier for
domestic companies to buy material from abroad. The supplier power is not so strong at
present.
The power of Buyers:
Buyers become a stronger competitive force the more they are able to exercise
bargaining leverage over price, quality, service, or other terms of conditions of sale.
Just as with suppliers, the competitive strength of buyers can range from strong to
weak. Buyers have substantial bargaining leverage in a number of situations. The most
obvious is when buyers are large and purchase a sizable percentage of the industry’s output.
The bigger buyers are and the larger the quantities they purchase, the more clout they have in
negotiating with the sellers.
One last point: all buyers don’t have equal bargaining power with sellers; some may be
less sensitive than others to price, quality, or service. (Thompson/ Strickland, 1992)
Due to the fierce competition with foreign products, customers are divided into different
classes. Strong customers are often companies with strong financial position and these
companies are in favor for foreign products. Domestic production serve mainly value-oriented

customers, who are not so strong and favor good quality products at reasonable price. For this
61
kind of customers, domestic companies often create their reputation and may get customers
loyalty. Therefore, the power of buyers is not strong as well.
2.2.4. Competitive Position of Major Companies/ Strategic Groups
A strategic group consists of those rival firms with similar competitive approaches and
positions in the market.
Some strategic groups are usually more favorably positioned than others because
driving forces and competitive pressures do not affect each group evenly and profit prospects
vary among groups based on the relative attractiveness of their market positions.
Strategic group analysis helps deepen understanding of competitive rivalry. First, driving
forces and competitive pressures often favor some strategic groups and hurt others. second,
the profit potential of different strategic groups may vary due to the strengths and weaknesses
in each group’s mark position. General speaking, the closer strategic groups are on the map,
the stronger competitive rivalry among member firms tens to be. (Thompson/Strickland, 1992)
2.2.5. Competitors Analysis: Predicting What Moves Which Rivals are likely to
Make Next
Successful strategists take great pains in scouting competitors - understanding their
strategies, watching their actions, sizing up their strengths and weaknesses, and trying to
anticipate what moves they will make next. (Thompson/Strickland, 1992)
2.3. Pinpointing the Key Factors for Competitive Success
Key Success Factors (KSFs) are the major determinants of financial and competitive
success in a particular industry. Key success factors highlight the specific outcomes crucial to
success in the marketplace and the competencies and capabilities with the most bearing on
profitability. At most, KSFs can serve as the cornerstones for building a company’s strategy.
Companies frequently win competitive advantage by concentrating on being distinctively better
than rivals in one or more of the industry’s key success factors.
Key success factors vary from industry to industry, and even over time in the same
industry, as driving forces and competitive conditions change.
To summarize, key success factors spell the difference between profit and loss and

ultimately, between competitive success and failure. A Key Success Factor can be a skill or
talent, a competitive capability, or a condition a company must achieve; it can relate to
technology, manufacturing, distribution, marketing, or organizational resources.
(Thompson’Strickland, 1992).
62
Chapter 3
External Environment Analysis
This chapter focus on the issue of indefinite opportunities and threats for Hanoi
Mechanical Company (HAMECO) in the near future. It begins with the analysis about the
macro - environment in which HAMECO operates. This section concentrates on analysis of
the current situation in Vietnam as well as showing strategic orientations and investment
opportunities for the Vietnam’s Machinery Industry in the coming years. Porter’s five forces
model is applied to analyze the industry concentrating in machine tools industry in order to
have a general view about competitive competencies of HAMECO at present and in the future.
3.1. Macro - Environment Analysis
3.1.1. Overview of Vietnam Economy
Political and legal factor:
Political and legal factors have a important impact on the level of opportunities and
threats in the environment.
Although the Communist Party has provided Vietnam with stable government, it has by
no means reached consensus on the way to go about solving the country’s massive problems,
neither has it created the detailed organizational methodologies that will need to be employed.
Such progress as has been made has been achieved by wrenching policy zigzags. The
Vietnamese economy has reached a crucial stage in its development. Economic progress
could stall unless there is real political will to carry out the changes needed for the economy to
emerge on a strong footing. Some of the Government’s recent moves haven’t been very
encouraging. “We are convinced that the Government should like to open up the economy, but
instead of going in a straight line, it is zigzagging” says Luu Le, Vietnam Country Manager of
Bank of America. (Vietnam: Politics Delay Tough Choices, Asian Business, 10/1995).
To support the economic liberalization and encourage the private sector, the

Vietnamese Government has promulgated a series of economic laws such as Law of Foreign
Investment, Company Laws, Law of Private Business, etc. It seemed to create a favorable
environment for foreigners doing business in Vietnam. Actually, it is not completely favorable
as it was supposed to be. For example, in February 1995, a Government edict placed fixed
annual rentals on the right to use the land - all land in Vietnam is state - owned which would
be set by the Finance Ministry and People’s Committees (the local authorities). The new
regulation perturbed the foreign banks that have set up in Vietnam, because it makes it harder
for business and Jvs to use land - lease documents as collateral. The foreign banks are also
concerned about Vietnam’s “one company, one bank” regulation, which limits companies to
using just one bank. It seems to be a means to force companies to use Vietnamese banks.
Vietnam’s acceptance into ASEAN in July 1995 was seen as a catalyst for the forces of
change. It is a positive step. It will help Vietnam accelerate economic reforms, improve the
63
competitiveness of its products and broaden economic relations. It will offer a bitter, but
healthy remedy. It remains to be seen to what extent the patient will take his medicine, in
terms of lowering import tariffs on ASEAN goods in keeping with the AFTA agreement.
With regards to the machinery industry, the investment environment is likely to be more
favorable and attractive to both domestic and foreign investors a little bit . At present the legal
system is much refined, procedures are simplified and there are crucial administrative reforms
in Government. The Government aimed to make the civil service more professional, and they
structured Ministries into more logical groups by, for example combining the ministries of Light
and Heavy industry, and the Ministries of Forestry and Agriculture. They are also aim to turn
the ministries into administrators of their assets, rather than active players in the economy.
Without these administrative reforms, further efforts to privatize Vietnam’s state - owned
enterprises are futile.
One more important thing is the import problems. The Government has not provided the
policy for domestic production protection especially for machinery industry. More than that,
due to the bad export and import management, some mechanical industrial production
aspects have been deadlocked. Thus, the Government intentionally let foreign mechanical
products penetrate deeply and gradually occupy the domestic market. Domestic mechanical

production is lacking jobs whereas it is confirmed that the market for mechanical products is
really big and is increasing more and more. The problem is that there is a need to have a
reasonable import policy to encourage and make it easier for domestic mechanical
manufacturers to survive and develop.
Economic growth:
After three years of bumper growth and the resumption of international development
financing and aid flows, Vietnam’s economy is poised to enter a phase of what might be
termed consolidated growth in 1995. The original policy changes (doimoi) that kick - started
the country’s shift to a market economy in the second half of the 1980s are being refined and
expanded today, creating a more workable economic environment, particularly from the point
of view of foreign business.
Industrial growth remains vigorous across the board, and there is evidence that the
country’s chronic infrastructure problems, which have hither to limited growth projections, are
starting to be tackled, thanks to new loans from such lenders as the International Monetary
Fund (IMF), the World Bank, and the Asian Development Bank (ADB). Also having an impact
are much - increased levels of overseas development assistance, especially from Japan,
France and Australia and various innovative private sector schemes linking infrastructure
development with business spin - off, as evidenced in recent major projects involving
Taiwanese and Korean companies.
Vietnam has 6,289 registered state enterprises, a 48% decrease from 12.084 at the
beginning of 1990. Although the numbers have dropped, state enterprises are still the main
engine of the company, accounting for nearly 90% of total funds of all enterprises, 85% of the
fixed assets in industry, 100% of large mines and employing 90% of skilled workers. According
to the Government’s General Statistics office, the state sector’s contribution to GDP (GDP is
estimated to growth by 10% this year - 1997) grew from 29.4 % in 1990 to 40.4% in 1994.
Production from JVs - nearly all of them with state enterprises - is included, rather oddly, in
figures for public sector output. Taxes from state enterprises last year accounted for almost
49% of all receipts (Business in Vietnam, 1995)
64
GDP GROWTH RATE

(%)
9.5
3.4
6.5
8.6
8.1
8.8
9.5
6
2.3
2.7
4.6
0
1
2
3
4
5
6
7
8
9
10
'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96
Figure 3.1: GDP Growth Rate
(Source: Statistic Department of Vietnam)
65
Economic structure
(GDP by real price - %)
28.9

33
30.1
42.4
27.5
38.1
Agriculture
Industries
Services
Figure 3.2: Economic structure between 1986 and 1995
(Source: Vietnam Economic Times, No 5/1997)
From a economy without any improvement before 1986, Vietnamese economy is
gradually recovering and getting stable, growth rate of next periods is higher than previous
ones and reached rather high level in last five years.
Based on the performance of the past two years, GDP is expected to grow by 10% in
1997. As observed in Figure 3.1, in 1995 and 1996, GDP growth is fixed with 9.5% in
comparison with 8.8% in 1994. This is not a mere ‘blip’ in as much as Vietnam’s effort in
building new relationship with a wide swath of countries worldwide is beginning to bear fruit in
terms of eliminating financial and technology access bottlenecks - to say nothing of markets -
for Vietnamese goods. This can be readily seen in a variety of sectors:
1. Agriculture production has grown 6.5 % in 1994 and 5.6% in 1995. Growth rate of food
grains in 10 years of reform reached 4%, higher than population growth rate. Therefore,
food grains per capita increased from 300 kg/year in 1986 to 371 kg/year in 1995. From a
country lacking of rice in 1988, Vietnam became the third largest rice exporter in the world
after United State and Thailand. Agricultural products increased 4.8% in 1996 compared to
1995. (See figure 3.3).
66
2. Industry as a whole did even better. The value of general industrial products in 1995 is
26.463 billion VND, more than 4 times in comparison with 1975’s data, reached average
growth rate 7.2% per year in 4 years. Especially in the period 1991 - 1995, GIP increased
over 10%.

3. Services are expected to grow as well, more or less in lock step with industry, especially
financial services and tourism.
4. Science - Technology became an important factor of production power, encouraged the
stable development of the economy with high speed. It is a new point of Vietnamese
economy in the reform period. Rate of investment in scientific research increased from
0.1% GDP previously to 0.4% GDP currently.
Economic situation generally is in favor for HAMECO to improve itself in the coming
years. GDP increased led to the increase in demand for other consumer goods industries and
other economic sectors. This will result in increasing demand for mechanical products and it is
hoped that HAMECO would be expand its production in the coming years.
Inflation:
Inflation has been retained in to levels (4.5% in 1996) that are comparable to those of
neighboring countries and far from the 67% recorded in 1991.
Since the super inflation economy (in 1986 inflation rate is 774.7%), inflation rate
decreased to just 12.7% in 1995 and especially in 1996 remained just only 4.5. The going
down in inflation rate adding with stable value of Vietnamese Dong created very favorable
conditions for open market economy, expanding trade relationship with abroad and attracting
investment capital.
However, certain warning signs will have to be heeded. Inflationary factors remain very
much in the equation and, with the sharp increase in exports crucial to maintaining the
country’s growth trajectory, commensurate pressures are reflected in growing budget and
external deficits.
In an inflationary environment, it may be possible to predict with any accuracy the real
value of returns that can be earned from business. Such uncertainty makes companies less
willing to invest. High inflation rate is a threat to businesses in general and particularly for
HAMECO. Inflation devalues the money and investment will bring much less benefits than it
should be as normal. Thus, the company should pay much attention in the movement of
inflation rate to have reasonable investment plan.
67
3

2.1
1.95
1.751.95
1.03
29
27.5
26.19
25.5
24.21
21.98
'91 '92 '93 '94 '95 '96
Export
Output
Figure 3.3: Output and export of food grains (million of tons)
(Source: Vietnam’s Statistic Department)
14
3.1
6.2
0
2
4
6
8
10
12
14
1986 1990 1995
Figure 3.4: Industrial growth rate (% per year)
(Source: Vietnam’s Statistic Department)
68

Inflation ratio
(%)
4.5
12.7
14.4
5.2
17.5
67
'91 '92 '93 '94 '95 '96
Figure 3.5: Inflation Ratios
(Source: Vietnam’s Business Times, Feb. 1997)
Interest Rate Policy:
Interest rates also determine the cost of capital for a company. This cost can be a major
factor in deciding whether a given strategy is feasible.
In 1993, State Bank of Vietnam abandoned stipulating sector - specific lending rates and
instead, differentiated them according to the purpose of loans - fixed and working capital. Its
current interest rate policy sets maximum rate on bank deposits and lending, with the
exception of “purpose - linked” funds (also called deposit substitutes) which can be mobilized
and on - lent at higher rates. Interest rates have been positive in real terms since 1989, except
during 1990 - 1991. While the thrust of interest rate policy is in the right direction, there are
some shortcomings. First, the number of maximum lending rates and deposit rates is too high.
Second, there is no convincing rationale for prescribing lower rates on deposit for economic
entities than households. Third, purpose - linked lending should be treated no differently from
normal bank lending, since exempting banks from the maximum lending rate runs the risk of
adverse selection and may have negative impact on bank’s financial soundness. Fourth,
although the interest rate on medium - and long - term loans was raised in August, 1994, it
remains lower than that on short - term loans. This inverted rate structure does not reflect
maturity or credit risk premiums and discourages term lending. All these aspects of interest
rate policy create financial distortions and aggravate financial market segmentation at a time

when it is urgent to unify the formal financial system and forge links with the informal credit
market. The current rates are 1.75% per month for short-term loans, 1.7% per month for long-
term loans (the former rate was 2.1% and 2.2%) and 9% per year for foreign currency. The
decrease in interest rate is much in favor of business environment. For HAMECO, it is really
good for gaining ability to cover the bank’s loan because the decrease in interest rate reduces
remarkable amount of money that HAMECO will have to pay off as interest. (Source: Report
No. 9223 - Vietnam, World Bank, 4/1991)
International Trade:
Vietnam has been increasingly engaged in foreign trade since 1986. Major trade
partners are Japan, Germany, Australia, Hong Kong, South Korea, Malaysia and Thailand.
69
Because of a lack of technology in processing, principal exports are mostly primary products.
The important ones are crude oil and rice, which make up about 50 per cent of the total export
value. Eighty percent of crude oil is exported to Japan. Other export products consist of
fishery products, rubber, textiles and coffee.
In terms of imports, the major item is refined oil. Although Vietnam has abundant crude
oil, the fact that there are no local refineries causes the country to export nearly all of its crude
oil and then import in the form of refined oil form Russia, Singapore, and Indonesia.
Additionally, there are also imports of consumer goods, motorcycles, fertilizers, chemical
products and machinery, all of which are expected to increase in line with the growth of
domestic investment.
In 1994, Vietnam’s exports were expected to reach US $ 3.6 billion, compared to the
previous year’s US $ 2.85 billion, or up to 26%. Imports were anticipated at US $ 4.2-4.5
billion, compared to US $ 3.3 billion in 1993, or up to 30%. This caused a trade deficit of about
US $ 600 - 900 million. Foreign reserves are low, about US $ 300 million, which is equivalent
to less than 1 month of imports. (Bangkok Bank Monthly Review, April-June 1995)
Machinery industry in Vietnam in general and HAMECO in particular is looking for the
exports’ markets abroad. ASEAN countries can be considered as potential markets for export.
The expansion of international trade created more and more relations between Vietnam and
other countries. HAMECO has by built itself relationships with some foreign countries such as

Japan, France, Thailand and is eager to look for new relations with others to create new
market for exporting its products. This opened a bright future for Vietnam machinery industry
to become a key industry in modernization and industrialization.
Import & Export
(million US$)
2200
2541
3924
4500
6778
7000
5000
3600
2985
2581
2087
11000
'91 '92 '93 '94 '95 '96
Export
Import
Figure 3.6: Import and export
(Source: Statistical Department of Vietnam)
70
Foreign Direct Investment:
Foreign direct investment plays an important role in Vietnam’s industrial development.
Up to January 19, 1995, there have been 1,017 licensed projects with an investment capital of
US$ 11.1 billion. The top five on the list are projects from Taiwan, Hongkong, Singapore,
South Korea, and Japan. Thailand ranked twelfth, with 46 projects worth US$ 284 million.
Taiwan and Hongkong top the list because of the close relationship between Chinese who
immigrated to Taiwan and Hongkong. As for the US, its role became more evident after the

embargo on Vietnam had been lifted by the US President on February 4, 1994. The US,
ranking thirteenth, has 28 projects including oil and gas exploration.
Even though foreign investment in Vietnam has been expanding noticeably, the number
of projects that are in operations is very low. According to the Secretary General of SCCI,
actual investment accounted for only 37% of the approved investment due to inadequate
infrastructure. Moreover, the government’s efforts to have various industries dispersed
throughout the country have not proved to be very fruitful.
Nevertheless, foreign investment is expected to grow rapidly in infrastructure projects
such as in telecommunications and transportation, real estate development, agricultural
processing and consumer goods production, to meet with increasing domestic demand.
Moreover, the fact that the US embargo on Vietnam was lifted enabled Vietnam to receive
more assistance from foreign countries and international organizations, and encouraged more
investment.
Foreign investment situation created many opportunities for machinery industry to
improve itself through the help of foreign investment. Now, it is easier for foreigners to invest
in Vietnam and it is an effective way to develop Vietnamese industries, especially it is very
necessary for machinery industry. There have been many Joint-Ventures in machinery
industry, mayjor in automobile industry. In machine tools as well as in industrial equipment
field, it is likely that there is not any JVs yet. Actually, some strong foreign companies kept an
eye on this field of machinery indutsry. Let's hope that there will be JVs in coming years.
Manufacturing:
A common key in the rapid transformation of traditionally agrarian Asian societies into
the so-called economic miracles today has been their capacity to develop productive, cost-
effective-and highly profitable-manufacturing industry.
The State still play a vital role in the industrial sector, with 70 per cent of the total output
coming from state enterprises tend to decline as a result of the liberalization policy and a
reduction in subsidies. The number of state enterprises went down from 12,000 in 1991 to half
the number at present. Meanwhile, the private sector’s role has increased since 1986 when
private companies were allowed to carry out their businesses with, or as join - ventures with
foreign companies. Then in 1991, the Private Company Law was enacted. Rapid growth of

private business and other joint - venture has accelerated construction business, especially
the construction of houses, offices and infrastructures. Major industries in the North are mostly
71