CONSTRUCTION ECONOMICS

ASSIGNMENT 1

PROPOSAL FOR GREY’S FITOUT:

PROPOSITIONS ON HOW TO WEATHER THE

RECESSION STORM

DATE:

6TH OCTOBER 2013

LECTURER:

Dr. JAMES ROTIMI

BY:

ANUSHYA RAMASEGAR

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FACULTY OF DESIGN AND CREATIVE TECHNOLOGIES

AUCKLAND UNIVERSITY OF TECHNOLOGY TE WANANGA ARONUI O TAMAKI MAKAU RAU

School of Engineering

Master of Construction Management

Name ANUSHYA RAMASEGAR

ID Number 1380633

Paper Name CONSTRUCTION ECONOMICS

Assignment Proposal for Grey’s Fitout: Propositions on How to Weather The Recession

Storm

Number of words (excluding appendices) 3232

Please read and tick the boxes below before handing in your assignment

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Anushya Ramasegar 06/10/2013

………………………………………………………….. ……………………

Signature Date

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TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY ............................................................................ 4

2.0 ISSUES ......................................................................................................... 4

3.0 BACKGROUND ........................................................................................... 5

4.0 ALTERNATIVE COURSES OF ACTION .................................................... 6

4.1 Employee Focus ......................................................................................... 6

4.2 Staff Secondment to Dunedin Office .......................................................... 6

4.3 Expanding Network and Marketing Services .............................................. 7

4.4 Establish inter-firm relationships and partnerships with suppliers ............... 8

4.5 Hiring and Pay Freeze ................................................................................ 8

5.0 IMPLICATIONS ........................................................................................... 9

6.0 RECOMMENDATIONS AND CONCLUSION .......................................... 12

7.0 REFERENCES ............................................................................................ 13

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1.0 EXECUTIVE SUMMARY

Grey’s Fitout Pte. Ltd. has benefitted from success since the establishment of the

company in 1999. With 53 employees and offices in Christchurch and Dunedin, the

company has had a comfortable profit margin annually and has a five year expansion

plan in the future.

However, recent events of the Canterbury earthquakes have largely affected not

only the company but the economies of the city of Christchurch as well. Constant

aftershocks, floods and rebuilding works have hampered works on on-going projects

in Christchurch.

This report attempts address these problems and aims to produce solutions to

mitigate losses and sustain the business. Several solutions have been researched and

studied pertaining to the recession problem. The remedial solutions recommended

are:

Employee focus

Employees involved in site work should be seconded to the Dunedin

office where there are ongoing works in the Otago Polytechnic Project

Initiate efforts to expand network and market the services offered by the

company by approaching public institutions and tertiary institutions for

long term grants and contracts.

Establish inter-firm relationships and partnerships with suppliers to

strengthen company’s financial position

Implement a freeze on hiring and pay

The advantages and disadvantages of the methods recommended shall be discussed

in detail in Section 4.0. These remedial measures shall be implemented over a period

of one year before an outcome performance review is done.

2.0 ISSUES

One of the major setbacks as a result of the earthquakes in Canterbury is the

economic impact on SMEs (Small and Medium Enterprises). Due to inevitable

circumstances ongoing projects have been halted causing a standstill in the

company’s revenue. The impact of this occurrence has a caused a ‘domino-effect’ on

the economies of the Christchurch area.

In addition to that, planning and reconstruction policies are currently being

reviewed and revised immobilising reconstruction works. SMEs involved in the

construction industry are facing a dilemma as sales revenues and profits decline. In

an effort to cut down costs manufacturers and suppliers will cut back on production

of material and equipment further delaying ongoing reconstruction works. Inability

to settle debts further reduce the company’s valuation to obtain financing from

banks.

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These effects produce a chain reaction and affect many other SMEs who rely on

manufacturer’s output to do business.

Since SMEs finance their firms through debt or equity sources. The capital structure

used allows the company to optimise the use of it resources. Most companies employ

this method because it allows the owner to maintain full control of the business and

also because it is the most economic form of financing. However,

3.0 BACKGROUND

The earthquakes in Canterbury left a trail of economic destruction so severe

that the rebuild cost will be equivalent to around 10% of the Gross Domestic Product

(GDP) of New Zealand (New Zealand Parliament”, 2011). A better picture can be

painted by comparison looking at the rebuilding cost of the Fukushima tsunami

which only took 3% - 4% of Japan’s GDP (New Zealand Parliament”, 2011).

Damage assessment is higher compared to forecasted figures. Damage

estimates have increased from $15 billion in the 2011 budget to $20 billion and

possible up to $30 million if business disruption or additional costs from inflation,

insurance administration or rebuilding to “higher standards than before the

earthquake’ are included (“New Zealand Parliament, 2011). According to New

Zealand Department of Statistics (2011), building activity fell in the September

quarter, down 2.3% and is the third consecutive quarterly falls.

The graph below shows the latest four quarters has fallen by 16% followed by

three quarters of rises. The onset of recession is a worrying cause to SMEs especially

to businesses which are involved in the construction industry. Due to the volatility

nature of the business an economic recession can easily bankrupt a business.

Figure 1: Quarterly Trend Values of Building Works (New Zealand Statistics, 2011)

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4.0 ALTERNATIVE COURSES OF ACTION

4.1 Employee Focus

The most important resource a company has during the time of a downturn or

a recession is its manpower. Hence it is vital the employees of the company are

looked after. For two reasons, employees can use the recession time to network for

the company and keep in touch with their clientele to avoid losing out on job

opportunities and also retrenching workers proved to be counterproductive in the

long run as hiring new staff and training them from scratch is not cost effective and

also, the retrenching exercise reduces morale amongst employees and reduces their

confidence in the company and their role in the company (Owen Richason, Marc

Davis, 2009).

Employees would feel that they're appreciated and keeping them well

informed about the changes the company is going through are the primary ways to

ensure that they will not want to cut and run the moment someone comes along with

a better offer. Providing career development options when monetary compensation

isn't possible because this will help employees to perform better and go further in

their careers. Above all else give recognition; feeling appreciated is human desire

and a motivator. It costs nothing yet pays back time and time again. It fosters team

working, partnering and better relationships. Recognition need may not always be a

financial reward, although in some circumstances that would be appropriate, but in

most instances a simple gratification of effort will go a long way to creating an

attitude in employees where they want to give more. Reward the employees when the

company performance allows such measures to be implemented, by means of a raise

and/or a promotion would be an ideal motivation for the employees.

Since the recession is localised, one of the best ways to retain talent is

through the environment that is created. Employees would depart from the company

for reasons monetary reasons and some due to work life balance, environment, and

some due to work culture. It is usually the company values and climates that they

create. Thus, working on creating and strengthening the right environment would be

a great place to begin. From a process perspective, this could begin through surveys

of employees. More important than the survey are the actions taken by the

organization based on the feedback. Listening to and acting upon employee input are

fantastic first steps any organization can take, regardless of size or industry.

4.2 Staff Secondment to Dunedin Office

A work scheduling analysis should be made to identify site workers are

available along with a cost benefit analysis to identify the possibility of temporary

secondment to assist the Otago Project in Dunedin. These workers shall remain there

for a period of time to assist in improving customer-client relations while

endeavouring to secure projects there.

Professional placements give employees the opportunity of acquiring new

skills whilst continuing their employment. The seconded staff experience away from

the norm could lead to valuable experiences whilst on placement and generally gain a

broader outlook. An employee who is willing to take the secondment also

demonstrates his/hers flexibility and adaptability, both of which are desirable for the

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company. The company would benefit from allowing employees to take secondments

in many ways. Employees that have taken a secondment acquire transferable skills

and knowledge that they can put into practice once they return to their original

position. These skills can then be communicated across through to the team by

means of in-house seminars or presentations to the remaining team members to

improve and enhance the skill set of other staff.

The benefits of secondments are usually significant; however, the drawback

would be the possibility that when a seconded employee returns to the organisation

they will have had such a rewarding time while they have been away that may want

to leave their job in favour of the new one. To overcome this, it must be implemented

that the returning employees should be immediately encouraged to put their new

skills and experience into practice, meaning that their role may have to change.

4.3 Expanding Network and Marketing Services

During a recession the organisations which are most likely to be least affected

by an economic downturn are governmental organisations and educational

institutions; including tertiary institutions. Preparing a business case or a business

proposition and approaching schools and public institutions for a long term grant

could either bring a positive outcome or a neutral outcome. Bullington and Mulane

(2001) stated that small businesses should focus upon investing time in developing

partnerships with customers having strong capital backing and positive cash flows.

Apart from that, there are numerous regional business partners around the

country, prepared to help local businesses develop and innovate with expert

suggestion and access to funding. Regional Business Partners have been set up by

New Zealand Trade & Enterprise (NZTE) and Callaghan Innovation is leading the

cause as a hub for business development know-how by providing research and

development (R&D) expertise. Each successful partner works with local businesses

in their region to give advice, support and access to funding to help them grow their

businesses.

The New Zealand Government, provide grants and incentives regardless of your

chosen industry or business type, there are a variety of grants and incentives

available to help the company to grow. Two possible avenues will be discussed

which are the following (Regional Business Partners, 2013):

New Zealand Trade & Enterprise, NZTE Capability Development Vouchers.

Business’s research and development funding from Ministry of Science and

Innovation (MSI)

The Government’s business research and development (R&D) funding programmes

are managed by Callaghan Innovation, an essential body set up to accelerate the

commercialisation of innovation in the private sector. The primary aim is to build

links between business, government and research organisations and to improve New

Zealand’s prosperity through science and innovation (Regional Business Partners,

2013).

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4.4 Establish inter-firm relationships and partnerships with suppliers

Sandee (2002) indicated that in times of economic distress firms that succeeded in

times of economic recession relied upon collaboration to reduce cost and risk while

expanding their network to ensure operational flexibility. Also, Parrilli (2002) notes

that small businesses that can adopt a flexible specialization paradigm focus upon

intra- and inter-firm relations and tap public and private supporting institutions are

more likely to survive in times of an economic crises. Establishing a partnership as

such not only strengthens the companies during a crisis but also portrays a reliable

image and helps build trust and foster social relationships with clients.

4.5 Hiring and Pay Freeze

Although many firms prefer to opt for the redundancy or retrenching approach, it has

been proven to be counterproductive in the long run (Marc Davis, 2009). Instead, a

less harsh method can be implemented by freezing pay rise, staff allowances, travel

allowances, selected staff benefits, commission and training allowances. This allows

the company to have a certain surplus of capital to weather out the recession storm.

Also, the employees concurrently will be aware of the company’s sense of

consideration and will develop a sense of loyalty towards the company. This

indirectly will boost morale amongst employees and promote a positive work

environment.

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5.0 IMPLICATIONS

The main concept of sustaining a business while weathering a recession storm

is not to make drastic or dramatic changes but small ones which will help with the

growth of the company in the long run. According to Battisti (2011) (Table 2), more

than half of urban SMEs affected by recession opt for an increase of revenue

approach whereby the company aims to increase their resource by introducing new

products or services. Other companies opt for a more conservative approach by

adopting the cost cutting approach by introducing salary deductions, redundancy and

reduction in advertising and marketing.

Figure 2: SME Strategic responses to the recession (Battisti)

However, if the two approaches are combined, the ‘increase of revenue’

approaches and the ‘cost-cutting’ approach are combined; there would be a balance

of negative and positive initiatives creating the optimum solution for Grey’s Fitout to

take on the recession onset. This approach which is called the ‘ambidextrous

approach’ is proven to be successful with SMEs who opted for a positive approach

coupled with a negative approach (John Kitching et al, 2012). In this case adopting a

pay freeze and combining it with methods to increase revenue using networking and

marketing provides a diversified approach to the problem opening several different

avenues where the company can benefit from.

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Table 1: Benefits and Implications of Business Solution Proposed

No. Implementation Benefits Disadvantages Implications

1 Employee Focus

retain talent

increase

employee loyalty

improve

employee

productivity

cost

inefficient in

the long run

company

will be ready

for boom

period post recession

2 Staff Secondment to Dunedin Office

increase

productiveness in

Dunedin office

expand network

in Dunedin

increase revenue

employees

may not be

willing to

locate to

Dunedin

opportunity

to expand

business in

Dunedin

office

cost of

relocating

employees

3

Expanding

Network and Marketing

Services

minimise effect

of recession

able to utilise

employee

increasing

revenue

less cost

involvement

rejection

possibility of

attracting

new clients

and projects thus

increasing

revenue

4

Establish inter-

firm relationships and partnerships

with suppliers

increase potential

of gaining

contracts

increase revenue

able to utilise

employees

high cost of

initial start-up

decision of

whether to

dissolve partnership

post-recession

lesser control

over business

a successful

partnership

that could

last long term

conflict of

interests

might occur

5 Hiring and Pay

Freeze

help create

positive work environment

holistically

increase

resources

short term

solution

possibility of

losing some

employees

Employees

are retained post

recession

Financial

difficulties

mitigated

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Table 1 above represents the solutions recommended along with the positive,

negative outcomes and the implications that follow if the solution is implemented. It

is recommended that the solutions above be implemented on a stage by stage basis.

This is to allow the onset of changes and subsequently permit the evaluation of the

effectiveness of the method implemented. A gradual increase in the intensity of the

measures implemented is recommended to cushion the impact of the recession

towards the company and its employees.

The norm during a recession is to declare redundancy and perform a

retrenchment operation. However, literature has proven this to be counterproductive

in the long run as difficulties arise post recession whereby there is a need to hire and

train new talent (Marc Davis, 2009). This is disadvantageous in terms of resources

and also affects the overall working environment and dynamics of the company

(John Kitching et al, 2012). Hence it is recommended that the company takes

measures to boost morale amongst employees to and continue to develop them to

better handle the business post recession. Employees make up the quality of the

service provided by the company, satisfied employees produce good quality works

which in turn, design a quality trademark which will improve the company’s image.

The next step would be to second site staff to the Dunedin office to assist

with the ongoing Otago Polytechnic Project. This measure would provide the

company the opportunity to utilise some of its manpower productively. Having a

bigger staff count in Dunedin could prove to be beneficial as the prospects of

obtaining bigger contracts are there.

Thirdly, expanding the network and marketing company services is an

economical way to market the company’s services. The recommendation is that, the

company approaches government organisations and tertiary institutions with a

business proposition recommending long-term contracts at a discounted rate. Even if

this measure does not pay off immediately and the company experiences rejection, in

the long run, this method could be still used to obtain contracts, build client

relationships and market the company’s services. Also, maintaining relationships

with current clients is equally important (Sameer Prasad, 2012). This is to ensure

continuity in business relationship with them.

Gauging the severity and duration of the recession, forming partnerships with

suppliers or other companies could prove to be a symbiotic solution. Although there

are drawback to this method, such as lesser control of the company and the decision

of dissolving partnership post recession, if the circumstances call for this measure, it

will allow the company to stay afloat through the recession. The integration and

coordination between the companies involved would be an asset when bidding for

contracts.

Lastly, hiring and pay freeze should only be implemented under drastic

circumstances. The recommendation is that employees will have their standard

benefits frozen along with their pay. Although this may produce disgruntled

employees, there is the silver lining that they were not retrenched or made redundant.

The company can capitalise on this aspect further motivate the staff by reiterating

that the measure taken is only temporary.

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6.0 RECOMMENDATIONS AND CONCLUSION

Recession can be seen as a threat or an opportunity to exploit the advantages

that it brings. Companies typically adopt an approach best suited to their financial

needs and future plans. No matter what the strategy is, there is always a certain

amount of risk that comes along with the chosen resolutions. However, failure to

adapt to the recession would prove to be costly to any business.

Having said that, it is recommended that an ‘ambidextrous approach’ be

adopted to cope with the current recession onset experienced by the company.

However, the implementation process should be performed in stages so that the

company can adopt a ‘wait and see’ approach to the outcome of each stage before

proceeding to implement the subsequent approaches.

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7.0 REFERENCES

Cardomone and Joseph R., 2008, Small business opportunities exist in recession, Boulder County

Business Report 27.25

Sameer Prasad, Jasmine Tata and Xuguang Guo, 2012, Sustaining small businesses in the United

States in times of recession, Role of supply networks and social capital, Journal of Advances

in Management Research, Vol. 9, Pg 8-28

Nick Churchouse, 2009, Dominion Post, Wellington, New Zealand

Martina Battisti, David Deakins and Martin Perry, 2011, The sustainability of small businesses in

recessionary times, Evidence from the strategies of urban and rural small businesses in New Zealand, International Journal of Entrpreneurial Behaviour and Research, Vol. 19, Issue 1,

Pg 72 – 96

Owen E. Richason, How to manage a business in a recession, Demand Media, Retrieved from:

http://smallbusiness.chron.com/manage-business-recession-2468.html

Marc Davis, 2009, The impact of recession on business, Investopedia, Retrieved from:

http://www.investopedia.com/articles/economics/08/recession-affecting-business.asp

Frank Vickers, 2006, Recession proofing your business, Retrieved from:

http://eprints.kingston.ac.uk/5852/1/Kitching-J-5852.pdf

Bullington, K.E. and Mullane, J.V. (2001), “Supplying entrepreneurial venture: lessons from

information technology companies”, Management Decisions, Vol. 39 No. 1, pp. 59-63

Sandee, H. (2002), “The impact of the crisis on small-scale enterprise in Java, findings from selected

case studies”, in van Dijk, M.P. and Sandee, H. (Eds), Innovation and Small Enterprises in

the Third World, Elgar Publishing, Northampton, MA, pp. 187-208

Parrilli, M.D. (2002), “Innovation and competitiveness within the small furniture industry in

Nicaragua”, in van Dijk, M.P. and Sandee, H. (Eds), Innovation and Small Enterprises in the

Third World, Elgar Publishing, Northampton, MA, pp. 143-65

John Kitching, David Smallbone, Mirela Xheneti and Eva Kasperova, 2012, Adapting to a fragile

recovery: SME responses to recession and post-recession performance. Retrieved from:

www.isbe.org.uk/content assets John Kitching.pdf

Regional Business Partners, Retrieved on, Oct 2013, www.business.govt.nz/support-and-

advice/advice-mentoring/regional-business-partners

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