introduction to strategic management in construction
TRANSCRIPT
Introduction to Strategic Management in ConstructionCIV-E2070 Strategic Management in Construction
Antti PeltokorpiAssistant ProfessorDepartment of Civil Engineering, Aalto [email protected]
Learning outcomes
• Understand what is strategy and strategic management
• Describe principles of main strategic schools
• Describe businesses in construction related markets
Lecture topic assignment I -Introduction to Strategic Management
Listen Professor Richard Rumelt’s lecture “Good Strategy / Bad Strategy”
https://www.youtube.com/watch?v=UZrTl16hZdk
Based on the lecture material and video, write about 500-word reflection
about
“What is a good strategy?”
Describe also what this “good strategy” could be in construction sector.
Send your reflection through MyCourses by the next lecture 23rd April
Definition of Management
THE PROCESS OF DEALING WITH OR CONTROLLING THINGS OR
PEOPLE
• The people managing a company or organization (collectively)
• The responsibility for and control of a company or organization
(by Oxford British & World Dictionary 2015)
Management as a coin
MANAGING ISSUES AND LEADING PEOPLE ARE THE TWO SIDES OF
THE SAME COIN…
The focus in this course is mostly on managing ISSUES
– and remembering at the same that [leadership and leaders] +
[empowerment and staff] are critical for purposefully doing something
like setting challenging goals and also attaining them
4 kinds of behavior explain 89 % of leadership effectiveness
(Feser et al., Decoding leadership: what really matters? McKinsey Quarterly, January 2015, pp. 1-4)
Areas of management in firms
1. Corporate & multi-business
management
2. Single business management
3. Operations management (incl.
projects)
5.
Manage-
ment
tools and
techni-
ques
4.
Strategic,
business,
scenario,
and
foresight
planning
methods
Scope of strategic management
1. Corporate & multi-business
management
2. Single business management
3. Operations management (incl.
projects)
5.
Manage-
ment tools
and
techni-
ques
4.
Strategic,
business,
scenario,
and
foresight
planning
methods
What is strategic management?
Strategic management as a direction of organization
Subjects of primary concern to senior management
Strategic choices to make in order to survive, e.g.:
• The selection of goals
• The choice of products and services to offer
• Level of scope and diversity
• Design of organization structure
• Administrative systems and policies to define and coordinate work
Choices that have critical influence on the success or failure of the
enterprise and that must be integrated
Rumelt et al. 1994
What strategic choices of construction industry companies you can remember from the past 12 months?
• List at least 3 choices you can remember from last 12
months
Practical example: Case Vesivek
• More than 25,000 roof renovations in Nordic
• Effective concept, they can fix roof in just two days
• The own sheet profile production
• Do not use subcontractors
• Offer everything in a single package
• 97 % of our customers recommend us
Vesivek is specialized on easy roofs, they do not renovate complex mansard roofs etc.
They have incorporated roof material production in the company because it is a good
business too. Due to their focused strategy, they can utilize equipment, such as cranes,
efficiently and differentiate by promising two days lead time to customers.
What is strategic management?
Corporate strategy involves answering a key question from a portfolio
perspective:
• "What business should we be in?"
Business strategy involves answering the question:
• "How shall we compete in this business?“
Michael Porter identifies three principles underlying strategy:
1. Creating a "unique and valuable market position",
2. Making trade-offs by choosing "what not to do", and
3. Creating "fit" by aligning company activities with one another to
support the chosen strategy
What business should we be in? - How to define and separate business areas?
• Need-based: refugee accommodation, small flats for investors…
• Customer-based: privat, public, consumers, businesses…
• Market-based: countries, regions, delivery channels…
• Product-based: residential buildings, car parks, office buildings,
complex projects…
• Technology-based: concrete elements, wooden structures, pre-
fabricated modules…
• Know-how based: different design and engineer fields…
• Resource-based: land, people…
• Business model-based: developer, contractor, design-build
contractor…
• Competition-based: agressive, defending, imitating…
Source: Mika Kamensky, 2010
Fundamental questions in strategicmanagement
1. How do firms behave?
2. Why are firms different?
3. What is the function or added value by the
headquarters unit in a diversified firm?
4. What determines success or failure in
competition?
Rumelt et al. 1994
Generic business management (BM) as a part of strategic management
What will be the most
attractive markets?
In what businesses
will our firm compete?
How will firms
compete in these
markets?
BM: How do we
succeed in this
business ”X” in the
future?
Businesses, countries,
sectorsFirms
Classification of schools of thought on generic business management
School of
Thought
Assumptions on business success Prescriptions
1. Porterian school Superior firm performance can be explained by
a chain of causality
Choose industry, Create position, Run a
race, Make tradeoffs, Deploy internet
2. Resource based
school
Above-normal profits can be sustained based
on resources
Discover and exploit valuable, rare, costly to
copy resources
3. Competence-
based school
High goals-attainment is possible
in competence-based competition
Build, leverage and maintain competences,
Close gaps, Build flexibility
4. Knowledge-
based school
Above-average profitability can be
ensured by new knowledge
Balance advancement and survival
strategies, Use enablers
5. Organization-
based school
Effectiveness can be achieved by new
(extended, networked, N-) forms
Create, experiment, multiply, and
recombine in the N-form heterarchy
6. Process-based
school
High performance can be achieved
by managing a process
Change choice cascade by aspirations,
insight, incentives
7. Dynamism-
based school
High performance can be achieved in a chaotic
business
Innovate new business concepts and
put them into practice
8. Evolutionary
school
Desired destiny can be shaped by strategy and
internal selection
Gain the edges, Time pace, Shape semi-
coherent direction
Practical example: Case Forenom
Forenom specializes in temporary accommodation solutions and relocation services. The company
was founded in 2001. In 2019, Forenom's turnover was 123 million Euros. Forenom's services
consist of three different parts: accommodation services (furnished short-term apartments and
apartment hotels), relocation services and financial property management.
BUSINESS MANAGEMENT ANALYSIS: Forenom has innovated and developed new services in
residential sector that goes beyond the traditional asset-specific accommodation but are more long-
term solutions than hotels. It has innovated new solutions for rapid needs, e.g. for cities in social
housing and for refugees. The company relies on recruiting innovative people outside the typical
facility management sector.
Case Forenom can be illustrated as an example of dynamism-based business management in
which high performance can be achieved in a chaotic business by innovating new business concepts
and putting them into practice.
Porterian School - The determinants of success: A chain of causality
Managerial
choicesInitial conditions
Longitudinal
Drivers
Activities / Value
systems
Sustainable compe-
titive advantage
Attractive relative
position
Attractive industry
structure (5 forces)
Firm successCross-Sectional
Structural determinants of
differences in the cost or
buyer value of activities
or groups of activities
Porter 1994
Porter: Five forces to diagnoseindustry structure
Threat of new
entrants
Rivalry among
existing
competitors
Threat of substitute
products or
services
Bargaining power
of suppliers
Bargaining power
of buyers
Michael E. Porter, "How Competitive Forces Shape Strategy," Harvard Business
Review, May 1979 (Vol. 57, No. 2), pp. 137-145.
Competitive advantage (by Porter)
• Two basic types:1. Lower costs than rivals
2. Ability to differentiate and command a premium price that exceeds the extra costs of doing
so
• Competitive advantage is related to competitive scope:• Product and buyer segments
• Geographic locations
• Degree of vertical integration
• Extent of related businesses with coordinated strategy
• Choice of scope central in strategy
• Many best positions in industry• Firm’s starting position, Differentiation vs. imitation
• Variety-based positioning, Needs-based positioning, Access-based positioning
Resource-based view (RBV) of the firm
• A model of firm performance that focuses on the resources and
capabilities controlled by a firm as sources of competitive advantage
• Resources as tangible and intangible assets
• e.g. firm’s factories, products, reputation among customers, teamwork among
managers
• Financial, physical, human and organizational resources (e.g. culture,
reporting structure, informal relations among groups)
• Capabilities as a subset of resources that enable a firm to take full
advantage of other resources it controls
• e.g. marketing skills, teamwork and cooperation among managers
VRIO framework to analysecompetitive potential of resources and capabilities
• Value: Does a resource enable firm to exploit an external opportunity and/or
neutralize external threat?
• Rarity: Is a resource currently controlled by only a small number of
competing firms?
• Imitability: Do firms without a resource face a cost disadvantage or in
obtaining or developing it?
• Organization: Are a firm’s other policies and procedures organized to
support the exploitation of its valuable, rare and costly-to-imitate resources?
Application of RBV in construction -The building system as strategic asset
• Growing focus on industrialization
• The choice of a building system (technical and process
platform) defines what resources and technology are
needed, and also the organisation within the company, its
market position, and possible growth
• The building system as a strategic asset (valuable, rare,
non-imitable) for the specialised contractor, while the
asset for the general contractor lies more in the
organisational power of the company than in the technical
solutions
• The specialised contractor should strive to clarify and strengthen
their total offer to the client
• The more general contractor should continue to exploit its human
resources, moving towards a more unique offer to their client
Businesses in Construction relatedmarkets
1. TECHNOLOGY-INTENSIVE CONTRACTING
• System, general, turnkey, engineering, and plant contractors (e.g.
Nokia/telecommunications networks)
2. CONSTRUCTION-RELATED CONTRACTING
• Design-to-build, building, civil, HEPAC, other trade, and specialty
contractors (e.g. YIT Corporation Oyj)
3. PROCESS ENGINEERING, DESIGN, AND CONSULTING
SERVICES
• Designers and consultants, related mainly to industrial processes (e.g.
Poyry Oyj/ wood processing)
Businesses in Construction relatedmarkets
4. CONSTRUCTION-RELATED DESIGN AND CONSULTING
SERVICES
• Architects, engineers, project managers, and consultants related mainly to
buildings and infrastructure (e.g. A-Insinöörit Oy)
5. SUPPLY OF BUILDING PRODUCTS, SYSTEMS, AND
MATERIALS
• Specializing in concrete, structural steel, ceramic, and wooden based
offerings (e.g. Parma, Ruukki, Peikko).
6. SUPPLY OF MACHINERY, COMPONENTS, etc.• Specializing in particular industrial subsystems and products, modularization, and
automation (e.g. Metso Automation, Kone)
Businesses in Construction relatedmarkets
7. SUPPLY OF CONSTRUCTION MACHINERY, EQUIPMENT, AND TOOLS • Specialization in logistics, and trading (e.g. technical wholesaling and retailing outlets, e.g.
Onninen Oy, Ramirent Oyj)
8. REAL ESTATE OWNERSHIP, DEVELOPMENT, AND MANAGEMENT• Long and short-term investors and developers (e.g. LähiTapiola, Kojamo, Senate Properties/
ownership of the governmental building stock in Finland)
9. LIFE-CYCLE SERVICES related to stocks and objects, etc.• Specializing in services in real estate management, FM, roads driving assurance and quality
level maintenance, industrial plants, utilities, networks, and systems management, O&M, and
environmental sustainability management (e.g. Ovenia Group/property services).
How to succeed in differentconstruction businesses?
Contracting
(e.g. general
contractor)
Development
(e.g. housing or
business park
developer)
Service
(e.g. design
office)
Main logic to
make profit?? ? ?
Risks? ? ? ?Drivers for
success?? ? ?
Role of strategy in contracting business
• Which one is more crucial for companies in
Big / Mega -project business:
• Corporate strategy?
• Business unit strategy?
• Project strategy?• e.g Redi, Tripla, Areva in Olkiluoto Nuclear Power
Plant
Sensitivity to fluctuations in the business cycle
• Construction as investment business
• Growth in other businesses determines market volume in many construction businesses
• Recession will take place in any market, later or sooner
• Long delivery time → overcapacity → long investment recession
• Need to focus in strategy vs. Risks to focus on one market only
• Ensuring firm’s profitability with balanced portfolio:
• New investments, renewals, renovations, maintenance services…
• Private customers, public customers…
GDP
Construction
Summary of the lecture
• Strategic management as choices that have critical influence on
the success or failure of the enterprise and that must be
integrated
• Corporate strategy: "What business should we be in?"
• Business strategy: "How shall we compete in this business?“
• Strategic business management schools which have different
recipes for business success
• Different businesses in construction related markets