Introduction to Strategic Management in Construction

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

Strategic plan of YIT oyj

source: yitgroup.com

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.

Practical example: Case YIT

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

WHY ARE THERE

UNIVERSITIES?

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

Development of Strategic Management

Source: Sanchez and Heene 1997

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

Four strategies for architecturalpractices (Winch and Schneider 1993)

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