Strategic Management in the Construction Industry Essay Sample

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What is Strategy?

The word ‘strategy’ has been used by the experts of various domains with different shades of meanings.  All the thinking of renowned experts of military, politics and business have revolved around the term ‘strategy’. We can trace the roots of documenting the strategic options within the Roman military. Thus, the concept of strategy development dates back to centuries. The importance of use of strategic thinking and strategic decision making can be evidenced by exploring the amount of literature available on the theme. However, it is quite astonishing that the extent to which the theoretical grounds exist does not match with the application of those theories, in its early years of inception. (Kay 2003) However, in recent years, the increasing trend of the application of those theories in the real corporate world.  Specifically in the field of construction industry, little attention has been paid in terms of strategic development.  Although, there are a lot of efforts from Newcombe, Channon and Grinyer to integrate the concepts of strategic decision making in the field of construction industry, yet a lot needs to be done in this field. (Halpin 2005; Longman 1971; Fellows et al. 2002)

What is Strategic Management?

Strategic management is a heritage and refined form of organization wide decision making. It is an approach that is systematic in approach. Strategic management is one of the most important duties of the general management that requires the top level decision makers for the organization to position and relate the organization according to the prevailing environment in such a way that its consistent growth and success can be ensured. Thus, we can conclude that strategic management is related to decisions on strategies, planning to implement those decisions, and controlling it. (Mintzberg 2007) This whole discussion makes it clear that there are three main parts of strategic management. The first part is strategic analysis, which is actually the scanning of internal and external environment to create a better understanding of strategic position of the firm.  Making the strategic choice is the second step and it involves selecting most appropriate option among all the available strategic alternatives.  The third part is the strategic implementation which involves the planning on the ways to implement the decisions. In theory, these are referred as three distinct parts of strategic management. (Johnson and Scholes 1998) However, in practice, especially in terms of construction industry, all of these three parts may overlap. (Nunnally 2006)

The major purpose of formulation of some strategy is to meet some objectives. Moreover, it is the organizational strategy that sets the organizational structure and its culture. Thus, we can conclude from this that the strategy has a key role to play in the overall growth of the organization. Above all, it is the strategies of the organization that ensures that the direction into which the organization is desired to move forwards, it actually happens. Out of all the strategies, some are explicit, while others are implicit. Some strategies need to be kept confidential, such as the tender amount for a particular project needs to be kept confidential; however, many strategies are required to be rooted in the organizational culture, so that the outcomes expected from those activities can be achieved. (Jackson 2004)

In the field of management science, there are two significant views about the nature of strategy. First view is that the strategies are planned. Thus, they are worked out in advance and therefore, they are explicit in nature. Thus, in the light of this view, the proponents of this view believe that managers develop the proper and systematic plan beforehand to implement those strategies. (Hitt, Hoskinson and Ireland 2006) On contrary to that, there is one school of thought that believes that policies, strategies and plans evolve over the period of time, thus they are evolutionary in nature. Therefore, the proponent of this belief states that the plan or strategy is a series of decisions taken over the period of time. (Hunger and Wheelen 2007) Thus, for a construction firm, the strategic management is to manage its strengths and weaknesses with respect to the opportunities and threats present in the construction industry of UK.

Characteristics of strategic decisions

After careful and through analysis of the characteristics of strategic decisions, following key features have been extracted.

  • The scope of the strategic decision is not only the organization’s strategy in isolation; rather the strategic decisions should be in line with the circumstances prevailing in the external environment as well. (David 2006)
  • The strategic decisions are taken in light of strengths and weaknesses, extracted from the internal environment of the organization. (Halpin 2005)
  • Besides strengths and weaknesses, the opportunities and threats in the external environment also play decisive role in the development of the strategy.
  • While making the strategies, organizations try to make the most of their strengths and ensure minimal negative impact of their weaknesses. While doing so, the opportunities in the external environment must be availed and threats must be encountered efficiently. (Hunger and Wheelen 2006)
  • This is a practice of matching the activities of the organization to the capacities of the organization and the resources available to them.
  • If the existing use of resources is not aligned to the new strategy, the newer strategy would compel the organization to change the way resources are used or adding more resources. (Kay 2003)
  • Since these are top level decisions, therefore, it will affect all the decisions taken down the hierarchy.
  • These decisions are more uncertain in terms of its outcome, as compared to operational level decisions. (Mintzberg 2007)

All of these characteristics apply to the UK construction industry and strategic management applied there as well. (Longman 1971)

Importance of strategic decisions

The strategic decision decides the fate of the organization. Thus, it is not only important, but also any error in the strategic decision making leads to fatal costs of failures. Thus, before moving further, it is necessary to identify few aspects which highlight the importance of strategic management.

Since it is the type of decision making where external environmental factors are also considered, therefore it becomes necessary to do strategic management effectively, so that the changes in the environment can be integrated into the organization’s policies readily and in time. It also becomes important due to the fact that the business environments are getting more and more dynamic and the pace of change is continuously accelerating. Careful strategic decision making is required in order to protect the organization from crisis situation and to ensure its stability over the long term horizon. The corporate world is getting more and more competitive. Therefore, the continuous process of evaluation the environment for opportunities and threats and identifying one’s strengths and weaknesses on continuous basis is the key to the survival of the organization.  (Kay 2003)

In the context of big firms, strategic management is vital. This is so because of the fact that bringing change in larger firms is more difficult, thus there is a need to anticipate the change beforehand and work proactively.  (Longman 1971)

It has been observed that the corporate harmony is one of the biggest assets of the organization. Through strategic management clear picture of the organizations current status and its directions as well as strategies can be transcended down the hierarchy so that the thoughts of every member of the organization get aligned. (Pearce and Robinson 2005)

Above all, one of the major objectives of the organization is to maximize the returns to the shareholders and investors. In order to achieve this goal, the financial health of the organization is essential. The organization can grow financially on consistent basis only if careful, realistic and adoptive forecasting is done, on systematic basis, keeping in view the environmental factors. (Nunnally 2006)

Likewise, in the case of construction industry too, strategic management is important, as it is vital for its financial health, increased profitability and to counter the dynamic and rapidly changing external environment. (Fellows et al. 2002)

Key Players

The key players for the strategic management are those who are on the top of the organizational hierarchy.  These are the people who have genuine, significant and long term interest in the business or are at the most responsible ones for the execution of the organization’s business. This category may include Board of Governors or Board of Directors, Chief Executive Officer (CEO), Chief Financial Officers (CFO), Chief Technical Officers (CTO, in some cases) and other CxOs. Moreover, if the organization has multiple markets and products, a head representing each of the market or if the organization is operating on diverse territories, heads from each of the territory may be invited. (Hunger and Wheelen 2006) Although, the meetings for strategic level of initiatives is meant for top level management only, yet,  it is advised that if feasible, some sort of discussion should be done or informally, suggestions should be taken  from those working on front end or grass root level. In case of a large construction firm, the key players would be major investors, top most architects and engineers, business heads for various kinds of project categories like residential, civil etc. (Hill and Jones 2006)

Levels of Strategy

Strategic Management is carried out at various levels in the organization.  Usually there are three levels of strategy. These are:

Corporate Level Strategies:

Corporate Level Strategies are those strategies which have the scope of overall organization, such as which new markets to enter, which new businesses to start etc. In case of construction industry, the corporate level decision would to enter into a new construction category. (Mintzberg 2007)

Business Level Strategies:

Business level strategies are lower in terms of scope than corporate one, and higher than operational one. This includes strategies such as how to compete in a particular market. For construction industry, the strategy to excel the competitors in civil engineering projects is a business level strategy. (Mintzberg 2007)

Operational Level Strategies:

There are the decisions by the heads of functional departments, such as, estimating, buying a plant. Usually the decision of a construction project manager is an operational level strategy. Although these are low level decisions yet they affect the organization’s overall strength. (Mintzberg 2007)

Strategic Planning Process

So far we have discussed the definition, nature, importance, need, characteristic and nature of strategic management. Let us now discuss most essential part of it – the strategic planning process. Strategic planning process refers to the key steps involved in the process of planning for a strategic initiative. (Pearce and Robinson 2005)  These steps can be followed in any industry, but we would try to be specific on the construction industry. Following are those key steps:

Missions and objectives

The first and most important step in the process of strategic planning is setting missions and objectives. The aim of this task is to set the goals and directions. This is most vital step for the construction industry, because if the directions are set wrong, no matter what magnitude of the efforts, the result would be failure. Therefore, there is always laid a great degree of emphasis on the mission and direction setting. Usually, the missions represent the core purpose for which the organization was built along with its core values. (Kay 2003)

Environmental Scanning

The next important step is the environmental scanning. Here the term environment refers to both, the internal as well as the external environment. A number of tools are available to do so which will be discussed in detail and applied to construction industry in forthcoming passages.  (Johnson and Scholes 1998) Tools like PEST analysis which analyses the political, economic, social and technological environment are mainly dealing with external environment, but tools like SWOT analysis has both components, internal (strengths and weaknesses) as well as external (opportunities and threats).

Strategy Formulation

According to Hunger and Wheelen (2006) once the direction is set and the awareness of the internal and external environment is created, the next step is to formulate strategies to achieve the set objectives.  The strategy should be designed in such a way that it provides competitive advantage to the firm over others in the industry.

Strategy Implementation

Another most important step in the strategic planning process is the implementation of the strategy. The success of this step depends on the extent to which efforts are put in previous steps. The more realistic strategy formulation would be, the more are the chances to implement the strategy. The deliverables of the strategy implementation are programs, procedures, guidelines etc. (Cole 2003)

In the words of David (2006), one of the most important factor for the success of a strategy is how it is communicated to others and to what extent others have bought the idea for whatever change the strategy would result in. In construction industry, especially in the larger firms, those who take the decisions not necessarily implement that, thus there is  need of effective communication and collaboration skills, along with convincing power in order to maximize the chances of successful strategy implementation.

Evaluation and Control

Previously, it used to be thought that the implementation of strategy is the last step of strategic planning process. However, at the point of implementation, it cannot be completed as finished.  There is a need to evaluate the outcome of the strategy and make necessary adjustments in the strategy, wherever possible. (Burrow et al. 2007) The process of evaluation and control is itself very complex one and thus needed to be carried out on pragmatic basis. Thus, to evaluate and control, following steps should be taken:

  • Setting benchmarks
  • Recording target variables
  • Comparing actual values with benchmarks
  • Make required amendments in the strategy

For example, a construction firm decides to replace the supplier A with Supplier B, because of low cost. In doing so, they had set the benchmark of 30% cost reduction in total project. However, within a week it becomes evident that the quality is being compromised and that it would ultimately earn bad reputation for the company.  Thus, the decision may be taken, either to revert back to supplier A or to ask the supplier B to improve his quality to maintain the contract. (Hitt, Hoskinson and Ireland 2006)

Now we would apply two most important tools of strategic management on the construction industry of UK – the SWOT Analysis and PEST analysis.

SWOT stands for strengths, weakness, opportunities and threats. Let’s discuss each one by one.

Strengths:

The UK construction industry is one of the biggest construction industries in the world. According to the statistics collected by the Experian Business Strategies (2004), the UK construction industry is the second largest one, in terms of construction value added per capita.  In terms of non-resident constructions share, Britain remains highest, among its close competitors like US, France and Germany. In terms of value added per person employed in the construction industry (in 2001), it was 37100$, which was highest after US, more than France and Germany.

Thus, UK is far greater in terms of productivity and volume (in non-residential construction) as compared to its European counterparts. (Experian Business Strategies 2004)

Weaknesses:

One of the weaknesses of UK construction industry is that is productivity in terms of every additional hour is quite low.  According to Experian Business strategies (2004), in UK, for every additional employee hour, the value addition is 18800$, which is lowest among US, France and Germany.  In UK, very small construction firms are not at all productive. This, according to analysts is the main reason for the low productivity of UK. Thus, there is a need to increase the productivity of small construction firms through starting such loan and lease schemes through which small firms can buy new and automatic machinery to improve their productivity.

LABOUR PRODUCTIVITY IN CONSTRUCTION
  UK US France Germany
Value Added per Person Employed in 2001 (1999 $, 000s) 37.1 50.1 35.6 33.5
Value Added per Employee Hour Worked in 1999 (1999 $ 000s) 18.8 25.9 20.4 20.9
Source: Experian Business Strategies

Opportunities:

According to Clough et al. (2008), the opportunities for the UK construction industry lie in terms of rapid advancements in science and technology. New and more efficient machinery is being developed, leading to increase in productivity. Thus, there is a need to adopt the technology and invest in R&D significantly. Moreover, the recent announcement from government about increase in various non-residential developments forecasting is also healthy sign and an opportunity to grab, for the UK construction industry.

Threats:

The recession in the world has been started. Economists suggest that every country would be impacted by it. The UK is no exception. Thus, the recession might lead to the high inflation and decline in value of money, leading to lesser investment and property and therefore lesser constructions. This may become a threat for US construction industry. (Clough et al. 2008)

Let us now look briefly at the PEST analysis. In PEST analysis, external environment is dealt, including Political, Economic, Social and Technological analysis. Politically, after the appointment of Gordon Brown, there seems to be no such factor that may hamper construction industry. Economically worldwide recession is a major challenge. In social perspective, there are only few concerns related to the natural environment, but that does not seem to affect much. Last but not the least, technologically; the situation is in favor due to development of advanced machineries. (Halpin 2005)

Conclusion:

To sum up, the effective strategic management is the foundation for the success of any organization. Although, there is very little literature on the application of strategic management in the construction industry, yet most of the concepts and theories of strategic management, as discussed, can be easily applied in the construction industry. The strengths, weaknesses, opportunities, threats as well as analysis of Political, Economic, Social and Technological environment is also provided to demonstrate how these theories can be applied to the construction industry.

LIST OF REFERENCES

  • Burrow, J., Everard, K., & Kleindl, B. (2007) Business Principles and Management. Ohio: South-Western Educational Pub.
  • Clough, R., Sears, G., & Sears, S. (2008) Construction Project Management: A Practical Guide to Field Construction Management. New York, NY: Wiley.
  • Cole, G. (2003) Strategic Management. New York: Cengage Lrng Business Press.
  • David, F. (2006) Strategic Management: Concepts and Cases 11th Edition. Alexandria, VA: Prentice Hall.
  • EXPERIAN BUSINESS STRATEGIES – DTI. (2004) CONSTRUCTION ECONOMICS AND STATISTICS 1st ed.
  • Fellows, R., Langford, D., Newcombe, R., & Urry, S. (2002) Construction Management in Practice. Malden, MA: Wiley-Blackwell.
  • Halpin, D. (2005) Construction Management. New York, NY: Wiley.
  • Harrison, J., & John, C. (2007) Foundations in Strategic Management Foundations Series in Management. Mason, OH: South-Western College Pub.
  • Hill, C., & Jones, G. (2006) Strategic Management: An Integrated Approach. Boston: Houghton Mifflin Company.
  • Hitt, M., Hoskisson, R., & Ireland, R. (2006) Strategic Management: Concepts and Cases with InfoTrac. Mason, OH: South-Western College Pub.
  • Hunger, D., & Wheelen, T. (2007) Strategic Management and Business Policy 11th Edition. Alexandria, VA: Prentice Hall.
  • Hunger, J., & Wheelen, T. (2006) Essentials of Strategic Management 4th Edition. Alexandria, VA: Prentice Hall.
  • I, M. (1992) WRITERS ON STRATEGY AND STATEGIC MANAGEMENT. New York: Penguin.
  • Jackson, B. (2004) Construction Management JumpStart. New York: Sybex.
  • Johnson, G., & Scholes, K. (1998) Exploring Corporate Strategy: Text Only 5th Edition. Alexandria, VA: Prentice Hall.
  • Kay, J. (2003) Foundations of Corporate Success: How Business Strategies Add Value. New York: Oxford University Press, USA.
  • Levy, S. (2006) Project Management in Construction McGraw-Hill Professional Engineering. New York: McGraw-Hill Professional.
  • Longman (1971) Construction management in principle and practice; Management studies series. New York: Longman.
  • Mintzberg, H. (2007) Mintzberg on Management: Inside Our Strange World of Organizations. New York City: Free Press.
  • Nunnally, S. (2006) Construction Methods and Management 7th Edition. Alexandria, VA: Prentice Hall.
  • Pearce, J., & Robinson, R. (2005) Strategic Management with Premium Content Card and Business Week Subscription. New York: McGraw-Hill/Irwin.

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