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Balfour Beatty plc: Competitive Analysis (An Analysis of Balfour Beatty's Business & Competitive Position)
Introduction & Background
Balfour Beatty (Balfour) is a world class engineering, construction and services group and its strategic and competitive position can be investigated using management tools such as a SWOT analysis as shown in Appendix 1. The breadth and depth of Balfour's expertise ranges from design, construction, equipping, manning and the management of buildings. It focuses on international markets for rail, road, utility systems, building and complex structures.
Balfour's long term strategy is to; develop its business through overseas expansion and through acquisitions and disposals . . . it aims to be market leader through long term customer relationships and well developed supply chains.
However, the very fact that Balfour has so many diverse product and service offerings could prove a weakness, as much of the management focus will be on maintaining and ensuring the quality of the services/products provided. These services are also spread throughout the globe. It's not surprising therefore that Balfour has well over 20 different operating companies to manage these services, but that in may create duplications in terms of administrative and accounting support for instance and therefore unnecessary costs.
Despite this, one of the main drivers for the business is to create sustainable partnerships in all areas of the business, whether with suppliers, buyers, customers or stakeholders. From Porter's Five Forces analysis (see Appendix 2), we can see those forces influencing the business and these will be discussed in more detail later.
Balfour's stated strategy of acquiring businesses also creates a constant headache and could possibly lead to management taking their eye of the ball. The ongoing need to adjust and re-adjust the organisation and to adopt the requirements of the newly acquired businesses is a major concern. And yet, for an organisation to achieve sustainable competitive advantage, it requires change.
There are also a number of social, technological, economic and political (STEP) influences (see Appendix 3) which influences the strategic direction that Balfour follows. Balfour has introduced its own social responsibility policy, and was even awarded a social responsibility award for its efforts in this area. Employing 25,000 people worldwide creates a number of human resource issues, such as dealing with absence, pensions, health, training and mentoring. Balfour employs over 100 graduates each year, and the effort required to train and mentor these is costly both in terms of finances and resources.
Safety for Balfour is paramount, with a number of fatalities in previous years, it has introduced a policy of zero tolerance, and so the implementation of health and safety measures, monitoring them and constantly improving them is a key driver to the success of the organisation.
Political issues are a particular concern since Balfour would have no ability to influence any policies for taxes that the government may wish to introduce. The recent increase in the cost of fuel would have a dramatic impact on the profitability or otherwise of Balfour's business, as it operates 7,000 vehicles worldwide. Whilst Balfour is endeavouring to reduce the amount of fuel used, as well as reducing the amount of waste, it will inevitably continue to have an effect on the environment, but at leas they are trying to address the situation.
Balfour is an international and profitable organisation whose aim is to; create long term shareholder value by providing engineering, construction and service skills to customers for whom infrastructure, quality, efficiency and reliability are critical . . . and seeks to operate safely and sustainably
1 Strategic Overview
(a) The Strategic Contribution of Mansell
The above quotation was taken from the 2002 Annual Report, prior to the acquisition of Mansell. According to Porter, The essence of strategy formulation is coping with competition. Balfour's strategy of acquiring and merging businesses was a way of dealing with the competition. In Mansell , Balfour recognised the opportunity to add complementary skills and expertise to its business, but also recognised that there was a synergistic fit.
Balfour's aim is to achieve competitive advantage. There are two types of competitive advantage - lower cost and differentiation. Rather than choose the lower cost route, Balfour chose differentiation - the ability to provide unique and superior value to the buyer in terms of product quality.
Mansell also had competitive advantage, as it, grows out of the way firms organise and perform discrete activities. According to the International News magazine, Balfour Beatty Update dated April 2004, Mansell had followed a clear strategy aimed at sustainable growth and focused on discrete market sectors, developing a sustainable position in sections of the UK building market in which we do not currently operate. It also brings a wide range of blue-chip customer relationships.
Mansell had complementary skills with excellent market positions in social housing, refurbishment and other association construction disciplines. Its geography and product mix was a perfect synergistic fit with the already established Balfour brand and service offering. Mansell uniquely had product groups, product development and product directors. The entire business was focused around developing these specialist products.
Philip Cleaver (Chief Executive of Mansell in 2001) agreed, by focusing on discrete products Mansell has successfully differentiated itself from its competitors.
Following the acquisition of Mansell and the integration of the business within the Balfour group, the focus on producing long term framework and partnering agreements was introduced and has been particularly successful with 65% of its business coming from this source. The Balfour strategy certainly seems to be working.
(b) Addressing the Egan Agenda
There was another reason for Balfour to acquire Mansell. In 1998 a Construction Tax Force, led by Sir John Egan produced the Rethinking Construction report. It was commissioned by the government to improve the efficiency and quality of the service provided to customers. The summary conclusions from the report were that the industry had low profitability, invested little in capital, research, development and training and ultimately had many dissatisfied customers.
Appendix 4 attached identifies those drivers for change that were found in the report, as well as four project process improvements and seven targets for improvement.
The acquisition of Mansell immediately addressed the Project Process improvement area, as it already operated its own product development, had product groups and product directors. Concentrating on developing partnerships and framework agreements addressed another essential element of the criteria of the Egan report, in order to achieve its full potential, the industry required substantial changes in its culture and structure and needed to replace competitive tendering with long term relationships based on clear measurements of performance and sustained improvements in quality and efficiency.
Other areas that were addressed with the acquisition including the provision of committed leadership, focus on the customer, product team integration and a commitment to people. The key phrase in Mansell's annual report 2002 was collaboration with customers, with supply partners.
Working in collaboration helps us create sustainable relationships that deliver best value to our customers and benefits to our stakeholders. Their open approach proved successful to the long term success of their customer relationships.
The acquisition of Mansell undoubtedly significantly addressed the issues raised within the Egan agenda within the Balfour group.
2 The Competitive Environment
(i) The Competition
In order to understand the competitive environment we must first understand what is meant by competitive environment -an industry is a group of competitors producing products or services that compete directly with each other.
Porter's Five Forces analysis (Appendix 2), identifies that the collective strength of these forces determines the ultimate profit potential of an industry.
In acquiring Mansell, Balfour has differentiated itself and created competitive advantage. However, through its evolution Balfour has a number of distinct advantages, including size, geographic coverage, research and development capability, partnership arrangements which further reinforce its position. Finally, Balfour constantly improves and upgrades its products and service offering either by reorganisation or by acquisition and merger. All of these affect the ability of a new entrant into the market, and therefore vie for position with Balfour.
Contained within the building construction industry there are 7434 companies in the UK of varying sizes. The UK market was worth 107.01bn (2005) and the global market $4.2tn. The UK market is forecast to grow to 123.1bn by 2010. There is a great deal of consolidation taking place with a number of acquisitions and mergers taking place, such as Amec selling Amec Spie, Carillion buying Mowlem plc in March 205, Kier bought Ashwood Homes in 2005, Morgan Sindal bought Gleeson MCL in 2006 and Balfour disposed of Andover Controls in 2004 and acquired JCM Group in 2005.
Some of the main competitors within the UK and the USA are ;
In the UK In the USA
Alfred McAlpine Betchtel Group Incorporated
Amec plc Bovis Lend Lease
Bovis Lend Lease Centex Construction Group
Kier Group Gilbane Building Corporation
Costain
Corillion
Morgan Sindall
Laing O Rourke
Skanska
HBG Construction
Mowlem
In analysing two of the main competitors within the UK, both Amec plc (Amec) and Kier Group (Kier) are interesting for the following reasons.
Amec's stated strategy is to be a leading supplier of high value consultancy, engineering and project management services to defined market segments within the world's energy and industrial process industries.
Amec differentiates itself from Balfour in that it has offshore gas and oil production facilities. It is similar to Kier in that it also has metal and mineral mines, a clear one stop shop proposition.
Its main business offerings are in oil and gas, oil sands, minerals and metal mining, nuclear, industrial, earth and environmental and wind energy. Unlike Balfour therefore, Amec concentrates on non domestic construction, rather than property development and social housing. In fact in December 2006 it announced its decision to dispose of its, Built Environment portfolio including Building and Civil Engineering, Building and Facilities Services, Property Developments and PPP, together with some peripheral activities. These businesses accounted for aggregate revenues in 2005 of 1.3bn and generated profit of 14m.
Therefore Amec has reformed itself and differentiated itself in focusing on its core strengths within the non domestic construction market, making its competitive advantage more sustainable, as it no longer has the focus of attention taken away from its core business.
As with Balfour and Kier, Amec also embraces the social and environmental aspects of the industry.
Amec is a main competitor of Balfour's because it does offer civil engineering, building engineering contracting and manufacturing, offshore oil and gas production, refineries and process facilities, water, gas and electricity utilities and housing and property development (even if it has decided to dispose of part of the portfolio, it still constitutes a major competitor). Amec also operates within the USA.
Like Balfour, Amec is particularly successful in the public sector market and has embarked upon a strategy of growth through acquisition and merger. Amec is a profitable organisation.
Kier has a UK wide network of regional contracting businesses, with major projects expertise. They offer a full lifecycle of services for buildings, including facilities management. In summary they are a, construction, development and service group, specialising in building and civil engineering, support services, private house building, property development and Private Finance Initiative.
They operate using strategic alliance business units and are a solid business, with over 14 years of steady growth. Like Balfour and Amec, Kier is a well established business, having been formed in the 1920s. Like Balfour, Kier also has its own infrastructure investment company. And as with the majority of construction companies, in a need to follow the recommendations of the Egan Report, Kier embraces the social and environmental aspects of sustainability.
Unlike Balfour, Kier are also involved in opencast mining and facilities management. Kier's vision is to be the most respected company in the industry.
Balfour and Kier operate within very similar markets and offer very similar expertise, with the exception of the opencast mining and facilities management. It would make perfect sense for Balfour to consider a merger or acquisition of Kier in the near future. This would provide the added benefit of consolidating its position, but also creating critical mass in market share in areas such as private house building and PFI.
Year on year, Kier achieved turnover growth through the period 2001 - 2005.
Amec and Kier both operate in the same market places at Balfour, both are profitable and show continued growth year on year. Each would be a strategic fit, whether that is via acquisition, merger or some form of framework agreement or joint venture arrangement.
(ii) Competitive Advantages of the Competition
Using Porter's five forces model (Appendix 2), we can see that there is very little threat of entry into the market, due to the size and barriers to entry, such as cost and geographic coverage. The bidding process, particularly for PFI projects is particularly cumbersome and can be seen as a barrier to entry.
Porter's Value Chain (Appendix 4) analysis provides an overview of how Balfour focuses on achieving sustainable partnership arrangements with its value and supply chain. This is an area where Balfour differentiates itself from the competition. Both Amec and Kier also have their own discrete offerings, which allows them to achieve sustainable competitive advantage, whether that is as a result of focusing on international markets, oil and gas markets, mining or facilities management.
Each company (Balfour, Amec and Kier) have all positioned themselves in the market where they can best defend itself against (these five forces) or can influence them in its favour.
All three organisations are flexible and adaptable enough to change to its changing environment. That is why they do have sustainable competitive advantage. Each organisation also has strategic fit among each of its activities, as identified in the Value Chain, the more a company's positioning rests on activity systems with second and third order fit, the more sustainable its advantage will be.
3 Financial Analysis & Comparison
In order to carry out a financial analysis and comparison of the Balfour interim figures with that of the competition, attached in Appendix 5 is a spreadsheet which identifies the profitability, efficiency and liquidity ratios of Balfour, Amec and Kier Group based on the annual reports for the years 2001 - 2005, which are the comparable numbers that were available at the time of writing this report.
Balfour enjoyed a hike in its profitability during 2004 at 7.34%, but reduced to 3.67% in 2005, this may reflect for instance, fewer acquisitions during 2004 therefore affecting the bottom line, or it may be as a result of lower operating costs during that particular year. The gross margin ratio is pretty consistent throughout the five years, with a dip in 2005, which reflects the company's ability to control its production costs and to manage its margins.
The Return on Capital Employed has varied over the five years, with the most noticeable change in 2005. Debtor days has reduced to 47.37 in 2005 which reflects the company's ability not to allow excessive credit. Unfortunately it would appear that Balfour could take better advantage of the trade credit made available to it, as the Creditor days is particularly low at 37.86 in 2005. Trying to extend this limit would help with cash flow and forecasting.
The current ratio has fluctuated around the below 1 mark which could be a cause for concern, as this measure estimates whether a business can pay debts due within one year from assets that it expects to turn into cash within that year. The liquidity ratio reflects a measure of less than 1 again, which could be a cause for concern as this ratio measures where assets that cannot be turned into cash quickly or easily (such as stock) must be turned into final product, then sold and the cash collected. This ratio adjusts the current ratio to eliminate assets that are not already in cash.
The gearing ratio has increased to 206.16 in 2005 highlighting the need to borrow more in order to invest in the assets of the business. This may be as a result of acquisition or research and development costs for instance.
Amec's profitability reduced considerably in 2005 to 0.51% from 1.41% in 2004, its gross margin has remained fairly constant during the five year period being at 12.31% in 2005. Return on capital employed has varied widely during the five year period. In 2001 it was at 12.16% reducing to 10.41% in 2003 and dipping further in 2005 to 2.31%. This would suggest that management is less effective during 2005 in producing returns on resources before making any distribution of those returns.
The current and liquidity ratios are good at around the 1;1 mark for the five year period, which suggests the organisation has no difficulties in paying its debts during the year.
Amec's gearing ratio is also high at 254.4 during 2005. Debtor days seems particularly high at 95.79 during 2005, having been at 57.06 in 2002. This needs to be addressed as soon as possible. Creditor days is far more acceptable than that of Balfour's.
Kier's profitability ratio has increased in 2005 to 3.68%, from 2.81% in 2004. Gross profit has also consistently risen over the five year period. Return on capital employed is higher than the competition at 26.81 in 2005. The current ratio is at a good level during the five year period, being at 1.17% in 2005. However, the liquidity ratio is very alarming at considerably less than 1;1, and consistently lower than 0.7;1. Management would need to seriously consider this area of the accounts.
Debtor days it is at an acceptable level at 43.04 days in 2005 and creditor days at 86.95 days in the same year.
Factors influencing these figures would include acquisitions and other exceptional costs which would have the effect of distorting the trends of the figures. Other exceptional costs such as government levies or taxes, fines or other investments.
Conclusion
Balfour operates in a fast moving, volatile industry, where acquisition and merger are seeing the consolidation of the industry. Balfour differentiates itself by focusing on sustainable partnerships with customers and suppliers. It has broadened its service offering to include social housing, with the acquisition of Mansell, which in turn, facilitated the company's adherence to the Egan Report.
The industry is vast, with many competitors. Amec plc and Kier Group have expertise that Balfour lacks, that of mining, and in Amec's case, oil and gas production facilities. They therefore differentiate themselves by providing discrete offerings. Each organisation is adaptable and flexible enough to adjust to its changing environment, and in turn, achieves sustainable competitive advantage.
With all three of these organisations having the stated strategy of growth via organic and transformational means, such as acquisition, it's just a question of . . . watch this space!
Bibliography
Michael E Porter - The Competitive Advantage of Nations - Macmillan Press 1998 pages 33 - 70
Michael E Porter - On Competition - Harvard Business Review 1998 p21 - 163
Christopher Moir and John Dawson - Competition and Markets - Macmillan Press 1990 p50 - 64
Ralph D Stacey - Strategic Management & Organisational Dynamics - Pitman Publishing 1996 p31 - 167
T Burns and GM Stalker - The Management of Innovation - Tavistock Publications 1961 p50 -189
G Johnson & R Scholes - Exploring Corporate Strategy - Prentice Hall 1998, p26 - 35
Graham Mott - Management Accounting for Decision Makers - Pitman Publishing 1991, p78 - 91
Ronald W Hilton - Managerial Accounting, 2nd Edition, McGraw Hill 1991 p40-72
Frank Wood's - Business Accounting 1 & 2, 6th Edition, Pitman Publishing 1993 p140-201
Keynote Market Report 2006 - Building Contracting, 9th Edition, Edited by Jenny Baxter, p24 - 64
Mintel Report - Construction Industry - January 2007
Websites
Keynote market Report 2006 - Building Contracting, 9th Edition, Edited by Jenny Baxter
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