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The corporate strategy is a key determinant in all the companies. A right and reasonable corporate strategy is valuable and helpful to ensure the continued competitiveness and performance of these companies. Then, after the corporate strategy is established, strategic groups will be developed according to the same corporate strategy options. The companies in the same strategic group have the similar competitive positions within the particular market.
Compared with other companies, the construction companies have their own particularities. As the construction industry occupies a pivotal position in the UK economy, the construction companies as the subject of construction industry in the UK are the representative. In addition, as the current economic climate has become more and more complex,
The review can be seen as the foundation of the project. The aim of the project is to explore corporate strategies of major UK construction companies with a view to establish factors that influence the competitiveness. Thus, the relevant information to support the project has been involved in the review.
The aim of the review is to get a clear understand about the strategy, strategic options and strategic groups, explore the nature of construction companies and have a overview of the UK construction industry. The previously published information which is relevant to the aim has been analyzed in the review.
The full name of the UK is the "United Kingdom of Great Britain and Northern Ireland". The UK is an island nation which is made up of England, Scotland, Wales and Northern Ireland. The London as the capital of the UK is one of the largest financial centers in the world. What is more, the UK is located in Western Europe and next to the coast of France. In addition, it covers an area of approximately 245,000 square kilometers. Moreover, the population of the UK is around 61 million (Economy in Britain, 2009). This is the basic conditions of the UK.
2.2 The UK economy
After the Second World War, the global economy was developed violently. At the same time, the economic was also developed fast and swiftly in the UK. However, the great recession in 1992 had a negative influence on the development of the UK economy (Benati, 2004). Since emerging from recession, rapid and drastic changes were taking place in each aspect of the UK economy.
In recent year, the world economic situation has created a favorable market environment for the sustained and fast economic progress in the UK. The UK belongs to the European Economic Community (EEC) maintains a sound momentum of sustained, rapid and healthy development. What is more, the gross domestic product (GDP) of the UK reached to about US $2.68 trillion in 2008 which is the sixth rank in the world (List of countries by GDP, 2009). The three major sectors contribute which is supposed to contribute to the increase of GDP are services, industry and agriculture. Generally speaking, the percentage contribution of agriculture, industry, and services to total GDP are 1.3%, 24.2% and 74.5% respectively (The world factbook, 2009).
Fig.2.1 Top 7 counties in the world ranked by GDP
Fig.2.2 The percentage contribution of each sector to GDP
Currently, the UK has become one of the largest economies not only in the Europe but also in the world (Howes & Tah, 2003). There are combinations of changes which are directly or indirectly relevant to the development of the UK economy. Firstly, in the recent past, public ownership has been greatly reduced by the British government. Secondly, the new technologies and equipments have been widely used in the agriculture which is extremely important to raise working efficiency. About it can satisfy about 60% of food needs in the UK. Thirdly, the government is devoted to the promotion of social welfare programs. In addition, energy industry has become more and more important in recent years. Finally, the importance of industry which is the second largest proportion of GDP shows an obvious decreasing trend.
For the past two years, the economic crisis was caused and led to a series of problem such as the global economic slowdown, tight credit and falling home prices. There is no doubt that the UK economy also has been seriously affected. As a result, the government has to implement a series of new policies and programs in order to stabilize the economy. Firstly, the government tries to nationalize the bank system and cut taxes. Secondly, bank interest rate has been adjusted in order to stimulate the economy and promote the consumption. Thirdly, some capital projects have been brought forward by the government. What is more, the government has trimmed off its expenditure and suspended public sector borrowing rules. Last but not least, it is possible that the UK may join the European Economic and Monetary in the future.
2.3 The UK industry economy
The industry as the second largest proportion of GDP plays a significant role in the each aspect of the development of the UK. However, there is an obvious decreasing trend for the importance of industry. For example, in 2006, the percentage contribution of agriculture, industry, and services to total GDP were 1%, 25.6% and 73.4% respectively (The world factbook, 2009). Compared the percentage in 2008, it can be seen clearly that there is a slight decrease for the percentage contribution of industry to total GDP.
Fig.2.3 The percentage contribution of each sector in the industry to GDP in 2006 and 2008
2.4 The UK construction industry
During the recession mentioned above, the UK construction sector as a critical component of the industry suffered a severe blow. After the recession, there was a turnaround. The UK construction sector faced a good opportunity to make great progress.
In the late 1990s, the British government focused on increasing the investment in diverse aspects of infrastructure developments that includes health, education and transport (Benati, 2004). Due to the government infrastructure investment programmes, the UK construction industry enjoyed a golden period of strong growth and was developed rapidly. Meanwhile, in the 2000s, the British government increased the expenditure substantially in order to improve the public services (Benati, 2004). As the construction sector is close relevant to the public services, this policy also led to an increase of the significance of the construction sector.
Nowadays, the construction industry has become increasingly important to the UK economy. In general, the percentage of construction industry can contribute to the GDP is around 10%. In addition, about 9.2% of the nation Gross Value Added (GVA) was contributed by the construction sector in 2007 (Construction overview in the UK, 2009). What is more, for the UK construction industry, there are more than 250,000 firms that all have about 2.1 million employees (Corporate Watch UK, 2004).
The construction industry always includes a variety of diverse business activities and sectors. Generally speaking, in the UK, the construction industry mainly consists of housebuilding, infrastructure, industrial construction, commercial construction and building materials (Corporate Watch UK, 2004). The percentage of each sector in the industry has been shown in the table below.
Fig.2.4 The market share of each sector in the industry
2.4.2 The influencing factors
In 2008, economic crisis was caused which had very bad influence on the UK construction industry. The UK construction industry was fallen into the unprecedented low ebb. Undoubtedly, the government has the authority to drive forward economic recovery. Incidentally, the Olympic Games will be held in London in 2012 which may be an opportunity to promote the growth of the UK construction industry. On the other hand, the development of the construction investment can provide satisfactory profit to the UK economy. For example, according to the report named construction (2009) in the UK economy, if there is £1 spent on construction, the GDP will be increased by £2.84. Thus, its importance and necessity can be seen. At the same time, there are a list of factors can influence the output of the construction industry such as the role of government, exchange rates.
Firstly, the economic performance of the construction sector can be affected by the role of government. If government increases the investment spending in construction, the demand for construction will be increased which can lead to the high growth of the construction industry. For example, the rapid growth of UK construction industry in the late 1990s benefited from the government infrastructure investment programmes (Blake & Croot, 2004). On the other hand, if the investment spending in construction is decreased, there will be not enough new projects which may slow down the growth of the construction industry.
Secondly, the exchange rate also can affect the development of the construction industry. If money increases in value and the exchange rate is higher, it will be difficult for the construction companies to increasing their markets overseas. Once the exchange rate begins to slip, the future prices and costs will become uncertainly. The uncertain business environment will be seen as a kind of risk which may lead the firm into bankruptcy. On the other hand, if the money falls in value and the exchange rate is lower, the exports may become more competitive and have short-term benefits. However, in the long term, it can be a negative influence on economic which may discourage consumption, reduce revenue and wage levels, push up bad debts and increase the rate of bankruptcy.
Finally, the interest rate can play an essential role in influencing the construction industry. If the interest rate is too high, the cost of borrowing will be also increased. As the source of funds for the construction industry is largely dependent on borrowing, the higher cost of borrowing is possible to deeply affect the operation of the construction companies. On the other hand, the lower interest rate may can stimulate consumption and encourage enterprise investment in the short term. However, the consuming capacity will be limited in the future.
It cannot be ignored that some other factors can also exert an influence on the construction industry such as government policy, inflation and raw material prices. All of these factors are interrelated and interact on each other. For example, the high inflation rate is usually treated as a sign of increasing the interest rates(Blake & Croot, 2004). Therefore, all of these factors need to be analyzed as a whole and viewed in the proper perspective.
3 Corporate Strategy
3.1 The definition of strategy
From what have been mentioned above, it can be seen that there are some external factors can influence the performance of the construction companies. However, the organization and operation of the construction companies are also important which are able to affect the competition force and occupation rate in the market of construction companies. What is more, corporate strategy plays a key role in the organization and operation of construction companies. An effective corporate strategy as a correct guide of the future development can ensure continued competitiveness and performance of construction companies.
Facing the keener and keener competition in the market, the corporate strategy has played a more important role in each aspect of construction companies. To speak without exaggeration, corporate strategy is bound up with the fortunes of the construction companies.
Despite its importance, the term 'corporate strategy' is not statutorily defined. The literal meaning of strategy is a plan of action which is used to achieve a particular goal (Davis & Devinney, 1997). In the past, strategy was designed to achieve the long-term objectives (David & Male, 2001). Sometime, strategy has also been viewed a plan of company for making profit and winning. Another says that corporate strategy can be considered as a kind of guiding map which is used to give directions to the strategist about the corporate behavior (Foss, 1997). Corporate strategy is also believed as the determination of how a company will achieve its goals (Foss, 1997).
Anyway, despite the different definitions of corporate strategy, there is one thing in common. The aim of the corporate strategy is to help these companies to satisfy the manager's demand of operating performance and maximize the organization performance (David & Male, 2001).
3.2 The role of corporate strategy
Generally speaking, the business development of a company mainly includes four key elements. The first element is mission and vision which can be defined as the direction that the company will evolve in the future. The second element is objectives which can be viewed as the goals used to achieve the vision. The third element is strategies which can be understood as the strategic options which can help to attain the goals. The last element is tactics that chiefly responds to put the strategies into action.
Fig.3.1 The strategic process of corporate strategy
According to the table, it can be seen easily that the premise of the strategy process is to make sure the company have a clear mission and aim (Skaik, 2009). A well defined mission is the solid foundation of the future development of a firm. What is more, a clear mission as the core business can provide the lasting motility for companies to achieve their targets. Strategy process as a bridge is responsible to connect mission and objectives with tactics. In other words, the role of corporate strategy is to relate theory and practice.
3.3 Strategy process
The strategy management process can be viewed as a kind of decision-making process that is designed to determine the most suitable measures for companies to achieve their objectives. Generally speaking, the strategy management process can be divided into three steps which are strategy formulation, strategy choice, and strategy implementation (David & Male, 2001).
The strategy process should base on not only the internal conditions of the company but also the external environment conditions. The internal conditions can be defines as the typical features of the construction company. It usually includes the human resources, financial resources, production, marketing channels, research and development. Meanwhile, the external environment conditions mainly stand for the opportunities and threats that the construction companies will face. It always covers the economy, societal developments, technological developments, industry structure, suppliers, customers, competitors, new entrants and the level of competition between companies.
On the other hand, during the strategy management process, the interests of seven groups should be taken into account. In general, the seven groups are customers, suppliers, managers, shareholders, strategic partners, employees, and society. A successful strategy should add value for these groups over the long run.
Fig.3.2 The related groups in the process of corporate strategy
3.3.2 Strategy formulation
Strategy formulation is the process of determining suitable ways to accomplish the purpose and reach the missions. The essential step of the strategy formulation process is to attempt to analyze and balance the external environment, especially the opportunities and threats that the company faces. Then, according to the analysis, the strategy formulation should base on distinctive resources and capabilities of the company such as the particular products and customers in order to build and establish its own competitive advantages (David & Male, 2001). What is more, the strategic options of the company determined by strategic decision-makers to achieve the objectives are the end result of the strategy formulation process (Foss, 1997). By the way, the aims and missions may need to be adjusted within this process in order to better match the corporate strategy.
3.3.3 Strategic options
The corporate strategy is the decisive factor in the operation of the company. During the corporate process, the company should be considered as a whole. As every organization has its own features and mission, diversified strategies is required to satisfy the various demands. What is more, the corporate strategy is concerned with the internal and external situations of a company. Based on the different internal situations and external situations, it is extremely important for the company to choose a reasonable strategy. In addition, it should be noted that an unreasonable corporate will tend to be the major barrier of company. For example, it is impossible for a small company to set up a corporate strategy that focuses on opening up overseas markets.
Strategic options can be viewed as the alternative and oriented actions that should be formulated in response to the external environment of the company.
There are several points for attention during the process of formulating strategic options. Firstly, it is necessary to make sure the actions are relevant to the mission and aim. Secondly, for each threat and opportunity, various strategic options may need to be developed. Thirdly, each strategic option can respond to several threats and opportunities. Moreover, the strategic options should focus on the particular target group and the particular production. Then, the strategy options keep abreast of new situations. Generally speaking, the principle of strategic options is to help companies to gain a competitive advantage in relating to status of their positions in the external environment.
3.3.4 Strategy choice
The strategy choice process can be simply divided into three steps that are identification, evaluation and selection. The purpose of the strategy choice process is to identify the available options and then select the best one (Botten, 2009). For the strategy choice, it is also largely dependent on the internal and external factors have been mentioned above. During the process, it is necessary to evaluate the existing resources and capabilities of the construction company, especially the strengths and weakness (Lindelow & Serneels, 2005). At the same time, as a good choice can help the company to keep ahead of its competitors, the competitors also need to be considered in determining the final decision (Howes & Tah, 2003). In addition, it must be noted that individual preference criteria should be avoided in the process of strategy choice (Munday, 2004).
3.3.5 Strategy implementation
Although the strategy formulation and choice are of great importance, the implementation relates to the success or failure of the whole process (Cobbold & Lawrie, 2001). Because the strategy will be perfected and improved after the feedback is obtained, it is better to view strategy implementation as a process of developing strategy not executing. What is more, the strategy should be executed by combining with the typical systems of the company such as organizational structure, human Resource in order to. As a result, the successful implementation of strategy may require a specific management office that can be entirely responsible for the execution. Undoubtedly, the establishment of the specific office will be more effective to manage the strategy implementation, collect the feedback and then adjust the strategy (Foss, 1997).
The classification of strategy process is different due to the various related date. For example, the diagnosis and feedback may be taken into consideration and listed in the process of strategy management. However, for this passage, the diagnosis which can be understood as analyzing both internal and external factors has been considered in the process of strategy formulation. What is more, the feedback which can be used to perfect the strategy has been considered in the strategy implementation process. Therefore, based on this information, the strategy process and can be described as following.
Fig.3.3 The main steps in the strategy process.
Corporate strategy is crucial in achieving the set objective. Corporate strategy may be compared to a car. The mission is just like the destination of a far journey. The objectives can be seen as stopping places on the journey. The car is convenient and helpful for you to reach to your destination and stopping places. However, when you choose your car, it is necessary to combine with your own situations and road conditions. For example, if you have plenty of money and the traffic is satisfied, you may choose a super sports car which is fast and comfortable. If you out of money, regardless of the good enough traffic, you may choose a used car which can help to save money. What is more, during the journey, you can also change your car due to the limitation of road conditions and the change of your own situations. For instance, if the road becomes narrow, you may need to get a small car to replace the existing car. All in all, according to the different situations, you should make the right choice to arrive at the destination of your journey. For a company, the most important thing is not to have a strategy, but to attain it and make it happen in the future.
4 The corporate strategy in construction
4.1 The nature of construction industry
Construction industry is closely relevant to our daily life and has a major impact on our environment. With the development of the society, construction industry has become increasingly important. What is more, the construction industry has been one of the key in some countries. For example, in the UK, the percentage of construction industry can contribute to the GDP is around 10%.
Compared with other industries, construction industry has its own particularity. The construction firms as the subjects are responsible to the particularity of the construction industry. Generally speaking, the unique characteristic is mainly reflected in two aspects: the nature of the constructions and the operation of the construction companies.
4.1.2 The nature of the construction
The construction can be seen as a complex process to transform a mental concept into a physical structure (Morton, 2007). As a result, it is difficult to standardize and predict the construction. There are three main groups involved in the construction which are owner, designer and contractor. Undoubtedly, the relationship and information communication between each group is very important which can affect the construction quality. Only when the project is fully understood by the designer and contractor, the needs of owner can be better satisfied. By the way, due to the more and higher requirements of clients and owners, the construction projects become more complex and time-sensitive.
Fig.4.1 The process of construction project
On the other hand, there will be a list of potential dangerous factors may hinder construction work such as weather, site conditions and coordination of multiple parties (Skaik, 2009). Firstly, as the construction will be built outsider, the uncontrollable weather can have a slightly influence on the construction work. Secondly, due to the difference of each site area, it is necessary to explore the site conditions before the construction. Then, as the construction is a kind of group activities, to coordinate the multiple parties will be of vital importance. What is more, it cannot be ignored some other factors are also equally important that should be considered with the construction process. In a word, during the process, the variability of construction requires the work processes to deal with uncertainties, continuous changes, and potential risk.
4.1.3 The nature of construction firm
For the construction firm, the chief task is to manage the construction job more effective and expand the market share actively. The businesses of the construction firms mainly consist of six parts: housebuilding, infrastructure, industrial construction, commercial construction, building materials and others. The main primary participants of the construction firms are customers, suppliers, shareholders, strategic partners and staff.
Compared with the other organizations, the construction firms have a variety of characteristic. Firstly, because of the various project, the management should keep pace with the local resources and local environment. For example, if necessary, it is better to hire plants form the local construction companies. Secondly, due to the different demands of owners, it is difficult for construction firms to have a unified standard to identify the construction process. Thirdly, as the uncertainty of future work force, it brings certain difficulty in decision-making process, especially in determining the corporate strategy and managing human resources. Without doubt, all of these characteristics cause a bottleneck in the operation of a construction company.
On the other hand, government plays a key role in the construction industry which can also deeply influence the development of the construction firms. To speak without exaggeration, the fiscal policy is closely linked to the fortunes of construction companies. For instance, because the major source of funds for the operation of construction companies is largely dependent on borrowing, there is no doubt that interest rate can largely influence each aspect of the construction companies.
Another special feature of construction companies is that some parts of a project are possible to be subcontracted to subcontractor during the construction process. It is a good way to work together for the mutual benefit (Dubois & Gadde, 2001). Thus, the interdependence between contractor and subcontractors should be considered in the corporate strategy. It can be seen that a win-win structure which is greatly beneficial to each joint partner will take the place of monopoly in the construction industry. To conclude, an integrated management system is needed to balance each aspect and then make sure the competitiveness and performance of construction companies.
4.2 Strategic groups
A strategic group consists of a group of rival companies within the same industry who adopt similar corporate strategies (Evers & Gerke, 2008). This is to say that these rival companies have the similar competitive positions in the same industry. What is more, these companies all plan to gain a competitive advantage in a special market with particular production (Evers & Gerke, 2008). In addition, it is superficial to argue that one strategic group is better than another. It cannot be said to be good or bad, just different. Moreover, the strategic group can provide a chance for managers to evaluate the performance and processes of the companies. On the other hand, in general conditions, strategy group can be inextricably linked for a long period. However, if the procurement and corporate strategies are changed, the strategic group is possible to be different.
Fig.4.2 The relationship of the strategic groups
This table can be seen as the construction industry. A variety of shapes stand for various strategic groups. What is more, the size of each shape means the market share that each strategic group has. Thus, in general conditions, it can be seen that each strategic group is relative unattached because of the different corporate strategies. However, sometimes, there is a good deal of conflict between each strategic group because they respond to the same customers (Newman, 1978). On the other hand, even when the two strategic groups focus on the same market, their positions in the market are different.
It is necessary to take hotel industry as an example. The B&B, inn and youth hostel can be seen as three different strategic groups in the hotel industry. Although the clients of these three strategic groups are the public, their positions in the market are different. The youth hostel always focuses on the teenagers and students. The location of inn is usually near to the center of the city. The B&B always locates next to the tourist attraction and servers the travelers. What is more, there is no denying that sometimes there will be conflict between these three strategic groups as a result of the similar clients.
4.2.2 The strategic group in construction industry
For the construction industry, because of its own particularity, it is really difficult to analyze and identify the strategic groups. What is more, there is no enough evidence to support the topic. Thus, the strategic groups in the construction industry will be analyzed according to its basic principle. The general process of formation of strategic groups should base on the corporate strategy. According to these information, in order to better understand the strategic groups in the construction industry, it is vital to pay attention to the corporate strategy process (Hans-Dieter & Simon, 2009).
The foundation of the strategy process is to identify the internal and external situations of the construction company. The external environment which is relevant to the optimal decision analysis of business scope can be mainly reflected from two parts. Firstly, it is vital to have an overview of the market in order to get a clear realization about the opportunities and risks the company will face. Secondly, the competitors need to be analyzed which is value for company to find out their advantage by contrast. On the other hand, the analysis of internal environment is to identify the strengths and weaknesses of the company. The purpose of analysis of internal environment is to try to make good use of and better deploy the inner resources, including human resources, financial resources and utilizing effectively management method.
SWOT analysis as a useful method to improve the development process of corporate strategy has been widely applied in the process of strategy formulation. It is seen as a simply management method that can identify the company's strengths and weaknesses, describe opportunities and threats that the company faces. Based on the result of evaluation, the inside and outside resources of the company can be reasonably allocated and then the competitive advantages will be built (Jackson et al, 2001). However, the conception of SWOT analysis was mentioned for forty years ago. With the rapid development of our times, there are some defects in it (Lu, 2005). Nowadays, as more and more analysis method has been developed such as PEST analysis and Porter's Five-Forces analysis. Thus, it is necessary for construction company to choose a suitable analysis method according to their needs and own situations.
In order to classify the different strategic groups within the construction industry, it can be reflected from 2 factors that can best represent the internal and external environment: business scope and resources allocation. Only the construction companies that have similar business scope and resource allocation can be put into the same strategic groups. As the business scope and resources allocation are limited in the particular internal and external environment, it will be helpful to identify the strategic groups in the construction industry. Thus, relying on the corporate strategies, the construction companies in the UK should be identified and analyzed from these two sections.
Undoubtedly, for the construction companies, the corporate strategy makes all the difference between success and failure. Meanwhile, there are a combination of factors can influence the strategy process. Generally speaking, the corporate strategy is determined by the company's internal and external environment. Thus, a right corporate strategy can balance not only the company's strengths and weaknesses but also the opportunities and threats that the company faces. If not, it will tend to be the major barrier of the development of the companies.
The corporate strategy is the foundation of the selection of strategic groups. In the new market circumstances, there are various standard to identify the strategic groups. However, the essential factors can reflect the company's internal and external environments are business scope and resources allocation. Thus, for the UK construction companies, only when they focus on the same business scope and have similar resources allocation can be seen as a strategic group.
This review has provided a transparent explanation about the general concept of strategy, strategy options and strategy groups. Then, in the future study, relying on the basic knowledge of the corporate strategy and the features of UK construction industry, the orientation of a selection of construction companies will be analyzed in order to establish their pattern of strategy and how they compete.