Strategic Analysis of CRH Company, Threats, and Opportunities in the External Environment - Case Study Example

STRATEGIC ANALYSIS OF CRH I. External Environment and Critical Success Factors for CRH Introduction The threats and opportunities that influence the performance of an organization are measured through external environment analysis. The critical success factors are defined as the most important areas of a company whose performance results are very crucial in determining the overall success of a company (Rockart, 1982).This report discusses the external environment in which CRH operates and the critical success factors for CRH. 2. External Environment of CRH According to Coulter (2005), there are both and general environment like political, economic, social and technological sectors that indirectly affect the company’s strategic decisions and specific environment like customers, competitors, suppliers etc which influence directly the company’s strategic decision. PESTEL analysis is used to analyze the general environment of a company and Porter’s five rival forces is used to analyze its specific environment. PESTEL analysis means the analysis of Political, Economic, Social, Technological, Environmental and Legislative (PEST) factors that assess the strategic decisions of a company (Oxford University Press, 1998; Peng and Nunes, 2007)( see appendix 1). The political and legislative factors affecting the performance of CRH can be identified as the geopolitical instability in Ireland, the erosion in the regional differences in the building industry due to the harmonization of building regulations, product standards and tendering regulations by the EU, the consequent rise in the mobility of workers and multinational character of firms. In spite of these, due to the continuing fragmented nature of the construction markets, the local differences remained due to the differences in building regulations, product standards and construction practices. The main economic factors affecting the company’s performance can be identified as global imbalances, rising energy prices and high debt levels and the continuing opportunities for consolidation in the building industry in spite of these global factors. The social factors include consolidation of the industry’s consumer base, rising homogeneity of the needs of consumers and the rising demand for the consumers (Moroney, 2007). The technological factors include standard production processes, non proprietary and in some cases unsophisticated technology .The environmental factors include focus on product innovation which is environment friendly and addressing the challenges of climate change (CRH, 2007). For analyzing the specific environment factors Porter’s five forces model based on Porter (1980) model is used (see appendix 2). This model includes the analysis of determinants of the intensity of competition and profitability of the industry like bargaining power of buyers, bargaining power of suppliers, threat of entry of new competitors, threat of substitutes and competitive rivalry (Pavlicek, 2008). Competitive Rivalry This factor works favourable to CRH de to the boom in Irish construction industry as a whole as well as its vertically integrated leading position in virtually aII domestic markets for heavy side building materials and products (Moroney, 2007). Threat of Entry The threat of entry is high due to the fragmented production process and low barriers to entry in the market (Moroney, 2007). Threat of Substitutes The threat of substitution is very low due to the non-substitutable nature of services provided by the industry Bargaining Power of Buyers The customers of the building industry were becoming more demanding due to the consolidation of the customer base and the rising homogeneity of their needs (Moroney, 2007). Hence, bargaining power of the buyers is high. Bargaining Power of Suppliers The bargaining power of suppliers is also high since there is only very little difference between suppliers and they compete mainly based on price (Moroney, 2007). 3. Critical Success Factors The vision of CRH is “to be a responsible international leader in building materials delivering superior performance an growth”(Moroney,2007,p 720). The strategic objectives of CRH are “to seek new geographic platforms in its core businesses and to take advantage of complementary product opportunities in order to achieve strategic balance and to establish multiple platforms from which to deliver performance and growth”( Moroney,2007,p720). The critical success factors for achieving the focus of growth and performance are investing in new capacities, developing new products and markets, acquisition based expansion subject to rigorous and controlled process and a performance based remuneration policy(CRH,2007a;Moroney,2007) . Among these, the most essential ones can be considered as developing new products and markets as well as the acquisition based expansion. This is because of the highly fragmented market, the fragmented production process, high bargaining power of buyers and the high threat of entry to the building industry. 4. Conclusion The discussion shows threats in the external environment existing like highly fragmented market and fragmented production process. At the same time, opportunities to CRH include continuing opportunities for consolidation in the building industry and environment friendly product innovation. Most of the competitive forces are not working in favour of the industry. In spite of these, CRH has been able to maintain leading position in the market mainly through the development of new product and markets and acquisition approach based expansion. II. Direction and Methods Employed by CRH-An Assessment 1. Introduction The various directions and methods adopted by CRH for growing its business are critically evaluated here. This is done by examining its long-term objectives, generic and grand strategies. The alternative directions that CRH might have chosen are also recommended here. 2. Long Term Objectives The long-term objectives are the performance results to be obtained by pursuing certain strategies over a period of normally five years or more (David, 1997)(See appendix 3).The long term objective of CRH is to “become a responsible international leader in building materials delivering superior performance and growth”(Moroney,2007). This objective was in compliance with the capacity of the company and considering the internal and external environments of the company. For achieving this objective, the company focused on new product and market development, acquisition based expansion locally and globally and investment in new capacity. 3. Generic and Grand Strategies The three main strategic options called generic strategies that are allowed to an organization for its competitive advantage are cost leadership, differentiation and focus(Porter,1985) . The grand strategies are a comprehensive approach for directing the activities of a company and obtaining its long-term objectives (David 1997). It can be seen that CRH has been reducing costs and offering high quality products to customers thereby maintaining cost leadership strategy (Moroney, 2007). The strategy of differentiated products was also maintained since one of their main strategy was to develop new markets and products, which helped the business of CRH to grow. Since these two strategies could be maintained by CRH in a wide manner, there was no need for the company to adopt the focus strategy. The grand strategies adopted by CRH for growing their business include concentrating on products and markets for growth, market development through maintaining leadership in markets, product development through larger acquisitions, vertical integration, innovation and strategic alliances through acquisitions. 4. Conclusion The discussion shows that the long-term objective of CRH has been to become an international responsible leader in the market .Hence accordingly, the focus has been on growth and performance. The long-term objectives were developed after considering the external and internal environments of the company. Cost leadership and product differentiation were the two main generic strategies adopted by CRH for its success. The grand strategies adopted by CRH include innovation, strategic alliances, product and market development as well as concentrated growth. In spite of the tremendous growth achieved by CRH, there has been concerns regarding the sustainability of this high growth (Moroney, 2007).This was mainly due to the overdependence on acquisitions by CRH for its growth. Reports show that acquisitions contributed to around 70 percent of the profit growth of CRH. The markets for acquisition show tightening trend in the recent years, which impose a threat on the growth of CRH. There has been decline in the average value of add on acquisitions in the sector while the in spite of the rise in prices for large deals, returns were lower. All these are threats to the growth of CRH which depends mainly on acquisitions as a strategy for high growth. Moreover, though CRH had been following rigorous evaluation procedures for the acquisition process, it is shown that for large deals, this is not the case often. Hence, CRH sometimes considered even disputed deals also in the process as shown by studies (Moroney, 2007). This can affect the quality of the acquisition process, which might affect the performance of the company in the future. The acquisition-based approach has been adopted in view of the highly fragmented nature of the industry and the low barriers to entry in the market. However, the above discussion shows it is now appropriate to have a rethinking on this overdependence on acquisitions for profit growth in CRH. The internal resources need to be exploited more in the future for improving the growth performance rather than depending mainly on acquisitions for profit growth. Concentrating more on innovative strategy to develop new products can contribute to create customer value and thereby increasing the profits. In addition, the procedures for the evaluation of the acquisitions need to be more rigorous for improving the quality of the acquisitions. Other activities like firm infrastructure improvement and technology development can be given more focus to create more customer vale and thereby supporting the competitive advantage of the company. This can promote sustainable growth for the company given the low global demand in the construction sector and the hostile environment in the building materials industry. III. Core Competencies, Capabilities and Resources held by CRH-An Assessment 1. Introduction The core competencies, capabilities and resources held by a company are examined by internal analysis. Coulter (2005) defines the strengths of a company as its resources, capabilities and competencies that can be exploited and developed into a sustainable competitive advantage. In addition to analyzing company’s mission vision statements and strategic objectives, internal analysis examines the company’s main activities through value chain analysis (Coulter, 2005). The internal analysis of CRH is done here. 2. Mission Vision and Objectives According to the mission and vision statements, the focus of CRH is on top financial performance and growth through investing in new capacity, developing new markets and products as well as acquisition based expansion (Moroney, 2007). For achieving high performance, they have an experienced management team and performance based remuneration system. In addition to this, they believe the goals to be achieved through the way they perform their business. The main guiding principles of their business include openness, honesty, integrity and responsible behaviour (CRH, 2007b).Since the Porter’s five forces clearly show the high bargaining power of buyers and suppliers as well as the high threat of entry to the markets, above mentioned strategies of CRH sport its competitive advantage. In particular, developing new products and markets as well as the acquisition based approach supports CRH to overcome the threat of entry and high bargaining power of byres and suppliers .This in turn works in favour of the company for making it a leading one in the market. 3. Value Chain Analysis Value chain analysis has become a major technique for creating more customer value through work activities following Porter (1985) (see appendix 4). The two main features of the market portfolio that helped for its competitive advantage were the focus of maintaining leadership in markets and product segments as well as the deliberate geographic, product and segment balance. CRH has been recognized by many awards for its financial reporting, investor relations and excellence /innovation in environment/safety practices (Moroney, 2007).Thus inbound logistics was the primary activity that created customer value in CRH. The main support activity in CRH for creating customer value has been human resource management ie a management featured by experience, stability and continuity. 4. Conclusion The discussion shows that a clear and well-defined vision with focus on high financial performance and growth and strategies aimed at obtaining those goals supported the competitive advantage of CRH. The Vale chain analysis shows that inbound logistics aimed at bringing resources to the business and human resource management had been the two major activities that helped in creating customer value in CRH. Appendices Appendix 1 PESTEL Analysis PEST analysis means the analysis of Political, Economic, Social and Technological (PEST) factors that assess the strategic decisions of a company (Oxford University, 1998;Bennet,1999).This analysis is also called STEP analysis(Peng and Nunes,2007).PESTEL Analysis is an updated form of PEST analysis which includes analysis of Environmental and Legislative factors also. According to Wall and Rees (2001), P.E.S.T Analysis can be defined as an analysis system for the general environment within which the firm operates. The political factors include stable political factors, liberalization of markets, foreign investment etc. The economic factors include economic growth, market credit, profit taxation, interest rates etc. The social factors consist of health condition of the population, endorsement of computers, internet access, lifestyle etc. The technological factors consist of technical communication possibilities, data protection, possibilities of data storage; progressive technologies etc (Pavlicek, 2008). Appendix 2 Porter’s five forces Model Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organization’s external environment. However, the main criticisms against the Porter’s models are their focus on only profitability and survival and the assumptions of classic perfect market, simple and static market structures and competitive markets which disables to capture the dynamics of markets .Hence, it cannot consider new business cycle models (Speed, 1989 and Sharp and Daves, 1996). In spite of these criticisms, this model is still popular for external analysis. Appendix 3 Long Term Objectives, Generic and Grand Strategies The long-term objectives include particular improvements in the company’s competitive position, technology leadership, profitability, return on investment, employee relations and productivity and corporate image (David, 1997). According to Thomson and Strickland (1990), the advantages of setting up long-term objectives are to direct current actions viewing future results and stimulating the managers’ consideration of future implications of the actions made in the present time. According to the cost leadership strategy, the low cost leader gains competitive advantage in any market due to his ability to produce many at the lower cost. The point is that low cost need not always leads to low price. The strategy of differentiated goods and services permits to satisfy the needs of customers through a sustainable competitive advantage. The companies are thereby allowed to make the prices less sensitive and concentrate on value that generates a comparatively higher price and a better margin. Since there are these benefits for differentiation, it needs producers for market segmentation in order to target goods and services at specific segments, generating a higher than average price. There is possibility of extra costs for the differentiating organization, which can be offset by the revenues generated by sales. The focus strategy also known as niche strategy is more appropriate when an organization cannot afford neither of the other two strategies in a wide manner. This strategy is thus focused on a narrow specified segment of the market. The main 15 grand strategies are the following (1)concentrated growth which concentrates on products and markets complementing current products and services(2) market development (3) product development (4) horizontal integration (5) vertical integration (6)concentric diversification (7) conglomeric diversification (8)turnaround (9) divestiture (10)liquidation (11)bankruptcy (12) joint ventures (13)operations (14)strategic alliance and (15)consortia. Appendix 4 Value Chain Analysis Based on the assumption that customers demand some type of value from the goods and services they purchase or obtain the abilities of the organization to create customer values through work activities are examined here. Nine activities, among which five primary and four support activities are identified by Porter (1985) .The primary activities identified by him, are service, marketing and scales, outbound logistics, operations and inbound logistics while the support activities are firm infrastructure, human resource management, technology development and procurement. References Bennett, R. (1999). “Corporate Strategy”, 2nd Edition, Glasgow: Bell & Bain Ltd. Coulter, M. (2005). “Strategic Management in Action”, 3rd Edition, New Jersey: Pearson Education, Inc. CRH(2007a): “Our Responsibility”, http://www.crh.ie/crhcorp/responsibility/environment/, Accessed December 20 2009. CRH(2007b) : “Employees: Code of Business Conduct”, http://www.crh.ie/crhcorp/about/employeescode/, Accessed December 20,2009. Moroney M(2007) : “CRH plc: Redefining Corporate Strategy”, in Johnson, G., Scholes, K. and Mrittington, R. (2007) Eds, Exploring Corporate Strategy, 8 th edition, Harlow: F T/Prentice Hall. 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