The Construction Firm: Contractors and Subcontractors - Dissertation Example

 The Construction Firm: Contractors and Subcontractors Introduction Since 1980s, construction companies in UK has encountered several occasions wherein the construction business has been experiencing slow growth in business. In times of serious economic recession, it is common on the part of most UK-based construction companies who failed to diversify and create strong business alliances in other countries to experience a temporary setback with regards to its construction projects. (See Appendix I – Construction and GNP Trends between 1980 to 2011 on page 13) Within the construction industry, Rok plc is considered as one of the biggest contractors in the United Kingdom that focuses on repairing, refurbishing, and maintenance of government schools and social housing projects. In line with this, the company offers plumbing, heating and electrical (PHE) services on top of bidding for construction projects (Corporate Information 2011). Due to serious economic recession in UK between 2008 to 2009, the company corporate earnings of this company had been negative until the last quarter of 2009 (ibid). Even though the company managed to earn as much as 714,800,000 worth of sales as of January 2010, Rok plc has recently declared its bankruptcy when the company incurred £60 million worth of debt (Corporate Information 2011; Clapper 2010). As a result, the company is currently implementing a massive layoff of its workers and was removed from the stock exchange (Rok Plc 2011; Global Insolvency 2010). (See Appendix II – Corporate Earnings of Rok Plc. on page 14) To gain better understanding why Rok plc failed to withstand the business challenges caused by serious economic recession, this report will first discuss the company’s national approaches to ownership structure followed by discussing the importance of financial risk management, diversification and integration in construction business. Eventually, this report will discuss how the company managed should restructure its business nationally and globally in order to improve its asset-base and income stream generation. As part of discussing the organizational culture and behaviour of this company when managing its contracting system, this report will explain the link between business strategy and culture followed by discussing how organizational culture in a construction firm could affect the behaviour of its stakeholders when managing its supply chains. After identifying some distinctive management problems associated with poor organizational culture and behaviour in building construction, business concepts related to business alliances, supply chain management, and franchising in supply chains will be tackled in details. National Approaches to Ownership Structure, Financial Risk Management, Diversification and Integration in Construction Business Rok plc is the holding company of Rok Building Ltd, Rokbuild North Ltd., Rok Development Ltd., and Rok Estates Ltd. among others. As a diverse group of companies, the company’s is to create a diversified group of businesses in UK that will allow the company to build long-term quality profit for its stakeholders. For more than 20 years in service, Rok plc focused on repair, refurbish, and maintenance of government schools and social housing projects throughout the United Kingdom. The economic crisis in the United Kingdom has significantly affected the business performance of Rok Plc., the Rok group of companies remained a publicly bidded company. Since a large part of investment money comes from the public, this particular business approach to ownership structured increases the risk wherein the business owner may have little concern on how the company will establish and value the business relationship it had with its customers and group of accredited suppliers within the various public and private sector. Because of the tight market competition within the construction industry in times of economic recession, the research study of Flanagan et al. (2007) explained the imporance of financial risk management, diversification and integration over the success of a construction business. Upon analyzing the case of Rok Plc, one of its weaknesses is its inability to develop a strong financial risk management in times of economic recession. Because of a series of acquisition of new companies for vertical and horizontal investment purposes, Rok Plc was unable to handle its debt obligations even though Rok Plc itself was earning positive profit. Although Rok Plc was focused on strengthening its diversification strategy, the company was targeting the domestic construction market all over the United Kingdom. Based on the principles of domino effect, other significant parts of Rok group of companies were greatly affected by the economic recession in UK between 2008 to 2009. Because of weak financial control in Rok’s plumbing, heating, and electrical division, the company publicly announced that its total operating profit was only £4.5 million as compared to £8.9 million the previous year whereas its revenues dropped from £308.1 million to £56.4 million as of November 2010 (Brown 2010a; Brown 2010b). With is network of 60 offices and more than 3,500 employees, Rok Plc was operational in different geographic areas in the United Kingdom (InfoGrok Construction 2011). Because of the large network Rok Plc managed to establish over the past few years, the overall fixed expenses of the Rok group of companies is expected to be of large value. Despite the worst economic recessions in UK between 2008 to 2009 (PWC 2011), most of the large-scale contractors such as in the case of Rok Plc had to go through public bidding for them to win a project contract. With the purpose of covering-up the company’s fixed operational cost in times of serious economic recession in UK, it is most likely on the part of large-scale contractors such as in the case of Rok Plc to simply sell its plumbing, heating and electrical (PHE) services at a relatively or unrealistically low price. Contrary to what is going on in times of serious financial distress, the spokesperson of Rok Plc stated that “At no time has it ever been suggested by any reliable source that Rok puts in prices for its services that are unrealistically low” (Brown Inside Housing, 2010b). National and Global Restructuring and Management Solutions in Construction Business in Times of Serious Economic Recession To avoid saturating the domestic market, Rok Plc should have expanded its business globally rather than focusing on expanding its business domestically. This particular business strategy could have empowered Rok group of companies not to be totally too dependent over the state aids or national economic situation in the United Kingdom (Green et al. 2008). By going global, Rok Plc could have increased its competitive advantages as compared to its local competitors in the UK market. In order to win a bidding contract, Rok Plc including its subsidiaries are being challenged to bid the contract at the lowest possible price without sacrificing the quality of its services, ability to complete the project on time, and satisfy the customers’ preferences in terms of building designs and overall quality output (Flanagan et al. 2007; Cheng, Li and Love. 2000). Despite the tight competition within the construction industry, focusing on the micro-business environment of Rok Plc is considered a significant factor that will contribute to the success of the company. Within the micro-business environment of Rok Plc, there are two significant ways on how the company could make its operational cost low. First, the company should develop and implement a single organizational culture in its business practices that could make them effectively minimize the risk associated with human errors. The second strategy is to improve its supply chain management system. Importance of Organizational Culture, Effective Leadership Style and the Promotion of Two-Way Communication Human factor is one of the most important elements that could contribute to the success or failure of Rok group of companies in times of serious economic recession. In line with this, Green et al. (2008) revealed that one of the common reasons why most of the UK-based construction companies failed to earn profit in times of economic recession is because of its failure to invest in its human capital. For this reason, the top management of Rok Plc should pay more attention with regards to the significance of organizational culture, the use of effective leadership style and the promotion of two-way communication within the business organization. In time of serious financial or economic difficulties, there are quite a lot of business management strategies that could enable Rok Plc increase its competitive advantages and long-term sustainable performance against its close competitors. Aiming to differentiate Rok Plc’s service performance as compared to its close competitors, the company should develop an effective cost leadership strategy combined with its excellent customer service in creating brand awareness among its target customers (Flanagan et al. 2007). This can be done by carefully aligning the organizational culture between Rok Plc and its business alliances. According to David (1999, p. 143), organizational culture is referring to the “pattern of behaviour developed by an organization to cope with problems related to external adaptation and internal integration aside from enabling the employees to feel and think positively”. As a cultural paradigm developed by the stakeholders of a business organization, values and beliefs of these people could eventually form a strong pattern of accepted organizational behaviour which could significantly affect the employees’ perception towards the new organizational goal and mission (Willcoxson and Millett 2000). To improve the asset-base and income stream generation of Rok Plc, the company should focus on strengthening its strategic alliances with its accredited suppliers and other private and public sectors in order to penetrate the construction market in other countries. Specifically the cross-cultural differences between two groups of construction companies is not limited to the hierarchy of departments, the way information is shared and distributed within the business organization, and the way business operation is being managed. Since the management strategy used in each construction company may vary from one country to another, it is a common practice in most of the cross-country merger and acquisition to assign the local people in managing the top management group in other countries (Forrester 2011). Despite the tight market competition within the domestic and global construction industry, MacIntosh and Doherty (2007) explained that organizational change is necessary in making construction companies remain competitive. Particularly in the case of construction companies that has decided to enter into joint-venture or merger and acquisition agreement, its organizational leaders should create a new organizational culture that is aligned with the national culture in other countries. The problem with having a weak organizational culture that is not supported with a single vision and mission increases the risk wherein the construction company will experience difficulty implementing a set of organizational change. Because of possible miscommunication between the top management group and the rest of the employees, resistance-to-change could develop among employees who choose not to support the need for organizational change. In most cases, organizational miscommunication could only add up to unnecessary operational cost due to human errors. For this reason, Schein (2004, p. 11) strongly suggest the need to create a new organizational culture that is “diverse, promotes the practice of effective communication and leadership approach”. By doing so, the top management of Rok Plc could effectively avoid resistance-to-change. Suggested Ways on How to Improve the Management of Its Supply Chain System Each time the economic situation is not lucrative for construction business, Rok Plc should be more flexible when it comes to managing its daily business operations. On top of the importance of work flexibility in business management, most of the supply chain managers should focus more on how they could effectively cut down unnecessary cost by increasing the efficiency management in the flow of raw materials and information (Anvuur, Kumaraswamy and Mahesh 2011). The main reason why most of the construction companies today are establishing a strong business partnership or alliances with its accredited suppliers and other related companies is to reduce unnecessary cost of its procurement and supply chain system (Sisk 2009; Anvuur and Kumaraswamy 2007). By making the company’s procurement and supply chain management system more efficient, construction companies could create a value-focused model and supply chain network (Allee 2008). Since the era of globalization, a significant part of the modern way of improving the value of supply chain management involves the practice of franchising in supply chains. According to Subash Chander – a Contracts Manager in one of the famous construction companies in Ireland, “Where possible, we are employing the skills and resources of Walsall sub-contractors and the local supply chain to ensure that the construction of a new project is built by the community, for the community” (Midlands Business News 2011). Regardless of whether Rok Plc decide to enter into a vertical or horizontal sub-contracting agreement with a competitive contractor, the act of incorporating the concept of franchising in the management of supply chain system of a construction and service company or the act of hiring a group of sub-contractor to deliver these services on behalf of the company could save Rok Plc from the burden of having to employ and manage a large group of employees. Pryke (2009, p. 201) revealed that a traditional construction business is never a client-oriented. Based on the increase in demand for new project, Rok Plc could anytime negotiate with a sub-contractor to directly deal with the company’s direct customers. Since Rok Plc as one of the biggest contractor in UK could simply focus more on bidding for new projects and managing its sub-contractors. Upon analyzing the case of Rok Plc, the use of this particular supply chain strategy could have increased the company’s profitability. This is possible by freeing Rok Plc from the potential sunk costs associated with human errors. Conclusion and Recommendations Increase in operational cost would mean a reduction in the company’s profitability. Since most of the construction contracts can be won through bidding, enhancing the efficiency and flow within the supply chain management system of Rok Plc is considered as a significant factor what will increase its competitive advantages in times of serious financial or economic difficulties. It is also highly recommended for Rok Plc to consider exerting extra effort in establishing a strong business alliance with its accredited suppliers. By strengthening its business alliances with the private and public sector in UK and other countries, Rok Plc could have prevented the risk of financial distress caused by economic recession. When going global, Rok Plc should be aware that there is a strong link between the success of implementing a new business strategy and organizational culture. By effectively managing the cross- cultural differences among the stakeholders (i.e. employees, public and private investors, accredited suppliers, etc.), the company can effectively manage and operate its business more efficiently. It is equally important for Rok Plc to establish a strong organizational culture that is open to the idea of embracing organizational changes. Through the use of good leadership and communication skills, the project managers of Rok Plc could easily develop and implement new business strategies without the need to worry much over resistance-to-change. Likewise, this strategy will enable the company to immediately response to sudden changes that will occur in a given project plan without the need to encounter unnecessary human errors. Therefore, one of the best ways to reduce unnecessary cost associated with poor quality procurement and inefficient supply chain management system is to encourage the project managers to take advantage of developing organizational culture. There are many ways on how project managers could enhance the efficiency in the flow of its required materials. First, it is necessary on the part of the project managers of Rok Plc to build and maintain a strong alliance with its accredited suppliers. By doing so, the company can save a lot of money out of requiring the accredited suppliers to deliver the ordered materials just-in-time for the construction’s need. Likewise, it is necessary on the part of the company to improve the practice of franchising its supply chains. By enhancing the franchising of its supply chain system, the company could focus more on attracting new construction projects within and outside the UK market. *** End *** Appendix I – Construction and GNP Trends between 1980 to 2011 Source: PWC, 2011 Appendix II – Corporate Earnings of Rok Plc. Source: Corporate Information, 2011 References Allee, V. (2008). Value network analysis and value conversion of tangible and intangible assets. Journal of Intellectual Capital , 9(1), pp. 5-24. Anvuur, A., and Kumaraswamy, M. (2007). Conceptual Model of Partnering and Alliancing. Journal of Construction Engineering and Management , pp. 225-234. Anvuur, A., Kumaraswamy, M., and Mahesh, G. (2011). 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