Strategic Management for CRH Plc - Essay Example

?Table of Contents Table of Contents Company Overview 2 Introduction to Analytical Models 2 Critical Analysis 3 Porter’s Five Forces Analysis 3 Rivalry among the Existing Firms 3 Bargaining Power of Customers 3 Bargaining Power of the Suppliers 4 Threat of Substitutes 4 Threats of New Entrants 5 SWOT Analysis 5 Strengths 5 Weaknesses 6 Opportunities 6 Threats 7 PESTEL Analysis 8 Political Factors 8 Economic Factors 8 Socio-Cultural Factors 9 Technological Factors 9 Environmental Factors 10 Legal Factors 10 Conclusion 11 Strategic Management for CRH Plc Company Overview CRH Plc is an Irish international company involved in the production and supply of building materials. It is a product of a merger between Irish Wood and Road/stone wood in 1970. This paper focuses on three analytical models i.e. of Porter’s Five Forces, SWOT analysis and the PESTEL framework in discerning the strategic management of the company. Introduction to Analytical Models Application of Porter’s five forces in the company will help in the identification of its strategic position with respect to the external environment. Application of the model in CRH Plc will enable the company identify the external forces that affects the external activities of the company. This enables the formulation of improvement strategies that enhances performance in the changing marketing environment. The model generalises the strategies required in gaining competitive advantage in the industry for easy application (Onsman, 2004). However, application of the model may be misleading because it assumes a classic perfect market although it is clear that the construction and building industry is faced with numerous challenges. The SWOT analysis is crucial because it summarises the both the internal and external environment of a company i.e. strengths and weaknesses coupled with the opportunities and threats. The knowledge of both the internal and external environment will enable the company adopt measures appropriate for addressing both the internal and external challenges. However, analysis of the strategic management status of the company by use of the SWOT framework requires considerable time and energy when being applied in large corporations. The PESTEL framework assists in the identification of the macroeconomic factors that affects the whole industry, certain markets or the company. This is because many factors in the macroeconomic environment have significant impact on the overall managerial behaviour. According to the Global Industry Analysts (2011), the tool is crucial in understanding the factors that can influence the industry growth and decline. PESTEL analysis can also guide the company on the direction that they should take in avoiding failure or losses. However, undertaking the PESTEL is tedious and may be ineffective to large organisations. The framework is also limiting because it only focuses on the external environment of the company. Critical Analysis Porter’s Five Forces Analysis Rivalry among the Existing Firms The company has numerous competitors in the industry, especially the well established multinational companies such as Lafarge S.A. and Holcim Ltd. In 1990, the market was dominated by large companies that capitalised on the strength in their local markets to expand internationally. According to Davenport (2002), the competing companies increased their supply rate when the market for construction industry was booming locally; leading to increased competition for the local markets. This made CRH to venture into acquisition of smaller companies in both local and international hemispheres such as 26% shares of a North-eastern Chinese plant and a 50% stake of an Indian company in order to increase dominance both local and international markets (Batchelor, 2001). Bargaining Power of Customers The construction industry is extremely fragmented with the production rate varying depending on the location as well as other factors such as values and cultures. The application of the building regulations regarding the location of the company has made the business be location specific. This has increased the bargaining power of customers i.e. limitation in the location for the company has given the customer an advantage for choice depending on the comparison among the many companies whose location is known. Another factor that has increased the bargaining power of consumers is the mushrooming of many companies in the construction and building market due to the increase in the demand of building materials. The development of the company during the consolidation of the customer base for the industry was a major strength to the growth of the company (Batchelor, 2001). Consolidation of the markets reduced the bargaining power of the consumers because the demand for the construction and building materials was higher than the supply at the time. Bargaining Power of the Suppliers According to Regional Council, (2007), the company has maintained a solid and friendly working relationship with the suppliers. This has made it one of the best performers in both local and international markets such as the US markets. Their potential in the industry was enhanced by the favourable business agreements that the company had with the suppliers in the industry. The company applied the acquisition policy to encourage the suppliers for the acquired companies serve its interests. Registration of a considerable number of companies under its name made the company an independent performer in the industry (Batchelor, 2001). Increases in the number of competitors made the company invest more in the familiar business, therefore, reducing the dependence on the few suppliers of raw materials. Threat of Substitutes The presence of the high number of competitors in the construction industry poses a significant marketing challenge. This is due to the high probability of introducing substitute products in a bid to survive in the highly competitive industry. The major challenge is that the materials for construction and building industry are characterised by standardised marketing specifications that is normally fixed at all locations (Datamonitor, 2010). The lack of diversity or variety in the material specification has raised the probability for the presence of the substitute products in the market. Threats of New Entrants The construction and building industry is faced with a significant challenge of the threat for the new entrants. Since its inception, CRH has encountered high competition levels emanating from the new entrants (Datamonitor, 2010). The standard specifications characterising the construction and building materials has provided a leeway for the new entrants to easily penetrate the industry. The fragmentation of the business into specific locations has made it easy for the new comers to take advantage of the potential locations that the existing companies have not invested. Specification of the locations is advantageous to the new comer. This is because they can utilise the location advantage and establish businesses in the locations with low challenges related to the start-up competitions. SWOT Analysis Strengths The company focuses on the strategy of diversification for its products in the developed, emerging and maturing markets while focusing majorly on cement and aggregates (O'Halloran, 2004). The products are identified as eminent in the manufacture of many materials in the industry and exhibit a high growth potential. The large size of the company has enabled high productivity as well as high supply of building and construction materials in the market. Abundant resources enable the company to outsource and employ highly qualified manpower that helps in improving productivity and promoting the company’s development strategies. The company has a broad product range which enhances its control of wider markets. According to Batchelor (2001), acquisition has helped in reducing competition while improving the competitive strength of the company. Its concrete establishment in the local markets has enabled it to easily globalize and explore additional markets. The company size and the abundant resources in its possession implies that it an easily counter competitive threats. Weaknesses The company has build up high volumes of cement and aggregate products due to their high volume nature. The financial crisis lowered the demand for the products leading to excess capacities of the materials produced. This led to closing of some of the branches to cut down on the operating costs. According to Lavery (2002), another weakness is related to the fact that the company has recently witnessed a reduction in segmental performance. Some of the factors that have led to the reduction in performance in the various internal segments include increased competition and the increase in the price of raw materials. The company has also been faced by legal restrictions and law suits regarding the impact of the production processes in the environment. Opportunities According to table 1, the industry has exhibited a high potential for growth. Table 1: Market value/growth rate of the Building Materials Industry from 2005-2009 Source: Datamonitor (see Industry Profile of Global Construction Materials, March 2010, p. 9) The potential, for the growth in the Building Materials Industry is high in relation to the drastic increase in the human population (Hollensen, 2004). The sound global strategic position that the company occupies provides the capability to advance its expansion strategies and acquire a competitive advantage over its global competitors. Additionally, the company has the potential to partner with other companies in the enhancement of business. The partnerships enable the company take advantage of the economies of large scale as well as give it the potential to evade the threats of the new entrants. The focus on efficient and environmental friendly handling of the natural resources has enabled CRH Plc to cut down on environmental pollution and low energy use as well as the general reduction on costs. Threats The company is highly vulnerable to the restrictions emanating from the energy producing companies. The current increase in the prices of energy will significantly affect the customers as the cost will be transferred to them. Another threat that the company faces is related to the environmental restrictions. This is because the demand for cement is increasing more than the emissions per ton are falling. Acquisition of new companies bears the threat of unpredictable impacts of the government restrictions. PESTEL Analysis Political Factors The political aspect of PESTEL framework focuses on the government actions, decisions and policies that affect the economy. The government interventions affect the cost structure, revenues and the market behaviour of companies operating in a certain industry (Chudley and Greeno, 2006). The positive political influence to the CRH Plc’s industry environment was realised with the introduction of the governmental stimulus program in the wake of the financial crisis. The stimulus boosted the building materials sector that was in a verge of collapse. According to Bosch and Philips (2003), the stimulus packages offered were of large scale and had significant impact on the recipient countries. The globalisation plans of the company are vulnerable to the changing political environments in the countries where the company invests. The construction practices are subject to the political dispensation of a certain country. For example, the western liberal model for self-development practiced in Europe is different from the state-capitalism that is practised by Brazil. Therefore, expansion should take into account the diversity in the political systems of the global markets. Economic Factors Inflation rates, interest rates, exchange rates and economic growth as indicated by the GDP are the economic aspects of the PESTEL model that affects the business functions of CRH Plc. Any change on any of the factors has a far reaching effect on the company strategies. The demand for the building materials and the stability of the global economies are interrelated. The inflation rates have direct impacts in the business operations of CRH especially in the developing countries. However, enhanced research studies have not recognised any significant negative effect of exchange rates in the international trade volumes; an advantage to the CRH Plc (Goldman Sachs Global Economics, 2010). Additionally, most of the developing states are focusing on the growth in housing and infrastructure in stabilising the rates of their economic growth. Socio-Cultural Factors The changes in the social trends affect the demand for the products in the building and construction industry. The global reduction in poverty levels (Blackwell, Smith and Smy, 2003) is a clear indication that the quality of housing is bound to improve. This will enhance the success strategies and plans for the company as the demand for the products is bound to improve. The current social trends favouring rural-urban migration among many states has improved the demand for housing in the urban areas. The improvement in the level of the social parameters such as health and security is largely enhanced by the building and construction industry. However, the building and material industry has been affected by negative social factors caused by social instability such as wars. Technological Factors Some of the technological parameters affecting the company include research and development, improved automations and improvement in information technology (Halloran, 2004). The production for most construction materials such as bricks remains high due to the high-energy requirements. CRH Plc has been forced to apply high technologies that reduce any form of pollution e.g. investing in the technologies that ensures efficient waste water recycling. Additionally, customers require durable construction materials that curtail the maintenance and repair costs. These can only be produced by the application of enhanced technology. Environmental Factors The environmental factors are significant to the CRH Plc due to the high pollution potential that emanates from the products such as cement as well as recycling activities. For example, although cement is the most widely used product manufactured by the building and construction industries, its pollutant levels are significantly high (Retzlaff, 2009). The biggest players in the industry have collectively agreed to minimise the level of pollution resulting from each ton of cement produced. The main challenge associated with the commitment to this strategy is that the demand for cement is increasing at a higher rate compared to the reduction in pollution rates. Legal Factors The prominent challenges facing the companies in the building and construction sectors is coping with the planning laws, laws governing the handling of building materials and the building regulations (Manley and Mcfallan, 2006). CRH Plc has been forced to form international mergers and partnerships in order to acquire the necessary knowledge and experience on the legal environmental of the cross-border country. The significance of the legal factors in the building and construction industry has gained significance due to the enhancement in the restrictions regarding green house emissions. Governments requires companies to strictly adhere to the legal restrictions regulating the emission of green house gases, especially in most developed economies such as the European Union. However, companies such as CRH Plc face legal challenges resulting from the numerous laws that they are required to follow during their operations. The effects of such risks may not be foreseeable while establishing the business although they are eventually discerned by valuation. Conclusion CRH Plc should focus on the parameters of the PESTEL model in improving its operational levels. The monetary policy in Ireland should remain supportive to the construction and building industry through maintaining the current low interest strategy. The Irish government should also enhance the economic support through reviewing the supporting activities in reference to the changes in the economic position of the country (Ghobadian, 2004). In the improvement of the technological future, the company should invest in research in order to optimise the commercial viability of the products in enhancing the customer satisfaction. This will also negate the possibility of loosing customers in the highly competitive construction industry. Strict legislation should be enacted to ensure necessary strategies are put in place to ensure that the pollution prevention increase with an increase in cement production. The company should form mergers and/or partnerships with the resident companies of the countries where they want to invest. This will enable the company attune its functions with the legal environment of the new destinations they are willing to invest. Enhanced research will also enhance the company’s capability of handling the environmental issues. References Batchelor, C. (2001) "CRH Acquisitions Hit Euros 1.5bn," Financial Times, January 16, p. 26. Blackwell, D., Smith, P. & Smy, L. (2003) "CRH Expands European Empire with Euros 693m Deal," Financial Times, July 30, p. 21 Bosch, G. & Philips, P. (2003) Building chaos: An international comparison of deregulation in the construction industry London: Routledge. Chudley, R. & Greeno, R. (2006) Building construction handbook, Amsterdam, Butterworth-Heinemann. Datamonitor (2010) Global construction materials, Reference Code: 0199-2030. Davenport, D.M. (2002) ‘Enforcement of EU Competition Law-Implications for the European Community Construction Industry’ The International Construction Law Review, vol. 19, pp. 187-219. Ghobadian, A. (2004) Strategy and performance: achieving competitive advantage in the global marketplace, London/Basingstoke, Palgrave Macmillan. Global Industry Analysts (2011) Manufacturing & Construction Report - World Building Materials Market to Reach US$706.7. Goldman Sachs Global Economics (2010) Global Economics Weekly, Issue Nr. 10/43. Halloran, B. (2004) "CRH Makes 'Positive' Start to Year," Irish Times, May 6, p. 19. Hollensen, S. (2004) Global marketing - a decision-oriented approach, Harlow, Pearson Education Limited. Lavery, B. (2002) "Building Materials Company Ireland Loves to Hate," New York Times, September 5, p. W1. Manley, K. & Mcfallan, S. (2006) Exploring the drivers of firm level innovation in the construction industry Construction Management & Economics, vol. 24, no. 9, pp. 911-920. Onsman, (2004) Management power tools Tata McGraw-Hill. Regional Council, (2007) Industry News Viewed December 12, 2009 . Retzlaff, R. (2009) Green Buildings and Building Assessment Systems Journal of Planning Literature, vol. 24, no. 1, pp. 3-21. Read More