Management Judgment of the Construction Company - Case Study Example

Decision Analysis for Management Judgement Analysis of the Construction Company Case study For Paul Goodwin & Prof. Rod Green By Kyriaki Thomadaki 1st November, 2006 CONTENTS 1. Introduction 4 pOLYKEM Historical background 4 1.1 Role of Decision Making 6 Case Study 7 1.2decision making concept 7 Babis Vovos Corporations 8 2. Approach of Analysis 10 2.1 Assumptions 10 Competitive thermal insulation systems 17 INTRODUCING THE CASE STUDY 1. Introduction Today companies find themselves in a continuous battle for survival. This battlefield is no longer within the region of their location as companies have competitors, customers, and suppliers around the globe. This ever competitive and changing environment raises the need for knowledge on how to lead, manage and most importantly take decisions most efficiently and effectively in order to yield the maximum profit at the lowest possible risk. Such a case of management decision making is the one presented below. This case study refers to the construction industry, having as the protagonist one of the key leaders in the market, Polykem S.A. pOLYKEM Historical background Polykem was established in 1984 when its main activity was the distribution of thermal insulation products of a known chemical company in the Greek construction industry. The company started with a staff of 5 people and had as its unique activity the distribution of STYROFOAM products. Since then, it developed itself as a dynamic distributor of a wide range of insulation and construction products with a staff of 70 people and privately-owned warehouses in Athens. In the preceding years, the construction market in Greece has entered a mature stage. Competition became keen and customers had many alternatives to chose from. Consequently, after 16 years in the market, Polykem faced an unprecedented pressure from its upcoming rivals. In 1999 Polykem’s market share in its dominant product (Styrofoam, company A’s basic product, represented 80% of its sales) started to decline and was followed by a significant profit decrease. Throughout the years, Polykem’s prosperity was based on a single product. Its strategy was solely focused on Styrofoam effective distribution and the whole organization had inevitably linked its culture and structure core competences to the core product’s supply. In the year 2000, top management decided to enrich Polykem product portfolio with other distribution materials as a first attempt to improve its corporate competitiveness and become a dominant player in the market in which the company already enjoyed an excellent reputation for its core business. Additionally, a new approach to customers needs emerged in order to increase sales volume. All such sudden and rather radical changes shocked the organization. In 2002, after 2 years, Polykem had started to digest the changes and designed a new product portfolio strategy. Top management decided to implement a completely new distribution strategy by transforming the traditional distribution channel of retailer into a more loyal and effective dealer chain. Under this context, Company also developed a franchise network. Taking advantage of its expertise, product mix and sales network all over Greece, they switched the long term traditional relationship with dealers to legal contract agreements, building a more professional relationship. Polykem now had to improve its capabilities further ahead to meet the new strategy. In 2005, the chain reached the number of 25 retail shops across the Greek territory, being the leader chain in the field of construction materials. Ccurrently, POLYKEM is the exclusive representative of DOW thermal insulation products and also a dynamic distributor of a wide range of insulation, waterproofing and construction products in Greece. Polykem represents a number of very significant foreign suppliers like SCHAUMAN, ARMSTRONG, DRIZORO, DEITERMANN, POLYGLASS, VITRABLOCK, POLYFELT, COLBOND, KRONOPOL, K-FLEX and SILCART. The company also distributes products of a wide range of domestic producers such as KNAUF, ALCHIMIKA, ISOMAT, SONOCO, MARMOLINE, ISOCON, SECURITY, STAMPA, AVIP, NEOTEX and others. Its clientele / customer base consists of dealers, contractors and big construction companies. Babis Vovos International Construction (BVIC) is one of the biggest property developer and construction companies of Greece today. Polykem has cultivated a solid cooperation with BVIC for the last 5 years, investing on a long-term cooperation. Till now, every business that they have completed together was based on mutual benefit and this is the way they would like to continue their business relationship. But the construction market is gradually becoming more competitive, with a lot more players coming on the scene and the “rules” of business too have started to change. 1.1 Role of Decision Making Decision making processes are the primary managerial behaviours. During the process, primary focus areas are information acquisition, utilization, and opting for the best alternative. The decision modelling process contributes to the development of guides for improved decision making for the management. Decision-making orientation considers making decision to be the central purpose of management. Besides the factual information, Managerial intuition, judgement and experience also play major roles in decision making. The outcome of decisions is not always totally predictable, but managers are not supposed to be discouraged by the absence of complete predictability, they can take careful, systematic steps to increase predictability. What happens in a company/ organization concerning business prospects and sustainable development depends essentially on decision making at crucial junctures. Case Study This case study refers to a recent proposal that BVIC asked from Polykem on a new big construction of a block of buildings in the northern area of Athens. Mr Vovos met with the General Manager of Polykem to discuss on applying the new thermal and renovation insulation system, called Kelyfos, on the new buildings that BVIC are about to construct. We are talking about 5 buildings that each has 16 levels of 250m2 each. Thus, we are talking about big business and as a result big potential profits. At the same time, Kelyfos system, the new insulation system is one of the basic strategically important materials for Polykem who has concentrated all of its effort to promote and push this product in the market. BVIC would provide the perfect platform for publicising this quality product. In the meeting Mr Vovos briefed the General Manager of Polykem about the following: Mr Vovos informed him that BVIC is also in touch with three of the other main players namely Kael, Sto & Jubiland in the construction materials market as well, and BVIC expects their price offer as well within a week. He requested Polykem for a low price quote because he knows as BVIC has a working relationship with Polykem and it will require lot of efforts in establishing a working relationship with a new partner. Apart from the first offer that they will make, in case of decision lingering between two players, BVIC will give another opportunity to the two players (second round of price proposal submission). 1.2 decision making concept Herbert Simon described decision making as a three-phase continuous process model beginning with ‘intelligence’ and moving towards ‘design’ and ‘choice’. The intelligence phase of decision making involves the awareness of a problem at a symptomatic level; it requires a closer look at the problem and a thorough evaluation of the variables and their relationships. The design phase focuses on the evaluation of decision alternatives. During this phase, computer based deterministic or stochastic models may be used for decision design. Decision support systems (DSS) plays a major role in decision design under uncertainty. The choice phase is the output of the decision models. What follows is some information on BVIC, since this is the company that will judge Polykem’s offer either as interesting or unworthy of attention, as well as some information on the competing systems on which BVIC had also asked for an offer. Babis Vovos Corporations Babis Vovos (“BVIC”) is Greece’s leading property developer and manager, focused on the office real estate market. Since its inception in 1974, BVIC has constructed more than 30 office complexes with a total surface area of over 500,000 sqm. Currently, the group owns or manages over 200,000 sqm in 46 locations. As on Dec 31, 2005 BVIC’s gross portfolio of real estate assets was estimated at a total gross fair market value of Euro 944 million by Colliers Ιinternational. As the largest quoted Greek property company by turnover, and, by market capitalisation, BVIC is over twice as large as the rest of the Greek quoted real estate sector combined. BVIC has acquired an excellent reputation for developing landmark commercial properties around the central arteries of Athens, which offer significant advantages by virtue of their size, location and facilities. The company has developed a loyal and broad network of internationally acclaimed corporations as clients, including Vodafone, Coca Cola, Cosmote, Sun Microsystems, Carrefour, Microsoft, Siemens, Telecom Italia Mobile (TIM), Media Markt, Village Roadshow, the Greek Ministry of Public Works and the Greek Athletic Federation. BVIC is involved in all aspects of property development and investment, from site acquisition and construction to the leasing and sale or retention of constructed building. It is well known for providing ‘turnkey’ solutions for its office clients, with current completion times of approximately 12 months. BVIC acts as facilities manager for all the properties in which it retains an interest or in respect of which it has entered into sale and leaseback transactions. Under these facilities management agreements, BVIC maintains the exterior and common parts of the buildings, helping to maintain the value of the properties. Over the last few years, leveraging on the advantages offered by sale and leaseback agreements, BVIC is moving increasingly from the development and sale of properties, to their development, retention and management. The group is also diversifying its portfolio by expanding into new real estate segments, so that now, BVIC is involved in three major markets: the office market, the retail market and the vacation home market In terms of BVIC construction activities, the buildings’ designs are conducted in cooperation with leading Greek and International architectural companies. BVIC maintains a strong and long-standing relationship with large sub-contractors and has at least 400 employees in technical crews. The Group has the ability to easily and rapidly secure all of the employees needed in order to complete a project. Following the completion of the infrastructure and construction work conducted in connection with the Athens 2004 Olympics, there is a large supply of experienced technical crews in Greece. These factors allow for the quick completion of projects on the one hand and economies of scales on the other. 2. Approach of Analysis Earnest Archer studied the decision making process and models of over 2000 managers, supervisors and executives for many years. From his study, analysis and verification process, Archer contends that the most successful managers make business decisions according to a nine-step sequence. These sequences are; Step-1 Monitor the decision environment Step-2 Define the decision problem or situation Step-3 Specify decision objectives Step-4 Diagnose the decision problem or situation Step-5 Develop alternative solutions or courses of action Step-6 Establish the methodology or criteria for appraising alternatives Step-7 Appraise alternative solutions or courses or courses of action Step-8 Choose the best alternative solution or course of action Step-9 Implement the best alternative solution or course of action This is the most exhaustive approach to arriving at any decision. 2.1 Assumptions Decision making based on intuitions, assumptions is characterized by the use of hunches, inner feelings, or the gut-feeling of the person reaching the decisions. Suggestions, influences, preferences and the psychological makeup of the deciding individual/s play an important role. The subjective element is as vital as the objective judgment from the facts and figures. It is believed by many management gurus that the intuitive decider has more “precognitive” ability and is better able to anticipate the future in instances where reliable data is not available. After his conversation and briefing by the BVIC official, the General Manager of Polykem held a meeting with the Board of Directors to see what could be the best offer for the given situation. During the meeting, the General Manager himself proposed to make an offer 2% higher than the average price in the market since the product is perceived to be of high quality and in this will also help in maximising the company’s profits. Mr Markou the Sales Director expressed his opposition to this view because he claimed that getting this job or at least part of it is of high importance for us and thus we should offer a price somewhat lower than the existing market average. In the end of the 4 hours discussion, Mrs Balanica supported that since we do not want to loose this project but still keep a logical price, without downsizing it completely, let’s offer a price at the average level and hope we get at least part of the work. “Let’s not forget that we want to count on a long-term relationship with Mr Vovos and BVIC. And we should not view this as a one-off profit making opportunity rather than an opportunity to build a bridge between the two companies. This is the point where the decision analysis tools and techniques could be applied and aid us in identifying the most optimum, “best” solution in the particular circumstances. The decision that Polykem Board needs to make is whether to offer a price above average, on average, or below average. The possible outcomes for each offer could be that BVIC may fully accept the offer and solely use Polykem for the whole buildings construction, or partially use Polykem together with one or two of the competing companies offering a similar system or may totally reject Polykem’s offer. 2.2 DECISION TREE ANALYSIS Polykem’s Rate (A) Above average (B1) Not above average (B2) Average rate (B21) Below averge (B22) Rate Not selected (B11) Rate selected (Grand success for the company) (B12) Rate selected (Grand success for the company) (B21a) Rate Not selected (Polykem remains in the good books of BVIC) (B21b) Rate Not selected (Polykem remains in the good books of BVIC) (B22a) Rate selected (Grand success for the company) (B22b) Company is amongst the final two (Chances are BVIC won’t call for the second round of tendering as it is no more fond of Polykem’s (A loss for the company) (B11a) Company not in the final two. Company looses face and a trusted ally (A big loss for the company) (B11b) Polykem’s rate not in the final two (the company may request for some part of the project) (B21b1) Polykem’s rate is in the final two (one more competitive bidding) (B22a1) And (B21b1) Rate not in the final two (the company must take solace in the fact that it has been saved from the resulting losses. And in any case BVIC will accept Polykem as a reliable partner) (B22a2) Polykem’s rate is still outbid by the competing company (Polykem is certain to get some pie of the project) (B21b11) Polykem’s rate wins the race (Grand success for the company) (B21b12) 2.3 SENSITIVITY ANALYSIS Often, data in multi-criteria decision making (MCDM) problems are not very precise and prone to changing. Therefore, an important step in such applications is to perform a sensitivity analysis on the input data. Evans (1984) investigated this concept w.r.t. the decision theory by doing linear programming-like sensitivity analysis. His approach was based mainly on the ‘geometric characteristics’ of optimal decision regions in the probability space. Evans related the changes on probabilities of the states of nature with the analysis on the sensitivity for arriving at the optimal decision. In our case the probabilities can be as shown in the table below; PRICE OFFER/ m2 FULL SALE PARTIAL SALE NO SALE 30,00 € 44% 39% 17% 41,00 € 28% 49% 23% 55,00 € 5% 19% 76% Assumption 1= that the competitors will offer the already know price shown on the comparative table of the case study. Assumption 2= the probabilities are correct based on our so far cooperation with BVIC Do ot forget that in the decision tree we have at the beginning the options of these three prices, the outcome is fully accept and use us, partially accept it or reject us, if BVIC partially or totally rejects us we can make a second round offer etc. 2.4 UTILITY ANALYSIS AND UTILITY FUNCTION Utility models are models that give an idea about the decision makers risk preferences. Utility models reflect the decision makers preferences among couple of uncertain outcomes, instead of assessing the decision makers values directly. A utility is a numerical rating assigned to every possible outcome a decision maker may be faced with. In a choice between several alternative prospects, the one with the highest utility is always preferred. Utility analysis also involves the rationality principle i.e. when A is preferred to B and B to C, then A must be preferred to C. And when decisions are made by the ‘rational agent’ it should be clear that some numerical scale can be devised to rate any possible outcome "simply" by comparing and ranking these outcomes. For example in this case if we look at the decision tree we feel the urge to make of utility principle in cases like …. 2.5 SCENARIO CONSTRUCTION This involves spelling out the facts and figures about the company, the environment and competitors. A challenge posed by an unfavorable trend or specific disturbance in the environment like some governmental regulations/ policies, natural calamities may result in an unpredictable situation and the final decision rests on the latest development of the situation. Presence of some such factors may at times lead to absence of purposeful marketing action, stagnation or demise of the company/ brand or the product. In our case we are to asses the scenario in respect of thermal insulation systems; Competitive thermal insulation systems The technical support department had made an analysis of the competition, their price levels and the competitive advantages or disadvantages that the rest of the systems hold in the market, as a helping tool for the decision process. This comparative table is shown below. 3. STRENGTHS AND LIMITATIONS STRENGTHS OF POLYKEM: i. Polykem has been functioning well since its establishment in 1984 ii. It has now developed as a dynamic distributor of a wide range of insulation and construction products iii. Since the year 2000 management decided to enrich Polykem product portfolio and did it quite successfully. iv. A new distribution policy successfully adopted with changing times. v. At present Polykem is the exclusive representative of DOW thermal insulation products and also a dynamic distributor of a wide range of insulation, waterproofing and construction products in Greece. vi. Polykem represents a number of very significant foreign suppliers as well. vii. Polykem has cultivated a solid cooperative bond with BVIC for the last 5 years LIMITATIONS/ WEAKNESSES OF POLYKEM: i. Reducing profit margins in view of the growing competition ii. Significant reduction in market share iii. Throughout majority of these years, Polykem’s prosperity was based on a single product and the management could not pay due attention to diversifying into another area/ product. References Simon, Herbert A. “The shape of Automation for Men and Management”. New York: Harper & Row, 1965. Earnest B. Archer, “How to make a Business Decision: An Analysis of Theory and Practice”, Management Review, February 1980, pp 54-61 A sensitivity analysis approach for some deterministic multi-criteria decision-making methods http://www.findarticles.com/p/articles/mi_qa3713/is_199701/ai_n8734177 Determination of Your Utility Function, http://home.ubalt.edu/ntsbarsh/Business-stat/otherapplets/Utility.htm Read More