CRH PLC: Successful Corporate-Level Strategy in a Challenging Environment - Case Study Example

CRH PLC: Successful Corporate-Level Strategy in a Challenging Environment CRH is one of the top four building materials companies in the world. Its headquarters are located in Ireland, but even with its international presence it has suffered its second successive decline in annual earnings since it peaked in 2007. The peak is viewed as a cyclical development, and its cost savings and reduced debt ensured continued dividend growth. This study examines the corporate-level strategy of CRH in light of the environmental constraints. 1. Selection, critical evaluation, and justification for choice of models (Doke, et al, 2007; Bowhill, 2009; Bamford, 2010). 1.1 PESTEL – This model is appropriate for the analysis of international businesses. The acronym stands for Political, Economic, Social, Technological, Environmental, and Legal aspects of a business environment. Since CRH is an international business, PESTEL is a crucial tool to evaluate the various macro-environmental risks and opportunities in which the firm is to run its businesses. 1.2 Porter’s Five Forces – This is a framework for analysing industries towards developing a competitive business strategy. It addresses five competitive forces defining an industry: internal rivalry, threat from substitutes and from new entrants, and bargaining power of buyers and of suppliers. It provides the competitive snapshot for CRH’s construction materials industry. 1.3 SWOT Analysis – This is a structured model which evaluates a firm’s internal strengths and weaknesses and matches them with opportunities and threats in the environment. It provides insights into how CRH’s strengths may be enhances and its weaknesses overcome in order to maximize opportunities and minimize threats in the environment. 1.4 Barney’s VRIN Framework – An analytical framework that identifies competitive advantages based on four criteria: value, rarity, inimitability, and non-substitutability. This analysis helped to identify CRH’s competitive advantage as a unique integration of competencies rather than any single product or process. 1.5 McKinsey’s 7S Framework – Developed by consultants at McKinsey & Company consulting firm, this model is built on seven internal aspects of an organization which must be aligned for the firm to be successful, namely: strategy, structure, systems, style, staff, skills, and shared values. All firms contain these attributes, including CRH, therefore it becomes imperative to ascertain that these 7 Ss should be aligned for success. 1.6 Ansoff’s Matrix – This matrix developed by Igor Ansoff was designed to align four marketing strategies according to whether the market or product is new or established; depending on this combination, the strategy may either be market penetration, market development, product development, or diversification. The Ansoff matrix helps clarify the marketing strategies which in the case of CRH confirmed that it may avail of two different strategies depending on the level of development of the economy where CRH has its presence, but to assume that the product could not be diversified or developed. 1.7 Porter’s Generic Strategies – This framework defines the relative position of a firm within its industry depending on the competitive scope (whether the target market is broad or narrow) and the competitive advantage (if competitiveness depends on lower cost or product differentiation). In the case of CRH, the generic strategies were useful in envisioning an overall broad market, low cost approach to its construction materials business. 1.8 BCG Growth-Share Matrix – Developed by the Boston Consulting Group, the BCG matrix makes use of metaphors in helping a firm to assess its portfolio of businesses and determine the optimum distribution of resources to enhance strategic gains. The model is helpful in viewing CRH Group’s different businesses in juxtaposition with each other. It distinguishes between different strategies for the different businesses, and deciding which businesses should be continued and which discontinued, and how resources should be apportioned. 2. Critical Analysis, applying the chosen models 2.1 Environmental Analysis 2.1.1 PESTEL Political – Socialized housing policy and economic policies impact upon the demand for construction materials, and political platforms affecting their expansion or contraction also influence the expansion and contraction in the construction supplies industry. Economic – Economic cyclicalities affect demand for the business; growth in construction activity is half the rate of economic growth. In the West, the industry is mature and stable. Construction in major markets is forecasted to decline or remain flat, except Poland. In emerging markets, construction is a rising industry, but prone to greater cyclicalities. Social – Use of building and construction materials depends on the society and community in the immediate construction site. Structural trends continue to emerge Technological – Building materials and products are commoditized and therefore are relatively similar among suppliers; competition is largely by price. Environmental – Likelihood of prolonged severe weather in Europe and North America, and depletion of sources (i.e., timber) due to unsustainable practices, for which reason CRH must comply with environmental regulations to ensure sustainability. Legal – Construction and materials regulations and standards are variable on a geographic basis, and different regulations are largely enforced in different localities. 2.1.2 Porter’s 5 Forces Model http://www.emeraldinsight.com/content_images/fig/2720070605001.png Internal rivalry – High. Little differentiation among building materials supplied by different firms as a result of the high degree of standardization of building materials and products. There is a high similarity of products and production processes across markets and high stability over time, thus competition is primarily in terms of price. The industry is highly fragmented Threat from new entrants – High. Capital investment to enter the business is high, but establishment of firms are localized because of the location of raw materials reserves, differences in building regulations, construction practices, and product standards. Fragmented industry resulted due to proliferation of SMEs in localities. Threat from substitutes – Low. Substitutes would be comprised of products which necessarily would be outside the prescribed standards of the regulated materials, since they are outside the scope of regulations. Because of the risk this would pose to the structures to be built with these substandard materials, contractors would not risk to use substitutes, and architects and structural engineers will not authorize their use. Bargaining power of buyers – High. Switching costs are low between suppliers, because of the high degree of standardization in the product and the production processes. Therefore, customers can switch from one supplier to another easily and be assured of the same quality at the slightest difference in prices between suppliers. Bargaining power of suppliers – Low. Suppliers tend to be localized where raw materials reserves are located, and would usually be limited to the locality of the construction site to minimize expensive transportation costs. 2.2 Strategic Capability Analysis 2.2.1 SWOT Analysis Strengths Operationally and financially competitive Well positioned to exploit prospective sector upturn and emerging opportunities Well-placed funded acquisitions followed by well-managed integration, exploring revenue and cost synergies Strong history of profitability, with dividend track record of 26 consecutive years until 2009 Weakness High shareholder expectations may cause management to adopt aggressive strategies to realize strong short-term gains that may be detrimental to the long-term performance of the company. Opportunities Industry consolidation is expected to take place in the light of the current fragmentation. CRH is currently in the position of leadership, thus it has the advantage of leading in strategic acquisitions of small and medium scale construction businesses will allow it to preserve its position when the industry consolidates (i.e., when smaller companies combined to form large companies). Threats In the course of expansion, hostility and dispute in CRH acquisitions are likely in the case of tendered bids vis-à-vis negotiated deals. Cyclicality in the construction industry requires considerable capital investment, long lead times, and uneven additional requirements in capacity. 2.2.2 VRIN Framework by Barney (1991) The characteristics of CRH’s portfolio are noticeably characterized by: (1) leadership, which secured the company’s focus on securing its primacy in local and regional markets, and in product segments or niches, in the midst of industry fragmentation; and (2) a broad-based geographic, product and segment exposure, which has a smoothing effect on market and economic volatilities and enhanced opportunities for growth (Moroney, 2010). Valuable: The company integrated extraordinary financial expertise, synergistic acquisitions and strategic expansion, and high in-house expertise in the construction business. Rare: There are numerous firms which perform well in any of the above competencies (finance, acquisitions, or expertise in construction), or even a combination of two of them, but hardly any that have all three competencies, with the leadership style and organisational structure to support them. Inimitable: The present position of CRH is not readily replicable by competitors because their position and competencies have been acquired through numerous acquisitions, a long-term track record in financial excellence lasting decades, and accumulation and retention of corporate knowledge and human capital. Its processes, such as that involving its best practice and knowledge of acquisitions gathered in many years of experience, are contained in proprietary documents, making them inimitable. Non-substitutable: The unique combination of long-term competencies is too substantial to replicate in a substitute, and requires the validation of a successful track record in a stringently regulated industry such as that of construction and building materials supply. 2.3 Organisational Cultural Analysis 2.3.1 McKinsey’s 7-S Framework Superordinate Goals – Twin requirements of performance and growth are reinforced in through project evaluation, approval and review. Continuous improvement was pursued through benchmarking and best practice, re-engineering, and ongoing development investment in new plant, capacity extensions, and major upgrades. Other shared values include diligence, conservatism and prudence. Strategy – CRH espouses the vision ‘to be a responsible international leader in building materials delivering superior performance and growth.’ Its strategy is ‘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, 2010, p. 637). Expansion and growth is fuelled by: (1) investing in new capacity; (2) developing new products and markets; and (3) acquiring medium scale companies and growing them. Expansion is undertaken through strategic acquisitions that boost robust and synergistic production. Structure – CRH is vertically integrated, enabling it to take advantage of market expansions in ‘heavyside’ building materials and products. The company, unlike its competitors, has a federal structure, with a small central headquarters and only a limited range of central functions that involved mainly finance and business development. There were four regionally focused product divisions that exercise operational autonomy but not independence. Skills – CRH group’s management was characterised by experience, stability and continuity, led by the Chief Executives of whom there were only six in a 40-year span. Style – Leadership style is characterized as participative, with operational management being decentralized though coordinated. Owner-managers of acquired firms were retained to ensure business continuity and the maintenance of human capital. Systems – Financial functions and performance lead the firm’s competencies Staff – Employees are generally engaged in their jobs and with the company. Employee turnover was low, rotation and promotion was largely from within the company, and the performance driven remuneration policy effectively created shareholder value. As a result of the high level of employee retention, there was a considerable reservoir of in-house industry knowledge and expertise that accumulated within the company. http://en.wikipedia.org/wiki/McKinsey_7S_Framework 2.4 Strategic Options 2.4.1 Ansoff’s Matrix http://www.smartdraw.com/examples/view/ansoff+matrix+chart/ According to the Ansoff matrix, strategy is to be determined according to whether the markets and products are either new or existing. In the case of the construction supplies industry, the products are existing, although there is slight room for differentiation in the services that attend product delivery (promptness and accuracy of delivery, reduction of lead times to delivery, variation in order quantity, and so forth). CRH is currently in both types of markets, the traditionally more mature markets of the West, and the fast-growing emerging markets in the developing countries. In the Western economies, therefore, the company should best pursue the market penetration strategy with cost leadership and service enhancement, while it can be more aggressive in market development strategies in developing economies, with rapid expansion and affiliation or partnering with local construction companies, preferably with first entrant advantages. 2.5 Competitive Strategies 2.5.1 Porter’s Generic Strategies http://www2.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html The construction materials industry admittedly is subjected to such rigid standardization that product differentiation is not possible without transgressing the standards for products or production process. Therefore, the firm is limited to cost leadership or cost focus for products, and differentiation for support services surrounding the product delivery. The competitive scope in the case of this industry is broad; it should be recalled that the industry is in a state of fragmentation, meaning that many small and medium scale companies dominate the broad market in an industry without a strong structure with defined market leaders (Porter, 2008; Hill & Jones, 2012). Therefore, cost leadership is the strategy of choice, which is the prevailing market thrust for this industry (Moroney, 2010). 2.5.2 BCG Growth-Share Matrix http://shazeeye.com/wp-content/uploads/2010/12/BCG.png The construction materials supply industry is relatively stable in the developed countries, but because it is fragmented and because emerging markets are still expanding, CRH continues to pursue its expansion policy which results in high growth for the company. This strategy is seen to continue until the industry would have attained consolidation. High international market growth and high market share prevail, making CRH a star which should continue to invest for growth. Domestically and in the West, the market is slower growing, and therefore the construction materials business in these areas is a cash cow. On the other hand, the Group’s finance business (alluded to in the case) is a cash cow because of its highly stable earnings and cash flow, and thus should be continuously pursued. 3. Conclusion The corporate-level strategy of CRH has been examined with the aid of eight strategic models. The company’s environment is prone to policy and regulatory constraints simultaneous with economic cycles that influence the demand for construction. The industry is still fragmented, with low entry barriers, high internal rivalry and high bargaining power of buyers as a result of product standardization. These factors immediately suggest cost leadership as strategy of choice. In strategic capability analysis, CRH is financially strong with minor operational weaknesses. It is poised to take advantage of the impending industry consolidation, although it has to exercise caution in possible legal disputes on its global acquisitions. The competitive advantage of CRH does not lie in its products or processes, which are industry-regulated, but rather in its unique integration of financial strength and expertise, leadership in the building materials industry, and successful expansion through synergistic acquisitions. The organization’s superordinate goals and its cultural attributes are shown to be well-aligned, contributing to the firm’s success in its operations. Furthermore, the strategic options of CRH are constrained by existing products and markets, pointing towards market penetration and development and away from product development and diversification. Competitively, a broad market and lower cost point to a cost leadership strategy, and continued allocation of resources for the building materials business which is a cash cow in the developed countries and a star in emerging countries. Overall, CRH has done exceptionally well in a challenging economic environment by pursuing expansion, fiscal prudence, and cost leadership. It pursues market penetration through expansion through acquisitions, and its operational decentralization is suitable to this strategy. References Bamford, C E & West, G P 2010 Strategic Management: Value Creation, Sustainability and Performance. Mason, OH: South-Western Cengage Learning Barney, J B 1991 ‘Firm Resources and Sustained Competitive Advantage’. Journal of Management 17 (1) pp.99–120. Bowhill, B 2008 Business Planning and Control: Integrating Accounting, Strategy, and People. Chichester, West Sussex: John Wiley & Sons Ltd. Doke, L; Hatton, E; & Smortfitt, R 2007 FCS Entrepreneurship Level 2. Pinelands, Cape Town: Maskew Miller Longman (Pty) Ltd Griffin, R W 2012 Management, 11th edition. Mason, OH: South-Western Cengage Learning Hill, C W L & Jones, G R 2012 Strategic Management Theory, 10th edition. Mason, OH: South-Western Cengage Learning. Moroney, M 2010 ‘Case Study: CRH plc: successful corporate-level strategy in a challenging environment.’ Porter, M E 2008 Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, NY: The Free Press Read More