Rak-63.3320 Strategies in International Construction Business
Introduction to four business
management schools - A
22.1.2016
Rak-63.3320 Strategies in International Construction
Business
Assistant Professor Antti Peltokorpi
antti.peltokorpi@aalto.fi
Course schedule
Room: R4
Time
Topic
Material
Fri 8.1 8-12
• Introduction to the course
• Introduction to strategic and business management
• Introduction to global capital investment markets
Slides
Fri 22.1 8-12
Fri 29.1 8-12
Fri 19.2 8-12
• Kick-off of student-specific pre-examination processes with the instructions
and a form
• Guidelines for team-specific or student-specific applied ICB management
concept design tasks
• Introduction to four business management schools
1. Porterian school
2. Resource-based school
3. Competence-based school
4. Knowledge-based school
• Introduction to four business management schools
5. Organization-based school
6. Process-based school
7. Dynamism-based school
8. Evolutionary school
• Teams present their ICB management concept desings (15 min per team)
Slides +
articles
Slides +
articles
Previous lecture
Central concepts
• Management: Things & people
• Areas of management: corporate, business, operations
• Strategic management
•
Strategic choices that have critical influence on the success or failure of the enterprise and
that must be integrated
Fundamental questions in strategic management
Introduction to global capital investment markets
• Scope, market fluctuation, different businesses and company types,
procurement methods, outlooks of global markets
Rumelt’s lecture - reflection
Classification of schools of thought on
generic business management
School of
Thought
Assumptions on business success
Prescriptions
1. Porterian
school
Superior firm performance can be explained by
a chain of causality
Choose industry, Create position, Run a
race, Make tradeoffs, Deploy internet
2. Resource
based school
Above-normal profits can be sustained based
on resources
Discover and exploit valuable, rare, costly to
copy resources
3. Competencebased school
High goals-attainment is possible
in competence-based competition
Build, leverage and maintain competences,
Close gaps, Build flexibility
4. Knowledgebased school
Above-average profitability can be
ensured by new knowledge
Balance advancement and survival
strategies, Use enablers
5. Organizationbased school
Effectiveness can be achieved by new
(extended, networked, N-) forms
Create, experiment, multiply, and
recombine in the N-form heterarchy
6. Process-based
school
High performance can be achieved
by managing a process
Change choice cascade by aspirations,
insight, incentives
7. Dynamismbased school
High performance can be achieved in a chaotic
business
Innovate new business concepts and
put them into practice
8. Evolutionary
school
Desired destiny can be shaped by strategy and
internal selection
Gain the edges, Time pace, Shape semicoherent direction
Agenda
Introduce to strategic management thinking and concepts and to
their application in construction business
Introduction to four business management schools
1. Porterian school
2. Resource-based school
3. Competence-based school
4. Knowledge-based school
Porterian school
Comment of one prior student
“Understanding industry structure (through Porter’s 5 forces
framework) is equally important for investors as for managers. The
five competitive forces reveal whether an industry is truly attractive,
and they help investors anticipate positive or negative shifts in
industry structure before they are obvious. The five forces
distinguish short-term blips from structural changes and allow
investors to take advantage of undue pessimism or optimism. Those
companies whose strategies have industry-transforming potential
become far clearer. This deeper thinking about competition is a
more powerful way to achieve genuine investment success than the
financial projections and trend extrapolation that dominate today…”
Determinants of firms success prior
Porter’s studies
1. An internally consistent set of goals and functional policies
that collectively define the position in market
marketing
R&D
finance
production
procurement
Determinants of firms success prior
Porter’s studies
2. Internal goals and policies align the firm’s strengths and
weaknesses with the external opportunities and threats
Opportunities
Threats
Determinants of firms success prior
Porter’s studies
3. Creation and exploitation of distinctive competences, the unique
strengths that make possible competitive success
Causes of superior firm performance
• Dynamic theory of strategy
•
•
•
A chain of causality
Cross-sectional problem
Longitudinal problem
• ”The firm success is manifested in attaining a competitive
position or series of competitive positions that lead to
superior or sustainable financial performance”
• Competitive position is measured relative to the world’s best
rivals
The determinants of success: A chain
of causality
Cross-Sectional
Firm success
Attractive industry
structure (5 forces)
Attractive relative
position
Sustainable competitive advantage
Activities / Value
systems
Drivers
Structural determinants of
differences in the cost or
buyer value of activities
or groups of activities
Longitudinal
Managerial
choices
Porter 1994
Initial conditions
Five forces to diagnose industry
structure
Threat of new
entrants
Bargaining power
of suppliers
Rivalry among
existing
competitors
Threat of substitute
products or
services
Bargaining power
of buyers
Steps and pitfalls of industry analysis
Typical steps:
Define the relevant industry:
•
What products are in it? Which ones are part of another distinct
industry?
•
What is the geographic scope of competition?
Identify the participants and segment them into groups, if
appropriate: Who are
•
the buyers and buyer groups?
•
the suppliers and supplier groups?
•
the competitors?
•
the substitutes?
•
the potential entrants?
Assess the underlying drivers of each competitive
force to determine which forces are strong and which
are weak and why
Determine overall industry structure, and test the
analysis for consistency:
• Why is the level of profitability what it is?
• Which are the controlling forces for profitability?
• Is the industry analysis consistent with actual long-run profitability?
• Are more-profitable players better positioned in relation to the five
forces?
Analyze recent and likely future changes in each force, both
positive and negative.
Identify aspects of industry structure that might be influenced by
competitors, by new entrants, or by your company.
Common pitfalls:
In conducting the analysis avoid the following common
mistakes:
• Defining the industry too broadly or too narrowly.
• Making lists instead of engaging in rigorous analysis.
• Paying equal attention to all of the forces rather than digging
deeply into the most important ones.
• Confusing effect (price sensitivity) with cause (buyer economics).
• Using static analysis that ignores industry trends.
• Confusing cyclical or transient changes with true structural
changes.
• Using the framework to declare an industry attractive or
unattractive rather than using it to guide strategic choices.
Porter 2008
Four strategies for architectural
practices (Winch and Schneider 1993)
How the Internet influences industry
structure?
Competitive advantage
•
Two basic types
1.
2.
•
Lower costs than rivals
Ability to differentiate and command a premium price that exceeds the extra costs of doing
so
Competitive advantage is related to competitive scope:
•
•
•
•
Array of product and buyer segments
Geographic locations
Degree of vertical integration
Extent of related businesses with coordinated strategy
•
Choice of scope central in strategy
•
Many best positions in industry
•
•
Firm’s starting position, Differentiation vs. imitation
Variety-based positioning, Needs-based positioning, Access-based positioning
Competitive advantage as a result of
activities in value systems
•
Firm’s strategy is manifested in a way it configures and links the
activities in its value chain relative to competitors
•
Performing activities create cumulative assets in the form of skills,
organizational routines, and knowledge (internal), and brand image,
relationships, and networks (external)
Drivers of competitive advantage in an
activity
•
Why are some firms able to perform particular activities at lower cost or with
more valuable results than others?
•
The most important drivers of competitive advantage in an activity:
•
•
•
•
•
•
•
Scale
Cumulative learning it involves
Linkages with other activities
Ability to be shared with other business units
Location
Timing of investment choices
How and why brand reputation is an advantage?
Succesfull strategy = initial conditions
+ managerial choice
•
The combination of initial conditions and managerial choices
•
•
Initial conditions as outcome of previous managerial choices
•
•
The balance varies by company or industry
Some have hard-to-reverse commitments (path dependency)
”If managers can understand their competitive environment and the sources of
competitive advantages, they will be better able to search creatively for favourable
positions that are different from competitors’, assemble the needed skills and assets,
configure the value chain appropriately, and put in place supportive organizational
routines and a culture that reinforces the required internal behaviour”
 Imagination to define a new position or to find new value!
Resource-based
school
Resource-based view (RBV) of the firm
•
A model of firm performance that focuses on the resources and
capabilities controlled by a firm as sources of competitive advantage
•
Resources as tangible and intangible assests
•
•
•
e.g. firm’s factories, products, reputation among customers, teamwork among
managers
Financial, physical, human and organizational resources (e.g. culture,
reporting structure, informal relations among groups)
Capabilities as a subset of resources that enable a firm to take full
advantage of other resources it controls
•
e.g. marketing skills, teamwork and cooperation among managers
Fundamental assumptions of RBV
1. Resource heterogeneity: Different firms may possess different bundles of
resources and capabilities even if they competing in the same industry
2. Resource immobility: Some of the resource and capability differences
between firms are long lasting as it may be very costly for firms to develop
or acquire them
•
•
•
D. Ricardo (1817): fertile farm land as productive input with inelastic in supply
Toyota in manufacturing, Apple in product design, Harley Davidson in
brand…
Sustained competitive advantage explained by these two assumptions
VRIO framework to analyse
competitive potential of resources and
capabilities
•
Value: Does a resource enable firm to exploit an external opportunity and/or
neutralize external threat?
•
Rarity: Is a resource currently controlled by only a small number of
competing firms?
•
Imitability: Do firms without a resource face a cost disadvantage or in
obtaining or developing it?
•
Organization: Are a firm’s other policies and procedures organized to
support the exploitation of its valuable, rare and costly-to-imitate resources?
Application of RBV in construction The building system as strategic asset
•
Growing focus on industrialization
•
The choice of a building system (technical and process
platform) defines what resources and technology are
needed, and also the organisation within the company, its
market position, and possible growth
•
The building system as a strategic asset (valuable, rare,
non-imitable) for the specialised contractor, while the
asset for the general contractor lies more in the
organisational power of the company than in the technical
solutions
•
•
The specialised contractor should strive to clarify and strengthen
their total offer to the client
The more general contractor should continue to exploit its human
resources, moving towards a more unique offer to their client
Limitations of RBV
•
Assume relatively fixed rules of the game in an industry
•
Managers have limited ability to create sustained competitive
advantages
•
How to analyze return potential for one resource at a time?
•
Resource-based logic cannot be be used to create sustained
competitive advantages when the potential for these advantages does
not already exist
Competencebased school
The stimulus for competence
perspective on strategy
•
Strategic management theory and practice must become more
dynamic, systemic, cognitive, and holistic
•
•
•
•
DYNAMIC: How to create competitive advantages under conditions of
competitive disequilibrium and continual organizational change?
SYSTEMIC: Strategic managers as system designers; design and
implementation of a successful strategic logic for their organization as
an open system for value creation and distribution
COGNITIVE: How to involve and fully use the collective intelligence of
all participants in organization’s value creation processes?
HOLISTIC: Strategic management must understand how to create
value to all relevant stakeholders, not only through success in product
markets
Competence perspective on strategy
• Managing strategically to build, maintain, and
leverage organizational competence
•
Organizational competence is the ability of an organization to sustain
coordinated deployments of resources in ways that help the organization
to achieve its goals
Process of simultaneous competence
building, maintaining, and leveraging
Competence theory versus Finance
theory
Successfull economic organizing as a
”Virtuous Circle” of value creation and
distribution
Example of value creation logics in
construction business model
Free working capital
Investment
opportunities
Revenue clients
Construction
Project Development
Internal contracts
EBIT
ROCE
Return on equity
Dividend of profit
Essential elements in the competencebased approach
1. Perceiving opportunities for value creation
2. Developing sustainable processes for value creation
3. Aligning value-creation processes with competitive
environment
4. Strategic managers as designers of organizations as
systems for value creation
5. Competition as a contest between managers’ cognitive
processes
6. Strategy as ”stretch and leverage”
Competence groups – comparing
competitors
Five modes of competence
Three alternative roles of system
supplier
Helander and Möller 2007
Knowledge-based
school
Introduction to knowledge based
business school
• Interest in the role of knowledge in organizations
• Outcome is a knowledge-based view (KBV) that considers the firm as
• A set of knowledge assets and the role of the firm in creating and deploying
these assets to create value
• Value of people, machines, and business systems lies in the fact that
they embody knowledge
• Many types of knowledge are scarce, much of it is tacit (Polanyi 1966) and,
thus, difficult to transfer, and complex forms of knowledge are very difficult to
replicate
Introduction to knowledge based
business school
• Three research programs:
1. Organizational learning (OL) or learning organization (LO) (e.g Senge 1990)
2. Creation of organizational knowledge (Nonaka and Takeuchi 1995)
3. Social communities (Kogut and Zander 1992)
•
Learning as a competence and knowledge as a resource
•
Key factors both for economic competitiveness and access to participating in
many dimensions of social, cultural, and political life
Organizational learning and knowledge
management
Organizational knowledge
• Knowledge is understood as “some variant on a belief that A causes B”
 implies actually knowing how to do things or to cause things to
happen
• Knowledge ultimately resides in the minds of individuals
 organizational knowledge exists when individuals in a firm share sets of
beliefs about causal relationships that enable them to work together in doing
something
• Two new convictions:
1. Managing organizational knowledge effectively is essential to achieving
competitive success, and
2. Managing knowledge is a central concern – and must become a basic skill – of
the manager.
Nonaka’s two types of knowledge
• Tacit knowledge (subjective)
• Knowledge of experience (body)
• Simultaneous knowledge (here and now)
• Analog knowledge (practice)
• Explicit knowledge (objective)
• Knowledge of rationality (mind)
• Sequential knowledge (there and then)
• Digital knowledge (theory)
The knowledge creating company: A
social process between individuals
Faceto-face
On site
Peer-topeer
Collaborating
(Nonaka et al. 1995)
A benefit-oriented knowledge
management model in construction
•
Construction companies have difficulties implementing knowledge
management concepts
•
•
•
Knowledge only reveals its purpose or benefit, when applied to actions or
decisions.
•
•
•
Unable to identify any real visible benefit
The primary objectives are to successfully acquire contracts in their targeted area of
business, to realize customer satisfaction and to successfully complete the projects
from the company`s point of view
A benefit oriented solution to knowledge management in construction companies.
Valuable knowledge for construction companies is the knowledge needed for a best possible
realization and activation of the individual project success factors, respectively the
corresponding actions
Knowledge clusters at project level to combine information, documentation,
individual knowledge and collective knowledge to define actions for project
success
Borner 2004
Role of strategy in contracting
business
•
Which one is more crucial for
companies in Big/Mega -project
business:
•
Corporate strategy?
•
Project strategy?
•
e.g Areva in Olkiluoto Nuclear Power Plant
Critique on knowledge based school
•
No agreement among managers or management academics as to what
exactly they mean by terms like organizational knowledge
•
•
No generally accepted methodology for managers to use in managing knowledge
and organizational learning
KBV is not as yet a unique theory about how managers create
advantages
•
•
It is not as yet a new theory of strategy
It is unclear to what extent knowledge management is a set of
management theories and tools with real value
•
•
The danger of organizational learning is that it can undermine the efficiencies of
specialization (of individuals in particular types of knowledge)
Challenges and opportunities lie in managing tacit knowledge