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TEP4290 Modeling Of Built Environment Systems
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TEP4290 Modeling Of Built Environment Systems
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Course Code: TEP4290
University: Norwegian University Of Science And Technology
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Country: Norway
Question:
“Traditionally most construction companies are family owned and operated organizations that specialize in one or two spheres of activities, and, interestingly, rarely exist beyond two or three generations, which can lead to several questions.”
Describe what strategies and organizational structures an existing company might follow if it wished to diversify into different fields of endeavour in their immediate locality or distant regions?
Answer:
Introduction
Construction industry is of utmost importance to any society and economy, including Australia. This industry is responsible for building the infrastructure of an economy. The major area of activity of the construction industry is to develop the residential and non-residential buildings and engineering constructions, namely, roads, bridges, mines, water facilities, sewerage etc. (Greenhalgh and Squires 2011). Both the public and private sector companies operate in the construction industry in Australia. The history of this industry goes back thousands of years when the civilizations started to develop across the world. In the initial period, like in any other business activities, construction businesses were also based on families. Over time, the business activities spread into different sections of the society and the construction businesses started to include groups or partnerships other than the families (Crespin-Mazet, Havenvid and Linné 2015). In the following essay, the strategies and organizational structures of the construction companies will be discussed to highlight on the factors that influence the strategies and structures to be undertaken by an existing construction company in Australia while diversifying their business into different endeavors in the immediate locality or distant regions.
Organizational structure and strategies for business diversification
A family owned construction business usually adopts one of the five following ownership models, namely, owner/operator, distributed, partnership, public and nested (Neubauer and Lank 2016). In the owner/operator model, the family gets to decide which member would be the best successor of the business to keep the control in one member. In the distributed model, the owners in the family make the arrangements to pass on the control to the next generation (Sharma, Chrisman and Chua 2012). In the partnership, few members become partners to run the business and distribute the profits equally. In the nested ownership model, different family branches come together to own some of the assets jointly and rest of the assets separately. Lastly, in the public ownership model, a part of the shares of the company are publicly traded, the owners play a minimal role in running the company and it is run by professional managers (Baron and Lachenauer 2016). Among all these types of ownership models, the most commonly used model was distributed model, which helped the business to keep in the family only, followed by the partnership model. However, with time, the public ownership model was adopted by other groups of people who did not belong to a single family.
The family construction firms which followed the partnership model often faced the challenges of passing the ownership to the next generation in the family. In these firms, flatarchy organizational structure was usually followed. The companies encouraged internal growth by creating flat teams within the organization. However, in the long run, it often created problems, especially during the business expansion or diversification. The construction companies adopted other types of organizational structures, namely, functional, divisional and matrix (Jones, George and Langton 2013). The division between public and private sector also emerged in the construction industry, leading to the divisions in the types of construction works.
ADCO Construction Private Limited is one of the top 50 private construction companies of Australia, located in Sydney. It was established in 1972 and by 2017, the company has completed around 3500 highly valued construction projects across the nation (Adcoconstruct.com.au 2018). It is not a family construction business, only a group of people came together to form this private limited company. The company has contributed in the development of the society by constructing various types of buildings, such as, commercial, community, education, aged care, industrial, retail, interiors, health, aviation, leisure and aquatic, student and short term accommodation, green buildings and many more. However, it has been found that the company is not involved in engineering and residential construction. Thus, it has the scope for diversifying its business into these two areas of construction.
Currently, going by the profile of ADCO, it can be inferred that, the company follows the functional organizational structure. It has a CEO along with the Board of Directors and smaller teams for specific roles. There is an organizational hierarchy, with each of the department having a manager, reporting to an executive, one layer up in the hierarchy, supervising multiple departments. The employees are usually grouped based on their skill set and functions, and are focused on achieving specific goals of the company. One of the major challenges in this structure is the communication gap between different departments, which could create problems while handling different types of projects.
If the company decides to expand and diversify its business into residential and engineering constructions, it should follow the divisional organizational structure. Under this organizational structure, the company would be able to operate across various horizontal objectives with more autonomy and independence (Wilson and Post 2013). Divisional structure allows each division of the company to act as a separate company with its own hierarchy. Since, ADCO would diversify its business into other types, such as, the residential and engineering constructions, divisional organizational structure would be beneficial for it as all the divisions would work autonomously.
If ADCO wants to diversify its business into different endeavors, such as, in the residential construction or public engineering constructions, in the immediate locality or distant region, it might want to apply a new market entry strategy. As the markets for residential and public construction are already established, hence, to diversify its business, ADCO will face competitions. The company might adopt the cost leadership strategy to enter the new markets. Since, it is an established company in the non-residential, that is, commercial construction, it would be able to provide competition in lower cost. Under cost leadership strategy, ADCO has to sell its products either below the average prices of the industry for gaining the market share, or it has to keep the average price level for earning a profit level higher than the rivals (Yan and Liu 2017). If ADCO is able to provide an acceptable value to the clients by maintaining its profitability, then it would be able to deliver a superior performance and capture a significant market share. As stated by Valipour, Birjandi and Honarbakhsh (2012), the preferential access to the raw materials, economies of scale and proprietary technology form the potential competitive advantage for a construction company, which help it to adopt the cost leadership strategy. As ADCO is one of the market leaders in the commercial construction in Australia, it already has economies of scale, lower labor cost, lower equipment and overhead costs, technology and access to the sources of raw materials. This would help the company to enjoy cost advantage even in the new markets and become the low-cost leader to capture the market share. As the company has already been working across Australia, it can start investing in any suitable location based on the needs, be it an immediate locality or any distant region. For the residential or public engineering construction, the lower valued projects are more accepted and to enter into an established market, ADCO must adopt the cost leadership strategy.
Along with the cost-leadership, the company might also adopt the geographical differentiation strategy to focus on the needs of the immediate locality or any distant region. In the business diversification endeavors, ADCO might opt for a broad market approach. With this, they can exploit the economies of scale and also share the resources in different construction locations along with spreading the risks across various different markets and reducing the vulnerability significantly against the market fluctuations (Acharya, Engle and Richardson 2012). With globalization and economic growth of Australia, the market for residential housing is expanding significantly. The housing bubble has been affecting the Australian economy for the past few years, and ADCO has a good opportunity to capture a market share if adopts a broad market approach along with cost leadership strategy. Establishing the business in new geographical region would help the company to grow its network, which could be facilitated by broad market approach by ADCO.
Conclusion
Thus, from the above discussion, it can be concluded that, ADCO is a big name in the commercial construction industry of Australia. The company is not a family based business; rather it’s a private limited company. If the company wishes to diversify into different endeavors, it could enter into the market for residential and engineering constructions. For that, the divisional organizational structure would be beneficial for ADCO. It would help the company to have different autonomous sections overlooking the existing and the new business. The company should adopt the cost leadership strategy along with broad market approach to capture the share of the new markets.
References
Acharya, V., Engle, R. and Richardson, M., 2012. Capital shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102(3), pp.59-64.
Adcoconstruct.com.au, 2018. Overview | ADCO. [online] Adcoconstruct.com.au. Available at: https://www.adcoconstruct.com.au/about-us/overview/ [Accessed 13 Aug. 2018].
Baron, J. and Lachenauer, R., 2016. The 5 Models of Family Business Ownership. [online] Harvard Business Review. Available at: https://hbr.org/2016/09/the-5-models-of-family-business-ownership [Accessed 13 Aug. 2018].
Crespin-Mazet, F., Havenvid, M.I. and Linné, Å., 2015. Antecedents of project partnering in the construction industry—The impact of relationship history. Industrial Marketing Management, 50, pp.4-15.
Greenhalgh, B. and Squires, G., 2011. Introduction to building procurement. Routledge.
Jones, G.R., George, J.M. and Langton, N., 2013. Essentials of contemporary management. McGraw-Hill/Irwin.
Neubauer, F. and Lank, A.G., 2016. The family business: Its governance for sustainability. Springer.
Sharma, P., Chrisman, J.J. and Chua, J.H. eds., 2012. A review and annotated bibliography of family business studies. Springer Science & Business Media.
Valipour, H., Birjandi, H. and Honarbakhsh, S., 2012. The effects of cost leadership strategy and product differentiation strategy on the performance of firms. Journal of Asian Business Strategy, 2(1), p.14.
Wilson, F. and Post, J.E., 2013. Business models for people, planet (& profits): exploring the phenomena of social business, a market-based approach to social value creation. Small Business Economics, 40(3), pp.715-737.
Yan, S. and Liu, G., 2017. Competitive Strategy, Market Entry Mode and International Performance: The Case of Construction Firms in China. Business and Management Studies, [online] 3(1), p.1. Available at: https://dx.doi.org/10.11114/bms.v3i1.1999 [Accessed 13 Aug. 2018].
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