Competitive micro environment of small residential contractors

1
Competitive micro environment of small
residential contractors
I.T.U. Istanbul Technical University
Ela Öney YAZICI and Emrah ACAR 18-Mar-06 METU
Cultural and Convention Center Ankara
2
SUMMARY

• Few studies have attempted to analyze the
  competitive behavior of small and medium-sized
  enterprises (SMEs) although they constitute the
  majority
• Current models refect the perspective of large
  enterprises (LEs)
• Current models are often based on the production
  paradigm of the manufacturing industries
• Understanding SMEs competitive behaviors is
  important to create an industry with common
  sustainable practices
• SMEs are different (managerial, organizational,
  financial structure, oversensitivity to
  envronmental changes...)

Problem
Scope
Research
Findings
Conclusion
Summary
Cases
Targeted g.
Aim
3
SUMMARY

• Porters five competitive forces model is used
  to analyze the micro-environment of 9 small
  general contractors
• in-depth interviews with owner managers
• ...
• Competition models of the manufacturing
  industries should be approached with caution
• Special characteristics of the residential
  building market should be taken into account in
  model building
• The dynamics of small and local markets
  significantly differ from those of mass markets
  and these dynamics have considerable infuence on
  SMEs competitive bahaviors

Problem
Scope
Research
Findings
Conclusion
Summary
Cases
Targeted g.
Aim
4
Competitiveness

• an evolving concept that gains new meanings at
  different levels of analyses in line with the
  dynamism of economic life

market share
profitability
ability to provide low-cost/high quality
products/services
the ability of a firm to design, produce, and/or
market products superior to those offered by
competitors, considering the price and non-price
qualities
Problem
Scope
Research
Findings
Conclusion
Background
Cases
Targeted g.
Aim
5
Changing rules of the game

• Information and communication technologies (ICTs)
  and their facilitating impacts

1980s
1990s
e 2000s
Rational usage of resources was the common
strategy to remain competitive
More emphasis on the multi-dimensional and
evolutionary nature of competition / knowledge
investments and learning ability
Findings
Problem
Scope
Research
Conclusion
Background
Cases
Targeted g.
Aim
6
Paradigm shift
internationalization of the construction markets
more emphasis on innovation and client
satisfaction
environmental problems

changing routines, strategic and tactical
decisions of a conservative industry
Findings
Problem
Scope
Research
Conclusion
Cases
Targeted g.
Aim
Background
7
Research on competitiveness
young and immature
low level of theoretical abstraction
strong influence of the manufacturing industry
special characteristics of the construction
industry are rarely considered
perspective of larger enterprises (LEs) is the
major focus of interest
small and medium enterprises (SMEs), which
constitute the majority of the firms in almost
all countries, are often ignored
Findings
Problem
Scope
Research
Conclusion
Cases
Targeted g.
Aim
Background
8
SMEs should receive attention
to create an industry with common sustainable
practices
SMEs will keep on dominating this industry in the
short run
small projects are more suitable to be undertaken
by small firms
the required level of technical expertise is not
very high to enter the construction market
smallness and organizational flexibility can be
advantageous in a project-based production
environment
a large second-hand products market
technological upgrade of the existing building
stock
SMEs as sources of employment
Findings
Problem
Scope
Research
Conclusion
Cases
Targeted g.
Aim
Background
9
Problem

• Models that address LEs cannot be directly
  applied to SMEs which are not just the
  scaled-down versions of LEs
• SMEs differ by their
• managerial structure
• organizational structure
• financial structure
• oversensitivity to environmental changes

Problem
Findings
Scope
Research
Conclusion
Cases
Targeted g.
Aim
Background
10
Problem

• Current models fail to explain the competitive
  behaviors of SMEs
• they are largely influenced by the production
  paradigm of the manufacturing industry
• they do not take into account the special product
  and process characteristics in the construction
  industry

Problem
Findings
Scope
Research
Conclusion
Cases
Targeted g.
Aim
Background
11
Aim
understanding

• FURTHER EMPIRICAL EVIDENCE IS NEEDED TO
  UNDERSTAND THE MICRO-ENVIRONMENT OF SMEs AND THAT
  TRULY EXPLAIN THEIR COMPETITIVE BEHAVIORS

Problem
Findings
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
12
Scope

• Micro (external)-environment of
• small general contractors, headquarters of which
  are
• in Istanbul

Problem
Scope
Findings
Research
Conclusion
Aim
Cases
Targeted g.
Background
13
Targeted groups

• Policy makers
• Researchers

Problem
Scope
Findings
Research
Conclusion
Aim
Cases
Targeted g.
Background
14
Research design

• Literature survey / Porters 5 forces
• Research strategy
• Unit of analysis
• Multiple-case study protocol
• Pilot interviews
• Sample
• Data collection
• Data analysis
• Evaluation of the findings and reporting

Research
Findings
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
15
Research design / Previous work

Research
Findings
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
16
Research design / Porters 5 forces

Research
Findings
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
17
Research design / Porters 5 forces
Buyer power Buyer power refers to the impact of
clients on an industry. The power balance between
the producers and clients determines the extent
to which firms have ability and freedom to set
the product price. For example, few buyers with
significant market share might indicate that
buyers are powerful in an industry.
Supplier power Porters model is based on the
assumption that when suppliers are powerful, they
can exert pressure on the producers to capture
some of the industrys profits. When the costs of
switching from one supplier to another are high,
for example, suppliers are assumed to be more
powerful in an industry.
Barriers to entry There might be barriers in an
industry which inhibits the entrance of
additional rivals. These barriers might originate
from factors such as government regulation
patents and proprietary knowledge economies of
scale, and influence the degree of rivalry in the
industry .
Research
Findings
Problem
Scope
Results
Aim
Cases
Targeted g.
Background
18
Research design / Porters 5 forces
Rivalry Porter assumes that competition in real
life is not perfect and there are several factors
that prevent firms from pursuing competitive
advantages. Accordingly, any firm should choose
from a set of strategies to be successful in its
market. These strategies might be associated with
changing product price, improving product
differentiation, or innovative methods of using
channels of distribution. The intensity of
rivalry in any industry is influenced by several
factors. A large number of firms in the market
low switching costs of clients (from one firm to
another) high fixed costs existence of exit
barriers and low product differentiation are
among the factors that are assumed to increase
rivalry. Threat of substitutes Substitute
products are those which are produced in other
industries. A threat of substitute exists when
the demand for a product is affected by the price
change of a substitute product. Substitute
products are assumed to constrain the ability of
firms to raise prices in an industry

Research
Findings
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
19
Research design / Multiple-case study

• Collecting data in real-life context
• Rich and deep data
• Appropriate to answer Why and how questions

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
20
Research design / Porters 5 forces

• Can your clients easily substitute your firms
  services?
• Can you easily foresee your clients needs?
• Can you easily substitute your suppliers?
• Is the entrance of new rivals a threat for you?
• Can you easily foresee your rivals behaviours?

Research
Findings
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
21
Research design / Sampling

• Typical small general contractors in the
  residential building industry
• firm size
• field of operation
• location
• pragmatic criteria
• Problem of defining construction SME
• manufacturing / services / construction industry
• inadequacy of formal definitions
• evolutionary nature of definitions
• A reference study Sey et al. (2002)

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
22
Research design / Sampling
Table 6.2. Various characteristics of
Istanbul-based construction firms
Percentiles Percentiles Percentiles Percentiles Percentiles Percentiles
10 25 50 75 90 95
Number of employees 1 2 4 8 16 40
Volume of production (m2) (1998-2002) 1,500 3,887 10,000 30,000 100,000 200,000
Production value (US Dollars) (1998-2002) 103,050 364,279 884,173 2,925,000 13,262,600 27,182,333
Firm age 4 6 12 18 26 30
Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
23
Research design / Sampling
Table 6.3. Distribution of firms acd. to
characteristics in Tablo 6.2
Percentiles Percentiles Percentiles
10-25 50-75 75-100
Number of employees (2) (3) (4) (1) (6) (7) (8) (9) (5)
Volume of production (m2) (1) (2) (3) (4) (6) (7) (8) (9) (5) (6) (9)
Production value (US Dollars) (2) (3) (4) (1) (5) (7) (8)
Firm age (6) (1) (3) (4) (5) (7) (9) (2) (8)
Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
24
Research design / Sampling
Table 7.1 Characteristics of firms
Case Firm characteristics Firm characteristics Firm characteristics Firm characteristics Firm characteristics
Case Field of operation (building types) No of emp. Age Production volume Production value (US Dollars)
001 Residential and commercial 6 12 19,000 4,000,000
002 Residential and commercial 1 26 4,000 1,000,000
003 Residential and commercial 2 13 5,000 1,000,000
004 Residential and commercial 2 14 10,000 2,000,000
005 Residential, commercial industrial 14 17 33,000 8,000,000
006 Residential 6 6 10,000 10,000,000
007 Residential 5 15 15,000 15,000,000
008 Residential and commercial 3 - 18,000 6,000,000
009 Residential and commercial 6 7 12,000 3,500,000

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
25
Research design / Sampling
BEYKOZ
BESIKTAS
1
SISLI
8
BAHÇELIEVL.
KOZYATAGI
9
3, 9
3
4
2
6, 7
1, 3
Z.BURNU
AVCILAR
BAKIRKÖY
KADIKÖY
Sekil 7.1 Örneklem içindeki firmalarin Istanbul
içinde agirlikli olarak faaliyet gösterdikleri
bölgeler
Findings
Research
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
26
Research design / Sampling
Table 6.4. Details of in-depth interviews
Case code No of interviewees Position No of interviews Date Education level
001 1 Owner 2 11-Dec-03 PhD
001 1 Owner 2 19-Dec-03 PhD
002 1 Owner 1 5-Jan-04 PhD
003 1 Owner 1 26-Dec-03 Undergraduate d.
004 1 Owner 1 28-Jan-04 Undergraduate d.
005 1 Technical manaer 1 22-Mar-04 Undergraduate d.
006 1 Owner 1 27-Jul-04 Undergraduate d.
007 1 Owner 1 28-Jul-04 Primary school
008 2 1. Owner 2. Owner 2 25-Oct-03 1. Masters d. 2. Primary s.
009 1 Owner 1 6-Sep-2004 Undergraduate d.
Findings
Research
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
27
Research design / Data analysis
Figure 6.1. Basic steps in content analysis
Findings
Research
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
28
Cases / Targeted markets
Table 7.3 Targeted markets of sampled firms (by
income groups)
Income group Case No Case No Case No Case No Case No Case No Case No Case No Case No
Income group 1 2 3 4 5 6 7 8 9
Low ?
Middle ? ? ? ? ? ?
High ? ?
Findings
Research
Problem
Scope
Conclusion
Aim
Cases
Targeted g.
Background
29
Findings / BARGAINING POWER OF CLIENTS

• trust -the basis of relationships between
  contractors and clients in small and local
  markets
• importance of anecdotal evidence on quality of
  service spread rapidly through word of to
  potential customers
• vulnerability to market amplifies the need for
  careful positioning in markets and development of
  strong personal client relationships
• satisfaction of clients not only in terms of
  material issues but also of non-material
  (e.g.human ) issues

Findings
Problem
Scope
Research
Clients power
Conclusion
Aim
Cases
Targeted g.
Background
30
Findings / BARGAINING POWER OF CLIENTS

• other factors...
• speculative character of the building industry
• the fluactuating demand
• economic crises
• fashions
• shifting needs
• natural disasters (e.g. 1999 earthquake)

Findings
Problem
Scope
Research
Clients power
Conclusion
Aim
Cases
Targeted g.
Background
31
Findings / BARGAINING POWER OF SUPPLIERS

• SMEs usually have the power to easily change
  their suppliers be they materials-systems
  producers, distributors, designers, or
  subcontractors
• However, for only two of the contractors this
  was a routine others avoided taking advantage of
  this assymmetric power
• Dynamics of small and local markets
• trust
• marriages
• both material and non-material benefits from
  these marriages

Findings
Problem
Scope
Research
Suppliers power
Conclusion
Aim
Cases
Targeted g.
Background
32
Findings / DEGREE OF RIVALRY

• SMEs argue that they can easily foresee clients
  behaviours
• Needs and expectations are well-known
• ...almost everbody promises same sort of
  things
• unfair competition is a major problem
• illegal backing by local authorities

Findings
Problem
Scope
Research
Degree of rivalry
Conclusion
Aim
Cases
Targeted g.
Background
33
Findings / THREAT OF NEW ENTRANTS

• Not perceived as a threat by SMEs
• Sticking with a local market is more than the
  entrance
• Setting warm relationhips and trust with clients
  is a matter of time
• Setting good relationships with local
  authorities is a matter of time

Findings
Problem
Scope
Research
New entrants
Conclusion
Aim
Cases
Targeted g.
Background
34
Conclusion / manufacturing vs. construction

• Complexity of the product and the production
  processes
• Project-based production
• Involvement of client
• Influence of clients on producer-supplier
  relationship
• Both anonymous and contractual clients
• ...

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
35
Conclusion / residential building construction

• Fluctuating demand and the resulting uncertainty
• Well-established functional (architectural)
  needs
• Oversensitivity to environmental changes
• ...

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
36
Conclusion / dynamics of small-local markets

• client intimacy and mutual trust
• as evidenced by the emotional terminology
• ...
• Behavoral models can be as explanatory as
  rational models rational models

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
37
What next?

• How do SMEs perceive and define competitiveness?
• Should specific policies and tools (e.g., CRM)
  be developed to address the needs of SME
  community?
• What can we learn from the experience of SME
  policy makers from other industries?
• ...

Findings
Problem
Scope
Research
Conclusion
Aim
Cases
Targeted g.
Background
38
Thank you...
Background