Introduction & Background
BalfourBeatty (Balfour) is a world class engineering, construction and services groupand its strategic and competitive position can be investigated using managementtools such as a SWOT analysis as shown in Appendix 1. The breadth and depth ofBalfour’s expertise ranges from design, construction, equipping, manning andthe management of buildings. It focuses on international markets for rail,road, utility systems, building and complex structures.
Balfour’s longterm strategy is to; develop its business through overseas expansion andthrough acquisitions and disposals . . . it aims to be market leader throughlong term customer relationships and well developed supply chains.
However, thevery fact that Balfour has so many diverse product and service offerings couldprove a weakness, as much of the management focus will be on maintaining andensuring the quality of the services/products provided. These services arealso spread throughout the globe. It’s not surprising therefore that Balfourhas well over 20 different operating companies to manage these services, butthat in may create duplications in terms of administrative and accounting supportfor instance and therefore unnecessary costs.
Despite this,one of the main drivers for the business is to create sustainable partnershipsin all areas of the business, whether with suppliers, buyers, customers orstakeholders. From Porter’s Five Forcesanalysis (see Appendix 2), we can see those forces influencing the business andthese will be discussed in more detail later.
Balfour’s statedstrategy of acquiring businesses also creates a constant headache and couldpossibly lead to management taking their eye of the ball. The ongoing needto adjust and re-adjust the organisation and to adopt the requirements of thenewly acquired businesses is a major concern. And yet, for an organisation toachieve sustainable competitive advantage, it requires change.
There are also anumber of social, technological, economic and political (STEP) influences (seeAppendix 3) which influences the strategic direction that Balfour follows. Balfourhas introduced its own social responsibility policy, and was even awarded asocial responsibility award for its efforts in this area. Employing 25,000people worldwide creates a number of human resource issues, such as dealingwith absence, pensions, health, training and mentoring. Balfour employs over100 graduates each year, and the effort required to train and mentor these is costlyboth in terms of finances and resources.
Safety for Balfouris paramount, with a number of fatalities in previous years, it has introduceda policy of zero tolerance, and so the implementation of health and safetymeasures, monitoring them and constantly improving them is a key driver to thesuccess of the organisation.
Political issuesare a particular concern since Balfour would have no ability to influence anypolicies for taxes that the government may wish to introduce. The recentincrease in the cost of fuel would have a dramatic impact on the profitabilityor otherwise of Balfour’s business, as it operates 7,000 vehicles worldwide.Whilst Balfour is endeavouring to reduce the amount of fuel used, as well asreducing the amount of waste, it will inevitably continue to have an effect onthe environment, but at leas they are trying to address the situation.
Balfour is aninternational and profitable organisation whose aim is to; create long termshareholder value by providing engineering, construction and service skills tocustomers for whom infrastructure, quality, efficiency and reliability arecritical . . . and seeks to operate safely and sustainably
1 Strategic Overview
(a) The StrategicContribution of Mansell
The abovequotation was taken from the 2002 Annual Report, prior to the acquisition ofMansell. According to Porter, The essence of strategy formulation iscoping with competition.Balfour’s strategy of acquiring and merging businesses was a way of dealingwith the competition. In Mansell , Balfour recognised the opportunity to addcomplementary skills and expertise to its business, but also recognised thatthere was a synergistic fit.
Balfour’s aim isto achieve competitive advantage. There are two types of competitive advantage- lower cost and differentiation. Rather than choose the lower cost route, Balfourchose differentiation – the ability to provide unique and superior value tothe buyer in terms of product quality.
Mansell also hadcompetitive advantage, as it, grows out of the way firms organise andperform discrete activities.According to the International News magazine, Balfour Beatty Update datedApril 2004, Mansell had followed a clear strategy aimed at sustainablegrowth and focused on discrete market sectors, developing a sustainableposition in sections of the UK building market in which we do not currentlyoperate. It also brings a wide range of blue-chip customer relationships.
Mansell hadcomplementary skills with excellent market positions in social housing,refurbishment and other association construction disciplines. Its geographyand product mix was a perfect synergistic fit with the already established Balfourbrand and service offering. Mansell uniquely had product groups, productdevelopment and product directors. The entire business was focused arounddeveloping these specialist products.
Philip Cleaver(Chief Executive of Mansell in 2001) agreed, by focusing on discreteproducts Mansell has successfully differentiated itself from its competitors.
Following theacquisition of Mansell and the integration of the business within the Balfourgroup, the focus on producing long term framework and partnering agreements wasintroduced and has been particularly successful with 65%of its business coming from this source. The Balfour strategy certainly seemsto be working.
(b) Addressingthe Egan Agenda
There wasanother reason for Balfour to acquire Mansell. In 1998 a Construction TaxForce, led by Sir John Egan produced the Rethinking Constructionreport. It was commissioned by the government to improve the efficiency andquality of the service provided to customers. The summary conclusions from thereport were that the industry had low profitability, invested little incapital, research, development and training and ultimately had manydissatisfied customers.
Appendix 4attached identifies those drivers for change that were found in the report, aswell as four project process improvements and seven targets for improvement.
The acquisitionof Mansell immediately addressed the Project Process improvement area, as italready operated its own product development, had product groups and productdirectors. Concentrating on developing partnerships and framework agreementsaddressed another essential element of the criteria of the Egan report, inorder to achieve its full potential, the industry required substantial changesin its culture and structure and needed to replace competitive tendering withlong term relationships based on clear measurements of performance andsustained improvements in quality and efficiency.
Other areas thatwere addressed with the acquisition including the provision of committedleadership, focus on the customer, product team integration and a commitment topeople. The key phrase in Mansell’s annual report 2002 was collaborationwith customers, with supply partners.
Working incollaboration helps us create sustainable relationships that deliver best valueto our customers and benefits to our stakeholders.Their open approach proved successful to the long term success of theircustomer relationships.
The acquisitionof Mansell undoubtedly significantly addressed the issues raised within theEgan agenda within the Balfour group.
(i) The Competition2 TheCompetitive Environment
In order tounderstand the competitive environment we must first understand what is meantby competitive environment –an industry is a group of competitors producingproducts or services that compete directly with each other.
Porter’s Five Forcesanalysis (Appendix 2), identifies that the collective strength of theseforces determines the ultimate profit potential of an industry.
In acquiringMansell, Balfour has differentiated itself and created competitive advantage.However, through its evolution Balfour has a number of distinct advantages,including size, geographic coverage, research and development capability,partnership arrangements which further reinforce its position. Finally, Balfourconstantly improves and upgrades its products and service offering either byreorganisation or by acquisition and merger. All of these affect the abilityof a new entrant into the market, and therefore vie for position with Balfour.
Contained withinthe building construction industry there are 7434 companiesin the UK of varying sizes. The UK market was worth 107.01bn (2005)and the global market $4.2tn. The UK market is forecast to grow to 123.1bn by2010. There is a great deal of consolidation taking place with a number ofacquisitions and mergers taking place, such as Amec selling Amec Spie,Carillion buying Mowlem plc in March 205, Kier bought Ashwood Homes in 2005,Morgan Sindal bought Gleeson MCL in 2006 and Balfour disposed of AndoverControls in 2004 and acquired JCM Group in 2005.
Some of the maincompetitors within the UK and the USA are ;
In the UK Inthe USA
Alfred McAlpine BetchtelGroup Incorporated
Amec plc BovisLend Lease
Bovis Lend Lease CentexConstruction Group
Kier Group GilbaneBuilding Corporation
Laing O Rourke
In analysing twoof the main competitors within the UK, both Amec plc (Amec) and Kier Group(Kier) are interesting for the following reasons.
Amec’s statedstrategy is to be a leading supplier of high valueconsultancy, engineering and project management services to defined marketsegments within the world’s energy and industrial process industries.
Amec differentiates itself from Balfour in that it has offshore gasand oil production facilities. It is similar to Kier in that it also has metaland mineral mines, a clear one stop shop proposition.
Its main business offerings arein oil and gas, oil sands, minerals and metal mining, nuclear, industrial,earth and environmental and wind energy. Unlike Balfour therefore, Amecconcentrates on non domestic construction, rather than property development andsocial housing. In fact in December 2006 it announced its decision to disposeof its, Built Environment portfolio including Building and CivilEngineering, Building and Facilities Services, Property Developments and PPP,together with some peripheral activities. These businesses accounted foraggregate revenues in 2005 of 1.3bn and generated profit of 14m.
Therefore Amec has reformeditself and differentiated itself in focusing on its core strengths within thenon domestic construction market, making its competitive advantage moresustainable, as it no longer has the focus of attention taken away from itscore business.
As with Balfour and Kier, Amecalso embraces the social and environmental aspects of the industry.
Amec is a maincompetitor of Balfour’s because it does offer civil engineering, buildingengineering contracting and manufacturing, offshore oil and gas production,refineries and process facilities, water, gas and electricity utilities andhousing and property development (even if it has decided to dispose of part ofthe portfolio, it still constitutes a major competitor). Amec also operateswithin the USA.
Like Balfour,Amec is particularly successful in the public sector market and has embarkedupon a strategy of growth through acquisition and merger. Amec is a profitableorganisation.
Kier has a UK widenetwork of regional contracting businesses, with major projects expertise. Theyoffer a full lifecycle of services for buildings, including facilitiesmanagement. In summary they are a, construction, development and servicegroup, specialising in building and civil engineering, support services,private house building, property development and Private Finance Initiative.
They operateusing strategic alliance business units and are a solid business, with over 14years of steady growth. Like Balfour and Amec, Kier is a well establishedbusiness, having been formed in the 1920s. Like Balfour, Kier also has its owninfrastructure investment company. And as with the majority of constructioncompanies, in a need to follow the recommendations of the Egan Report, Kierembraces the social and environmental aspects of sustainability.
Unlike Balfour,Kier are also involved in opencast mining and facilities management. Kier’svision is to be the most respected company in the industry.
Balfour and Kieroperate within very similar markets and offer very similar expertise, with theexception of the opencast mining and facilities management. It would makeperfect sense for Balfour to consider a merger or acquisition of Kier in thenear future. This would provide the added benefit of consolidating itsposition, but also creating critical mass in market share in areas such asprivate house building and PFI.
Year on year,Kier achieved turnover growth through the period 2001 – 2005.
Amec and Kierboth operate in the same market places at Balfour, both are profitable and showcontinued growth year on year. Each would be a strategic fit, whether that isvia acquisition, merger or some form of framework agreement or joint venturearrangement.
(ii) Competitive Advantagesof the Competition
Using Porter’sfive forces model (Appendix 2), we can see that there is very little threat ofentry into the market, due to the size and barriers to entry, such as cost andgeographic coverage. The bidding process, particularly for PFI projects isparticularly cumbersome and can be seen as a barrier to entry.
Porter’s ValueChain (Appendix 4) analysis provides an overview of how Balfour focuses onachieving sustainable partnership arrangements with its value and supplychain. This is an area where Balfour differentiates itself from thecompetition. Both Amec and Kier also have their own discrete offerings, whichallows them to achieve sustainable competitive advantage, whether that is as aresult of focusing on international markets, oil and gas markets, mining orfacilities management.
Each company (Balfour,Amec and Kier) have all positioned themselves in the market where they can bestdefend itself against (these five forces) or can influence them in its favour.
All threeorganisations are flexible and adaptable enough to change to its changingenvironment. That is why they do have sustainable competitive advantage. Eachorganisation also has strategic fit among each of its activities, as identifiedin the Value Chain, the more a company’s positioning rests on activitysystems with second and third order fit, the more sustainable its advantagewill be.
3 Financial Analysis & Comparison
In order tocarry out a financial analysis and comparison of the Balfour interim figureswith that of the competition, attached in Appendix 5 is a spreadsheet whichidentifies the profitability, efficiency and liquidity ratios of Balfour, Amecand Kier Group based on the annual reports for the years 2001 – 2005, which arethe comparable numbers that were available at the time of writing this report.
Balfour enjoyeda hike in its profitability during 2004 at 7.34%, but reduced to 3.67% in 2005,this may reflect for instance, fewer acquisitions during 2004 thereforeaffecting the bottom line, or it may be as a result of lower operating costsduring that particular year. The gross margin ratio is pretty consistentthroughout the five years, with a dip in 2005, which reflects the company’sability to control its production costs and to manage its margins.
The Return onCapital Employed has varied over the five years, with the most noticeablechange in 2005. Debtor days has reduced to 47.37 in 2005 which reflects thecompany’s ability not to allow excessive credit. Unfortunately it would appearthat Balfour could take better advantage of the trade credit made available toit, as the Creditor days is particularly low at 37.86 in 2005. Trying toextend this limit would help with cash flow and forecasting.
The currentratio has fluctuated around the below 1 mark which could be a cause forconcern, as this measure estimates whether a business can pay debts due withinone year from assets that it expects to turn into cash within that year. Theliquidity ratio reflects a measure of less than 1 again, which could be a causefor concern as this ratio measures where assets that cannot be turned into cashquickly or easily (such as stock) must be turned into final product, then soldand the cash collected. This ratio adjusts the current ratio to eliminateassets that are not already in cash.
The gearingratio has increased to 206.16 in 2005 highlighting the need to borrow more inorder to invest in the assets of the business. This may be as a result ofacquisition or research and development costs for instance.
Amec’sprofitability reduced considerably in 2005 to 0.51% from 1.41% in 2004, itsgross margin has remained fairly constant during the five year period being at12.31% in 2005. Return on capital employed has varied widely during the fiveyear period. In 2001 it was at 12.16% reducing to 10.41% in 2003 and dippingfurther in 2005 to 2.31%. This would suggest that management is less effectiveduring 2005 in producing returns on resources before making any distribution ofthose returns.
The current andliquidity ratios are good at around the 1;1 mark for the five year period,which suggests the organisation has no difficulties in paying its debts duringthe year.
Amec’s gearingratio is also high at 254.4 during 2005. Debtor days seems particularly highat 95.79 during 2005, having been at 57.06 in 2002. This needs to be addressedas soon as possible. Creditor days is far more acceptable than that of Balfour’s.
Kier’sprofitability ratio has increased in 2005 to 3.68%, from 2.81% in 2004. Grossprofit has also consistently risen over the five year period. Return on capitalemployed is higher than the competition at 26.81 in 2005. The current ratio isat a good level during the five year period, being at 1.17% in 2005. However,the liquidity ratio is very alarming at considerably less than 1;1, andconsistently lower than 0.7;1. Management would need to seriously considerthis area of the accounts.
Debtor days itis at an acceptable level at 43.04 days in 2005 and creditor days at 86.95 daysin the same year.
Factorsinfluencing these figures would include acquisitions and other exceptionalcosts which would have the effect of distorting the trends of the figures.Other exceptional costs such as government levies or taxes, fines or otherinvestments.
Balfour operatesin a fast moving, volatile industry, where acquisition and merger are seeingthe consolidation of the industry. Balfour differentiates itself by focusingon sustainable partnerships with customers and suppliers. It has broadened itsservice offering to include social housing, with the acquisition of Mansell,which in turn, facilitated the company’s adherence to the Egan Report.
The industry isvast, with many competitors. Amec plc and Kier Group have expertise thatBalfour lacks, that of mining, and in Amec’s case, oil and gas productionfacilities. They therefore differentiate themselves by providing discreteofferings. Each organisation is adaptable and flexible enough to adjust to itschanging environment, and in turn, achieves sustainable competitive advantage.
With all threeof these organisations having the stated strategy of growth via organic andtransformational means, such as acquisition, it’s just a question of . . .watch this space