Applying Porter’s Frameworks to Managing A Business in Global Construction Markets

Pekka Huovinen, Helsinki University of Technology (email: [email protected])

Abstract

The purpose is to introduce and advance a population of the nine applications of Porter’s frameworks to managing a firm’s business(es) in global construction markets. Betts and Ofori (1992) recommend Porter’s frameworks as strategic planning techniques. Winch and Schneider (1993) suggest a model for architectural practices. Veshosky (1994) has applied the strategies to the A/E firms in the USA. Jennings and Betts (1996) have re•defined the strategies for quantity• surveying practices. Pinto et al. (2000) establish customer•based project•success metrics. Huovinen (2001) introduces fivecompetitive arenas. Langford and Male (2001) address product differentiation. Rapp (2001) links low cost, differentiation, and speedy response. Kale and Arditi (2002) recommend a neutral approach to scope with all the modes of competition. Finally, it is suggested that these existing and new applications be advanced further as a causal chain of Porter’s frameworks in the various contexts of global construction markets. @b@1@e@1@b@2@e@1

Keywords: Business management, competitive strategies, construction market, literature review, Porter Michael E.

1. Introduction

This paper is one of the outcomes of a 4•year literature•review process [1].A review problem of how a firm’s dynamic business can be managed successfully was approached in light of both the generic business•management concepts and their construction•related applications published between the years 1990•2002. This focus onbusiness•level management research is based on the author’s perception, i.e. managing a single business successfully is at the same time the most challenging and the most enduring level of strategic management. During the review, the converging versus diverging answers of the various authors were identified concerning the question “What is the primary way (element) of managing that will enable managers to set challenging business goals and also to attain them?” Thus, this business•management research was regrouped intothe eight broad schools of thought in business management as follows: Porterian, resource•based, competence•based, knowledge•based, organization•based, process• based, dynamism•based, and evolutionary school [1 p. 89].

109 In this paper,the sole focus is on Porter’s frameworks and their construction•related applications. This is so because the Porterian school seems to dominate, i.e. the total number of the practitioners applying Porter’s frameworks across industrial, service, and construction businesses is still likely to exceed the combined number of the practitioners relying on the outcomes of the other seven schools. Typically, Mintzberg et al. [2 pp. 352•3] acknowledge that Porter’s “positioning school” remained highly influential in terms of the annual “activity” (amount of publication and attention from practitioners) in the late 1990s. However, it seems that not even the Porterian school can show empirical evidence of sustained good business performance (e.g. [3]). In the early 1990s, Porter [4 pp. 428•9] emphasized the that theory embodied in a framework is contained in choosing its elements and variables, i.e. the way these are organized into a framework, their interactions, and the ways in which alternative patterns of variables and firm choices affect outcomes.

The purpose of this paper is (a) to introduce the cumulative chain of Porter’s frameworks, (b) to review the nine applications of Porter’s frameworks for managing a firm’s business in global construction markets, and (c) to suggest some promising ways of advancing the applicability and effectiveness of the same and new applications of Porter’s business•management frameworks in the future as follows.

2. Porter’s Business•Management Frameworks

2.1 Porterian school of thought in business management

Herein, the introduction ofthe Porterian business management is based only on Porter’s references and Porter and Wayland’s [5] contribution that are all (re)published between the years 1990•2002. Among them, there is only one integrated account of the development of his frameworks. Porter’s [4 pp. 431•9] chain of causality connects firm behaviour and business environment to competitive market outcomes. Porter offersa set of cross•sectional strategies to managers as follows:

§ A contextual market strategy for choosing the attractive, strategically distinct business(es); based on gaining the knowledge of the five forces inherent in each business or competitive arena [6, 7]

§ A positioning strategy for choosing, building, and sustaining a firm’s attractive relative position in the targeted business; based on choosing incompatible trade•offs with alternative positions [4, 6, 7, 8]

§ A competitive strategy for choosing, creating, and upgrading competitive advantage(s) within a firm’s competitive scope; based on aligning a firm’s activity system, resources [including competences], and organization to the adopted strategy as well as refining

110 these according to exogenous changes; by using the underlying structural drivers [4], [7, 8, 9, 10]

§ A coherent set of guiding principles for reconnecting a firm with strategy and a firm’s strategy with its operational effectiveness as well as for strategizing during the Internet era [8, 9, 10]

§ A locational strategy for managing a firm’s membership within a vibrant cluster [4, 8, 11, 12, 13, 14, 15].

2.2 Relevant critique of construction•related scholars

Over the years, strategic management scholars have criticized Porter’s causal chain of frameworks, typically, in terms of choosing positioning as the only strategy, organization, people, and resources that are missing, meta•strategies homogenizing firms, and their realist premises. Herein, only the relevant critique of some construction•related management scholars is reviewed as follows.

In the early 1990s, Fellows [16] argued thatPorter’s [7] five forces model is derived from the traditional view of competition (the perfect competition•monopoly continuum); therefore, it does not appear to take account of the theory of contestable markets. Porter’s approach is too narrow, i.e. a supply•side analysis. In addition, developed markets were recognizing the limitations of competitive perspectives and were moving toward cooperation. Thus, appropriate strategies are based on gearing the supply side to the greatest likelihood of maximizing demand•side satisfaction. In their reply to Fellows, Betts and Ofori [17] admitted that it is fair to say that Porter’s (1980, 1985) work had come under some criticism as an over•simplistic and populist approach. Yet, irrespective of its weaknesses, it cannot be doubted that the work had [already] made much impact and, on this basis, Betts and Ofori (e.g. [18]) considered it justified to apply Porter’s strategic planning principles to construction.

Winch and Schneider [19] have posited that, while very attractive,Porter’s [6] generic strategies were developed for manufacturing industries. Thus, these strategies are not immediately applicable to professional practice. E.g. cost leadership, which is the result of heavy capital investment or preferential access to material inputs, is un•attainable in professional practice due to its labor•intensive nature and the lack of inputs.

Later, Jennings and Betts [20 pp. 165, 176] recalled thatPorter’s competitive strategy theories had readily been applied to the [UK] construction industry. They found out that Porter’s [7] generic strategies might generally be suitable for use by private quantity•surveyor practices. However, the analysis of the traditional professions associated with construction is not so straightforward due to their service•based and knowledge•based nature. In particular, the unpopularity of cost leadership indicates that Porter’s work does not provide a balanced definition of competitive strategy for PQS practices.

111 In turn, Kale and Arditi [21 p. 238] sum up that construction•management researchers have been preoccupied with the concept of competitive positioning and its performance implications for quite some time. They consider that these works have provided important insights on this concept in the context of the construction industry. However, this research appears to be unbalanced in favor of anecdotal or descriptive approaches. Only a few researchers have empirically explored this concept (Jennings and Betts 1996) and its performance implications.

3. Construction•Related Applications of Porter’s Frameworks

3.1 Review of the Construction•Related Business•Management Concepts Published Between the Years 1990•2002

Hart’s [22] guidelines were applied to conductingthe review during the years 1999•2003.The replicable ways of searching, browsing, in•/excluding, retrieving, inferring, coding, describing, and analyzing the applied data were used and documented. The books of nine construction•related publishers and 25 journals were browsed extensively (see [1]). The generic nature of managing a firm’s business was maintained by limiting the search only for the concepts where the focal firms are based in the OECD countries. The only exception was to allow the references originating from Singapore or Hong Kong to be included in the applied data; due to the authors’ British Commonwealth heritage and interests in global business issues, too.

Global construction markets deal with design, implementation, services, and life•cycle aspects of investments in the utilization of natural resources, energy supply, tele•communications, transportation, other infrastructure, manufacturing, and general building concerns.Business dynamism includes the total spectrum of managing a firm’s business in static, dynamic, cyclical, hypercompetitive, and even chaotic markets. A population of firms operating in global construction markets involves various kinds of contractors, designers, suppliers, and service providers.

The review resulted in identifyinga population of 38 construction•related business• management applications published between the years 1990•2002. Overall, the key finding is that no research tradition exists concerning construction•related business management.

3.2 Nine Construction•Related Applications of Porter’s Frameworks

One of the sub•reviews resulted in the identification ofnine references where the authors apply one or several Porter’s frameworks to managing a firm’s business in (global) construction markets. The authors, their applied concepts, broad business contexts, and eventual empirical evidence appear in Table 1. Herein, the rule of neutralism [22] is maintained by quoting the authors’ original texts (without adding the reviewer’s own interpretations). In this way, a reader

112 can judge the validity of each concept for her or his own theoretical and/or practical point of view, and (s)he can then act accordingly (e.g. to acquire a valid reference).

(1) In the early 1990s, Betts and Ofori [18] found out that strategic planning was beginning to be adopted by many [UK•related] construction enterprises, and they concluded that strategic planning techniques [such as Porter’sframeworks] were vital for the survival and progress of construction enterprises of all types.

(2) In turn, Winch and Schneider [19] suggested a strategic model for [the UK] architectural practices, which is based on Porter’s (1980)generic strategies and developed from Maister’s [23] strategy model for professional practices. This model highlights strong delivery, experience, ambition, and ideas as beingfour key strategies that architectural practices follow, based on the parameters of project complexity and the client’s quality preference. They admit that architectural practices are notoriously difficult to manage. A major requirement is a sense of vision – an understanding of the distinctive competence, the underlying culture, and the awareness that to be effective, the whole and the parts need to be consistent with that vision.

(3) Veshosky [24] used Porter’s [6]generic competitive strategies as a basis for developing an analytical framework and applying this to the design segment of the A/E/C industry in the USA. He elaborated the content and the use of cost leadership, differentiation, and focus on a niche. He concluded that, while strategy concepts may be implicit in decision•making by managers of A/E firms, the formulation and implementation of explicit business strategies appear likely to be superior to strategies that occur by default, resulting from the decisions of autonomous managers.

(4) Jennings and Betts [20] have combined Porter’s [7]generic strategies and Maister’s [25] three benefit elements with the results of their study in order to four define new generic strategies (execution, expertise, efficiency, and experience) for private quantity• surveying (PQS) practices. They argue that their model represents a contribution to classifying and forecasting the way in which PQS practices compete, and how they utilize IS/IT to help achieve their goals. Each PQS generic strategy identifies a typical practice size, an IT•use level, strategy elements, and a staff structure.

113 Table 1: Applications of Porter’s frameworks to managing a business in global con•struction markets. The references are published between the years 1990•2002 (n = 9).

Author Porter’s original Applied, contextual Business context Empirical (year) framework framework evidence Bets and 5 forces (1979), (1) Relevance, scope, and Construction No new empirical Ofori generic strategies, ways for applying them in enterprises data (1992) [18] value chain (1985) construction Winch and Generic strategies (2) 4 generic strategies Architectural No new empirical Schneider (1980); Maister (strong delivery, exper• practices in the data (1993) [19] (1982) ience, ideas, ambition). UK Veshosky Generic competitive (3) Analytical frame•work Architecture/ Interviews of 11 (1994) [24] strategies (1980) and its application to the engineering firms. Explicit design segment of the (A/E) firms in strategies are A/E/C industry the US superior to ones occurring by default. Jennings Generic strategies (4) New generic stra•tegy Private quantity Survey (n = 47). and Betts (1985); Maister model to PQS practices surveying pract Suit•able strategies (1996) [20] (1986) with IT support ices in the UK except the cost leadership. Pinto et al. Value•chain model (5) Value•chain analysis International Aker Rauma Off• (2000) [26] (1985) of a project supplier offshore shore A client• contracting driven model of project success. Huovinen 5 forces model and (6) Framework for de• Technology• Case contractor (2001) [27] generic strategies signing an international intensive (based in Finland) (1980,1985) competitive strategy contracting Langford Competitive industry (7) Adapted 5 forces The UK No new empirical and Male forces framework shape the construction • construction data (textbook) (2001) [28] (1980) industry structure industry Rapp 5 forces model, value (8) Adapted 5 forces, The US No new empirical (2001) [29] chain (1980, 1985) speedy response, and construction data client value chain. industry

Kale and Competitive posi• (9) Mode: cost, quality, The US Survey (n = 93). Arditi tioning 1980, 1985, time, innovation. Scope: construction Em•phasis on all 4 (2002) [21] scope and mode of geography, delivery industry modes and a competition systems, and clients neutral scope outperform rivals.

(5) Pinto et al. [26 pp. 106•109] have adapted Porter’s [7]value•chain model to establishing a Finland•based project supplier’s customer•based project•success metrics. Their value chain analysis suggests that firms can compete most effectively if they clearly understand how they can help create value to their customer’s business•activity cycle. Besides the traditional determinants (time, budget and performance), a client•driven model (quality and customer satisfaction) drives all strategic project decisions. In a highly competitive industry, superior products go hand•in•hand

114 with superior service. Thus, it is the sum of all activities in the value chain that counts. Weak areas can be offset by strong advantages in other activities.

(6) Huovinen [27] has segmented capital•investment markets intofive competitive arenas across the globe. Within each arena, there are various investors which contractors target as their potential clients. Each arena consists of a series of competitive bidding situations. In turn, each situation involves one investor and competing contractors, which aim at preparing the best bid, offering the most beneficial investment solution, and finally winning the contract. A new framework is based on the idea ofthe creation of the best fit between the primary decision maker, i.e. the investor in question (with its investment need and process), and the most competent contractor (with its investment solution and delivery process). The framework consists of four areas: (a) business scope and objectives, (b) marketing and sales, (c) investment solution, and (d) contract fulfilment. The emphasis is on managing three kinds of relationships among the investors, the CASE contractor (and the partners), and its strongest competitors. It is applied to a context where a technology•intensive contractor is setting objectives for its future competitive positions in international capital•investment markets.

(7) Langford and Male [28 pp. 44•55] have adapted Porter’s [6]five forces framework to the UK construction industry. The industry provides the longer•term structural context whereas the market translates it into a short•term exchange relationship for setting up a geographically located production process. Products are either service•products or end•products. The service•product embodies reputation andproduct differentiation occurs through clients’ pre•qualification, procurement, and tendering mechanisms. Substitute products or services (undertaking the same function) are not an easy concept to apply in the construction industry. A functional analysis of the end•product substitution (process) suggests that the underlying purpose is to provide the client with a facility that allows organizational and business processes to proceed optimally. Thus, the solution for the client may not be in constructing a new facility but renovating, refurbishing, or maintaining an existing facility.

(8) Concerning the US construction industry, Rapp [29 pp. 37•42] has linked Porter’s –[6], [7] competitive industry•forces model (with three modes of low cost, differentiation, and speedy response) with the emphasis on the competitive vertical dimension (new rivals and substitutes) and the primarily cooperative horizontal dimension (suppliers and customers). Current competition may range from avoided competition to hypercompetition. Porter’s (1985)value chain is viewed as the client•value chain, where activities may be intermingled and iterative, depending on project•delivery mode and urgency.

(9) Kale and Arditi [21 pp. 241•6] have adopted Porter’s [6], [7] generic competitive positioning typology, but they have classifiedfour modes of competition somewhat differently, and explored this concept and its performance implications in the context of the US construction industry. Overall, significant differences in offerings are absent, which makes it favorable to compete solely on the basis of one mode. But this cannot be sufficient for gaining and sustaining competitive advantage. The survey findings support this assertion by pointing out that a cluster of the companies, which adopt a neutral (between a narrow and a broad) approach to scope and

115 place a strong emphasis on all four modes of competition (quality, innovation, time, and cost), outperforms their rivals. This hybrid mode of competition contradicts Porter’s original proposition that combining different modes of competition is not a viable approach.

4. Conclusions

In summary, the applicability of the nine applications varies a lot. In part, this seems to be due to the strictly scientific policy of publishing, i.e. the authors are not allowed to address the applicability of their concepts and the related user•instructions•issues. Thus, this concluding discussion involves the positioning of nine applications into a causal chain of Porter’s [4 p. 432) frameworks and some suggestions for advancing both the existing and new applications further across various contexts of global construction markets as follows (Figure 1). Interested scholars can readily take into account the critique of some construction•related management scholars (see pp. 3•4).

Overall, construction•related management scholars can adoptPorter’s chain of causality as a frame for advancing their applications. It is possible to explain, at least ex post,”Why was a construction firm’s cross•sectional strategy (non•)successful at a given point in time?”, that is given a particular competitive position, competitive advantage, activity system, and/or a set of drivers of the firm (cf. [30 pp. 92•3]). At the broadest level, a construction firm’s successa is function of two factors: the attractiveness of the global business in which the firm competes and its relative position in that business. A position is an outcome and not a cause. Why or how did this position arise? The firm possesses asustainable competitive advantage (e.g. lower costs or differentiation) vis•à•vis its rivals within its chosen competitive scope. Again, why. In order to address this, cost, differentiation, and scope must be decomposed. This requires a theory that provides an elemental look at what firms do. A construction firm involves

116 CROSS•SECTIONAL Firm success

Attractive relative Attractive industry position; Kale and Arditi structure (5 forces); Betts [21] and Ofori [18], Huovinen [27], Langford and Male [28], Rapp [29]

Sustainable competitive advantage (3 generic stra tegies); Betts and Ofori [18], Winch and Schnei der [19], Veshosky [24], Jennings and Betts [20]

Activities/Value system; Betts and Ofori [18], Pinto et al. [26], Rapp [29]

Drivers (structural determinants of differences in the cost or buyer value)

LONGITUDINAL

Managerial choices Initial conditions

Figure 1: Porter’s determinants of success in a distinct business as a chain of frameworks [4 p. 432). The nine references containing the construction•related applications are coupled with the related frameworks.

117 A system of discrete but interrelated economic activities • Why was this successful? Activity drivers are structural determinants of differences among competitors in the cost or buyer value of activities or groups of activities. Tying advantage to specific activities/drivers is necessary to operationalize the notion of competitive advantage in practice. Ex ante, Porter’s [4] view of the origin of advantage is that it lies in the ability to make good strategy choices and implement them. New choices are made as the environment changes or as accumulating activities and resources open up new options.

In addition, construction•related management scholars can make use of Porter’s [15 p. 16] work on operational effectiveness and positioning which begins to bridge positioning, location, and dynamic improvement to a firm’s competitive advantage. It stresses the necessity of continual improvement in operational effectiveness but emphasizes the need for continuity in strategy, along with the concomitant need for relentless improvement in the means for carrying out strategy. Both operational effectiveness and strategy, however, are influenced by location. In van den Bosch’s [30 pp. 92•3) words, ”firms create and attain superior and sustainable competitive positions over time by their dynamic processes”.

Finally, it is suggested that management scholars engage themselves with dynamizing the applied construction•related chain of Porter’s [4] frameworks so that managers in contracting, design, and product firms can ex ante formulate and implementsuccessful longitudinal business strategies in global construction markets (a) by enhancing their understanding of a firm’s initial internal and external conditions as well as their ability to make informed, successive true choices, (b) by formulating and implementing a set of cross•sectional strategies in innovative, integrative, and synergic ways, and (c) by learning to identify accidents or chances (or ”luck”) and evaluate their roles within different inputs, processes, causal relationships, and outcomes.

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