Assignment Overview on: My Business Idea

1.     Description of my Business:

This is a construction business that builds quality office spaces and sells it to commissioning organisations and developers. Commissioning organisations are representatives of prospective owners / developers of buildings who ensure that the buildings meet the specifications in all aspects of construction and performance and hence form an important part of the buying decision. The target market involves the corporate sector who may be the end-consumers, developers who may sub-contract construction work and commissioning organisations that may represent end consumers or developers. The business would have its operations from Central Business District (CBD) to get an opportunity to network with prospective clients, who would be organisations looking to expand or shift to new localities and premises. Pricing is based on cost leadership strategy and hence would be competitively priced, going after volumes of business with minimal margins to gain market share, though customer service and quality would not be compromised on.

2.     The Marketplace:

We would reach our target market through cold calling, networking and targeted advertising in local and national news papers. With a cost leadership strategy, advertising expenses would be to a minimum and the emphasis would be on cold calling and networking, attending industry events, presenting papers in important discussions and providing thought leadership. There would be good use of social media as well. We would build our competitive advantage by providing customer service and giving quality construction solutions in quick time while being competitively prices. We would achieve price leadership by keeping our costs low, maintaining minimal inventories, and increasing volume to achieve economies of scale. The major competitors tend to be at the higher end of the value chain where they charge premium prices, while there are competitors who are low priced but compromise on quality. There is an opportunity to target customers who are looking for value for their investment without compromising on quality. The threat that we face is heavy competition – there is always the threat of new entrants to the industry. Our strength is our flexibility – we could adapt to changing market conditions by being small and agile, with minimum overheads and just-in-time inventories. Our weakness is that we would not be able to match the heavy advertising spend by the heavyweights, so, we need to target at the sections of the market that are looking for value maximisation.

3.     Management:

We would be a team of experts from construction, marketing and finance who would be directors of the firm. We would hire professional managers / consultants for the different departments. Our organisation structure would be flat, and the professionals and managers would have expertise in their own fields. We would be hiring external consultants on a case-to-case basis based on individual client requirements and market opportunities. For instance, while developers may outsource just the construction part of the operations to us, if they needed us to handle interior decoration as well in some projects, we would hire consultant designers / interior decorators to handle individual projects without having them on our regular roles, since we would want to keep our costs low with a cost leadership strategy, but would still want to provide quality services to clients. We would also need external liaison officers to take care of public relations and government lobbying as well as negotiations in cases such as land acquisitions for projects.

4.     Credit Policy:

We sub-contract work from developers who work on a turn-key basis or we deal directly with the end consumers, business houses looking for office space – when developers sub-contract construction work to our business or when we are dealing with corporate houses for our end consumers, and we take up projects based on a credit policy that involves 30% advance payment, and the rest of 70% to be paid in the form of EMI’s (Equated Monthly Instalments). The advance would be used to pay for raw materials and other fixed costs, while the EMI’s would pay for the variable costs in business, taking care of cash flow needs of the business. Advance payment would ensure confirmed orders while EMI’s would serve as incentives for people to buy into office space. Of course, our credit policy is subject to negotiation and would depend on individual cases, while we would strive to stick to the mentioned credit policy.

5.     Key Performance Indicators:

Key Performance Indicators are warning signs that help monitor performance of the organisation on various fronts. In construction business, some of the key performance indicators have to do with quality, delivery and people. While benchmarking is one of the useful KPI’s in the construction business (Linh and Peh, 2005, P. 357), a process of measuring organisational performance against those of leaders in the business, accuracy is an issue in the construction business, even as it focuses on incremental changes in improvement rather than “radical breakthrough”. However, with the limitations in mind, factor ssuch as quality, delivery and people management could be benchmarked against the best in the industry to see how the organisation fared.

3.1. Quality:

Quality could be measured using client satisfaction in terms of the product and overall service levels, both from the commissioning organisation as well as from residents. The importance of quality as a KPI is that satisfied customers and clients would give repeat business and would also refer the business favourably to other clients, helping in developing new business. The number of recalls made in key components and in design changes would also be one of the KPI factors in quality. While the first two aspects of client satisfaction and resident satisfaction would be lag indicators, the number of recalls and changes required are lead indicators in that they are current and counting.

3.2. Delivery:

Delivery: In terms of delivery, construction cost benchmarking could be applied to see how the businesses fared in terms of lowering costs for given output, the costs involved in repairs, construction time involved and the time spent on repairs. Construction time is a lead indicator as it could be judged as the construction progresses, while construction costs, costs of repairs and time spent on repairs are lag indicators.

3.3. People Management:

The third aspect involved in KPI’s and benchmarking would be people management, where staff turnover involved in the business, sickness and absence of labourers and staff during projects as well as employee satisfaction levels obtained through surveys would indicate to the management as to how satisfied the organisation’s human resources are, and where the organisation stood in terms of good human resource management policies when benchmarked with industry standards.

3.4. Rationale for KPI’s:

The reason why quality, delivery and people are considered for KPI’s is that they are the most important factors that could determine the extent of business retention and new business development, and could also be vital sources of competitive advantage.

6.     Contingency Plans

Organisational Contingency Theory states that organisations succeed in relation to achieving the best fit with its environment (Burns and Stalker, 1961). Contingency factors are the external factors that impact on organisational factors (Howell, Windahl and Seidel, 2009). In other words, a project’s goals, structure and the way it is managed have to fit with the external environment. One of the theories to contingency framework (Shenhar and Dvir, 2007) includes consideration of four factors, namely Novelty, Technology, Complexity and Pace. Novelty measures how novel or new the crucial aspects of the project are, technology specifies if the project is of highly technical or needs low tech infrastructure, complexity measures the level of complexity of the project from low to high and pace specifies if the project is normal, medium paced or highly urgent and critical. When these four factors are plotted in a graph, they would ideally reveal a perfect diamond shape, which could be used to compare the level of expertise at hand to see if the project is compatible with the organisation’s infrastructure and capabilities.

It is important to lay contingency plans that have taken all the factors into consideration, such as novelty, technology, complexity and pace involved in the project, since they would have an impact on business sustainability in the long run. If the business is low on technological capability and if most projects that are available are high tech, the business may not be able to cope up with the situation. It is a similar case with novelty, complexity and pace, where the level of preparedness of the business for the various factors in contingency planning determines possibilities of success in the industry.

Similarly, while the focus of the business is on cost leadership and we operate on Just-in-time inventory model, it is important to have contingency plans in place, where the inventory may run out of stock because of delays in transit, non-availability of raw materials with suppliers, or a spurt in demand where inventories may just not be sufficient. Contingency plans would include having alternative modes of transport available for material to be shipped if the traditional modes fail, having alternative suppliers ready to meet non-availability of materials with established suppliers or on account of sudden increases in demand, even if they might result in higher costs for the short term. The concept of just-in-time inventory is in itself a reflection of contingency plans, where the business would not suffer significantly on account of locked up inventory and stuck cash, if there were to be a slump in economic performance that leads to slack in demand.

7.     Financial ratios

The key financial ratios involved in business management would be Asset turnover ratios and Profitability Ratios. Construction is a business that involves heavy investment in assets and people, and cash flow could be a problem if cash flow is struck in the pipeline, either with residents or with commissioning agents. Similarly, profitability ratios indicate the level of profitability of the business.

5.1. Asset Turnover Ratios:

Receivables Turnover = Annual Credit Sales / Accounts Receivable

Average Collection Period = 365 / Receivables Turnover

5.2. Profitability Ratios:

Gross Profit Margin = (Sales – Cost of Goods) / Sales

Return on Assets = Net Income / Total Assets

8.     Strategy for Improvement:

The four key areas where the business should continually focus its attention on would be:

6.1. Competitor Analysis and Industry Analysis:

The industry keeps changing and not being up-to-speed with industry dynamics may jeopardise business prospects. We need to update our skills with the latest in construction technology and stimulate organisational learning for consistent improvements in quality.

6.2. Sales, Marketing and Customer Satisfaction:

Sales would push business forward, marketing would understand consumer needs, and customer satisfaction would ensure repeat business and goodwill in the market. Our sales force would focus on cold calling and networking while marketing would focus on strategies in the construction business based on market research and information.

6.3. Cost Management:

Rising costs would eat into profitability and it is important to have an eye on costs and ensure that the business does not build excess capacity. Our strict adherence to credit policy and just-in-time inventory would remain the corner-stone of our cost management.

6.4. Employee Satisfaction:

High employee turnover and dissatisfied employees can go against quality standards and customer service levels, while proving to be a drag on productivity. Cost savings would be passed on to employees based on performance standards and customer satisfaction.

9.     References:

Burns, T., Stalker, G. (1961), ‘The Management of Innovation’, Tavistock, London

Howell, D., Windahl, C., Seidel, R. (2009), ‘A project contingency framework based on uncertainty and its consequences’, International Journal of Project Management

Ling, Florence, and Peh, Shanny, ‘Key Performance Indicators for measuring contractor’s performance’, Architectural Science Review, Vol. 48, pp. 357 – 65

Shenhar, A., Dvir, Div. (2007), ‘Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation’. Harvard Business School Press, viewed on 6 June 2012 <http://reinventingprojectmanagement.com/material/other/030_HBS.pdf>

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