What’s going on in the infrastructure construction industry?

It’s a time of great change in the infrastructure construction industry in Australia and most players are acutely aware that things are happening. So what’s actually going on?

Theoretical models can be very helpful in analysing a problem or considering issue from a strategic perspective. One relevant model in this instance – my favourite because of its simplicity – is known as “Five Forces”. The model is used to analyse the nature of competition within an industry. The model draws upon industrial organisation economics to derive five “forces” that determine the competitive intensity of an industry and therefore its overall attractiveness (read profitability).

The analysis was developed by Michael E. Porter of Harvard University, who described the model in his 1979 Harvard Business Review article “How competitive forces shape strategy”. Porter developed his Five Forces analysis in reaction to the widely used Strengths/ Weaknesses/ Opportunities/ Threats (SWOT) analysis, which he believed lacked appropriate rigour.

 

Porter identified five factors that act together to determine the nature of competition within an industry. These are:

• The threat of new entrants to an industry;
• The bargaining power of suppliers;
• The bargaining power of customers (“buyers”);
• The threat of substitute products; and
• The intensity of competitive rivalry within an industry.

 

Porter referred to the “five forces” as the micro environment, consisting of those factors surrounding a company that affect its ability to serve its customers and make a profit. A significant change in any of the forces normally requires a business to re-assess its industry position. It is reasonable to consider that overall industry attractiveness does not imply that every organisation in a given industry will return the same profitability. Businesses are able to apply their core competencies, business model, network and/or innovative capability to achieve a profit above (or below) the industry average.

Let’s consider infrastructure construction as an industry, shaped by Commonwealth and State Governments who as Buyers procure infrastructure such as roads, railways, water storage and delivery, electricity assets etc on behalf of taxpayers. The Suppliers are the contractors, large and small, who compete for (mostly) by tender to construct and/or maintain these assets.

Over the last two decades we have seen a gradual but increasing arrival of new entrants into the industry in the form of International contractors such as ACS and Ferrovial from Spain, Salini Impregilo from Italy, Suez Environnement and Veolia Environnement from France to name just a few.

Barriers to entry are important in determining the threat of new entrants to a given industry. Porter defines six major sources of barriers to entry:

Barrier	Description/Clarification
Economies of scale	Lower unit costs make it difficult for smaller newcomers to break into a market and compete effectively
Product differentiation (including branding)	Existing products and services with strong Unique Service Propositions (USPs) and/or brand increase customer loyalty and make it difficult for newcomers to gain market share
Capital requirements	High investment cost will deter new entrants to an industry and can restrict entry to larger organisations
Cost disadvantages independent of size	Other elements may create barriers eg. learning curve effects, proprietary technology, access to raw materials, government subsidies or favourable locations
Access to distribution channels	A lack of access to distribution channels will make it difficult for newcomers to enter an industry
Regulatory and legal restrictions	Government enacted rules as well as legal protections such as patents can provide the beneficiary with protection

So what’s recently changed in the infrastructure construction industry? International organisations have been encouraged to enter by the relative strength of the Australian economy as well as Government relaxation of regulatory and legal restrictions such as bespoke local standards and stipulated minimum local content requirements.

 

So let’s consider the “threat” from the perspective of existing suppliers (contractors) in the market. The answer depends on how “powerful” the existing suppliers are! Suppliers find themselves in a powerful position in an industry when:

• There are only a few large suppliers (and is this instance we are seeing an increasing number of suppliers);
• The product or service being supplied is unique or at least differentiated;
• The cost of switching to an alternative supplier is high (this being typically managed in this industry on a tender by tender basis);
• The supplier can threaten to integrate vertically (in many cases new participants have entered the infrastructure construction market via relationships with existing players; will we see increasing consolidation activity in the not-too-distant future?);
• The customer is small and unimportant (obviously not the case with Government buyers);
• There are no or few substitute resources available (very relevant when we start to consider imported manufactured kit or potentially off-shore sourced labour forces).

So it’s safe to say that supplier power is weakening and competitive rivalry is intensifying in the infrastructure construction industry! A fairly obvious conclusion, but what to do about it?

 

Porter proposed that, once having assessed the forces affecting competition and their underlying causes, a strategist can identify a given company’s strengths and weaknesses and then devise a plan of action. This may include:

1. Repositioning so that the company’s capabilities provide the best defence against the competitive force; and/or
2. Influencing the balance of the forces through strategic moves, thereby improving the company’s position; and/or
3. Anticipating shifts in the factors underlying the forces and responding to them, with the hope of exploiting change by choosing a strategy appropriate for the new competitive balance before opponents recognise it.

So as a business owner or executive manager, what specifically do you need to do?

 

Has this article been helpful? Please comment below or send me an email. I am always excited to hear from people making it happen!

Peter Wilkinson

BE (Mech), MBA

 

Website: www.samwilkoadvisory.com

Email: peter@samwilkoadvisory.com

Linked-In: http://au.linkedin.com/in/samwilkoadvisory/