Prof.ssa Francesca Vicentini

Arrigo GaetanoRinaldi AlessandroScaletta MartinaTuè Valentina23 Maggio 2014

ECONOMICS OF STRATEGY

NCC Construction Danmark

NCC Construction Danmark

NCC Group is one of the leading construction and property development companies in the Nordic region.

In particular, NCC DK was formed in 1999 through a merger of Rasmussen & Schiots and the Danish interests of Superfos Construction.

In 2005, the company went through a crisis, due to the downturn of the construction market.

In 2006, through a difficult five years period, Torben Billmann, CEO of NCC DK, transformed the deep financial crisis of the company in an opportunity of growth.

Objectives of NCC DK

• Create value for its customers and shareholders.

• Be a leading player in the markets in which it is active.

• Be the customers’ first choice.

• Customer centric.

• Practice fair price.

• Be profit centric.

• Cut costs (Cost reduction).

• Be leader in sustainability (i.e. social responsability, comply with the energy class 1, European Green Building standard).

Values

• Renew the construction industry: the best path toward profitable growth was to change the rules of the game in the Danish construction industry.

• Provide superior sustainable solutions.

Vision

• Become the one-stop shop that customers would go to first.

Mission

• Honesty

• Respect

• Trust

ABELL MATRIXHow do we define the business?

Customer Group: • Residential Home Owners• Public Sector Clients• Business Customers

Needs: • High quality fair price• No delays in execution

Technology:• Virtual Design and

Construction (VDC)

Levels of Strategy

Corporate StrategyWhere does the firm compete?

• Diversification

Before 2006: Residential home owners (B2C)

After 2006: Public Sector clients (52% projects) and Business Customers (45% projects). Task forces were created to assess all projects.

VS

• Vertical Integration

Before 2006: • Separation between

project phase and execution phase of buildings’ projects

After 2006: • The entire process of constuction from

initial concept and design, choice materials, detailing the civil construction and installation of the MEP systems.

• Close relationship with suppliers.

VS

Levels of Strategy

Business StrategyHow does the firm compete?

• Cost Leadership

2006Cut costs by 30%:• Lean business routines;• Central procurement

system;• Labor hour registration;• Contract Review Board;• Downsizing (Blue Collar

from 1.035 to 1.264 employees; White Collar from 985 to 892)

• Differentiation

2008Differentiation based on sustainability

Create value by granting to the customers the chance of saving in their long term operating costs, albeit with a higher initial investment cost (Class 1 energy products)

SWOT ANALYSIS (2006)Strenghts• Knowledge in engineering• Reputation and brand value

Weaknesses• No diversification (B2C residential houses)• Too many business heads• Dysfunction in organization (high costs

and number)• Volume orientation• Craftsman mindset• Production centric

Opportunities• Growing competence in

constructing energy efficient building

• Growing competence in virtual design construction

• Attractive growth opportunities in the B2B and B2P segments

Threats• High fragmentation of market• Inefficient value chain that characterizes

the industry• Climate change and breakdown in global

energy supply

Resource-Based ViewIntangible Resources:

• Knowledge in engineering, materials sourcing, civil constuction, installation of MEP systems

• Brand and reputation of NCC Group

Human Resources:

• White collars• Blue collars• Task forces

Tangible Resources:

• Financial resources (high)• Infrastructures

Resource-Based View

Capability

Digital Construction: competence in making the industry’s preferred software packages for architecture, engineering and costruction communicate seamlessly with each other and the abilities to integrate sustainable design choices with cost control

Core Competence

Virtual Design and Costruction (VDC) helps NCC DK to find standard construction solutions that could be re-used across project to save costs and could be also a big help in furthering the company’s sustainability agenda.

VRIO Framework of VDC

Rare?

YES

Costly to imitate?

YES

Exploited by organization?

YES

Valuable?

YES

Competitive implications?

Sustained advantage

ConvergenceEven if NCC DK was born as a construction company, it is now involved in a new process, by which the boundaries across industries become blurred, so changing the competitive landscape and creating a “metamarket”. This process is named “convergence”.

CUSTOMER NEED CONVERGENCEIntroduction of a Front Office and a Back Office service in order to offer multiple points of direct contact with the customers

INTRA INDUSTRY COMPETITIONCreation of a “key customer program”, combining solutions and services in a unique product (multifunctional) TECHNOLOGICAL CONVERGENCE

A) SUBSTITUTIONUpgrading of energy efficiency: Climate-fiendly single family home

B) INTEGRATION Industry’s value chain:Integration of Architects+Engineering Consultants

INTER- INDUSTRY COMPETITIONSame product(housing) differentiatedIn terms of sustainability

CROSS-INDUSTRY COMPETITIONThe firm (NCC DK) crosses the boundaries of construction industry, to achieve a piece of “design and project industry”, creating a product that is well (and self) designed and buildable at the same time.

METAMARKET =Design and engineering industry + Energy and efficiency industry +Back and Front Office industry

SCP Paradigm[b] ENVIRONMENTAL ANALYSIS (basic conditions)Where does the NCC DK act? What are the environmental conditions?-Nordic Area : no good climate conditions => specific needs -Strong and international economy-Elevated pro/capite income (diffused richness)- Young and small-sized population [S ]market STRUCTURE - Mature and price based => low DIFFERENTIATION;-High CONCENTRATION of small and-mid sized firms with a collective share of 80% (smaller

subcontractors are more profitable, but they are at the mercy of bigger players, thus carrying more risks ) =>

- Inefficient value chain: poor coordination across architects-engineers/ contractors- subcontractors

[F] firm CONDUCT- best quality at best prices (quality assurance)- Focus on risk management- From volume to profit centric organization

[ P] firm PERFORMANCE- No good price-level vs production costs (elevated)- One of the six largest players with 2,5% share in the danish market

Porter’s Five Forces (IBV)- before 20061) THE THREAT OF SUBSITUTESELEVATED- homogeneous products - price-based competition = buyer’s propensity to lower-cost subsitutes

2)THE THREAT OF NEW ENTRANTSHIGH- low entry barrieres (no significant regolatory barriers neither capital requirements)-High concentration of small and mid-sized firms that carried more risk

3) THE BARGAINING POWER OF SUPPLIERSSTRONGthe suppliers had the power to fix the prices

4) BUYER’S POWERSTRONG-price-sensitive buyers: the attention is above all focused on price and not on quality, performances or innovation

5) RIVALRY DEGREE: a) Intensity = high : powerful companies +a lot of small and mid-sized firms b) Basis = poor : limited differentiation of products; competition is based on price

Porter’s Five Forces (IBV)- after 20061) THE THREAT OF SUBSITUTESREDUCED-Differentiation makes the difference

2)THE THREAT OF NEW ENTRANTSLOWER THAN BEFORE 2006After the crisis in 2008, over 1000 construction companies in 2010 filed for bankruptcy:- higher barriers: only big-sized and/or well structurated companies are able to absorb the cost/risks and to invest

3) THE BARGAINING POWER OF SUPPLIERSDECREASED- No more price-based competition: suppliers have to get more skills and offer best quality standards at best prices

4) BUYER’S POWERBeeing DETERMINANT-From price-sensitive buyers to less-rational buyers: the attention is now also focused on quality and product performances and standards

5) RIVALRY DEGREE: a) Intensity = high : powerful companies with more share in the market b) Basis = wide : by introducing “differentiation”

Institutional Based View(InBV)<<Institutions are the RULES of the GAME in a society or, more formally, are the humanly devised constraints that shape human interaction>>. (Peng)

INSTITUTIONS

FORMAL CONSTRAINTSIn 2008 the Danish government introduced building regulation that ordered the gradual upgrading of energy efficiency in all new buildings, reducing the energy consumption to 75% of 2000 levels

INFORMAL CONSTRAINTSSocial responsabilityClimate change and breakdown in global energy supply are two of the ten largest risk for Nordic countries

ORGANIZATIONS

CONSTRUCTION INDUSTRY Buildings are one of the biggest contributors to CO2 emissions

FIRM SPECIFIC RESOURCESNCC Top management saw this constraints as a great opportunity to leverage its fast-growing competencies in sustainable developement, by:1)Reduction of company’s own carbon footprint2) Reduction of the energy demand

STRATEGIC CHOISESSUSTAINABILITY = Energy analysis, Design and project planning system to enable clients to incorporate long-term and climatic and energy consumption objectives in any new construction or renovation.

Strategy definitionStrategy change:

Three-phase transformation•Stabilization (2006-2007)•Efficiency & Sustanaibility (2008- )•Business development (2010- )

Shift from B2C to B2P and B2B businessChanges in organization:Reduced the number of business

In 2011 NCC DK had a clear strategy

Strategy definitionStrategy change: Phase I – Stabilization (2006-2007)

Reduce B2C businessDownsizing: Reduce the workforce

Restructuring: Each department become a cost center Result: departments not profitable were sold or closed down

Risk management: new risk metrics for walk away from projects highly risky

Contract review board: review of each projects and assigned a red,yellow or green mark

Strategy definitionStrategy change: Phase II – Efficiency & Sustanaibility (2008- )

Conference at IMD business school in Switzerland: the BoD define 12 Must-Win battles after reduced until 2: cost reduction and sustainability

MWB1: Cost reductionCut cost of 30%Central procurement system (economics of scale)Wages based on number of hours recorded (no more forfait)Reduction by 5% for the overhead costsDocument management, planning system, calculation system

MWB2: Sustainability

Upgrade of energy efficiency in new Building( Institutional BW formal and informal)Two oppurtunities (differentiation):Reduce the company’s own carbon footprint Reduce energy demand and carbon footprint from the buildings

Strategy definitionStrategy change: Phase III – Business Development (2009- )

MWB3: Task forces – staffed with cross-functional resources

Railroads, infrastructure, bridges, sports and parking facilities, hospitals, refurbishment/energy, energy service companies, concept housing, concept business.

Improve B2P and B2B business with 2 new MWBs

MWB4: Key customer Program Work proactively with clients offering a full solution with consulting adviceChanges in front office (customized solution) and back office (reduce overhead costs).

MWB5: Sales and Tendes TeamsNew bidding strategy: bid submitted only if the price cover the risk.New sales process ( PPVVC – Pain, Power, Vision, Value, Control)

SWOT ANALYSIS (2011 and Beyond)Strenghts• Company’s unique capability in digital

costruction (VDC)• Close relationship with its suppliers• Business mindset (risk managment)• Customer –centric• Commitment to sustainability• Expertise in many parts of the value

chain

Weaknesses• The VDC is focalized for internal

use

Opportunities

• Growing importance of sustainability;• Change the rules of the game in the

Danish construction industry• Internationalization• Focalization of VDC more externally• Differentiation based on sustainability

Threats• High fragmentation of market• Risk of imitability

Conclusions & suggestionsNCC DK want change the rule of the game making a vertical integration with architects (Co-Creation)VDC 5D modeling (time & cost) externally focused.

The choise of NCC DK to invest more on technology systems like VDC is a positive sign.Nowdays for a construction company is crucial to use a BIG DATA system.

Not only store data but be able to analyse them.

The focus on clients will help NCC DK to focalize the resources only the business that gives a posite return.

A vertical integration create a new market/industry with high barries to entry, and reduce the power of suppliers and possible substitute.

NCC DK create with CO-Creation a new concept of product, they don’t sell any more buildings but a service including a building (Total customer experience)