Competitive micro environment of small residential contractors

Competitive microenvironment of small residential contractors I.T.U. Istanbul Technical University Ela Öney YAZICI and Emrah ACAR 18-Mar-06 METU Cultural and Convention Center Ankara

SUMMARY • Few studies have attempted to analyze the competitive behavior of small and medium-sized enterprises (SMEs) although they constitute the majority; • Current models refect the perspective of large enterprises (LEs) • Current models are often based on the production paradigm of the manufacturing industries • Understanding SMEs’ competitive behaviors is important to create an industry with common sustainable practices; • SMEs are different (managerial, organizational, financial structure, oversensitivity to envronmental changes...) Problem Scope Research Findings Conclusion Summary Aim Targeted g. Cases

SUMMARY • Porter’s “five competitive forces” model is used to analyze the micro-environment of 9 small general contractors; • in-depth interviews with owner managers; • ... • Competition models of the manufacturing industries should be approached with caution • Special characteristics of the residential building market should be taken into account in model building • The dynamics of small and local markets significantly differ from those of mass markets and these dynamics have considerable infuence on SMEs’ competitive bahaviors Problem Scope Research Findings Conclusion Summary Aim Targeted g. Cases

Competitiveness • an evolving concept that gains new meanings at different levels of analyses in line with the dynamism of economic life • market share • profitability • ability to provide low-cost/high quality products/services • “the ability of a firm to design, produce, and/or market products superior to those offered by competitors, considering the price and non-price qualities” Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Changing rules of the game • Information and communication technologies (ICTs) and their facilitating impacts 1980s 1990s e 2000s Rational usage of resources was the common strategy to remain competitive More emphasis on the multi-dimensional and evolutionary nature of competition / knowledge investments and learning ability Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Paradigm shift… internationalization of the construction markets more emphasis on innovation and client satisfaction environmental problems … changing routines, strategic and tactical decisions of a conservative industry Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research on competitiveness young and immature low level of theoretical abstraction strong influence of the manufacturing industry special characteristics of the construction industry are rarely considered perspective of larger enterprises (LEs) is the major focus of interest small and medium enterprises (SMEs), which constitute the majority of the firms in almost all countries, are often ignored Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

SMEs should receive attention to create an industry with common sustainable practices SMEs will keep on dominating this industry in the short run small projects are more suitable to be undertaken by small firms the required level of technical expertise is not very high to enter the construction market smallness and organizational flexibility can be advantageous in a project-based production environment a large second-hand products market technological upgrade of the existing building stock SMEs as sources of employment Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Problem • Models that address LEs cannot be directly applied to SMEs which are not just the scaled-down versions of LEs • SMEs differ by their • managerial structure • organizational structure • financial structure • oversensitivity to environmentalchanges Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Problem • Current models fail to explain the competitive behaviors of SMEs • they are largely influenced by the production paradigm of the manufacturing industry • they do not take into account the special product and process characteristics in the construction industry • … Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Aim “understanding” • FURTHER EMPIRICAL EVIDENCE IS NEEDED TO UNDERSTAND THE MICRO-ENVIRONMENT OF SMEs AND THAT TRULY EXPLAIN THEIR COMPETITIVE BEHAVIORS Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Scope • Micro (external)-environment of • small general contractors, headquarters of which are • in Istanbul Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Targeted groups • Policy makers • Researchers Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design • Literature survey / Porter’s 5 forces • Research strategy • Unit of analysis • Multiple-case study protocol • Pilot interviews • Sample • Data collection • Data analysis • Evaluation of the findings and reporting Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Previous work Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Porter’s 5 forces Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Porter’s 5 forces Buyer power: Buyer power refers to the impact of clients on an industry. The power balance between the producers and clients determines the extent to which firms have ability and freedom to set the product price. For example, few buyers with significant market share might indicate that buyers are powerful in an industry. Supplier power: Porter’s model is based on the assumption that when suppliers are powerful, they can exert pressure on the producers to capture some of the industry’s profits. When the costs of switching from one supplier to another are high, for example, suppliers are assumed to be more powerful in an industry. Barriers to entry: There might be barriers in an industry which inhibits the entrance of additional rivals. These barriers might originate from factors such as government regulation; patents and proprietary knowledge; economies of scale, and influence the degree of rivalry in the industry. Problem Scope Research Findings Results Background Aim Targeted g. Cases

Research design / Porter’s 5 forces Rivalry: Porter assumes that competition in real life is not perfect and there are several factors that prevent firms from pursuing competitive advantages. Accordingly, any firm should choose from a set of strategies to be successful in its market. These strategies might be associated with changing product price, improving product differentiation, or innovative methods of using channels of distribution. The intensity of rivalry in any industry is influenced by several factors. A large number of firms in the market; low switching costs of clients (from one firm to another); high fixed costs; existence of exit barriers; and low product differentiation are among the factors that are assumed to increase rivalry. Threat of substitutes: Substitute products are those which are produced in other industries. A threat of substitute exists when the demand for a product is affected by the price change of a substitute product. Substitute products are assumed to constrain the ability of firms to raise prices in an industry Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Multiple-case study • Collecting data in real-life context • Rich and deep data • Appropriate to answer ‘Why’ and ‘how’ questions • + Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Porter’s 5 forces • Can your clients easily substitute your firm’s services? • Can you easily foresee your clients’ needs? • Can you easily substitute your suppliers? • Is the entrance of new rivals a threat for you? • Can you easily foresee your rivals’ behaviours? Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling • ‘Typical’ small general contractors in the residential building industry • firm size • field of operation • location • pragmatic criteria • Problem of defining ‘construction SME’ • manufacturing / services / construction industry • inadequacy of formal definitions • evolutionary nature of definitions • A reference study: Sey et al. (2002) Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling Table 6.2. Various characteristics of Istanbul-based construction firms Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling Table 6.3. Distribution of firms acd. to characteristics in Tablo 6.2 Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling Table 7.1 Characteristics of firms Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling BEYKOZ BEŞİKTAŞ 1 ŞİŞLİ 8 BAHÇELİEVL. KOZYATAĞI 9 3, 9 3 4 2 6, 7 1, 3 Z.BURNU AVCILAR BAKIRKÖY KADIKÖY Şekil 7.1 Örneklem içindeki firmaların İstanbul içinde ağırlıklı olarak faaliyet gösterdikleri bölgeler Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Research design / Sampling Table 6.4. Details of in-depth interviews Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Coding Increasing reliability of coding Cross-case analysis matrix Research design / Data analysis Figure 6.1. Basic steps in content analysis Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Cases / Targeted markets Table 7.3 Targeted markets of sampled firms (by income groups) Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Findings / BARGAINING POWER OF CLIENTS • trust -the basis of relationships between contractors and clients in small and local markets; • importance of anecdotal evidence on quality of service spread rapidly through word of to potential customers; • vulnerability to market amplifies the need for careful positioning in markets and development of strong personal client relationships • satisfaction of clients not only in terms of material issues but also of non-material (e.g.human ) issues Problem Scope Research Findings Clients’ power Conclusion Background Aim Targeted g. Cases

Findings / BARGAINING POWER OF CLIENTS • +other factors... • speculative character of the building industry • the fluactuating demand • economic crises • fashions • shifting needs • natural disasters (e.g. 1999 earthquake) Problem Scope Research Findings Clients’ power Conclusion Background Aim Targeted g. Cases

Findings / BARGAINING POWER OF SUPPLIERS • SMEs usually have the power to easily change their suppliers be they materials-systems producers, distributors, designers, or subcontractors • However, for only two of the contractors this was a routine; others avoided taking advantage of this assymmetric power: • Dynamics of small and local markets • + trust • + “marriages” • + both material and non-material benefits from these marriages Problem Scope Research Findings Suppliers’ power Conclusion Background Aim Targeted g. Cases

Findings / DEGREE OF RIVALRY • SMEs argue that they can easily foresee clients’ behaviours • Needs and expectations are “well-known” • “...almost everbody promises same sort of things” • unfair competition is a major problem • + illegal backing by local authorities Problem Scope Research Findings Degree of rivalry Conclusion Background Aim Targeted g. Cases

Findings / THREAT OF NEW ENTRANTS • Not perceived as a threat by SMEs • “Sticking with a local market is more than the entrance” • Setting warm relationhips and trust with clients is a matter of time • Setting good relationships with local authorities is a matter of time Problem Scope Research Findings New entrants Conclusion Background Aim Targeted g. Cases

Conclusion / manufacturing vs. construction • Complexity of the product and the production processes • Project-based production • Involvement of client • Influence of clients on producer-supplier relationship • Both anonymous and contractual clients • ... Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Conclusion / residential building construction • Fluctuating demand and the resulting uncertainty • Well-established functional (architectural) needs • Oversensitivity to environmental changes • ... Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Conclusion / dynamics of small-local markets • “client intimacy” and mutual trust • as evidenced by the ‘emotional’ terminology • ... • Behavoral models can be as explanatory as rational models rational models Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

What next? • How do SMEs perceive and define competitiveness? • Should specific policies and tools (e.g., CRM) be developed to address the needs of SME community? • What can we learn from the experience of SME policy makers from other industries? • ... Problem Scope Research Findings Conclusion Background Aim Targeted g. Cases

Thank you... Background

Competitive micro environment of small residential contractors