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Why, who, when and how?. An empirical view of the UK construction industry’s decision making process. Tony Williams Building Value Ltd the independent strategic advisor to the building materials, construction & support services sectors 11 June 2004.

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why who when and how

Why, who, when and how?

An empirical view of the UK construction industry’s decision making process


Tony WilliamsBuilding Value Ltdthe independent strategic advisor to the building materials, construction & support services sectors11 June 2004

uk construction industry is the focus of the study
UK construction industry is the focus of the study
  • Number three market in Europe
  • Accounts for 8% of GDP (below average)
  • Largest single domestic industry
  • Some 1.5 million employees
uk construction history
UK construction - history
  • Sustained growth since 1994
  • Relatively impervious to politics, aside from mid-1970s
  • Three major collapses in 1974-7; 1980-1; and 1991-3
uk construct output 1998 2006e
UK construct. output 1998 – 2006E

Source: CFR, Spring 2004

uk construction the future
UK construction – the future
  • Average ‘3% plus’ real growth through 2006
  • One of best major markets in Europe
  • Private Finance Initiative increasingly important
  • Repair, maintenance & improvement (RMI) averaging more than 48% of total
  • All UK publicly quoted companies on London Stock Exchange; the sector is world’s biggest 65 companies and £52 billion of value
  • 35 large privately owned businesses; many large
  • Wrote to the CEO with confidentiality assured
  • 46 multi-choice questions and one written answer with expected completion time of five minutes
  • Supplied SAE, promised to send results and donate £1 per questionnaire to industry charity (CITY)
questionnaire idiosyncrasies
Questionnaire idiosyncrasies
  • 90% of respondents used ticks in the question boxes; with 5% each employing crosses or slashes
  • Two thirds used black pen, 30% blue and 3% red
  • The PA of one CEO called, emailed and wrote to say he didn’t have time to fill it in; another declined my invitation to the conference
  • 5% eschewed the SAE and one send it back empty
  • 40% of companies identified themselves

“Those who run international businesses do so because they like to travel. Very few construction companies make more from overseas operations than at home; so why do they stay there? UK contractor, 2004


“A poorly controlled area at large corporate level is strategic decision making that doesn’t hold firm for the medium term. This means subsidiary managers never get to understand how they can be part of group-wide goals......


“…The lack of political will ‘to stick to one’s knitting’, even if market conditions change, means that a lot of second tier decision making is in vain”UK construction CEO, 2004


“What surprises me about construction is that decisions are taken without a proper review of the facts, particularly the risks, which many refuse to quantify by arguing that such issues are subjective or even emotive…


“…Not pricing for a known exposure at the bidding stage is very blinkered indeed – to say the very least”Development company CEO, 2004


“Risk is not related to size. You could just as easily lose £1 million on a £5 million job as one that is worth £50 million”Construction CEO, 2004


“Construction is a long term business and trying to make decisions to satisfy shareholders on a quarterly basis can be inconsistent with the strategic plan.......


…and if decision making favours one group of stakeholders at the expense of others, for a prolonged period, the business is virtually guaranteed to under perform”Construction CEO, 2004

summary and conclusions
Summary and conclusions
  • Mature industry with 74% trading for ‘25 years plus’
  • Mean revenue in £500 to 999 million band and typical head count of 1,000 to 2,499
  • Those with revenue of ‘£1billion plus’ dominate share of value (47%); while companies with less than £100 million dominate by number (31%)
  • Smaller companies enjoy greater productivity
summary and conclusions1
Summary and conclusions
  • Operate in one country or more than six
  • Three-quarters are public companies
  • 72% have 5-to-10 Executive Directors
  • 44% have 2-to-3 Non Executives
  • Executive Chairman and combined Chairman/CEO are now much less common
summary and conclusions2
Summary and conclusions
  • Managing Directors are employed in less than half of companies
  • Chief Operating Officers are present in only 21%; clearly they are not popular
  • Human Resources Directors are also in a minority (47%) and only 11% of those are on the Main Board
summary conclusions
Summary & conclusions
  • Subsidiary or regional boards are common (71%) but only 34% of companies appoint these directors to the Main Board
  • Main boards meet 7-12 times per year (79%)
  • 66% of companies have an Executive Committee
  • The CEO alone (37%) is at least as important as the Main Board (39%) in making the major decisions
summary conclusions1
Summary & conclusions
  • In acquisitions or divestments, 68% of those active used an external advisor
  • No definite relationship between size of firm and spending limits to be agreed by main board
  • 63% claimed that budget accuracy was ‘good’, ‘in line’ or ‘very good’; only 5% said it was poor
  • Two budget rounds – the most popular - produced an outturn ‘in line’ or better in 63% of cases
summary conclusions2
Summary & conclusions
  • Only one quarter of respondents employs Zero Budgeting; however it led to 78% hitting ‘good’ or better budget accuracy
  • 66% employ a pricing policy but one third did not adhere to it
  • Cost and Cash are more important, than Price and Profit, respectively
summary conclusions3
Summary & conclusions
  • Earnings per share are the single most important financial variable (74%)
  • Only 55% monitor cash daily
  • Operating & pretax profit margins are most favoured financial performance measures
summary conclusions4
Summary & conclusions
  • ROIC is used by a majority (66%)…
  • … but less (53%) say that regional managers know or understand their Cost of Capital
  • EVA is cited by only 26% of respondents
summary conclusions5
Summary & conclusions
  • Risk management and strategic planning are employed by only a narrow majority
  • By far the most common financial incentive is based on group performance against target
  • In house communication staff are not popular; even less so for investor relations
summary conclusions6
Summary & conclusions
  • Industry led by top down decision making
  • Vast majority claims to be proactive…
  • …but three-fifths remain opportunistic as opposed to calculated (and 5% are both)
final word
Final word
  • The CEO rules & doesn’t like executive competition
  • Modern management tools not wholly popular
  • Cost and cash are a focus; but budgeting accuracy looks too good to be true
  • High incidence of ‘proactive’ companies maybe wishful thinking
  • Uncommunicative and Opportunistic

“Prevarication is the bane of British management: a bad decision is better than no decision”Building materials CEO, 2004