Research Essay: Skanska's Construction Industry Analysis With PESTEL And Porter's Five Forces Model.

Discuss about the Research on the Construction Industry.

The construction industry present in the global market and the reputed industry compete in the global market. Urbanization has the strongest influence on the construction industries as more migration means more demands for the infrastructures. The construction industry needs to maintain the reputation in the market so that the close substitutes are not able to create any effect on their business. This discussion will mainly focus on the analysis of the external and internal environment of the construction industry Skanska in the UK. This report will include research on the industry, which is followed by PESTEL and Porter’s five forces model and the research on the organization is done by deriving the SWOT analysis of Skanska. This will also include the critical analysis of the company and the competence; the company faces are also included in this report.

The PESTEL and Porter’s five forces model helps in the researches on Skanska, the construction industry to analyze the external environment of the company.

The external environment of the company is analyzed in order to identify the strength, weakness, opportunities, and threats of the company by the following analysis tools.

Michael Porter’s five forces are the framework for the industry analysis; this measures the competitiveness of the business market. The Porter’s Five Forces model also identifies and analyses the five competitive forces, which shape every industry, and it helps to determine the industry’s weaknesses and strengths. This analysis tool is also frequently used for identifying the industry’s structure for determining the corporate strategy. The Porter’s model may be applied to any of the segments of the economy for identifying the profitability and attractiveness (Grünig and Kühn 2015).

This is to analyze how easily suppliers can drive up prices. The suppliers of each important inputs, the uniqueness of products and services, the strength and size of suppliers and the cost of switching from one to another supplier, can drive up the prices (Dobbs 2014). Skanska’s suppliers involve the building materials producers and the sub-contractors involves the smaller firms’related to specific farm areas. Skanska has large numbers of suppliers and as their position is high in the market, the supplier’s bargaining power is relatively low as compared to other construction industries. Skanska’s business area extends worldwide and they usually work with the local suppliers in those countries where they are active. This reduced the transportation costs for the bulky materials required in the construction process, which strengthens the supplier’s bargaining power by limiting the local availability of the suppliers (Gaoand Low2014).

This is to analyze how easily the buyers can drive the prices down. The buyer, importance of individual buyer to organization and cost of switching from one to another supplier, can drive the prices down (Jarzabkowski and Kaplan 2015). The buyer is bargaining power have a great effect on Skanska, Skanska performed an action to reduce this bargaining power that is by demanding financial claims for the disruption and delays or any changes in constructions and forcing the customers to spend more money on the firm’s terms and condition.

External analysis

This to analyze the number and capability of competitors in the market and if there are many competitors in the market offering the same product and services then that will reduce the market attractiveness. The rivalry in construction industries like Skanska is high because of the last years growing opportunities and the high exit barriers. In addition, many firms in the industry have differentiated their business and do not fully depend on the single sector. Skanska also faces competitive rivalry due to the requirement of the delivering the high quality of customer experiences and the long-lasting relationships for which the customer increases the rivalry among the firms (Bull et al. 2016).

When the substitute products exist in the market, it increases the chance of customers to switch for the alternatives in response to the increase in price. This mitigates the attractiveness of the market and the supplier’s power (Rothaermel 2015). The customers of the construction industry like Skanska face difficulties in changing the product when the price increases. Skanska’s products are inelastic because of the absence of the close substitutes to those products. Skanska has positioned themselves as one of the substitute companies and is well prepared for the future changes of threats.

The profitable markets attract various entrants and this reduces profitability. If there is the absence of strong barriers for an entry like patents, capital requirements, and government policies, then it will decline the profitability at a competitive rate. Skanska’s has great reputations among the firms and it is heavily based on the projects. Due to the long history of establishment, the new entries in the business market will not be able to dilute the number of projects, which Skanska will be offered in future.

The above analysis helps to find out Skanska’s structure, for the determination of the corporate strategy. The bargaining power of suppliers has less pressure on Skanska as it is a reputed company and mostly they work with the local suppliers. The bargaining power of buyers create impacts on the company. There are fewer threats of substitution for Skanska because of its brands there are very close substitutes of the company. There are no such effects of the threats of new entries for Skanska.

The PESTEL analysis determines changes in the market, which are caused by political, economic, social and technological factors. The PESTEL analysis is the framework or the tools that are mainly used by the markers to analyze and monitor the macro-environmental factors, which have a great impact on the organization. This analysis helps to identify the strengths and opportunities of the company.

This factor involves the government rules and regulations for the particular business organization. It also includes the study of the tax policy that involves exceptions, employment, environmental laws and others (Zalengera et al. 2014). The construction business is always involved in the political wrangling and the tax, legal issues also have a great impact on Skanska. The political factors have a great impact on this business; Skanska may lose 8% of the workforce if the UK are unable to retain the single market accessing the European Union.  Skanska’s construction project will be affected due to Brexit. The recent increase in the tax creates an adverse effect on Skanska.  

Porter’s Five Forces analysis

This factor analyses the economic environment by studying various factors such as the interest rate, exchange rate, inflation rate, and economic growth. These factors help to determine the costing of the product, expansion, growth and in accessing the demands. The world is changing at a high rate and there is continued instability in the business market around the world. The UK government has decided to provide the increased infrastructure spending to push the growth in the economy, which has slowed down due to Brexit. The UK government has decided to spend 1.2% of the GDP of the Economic Structure.

These factors involve the study of demographics and targeted customers and help in determining the size of the market. These factors form the macro environment of any organization (Paul, Yeates, and Cadle2014). The urbanization is the strongest factor and has a great influence on the construction industry. The increasing urbanization always causes more requirements for the construction industry, as it requires more real infrastructures and estate in cities. From the recent studies, it has been found out that, 54.50% of the world population lives in the cities. This is expected to be60% of the world population will be living in future years (Ilmonen  2015).

The technological factor undergoes continuous changes, the consumers are eager to adopt new emerging technology, and these factors include the understanding factors that bring technological advancement (Šommet 2013). The revolutionizing technological changes have a great impact on technological changes. Like, the prefabrication of the building components to other location and transporting those components have a positive effect on Skanska through the cost-effective process and reduced building time (Sullivan and Robinson 2017). The technology advancement introduces the entrance of Information and Communication technology for supporting the constructions with the analysis of projects and information.

The environmental factors have become important due to the increasing scarcity of the raw materials, doing business, pollution targets. These environmental factors include the effects of the climate, changes in the natural environment, which may affect the company. The daily workings in the construction projects of Skanska are getting affected due to the climatic changes in nature (Moura and Catalá 2014).

The legal factors involve the laws and the regulations, which are related to the company issue. The laws involving the contract laws, the law of tort, legislation, criminal law, the law of restitution need to be maintained by Skanska and being the global construction company, Skanska needs to maintain all these legislation.

The strengths and opportunities can be derived from the above analysis, Skanska will be affected due to Brexit and this can only be reduced if the UK is able to access a single market in the European Union. Urbanization is the strongest factor and had a great influence on the Construction industry. The technologies have a great impact on Skanska as it follows the cost-effective process by using technology for transportation. The environmental and the construction laws have a great impact on Skanska.

The research on the organization is followed by the internal analysis, the strength, weakness, opportunity, and threats of the company can be understood by the following analysis.

Bargaining power of Supplier

The SWOT analysis is mainly made of two four factors, the strength and weaknesses refer to the internals of the company whereas the opportunities and threats are considered external factors of the company. This analysis helps to analyze the environment and the company’s standing point. The PESTEL analysis helps to identify the threats and weaknesses of the company. The PORTER’S FIVE FORCES model helps to identify the strength and weakness of the company.

Skanska is in the favorable position in the business market due to its brand and history and it stands in comparison with the competitors when the tendering process has been initiated. Skanska is able to hold the marker because of their global presence and variety products and services. From the studies, it has been found that the early adoptions of technologies and also by aligning the supply chain and the productions to the social responsibility and the new regulations. Skanska has the supplier code for taking the ethical decisions in the decision-making process and it is also reputed for the green construction. The employee ownership program, good information system, and R&D focus help Skanska to compete in the global business market.

Skanska filed to establish them in the developing market and it is also unable to meet the targets of the operating margin that is set in the business plan for the constructions. The operating margin remained at 2.6% whereas the target set was 3.5%, though Skanska is struggling to keep its operating margin. The weak performance in the last few years is dragging down the operating margin (Low, Loveridge and Powrie 2017).

The global trends in the form of the urbanization and demographics are favorable for the growth of the construction industry, Skanska. The whole world is experiencing the high growth rate in migration and from the external analysis; it has been found out that the half of the world lives in the city. This leads to the rise in the demands of the infrastructures, housing, and healthcare sectors, which are in favor of the construction industries. Skanska is looking forward the low-cost production process, which can lead to the cost-effective housing solutions for the success in the future as it is expected that the urbanization will continue in the future period also (Murphy et al.2013). Skanska has positioned themselves, by reducing the transportation cost, or increasing the suppliers bargaining power, capital potential revenue growth.

This has been found out from the external analysis that the uncertainty in the UK market will have a great impact on Skanska. Due to Brexit, it is expected that Skanska will be losing the 8% of their workforce if the UK cannot retain the single market, and it needs to be accessed in the European Union (Ouyang et al. 2015). The intense competition is also raising in the business market and the operating margin is becoming low than the targets. This is expected that Skanska’s cost of sales will increase in the future, due to the lack of educated scholars.

Bargaining power of buyer

Thus, from the above analysis, it can be concluded that Skanska will be facing both the opportunities and threats in the future years and this can only be reduced by bringing variety in the operation process. From the analysis based on the growth data analyzed in the period of 2004 – 2013, it was found that Skanska’s value is highly dependent on the profitability and growth (Araszkiewicz and Tryfon-Bojarska 2017). For this Skanska has generated cash flows; this cash flow analysis will enhance the value of Skanska in the business market.

I will like to be a part of the operation management; if I ever get a chance then I want to be at the management sector of Skanska. According to my perception and understandings I have found out that there needs to be the up gradation of technologies, which will enhance the productivity and the customer relationship are need to be built up, though it is a reputed company, it also needs to hold the regular customers. All these factors need to be supervised and thus, if I was in that sector then all these parts I will be looking after. This will raise the competitions in the business market.

Various strategies of Skanska that are being globally active and for the diversified segments of the business, Skanska can position themselves for the expected GDP growth in the home markets.  From the external internal analysis, this is found out that the growth of GDP along with the current low rates and the inflation rates will create the favorable growth potentials for Skanska in the future (Pasetto 2015). This is also found out from the above analysis process that Skanska‘s present strengths outweigh their weaknesses and also their present position in the market is opened up for an opportunistic future of the company (Young et al.  2015).

Nowadays Skanska is facing comparisons and it is mainly based on the size, operating areas, and the geographical positioning. There are still some of the excluded companies, which had similar market variations and the business segments like Skanska. The mainly two close peers to Skanska are NCC and Hotchief (Zak and Macadam 2017). Hotchief has the same market capitalization like Skanska and the NCC market capitalization represents 41% of the market capitalization of Skanska. The peer’s geographical presence is similar to the place where Skanska generates the most of the revenues (Blockley 2017).

Conclusion

Therefore, from the above discussion, it can be concluded that the construction industries like Skanska, have their brand position and are able to participate in the competitions in the global business market. Skanska is not facing any threats of new entries but there are close substitutes of Skanska and those substitutes are present in the same operating areas. The technology needs to be upgraded in Skanska, for the better operation of the company. Skanska will be affected due to Brexit if the UK will not be able to maintain their single market in the European Union. Skanska needs to follow the environment and the construction laws for better production. 

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