Strategic Management Analysis of Arabtec Construction
Executive Summary
Arabtec Construction has maintained its position as one of the premier construction companies in the United Arab Emirates, and in the greater MENA area. Arabtec is a collection of subsidiaries that are providing its core services in various markets of the region. With this complexity and size of operation, this study seeks to explore and analyze the strategic management employed by Arabtec which supports its growth and development over the past years.
With Arabtec's sizable market portfolio, the company was able to take advantage of the recovering and booming real estate industry of the region, however the company also faced challenges of diversification as concentration risks increase. Diversification demands the company to create strategic plans on the expansion of the operation to crucial divisions. In the same manner, there are also questions regarding the implementation, change is a factor to be considered as it can directly hit the growth strategy of the company when the strategic plan is implemented. The goal of the strategic management is to increase expansion and make Arabtec Construction dependent from third-party providers such as ready-mix concrete suppliers.
The financial performance of the company has declined as it continues to grow its activities. With this situation, it is very important for the company to make use of its assets properly and effectively to increase the return on capital of the company. Arabtec must find management ways to ensure growth without the diminishing value of profit margin. Increased coordination and management integration will help to maximize the potential of assets and give opportunity for profit generation.
Table of Contents
Executive Summary ........................................................................................................................ 2
Introduction .................................................................................................................................... 3
Company Overview - Mission and Objectives ............................................................................... 4
Vision and Mission ..................................................................................................................... 5
Organizational Strategies ........................................................................................................... 5
Internal and External Environment Audit ...................................................................................... 6
Strategy Formulation ...................................................................................................................... 7
Strategy Implementation ................................................................................................................ 9
Strategy Evaluation ....................................................................................................................... 11
Benchmark of Performance ...................................................................................................... 11
Period of Evaluation/Gaps........................................................................................................ 13
Correction Actions.................................................................................................................... 13
References..................................................................................................................................... 14
Introduction
This strategic analysis on Arabtec Construction LLC focuses on understanding the strategic management adopted by the company which guides its growth and progress over the past years. With that, the study will explore the following statements:
� Both internal and external factors affect the divisions or departments, as well as the entire organization, in terms of corporate goals achievement and organizational performance.
� Changes of the industry environment demands Arabtec to come up with new strategies on specific areas that are affected by the industry changes.
� Arabtec Construction's business strategy is already established, but it is necessary to explore if this strategy is relevant to the change of the industry or there is a need to create a new model with new relevant functions as reactions to the changes of the environment.
� Alignment of the specific business strategies with the corporate strategy is necessary to ensure the maximized utilization of corporate resources or assets.
As much as this paper seeks to provide a strategy to be used to improve the standing of Arabtec Construction, it will properly examine and analyze the internal and external environment of the organization. In the analysis, it is necessary to take credit the changes affecting organizational performance. In the same manner, this study seeks to provide relevant recommendations to the organization as well as other organizations within the industry.
Company Overview - Mission and Objectives
Since its foundation in 1975, Arabtec Construction, LLC has grown to become one of the major construction companies in the United Arab Emirates with vast portfolio across the region (Arabtec, 2014). With the boom of the construction industry in the 1970s, Arabtec was able to gain traction and made itself an important organization in the industry. Today, Arabtec employes roughly 40,000 workers in various projects and plans in UAE, the GCC, and the MENA region, with the prospect introduction to Asia and Europe.
Arabtec Construction was monumental in the completion of the famed Burj Khalifa, the Inifinity Tower, Dubai International Airport, Dubai Sports City, Lakhta Center, and the Dubai World Central International Airport. Projects of the company include high rise building for residential and commercial development, luxury villas, mixed-used centers, oil and gas plants, and other important infrastructures in the region.
Vision and Mission
Arabtec Construction LLC's vision is "to be the leading provider of quality construction and engineering services in the Middle East, North Africa and across the globe" through "long-term relationships of value with our clients and partners by using quality construction and engineering solutions and employing the best resources and latest techniques" as its mission. Standard of quality and service are the values being established by Arabtec to give its clients the satisfaction they need.
To be able to serve its growing market, Arabtec has increased its workforce, recruited the best talent in the market, and acquired state-of-the-art equipment and plant that will enable its professional teams to accomplish diverse tasks with the latest technology in the market today.
Organizational Strategies
The current corporate strategy of Arabtect is centers on the creation of connection between functional divisions that are handling the growth objectives of the company. The corporate development strategy of the company is based on the competitive advantage in terms of organizational management, project management, and resources (Oxford Business Group, 2007).
Over the past years, the growth strategy of Arabtec has been centered on acquisition and mergers. This is part of the horizontal business strategy of the company to keep it expanding through banking on the already existing capabilities of its subsidiaries as noted earlier. As the result of this expansions, Arabtec is able to geographically expand operation, increase market share, and increase market command.
It is necessary to note that the UAE construction is highly fragmented. This means that the market is scattered and roughly divided into different segments, thus exposing the company to several market areas to cater. With these segments having different needs from another, Arabtec is working hard in its acquisitions as one of the ways to answer emergence of these new markets.
Internal and External Environment Audit
Prepared below is the SWOT analysis of Arabtec Construction LLC to review its internal and external environments:
SWOT of Arabtec Construction LLC | |
Strengths � Arabtec Construction LLC maintains a strong market reputation in the UAE market and the entire MENA region. � With the backing of its monumental construction projects, Arabtec can easily boost its portfolio to attract clients. � Debt capitalization is reduced through cash generation from its projects. � Arabtec has connected itself with property developers in the region to ensure strong market grasp. | Weaknesses � Concentration of geography may lead to concentration risks and costs inflation. � Poor property management system. � Project cost usually goes over the project margin. |
Opportunities � UAE and the entire GCC region's construction is booming and investments are poured to real estate. � Geographical diversification can resolve issues of geographical risks. � The real estate and construction industry is good for cash generation to avoid debt capitalization. | Threats � Slowing down of other markets economic activity will affect revenue returns for its projects. � Cost of materials will also reduce profit margin of the company. � Reforms of the real estate industry in UAE will surely affect and slow down Arabtec's input. |
With the industry being fragmented and markets being introduced in a fast pace, there is a demand for expansions and diversification. Few of the important acquisitions made by Arabtec include the Austrian-Arabian Ready Mix Concrete and the Arabtec Precast LLC. According to the Global Research (2006), these acquisitions allow the company to have important partners that will support its growth in the market. Austrian-Arabian Ready Mix COncrete provides the company with the needed ready mix concrete for its barious projects in the region. On the other hand, Precast LLC supplies pre-cast building materials.
Strategy Formulation
However, even with the current financial gains of the company, there is still a need of creating these divisions for the sake of strengthening its corporate business strategy: contract management, property management and quality assurance. With the development of these divisions, Arabtec will be able to strengthen its market operation base. Contract Management will help to acquire contract easily, with the aid of the QA in maintaining the best services to its clients.
In terms of the horizontal expansions that the company is working on, it is important to keep the company on the track of acquisition of related companies that can help the company become independent from third-party partners and suppliers. In fact, this will resolve issues of business concentration risks as geographical diversification with acquisitions of companies around the region will increase the likelihood of tapping on markets that can survive even in the collapse of another. According to Oxford Business Group (2007), diversification will help to increase core programs while creating cost synergies thus enabling the company to make use of its resources with the prospect of higher profit margins.
With this strategy of diversification to answer market fragmentation of the region, Arabtec will be able to grow in vertical and horizontal approaches. Horizontally, it grows its size and market scope. On the other hand, vertically it creates new products that will be able to meet demands of the market. This strategy will enable the company to avoid control of other organizations. Rather than losing supply chain value due to failure of suppliers, Arabtec now can control its strategies without dependence and active factor of suppliers in the market.
This geographical diversification will help to spread the risk of business concentration. In fact, the entry of the company to markets in Qatar and the Kingdom of Saudi Arabia will also provide opportunity of growing in emerging markets. Due to the acquisition, Arabtec gains strong market entry without the active engagement in the construction. With this strategy, Arabtect is able to build strong market presence with the incorporation of all its operations. The problematic of expansion strategy is the management of functional areas, thus demanding for strategic management strategy formulation.
The strategic management of the company will not only serve within its construction units, but it will also build its property management units, its value-added services such as designing and architecture, and its aggregate production, thereby scaling the operation of the company for the sustainable growth in terms of revenue and profit. This strategy will be centered in an integrated network through acquisition. With acquisition of all services needed for construction, Arabtec will grow its market presence (Kane, 2013).
Below is the framework of the strategy:
Contract Management
 |
Construction
Property Development
 |
Quality Assurance
Strategy Implementation
With the growth strategy of diversification and acquisition, the structure of implementation will be streamlined. This means that the organization will be adopting a new system process and policies for the implementation of the strategy. As noted in the preceding section, the strategy will follow the systemic process by passing the demands and requirements of implementation from the top of contract procurement down to the evaluation for quality assurance.
To do this, the change must be implemented through division or department heads. There should be a coordination between departments and divisions to make the strategy function as an integral one. In this regard, in terms of change, communication strategy will follow the 3 Stages of Creating Change introduced by Lewins.
Lewin's 3 Stages for Creating Change is a good evaluative procedure to implement change (Meisenheimer, 1997). This implementation method demands that divisions and departments are connected with each other for the implementation of gradual and low-resistance change to ensure success of the strategy objectives and goals. It will follow the process noted below:
UNFREEZE TRANSITION FREEZE This implementation strategy requires the value of communication principles. For the strategy to be implemented in a linear system without roadblock and obstacles, and unnecessary stops, communication for coordination of departments is necessary especially because projects of the company is made up of various subsidiaries, mergers, and acquired companies. While they are all connected in functions, communication key to effective functioning. For instance, the construction section of the strategy implementation is made up of aggregate production, designing, and the actual construction, this demands that acquires company such as the Austrian-Arabian Ready Mix will be able to deliver necessary aggregates for the construction on time. This coordination will help to increase turn around period of projects, thus accomplishing goals of expanding operations.
Strategy Evaluation
Strategic evaluation is the process of determining the effective of the strategy in accomplishing the objectives of the organization. It is important to note that the business strategy being promoted for the Arabec Construction is the diversification to resolve issues of business risks as noted in the Audit analysis of its environment.
Benchmark of Performance
Based on the strategy of diversification and coordination of all acquisitions and mergers for the formation of a better contract management, property development and quality assurance system, the following benchmarks will be used for the evaluation of the strategy:
� Coordination of Units/Divisions/Subsidiaries. It is important to note that the strategy of the company is anchored on the coordination and integration of all subsidiaries, its divisions and departments. Evaluation of this is easy because bottlenecks will be created or there will an abrupt and unnecessary stoppage of the process as presented in the Strategy Formulation section regarding the flow of project completion for the diversification strategy. For instance, if the project stops with the CONSTRUCTION, then there is a possible problem with subsidiaries that are acting as suppliers or with the designing team or with the aggregate production.
� Value Supply Chain. Another important benchmark of the strategy evaluation is the value chain. Through the horizontal acquisitions and expansions, diversification is made possible to allow the organization to move toward its goals of reducing the business concentration and become a global market player. Value chain problem means that the subsidiary or division is not able to deliver the necessary aggregates or precast or the workforce needed for the project.
� Financial Results. As much the goal of the company is to gain financial traction and to increase profit margin, return on assets, and increase project completion, the financial performance will be a benchmark for the strategy evaluation. If the profit increased after diversification through acquisition of third-party providers such as aggregate suppliers or steel providers, then the strategy is working well to help generate cash and profit for the company.
� Flexibility of Asset Utilization. Diversification through acquisition is employed in Arabtec to reduce its delays, use assets to maximum level, and increase turnaround period. The goal is invest on acquisition for diversification strategy to increase control over components of the business activity. If Arabtec gains much competency from the acquisition of the ready mix concrete company through flexibility of using the subsidiary's assets to supply concrete to projects, then Arabtec's strategy is fully working to its advantage.
Period of Evaluation/Gaps
Because Arabtec is a project-based company, then evaluation of the strategy or the benchmarks provided above should be done after each project is done. When Project A in Saudi Arabia is completed, the impact of the diversification will be evaluated to see if further diversification to other market segments and geographical markets is possible.
However, it must be noted that in the evaluation of the strategy, there is a definite meaning on the industry level. For this purpose, it is necessary to scan the environment again before making decisions regarding the evaluation results. There should be an allowance provided on economic indicators and industry markers.
Correction Actions
In terms of correction actions, the strategic plan of diversification can only be corrected through its (1) complete stoppage and discarding future acquisitions and mergers, (2) changing or leaving the market segment wherein the project is not working well, (3) addressing bottleneck problems of the system such as failure to deliver of the division or the subsidiary resulting to delay of project completion and inflation of its cost, thereby undermining the profit margin generated. These corrective actions could be employed to the diversification strategy after evaluation.
However, as shown by past reports, diversification is very important to Arabtec's performance. In this regard, any corrective action should not result to stoppage, but only to change of values and change of focus. This will resolve the problems or issues of the strategy while keeping on track with the goals and potentials of the same strategy.
References
Arabtec Construction, L.L.C. (2011). About Us. Retrieved from http://www.arabtecuae.com/AboutUs.aspx
Eagar, T. (2005). Beating the system : accelerating commercialization of new materials. Massachusetts Institute of Technology.
Global Research. (2006). Arabtec Holding PJSC - A Regional Construction Giant in the Making. Global Investment House.
Kane, F. (2013). Arabtec Holding to build on new growth strategy. Retrieved from http://www.thenational.ae/business/industry-insights/property/arabtec-holding-to-build-on- new-growth-strategy#ixzz2vtL84NQf
Meisenheimer, C. (1997). Improving quality: a guide to effective programs. Jones & Bartlett Learning.
Oxford Business Group. (2007). The Report: Dubai 2007. Oxford Business Group.
