Business Strategy Formulation of Construction Companies in Strategic Management Perspective

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1 Business Strategy Formulation of Construction Companies in Strategic Management Perspective Cahya Anjani 1, Umanto 2 and Novita Ikasari 3 Strategy formulation of a company is deemed to be vital for ensuring their sustainability and resilience. One of the most known management strategy tools based on external and internal environment is provided by the Boston Consulting Group (BCG) matrix. In this study, we applied the BCG matrix to construction companies that have specific business characteristics. The findings show that construction companies that are in Question Mark quadrant should use diversification strategy, due to their heterogeneity and high competitiveness nature. It leads to the need to group the market in order to understand the market structure that they serve. The grouping of market is focused on the necessity and the desire of the clients and the use of services as well as the products provided. It is shown that the dominant use of project type and project ownership is one of basic variables in grouping the market for construction industry. Keywords: Strategic management, internal and external environmental analysis 1. Introduction Almost in every country, both developing and advanced countries, the development of the construction sector consistently support the creation of social and economic infrastructure that lead to economic growth. In general, manufactures and non oil and gas mining sectors are providers of construction materials in the form of industrial products such as cement, iron, steel, and others. Meanwhile, other business sectors, such as agriculture, trade, oil and gas, mining, and services are the users of the products of construction sector. The construction industry can be categorized as one of the industries playing an important role in the economic development process of a country. The data of Central Bureau of Statistics (BPS) Jakarta shows that the construction sector contributes 13.3% to regional economy (Statistics of DKI Jakarta Province, 2015). Nevertheless, the changes in external environment around the construction industry such as economic, political, and cultural conditions have affected their business sustainability. Therefore, adaptation through the implementation of appropriate strategies for business survival is necessary. In this context, Porter (2008) explains that the intensity of competition in an industry is not an issue coming by chance or luck, but it is rooted in the underlying economic structure and goes beyond the behavior of existing competitors. Furthermore, Porter (2008) explains that the state of competition in an industry depends on five essential strengths, namely: (1) the entry of newcomers; (2) the threat of substitute product; (3) the bargaining power of 1 Department of Business Administration, Faculty of Administrative Science, Universitas Indonesia, Indonesia, chyaanjani@gmail.com. Contact: Department of Business Administration, Faculty of Administrative Science, Universitas Indonesia, Indonesia, umanto.eko@gmail.com, Contact: Department of Business Administration, Faculty of Administrative Science, Universitas Indonesia, Indonesia, novita.ikasari@yahoo.com, Contact:

2 the customers; (4) the bargaining power of the suppliers; and (5) the rivalry among existing competitors. Eventually, these five strengths determine the intensity of competition and capacity in industry and will be highly important from the point of view of strategy formulation. In addition to external environment, internal environment also needs to be analyzed to determine the strengths and weaknesses of a company. Wheelen and Hunger (2012) explain that analysis of internal environment is the process of identifying the internal strategic factors in the form of strengths and weaknesses such as organizational culture, system and resource to determine whether the company is able to take an opportunity and avoid threats. A quality strategy is required to anticipate highly dynamic environmental changes. It is chosen by a company to stay competitive in current market of construction industry. Associated with internal issues of construction companies, the initial identification of this study indicates that some of the fundamental issues faced by construction companies are, among others, related to low quality of construction, disharmony between the actors of construction industry, low competitiveness of contractors, and lack of expertise and certified manpower. In the context of strategic management, Hor and Smith (1999) identify six steps to be carried out: (1) environmental analysis, (2) establishing organizational direction, (3) strategy formulation, (4) strategic decision or choice, (5) strategy implementation, and (6) strategic control. Therefore, this study aims to analyze the effect of external and internal environment on business strategy that will be implemented by the construction company. The originality of this study is to formulate long-term strategies by analyzing external and internal factors and how construction companies proceed to address government's policies in determining the future strategy. 2. Theoretical Framework 2.1 External Environment of an Organization External environment is the environment outside an organization required to be analyzed to determine opportunities and threats that shall be faced by a company. An understanding of external environment is related to the environment of macro, industry, and information technology. Macro environment includes general strengths indirectly related to short-term activities of the organization frequently affecting long-term decisions. Wheelen and Hunger (2012, p.99) identify four related strengths, namely economic, technological, legal and political, as well as social and cultural strengths. In a more or less similar context, Hor and Smith (1999) refer to them as PEST, the acronym for Political, Economic, Social, and Technological strengths. Related to industrial environment, Porter (2008) reveals five strengths of competition consisting of Threat of Substitutes, Threat of New Entrance, Industry Rivalry, Bargaining Power of Customers, and Bargaining Power of Suppliers. Furthermore, Porter (2008) reveals that the state of competition in an industry is defined by five competitive strengths determining the intensity of competition and profitability of the industry. The strengths of competition will be the basis for strategy formulation of the company aiming to obtain a

3 position and survive in the industry. In this case, the company is required to have the ability to draft a good strategy in order to occupy a competitive position in the industry by minimizing the effect of those five strengths. Technological environment is related to company capability in utilizing technical knowledge, providing solutions, and meeting the new needs of the market. Technology is positioned as a facilitator in developing a product and helping meet the needs and desires of the market (Peres, Muller and Mahajan, 2010); it can eventually be used as one of the factors influencing the success of new products. By using advanced technology, a company can create better or more innovative products (Li and Calantone, 1998). Similar opinion is also expressed by Gatignon and Xuereb (1997) stating that a company having innovative ideas will utilize technology in the development of new products. Therefore, the technology-oriented company can be defined as a company with capability and will receive a substantial technological support in the development of innovative new products. Technological orientation means that a company can utilize technical knowledge in providing solutions and meeting the new needs of the market. 2.2 Internal Environment of an Organization Internal environment of an organization consists of organizational structure, culture, and resources (Wheelen and Hunger, 2012). Internal environment should be analyzed to determine the strengths and weaknesses of a company (Hor and Smith, 1999). Furthermore, Hor and Smith (1999) state that an analysis of internal environment of an organization has two important roles: (1) managers need an accurate assessment of what the organization is capable of before they can develop goals and strategies, and (2) the analysis is important in formulating implementation plans; it is part of developing an agenda for action (to tackle weaknesses and exploit strengths). 2.3 Quantitative Approach of SWOT Analysis According to David (2011, p.178), the matrices of strength, weakness, opportunities, and threats are tools that can be used to help managers develop four types of strategies: Strengths-Opportunities (SO) Strategies, Weaknesses-Opportunities (WO) Strategies, Strengths-Threats (ST) Strategies, and Weaknesses-Threats (WT) Strategies. Furthermore, David (2011) says that SO Strategy is a strategy based on the way of thinking of an organization, namely to exploit all the strengths to seize and exploit as many opportunities as possible. This is a positive aggressive strategy to fully strike in initiative and planned manner. In SO strategy, the organization pursues external opportunities by considering organizational strength. Meanwhile, WO Strategy is a strategy based on the utilization of existing opportunities by minimizing the weaknesses of an organization (David, 2011). In this case, turn-around strategy as a strategy to change course is necessary. Large external opportunities are essential to reach, but searching for solutions for internal problems or weaknesses within the organization should be prioritized. In this case, the weaknesses of the organization need to be improved and solved to get the opportunity.

4 ST strategy is a strategy based on the strength of an organization to address the threats detected (David, 2011). This strategy is known as diversification strategy. It means that no matter how big the threat is, panic and haste will only worsen the situation. Therefore, it is important to understand that the organization has great strength and independence and can be used as a weapon to overcome threat. (David, 2011). WT strategy is a strategy applied in the form of defensive activities attempting to minimize weaknesses and avoid threats (David, 2011). Furthermore, David (2011, p.179) says that an organization in these conditions is in danger. Weaknesses strike from within, while threats attack from outside. This condition eventually encourages all elements of the organization to plan an activity to reduce the weaknesses and avoid external threats. 2.4 Boston Consulting Group (BCG) Matrix BCG matrix graphically shows the differences between various divisions in relative market share position and industrial growth rate (David, 2011). Furthermore, David (2011) states that BCG matrix allows multidivisional organizations to manage their business portfolio by considering the relative market share position and industrial growth rate of each division relative to other divisions within the organizations. Relative market share position is defined as the ratio of market share of a particular division to the market share owned by the biggest competitors in the industry (David, 2011). Furthermore, David (2011) states that relative market share can be determined using a formula. The higher the value of market share owned by a company, the greater the proportion of the market it controls. Relative market share position is given to the X-axis of BCG matrix. The midpoint of the X-axis is usually 0.50 or equal to the division having half of the market share of the leader company in the industry. The Y-axis represents industrial growth rate in sales measured in percentage. The percentage of growth rate on the Y-axis can range from -20 to +20 percent with 0.0 as the midpoint. Industries with high growth rates indicate the availability of widespread market share and many opportunities to gain. The four quadrants in BCG matrix can be described as follows:

5 Figure 1: The Quadrants of BCG Matrix Source: David (2011, p.186) BCG matrix is divided into four business groups, namely (David, 2011, p ): 1. Question Mark Companies in Quadrant I have low relative market share position and compete in fast-growing industries. Usually, the cash requirements of the companies are high while the cash income is low. They are called question mark because they must decide whether to strengthen the companies by executing intensive strategy (market penetration, market development, or product development) or sell them. 2. Star Companies in Quadrant II (also called Stars) represent the best longterm opportunities for organizational growth and profitability. Companies with relatively high market share and high industrial growth rates should receive substantial investments to maintain and strengthen their dominant position. This category is a market leader, but it does not mean it will provide a positive cash flow for the companies, because they have to spend a lot of money to win the market and anticipate their competitors. Future, backward, and horizontal integration, market penetration, market development, product development, and joint ventures are the appropriate strategies for the companies to consider. 3. Cash Cow Companies in Quadrant III have high relative market share and compete in slow-growing industries. They are called cash cow because they generate much cash than needed. They are often milked to finance other business sectors. Frequently, many current cash cows were stars. These companies are managed to maintain strong position as long as possible. Product

6 development or concentric diversification can be an attractive strategy for strong cash cows. However, for weak cash cows, retrenchment or divestment is more suitable to apply. 4. Dog Companies in Quadrant IV have low relative market share and compete in low-growing or not-growing industries. Due to its weak internal and external positions, the companies are often liquidated, divested or retrenched. When a company becomes a dog, retrenchment can be the best strategy to apply because many dogs resurface after massive retrenchment of costs and assets to be a survived and profitable business. 3. Research Method The data of this study are collected using questionnaires and interviews. This is a descriptive study to solve the practical issues by collecting data, compiling, clarifying, analyzing, and interpreting data. The population in this study is all construction companies in DKI Jakarta with medium qualification. Medium qualification refers to. The population is 100 companies, while the samples taken are 80 companies. The strategy formulation in this study refers to the concept developed by Wheelen and Hunger (2012), where stages in the strategy formulation are identified as follows: 1) The first stage: the input stage, consisting: A. External Factors Analysis Summary/EFAS EFAS matrix is used to evaluate external factors including economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive issues with the following analytical steps: a) Creating a list of critical success factors including the opportunities and threats of the study program. b) Determining the weight of critical success factors with a higher scale for the achievement and vice versa with the amount of weight of 1.0. c) Determining the rating of each critical success factors from 1 to 4, with a scale of 1 = poor, 2 = below average, 3 = average, 4 = above average, and 5 = excellent. d) Calculating the score by multiplying the weight by the rating of all critical success factors. Table 1: External Factors Analysis Summary (EFAS) Critical Success Factors Weight Rating Score Opportunities Threats Total Source: Wheelen and Hunger (2012, p.126)

7 B. Internal Factors Analysis Summary/IFAS IFAS matrix is used to determine internal factors related to strengths and weaknesses covering the aspects of management, finance, human resources, marketing, information systems, and operations processes, with the following analytical steps: a) Creating a list of critical success factors including the opportunities and threats of the study program. b) Determining the weight of critical success factors with a higher scale for the achievement and vice versa with the amount of weight is 1.0. c) Determining the rating of each critical success factors from 1 to 4, with a scale of 1 = poor, 2 = below average, 3 = average, 4 = above average, and 5 = excellent. d) Calculating the score by multiplying the weight by the rating of all critical success factors. The form of Internal Matrix is as follows: Table 2: Internal Factors Analysis Summary (IFAS) Critical Success Factors Weight Rating Score Strengths Weaknesses Total Source: Wheelen and Hunger (2012, p.164) 2) The second stage: The Matching Stage The Matching Stage is carried out to get an alternative strategy chosen from SWOT matrix. The stages of each matrix are as follows: A. SWOT Analysis (Strength-Weaknesses-Opportunity-Threats) SWOT analysis is used to develop four types of strategies, namely: SO (Strength-Opportunity) Strategies, WO (Weakness-Opportunity) Strategies, ST (Strength-Threats) Strategies, and WT (Weakness-Threats) Strategies. - Make a list of opportunities, threats, strengths, and weaknesses of the Study Program quoted from the EFE and IFE matrices; - Match internal strengths and external opportunities then record them into the SO strategy cell; - Match internal weaknesses and external opportunities then record them into the WO strategy cell; - Match internal strengths and external threats then record them into the ST strategy cell; - Match internal weaknesses and external threats then record them into the WO strategy cell; The analysis of SWOT matrix is shown in the following table:

8 Table 3: SWOT Matrix or TOWS Matrix Source: Wheelen and Hunger (2012, p.182) 4. Findings and Discussion In this study, an analysis on the findings at the initial stage is carried out by analyzing external and internal factors. The data are obtained by distributing questionnaires to eighty respondents of construction companies. 4.1 External Environment External environment is the environment outside an organization required to be analyzed to determine opportunities and threats that will be faced by a company. The dimensions included into external environment are macro environment with variables of law enforcement, economic development, regional autonomy, technological developments, and the intensity of competition. This study applies SWOT approach (Strengths, Weaknesses, Opportunities, Threats) to filter perceptions and judgments of respondents about existing internal and external factors in the company, to eventually gain the factors of strengths, weaknesses, opportunities, and threats. From the calculation of weight of EFAS, several alternative strategies that can be used to anticipate external environment of a company are generated. The following is the result of processed data related to the external strategies factor (EFAS):

9 OPPOR TUNITIES Table 4: External Strategic Factors (EFAS) Question N MEAN WEIGHT RATING PT. LPI LE1 Law Enforcement LE2 Economic Development B*R STATE Strict rules are unavailable Economic Support LE3 Regional Autonomy LE4 Dependence on regional leaders Technological Development Less skilled Total Opportunities THREATS N MEAN WEIGHT RATING PT. LPI B*R STATE LE5 Newcomers Bound to the rules of construction services LE6 The Bargaining Power 80 of the Suppliers Highly diverse LE7 The Bargaining Power The Government and 80 of the Customers Private Sector LE8 Substitute Product Rare/Low LE9 The Intensity of 80 Competition Overpowering Total Threats Total Opportunities - Threats Y Axis Source: Processed Data (2017) Observed from Table 4, the total table of EFAS matrix that will be used in making the SWOT analysis diagram is obtained. The result of calculation of EFAS matrix for the Y axis is The X point of IFAS matrix is obtained after the Y point to determine the strategy that will be presented in SWOT matrix. 4.2 Internal Environment In this study, to analyze the strengths and weaknesses of a company, the following assumptions are used: if the average (mean) of response is 2.5 to 5, it means strength. Meanwhile, if the average (mean) of response is below 2.5, it means weakness. The following is IFAS table based on the analysis of the answer of 80 respondents:

10 Table 5: Internal Strategic Factors (IFAS) STRENGTHS Question N MEAN WEIGHT RATING PT. LPI B*R STATE LI1 Risky Measures In accordance with the Law of Construction Service LI2 Rewards System In accordance with job specifications LI3 Communication Pattern Can be applied in work LI4 Vision and Mission Well-organized LI6 Departmentalization Functional department LI7 Division of Work Well-organized LI8 Responsibility Can be accounted for LI9 Delegation of Authority Top down LI10 Valuable Developing and implementing strategies that can increase value LI11 Rare Developing and exploiting different competencies from competitors LI12 Difficult to Imitate Such valuable and rare competencies can only be a source of sustainable competitive advantage LI13 Difficult to Replace Difficult to replace Total Strengths WEAKNESSES N MEAN WEIGHT RATING PT. LPI B*R STATE LI5 Level of Control Less Controllable Total Weakness Valid N (listwise) Total Strengths - Weaknesses X Axis Source: Processed Data (2017) The results obtained from the table of EFAS and IFAS matrices are used in the formulation of SWOT analysis diagram. The result of the calculation of EFAS matrix for Y axis is , and IFAS matrix for the X axis is It suggests that the points in the area of TS (Threat Strength) determine the strategy that will be presented in the SWOT or TWOS Matrices as follows:

11 Table 6: SWOT Matrix Opportunity Law enforcement Regional autonomy Economic development Information technology Threat Newcomers The Bargaining Power of the Suppliers The Bargaining Power of the Customers Substitute Product The Intensity of Competition Source: Processed Data (2017) Strengths Risky measures, communication patterns, vision and mission, division of work, responsibilities of employees, qualified, rare, difficult to imitate, departmentalization, delegation of authority, difficult to replace SO Strategies The measures should be adjusted to the applicable law Communication pattern between PT Laga Pratama Interindo and government project Division of work is adjusted to government project TS Strategies Strategic competence is needed to anticipate any threats The vision and mission of the organization is adjusted to the guidelines of competitive advantage Diversification and market penetration by taking public and private tender Weaknesses Level of control WO Strategies Delegation of authority in accordance with the law The level of control of government project is autonomous WT Strategies Changing the organizational structure Seeking partners to anticipate the competition ST strategy is a strategy based on the strength of an organization to address the threats detected (David, 2011). This strategy is known as diversification strategy. It means that no matter how big the threat is, panic and haste will only worsen the situation. Therefore, it is important to understand that the organization has great strength and independence and can be used as a weapon to overcome threat. 4.3 The Analysis of Long-Term Strategy of Construction Companies Using BCG Matrix BCG matrix has two axes and consists of four cells. The vertical axis represents the market growth rate considered as the proxy for industrial attractiveness, while the horizontal axis reflects the value of relative market share owned by each strategic business unit. Relative market share is considered as a proxy for the strengths of the company. The four cells in BCG are formed after each axis is divided into two parts with a predetermined dividing point. Consequently, each axis is divided into two parts. The first part points to a low scale, while another part points to a high scale. The vertical axis representing the market growth rate is divided into two parts, namely the axis pointing to a low market growth rate and the axis pointing to a high growth rate. Similarly, the horizontal axis is divided into two parts, namely the axis pointing to high relative market share and the axis pointing to low relative market share. The market growth rate is the projection of sales level for the market served. In this study, it is measured from the increase of percentage of sales value or volume in the last two years (2015 and 2016). The data of sales

12 No. volume in 2015 and 2016 are shown as follows = (30,705, ,775,873.00)/30,705, (in thousands) = 0.03 times (X-axis). Meanwhile, with regard to the analysis of the market share of PT Laga Pratama Interindo, this study uses a variable of net wealth as the basis of analysis by referring to the Decree of Construction Service Development Agency (LPJK) No. 10 of The decree explains an important sense of Medium-Scale Qualification referred to in paragraph (2) letter b including subqualification: medium 1 (M1) and medium 2 (M2). This study puts PT Laga Pratama Interindo as a construction company in M qualification with a net worth of 2 to 10 billion. Table 7: Sub-qualification of Construction Companies Qualificati Net Worth Experience on 1 M2 > IDR 2,000,000,000 - IDR 10,000,000,000 Carrying out the work with a current total cumulative value of income reaches at least IDR 10,000,000,000 within a period of 10 years or having the highest experience of M1 subqualification work of IDR 3,330,000,000 within a period of 10 years. Source: National Construction Services Development Board No. 10 of 2014 The market share based on the net worth of PT Laga Pratama Interindo = 30,705,934,000/10,000,000,000 = 3.07 times (X is greater than 1). Based on the growth and market share, PT Laga Pratama Interindo is in the quadrant of question mark. GROWTH RATE STAR 0.03 QUESTION MARK 3.07 RELATIVE MARKET SHARE CASH COW DOG Figure 2: The Application of Theory of Boston Consulting Group in PT Laga Pratama Interindo Source: Processed Data (2017) The findings show that construction companies in the position of question mark can use a diversification strategy since construction industry has heterogeneous and highly competitive characteristics. Referring to the perspective of BCG, the companies in Quadrant I have relatively low market share position and compete in fast-growing industries. Usually, the cash requirements of the companies are high while the cash income is low. They

13 are called question mark because they must decide whether to strengthen the companies by executing intensive strategy (market penetration, market development, or product development) or sell them. In practice, if a company is in the division of question mark, it needs to group the market in order to understand the market structure it will serve. The grouping of market is focused on the necessity and the desire of the clients and the users of services and the products provided. It is shown from the dominant use of project type and project ownership status as one of the basic variables in grouping market for construction industry. Another important basic variable is the value of the project reflecting the business scale of the company. In general, larger companies seem to be able to serve more market segments compared to smaller companies. It is logical because of their limited resources (fund, labor, expertise, technology) that seem to be the constraints to serve all market segments. It leads to the difference of point of view of construction companies in considering the existing potential of a market and the difference in the number of market segments served. In grouping market in the construction industry, there are differences between a company and other companies. The findings of this study also show that current construction companies have a higher tendency to serve the government rather than private sectors. It means that government projects have a certain appeal to construction companies compared to private projects. In order to survive and gain profit, companies must have strategic planning. SWOT analysis is not sufficient to decide the position of a company in the market. Strategies that have been determined based on SWOT can be evaluated with BCG matrix to determine their compatibility with the condition of the company in the market. From the interviews, there are several reasons why government market tends to be considered more potential than private market, including the certainty of the development budget as stated in the state budget both at central and regional levels. Thus, government market is seen as a market with high potentials to provide income for the company. However, government tender will also cause problems if it is not carried out properly in accordance with the applicable regulations. In addition, the absence of a standard system and the lack of openness of procurement systems of goods and services applied by private consumers provide opportunities for unhealthy competition among construction companies. The condition ultimately raises specific approaches, both formal and informal, in order to participate in project tender or win private projects without going through a tender process. The high level of risk in terms of uncertainty of payments, particularly in the final moments of project completion, serves as an excuse to prefer government market as their target markets. From the vision and mission stated by the companies, it is seen that the impression of being a large, reliable, reputable, best, superior and widely known construction companies is the impression that wants to be implanted

14 in the minds of the clients. It is ultimately a form of measures to implant a positive image in the minds of the community about the company, particularly to the clients and/or prospective clients. On the other hand, establishing a position on a price basis shows the intense competition encountered by construction companies in current market of construction industry. In this case, the company wants to be perceived to have the products of construction services at competitive prices. In a practical framework, the diversification strategy carried out by PT Laga Pratama Interindo through market penetration is not only aiming to the middle qualification, but also to the large qualification. Therefore, it must have a net worth of 10 to 50 billion or more than 50 billion in order to gain greater profit. In addition, PT Laga Pratama Interindo must also target private tender to gain larger profit and does not merely rely on government tender derived from the regional budget (APBD). Therefore, PT Laga Pratama Interino can gain a larger profit and can form a strong image with competitive prices as well as gain trust of the client. 5. Conclusion and Recomendation The construction companies in the position of question mark can use a diversification strategy since construction industry has heterogeneous and highly competitive characteristics. This leads to the need to group markets in order to understand the market structure they serve. The grouping of market is focused on the necessity and the desire of the clients and the users of services and the products provided. PT Laga Pratama Interindo is placed on Quadrant II. Despite facing various threats, the company remains internally strong. The strategy to be implemented is to use the strengths to exploit long-term opportunities by means of diversification strategies. Diversification is to create a different strategy by utilizing internal strengths to allow the creation of opportunities in the future. This strategy is known as diversification strategy. It is important to understand that organizations have great strength and independence and can be used as a mean to overcome threats. In this case, the diversification for PT. Laga Interindo Pratama is market penetration through tenders, market development (by trying to be a large-scale company), or product development for either government or private tender. Reference Central Bureau of Statistics Jakarta. (2015). Statistik Daerah Propinsi DKI Jakarta David, Fred R. (2011). Strategic Management: Concept and Cases, 13 th edition. New Jersey: Pearson Education, Inc. Gatignon, Hurbert, and Jean-Marc Xuereb. (1997). Strategic Orientation of the Firm and New Product Performance, Journal of Marketing Research, Vol. 34, No. 1, Special Issue on Innovation and New Products. pp

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