FIVE FORCES ANALYSIS OF THE AUSTRALIAN CONSTRUCTION INDUSTRY
Table of Contents
I. Introduction
II. Background of the Company
III. Porter’s Five Forces Analysis
A. Threat of New Entrants
B. Intensity of the Competition
C. Pressure from Substitutes
D. Bargaining Power of Suppliers
E. Bargaining Power of Buyers
IV. Complementors Affecting the Industry
V. Major Strategic Implications
VI. References
I. Introduction
Establishing the conditions surrounding the external environment of the organisation is one of the indispensable elements in formulating strategy for any organisation who seeks to do wonders in their respective industry. This paper will be covering the external environment of MacMahon Holdings Limited of Australia. Specifically, an analysis of the construction industry in the Australian setting will be carried out using Porter’s Five Forces Analysis.
II. Background of the Company
The MacMahon Mining, a company under the MacMahon Holdings Limited, is one of the largest construction firms companies in Australia. It administers a couple of business units in the industry: construction and mining. The former unit entails functions of building infrastructure projects while the latter indicates open and cut operations and mine management. With its headquarters located in Western Australia, the company has to establish satellite offices in Queensland, Northern Territory, New South Wales, and South Australia. With a workforce approximately 3,000 strong and skilled individuals, the company is one of the most prominent players in the construction industry in Australia. An analysis of the industry will be made to paint a picture of the overall conditions and possible trends that MacMahon may encounter in the near future. Being a manager of one of its projects provides first hand knowledge on certain elements on which I am immersed at during my stint with the company. Moreover, studies on the Australian construction industry will also be consulted particularly to establish certain rates and frequencies incurred in the segment.
III. Porter’s Five Forces Analysis
This analytic model is based on the work of Michael Porter on the examination of the microenvironment of the organisation. (Shermann and Black 2006, 29) On the whole, the discussions provided below will be indicating the level of attractiveness of the industry and the market with reference to the respondent company MacMahon.
A. Threat of New Entrants
The barriers of entry in the Australian construction business are not considerably high, but nevertheless taxing for new entrants. This is basically because the economies of scale in the industry appear to be negligible as pricing strategies of the players are seemingly the same. Given the nature of the construction industry, the quality of the service provided supersedes the costs that project often entails. In the same regard, biddings are the most frequent mode of service acquisition in the industry which also entails that any company could contribute to the process.
This is the same with product differentiation. The services provided as well as the products offered tend to be interchangeable and indistinguishable in the construction industry. In the same regard, the government policies in the Australian setting encourage entry in the industry, both in local and international construction firms. This is seen in the survey made by the Australian Procurement and Construction Council (2002, 10) indicating that there were at least 723 construction companies in the whole of Australia in 2001 alone.
The study of the Australian Construction Industry Forum (ACIF) similarly mentioned that there are certain regulation requirements and tax responsibilities that these construction firms have to address. (ACIF 2005) This reflects that the capital requirements, costs disadvantages of independent of scale and access to distribution channels could be unbearable for those who intend to enter the industry.
B. Intensity of the Competition
The competition in the construction industry in Australia is characterised as diverse. As mentioned in the 2002-2003 survey of the Australian Bureau of Statistics, there are at least “339,982 construction businesses operating in Australia with employment of 716,200 persons.” (ABS 2004) This means that the industry is considerably diversified and evidently numerous competitors. The big players in the industry like McMahon tend to have certain advantages over the small players with their respective niche. However, they face certain challenges with the other monoliths in terms of pricing strategies in their bids for projects and other high strategic stakes. Other areas that they contend with are the constant cutting of the fixed costs and storage costs to strike a balance on their operational expenditures and overall revenue. The smaller companies may not be able to deal with this area as effectively thus making the barriers of exit considerably low in the industry.
C. Pressure from Substitutes
The threat from substitutes in the construction industry is rather low in the Australian setting. Alternatives on companies that drill earth construct infrastructures tend to appear inexistent to a certain degree. This means that the potential returns in the industry is acquired mostly by the numerous competitors in the Australian construction industry. A constant threat however for the local companies is the possibility of foreign construction firms to generate greater deals and bids for huge infrastructure projects in Australia.
D. Bargaining Power of Suppliers
As indicated in the previous sections, the players in the construction industry in Australia are numerous. This gives the suppliers in the said industry considerable power over these organisations. This power is reinforced by the rarity of the substitute products that these construction firms may acquire. Such indispensable materials include steel raw materials, lumber, and even the heavy machinery needed for their operations. However, though these products appear to be highly important to the players in the construction industry, this is offset by the capability of these companies to switch suppliers readily without compromising severe changes in the costs. The problem in this observation is that the bigger construction companies like MacMahon could afford to take this course of action. This could be highly disadvantageous for the smaller companies in the industry.
E. Bargaining Power of Buyers
The bargaining powers of the buyers in the construction industry are considerably high in Australia. As indicated in the earlier part of this paper, the industry has numerous players which also mean that the individual project owners have similarly numerous options. In the same regard, the diversity of the players in the industry provides the buyer the option to consider costs of the services that these companies offer. The presence of smaller companies tends to present a very low pricing alternative while the presence of large corporations guarantees potential excellence in output. In any case, the buyer is immensely powerful in this industry. Basically, given that every transaction tends to entail huge amounts of funds, the individual players similarly give non-traditional procurement methods like build-operate-transfer and build-own-operate-transfer.
IV. Complementors Affecting the Industry
There are several complementors that affect the construction industry in Australia. According to the Australian Bureau of Statistics (2004), construction is described as “carrying out alterations, additions or renovations or general repairs” in residential, non-residential, and non-buildings. It also mentioned that it consists of “structural steel erection, carpentry, bricklaying, concreting, plumbing, painting, plastering, tiling and carpeting.” Thus these trade services are complemented by the sale of raw materials needed such as lumber, steel, and other concrete products.
More importantly, another complementor of this industry is the presence of employment and labour. Specifically, the industry requires skilled labour. The ABS (2004) further mentioned that “716,200 persons comprising 439,600 employees (61.4%) and 276,600 (38.6%) working proprietors/partners of unincorporated businesses” were recorded in June of 2003. This means that the industry would not have been as productive without the presence of these sixth forces.
V. Major Strategic Implications
The discussions above have manifested the current conditions surrounding the construction industry of Australia. It has indicated certain points on which prospective entrants in the industry and even existing players could use to improve their market share. For instance, the discussions maintained that entry is easy in the market. However it also manifested the fact that exists is easy as well considering the fierceness of competition in the industry. Thus, for companies (foreign or local) who intend to penetrate and amass a respectable market share, they must ensure that their capital is more than capable to support their operations to build a competent reputation in the market. This will ensure that they will have great relationship with their customers. Other courses of action may be observed in offering alternative procurement schemes. In the same manner, they should also start building relationships with the suppliers in the industry. Though they do have the option to change suppliers readily, the loyalty they show to these individuals defines the character of the corporation with the rest of the other suppliers as a great business partner.
For the existing players in the industry, they should do the same thing: establish great ties with the market and make good relations with their suppliers. To boot, they should also start helping small companies to exit the market as it is characterised as heavily diverse and highly competitive. This is a great way and somewhat cost-effective manner of acquiring property, machinery and personnel in the industry. They should also start lobbying for higher entry barriers like policies and regulations to ensure the quality and integrity of the industry is preserved.
VI. References
Australian Bureau of Statistics. (2004) Private Sector Construction Industry, Australia, 2002-03. Available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/02C980C509048EACCA2568A9001393D0?OpenDocument [Accessed 10 March 2008]
Australian Construction Industry Forum (2005) Reducing the Regulatory Burden on Business. Available at: www.regulationtaskforce.gov.au/__data/assets/pdf_file/0020/70157/sub060.pdf [Accessed 10 March 2008]
MacMahon Holdings Limited. (2008) About Us. Available at: www.macmahon.com.au [Accessed 10 March 2008]
Sherman, S., and Black, J. (2006) “Proactive Reification: Shifting Market Structure and Enrepreneurship.” SAM Advanced Management Journal. 71(2), 29.
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