Construction market in K.S.A

K.S.A is considered to be the biggest construction market in the Middle East particularly in the gulf region, supported by a sustained government spending huge investments in both the private and the public sector. Construction sector contributes nearly 6-8% of its total Gdp.

Economy drivers of construction market:

The construction market in K.S.A is driven by a number of economic factors:

A strong demand resulting from the growing population.

The need for infrastructure development in order to attract private sector investments e.g.( Riyadh metro, Makkah Railway and Airport upgrades) the allocated budget of 2015 for transport and infrastructure is nearly usd 167.82 Billion.

The need for skilled labour drives the investments towards education, healthcare to which 44% of 2015 budget is allocated (e.g. 28 new universities and 1000 new generation schools, new hospitals, blood banks and medical centers).

Sustaining religious tourism by continuous development of Makkah and Medina cities (e.g. Pilgrim city project, extensions of Makkah and Medina Holy Mosques).

Challenges of construction Market

Shortages of skilled labour which is caused by the strict regulations of Saudiization and delays meeting the strong demand of the market

Shortage of construction materials which imposed heavy imports on the government lately

Falling of oil prices may cause a fall in the allocated budget for the sector.

Economic statistics of K.S.A

Total population 2014 ( people) 30,770375 *

Population growth rate 2014 2.55%

Population density (person / sq km) 2014 15.3

Saudi population 2014 (people) 20,702536 *

Saudi population growth rate 2014 2.10%

GDP growth at constant prices 2014 3.47%

Per capita GDP at current prices in 2014 (SAR) 90,946

Saudi-Binladin Group (SBG) Case Study:

Company overview:

S.B.G was founded by Sheikh Mohamed Binladin in 1931, headquartered now in Jeddah, with about 35,000 employees, a capital of several billion usd. It is a multi-national organization represented in a number of cities (Jeddah, Cairo, Beirut, and Dubai). The founder Sh.Mohamed Binladin had a strong relationship with the Kingdom founder King Abdul-Aziz Al-Saud which led to awarding the organization government contracts of developing and refurbishment of Makkah and Medina Holy Mosques, and was a main reason for a sustained income for the organization over the past decades.

Analysis of business environment in S.B.G:

Layers of the business environment are as shown in the figure:

SBG Macro-environment

PESTEL Analysis:

1. Political factors:

1.1 Relationship with the royal family Ever since the foundation of SBG there has been a stable relation between the headquarters (Binladin family) and the royal family leading to:

- Direct award of most projects to SBG in many sectors (Ministry of interior projects, National guard housing projects, Royal palaces new and refurbished)

- Consequently the tendering process was ignored and that department was of no importance to SBG.

- By 2015 after the death of King Abdullah I.Abdelaziz King Selman made a lot of government changes, changing the policy to enforce competition between contractors and have the allocated budgets justified. This impacted SBG in employing tendering and Hr specialists.

1.2 Pressure groups & employment office:For decades SBG has been depending on foreign workforce but since 1975 and responding to several pressure groups in the kingdom, the employment office enforced the Saudiization law on the private sector which reached now to 15% of the total work force of the organization.

However it is very common for organizations here to apply a disguised Saudiization, employing nationals to escape from the law and paying their salaries but with a zero productivity. Organizations still can’t count on nationals’ output due to the lack of experienced land skilled labour. Will the government increase the Saudiization % in the coming years; this is a big threat to SBG.

1.3 The Arab spring: Since 2011 the Middle East has been suffering from successive revolutionary waves. KSA although a stable government has been subsidizing countries as (Egypt, Syria, Yemen, Iraq,..) for political benefits, which had its impact on the sector reducing the allocated budget.SBG also has incurred disastrous losses in the South-Borders project due to opposition from the Howthy rebels and the collapse of the Yemeni government, most of the project zones are pending.

2. Economic Factors:

Three main economic factors affect SBG strategy and management policy:

1- Unemployment & preponderance of foreign workforce opposed by the Saudiization government policy

2- Taxation policy: which attracts the foreign workforce to KSA due to the tax-free salaries offered by public and private sectors? This is an advantage for SBG to overcome the rarity of specialized local workforce.

3- Labour turnover policy:The employment policy of SBG switched after the economic downturn 2008 to package deals with employees inclusive all benefits, in addition to turnover expenses, so labour after finishing their project are given 45 days (with no salary) to search another project within SBG otherwise their contract is terminated. So SBG doesn’t suffer labor turnover problems.

3. Socio-cultural factors:

- Religious factors: Imposed intensive work shifts in the holy mosques projects and related housing projects for pilgrims

- Conglomerations of same nationalities have a significant impact of labour distribution, salaries, comfort of employees.

- Preponderance of foreign workforce.- The company name may be one

factor why SBG doesn’t expand globally e.g. in Europe or USA, as it is named after M.Binladin the father of Ussamah Binladin which is to Europe and USA the leader of terrorism. SBG is a weighted name in the Middle East but could this be the same in outside markets?

4. Technological factors:

SBG has established a new department recently of specialized engineers to study the technological advance in the construction sector over several developed countries in Europe and USA to implement the most recent technologies to enable the organization to achieve the best value of its projects by effective use of its resources, the engineers are offered very attractive salaries and travelling benefits.

5. Environmental factors:

In the light of the climate change and the several conferences that have been held globally to combat the global warming, SBG has established in 2009 the LEED department consisting of certified LEED engineers and supervisors to ensure contribution to the global environmental move through used materials and processes.Also in 2013 Sh.Bakr Binladin launched the (metal recycling) company as one of the group companies reflecting the keenness for waste management.

6. Legal factors: - Foreign investment law imposed

restrictions on foreign investors in KSA through the need of a national sponsor.

- Competition law is a threat for SBG against the bureaucratic policy that SBG depends on in being awarded projects directly from the royal family.

- Employment law imposed strict regulations on foreign workforce employment through the localization of workforce by 15 % of the total workforce taking into consideration the lack of skilled workers among Saudi nationals.

Porter’s 5 forces framework:

1. Supplier power

SBG is a huge contractor in KSA. In many construction fields, Extensions of Holy Mosques, Commercial buildings , Armed forces projects with huge investors within the royal family, so it is a powerful supplier in addition to the huge workforce and royal relationships.

2. Customer power:

As Explained before the major client is the government (royal Family) and its power has its impact on three lines

1- Pricing in the ruling period of King Abdullah I. Abdul-Aziz this was an advantage to SGB as projects were awarded with little attention to price and focusing on the timing of the project whatever it costs. But the current government under King Selman is stressing on implementing the competition law.

The government replaced SBG CEO by Sh. Saleh Binladin and advised him to focus on pricing and feasibility studies.

2- Timing:

This factor often forces SBG to expand its resources as the royal family in most cases compress the project time planned and submitted by SBG, while the progress payments made to SBG aren’t made at regular intervals to secure the cash flow corresponding to this expansion.

3- Quality: Due the time compression happening in most projects SBG is a quality sacrificer, consequently due to the customer power tasks are redone or may take longer time and be subject to penalties or even threatening SBG by replacing with one of its competitors.

3. Threats of new entry:

This is relatively a weak threat to SBG due to several reasons:

- SBG has few number of competitors

- SBG holds most of government projects and gained satisfaction over the past decades.

- Political situation and economic problems in the Middle East makes the government reluctant to try a new organization.

4- Threats of substituting product or service:

This threat may be caused due to quality issues along with the customer power and previous pricing policies.SBG has to own a qualified pricing team and strengthen its tendering processes in order to tackle this threat.Product substitution is relatively a weak threat to SBG due to the huge investments in KSA in commercial and residential projects and the significant weight of SBG in the market.

5- Competitive rivalry:

Although SBG has a few number of competitors this could be a threat due to the following:

- Customer power to replace and choose an alternative organization

- High competitiveness resulting from the few number of competitors ( Saudi Auger , ALseef, in similar business

- SBG is a group of companies ruled by bureaucratic relations within the company and due to individual interests of the stake holders of these companies the whole organization is affected in pricing, planning, and construction coordination. This is a weakness point against its competitors.

SWOT analysis (Strengths and weaknesses, opportunities and threats).

1- Strengths of SBG:

- Adequate financial resources- Access to economies of scale: as

SBG has its own precast factory, Marble and Granite factory and Ready mix equipment.

- Powerful stake holders (Binladin Family)

- Significant assets and high capital value. SBG owns a whole company named ERC for equipment supply( yet not sufficient for the project that SBG holds)

- Huge workforce (35000 employees).

2- Weaknesses of SBG:

- Weak research and development.- Work inefficiencies due to the weak

coordination between the companies of the group

- Weak supply chain delaying arrival of materials, documents, and affecting decision making.

- Inaccurate pricing and weak tendering department

- Conflict of interest resulting from the presence of many companies inside the group, some of them owned by powerful managers who are neither nationals nor from the Binladin family.

- Weak coordination between departments

- Unsatisfied employees

- Weak human resources department which affects the moral of foreign employees in their residence permits and health insurance, which are delayed for months so the employee is unable to take his annual leave easily, and may remain 3 months in the year without medical insurance.

3- Opportunities:

- Innovation: SBG has the financial capacity and expertise to apply innovative processes and select most advanced materials and techniques in the construction industry. This would be difficult by competitors to overcome. The new department launched by Sh. Bakr Binladin that studies technology advance in developed countries should be enforced and expanded to implement these researches and technologies as well as exploiting the companies resources in the best effective way.

- New services: such as operation and maintenance of projects. This is already a department in SBG since 2010 but needs to be developed to include whole life costing as a service. This integration will open a good opportunity for SBG as this process is new in Saudi Arabia.

- SBG also has the capacity to enter other fragmented markets in KSA merging or acquiring specialist small organizations with its capacity and take the lead easily.

4- Threats:

- Environmental effects can have a negative impact on SBG and can subtract from its value. SBG only began recently to consider environmental impact and every project now has a LEED department of engineers and supervisors, but SBG as stated before is still weak in R & D and thus this department is under a threat of being outdated, taking into consideration the employees dissatisfaction from being untrained and having an idle experience for several years.

- Government regulations with the reduction of foreign workers and Saudiization.

- Governmental changes and the loss of the current bureaucratic relationships is a threat of losing many projects and having a bulk of idle workforce. After the recent government changes some companies of the SBG group gave its employees a six month leave subject to being renewed. About seven projects have been withdrawn from SBG after the recent governmental changes by King Selman (e.g. KAYAN Tower project. The Medical city project )It is arguable whether these projects were withdrawn due to malperformance of the company or bureaucratic relationships with competitors.

Choosing a strategic option:

Having analyzed the external environment of SBG, Strengths and weaknesses, opportunities and threats, the below table is an assessment of the available strategic options.

STRATEGIC OPTION

Priority

Reasonhigh Medium Low

Expansion More Viable for smaller organisations while SBG is a huge organisation in the Middle East

Acquisitions & Mergers

No need in Construction market due to significant few competitors each satisfied with its market share but if mixed with a diversification option would give a great benefit

Divestment Not applicable because the construction maket a growing one but some concern with outdated processes and materials

Rationalization

Strengths in SBG are relatively consolidated as each company of the group is specialised in certain items( concrete division for skeleteon construction- Premco for precast and readymix- Sacodeco for finishes , etc .. ) but the weak coordination obstructs the construction efficiency

Diversification This is the most important for esp. if mixed with acquisition and mergers

Research and Development

the potential for this option is high due to the huge capacity of SBGFinancially and technically.

1. Diversification:

A corporate strategy to enter into a new market, presented by the Ansoff matrix. This is considered the most risky option as the corporate has little experience in the new market. But this risk can be mitigated by some kind of a mixed strategy between Diversification and acquisitions and mergers as will be explained later.

2. Research and development:

This strategy is a good option also for SBG due its financial capability, famous market name, un-dominated market in Saudi Arabia in this field.This may be done in the same sector (construction) either by product development, market development or by implementing new technologies to the industry. SBG needs to enforce the R&D department launched in 2011, develop and expand it to pass to the phase of implementation.

Choosing the diversification strategy:

This is the most effective path in the future of SBG which can boost the profit and increase the value of the share holders investments. While being risky as mentioned before due to the lack of knowledge and experience in a new product or market if applied without a careful study of the external market and setting the correct objectives, identifying the new markets’ features and characteristics. Mukherj (1998) concluded in his studies that organizations of high prior performance tend to have successful diversification strategies.

Factors that influence SBG diversification strategy:

- Industry profit levels- Expenditures in research and

development- Capital outlay- Efficiency levels- Proper management of core

competences and strategic assets.

Diversification in the construction market :

1. Product & market development Steps that need to be taken:

- Idea for new products (marketing)- Knowledge and detailed

specifications for the new products (marketing)

- Initial concepts of design (Production engineering)

- Final design (production engineering)

- Production tooling (manufacturing)

- Vendor selection (marketing)- Prototypes- Production

These steps will have positive effects in product development and cost effectiveness.

2. Proposals of product developments

- Whole life costing projects- Urban rehabilitation- Steel manufacturing (SBG owns

several factories such as marble and precast concrete)

- BIM ( Building information modeling)Implementation.

Diversification mixed strategy:

A strategy that SBG can adopt is the mixing of diversification and acquisitions and mergers. In such fragmented markets in Saudi Arabia as retailing, the organization can acquire or merge with small or medium sized retailers taking advantage of its big size and capacity and the expertise of these small organizations to achieve mutual growth and penetrate a new market.

Benefits to the small – medium sized organizations:

- Growing and expansion of the organization.

- Increasing sales.- Benefiting economies of scale.- Market share gains.

Benefits to SBG in the mixed strategy:

- New market penetration- New experiences gained- Lower risk than developing new

products on their own.- Lower risk than implementation of

new technologies with high expenses and uncertain return.

Potential Risks:

- Legal restrictions made by the government concerning the market shares of small businesses

- Environmental risks due to the climate change and the move towards a clean world can impact the product choice, the materials and energy supply used,

- Conflict of interests between parties

Recommendations for a successful Strategy:

- Careful market analysis- Careful suppliers and retailers

study and analysis- Careful planning for the new

product chosen.- Avoiding ambiguity in agreements- Stressing on training and

development for the chosen route and expanding the knowledge of employees

- Involving SBG employees and departments in the new business.

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