4 Business Plan/Strategy
4.1 Ansoff Matrix
For Balfour Beatty to increase the level of its business over the next five years, from 2010 to 2015, a relevant Business plan/strategy is needed. The Ansoff Matrix helps businesses decide their product and market growth strategy. The strategy proposes Balfour’s attempt to expand its business, will depend on “Whether it markets new or existing products in new or existing markets.”
This depends on four growth strategies, to help develop the course of the business strategy:
- Market Penetration – is a growth strategy whereby businesses concentrate on selling existing products into existing markets.
- Market Development – is a growth strategy whereby businesses set out to penetrate new markets using existing products.
- Product Development - is a growth strategy whereby businesses introduce new products into existing markets.
- Diversification - is a growth strategy whereby businesses take a much bigger risk and try to penetrate new markets, using new products.
See Appendix 8 for the table of the Ansoff Matrix.
Having considered the four options, it would be more beneficial for Balfour Beatty to implement the Market Penetration Strategy. Balfour is already a market leader and with the current economic climate it would be an unnecessary risk to implement one of the other strategies. This will allow Balfour to further establish themselves in the industry, and also take advantage of the high numbers of construction companies going into administration. It is a sound strategy in the short term that would help minimise potential loses in the recession. However depending upon their financial situation, it may also be beneficial for them to consider similar markets abroad in countries less affected by the ‘global recession’.
4.2 The Boston Matrix
Developed by the Boston Consulting Group, the Boston Matrix is known as a good marketing managing tool. The two main aspects of this matrix are:
- Relative Market Share
- Market Growth
Each individual element/product of the business is analysed and placed onto the relevant part of the matrix.
Unlike stars these products tend to have a much lower share of the market. They tend to absorb money for the company as opposed to generating it; therefore these products should be disposed of, quickly.
See Appendix 9 for the table of the Boston Matrix.
Currently Balfour Beatty are Cash Cows, they have a high share of the market. Having been established for 100 years and currently as the biggest construction company in the UK, they have proven to be a mature and successful business. However in order to maintain this, Balfour need other sectors to become Stars, which will eventually become Cash Cows, sectors such as their Investment sector. This sector is crucial over the next 5 years, as a right or wrong investment, in the current climate, could make or loose the company hundred of thousands, maybe even millions.
The Top 100 construction companies league table ranks the UK's 100 biggest construction companies by turnover and profit. The table is compiled every September. Balfour Beatty remained at the top of the list when ranked in September 2009.
See Appendix 10 for the Full list of the Top 100 Construction Companies
5 Financial Implications
5.1 Ratio Analysis:
‘Business ratios are the guiding stars for the management of enterprises; they provide their targets and standards.
There are many types of business ratios used by management in order to assess organisations in various ways. Characteristically, the different types of ratios used, are not limited to, but consist of: -
- Performance/Profitability Measuring Ratios
- Corporate Liquidity Ratios
- Financial Strength Ratios
5.1.1 Performance/Profitability Analysis
Return on Investment
‘Each pound of asset has to be matched by a pound drawn from the financial markets’
The above is a statement from Walsh (2006) saying the minimal requirement of shareholders when looking at Return on investment ratios. Efficient use of assets and funds invested, will lead to a higher Return on Investment percentage.
It is arguably the most vital ratio in business finance, as it measures absolute returns delivered to the shareholders. A good ratio here will usually lead to an increase in share price and high demand and thus liquidity for their shares and perhaps lower interest rate from potential future loans; due to the risk reduction arising from higher level performance.
The formula used to measure the Performance/Profitability ratio, Return on Investment is: -
Balfour Beatty:
Carillion:
Balfour Beatty Figure: 31.36%. The higher this figure, then the better the company has performed. This figure is encouraging as they have out-performed market leaders (in terms of revenue) ICHICKEN Co Ltd, who recorded a lower 26.87%. This is a crucial finding as it shows that despite ICHICKEN generating more revenue, Balfour Beatty have proved more efficient in using investors’ funds. Additionally, Carillion PLC, who are ranked 2nd in the UK’s top 100 construction companies, recorded a low 13.33%.
Gross Profit Margin
To further assess how efficient Balfour Beatty is, we should assess the Gross profit margin on their turnover. This will show us how efficient Balfour Beatty is in creating revenue. They can keep this percentage up by keeping overheads low, and not over investing in too much stock and raw materials. Gross profit is perhaps the most suitable figure to measure efficiency, as it excludes any expenses that are, to a certain extent, beyond company control and should not be considered when assessing performance; such as Taxation & Interest.
The formula used to measure the Gross Profit Margin is: -
Balfour Beatty:
Carillion:
Balfour Beatty figure: 7.66%. As might have been expected, Balfour Beatty also outperforms ICHICKEN on this ratio as well, with ICHICKEN standing at 5.28%. Additionally, Carillion PLC recorded a result of 7.17% which is also lower that Balfour Beatty.
We can see from the 3 ratios that Balfour achieve high performance levels, and with this good efficiency, the scope of growth is expanded substantially, as they have shown potential to efficiently handle higher revenues.
5.1.2 Corporate Liquidity Ratios
Debtor & Credit collection period
Lack of cash is one of main reasons that companies fail. So it’s important to see how well Balfour Beatty maintains its working capital. Debtor Collection period shows the average amount of days it takes for Balfour Beatty to physically receives payment from Debtors.
The formula used to measure the Debtor & Credit Collection period is: -
Balfour Beatty’s figure: 62 days. This means on average it is taking 62 days for Balfour Beatty to receive its cash from sales. Balfour should aim to reduce this figure as much as possible; thus giving them the advantage of having a healthier working capital, allowing them to use the cash in other areas of business. Alternatively, creditor collection period is how long it takes Balfour to pay up its debts. Balfour Beatty’s figure: 49 Days. This figure shows that Balfour is taking, on average, 49 days to pay up its debts. It is healthy that Balfour keeps this figure up, as it allows Balfour to keep its cash, and use it for other purpose. However, as important as keeping this figure as high as possible is; equally important is not extending it too much. This may have a negative effect, irritating suppliers, thus affecting business relationships and further reputation of the company.
However, in comparison to Carillion, Balfour Beatty still has a healthier ratio for both Debtor and Creditor collection periods.
Current Ratio
Balfour Beatty’s figure: 77.12%. This shows that for every £1 of liability, Balfour have 77pence of assets. This figure will need to be improved, and can be improved by the strategies mentioned above.
5.1.3 Financial Strength Ratios
Interest Cover
Loan providers and investors, will be interested to see how safe their investment is. It shows loan providers how comfortable interest is paid, and seen as loans get paid before investors, investors will also be worried about this figure.
Balfour Beatty’s figure: 5.04. This means that Balfour’s profit can comfortably pay their interest 5 times.
See Appendix 12 for the Full list of the Financial Implications of Balfour Beatty.
6 Executive Summary
From this report it is clear that Balfour Beatty is a well ran organisation. Through the PEST analysis it became clear that the current market is at the start of some testing times, however after concluding the SWOT analysis it also became clear that Balfour has the structure and resources to see it through, but this will depend on the management of the organisation.
There are many potential openings in the market for Balfour, much of it abroad, due to the political environment and global recession. Despite reductions in interest rates, it is still difficult for companies to get loans, however Balfour's current order book and long term relationships with blue chip clients, allows them some slack. Balfour’s diversity allows it to compete in many sectors, and due to its huge work load the business was split into four sectors. Each sector contains smaller Balfour companies, both in the UK and abroad.
As a market leader Balfour’s pricing strategy needs to reflect that but this should depend upon the market conditions and clients, as setting the market price could easily see them over price projects and in such a slow market, this could see them loose jobs.
Through Porter’s 5 forces it is apparent that Balfour should not be too worried by the threat of entry, as not many new construction businesses will be starting up. Also if they are careful, they will also benefit from lack of supplier completion, due to the decrease in buyers. The largest threat to the market will be substitutions as clients will be looking to save money.
Balfour is already a market leader and with the current economic climate it would be a brave or stupid move to look beyond Market Penetration as a strategy for the foreseeable future, allowing Balfour to further establish themselves in the industry, and also take advantage of the high numbers of construction companies going into administration.
Balfour Beatty are Cash Cows, due to their high share of the market, long establishment and current position as the UK’s biggest construction company and to maintain this, Balfour need other sectors to become Stars, which will eventually become Cash Cows.
Ratio analysis provided a sound numerical assessment of Balfour Beatty. Promising percentages were evident, with Balfour showing good efficiency in particular; with high Return rates on Shareholder investment and a high Gross profit margin, it is clear that Balfour knows how to spend efficiently, further providing them with good potential of growth. This can be partially attributed to their healthy working capital ratios. By keeping large amounts of cash in the business at all times, companies are safe from liquidity problems. However, Balfour’s position is compromised with a low current ratio, which can lead to future difficulties. However, it is evident that Balfour are extending their creditor days, and reducing their debtor days, perhaps in aim to improve this figure.
7 Bibliography
Christopher Moir and John Dawson -Competition and Markets - Macmillan Press 1990 p50 - 64
Ralph D Stacey - Strategic Management &Organisational Dynamics - Pitman Publishing 1996 p31 - 167
G Johnson & R Scholes – Exploring Corporate Strategy - Prentice Hall 1998, p26 - 35
Ronald W Hilton - Managerial Accounting, 2ndEdition, McGraw Hill 1991 p40-72
Frank Wood's - Business Accounting 1 &2, 6th Edition, Pitman Publishing 1993 p140-201
Keynote Market Report 2006 – Building Contracting, 9th Edition, Edited by Jenny Baxter, p24 - 64
Mintel Report - Construction Industry -January 2007
Keynote market Report 2006 - Building Contracting, 9thEdition, Edited by Jenny Baxter
Website:
8 Appendices
Appendix
Appendix 1:
Appendix 2:
Appendix 3:
Appendix 4:
Appendix 5:
Appendix 6:
Appendix 7:
Appendix 8:
Appendix 9:
Appendix 10:
The Tables below show a list of the Top 100 Construction Companies of 2009, ranked on by turnover and profit. The tables are compiled every September.
Note: Ardmore: The figures are for Ardmore Construction, the largest element of the Ardmore Group, which includes Ardmore Construction, Paddington Construction, BCL Rail Services, BCL Plant and BCP (British Contractors Plant Limited). Barr/McLaughlin & Harvey: The companies are listed separately but have common ownership in Trench Holdings. Bechtel: UK arm of the American construction giant. Bouygues: The figures are for the three largest construction arms of the French giant Bouygues that operate in the UK: Bouygues UK, Colas and Warings. The figures are for the combined performance of the companies and most are straight additions, so no account is taken of any intertrading. Bouygues does not file consolidated accounts for its combined UK operations. Bouygues has other construction related interests in the UK such as Ecovert FM, Thermal Transfer and David Webster. These have not been included. Bovis Lend Lease: The figures are for Bovis Lend Lease Holdings Limited, registered in England, which is a subsidiary of Australian-owned Lend Lease Corporation Limited. Brett Group: The figures include some contribution from building materials. Carillion: Acquired Alfred McAlpine in late 2007. Enterprise: Figures for turnover and for 2007 are pro forma. No representative figure is provided for profit before tax and for staff costs for 2007. BAM: The figures are for the aggregate performance of BAN Construct (formerly HBG Construction) and BAM Nuttall (formerly Edmund Nuttall), both subsidiaries of the Dutch-based Royal BAM Group. The figures are not taken from consolidated group accounts and most are straight additions, so no account is taken of any intertrading. The figure for the highest paid director is for Nuttall. Headcrown: The parent company for a range of construction firms including Cruden Group, JF Finnegan, Gee Group and Browns of Wilmslow. No highest paid director was given in the consolidated accounts, so the figure taken is from JJ Finnegan. Lagan: The Lagan group of companies consist of five separate divisions trading as: Lagan Holdings; Lagan Cement; Lagan; Homes; Lagan Developments; Kingscourt Bricks. The financial information is provided by the company and comprises the aggregated figures for the trading divisions. Inter-trading has been netted out for the purposes of these figures. Laing O’Rourke: The 2008 figures are taken from the firm’s Annual Review 2008 presented on the company website. The figures are for Laing O’Rourke Corporation and thought to represent the consolidated operations of the business. These figures have been included despite the company not being UK registered, which would normally exclude it from inclusion in the listing. Laing O’Rourke Corporation is understood to be registered in the British Virgin Islands along with its parent Suffolk Partners Limited. The 2007 figures are for Laing O’Rourke plc and are verifiable through the UK Companies House data. The largest UK registered operation known to The Construction Index is Laing O’Rourke Construction Limited, which achieved a turnover of £623 million in the year to March 2008. Figures for the year to 2009 were not made available to The Construction Index before publication, but it is understood that Laing O’Rourke turned over £4.1 billion. Southern Electric Contracting: The firm is a subsidiary of the Scottish and Southern Energy Group. Vinci/Ringway: The figures are for the combined performance of both companies, which are both subsidiaries of the French-owned Vinci. The figures are taken from the individual filed company accounts and most are straight additions. No account is taken of any intertrading. Ringway figures for 2008 were not available, so the figures used for 2007. The figure for highest paid director is for Vinci. Vinci acquired Taylor Woodrow construction in the autumn of 2008. Taylor Woodrow construction had a turnover of about £690 million in 2007. Willmott Dixon: The firm bought back in-house its former housing maintenance and building specialist Inspace, which it floated on the stock market about three years ago. Figures for the full group have not been prepared. Those presented are mainly for the Willmott Dixon operation alone, although the firm provided aggregated figures for the turnover and profit of the aggregated business, which have been included.
Appendix 11
Company History:
1872
George Balfour, a Scot by ancestry, was born in Portsmouth. At 16 he served a five-year apprenticeship in the Blackness Foundry in Dundee.
1882 – Electric Lighting Act
Parliament passed the Electric Lighting Act to keep the supply of electricity on a local footing. Electric tramways began to take over from the old horse-drawn systems. This inspired George Balfour and Andrew Beatty to establish their own business.
1909 – Balfour Beatty founded
Balfour Beatty was founded by George Balfour, a Scots mechanical engineer, and Andrew Beatty, an English chartered accountant. The company described itself as "general and electrical engineers, contractors, operating managers for tramways, railways and lighting properties and for the promoting of new enterprises."
The company's first contract was for a new tramway system in Dunfermline in Fife. Worth £141,450, it involved laying new track and lighting cables and installing additional generating plant at the power house. The company subsequently moved into civil engineering when it was commissioned to build a five-mile-long aqueduct at Kinlochleven.
1914 – First World War
Balfour Beatty moved to new London offices, but within weeks the nation was at war. Many Balfour Beatty staff in London and Edinburgh left to join the army and those who remained had to take on new and extra work. Although tramway work was halted Balfour Beatty was able to undertake other projects of national importance.
1918
George Balfour was elected as the Conservative and Unionist member for Hampstead. He played a prominent part in debates on electricity in 1919, 1922 and 1926 as well as many discussions on unemployment.
1920
Unemployment more than doubled between December 1920 and March 1921. Recognising that the new electrical industry held great promise for better employment, George Balfour and Andrew Beatty registered a new company, Power Securities Corporation Ltd, in 1922, to increase financial resources to fund more and larger projects including hydro-electric projects in Scotland.
1924
Balfour Beatty began its work outside the UK with hydro-electric projects in East Africa. This was extended in 1926 to work in Palestine to supply electricity and water to Jerusalem and Bethlehem.
1926
The Central Electricity Generating Board was set up to construct the national grid, at a cost of £26.7 million. By 1922, the Midland Counties Electric Supply Company had standardised the voltage in Derbyshire and Nottinghamshire. In the same year the Lochaber water power scheme commenced, which called for a 15-mile tunnel to be driven through granite mountains in Fort William. This was the longest tunnel in the world and the largest project in the Scottish Highlands.
1929
By 1929 power facilities were being built all over the world, along with railways and tram systems. These included a railway in Bermuda, and Balfour Beatty offices were maintained in Buenos Aires and Montevideo.
1931
Balfour Beatty became engineers and agents to the Perak River Hydro-Electric Power Company in Malaya, at the request of the British Treasury. The company held a concession to supply electricity to the tin mines in Kinta valley and built two power stations, but just as these were completed a world slump hit the tin industry, bringing financial problems. A gradual recovery brought good results until December 1941, when Malaya was invaded in the war.
1934
Iraq required gigantic irrigation schemes and the first task was to build a barrage across the river Tigris. This was completed in 1938.
1939 – Second World War
By the outbreak of the second world war the National Grid plan was complete and Sir Johnstone Wright, president of the Institution of Electrical Engineers said that the organisation of British electricity was without parallel in any other country.
Overseas work was severely curtailed during the second world war. The famous Churchill Barriers were built in the Orkneys to protect the eastern approaches to Scapa Flow - home of the British naval fleet. Once the war was over reconstruction work began. In 1946, work valued at £4 million included installing 100,000 kW of power plant, erecting 230 miles of transmission lines, bomb damage reconstruction, railway tunnel repairs and opencast coal mining. Two massive projects were initiated: a 360,000 kW generating station at Staythorpe and a 345,000kW station at Burry Port in south Wales.
1945
Once the war was over, and the Labour party elected, nationalisation of some industries was inevitable. This deeply affected Balfour Beatty and its financial parent, Power Securities. A new British Electricity Authority would be responsible for competitively tendering all construction work using public money.
1951
Balfour Beatty continued to be successful outside the UK. This included the construction of the Wadi Tharthar project in Iraq. The £6 million project was opened by King Faisal in 1956.
Other projects included the longest rail tunnel in Britain under the Pennines, the Sloy Dam in the north of Scotland and major works for the developing London Underground system. A Balfour Beatty company was also registered in Toronto to undertake marine projects in the Great Lakes in 1954.
1957
Nuclear power was an exciting new challenge and in 1957 work began on a power station at Berkeley.
1959
By the time the company enjoyed its golden jubilee in 1959, it was able to celebrate "50 years of power development and services as a complete organisation with design, construction, operation and management of engineering projects in any part of the world."
1960
In the 1960s, Balfour Beatty built a second Blackwall tunnel under the Thames. It also brought vital new power generation and transmission capacity to Malaysia, Kenya, Tanganyika and Nigeria, where the Kainji dam opened in 1969. Vital new water systems were also provided in the Jordan Valley.
By 1968, Balfour Beatty was well established and successful, but with the new 400kV Supergrid in the UK now complete, the future looked less rosy.
1969
Balfour Beatty merged with the construction activities of BICC, the British cable-making giant. This strengthened existing disciplines and added related activities such as railway electrification and a diversification into new markets including motorway construction, building and property development.
1975
In the 1970s major projects were carried out in Iran, India and the UK. To this day, most of the tunnels in the world, which carry electrified railways, have Balfour Beatty conductors in them.
Work also began at the £350 million Mina Jebel Ali port in Dubai.
Balfour Beatty was also heavily involved in the major expansion of the UK road network and urban traffic management schemes. In 1976 Balfour Beatty Construction won a £30 million contract in a joint venture to build the Kielder dam in Northumberland.
1983
Balfour Beatty became one of Britain’s top contractors with a turnover of £680 million.
1986
Balfour Beatty leads the UK-side of an Anglo-French joint venture awarded the turnkey contract to build the Channel Tunnel.
1994
A Balfour Beatty and Costain joint venture was awarded the £93 million contract for the Cardiff Bay barrage. A contract to build the Hong Kong Airport terminal building at Chep Lap Kok was also undertaken in joint venture.
The Channel Tunnel linking Britain and France opened in 1994. Balfour Beatty had played an important part in its construction and continued work to build sections of the new fast rail link from the coast to London.
1996
Balfour Beatty was an early entrant into the UK PPP market, being awarded its first project in 1995. By the turn of the decade, the company had established itself as a leader in this fast-growing market.
As part of the privatisation of British Rail and creation of Railtrack, Balfour Beatty acquired rail maintenance and rail renewals businesses to augment its position as the UK’s leading rail contracting company.
The appointment of Chief Executive Mike Welton and Finance Director Ian Tyler marked the beginning of a period of consistent growth for the company, which has continued to this day.
1997
Radical changes in worldwide cable markets hit the cable business hard and the losses in the manufacturing business mounted. In 1997 a strategic decision was taken to dispose of the cables businesses, the bulk of which was accomplished by 1999.
During this period, Balfour Beatty's key projects included the Pergau hydro-electric project in Malaysia, a turnkey contract with Thames Power for a gas fired power station at Barking Reach in east London and a £39 million contract for the extension of the M8 in Scotland.
Balfour Beatty Capital Projects was formed to manage the Group's growing portfolio of privately financed infrastructure projects and a new chapter began.
1998
Following the privatisation of Britain’s railways, Balfour Beatty played an important part in the maintenance of major lines and won the contract to remodel the approaches to Euston station and transform the ageing West Coast Main Line.
1999
The fast growing US transport market resulted in major contracts for Balfour Beatty in Texas, California and South Carolina. While in Hong Kong, a HK$2.2 billion contract to construct the Nam Cheong station in Kowloon was secured.
2000
Following the demise of BICC, Balfour Beatty emerged once more as an independent public company. It was bolstered by a recovery in its financial strength, a new management team and the cash proceeds of the cables sale.
In its aim to become a world leading supplier and maintainer of fixed rail infrastructure, the Group acquired Adtranz's rail electrification and traction power supply business. This gave the company an immediate and major presence in the worldwide high-speed rail market.
2002
The creation of Balfour Beatty Utilities enabled the Group to secure outsourced term contracts with many of the UK’s privatised utility companies.
2003
The year saw the retirement of the chairman, Viscount Weir. He had guided the Group through its major transformation in the late 1990s when the worldwide cables business was divested and Balfour Beatty was established as an independent public company.
2004
The announcement that Balfour Beatty was the preferred bidder for Birmingham Schools brought the number of PPP schools projects to five. The other projects were located in Stoke, Rotherham, North Lanarkshire and Nottinghamshire.
2006
By 2006 Balfour Beatty, with an established track record in airport infrastructure development, was selected by Devon County Council as preferred bidder to acquire Exeter International Airport.
2007/8
The acquisition of Centex Construction, a leading US construction management company and GMH, a major player in the US PPP military accommodation market creates a major business in the US.
2009
Balfour Beatty is now ranked 19th in the international league table of contractors. The Group is the largest fixed rail infrastructure contracting company in the world, a UK leader in roads, support services, electrical and mechanical engineering and other disciplines. Our excellent financial performance, all round strengths, clear strategy and strong cash position mean that we face the future with great confidence.
http://www.balfourbeatty.com/bby/about/history/
http://www.balfourbeatty.com/bby/markets/
http://www.balfourbeatty.com/bby/segments/business-intro/
http://www.balfourbeatty.com/bby/investors/shinfo/cs/
The acronym PEST is used to describe a framework for the analysis of the external macro-environment
Pride W et al. 2006, Pg.93
http://en.wikipedia.org/wiki/Marketing_mix
http://www.balfourbeatty.com/bby/media/publications/2007publ/ataglance07/ataglance07.pdf
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http://www.marketingteacher.com/Lessons/lesson_boston_matrix.htm
http://www.theconstructionindex.co.uk/market-data/top-100-construction-companies/2009
Balfour Beatty’s debtor and creditors collection period taken from ‘FAME’ database
Carillion’s debtor and creditors collection period taken from ‘FAME’ database
http://www.balfourbeatty.com/bby/about/structure/
http://www.balfourbeatty.com/bby/about/structure/#civil
http://www.balfourbeatty.com/bby/about/strategy/
http://www.balfourbeatty.com/bby/about/bby_1123.pdf
http://www.omegaaccountancy.co.uk/four-p-s-the-marketing-mix.html
http://www.balfourbeatty.com/bby/contactus/
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http://www.theconstructionindex.co.uk/market-data/top-100-construction-companies/2009