South Africa’s construction sector has been developing at a rapid rate in the year 2011. This is attributable to the upcoming new infrastructure and housing units. Porter advanced five forces, which will help us analyze and evaluate these construction sector firms (Hough, 2006). The forces that nurture rivalry between firms and firms need to understand as it addresses firms’ opportunities and competitive stance. To analyze the construction industry, I will discuss a number of factors comprehensively. The muscle of suppliers, the threat posed by new entrants, substitute threats, the power of the consumer, and the degree of rivalry are the major factors that are going to be analyzed in this paper (Hough, 2006). This analysis has singled out the Aveng group. Aveng Group is a construction contracting company that operates in different construction disciplines. They offer not only infrastructural and construction services but also engineering services. The company’s mother headquarters are in South Africa. The company is one of the most reputable organizations both locally and internationally. It is also listed on the South Africa stock exchange.
In any sector, every firm is trying to outpace its competitor. To achieve this competitive advantage, the employment of different strategies is paramount. Aveng management has remained competitive despite many challenges because of the sound strategies employed by its top management. In the year 2009 – 2010, South Africa experienced mild development throughout the country as far as construction is concerned. This is because more emphasis was placed on the development of infrastructure to make the FIFA world cup successful. Aveng group operations and revenue were also largely affected by this skewed move. The company enjoys a strong solvency position; this is a plus in addressing competition as the company is able to source funds at a cheaper rate from financial institutions to finance its projects. The strong financial base has helped decrease the rivalry such that to challenge Aveng group, a competitor should have a strong financial muscle. In addition, a decrease in company debt not only will keep the firm inventory intact, but it will also foster market confidence hence attracting customers. This will reduce the rivalry, as the customer directly demands the services. Aveng group prides itself in the wide area of geographic coverage. This aspect locks out other competitors and gives the company a competitive advantage. This reduces the rivalry from not only the incumbent firms but also the new entrants. Moreover, this barrier establishes a niche for the construction firm. Considering the firm is operating in over 25 countries, its revenue can cover its expansion and mitigate operation costs (Hough, 2006).
Liquidity ratio is a problem that faces this construction firm. It stands at 1.5, a figure that is lower than the required contractors’ sector average of 1.8. This is opening room for her rival partners who enjoy a better rating. The firm however is experiencing a decline in its operating margin. This has relatively reduced its profitability and to a large extent advantaged the other industry players who have gained footing and delivered in the sectors in which the firm failed. This is a great setback to the Aveng group both locally and internationally because, with decreased profitability, a firm is unable to enter new markets and upgrade its operations. Moreover, considering this is lower than the general contractors’ required margin of 7.5, Aveng group pricing strategy and management efficiency will be largely affected. Competing companies are in a position to oust this company from its already established market because of its inefficient cost management and weak pricing strategy. An increased cost affects the company’s economies of scale. This will moreover increase rivalry with other constructors who want to fill in the gap. According to Ghobadian and ORegan (2006), a weak company pricing strategy will slow the firms’ growth in the market. This will encourage firms to fight for market share. This is because given firms acquire the much-needed market share; their revenue will increase in a large amount.
Aveng group has an edge over her competitors as far as credit for expansion is concerned. It can easily reduce the level of rivalry by prudently reducing operation costs and setting the pace with viable investments using the African Development Bank credit facility. The credit facility is meant to maintain infrastructure in the South African region. This maintenance will demand the products and services of the Aveng group. Policymakers have posted a positive economic prospect. The South African gross domestic product is expected to grow by up to 2.8 %. The construction sector is expected to play a major role in these figures. This is because economic growth leads to the creation of job opportunities. Considering a good number of the population is securing employment, demand for houses is relative. This fiscal outlook will call for construction firms to construct houses to address demand. This in the long run will improve the standing of the Aveng group in relation to its performance. Aveng group improved standing will decrease the rivalry from competing firms as it will have a huge financial muscle to foster its operations and expand to new markets. Establishing other branches in other parts of the world will to a large extent reduce the degree of rivalry with competing firms. Aveng group has a huge experience in the construction industry, and it can use it to penetrate other African states and be a dominant construction player in the industry.
The nationalization of mining operations is a large impediment to Aveng group growth. This discourages operations in its mother company, and to maintain its portfolio it has to seek refuge in safer countries. In addition, high oil prices have led to the fluctuation of raw material prices. Steel is the most affected form of raw material. This sensitivity price has increased rivalry with other industry players, some of who had this material in their hardware. An increase in raw material prices normally leads to ineffective pricing and this is where cutthroat competition comes in. Pricing is a major challenge in the construction industry as it attracts cutthroat competition which can result in zero profit and consequent exit of small firms, who are unable to cope with the increased competition. A large firm’s pricing strategies might be insensitive to the sole goal of profitability but may want to acquire and increase its market niche for future portfolio improvement (Ghobadian & ORegan, 2006).
In conclusion, the Aveng group has a well-established market niche. Effective cost management and improved liquidity position are paramount if the group is to reduce the amount of rivalry posed by other constructors. Moreover, the group using its experience in South Africa needs to penetrate to the other international markets and be an African construction giant. The government, through its regulation authorities, needs to look into the oil issue as most firms including the Aveng group are disadvantaged with an increase in raw material prices.
List of References
- Ghobadian, A. & ORegan, N. 2006, ‘The impact of ownership on small firm behaviour and performance’, International Small Business Journal, Vol. 24 No. 6, pp. 555-86
- Hough, J. R. 2006, ‘Business segment performance redux: a multilevel approach’, Strategic Management Journal, Vol. 27 No. 1, pp. 45-61.