Operating Models of Construction Businesses
Jeng Yuan Lin1*
1 Ph.D. Program of business, Feng Chia University, Taiwan
*Corresponding Author: [email protected]
Accepted: 15 February 2023 | Published: 1 March 2023
DOI:https://doi.org/10.55057/ijbtm.2023.5.1.8
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Abstract: The construction industry plays a critical role in Taiwan’s economy. In the past, the industry yielded high profits. However, due to excess supplies in the real estate market and economic recession, the construction industry must develop suitable operating models for sustainable operations. This study explored the sustainability of the operations and management of construction businesses and compared various types of construction companies in terms of the areas of work they undertake, such as land development, product planning and design, budgeting, construction outsourcing, quality control, and after-sales service. This study organized these areas of work and conducted objective comparisons to determine how the construction industry can achieve sustainable management. The researcher of this study was a practitioner in the construction industry. This research report can serve as references for fellow industry practitioners and encourage more experts in the construction industry to provide their operational philosophies as references for their peers.
Keywords: construction industry, operating model, sustainable operation
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1. Introduction
1.1 Research background and motivation
The common understanding of the construction industry is that construction companies build houses. However, the construction industry is a comprehensive industry that bridges industrial and business operations. Construction can also trigger the development of upstream and downstream industries. Thus, the construction industry is often called the most iconic traditional industry.
Land development falls within the scope of the construction industry and is among the main undertakings of this industry. Investment in and development of the construction industry can lead to the development of human labour and building materials in construction companies.
Such developments can also create opportunities for the production and development of traditional industry products. The market prospect of the real estate market can affect the business environment and socioeconomics at the political, economic, social, and regulatory levels. For example, from 1997 to 1999, the implementation of a floor area ratio control caused a considerable number of construction companies to rush into housing construction, which resulted in an oversupply in the housing market and consequently a domino effect of bankruptcy among construction companies. The construction industry was also affected by 1999 Chi Chi earthquake, global competition due to Taiwan joining the World Trade Organization in 2001, the global financial crisis, the luxury tax in 2011, and the integration of the house tax and land value tax in 2014.
Construction companies in Taiwan are affected by the global environment and domestic economic instability, which cause changes in market demand, supply, policy, as well as operation and management practices. Domestic politics also negatively affect the industry.
Increasing the competitiveness of the construction industry and integrating effective resources and capabilities for sustainable development are current problems that the construction industry must proactively resolve.
This study explored how the construction industry can survive and thrive through operation management and various after-sales services to achieve sustainable operation.
1.2 Research objectives
During economic recessions, the construction industry, an iconic traditional industry, is profoundly affected. For the construction industry to continue operations, they must demonstrate effective and efficient operations and management. The industry must also become more competitive in their cost control measures such as reducing human labor and having a flat organizational structure to allow rapid implementation of decisions and achieve goals. Moreover, shrewdness is required for construction companies to identify land zones to develop and gain the edge in reducing land cost. Regarding the outsourcing prices of construction project, project scheduling, and quality control, certain methods are required.
Finally, after-sales service strategies must be implemented quickly and ensure client satisfaction with the warranty they offer. Because the construction industry is a regional competitive market, the development of construction projects and the delivery of after-sales services must be bridged seamlessly and effectively to resonate with house buyers and ensure sustainable management.
This study explored the construction industry’s operation, management, and engineering practices for sustainable development. Moreover, this study compared construction development companies with technology departments and companies that outsource projects to other construction companies in terms of their operations and management, such as land development, product planning and design, budgeting, project outsourcing operations, engineering quality management, and after-sales services.
This study conducted a sequential and systematic analysis with objective comparisons to determine how the construction industry can achieve sustainable management.
2. Introduction to the industry
2.1 Definition of the construction industry
The construction industry constructs buildings that are warm and safe and allow people to live peacefully. Construction projects must also consider the local environment, geography, and cultures to design buildings that are visually aesthetic.
Broadly speaking, the construction industry consists of architects who design buildings, construction companies that implement the construction plans, construction material businesses, building equipment providers, interior designers, construction service businesses (e.g., advertising planning and consignment), building maintenance and management service providers, security, and banks during real estate development. Anything related to the development of real estate can be considered as part of the construction industry.
In a narrow sense, the construction industry refers to construction companies in the construction investment industry (that are primarily involved in investing and commissioning
construction companies to carry out construction projects but also in planning, advertising, and sales). In other words, the industry denotes construction companies, investors, or developers whose work aligns with the function of construction. With large-scale ones integrating a wide range of operations such as developing land, planning and design, constructing houses, selling houses, and providing related services.
Construction companies provide spaces for human activities or services, in whole or in part, on the design, decoration, and construction of internal or external spaces. Architecture refers to both the actual buildings and the process of constructing buildings. The actual structure of completed architectural projects are called buildings. Buildings are typically considered products of the culture of a period and also a work of art. Buildings encapsulate and showcase culture through unique and innovative designs. Construction also includes comprehensive environmental designs, such as regional planning, urban and rural planning, landscape design, and ecological engineering projects. All construction projects that occur before a community is established are part of the construction industry.
2.2 Characteristics of the construction industry
In the construction industry, product quality depends on the conscience of the product providers. Real estate is a unique product whose transactions must be safe and human-centered.
Real estate differs from other types of products in that it can be a home, investment, or a sign of social status. However, real estate is also affected by the market mechanism. Consequently, resource allocation for real estate development is complex.
Real estate development constitutes a large part of the construction industry, and considerable funds are required in the land acquisition, design, planning, construction, and sale processes.
The construction industry consists of enterprises that design and develop products, integrate technology and environmental protection practices, market their buildings, and provide services. The construction industry also involves comprehensive planning and design of products, construction, and sales. Moreover, the construction industry differs greatly from other industries operations in that it requires a high level of integration among funds, technology, and labour, and the products are expensive, diverse, and immobile.
Products appear on the market due to innovation from the supplier or the preferences of the consumer. The nature of real estate commodities manifests mainly in the environmental characteristics of land, which greatly affect prices, and sometimes in their scarcity or quality.
Crosby (1979) maintained that good quality means meeting needs. Enterprises must establish the product specifications from the customer’s perspective; only after meeting such specifications can the product meet the customer’s needs. Shetty and Ross (1985) defined quality as the ability of a product or service to meet the needs of customers. Construction requires proper ethics and conscience. Money can always be earned; however, disregarding conscience, quality, services, and reputation eventually leads to being eliminated from the market. Therefore, architects must pay attention to construction operations and be responsible for both quality and services to earn the trust of consumers.
An industry consists of famous brands that strive for excellency. In addition to the commodities (i.e., houses) of enterprises, consumers’ word of mouth and enterprise image create a benevolent cycle and are key to the survival of an enterprise. The quality of a building affects not only individuals but entire families, and owning a home is a dream for many people. Homes are the foundation of life and development.
2.3 Introduction to sectors of the construction industry The construction industry can be divided into the following:
A. Land integration and development: Businesses whose main scope of operations consists of real estate (land) planning and development, urban planning, and regional planning such as self-organized municipal rezoning, urban renewal, and the integration of investment in old building reconstruction.
B. Building investment: Businesses that develop land to construct buildings. These businesses emphasize controlling the market timing and sales and are less concerned about product planning and construction quality. Areas related to building investment include investing in and commissioning construction companies to carry out construction projects;
sales; planning; and advertising.
C. Building construction: Construction businesses with construction capabilities. They primarily undertake civil engineering projects and construction projects. The scope of these projects can include demolition, building structure construction, mechanical and electrical equipment installation, civil engineering, and reconstruction. These businesses are the backbone of national economic infrastructure, possess expertise in construction operations, and have technical teams with construction capabilities. Such businesses are divided into Grades A, B, and C, with every business starting from Grade C. According to Article 7 of the Construction Industry Act, construction businesses may apply to be upgraded to the next grade after they have undertaken engineering projects whose total worth exceeds a required minimum for a given duration. Moreover, a maximum amount is set for the individual projects that can be undertaken by businesses of each grade. Thus, a considerable amount of time, money, and personnel is needed for a business to grow to Grade A.
D. Integrated contracting: Businesses that plan and invest in real estate. These include building investors and developers, architects, construction contractors, landscape designers, interior designers, agencies, sales, appraisers, financing businesses, notaries, and businesses that handle consumers, users, as well as the leasing, management, and maintenance of real estate.
The construction industry can be roughly divided into these four areas. The speed of population growth and degree of urbanization differ across regions in Taiwan. The northern, central, and southern regions of Taiwan may learn from one another’s experience in real estate investment, development, operation, and management. Target markets can be clearly segmented for individual regions, and a strategic model for sustainably developing new markets and cross- region investment can be established.
2.4 Sustainable operation of the construction industry
The construction industry can attract numerous investors because its business model involves a series of activities that can be implemented to provide clients with value and create profit (Afuah, 2004). Most investment projects in the construction industry are independent from one another, meaning that investors can get their share capital back and receive profits they are entitled to at the end of each project. Therefore, unlike projects in traditional industries where investors only receive dividends each year, real estate projects are simple to invest into and returns high profits. Thus, it is the top choice for many investors. Friedman (1970) maintained that maximizing company profits is a major strategy of enterprises. Additional costs can lead to lower corporate competitiveness. However, this investment philosophy lacks a sustainable mindset and will fail during recessions. Many shareholders often sell their stocks, which places a heavy financial burden on executive shareholders and ultimately on consumers. Buying a
house requires the life savings of most consumers. Thus, construction businesses must adopt a business model that ensures sustainable operations.
As the quality of life increases, industries rapidly develop, and environmental protection becomes more valued, the system of real estate investment, production, trade, and use have become increasingly complex. Additionally, the operational model is closely related to the operational mechanism of real estate departments. When a large amount of funds is invested, resources are limited, and the use and construction expenses are adjusted, the operation, planning, and management of real estate is substantially affected.
The widespread use of the Internet and e-commerce has brought tremendous changes to how people engage in various activities and the content of these activities, in turn affecting people’s requirement for house location, quality, and quantity. These changes have exerted structural influences over the operation and planning of the real estate industry.
Websites related to real estate have developed Taiwan and abroad and offer abundant information. In response, the operation and planning of real estate must keep up with the development of technology and be adjusted accordingly to include new concepts and technology and thus to identify buyer needs. According to Dilthey (1957), operational philosophy is a worldview rather than a tool to achieve specific goals.
Community management is a critical communication tool between enterprises and users (such as the use of an application made by an enterprise) to increase the add-on values of a real estate product. Community management allows enterprises and consumers to understand the challenges they share regarding the real estate environment and the degradation of equipment after long-term use. Construction equipment has a service life of no more than 30 years, and the lifespan of buildings is 50–100 years. In consideration of building maintenance or updates, communicating to users about new products or specifications or how to find suitable products is a necessary service in the construction industry. Community management allows consumers to understand and even trust enterprises, which is critical for the sustainable operation of enterprises. Magretta (2011) defined a business model as a framework to plan how enterprises create services for all its stakeholders. Comprehensive management services can effectively increase the add-on values of a real estate product. Enterprises must continue innovating and developing added values to achieve sustainable management
3. Operational strategy and vision of the construction industry
3.1 Positioning and analysis of construction products
After an enterprise determines the scope of its target market, it must formulate appropriate marketing strategies. To address different market needs, enterprises produce various products to satisfy customers of the local market (e.g., commercial buildings, complex buildings, houses, villas, and office buildings) and secure a leading position in the real estate market.
Such strategies are not applicable to every construction company. Enterprises must integrate local resources, capacities, skills, and advantages and identify primary and secondary competitions to make suitable decisions.
The operation of the construction industry foregrounds timeliness, emphasizes efficiency, and requires each step to be followed correctly to secure business opportunities. Hage and Dewar (1973) considered operational philosophy as the belief of the elites of an organization.
Operational philosophy is used to predict the future actions of an organization for its survival.
The survival of construction companies depends on their ability to obtain a building license quickly after their acquisition of land and to promote, sell, and start constructing within a short period of time. Enterprises can use high-end construction plans to secure a market share. Only when enterprise adopt sophisticated management practices and ensure smooth implementation of construction projects can they achieve their sales goals and make gains on their investments within the expected timeframe.
3.2 Management strategies of the construction industry consist of the following major goals.
A. Increasing the turnover rate of products: For a construction company to receive building licenses shortly after obtaining a piece of land, they must have prepared extensively ahead of time.
B. Planning and design: Cadastral data and onsite environmental survey.
C. Demolishing houses and grading land: Tearing down houses, grading land, conducting measurements on site, and geological drilling.
D. Identifying and measuring the boundary of the site to understand the site conditions for creating an accurate design.
E. Planning and design: To finalize a project, comprehensive construction planning, advertising, sales, and the coordination between an effective leader and architect are required.
F. Controlling the progress of construction: The paperwork for land development is complex.
Professional personnel are required for applying for licenses to ensure that the project can keep up with the operational schedule.
G. Controlling advertising and marketing: To sell a product, marketing is required. From construction planning to design, ideas must be discussed with marketing personnel to reach a consensus.
H. Controlling procurement and outsourcing: The official procurement and outsourcing operations are based on the budget, and the construction depends on outsourcing.
Procurement and outsourcing are critical requirements for engineering projects.
Procurement and outsourcing strategies must be developed according to the required time, cost, and quality of a project to control the progress of procurement and outsourcing.
After selecting a target market, enterprises must establish an image unique to themselves on the market to attract clients. Thus, to shape consumers’ attitudes and behaviors, word-of-mouth marketing is critical (Brown & Reingen, 1987). Word-of-mouth plays a critical role in affecting consumers’ attitudes and altering their behavior; it is convincing and influential (Bristor, 1990).
Market positioning represents the enterprise’s image and the value it provides, allowing target clients to differentiate it from competitors.
Market positioning is useful for adopting the appropriate marketing mix. For example, when an enterprise positions itself as a high-quality enterprise, quality is the focal point of the enterprise. When prices are acceptable, products with more functions, lower malfunction rates, and superior services have a higher quality. Thus, the value of products is codetermined by price and quality. To launch an excellent product at a high price, high-quality advertising is required to build a sustainable and convincing image. Through media channel sales and onsite advertising, the company can expand their customer base and improve the publicity of their products quickly.
a. Market factors:
The effect of market factors on sales channels is primarily caused by the broad scope of the sales market; all the products of an enterprise are unlikely to rely only on direct sales channels.
Additionally, consumers have different purchasing habits and may purchase products with higher prices less frequently.
b. Product control factors: Real estate products with different characteristics require different sales channels.
i. Real estate with higher unit prices requires shorter sales channels. For example, villas and mansions are expensive and require market surveys for the unit price per ping (a unit of area used in Taiwan and is equivalent to approximately 3.3 m2) and the total sales price. After the construction company signs for the price, the construction project will be positioned, and its sales channels are determined.
ii. For real estate products that use complex technology, the sales channel should not be long.
iii. When the product is in short supply, the sales channel should be short.
iv. The sales channel of new products should be long. By contrast, when the product is oversupplied, the sales channel should be short.
c. Enterprise factors:
i. Enterprise scale and reputation: When an enterprise has a large scale and a favorable reputation, it can choose between different channels.
ii. Enterprise management ability: Regular enterprises can develop construction projects but often lack marketing capabilities. Such enterprises require brokers with marketing capabilities.
iii. Enterprises’ demand for channel control: Enterprises with a stronger desire to control channels and stronger marketing capabilities can directly sell products to consumers or use shorter channels.
iv. Enterprises’ willingness to offer services: In general, brokers hope that enterprises can shoulder greater risks and service items to provide more favorable conditions for commercial sales. Under these conditions, brokers are more interested in competing in the sales. Otherwise, enterprises sell on the basis of their own marketing capabilities.
3.2 Product positioning and marketing
The determining factors of product positioning are the basis for other strategies. Products are tangible; they are not only buildings but also anything that satisfies consumer needs, such as customized services. Real estate products satisfy diverse needs, including accommodation, shelter, entertainment, and learning. Such products are a combination of services. Real estate products consist of three levels: product core values, physical products, and extended products.
1) Product core value: This is the basic level of real estate and the core content that satisfies consumers. Consumers buy a house for several purposes. A marketing professional’s task is to identify consumer needs and offer the core benefits and values that meet these needs.
2) Physical products: When planning and designing a product, production personnel must transform the core concepts of a product into physical products to sell to consumers and satisfy their requirements. The physical aspects of buildings include construction quality, building appearances, building sizes, colors, and layouts.
3) Extended products: When consumers purchase physical products, they may seek additional services or benefits based on the economic, social, or physical environment of a product. For example, they may buy products from enterprises that demonstrate quality,
have favorable reputation, and provide guarantees; products with more favorable mortgage options; products located in a neighborhood that offers day-to-day convenience, contains public amenities, or is near major construction projects.
Real estate products have both tangible and intangible properties and various extended products that emerge from their core values. Thus, the planning of each construction project requires compliance with the branding strategies. Today, a division of labour and expertise are key to the success of companies. Based on branding strategies, sales departments should be established to cultivate talent with related expertise and thus to achieve the integration of production and sales. Such integration can eliminate possible problems arising from collaborating with real estate agents, increase the overall service quality, and provide additional benefits to clients, which increases customer loyalty and provides information on market trends in real time.
To make a profit, construction companies, construction advertising and planning companies, and sales departments must collaborate to determine where the product’s value lies, what added values the product has, and whether the product can resonate with consumers. The price of a product is negotiated between the seller and the buyer, and increasing product value is a consensus between both parties. Determining product value and gaining recognition by consumers are critical. Weiner (1988) argued that value is a process of social cognition and a result of individuals adapting to the environment. Environmental pressure shapes an enterprise’s operational philosophy and is a critical topic in sales strategies.
4. Conclusion
The research results revealed that construction businesses mostly believe that the economy is booming and launched several products over the course of a short duration to make short-term profits. However, the population has been decreasing, and the number of consumers that can afford buying houses is debatable. These businesses may be less aware of the crises they face because part of their funds originates from financing loan. Moreover, businesses often rush to start their construction projects, resulting in low-quality construction and an excessive number of houses, which leads to a gap in cash flow. Consequently, businesses operate improperly and withdraw from the market. Products often require secondary construction to meet living needs.
These factors negatively affect the long-term development of the housing market and cause the waste of resources in society. When the economy is favorable, construction companies may sometimes buy low-cost land that is not suitable for construction, carry out a construction project on the land, and sell the constructed properties to unwitting consumers to turn a profit.
Alternatively, companies may remove the molds early to finish their construction projects early. Companies might also use second or third-class materials to build houses and sell them at a high price. Such practices can cause the buildings to be damaged or destroyed during natural disasters such as earthquakes.
If enterprises continue to have a gambling mentality when running their business, their enterprises cannot be managed and developed sustainably. To erase price competition and the practice of blindly following the economic cycles, construction companies must first give up the mindset of maximizing their market share by mass construction. In the industrial sphere, prices are reduced by mass production because machinery-based mass production could reduce costs.
However, buildings are immobile products whose production cannot be completed solely by machines. People should consider buildings as artifacts that are constructed with techniques passed down from mentors to apprentices. Industry leaders should revisit the true meaning of construction.
Enterprise management strategies must be tested by the market to gain recognition from the industry. However, before making strategies, an enterprise should first consider, in addition to the profitability of a product, what effects does this product have on consumers? What is the product’s value? Before an enterprise can make customers identify with the product, it should ask itself whether it or its salespeople identify with the product. If so, then this product can succeed, and the enterprise can achieve sustainable management.
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