The strategic options open to heating and ventilating engineers

9.8.1 A large number of strategic options are open to subcontractors. For example, they may choose to develop their specialist skills and invest in plant and machinery which increases or improves their productivity, standards of specification, quality of output,

reliability of components, speed of assembly on site, and other aspects of their contribution to the construction process. These strategies ultimately provide increased value added by the specialist contractor using more detailed knowledge-based design inputs and skills, and the supply of trained, experienced and motivated and better equipped specialist engineers. These strategic options apply to heating and ventilating contractors although they do not necessarily adopt them.

9.8.2 For example, investment and training strategies aimed at improving particular detailed aspects of the building process give specialist firms opportunities to differentiate their services and increase their profit margins. However, relatively little training is

undertaken in-house by heating and ventilating contractors due to the increasing prevalence of labour only subcontracting. Qualitative technical and product differentiation between specialist firms are also options available to heating and ventilating contractors who supply different components. In contrast main contractors are expected to provide a non­

differentiated product or service defined by the specifications given in tender documentation. 9.8.3 One option open to main contractors is expansion abroad. This option while possible is however, more complex for specialist firms. In most cases specialist contractors would be too small to justify setting up foreign operations, or their contribution to a building project would be too small to justify the additional overhead costs of travel and accommodation compared to a local provider. Component manufacturers are, of course, in a position to export their output to local firms abroad. In the 1997 HVCA Specifier’s Guide are listed 310 HVCA member firms prepared to carry out work abroad, which does not necessarily imply that they had all indeed done so previously (Specifier’s Guide 1997 p.327-340). Also, several of the members of the HVCA Major Contractors’ Group report foreign earnings in their armual accounts, but these are never more than a relatively small proportion of turnover.

9.8.4 Other strategies open to large main contractors include undertaking build, own, operate and transfer (BOOT) projects. This option is not usually available to specialist firms.

One reason for this is that while main contractors are management and finance orientated, subcontractors are based on skills and assets, such as specialised plant and equipment.

9.8.5 Barriers to entry and exit also affect the strategic options open to firms. As with any market, decisions to enter or exit depend on the size of the barriers. The barriers to entry and exit into and out of the heating and ventilating industry are relatively low, like the rest of the construction industry, compared to other industrial sectors such as manufacturing. The major barrier to entry for heating and ventilating contractors is the ability to tender for work.

Looking vertically forwards from the point of view of new entrants into the heating and ventilating market, the time needed to establish legitimation, namely client contacts and a good reputation with main contractors form one of the main barriers to being invited to tender. Vertical backwards integration from heating and ventilating contractors, because

particular components may be specified, may involve close links with suppliers. In other words, in general it is the linkages with suppliers and clients rather than fixed capital

commitments which form the obstacles to entry. As the barriers to entry tend to be related to marketing factors, decisions to enter may be responsive to demand and current market opportunities and short term profitability rather than any long run strategy.

9.8.6 The main barriers to exit concern the asset and skill specificity of heating and ventilating contractors and engineers. Their specialist technology and techniques tend to have a narrow application, even linked to installing particular prefabricated components.. Departure from the market means these skills and knowledge would not necessarily be applicable or useful elsewhere and the company might have to cease trading. Managers and the working proprietors of small firms would lose their main source of income if the firm were to close.

9.8.7 Decisions to exit may be more related to the expected high opportunity cost of leaving the market, which leads firms to delay making the decision to leave the market in recessions until long after losses have begun to be incurred. In Figure 8.1, this can be seen in the time lags between the upper turning point and the peaks in bankruptcies and insolvencies, which follow. Particularly in recessions competition is a zero sum game in which firms as a whole cannot expand. Therefore, one question raised by Penrose (1959, p.244) of relevance here is whether or not small firms are more adversely affected by the downturn in trading conditions than large firms.

9.9 Concluding remarks

9.9.1 As subcontractors in the building process, heating and ventilating firms are often to be found at several removes from the client and in a weak negotiating position. Heating and ventilating contractors need to overcome their marketing and production difficulties if they are to survive. To achieve this objective it appears that firms’ best interests are served if they manage growth. Growth is not only a measure of success, relieving the workforce from the threat of redundancy, it enables the firm to remain competitive and survive. The issue is the relationship between growth and both size-survival and entity-survival. If there is a trade-off between growth rates and survival, as annual growth rates increase the survival of firms becomes more doubtful. Low growth rates and negative growth rates will also likely have detrimental affects on a firm’s survival chances. The question is what rate of growth in the heating and ventilating industry is most closely associated with size and entity survival? 9.9.2 The other main points of this chapter include:

• The role of subcontractors has changed as they have found it necessary to assume some of the managerial functions traditionally carried out by main contractors.

• Subcontracting in the construction industry allows production flexibility.

• Because of the level of uncertainty in the construction market the strategies of firms tend to be reactive and change over time depending on circumstances.

9.9.3 In view of the dynamic nature of the industry and the need to adapt to changing circumstances, the following chapter considers the changing market conditions brought about by changes in the business cycle.

Chapter 10 Business cycles and the responses of heating and ventilating