STRATEGIC PLANNING FOR PROFIT MAKING: MY EXPERIENCE
Date: September 01, 2021 |Published by: MIU | Category: Blogs
By: Assoc. Prof. Ir. Ts. Capt.(R). Hj. Zulkifli Bin Mat Ariffin
In business, our profits are our reward for our accomplishments. In fact, profitability is the only consistent measurement tool of a business' success. Profits are the lifeline of a business. They stimulate the company growth, support the owners, provide for the well being of the staff, and ultimately determine the success or failure of the business. This paper describes a model developed in 2010 to demonstrate the need for change in my construction company. This paper examined how we could increase our profits since we are not in the business to make little or no money. Several staffs from my organization were interviewed or consulted in order to capture the dynamics structure. Essential variables were listed, and causal modelling was used to obtain important relationships. System dynamics was selected as the modelling technique due to the dynamic nature of the problem to be modelled and the impact of causal interrelationships. A system dynamics model was developed in loop form to represent and define the relationships between the variables. Extensive analysis of the model was conducted to determine the behaviour among the variables. The lessons learned were applied to serve as a model for making more profits for the company.
With office based in Kajang, Selangor, Zurasco Sdn. Bhd., a construction company, has expanded and developed quickly, becoming a construction company with quite an excellent reputation. Since it was founded in 1991, this construction business has grown from a small construction company working primarily on local district government contracts to a prestigious government building projects ranges from RM 10 million and above per contract. As the Managing Director of the company, I have a long history in the construction business. In 2001 my commitment to the company was recognized when I took over the company leadership. I was an experienced professional engineer, as certified by the Board of Engineer, Malaysia, meaning that the company has the expertise of a Managing Director qualified to construct buildings. The company itself is also registered with the Construction Industry Development Board, Malaysia (CIDB). This organization is the governing body that approves construction company like Zurasco Sdn. Bhd. to practice. The company involves with a wide variety of projects. Schools, mosques, shop lots, office buildings, retail outlets, detention centre facilities, garages, storage buildings, reservoirs and roads and highways have all been built by Zurasco Sdn. Bhd. In general the company has always been heavily involved with the construction activities all over the country, not just in the Klang Valley. To date, Zurasco Sdn. Bhd., a One Million Ringgits paid up capital company, has provided construction services to the Public Work Department, Drainage and Irrigation Department, Selangor State Development Corporation, Malaysian Palm Oil Board and Ministry of Home Affair as well as other agencies in various states and federal governments. Company revenue hovered around RM 5 million during the early years and then in 2002 business started picking up. We were very committed to serving the needs of our clients. Without that sustained level of commitment we simply couldn’t survive in this business. At one time, we have about RM 50 million worth of works in our hands. We were very familiar with the business opportunity, and we used to assume that we could run our business successfully forever. But as the company continues to grow, making profit has become more of a challenge. There are just too many challenges to obtain the desired profit. We have been a contractor since 1991, worked with hundreds of projects, big and small, but the sad truth is that we never become financially independent because of our small profit. Sad but true. If we continue to do what we have always done during the last eighteen years of survival at that time, we found it eventually didn’t deliver the expected profits we were looking for. So, at that time I decided to let go of our past and face the fact that the future should be different. We hope to be very successful by trying to change or modify our business plan or strategy while it is still not too late. It was a successful attempt and this Grade G7 construction company still survive until today even though I am not active in it anymore, but wisely still holding 60% of the company shares.
We employed a few methods to increase the effectiveness of our decision making. These methods helped us understand how to make decisions while avoiding expensive decision-making pitfalls.
In this method, the pattern behaviour was identified as the “profits too small”. The main factors (causal factors/variables) that plays a role in causing the company profit to fluctuate are:
- Tender/bidding price - is the price that a contractor offers to the client to complete a project.
- Overhead cost - Overhead costs include the business's utility costs, your advertising costs, insurance, and stationeries.
- Targeted profit - Profit at which a contractor is hoping to get.
- Materials cost - This is the cost for each construction item used to complete the job.
- Labour cost - The labour cost is the cost of hiring people to do the job.
- Revenue - This is the total amount of money received by the company for services provided during a certain time period.
- Subcontractor’s price - The price the subcontractor will charge to do their part of the work
- Total subcontract commission - Amount of money agreed by subcontractor to pay to main contractor as goodwill in the event that the main contractor allow the subcontractor to perform the whole project and gave the subcontractor total control of the project.
As can be seen in the causal loop diagram, all of these factors represent dynamic interrelationships in the system. It provides visual representation which makes ones understanding of a system structure. The causal loop diagram in Diagram 1.0 clearly shows the overall Causal Loop Diagram. It is a conventional business model for a construction company that was produced upon analyzing the research materials.
Diagram 1.0 – Overall Causal Loop Diagram
There were ten loops presented at that time, that is Loop 1 to loop 10. Six of them are positive loops, that is reinforcing feedback loop denoted by plus (+) signs and four of them are negatives balancing loop denoted by minus (-) signs.
The examples of the feedback loops that were utilised in making decision are as follows:
Diagram 1.1 – Causal Loop L2
Example 1 (+) : Labour cost problem --> Number of tender participate --> Tender won --> Revenue à Profit à Saving à labour cost problem
This positive feedback loop 1 shows that when the cost of labour increases, the number of tenders participated by the company will decreases. When the number of tender participated decreases, the chance of getting the job is also decreases. This leads to the fact that the revenue and then the profit will decrease.
Diagram 1.2 – Causal Loop L6
Example 2 (+): Wages à staff morale à estimating accuracy à profit à wages
The wages of the workers are very important. Having a high-paid wages, increases the workers satisfaction. The staff morale goes up, which increase the staff efficiency and the quality of the work done. An increase in accuracy in project cost estimating will increase the profit for the company. This is a long-run positive feedback loop which brings profits and makes workers and management staff satisfied with high-paid salary.
Diagram 1.3 – Causal Loop L7
Example 3 (-): Profit à staff training frequency à overhead cost à profit
This is a balancing feedback loop. This loop shows that the available funding for the staff is increases if the profit is increased. If the company does not have a control method, then more staff will go for training unnecessarily and the overhead cost will be increased. This will reduce the profit and the available funding for training in the long run.
Diagram 1.4 – Causal Loop L8
Example 4 (+): Profit à staff training frequency à estimating accuracy à profit
This is a positive feedback loop. It shows that when the profit is increased, more training activities can be done. It reflects the quality of works such as project cost estimating accuracy. When the estimating is correct the possibility of getting more profit is also increases. This is a balancing loop that keeps the system going smoothly.
All of these casual loop diagrams were used to help us to understand and to analyse our complex systems. We were looking for solutions in making more profit by identifying the key variables in our system and the cause-and-effect relationship between them.
SECOND METHOD-BLUE OCEAN STRATEGY
This strategy was used to help us to think about what our business was trying to achieve. The strategy is the systematic hunt of new markets and new demand creation through the pursuit of higher value at lower cost. This business strategy helps us to consider the proposed solutions. Upon analyzing the research materials and the company conditions, the following system were constructed. It is a conventional business model for a construction company. As have been detected and recognized in the research and study of the industry, these are all the factors that serve as a mean to dictate the successfulness of a construction company which eventually translates to additional or higher profits. These are the factors that all the construction companies traditionally compete on. Hence, these factors are considered in our strategy planning in order to study how these factors contribute to the success of a construction company. From the survey, the following questions and answers have been considered.
What factors does the construction industry traditionally compete on?
- Financial facility
- Professional service
- Technical team
- Latest technology
- Business connection
Are there any factors that set us apart?
- Latest technology
What could be created to add value?
- Relationship with MORE client
- Online pricing/quotation
All those factors were pictured on the company strategy canvas. Hoping by redefining the market space, the company could be the first choice in providing construction related services.
The Strategy Canvas
Graph 1: Strategy Canvas 1
ERRC Grid to Strategic Moves
With only one idea in mind that was to create a new market to work with instead of competing in an existing market, the four actions framework to ERRC grid was carefully utilized.
RELATIONSHIPS WITH CLIENTS
Table 1: ERRC grid
However, this is not just about creating something different and being the best only. Creating value innovation for the company and the clients was also considered. This means that the services provided needs to fit a strategy canvas that keeps both the company and the client satisfied. To achieve that objective, certain activities were eliminated and reduced while certain activities were improved and created. The new and different strategy canvas is shown below. The obvious difference is that the company is going to look a lot lower in certain strategies but much higher in others.
Graph 2: Strategy Canvas 2
The canvas pictured the readjustment made. The company created a blue ocean by dropping traditional construction features like experiences and procurement activities and paying less attention to cost, completion time, professional service, supplier support and business connection. It instead focused on quality service, capital increase, financial facility, modern equipment, best technical team, latest construction technology, getting more clients, and high-tech communicating facility as shown in the strategy canvas 3 below. This shift in focus is a double prongs strategy. An improvement in the focus factors will automatically improve other factors. Good team, for example will make sure that the best price can be offered. Appropriate equipments will ensure that the project can be completed on time. By using the latest technology and the best communication facility more professional services can be provided.
“To Create”- More Relationships with Clients
Essence Of Blue Ocean
Graph 3: Strategy Canvas 3
INNOVATIVE SOLUTION TO IMPROVE THE SITUATION
1. Introduce Construction Database System and Online Pricing
The construction management database and communication system were designed to accommodate the record keeping requirements and information dissemination to the clients. It provides a user-friendly computerized management program to promote better communication between the company staff and the client or potential client. The database system also helps communicate new practical ideas, applications and developments to the clients and other construction professionals. Our construction environment was loaded with the information technology gadgets. Tender or quotation were done online all the way.
To grow the construction business from the inside out the company must treat all of our clients as our best clients. The company must make the clients love what the company do by providing unique superior quality services. Unique superior services will make the clients know us better and willing to pay us money for those services. Since our clients are the best judge of our unique services, we struggled to drag more of them so that more of them will recognize the value of the unique services we provided. We helped our clients to discover the real value of our unique services.
Quality Certification: Higher Quality-More Clients-More Profits
The introduction of construction resources that can “think” is another solution to improve the company. It is an innovative, state-of-the-art “smart” technology. Smart technology not only helps organization diverges from the other industry players, but also builds employee confident, and changes the systems that influence their pattern behavior of work. The flexibility and adaptability of the smart technology has been proven in different industries. Some of these applications include quality monitoring gadgets and high tech equipments, machineries and power tools. Our company started utilizing machines or tools that can “think” and perform the task automatically and that is saving to us.
Focus On Smart Equipment to Increase Profit
To minimize the construction defect in this high-tech arena, the new patent-pending variation of the construction technique must be developed to ensure maximum convergence. The patent-pending process can introduce more gap between the competitors. The company strived to be the first in any construction method by applying the most unique feature in the construction system. The company’s innovative construction method represented the latest technology manipulation example where the design-build team will go beyond the traditional construction methods and took the considerable financial risk of developing and implementing a new technology conscious construction method. This technology such as Industrialized Building System (IBS) provided us with higher quality product at cheaper price by reducing wastage.
IBS System-Latest Technology-Higher Quality-Reducing Wastage-More Profit
This unique construction company were under the guidance of an expert technical team. They consist of a very professional and experienced team member.
Their purpose was to strengthen the company performance, launch and complete the projects and build stronger relationships with clients. Our technical team worked hand in hand with our researchers and other professionals under the same roof in order to develop the synergies to help us maintaining objectives, facilitating innovation and speeding technology transfer.
Professional And Experienced Team Members to Strengthen The Company Performance
Capital Investment & Financial Facility
In running our company, we also introduced an innovative project financing and financing technique. We will employ a nicely engineered financing mix. Our project finance is different from traditional forms of finance because our financier principally looks to our unique assets and confirm revenue of the project in order to secure and service the loan. Since the projects were very well organize project, the risk associated with the project also was very low. Our quality unique project or product minimize the dangers of any events which could have a negative impact on the financial performance of the project such as the project not being completed on time, on budget, or at all.
Good Financial Facilities- Increase Profit
Executing the proposed innovation means introducing changes. The process of change for sure would have impact on our company and on all of our workers. The company workers and associates viewed these changes with a mix of opinions. Overall impressions of these changes to the company generally were negative. The majority of the workers expressed their views that they were not be able to adapt to the changes fast enough. Changes might affect what the company does and the way the company does things. That was what worries the workers the most. Could they learn the new things? Could they operate the new machines? What would happen to them if they cannot do that or if they were underperformed? They were very skillful already but now they have to acquire a new skill. That was a burden to them. The staffs and the workers found it much easier to come up with reasons for rejecting the idea than with reasons for supporting the idea. This shows clearly the complexity of change. Nevertheless, the change must be implemented. We will only be able to successfully implement a new strategic direction, if we manage to gain the commitment of everyone within the company. At this point we worked hard to develop the processes that enable all workers to learn about change and we introduced a culture of dialogue between the company management and the workforce.
Another problem that we faced in implementing our strategy was the limited resources available. Limited resources usually lead to a dead end. Without adequate resources, things will never change around us. But we strongly and positively believe that lack of resources will make us a better company. Sadly, this didn’t work very well. The problem was that there were not enough resources. Resources constraints, especially internal fund, hindered us in our efforts to conclude some of our objectives. We seek help and advice from experts. They helped us obtain additional financing, identify customers and suppliers, and helped us develop resources constraint strategy.
Another hurdle was that, when we want to start implementing our plan and trying to get value from our project, we were surprised by some of the road blocks put in our path by our government or our local authority and others governing body. Government and local council policies and procedures may be inflexible. It was not easy to get necessary approval from them. Ultimately, our efforts to introduce new things and different procedures involved and impacted many people along the way such as the government agencies and the local authorities. And not all of those people were happy about it. Our bigger profit was their extra works. We considered anything or anyone that could pose a risk to our efforts. All it takes is one or two unhappy political figures complaining to the local authority to derail our efforts to build a strong construction company. Changes could happen abruptly and threatens the status quo. We carefully planned not to encroach into somebody territory. Before we embark, we studied and had a very good picture of where the opportunities exist and where the potential conflicts could appear.
Finally, to be safe in chasing for big profit, we must always remember that we are in the blue ocean. Blue Ocean is normally far away from the mainland, and we are alone out there. If something happens to us, it is very difficult to get help. Blue Ocean is always deep, and we do not know what’s underneath it, might be sharks or might be giant killer octopuses. The wave in the Blue Ocean is always bigger and continuously hitting our boat. Thinking of it makes us scared and prevents us from going there and that will be the biggest hurdles. To overcome that, we must remember that there is where a lot of fish are. We must equip ourselves and go there. Do not use canoe for deep sea fishing. We must use a bigger ship equip with sophisticated gadget such as aqua sounder or sophisticated gadget and operated by professional crews. And the most important thing is that, as a CAPTAIN we must always know the rules of the sea.