Construction market in K.S.

A
K.S.A is considered to be the biggest
construction market in the Middle East
particularly in the gulf region, supported by
a sustained government spending huge
investments in both the private and the
public
sector.
Construction
sector
contributes nearly 6-8% of its total Gdp.

Economy drivers of construction

market:
The construction market in K.S.A is driven
by a number of economic factors:

A strong demand resulting from the

growing population.
The
need
for
infrastructure
development in order to attract private
sector investments e.g.( Riyadh metro,
Makkah Railway and Airport upgrades) the
allocated budget of 2015 for transport and
infrastructure is nearly usd 167.82 Billion.
The need for skilled labour drives the
investments
towards
education,
healthcare to which 44% of 2015 budget is
allocated (e.g. 28 new universities and
1000 new generation schools, new
hospitals, blood banks and medical
centers).
Sustaining religious tourism by continuous
development of Makkah and Medina cities
(e.g. Pilgrim city project, extensions of
Makkah and Medina Holy Mosques).

Shortage of construction materials which

imposed heavy imports on the government
lately
Falling of oil prices may cause a fall in the
allocated budget for the sector.

Economic statistics of K.S.A

Total population 2014 ( 30,77037
people)
5*
Population growth rate
2.55%
2014
Population
density
15.3
(person / sq km) 2014
Saudi population 2014 20,70253
(people)
6*
Saudi
population
2.10%
growth rate 2014
GDP
growth
at
3.47%
constant prices 2014
Per
capita
GDP at
current prices in 2014 90,946
(SAR)

Saudi-Binladin Group (SBG) Case

Study:
Company overview:

Challenges of construction Market

Shortages of skilled labour which is

caused by the strict regulations of
Saudiization and delays meeting the
strong demand of the market

S.B.G was founded by Sheikh Mohamed

Binladin in 1931, headquartered now in
Jeddah, with about 35,000 employees, a
capital of several billion usd. It is a multinational organization represented in a
number of cities (Jeddah, Cairo, Beirut,
and Dubai). The founder Sh.Mohamed
Binladin had a strong relationship with the
Kingdom founder King Abdul-Aziz Al-Saud
which led to awarding the organization
government contracts of developing and
refurbishment of Makkah and Medina Holy
Mosques, and was a main reason for a
sustained income for the organization over
the past decades.

Analysis of business environment in

S.B.G:
Layers of the business environment are
as shown in the figure:

SBG Macro-environment

PESTEL Analysis:
1. Political factors:
1.1 Relationship with the royal family

Ever since the foundation of SBG

there has been a stable relation
between the headquarters (Binladin
family) and the royal family leading
to:
- Direct award of most projects to
SBG in many sectors (Ministry of
interior projects, National guard
housing projects, Royal palaces
new and refurbished)
- Consequently
the
tendering
process was ignored and that
department was of no importance
to SBG.
- By 2015 after the death of King
Abdullah I.Abdelaziz King Selman
made a lot of government changes,
changing the policy to enforce
competition between contractors
and have the allocated budgets
justified. This impacted SBG in
employing
tendering
and
Hr
specialists.
1.2 Pressure groups & employment
office:
For decades SBG has been
depending on foreign workforce but
since 1975 and responding to
several pressure groups in the
kingdom, the employment office
enforced the Saudiization law on
the private sector which reached
now to 15% of the total work force
of the organization.
However it is very common for
organizations here to apply a
disguised Saudiization, employing
nationals to escape from the law
and paying their salaries but with a
zero productivity. Organizations still
cant count on nationals output due
to the lack of experienced land
skilled labour. Will the government
increase the Saudiization % in the
coming years; this is a big threat to
SBG.

1.3 The Arab spring:

Since 2011 the Middle East has
been suffering from successive
revolutionary waves. KSA although
a stable government has been
subsidizing countries as (Egypt,
Syria, Yemen, Iraq,..) for political
benefits, which had its impact on
the sector reducing the allocated
budget.
SBG also has incurred disastrous
losses in the South-Borders project
due to opposition from the Howthy
rebels and the collapse of the
Yemeni government, most of the
project zones are pending.
2. Economic Factors:

Three main economic factors

affect
SBG
strategy
and
management policy:
1- Unemployment & preponderance
of foreign workforce opposed by
the Saudiization government policy
2- Taxation policy: which attracts the
foreign workforce to KSA due to
the tax-free salaries offered by
public and private sectors? This is
an advantage for SBG to
overcome the rarity of specialized
local workforce.
3- Labour turnover policy:
The employment policy of SBG
switched after the economic
downturn 2008 to package deals
with employees inclusive all
benefits, in addition to turnover
expenses, so labour after finishing
their project are given 45 days
(with no salary) to search another
project within SBG otherwise their
contract is terminated. So SBG
doesnt suffer labor turnover
problems.
3. Socio-cultural factors:

Religious factors:
Imposed intensive work shifts in the
holy mosques projects and related
housing projects for pilgrims
Conglomerations
of
same
nationalities have a significant impact
of labour distribution, salaries,
comfort of employees.
Preponderance
of
foreign
workforce.
The company name may be one
factor why SBG doesnt expand
globally e.g. in Europe or USA, as it
is named after M.Binladin the father
of Ussamah Binladin which is to
Europe and USA the leader of
terrorism. SBG is a weighted name
in the Middle East but could this be
the same in outside markets?

4. Technological factors:
SBG has established a new
department recently of specialized
engineers
to
study
the
technological advance in the
construction sector over several
developed countries in Europe and
USA to implement the most recent
technologies
to
enable
the
organization to achieve the best
value of its projects by effective use
of its resources, the engineers are
offered very attractive salaries and
travelling benefits.
5. Environmental factors:

In the light of the climate change

and the several conferences that
have been held globally to combat
the global warming, SBG has
established in 2009 the LEED
department consisting of certified
LEED engineers and supervisors to
ensure contribution to the global
environmental move through used
materials
and
processes.
Also in 2013 Sh.Bakr Binladin
launched the (metal recycling)
company as one of the group
companies reflecting the keenness
for waste management.
6. Legal factors:
- Foreign investment law imposed
restrictions on foreign investors in
KSA through the need of a national
sponsor.
- Competition law is a threat for SBG
against the bureaucratic policy that
SBG depends on in being awarded
projects directly from the royal
family.
- Employment law
imposed strict
regulations on foreign workforce
employment
through
the
localization of workforce by 15 % of
the total workforce taking into
consideration the lack of skilled
workers among Saudi nationals.

Porters 5 forces framework:

1. Supplier power

SBG is a huge contractor in KSA. In

many construction fields, Extensions
of Holy Mosques, Commercial
buildings , Armed forces projects
with huge investors within the royal
family, so it is a powerful supplier in
addition to the huge workforce and
royal relationships.

2. Customer power:
As Explained before the major client
is the government (royal Family) and
its power has its impact on three
lines
1- Pricing
in the ruling period of King
Abdullah I. Abdul-Aziz this was
an advantage to SGB as projects
were awarded with little attention
to price and focusing on the
timing of the project whatever it
costs.
But
the
current
government under King Selman
is stressing on implementing the
competition law.
The government replaced SBG
CEO by Sh. Saleh Binladin and
advised him to focus on pricing
and feasibility studies.
2- Timing:
This factor often forces SBG to
expand its resources as the royal
family in most cases compress the
project time planned and submitted
by SBG, while the progress
payments made to SBG arent
made at regular intervals to secure
the cash flow corresponding to this
expansion.
3- Quality:

Due the time compression

happening in most projects SBG
is
a
quality
sacrificer,
consequently
due
to
the
customer power tasks are
redone or may take longer time
and be subject to penalties or
even threatening
SBG by
replacing with one of its
competitors.

3. Threats of new entry:

This is relatively a weak threat to
SBG due to several reasons:
- SBG has few number of
competitors
- SBG holds most of government
projects and gained satisfaction
over the past decades.
- Political situation and economic
problems in the Middle East
makes the government reluctant
to try a new organization.
4- Threats
of
substituting
product or service:
This threat may be caused due
to quality issues along with the
customer power and previous
pricing policies.
SBG has to own a qualified
pricing team and strengthen its
tendering processes in order to
tackle this threat.
Product substitution is relatively
a weak threat to SBG due to the
huge investments in KSA in
commercial
and
residential
projects and the significant
weight of SBG in the market.

Although SBG has a few number

of competitors this could be a
threat due to the following:
Customer power to replace and
choose an alternative organization
High competitiveness resulting from
the few number of competitors
( Saudi Auger , ALseef, in similar
business
SBG is a group of companies ruled
by bureaucratic relations within the
company and due to individual
interests of the stake holders of
these
companies
the
whole
organization is affected in pricing,
planning,
and
construction
coordination. This is a weakness
point against its competitors.

SWOT analysis (Strengths and

weaknesses, opportunities and
threats).

1- Strengths of SBG:
-

5- Competitive rivalry:

Adequate financial resources

Access to economies of scale: as
SBG has its own precast factory,
Marble and Granite factory and
Ready mix equipment.
Powerful stake holders (Binladin
Family)
Significant assets and high capital
value. SBG owns a whole company
named
ERC
for
equipment
supply( yet not sufficient for the
project that SBG holds)
Huge
workforce
(35000
employees).

2- Weaknesses of SBG:
-

Weak research and development.

Work inefficiencies due to the weak

coordination
between
the
companies of the group
Weak supply chain delaying arrival
of materials, documents, and
affecting decision making.
Inaccurate pricing and weak
tendering department
Conflict of interest resulting from
the presence of many companies
inside the group, some of them
owned by powerful managers who
are neither nationals nor from the
Binladin family.
Weak
coordination
between
departments
Unsatisfied employees
Weak human resources department
which affects the moral of foreign
employees in their residence
permits and health insurance,
which are delayed for months so
the employee is unable to take his
annual leave easily, and may
remain 3 months in the year without
medical insurance.

4- Threats:
-

3- Opportunities:
-

Innovation: SBG has the financial

capacity and expertise to apply
innovative processes and select
most advanced materials and
techniques in the construction
industry. This would be difficult by
competitors to overcome. The new
department launched by Sh. Bakr
Binladin that studies technology
advance in developed countries
should be enforced and expanded
to implement these researches and
technologies as well as exploiting
the companies resources in the
best effective way.

New services: such as operation

and maintenance of projects. This
is already a department in SBG
since 2010 but needs to be
developed to include whole life
costing as a service. This
integration will open a good
opportunity for SBG as this process
is new in Saudi Arabia.
SBG also has the capacity to enter
other fragmented markets in KSA
merging or acquiring specialist
small organizations with its capacity
and take the lead easily.

Environmental effects can have a

negative impact on SBG and can
subtract from its value. SBG only
began
recently
to
consider
environmental impact and every
project
now
has
a
LEED
department of engineers and
supervisors, but SBG as stated
before is still weak in R & D and
thus this department is under a
threat of being outdated, taking into
consideration
the
employees
dissatisfaction from being untrained
and having an idle experience for
several years.
Government regulations with the
reduction of foreign workers and
Saudiization.

Governmental changes and the

loss of the current bureaucratic
relationships is a threat of losing
many projects and having a bulk of
idle workforce. After the recent
government
changes
some
companies of the SBG group gave
its employees a six month leave
subject to being renewed. About
seven
projects
have
been
withdrawn from SBG after the
recent governmental changes by
King Selman (e.g. KAYAN Tower
project. The Medical city project )
It is arguable whether these
projects were withdrawn due to
malperformance of the company or
bureaucratic
relationships
with
competitors.

Diversification

Research and
Development

Having analyzed the external

environment of SBG, Strengths
and weaknesses, opportunities
and threats, the below table is an
assessment of the available
strategic options.
Priority

Expansion

hig
h

Mediu
m

Lo
w

1. Diversification:

Acquisitions &
Mergers

Rationalization

Choosing a strategic option:

STRATEGIC
OPTION

Divestment

Not a
make
with
outd
Stren
cons
grou
item
cons
read
but t
cons

This
mixe
and

the p
the h
Finan

A corporate strategy to enter into a new

market, presented by the Ansoff matrix.
This is considered the most risky option
as the corporate has little experience in
the new market. But this risk can be
mitigated by some kind of a mixed
strategy between Diversification and
acquisitions and mergers as will be
explained later.

This is the most effective path in the

future of SBG which can boost the
profit and increase the value of the
share holders investments. While
being risky as mentioned before due
to the lack of knowledge and
experience in a new product or
market if applied without a careful
study of the external market and
setting the correct objectives,
identifying the new markets features
and characteristics. Mukherj (1998)
concluded in his studies that
organizations
of
high
prior
performance
tend
to
have
successful diversification strategies.

2. Research and development:

This strategy is a good option also for
SBG due its financial capability, famous
market name, un-dominated market in
Saudi Arabia in this field.
This may be done in the same sector
(construction)
either
by
product
development, market development or by
implementing new technologies to the
industry. SBG needs to enforce the R&D
department launched in 2011, develop
and expand it to pass to the phase of
implementation.

Choosing the diversification

strategy:

Factors that influence SBG

diversification strategy:
-

Industry profit levels

Expenditures in research and
development
Capital outlay
Efficiency levels
Proper management of core
competences and strategic assets.

Diversification in the construction

market :
1. Product & market development
Steps that need to be taken:
-

Idea
for
(marketing)

new

products

Knowledge
and
detailed
specifications for the new
products (marketing)
Initial
concepts
of
design
(Production engineering)
Final
design
(production
engineering)
Production
tooling
(manufacturing)
Vendor selection (marketing)
Prototypes
Production
These steps will have positive
effects in product development
and cost effectiveness.

2. Proposals of product developments

-

Whole life costing projects

Urban rehabilitation
Steel manufacturing (SBG owns
several factories such as marble
and precast concrete)
BIM ( Building information
modeling)
Implementation.

A strategy that SBG can adopt is the

mixing
of
diversification
and
acquisitions and mergers. In such
fragmented markets in Saudi Arabia
as retailing, the organization can
acquire or merge with small or
medium sized retailers taking
advantage of its big size and
capacity and the expertise of these
small organizations to achieve
mutual growth and penetrate a new
market.
Benefits to the small medium sized
organizations:
-

Growing and expansion of the

organization.
Increasing sales.
Benefiting economies of scale.
Market share gains.

Benefits to
strategy:
-

Diversification mixed strategy:

SBG

in

the

mixed

New market penetration

New experiences gained
Lower risk than developing new
products on their own.
Lower risk than implementation
of new technologies with high
expenses and uncertain return.

Potential Risks:
-

Legal restrictions made by the

government
concerning
the
market
shares
of
small
businesses

Environmental risks due to the

climate change and the move
towards a clean world can
impact the product choice, the
materials and energy supply
used,
Conflict of interests between
parties

Recommendations
successful
Strategy:
-

for

Careful market analysis

Careful suppliers and retailers
study and analysis
Careful planning for the new
product chosen.
Avoiding
ambiguity
in
agreements
Stressing on training and
development for the chosen
route
and
expanding
the
knowledge of employees
Involving SBG employees and
departments
in
the
new
business.

Johnson, G., Scholes, K.,

Whittington, R. and Johnson, G.
(2011) Exploring strategy. Harlow:
Financial Times Prentice Hall.
Ghazzawy, H. (2015) Saudilegal ::
Competition Law, Saudilegal.com.

Available at:
http://saudilegal.com/saudilaw/08_l
aw.html (Accessed: 27 May 2015).
Wikiwealth.com,
(2015) Construction company
SWOT Analysis - WikiWealth.
Available at:
http://www.wikiwealth.com/swotanalysis:construction-company
(Accessed: 27 May 2015).
Mindtools.com, (2015) Kotter's 8Step Change Model: Implementing
Change Powerfully and
Successfully. Available at:
http://www.mindtools.com/pages/art
icle/newPPM_82.htm (Accessed:
27 May 2015).