Market positioning through diversification
According to a Mercuri International study, the increasing competitive pressure on construction companies requires the revision of existing corporate structures. Extending product ranges (diversification) is one way to secure the market position in the long term. By complementing the core business with sector-related services, the establishment as generalist succeeds. Another possibility is to strengthen the core business. This ensures the function as price or quality leader.
|Diversification: In addition to the classical construction business, the offer is extended by upstream or downstream business segments (e.g. turnkey construction, project development, other services).|
1. Diversification in Germany
An increase in diversification transactions has been recorded since 2013
Due to the financial crisis, the realization of new construction projects has become more difficult. The lending of many banks has become more stringent, and many companies are pushing their construction projects to procrastinate. To compensate for the unstable situation created by the financial crisis, a trend towards diversification has been apparent since 2013. The decline in sales was offset in this way. The diversification along the value chain is particularly worthwhile in crisis situations. In economically difficult times, for example, public funds are invested in infrastructure to stimulate the economy. Low-interest rates benefit building construction. The possibility to operate in different segments of the construction industry compensates for the risk of cyclical fluctuations.
|Learn more about the expected development of the European construction industry in 2018|
2. Decision on diversification
Large, international corporations, in particular, are active in activities along the value chain. One of the advantages is that even large projects can be managed almost entirely from a single source. The decision on diversification has further objectives:
|Growth||By entering into product and market areas with promising growth trends, the goal is to influence sales and profits positively.|
|Minimize risks by diversifying the business segments
|The entry into new product and market areas serves the risk balance between the individual business segments.|
|Achieve competitive advantages
|Existing strengths are used in new markets to achieve a competitive advantage to their competitors.|
|Improvement of profitability
|Growth and the development of new market and service offerings enable better utilization of existing resources and financial means.|
3. Possibilities of diversification
1. Vertical diversification
The inclusion of upstream or downstream construction services in the product range.
Example: HIB Huber Integral Construction
HIB Huber Integral Bau is one of the leading companies for car park solutions in composite steel construction. In the year 2014, the company took part in its primary supplier Metalbark. The investment will strengthen and further expand the market position in the long term.
|Financial year 2015/2016||Financial year 2014/2015(Interest in Metalbark)||Financial year 2013/2014|
|Sales||€ 5,410,504.05||€ 5,968,864.62||€ 5,143,537.05|
|Number of employees||130||108||103|
|EBIT||€ 1,016,207.85||€ 2,125,291.23||€ 1,618,259.05|
|Profit/loss||€ 626,362.47||€ 1,555,124.11||€ 1,137,143.83|
|2014: Participation in HIB Huber Integral Bau 25%|
2. Horizontal diversification
The expansion of the product range to include services or products, which are closely related to the current performance spectrum.
GETEC supports energy service projects and offers customized contracting solutions. Through the takeover of the company Urbana Energiedienstleister GmbH, the existing know-how is bundled. In this way, new product and business models are to be developed as well as the market position strengthened.
|GETEC||Urbana Energiedienstleister GmbH||Total|
|Sales||€ 782.6||€ 57.9 Mio||€ 840.5 Mio|
|Number of employees||1.165||119||1.284|
|EBIT||€ 40.0 Mio||€ 5.9 Mio||€ 45.9 Mio|
|Score result||€ 25.5 Mio||€ 1.0 Mio||€ 26.5 Mio|
|Sales||€ 698.2 Mio||€ 77.0 Mio||€ 775.2 Mio|
|Number of employees||980||206||1.186|
|EBIT||€ 33.3 Mio||€ 6.5 Mio||€ 39.8 Mio|
|Score Result||€ 20.9 Mio||€ 1.8 Mio||€ 22.7 Mio|
|2017: Participation of GETEC in Urbana Energiedienstleistungs GmbH 100%|
4. The market leader through diversification
The majority of sales are generated by services for industrial plants, power plants, and real estate. Since 2001 the strategic orientation has been revised. The targeted acquisition of companies from various business areas has expanded the range of services. As a result, Bilfinger SE has developed away from the construction company. We will give you an impression of the expansion of Bilfinger SE’s business. For this reason, we have compiled a selection of Merge & Acquisition (M & A) activities for you:
|Company||Time of M&A||Business|
|Acquisition von Rheinhold & Mahla||2002||Interior equipment for maritime applications|
|Acquisition von Arnholdt GmbH||2003||Scaffolding Service|
|ThyssenKrupp DiPro||2004||Facility Management|
|Acquisition von Salamis UK||2006||Industrial service for the oil and gas industry|
|IPower Solutions||2008||Energy Industry|
If you are interested in the complete list of M & A activities, you can find this HERE
Strabag SE has become one of the largest construction groups in Europe. In addition to diversification by country, services are offered along the entire value-added chain. The primary business of Strabag SE is in Germany and Austria despite a large country network.
In contrast to Bilfinger SE, with a share of 83% of sales, the bulk of the company’s business is attributable to the core business of traditional construction services.
The expansion of the product and service portfolio offers a great opportunity for enterprises. However, the implementation of a diversification strategy requires a high financial effort. In addition to the financial burden, higher coordination costs are also incurred. This means that it is no longer possible to react flexibly to market changes. These risks are widely accepted by large corporations to expand their market power.