Let’s begin our analysis.
The objective of market analysis is to determine the attractiveness of a particular market for X’s current and future operations. Attractiveness of the market or the profit potential, viz. ability of the market to provide long term ROI will be a key input for the product-market (Service-market in this case) investment strategy. It should be kept in mind that although participating in an attractive market can increases a firm’s chance to profit but a firm’s profit making ability is also a function of its inherent strengths and weaknesses. Market analysis also facilitates in indentifying emerging sub-markets within larger market, trends in the marketplace, dynamics of the market place and key success factors.
Market Size & Growth:
Influence of construction industry on M&E sector is immutable. Most indoor constructions will always involve mechanical & electrical works. Besides the widely held belief in the market that M&E industry is dependent on construction industry, a look at the output from the M&E industry and the correlation of change in output between two industries reveals that it is indeed closely linked to the output from the construction industry. M&E industry derives its demand from construction industry. Any changes that affect construction industry get readily passed on to M&E industry.
Change in output for construction and M&E industry. Source: Office of National Statistics, UK Government
The construction industry chart presented is representative of combination of Commercial, Industrial, Infrastructural & Residential subsectors with in construction industry.
The size of overall construction industry for the year ending 2008 was £ 123.5 billion. The relative market size of Mechanical & Electrical sub-sector within the construction industry has been around 10 – 14% historically. Current market size of M&E sectors is circa £ 14.3 billion that is roughly 11.5%, the total number of VAT registered companies in M&E sector is about 27,091 this is roughly 14% of trade category of construction industry. The entry barrier of for the M&E is quite low, a semi skilled field engineer with little investment in tools and a Van for mobility is in a position do deliver the service with minimal overhead costs. The sheer numbers of firms operating within M&E sector erode any competitive edge that any single firm may try to bring to the market; also given that these firms are of different sizes any differentiation strategy adopted will be hard to sustain.
Also the profitability on the firms in this industry is independent of their size, we have firms in M&E sector spread across a broad spectrum of sales growth; some firms are experiencing high growth while others are experiencing severe negative pressure. The Top 50 companies in terms of sales growth range in their annual sales figure of over £ 500 million through firm with just over a £ million in their annual sales [i](refer appendix). The companies with high turnover and deep pockets can bring economics of scale to the market place and thus put price pressure over its competitors, smaller ‘man-in-van’ operators are agile and quick to respond to customer needs at the bottom of the market value chain and therefore bring speed to market.
Apart from the size and number complexity of the M&E industry that brings in performance pressure on X one more daunting challenge that it confronts is the growth prospect of the market. Owing to sever economic downturn of 2008-9 the prospect of growth in the construction industry and in turn M&E market has dwindled. The future projection for the construction industry looks bleak, this in turn is sure to make its effects felt on M&E sector. A declining market means increased price pressure and higher competition to hold on to your share of diminishing pie. The chart below illustrates the point.
UK Construction Industry output. Source: MBD analysis
Dan porter’s characterization of hostile market in which there is fall in demand for the products or services being offered and in which there is severe competitive expansion can be clearly seen to be the case of this current M&E industry. Therefore the current M&E can be labeled as hostile. There is fall in demand caused by credit crunch leading to overcapacity of supply combined with competitive expansion. The hostile market condition of ‘Margin pressure’ can also be seen to have realized.
However everything is not as gloomy as it appears on the first look. Within this declining market there are specific sub-markets that present X opportunities to hold on to its market share and even grow, this is discussed in next few articles.
Segments & Sub-Market:
As mentioned previously although at national level the overall construction industry is declining, there are specific sub-markets that could offer hope to X. It should be remembered here that a declining market is as hard on competitors as it is on X, this could mean some of the competitors are exiting and disinvesting. X could possibly attempt to encourage its competitor to exit and become a dominant player with in its band of value-chain. Major segments of construction industry are shown below. Some of the sub-markets where X could stake its bets are illustrated after discussion on segments.
Major segments that can be categorized with in construction and M&E market are listed below:
· New work and Repair & Maintenance segment
· Geographical output segment
· Customer type segment
A key input to product-market investment strategy of ‘where to compete’ in the Strategic Market Management (SMM) context is obtained by understanding market segments. The analysis below will suggest X some of the regions it ought to consider for its sales growth and customer types it has to align its services towards are indicated below.
I will not get in to details of each segment in this article but in next few articles I will throw enough light on the dynamics that are shaping M&E sector.
