lauri palojärvi (2007) on managing risks in international growth business of finnish construction...

Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

ON MANAGING RISKS IN INTERNATIONAL GROWTH BUSINESS OF FINNISH CONSTRUCTION FIRMS

AND BUILDING PRODUCT SUPPLIERS

A note at Nordnet 2007by

Lauri Palojärvi

Lic.Sc., Doctoral CandidateTKK Construction Economics and Management,

P.O. Box 2100, FIN-02015 TKK, Finland,e-mail: [email protected]

mailto:[email protected]


AIMS OF THIS NOTE

• Motivating with ’growth’ background

• Posing challenging research issues

• Pointing out to the pioneering literature review and its insights

• Testing with the exemplary case

• Concluding with an imperative for future research efforts


AUTHOR’S BACKGROUND AND RATIONALE• Author, Lauri Palojärvi, born in 1946, has worked over 30 years in the top management positions of Finnish construction industry – Lemminkäinen, Partek, and Metsäliitto/Finnforest.

• He has also served Finnish Government first in Brussels, when Finland joined the EU, and then as CEO of state-owned Kera Corporation (later Finnvera) - Public risk financing company.

• He has lived 13 years in Africa, the Middle East, the South East Asia, and Western Europe.

• He has completed a licentiate thesis (1986) on risk management in construction project export.

• Growing international construction business contains major risks. In January 2007, this fact triggered the author to begin a related study with the aim of achieving a Doctoral degree.

• First insightful findings of the literature review and the case

study are now being shared at Nordnet 2007.


0

500

1000

1500

2000

2500

3000

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Others Nordic Countries Middle East Baltic Countries Russia

Building and construction companies- foreign operations

milj. €

Source: RT

Figure 1. Value of foreign operations of Finnish construction contractors between

the years 1971-2006 (Source: RT).

FROM A SCRATCH TO FAST GROWTH


0

2

4

6

8

10

12

14

16

1980 1985 1991 1993 1998 1999 2001 2003 2005

Building and construction companies- foreign operations Building product Industry- foreign subsidiaries Consulting Engineering Export Construction project Export Building product Export

Development of foreign operations of the Finnish Building & construction Industry

mrd. €

Source: VTT

Figure 2. Value of the foreign operations of the Finnish construction industry as a

whole between the years 1980-2005 (Source: RT and VTT).

PRODUCT BUSINESS BECAME MUCH „MORE INTERNATIONAL”


0

5

10

15

20

1993 1998 2003 2008 2013

Building and construction companies- foreign operations Building product Industry- foreign subsidiaries Consulting Engineering Export Construction project Export Building product Export

Source: RT 2004

mrd. €

Development of foreign operations of the Finnish Building & Construction Industry

Figure 3. Actual value (1993, 1998, and 2003) and forecasted value (2008 and 2013) of

the foreign operations of the Finnish construction industry (Source: RT).

BY 2013 , FINNISH FIRMS´ INTERNATIONAL BUSINESS EXCEEDS THEIR DOMESTIC

BUSINESS


• Practical experience and relevant literature suggest that, with sound risk management, severe losses can be avoided and/or opportunities can be seized.

• Key question : How can Finnish construction firms and building product suppliers manage risks in their growing international businesses?

• Research problem : What are the respective main risk types and how can such risks be managed effectively?

• Hypothesis: Main risks arise from (i) the competencies of key management and (ii) the contractual arrangements in international businesses and projects, respectively.

CHALLENGING RESEARCH ISSUES


PIONEERING LITERATURE REVIEW ON ENLARGED RISK MANAGEMENT

• Review on literature, published in English in 2000-2006, was conducted on traditional risk management plus overlapping uncer-tainty, complexity, and crisis management

• Book search resulted in 3247 hits• 388 books were assessed by TKK/CEM

risk research group• 64 books were reviewed for a publication• Complementary article search on enlarged

risk management identified app. 150 articles; thereof, 52 articles were eligible for a publication


Context Non-construction Construction-related SUM

Uncertainty 13 (11 %) 6 (5 %) 19 (16 %)Complexity 10 (9 %) 0 (0 %) 10 (9 %)

Risk 41 (35 %) 40 (34 %) 81 (70 %)

Crisis 3 (3 %) 3 (3 %) 6 (5 %)SUM 67 (58 %) 49 (42 %) 116 (100 %)

No. (%) No. (%) No. (%)

Table 1. Distribution of 116 references published mainly between 2000-2006 by the four risk-related views and the non-construction vs. construction-related contexts (Source: Ahonen et al. 2007).

NO BOOKS ON FIRM/PROJECT CHARACTERISTICS, INTERNATIONAL BUILDING PRODUCT BUSINESS

NOR COMPLEXITY – ON CRISIS, FEW ONLY


• Risk is defined to arise from uncertainty by assess-ing – either rationally or intuitively – a probability and an impact of an uncertain event (e.g. Flanagan and Norman 1993).

• Crisis is a consequence of mismanaged risk (Loosemore 2000). Crisis is a low probability, unexpected, high-impact event that is not covered by contingency plans (Booth1993).

• Complexity is a characteristic of a system arising from interactions between its elements. Project complexity depends on ´a number and varieties of elements, and interconnection among them´(Shenhar and Dvir 2004).

LITERATURE REVIEW FINDINGS


• Uncertainty prevails, when a decision-maker has no historic data - e.g. “a group of instances” - relating to a situation for e.g. an event, conditions etc. to occur (Knight 1921). •Uncertainty is defined as “a lack of certainty” and uncertainty management as “managing perceived threats, opportunities, their risk implications, and also various sources of uncertainty which give rise to and shape risk, threat, and opportunity” (Chapman and Ward 2002). • Some Norwegian authors consider uncertainty manage-ment as a project owner’s means to tap opportunities, while risk management is a domain of PM (Langlo 2003). • Herein, it is defined that uncertainty is an everlasting framework of all events, including risk events.

AUTHORS’ REVIEWED INSIGHTS


• Risk is a possibility that expectations are not met (Lifson and Scheifer 1982). In project business, risk usually was understood as a possibility of an event with negative consequences. – Later ‘risk arises from uncertainty by assessing a probability and an uncertain event’s impact’ (Flanagan and Norman 1993). •Crisis is a low probability, unexpected, high-impact event that is not covered by contingency plans. Mismanagement of crisis may result into disaster (Loosemore, 2000). - In more common words, crisis is a consequence of risk, which is not properly managed. •Complexity has a linear impact - the more complex a project or a business is, the more risk is there to be managed.

AUTHORS’ REVIEWED INSIGHTS (continued)…


Table 2. Main findings of the literature review: “Top 10” enlarged risk management concepts (Source: Ahonen et al. 2007).

Theoreticaladvancement/Practicalapplicability

Flanagan and Managing risk inNorman Risk management in construction(1993 , new construction firms/businessedition 2007) (3 .3 .2)

Managing risk in nonDeloach Enterprise-wide approach to construction(2000) risk management (EWRM) firms/business

(3 .3 .1)

Smith andMerritt (2002)

Firms with complexCooper et al or large-scale(2005) projects and

procurementsInstitution ofcivil Risk managementengineers and RAMP Risk analysis and throughtout athe actuarial management for projects construction projectprofession life-cycle(2005)

Managing risk in non construction projects (4 .3 .1)

Managing risk in construction projects (4 .3 .2)

High / High

Author (Year) Concept Focus (Table) Recommended for

High / High

Managing risk in construction business

Managing risk in international business

Proactive risk managementManaging risk in non construction projects (4 .3 .1)

Firms with product develoment projects (product suppliers)

High / High

High / High

High / High

Project risk management


Table 2. Main findings of the literature review: “Top 10” enlarged risk management concepts (continued).

Theoreticaladvancement/Practicalapplicability

A framework for determiningthe level of uncertaintysurrounding strategic decisionsand for tailoring strategy to thatuncertainty

Firms with difficultPhilosophy and general and complexprocedure of successive projects, strategicprinciple plans and/or

programmesFirms searching forthe appropriate

Shenhar and Distinguishing between managementDvir (2004) projects approaches projects

respective to theircomplexity

Complexity in non- ComplexityRalls with construction Medium/ management inWebb (1999) firms/business Medium global alliances or

(3 .2 .1) acquisition ventures

Construction crisis Medium/ Buiding constructionmanagement High project management

Complexity management in partnering by transforming chaos into economic order

Loosemore (2000)

Managing crisis in construction projects (4 .4 .2)

Lichtenberg (2000)

Uncertainty in non- construction firms/business and projects (3 .1 .1)

High / High

Complexity in non- construction projects (4 .2 .1)

High/ Medium

Courtney et al (1999)

Uncertainty in non- construction firms/business (3 .1 .1)

Medium/ High

Firms competing in a highly uncertain business environment

Author (Year) Concept Focus (Table) Recommended for


Figure 4: Prime event, risk event, and the consequences of risk (Source: Palojärvi 1986).

1980s’ UNDERSTANDING - NO MAJOR CHANGES BY EARLY 2000s


Figure 4 (continued): Prime event, risk event, and the consequences of risk (Palojärvi 1986).

1980s’ UNDERSTANDING - NO MAJOR CHANGES BY 2000s


Figure 5 : Successive principle (Source: Lichtenberg 2000).

FLOW CONCEPT WITH ”SUCCESSIVE PRINCIPLE” FOCUSES ON RUDEST ESTIMATES


• Case in a “nutshell” and its background in light of uncertainty, complexity, and risk management

Actors´ expectations at the relevant stages

Actions of risk management (if any were carried out)

• Comments on the occurred risks and the actual risk-specific management

• Discussion and findings of the case

COMPETENCIES MUST BE MASTEREDFIRST AT HOME!!

– EXEMPLARY CASE ”FMO TAPIOLA”


Figure 6. Pioneering architectural outlook of Case FMO Tapiola in Finland.


BRIEF OF AN EXEMPLARY CASE OF FMO TAPIOLA PROJECT (table 3)

Project developer

Finnforest Corporation (a part of Metsäliitto)

Ultimate (current) owner

Tapiola (a major Finnish insurance group)

Project location

Tapiola in City of Espoo, Finland

Strategic background

To campaign for more value added wood products in construction

Mean to campaign

To develop a real and visible pioneering building object; a new concept to be multiplied in large foreign building markets

Building object

A 4-storey 8000 sqm office building with wooden structures facades and interiors plus a 5000 sqm car park as the founda- tion – app. 25 M€ in total; to be competitive against a simulated concrete building of same size and office layout design


Building Projects

Building Systems

Building Products

Development Projects

Contractors, suppliers

Wooden

building products

InvestorTapiola

Finnforestas developer

Architects &

designersAuthorities

FMOTapiolacase

Land acquisition

Building Projects

Building Systems

Building Products

Development Projects



Wooden

building products

InvestorTapiola

Finnforestas developer

Architects &

designers

Architects &

designersAuthoritiesAuthorities

FMOTapiolacase

Land acquisition

FMO PROJECT IMPLEMENTATION


FMO TAPIOLA CASE BRIEF: BUSINESS AND/OR PROJECT OBJECTIVES

• Early (strategic) business objectives were to enhance the company’s brand as “an overall pioneer of building with wood” and “to enhance the internal cohesion” (2002)

• Project objectives included the competitive building cost (frame 23-25 M€), short schedule (15 months), and high quality to attract investors (2003)


Table 4. FMO Tapiola Case - Major risk breakdown structure for the developer’s view (applying Hillson 2002).


FMO Tapiola - Competence Diamond

General Management(GM)

Novelties and Specialities

Products and Assembly

Intenational Issues

Project Management

Other Building Trades inclCM

Design

Local Business

Figure 7. Perceived degrees of a competence diamond inFMO Tapiola Case


Figure 8. Project organization in FMO Tapiola Case during the implementation stage.


CONCLUSIONS AND SUGGESTIONS• Review provides an understanding of the theoretical bases of “enlarged risk management” as part of managing international construction businesses and projects. • Literature confirms: Professional contractual arrangements and solid management competencies belong to success factors. • Likewise, the exemplary case study (to highlight the case method) confirms the paramount importance of proper risk identification, calling for proactive risk management, and that management competencies and contractual arrangements are the likely sources of major risks .• For further case review, ca. 10 real cases will be presented with the author in a definite role in them. Ex post, author is now assuming the role of an action researcher to explain further the un- or quite successful management of risky business/project level characteristics in international contexts. Initially, it seems that some of project risk

management techniques can be applied onto firm/business level, too.

lauri palojärvi (2007) on managing risks in international growth business of finnish construction...

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