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The test of sustainability is to see whether competitors are able to replicate or imitate the resources and capabilities used by the incumbents in this industry in such a way as to negate any advantage.  From the following analysis, it will be seen that the minimum requirement to compete in this product/services industry is to have the managerial resources and competencies to give better value for money to the customer than the customer can obtain by managing his or her own facility. This competency of "good management" springs from the wisdom and insight "sunk" into the  management task of levering existing knowledge by using it and re-using it in different contexts and on different continents to augment disttinctive tacit and explicit organisational competencies.

Extracts from a Report on Knowledge Management in the International FM Industry

1. Main Conclusion and Recommendations.

We conclude that superior returns are earned in this industry through the distinctive competence of good knowledge management, use and re-use.  This is the  way to superior resource management.  We recommend that the route into the FM industry should be by levering existing knowledge in the firm through forward integration.  This necessitates capturing in an explicit form the tacit knowledge of a distinctive (or "core") competency, such as excellent management of a reliable company product or service.   The forward integration would be engineered by codifying and making available (levering) to staff  worldwide the know-why, the know-what and the know-where of such a distinctive capability.  The distinctive competence could just as easily be the good management of outsourced staff as it could be the service component of an electrical, mechanical or other product that is widely used in facilities throughout the world.  The way into this industry which has a very high return on capital is to leverage one's present internal architecture, one's capacity for service innovation or one's reputation.

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2. Many of the services which make up the FM value chain are in themselves unsophisticated (cleaning, custodial, electrical maintenance). Multinational firms from the mature FM countries, such as Johnson Controls, have adopted a strategy of building worldwide capabilities by adopting a new game strategy, namely to codify and leverage a core competency from which they can integrate forward. They have pinpointed their best organisational routines and learning practices  in manufacturing and they have transferred them forward into facilities operations and maintenance. They are now continuing to encapsulate tacit knowledge in an explicit form in central databases which are available to all JC sites worldwide. 

Here is more detail  :

Industry rate of growth in mature markets: FM contracts are set to grow in Europe by 10-20% in 1999-2000. "In 1998, 86 percent of U.S. corporations were outsourcing FM, a 30 percent increase since 1992" "New South Wales Treasury’s ongoing annual surveys have put cumulative value of service contracts from just over $0.5 billion in 1993/1994 to approx $1.8 billion in 1995/1996."

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Profitability: "In the U.K. operating profit to turnover in the Building Facility Management Industry was between 3% and 7.5% of turnover in 1998. But Operating Profit in relation to current assets employed was nearly 100%. High turnover compared to O/P is not surprising as FM pays for contracts and takes a percentage off the top for its trouble."   When an FM company wins an outsourcing contract it usually takes on the client’s former personnel and works on the client’s premises, so the FM company needs few strategic assets of its own.

Far Environment (Social, Technological, Economic & Political Factors). Since the debate launched by Prahalad & Hamel (1990) and James Brian Quinn (1992) on core competencies, global corporations are outsourcing more and more competencies, such as FM, which are deemed non-core. This trend is also affecting Government departments, especially the U.K., New Zealand, Australia and the U.S, and it is offering opportunities to FM firms which can promise greater quality and cost-savings than most in-house teams.The following drawing shows some of the countries in the world relative to whether they are in the first, second or third wave of Integrated Facilities Management. The information has been obtained from a 1997 speech made by Oliver Jones of Symonds Facilities & Project Management.

The life-cycle can be termed as nearing maturity in wave 1, at its beginning in Wave 2 and not yet started in Wave 3. From the BCG matrix in figure 3 and the levels of sophistication in figure 4. it can be deduced that the industry world-wide is fluid and heterogenous. Corporations buy FM services from anything between a range of small one-service, local or regional companies to world-wide FM companies such as Johnson Controls, one of whose main global clients is IBM.

The strategy adopted by Johnson Controls is similar to the strategies adopted by other international players (such as Symonds or Serco of the U.K.). Using the Ansoff Matrix it can be seen that Johnson Controls is innovating into new products which depend on its core competencies, developing new markets with proven products and avoiding the riskiest strategy of all, which is diversification:

New Products: Compagnie Générale des Eaux (Vivendi) and Lyonnaise des Eaux (both originally French water distribution companies), are making use of the water=cleanliness image at the start of their business chain to forward integrate into the FM industry via the HVAC (heating, ventilation & air conditioning route). At the next stage they will take on security, cleaning & custodial services.  Vivendi and Suez will move into the U.S. in a big way in 2000-2005.

New Markets: Symonds, a U.K. FM company which was acquired by Compagnie Générale des Eaux (Vivendi), is making use of the U.K.’s historical ties with the Commonwealth, to move into the FM industry in Australia and New Zealand and is using Australia as a base to be ready for the third wave of FM markets in China and the Pacific Rim.

Let us take a look at two UK national firms who could begin to look at new markets. On a national level, the same strategy of firms analysing their resources and capabilities and integrating forward into Integrated FM can be demonstrated by the examples of:

BICC (U.K.) which manufactures cables. It moved into FM via installation and maintenance of low and high tension cable by their engineering and construction company Balfour Beatty, which itself gave birth to Balfour Beatty Asset & Facilities Management, and:

Construction companies such as John Mowlem (U.K.) which have moved into FM by providing services in the facilities they build. This prolongs the life-cycle of the original product and the construction company benefits from a stable income for a set period of time to offset the cyclical nature of the construction industry.

Other strategies being followed, in this period of restructuring and re-engineering, resemble Porter’s generic strategies as shown below:

  Cost Leadership to sell FM outsourcing as a cost-savings exercise. Recent data from the U.S. shows that in an extensive cleaning study (carried out by BOMA) in-house cleaning arrangements cost about 27% more than an all-contract staff arrangement ($1.65 versus $1.28 per cleanable square metre).

 In a single segment, the small firm can also promise higher knowledge of cleaning products because it focuses on that one activity. But other data are not so conclusive.

Differentiation: A survey by the U.S. Outsourcing Institute puts average outsourcing savings at 9%.  This is  well below the 20 to 40 percent some suppliers promise. Suppliers aware of these figures propose a "partnership" or "strategic alliance" strategy. Premises & Facilities Management Magazine, U.K., January 1998, quotes the example of the Rover Group in the U.K. which gave a five-year FM contract to Drake & Skull (DSTS) for its Swindon site. DSTS wishes eventually to provide FM to all of Rover’s sites. There is no management fee. DSTS’s costs will be found from savings and further savings will be split 50:50 between the partners. DSTS is quoted as saying: "Cost is only part of it. We are also looking to increase the ‘contract worth in terms of productivity and quality... There is a continuous drive for improvement."

The fact that CGE/Symonds will not disclose its annual turnover may be a sign that this strategy of forward integration of the business chain into new markets is proving profitable and that the overall competitive advantage is being masked from competitors.  The Johnson & Scholes 1988 test of strategic effectiveness looks at the sustainability, feasibility and acceptability of a strategy.   It would seem to show that:

Suitability: the strategies of new product and new market development are suitable where they can build on resources and capabilities in project management, construction, engineering & water supply.Feasibility: The strategies described above are feasible because the capital cost of entry to the FM industry is very low (the premises are most often supplied by the customer, the customer’s personnel are often hired in the deal--so they bring their knowledge of the facility with them and this can be augmented by the organisational routines and managerial acumen of the FM company).Acceptability: The international industry is fragmented so there will be little threat of retaliation from established, major market-share industry rivals. Also, as the return on capital invested is high in relation to costs of entry (as long as the firm has a managerial resource base to build on) the strategies will be acceptable to shareholders.

The Effectiveness of Potential Strategies that Could be Followed

Other potential strategies that could pass the Johnson & Scholes test in the International FM market segment are:

To form strategic alliances with international Insurance Companies (much as garages do with car insurance companies) so that the FM company would handle all litigious repairs.

To offer professional FM services to multi-national corporations for their expatriate employees;

For multinational companies involved in construction, mechanical equipment manufacture, architectural services or reprography to expand into facilities management by forward integrating their business chain, not only to ensure maintenance of their own equipment but also to take advantage of their distinctive managerial competencies to manage other facility services. Market share could be built up by buying national or regional single-service companies. The multinational company’s managerial routines, recipes & purchasing power would lead to greater profits on the market share thus acquired.

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An Assessment of the Sustainability of Distinctive Sources of Superior Performance

The test of sustainability is to see whether competitors are able to replicate or imitate the resources and capabilities involved in (an industry) in such a way as to negate any advantage from them.  From the foregoing analysis, the minimum requirement to compete in a product/services industry is to have the managerial resources and competencies to give better value for money to the customer than the customer can obtain by managing his or her own facility. This competency of "good management" relies upon the "sunk cost" of building up organisational routines. To stay with the example of Johnson Controls, from a manufacturing base this company has used its knowledge of quality in building management to move into the FM service sector. Once ensconced in FM it has used its quality control techniques to standardize more than 200 processes in the area of site management all over the world - work order management, manpower scheduling, service tracking and performance history reporting and preventive maintenance routines. Johnson Controls seems to enjoy natural monopolies, in that it has a closed-standard controls system, it benefits from sunk costs such as prior investment in knowledge, and it has the exclusivity on its systems and knowledge management processes. All of this can be described as the result of extremely good IT systems and human resource management.

To see whether a competitive advantage such as the good management of resources exercised by Johnson Controls is sustainable, it is necessary to look at:

Whether Johnson Controls is aware of its distinctive capabilities relative to other organisations in the same industry, so that it can protect and build on them? This seems to be the case. And:

If it is possible for a competitor to identify those distinctive capabilities and get around the problem of "causal ambiguity" (Lippmann & Rumelt, 1982) and discover whether those capabilities which have been defined as at the root of Johnson Controls’ success are durable, replicable and mobile ? (Grant, 1995). The company has a track record in FM since 1980 which would seem to show that even if one more of its managers were to be hired away by a competitor this would  not diminish Johnson Controls profitability or management of its business. Therefore Johnson Controls seems to have built up a sustainable and distinct source of superior performance.

Two other tests of sustainability can be used, that of Kay (1993) and that of Peteraf (1993)

Kay suggests that sustainability is based on three distinctive capabilities which are difficult to replicate: architecture; the way in which the firm manages its relations and contracts (spot, classical or relational) with stakeholders; reputation; which can be a source of advantage; and innovation; when it allows a firm to compete more effectively.

Peteraf refers to "the cornerstones of competitive advantage" as shown in the diagram below:

To take ‘ex ante’ limits to competition, (which can be defined as the willingness to bid for a resource or invest in building a capability) not all FM companies are willing to take the risk of investing on an international basis, so the first movers into the International FM segment are building an advantage that will be difficult to replicate (Grant, 1995, p. 161).

CGE/Symonds, Serco (in the U.K.), Lyonnaise des Eaux and Johnson Controls are competing from heterogenous capabilities and any of them would find it difficult to replicate the other’s value chain.

With regard to imperfect mobility, it is difficult to see how the firm-specific resources of Johnson Controls or CGE/Symonds could easily be transferred unless a whole management team was hired away from either company.

The FM industry would seem to be attractive and its incumbents are protected by deceptively low margins.  Although margins are low, return on capital invested can be as high as 100% per year. In the International Facilities Management segment of the FM industry, only the richest countries are towards the mature end of the life cyle. A strategy of forward integration of the business chain is paying off for multinational companies which have distinctive managerial competencies. These companies are competing from heterogenous resource bases and are attacking the segment from different angles, all of which ensure good returns.

If your company is attracted by the high returns of the International Facilities Management Industry you should first of all determine (a) if it has a distinctive competence in managing resources for Value for Money in its own facility, and/or (b) determine whether it has a distinctive product or service already used within the facilities industry. If it is your Board’s decision that it can obtain better value for money for customers than they can for themselves by running their own facility, you should enter the International FM segment by acquiring the relatively unsophisticated regional or national companies in the first, second and third wave countries described above which do not have Johnson Controls, Suez's, Serco's or Vivendi's knowledge management skills.  You should then make explicit your tacit knowledge, transform this knowledge into known, distinctive competencies (distinct sources of superior advantage). You can then begin to mine and transfer your knowledge of your  tacit and explicit routines to the companies you acquire. See the article from Nonaka & Takeuchi, also on this web site, to see how a company could set up a knowledge creation spiral within the acquired companies from both its own superior resource management, its customer and employee knowledge base and the experience brought by the first wave acquisitions to the second and third wave acquisitions.

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