measuring and improving strategic performance of contractors

Thesis for the Degree of Doctor of Philosophy Measuring and Improving Strategic Performance of Contractors by Luu Truong Van Interdisciplinary Program of Construction Engineering and Management The Graduate School Pukyong National University February 2009 Measuring and Improving Strategic Performance of Contractors (건설계약자들의 전략적 수행을 개선과 측정) Advisor : Prof. Soo-Yong Kim by Luu Truong Van A thesis submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Interdisciplinary Program of Construction Engineering and Management The Graduate School Pukyong National University February 2009 Luu Truong Van 의 공학박사 학위논문을 인준함 2008 년 12 월 16 일 주 심 농학박사 이영대 (인) 위 원 공학박사 김영진 (인) 위 원 공학박사 문성우 (인) 위 원 공학박사 김대영 (인) 위 원 공학박사 김수용 (인) Measuring and Improving Strategic Performance of Contractors A dissertation by Luu Truong Van Approved by: Chairman Young-Dai Lee Member Young-Jin Kim Member Sung-Woo Moon Member Dae-Young Kim Member Soo-Yong Kim February 25, 2009 - i - Measuring and Improving Strategic Performance of Contractors Luu Truong Van Interdisciplinary Program of Construction Engineering & Management The Graduate School Pukyong National University Abstract The current business environment in construction is characterized by fast change and severe competition. This research reports on the design, implementation and evaluation of a dynamic performance measurement framework, as an attempt to better match the business environment. System dynamics (SD) and Balanced Scorecard (BSC) is integrated to meet research objectives. The development of a dynamic BSC (DBSC) is a logical extension to the Balanced Scorecard to address above problems. The major objective of this research is to describe how the BSC and Strength-Weakness-Opportunity-Thread (SWOT) matrix can be used to formulate the business strategies and to measure the strategic performance of construction. Angiang Construction Enterprise (ACE) is selected as a case study to measure the strategic performance. An applicable simulation model of a construction enterprise was built using system dynamics methodology. The DBSC model was calibrated to a construction enterprise to measure the strategic performance and to formulate and evaluate practical policies to improve its performance. In order to considerably improve performance, some integrated policies combining the separate policies having the most effects were evaluated. - ii - This research reveals that the DBSC model should be considered as a promising tool for the construction enterprise to experiment with the effects of its strategies and policies prior to implementing them in the real project. This also proves that the integration between SD and BSC has enormous potentials in the performance measurement of construction organizations. The findings imply that the low training frequency of human resource and high proportion of direct costs and administrative expenses to turnover are generally “Achilles’ heel” of medium-sized construction enterprises in Vietnam and very likely in other developing countries. The findings from this case study provide valuable lessons for practitioners in the application of new management frameworks (i.e. BSC and SWOT) in managing their strategic performance in other developing countries and region. The integration of BSC approach and SWOT analysis can help medium-sized construction enterprises in developing countries identify short-term objectives and long- term strategies, establish the performance measurement. As the Asian saying goes, “to know oneself is true progress”. Therefore, based on the research findings, Korean construction firms can gain insights into Vietnamese construction firms. As a result, thorough understanding of competitors in Vietnam is the best way so that Korean construction firms can win construction contracts in Vietnam. For that reason, the research findings are very useful for Korean construction industry. Since a medium construction firm from a country to the other country may have the same principles to formulate their strategies, the research framework and the model in this study can be applied to medium construction firms in Korea with minor adjustment. For those reasons, this study is useful not only to practitioners, researchers, and clients in Vietnam but also to those in Korea. - iii - ACKNOWLEDGEMENTS Through out the course of this study, I wish to thanks from the bottom of my heart to my advisor, Professor Soo-Yong Kim, whose expertise, patience, constructive comments, enthusiastic guidance, encouragement, and friendly discussion have been of immeasurable value. I express my deep gratitude to Professor Soo-Yong Kim for providing the opportunity to undertake my study. I am very happy to acknowledge my debt to Professor Soo-Yong Kim for nice treatment and financial support over the past duration of graduate study at Pukyong National University. I also express my deep gratitude to Professor Young-Dai Lee, who served as chairman of the examination committee for his kindness, helpful recommendations and valuable comments. Special thanks also are extended to Professor Sung-Woo Moon, Professor Dae-Young Kim and Professor Young-Jin Kim, committees of this dissertation, for their helpful suggestions and recommendations as well as their valuable comments. I am also grateful to Professor Soo-Yong Kim, Professor Young-Dai Lee, Dr. Jin-Kook Yang, Dr. Jung-Man Jung, Dr. Hur Yurl and Professor Soo- Yong Lee, for what they taught. Grateful acknowledgement are extended to top managers, line managers and site managers, who made it possible for the survey in Angiang Construction Enterprise (ACE). I also express my gratitude to Mr. Cao Huu Loi, a vice director of ACE for nice help. Without their hearty participation and corporation, the objectives of this study have not been accomplished. - iv - I am really grateful to the faculty and staffs of Department of Civil Engineering for their valued helping during my study. Special thanks are extended to Dr. Park Young-Min, who had always supported, and to Mr. Lee Yang-Woo, Mr. Park Choong-Soo, Mr. Jang Hyo-Won, Mr. Lee Sang-Hee, Mr. Jung Poo-Jin, Ms. Cho Ha-Ra, Mr. Kim Jang-Soo, Mr. Kim Hoe-Syeob, Mr. Tulo and Mr. Le Hoai Long for their kind support and assistance. I would also like to express deepest gratitude from the bottom of my heart to my wife - Tran Thi Thu Huong, my son – Luu Truong Thinh and my daughter – Luu Diem Huong Mai, who always support, love, sacrifice, and encourage me in every day and forever. Finally, I wish to express my deepest gratitude and I am forever indebted to my parents, my brothers, my sister for their infinite sacrifice, love and encourage. Pukyong National University, Busan, Korea December, 2008 Luu Truong Van - v - TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENT iii TABLE OF CONTENTS v LIST OF TABLES xiii LIST OF FIGURES xv CHAPTER 1: INTRODUCTION 1.1 Background 1 1.2 Problem statement 2 1.3 Objectives of the study 4 1.4 Scope of work 5 1.5 Expected contribution 6 1.6 Expected contribution to Korea Construction Industry 7 CHAPTER 2: LITERATURE REVIEW 2.1 General 8 2.2 Characteristics of construction industry 8 2.3 Strategic performance measurement of organizations 9 2.3.1 Definition of performance measurement 9 2.3.2 Background to strategic performance measurement 11 2.3.3 The evolution of modern performance measurement 12 2.3.4 Balance Scorecard (BSC) 25 2.4 Previous studies on organizational performance measurement in the construction industry 29 2.5 System thinking and system dynamics 32 - vi - 2.5.1 System thinking 32 2.5.2 Systems thinking techniques 35 2.5.3 Systems dynamics 35 2.5.4 System dynamics models 39 2.6 Applications of system dynamics in management 40 2.6.1 The roles of system dynamics 41 2.6.2 System dynamics in performance measurement 42 2.6.3 System Dynamics in Construction Management 45 CHAPTER 3: RESEARCH METHODOLOGY 3.1 General 48 3.2 Research method framework 48 3.3 Stage 1: Developing the performance measurement system using the BSC approach 50 3.3.1 Corporate strategy formulation 50 3.3.2 KPIs identification 52 3.3.3 KPIs validation 53 3.3.4 The strategic performance measurement and evaluation 53 3.4 Stage 2: Developing a dynamic-BSC (DBSC) model using the SD approach 55 3.4.1 Principles of system dynamics modeling 55 3.4.2 System dynamics modeling process 56 3.4.3 Research methodology for stage 2 58 3.4.4 System dynamics modeling 58 3.4.5 Model testing 65 3.4.6 Policy design and evaluation 65 3.5 Tools for the research 65 [...]... of the ACE’s performance scale computation 141 Figure 5.7 Summary of performance levels of each perspective and the overall performance of ACE 146 Figure 6.1 The dynamics of the enterprise performance showing low profit margin percentage 153 Figure 6.2 The dynamics of the enterprise performance showing decreasing proportion of interest to profit after tax 154 Figure 6.3 The dynamics of. .. percentage and profit after tax under the situation of the principal resulting from the whole turnover192 Figure 7.16 Profit margin percentage and profit after tax under the situation of no grow of local construction market 193 Figure 7.17 Profit margin percentage – simulated output and historical data 195 Figure 7.18 Proportion of loan interest to profit after tax – simulated output and historical... commitment of time, effort, talent and money (Oglesby et al., 1989) 2.3 Strategic performance of organizations 2.3.1 Definition of performance measurement The meanings of terms and activities used to describe the field of business measurement have remained constant over time Armstrong & Baron (1998) outline the semantics of the terms used within the performance measurement field The term performance. .. policy 2a and 2b 213 - xviii - Figure 8.5 ‘Efficient level of the whole operation’ performance under policy 2a and policy 2b 214 Figure 8.6 ‘Profit after tax’ performance under policy 3a and 3b 214 Figure 8.7 ‘Profit margin percentage ’ performance under policy 3a and policy 3b 215 Figure 8.8 Overall cost under policy P3a and b 215 Figure 8.9 Turnover under policy P3a and b ... Investigation into degree of importance of KPIs for strategic performance of ACE 272 Appendix 3 Weight result of KPIs 276 Appendix 4 KPIs data collection form 281 Appendix 5 Completed performance evaluation form 288 Appendix 6 The equations of the DBSC model and their parameters 292 CURRICULUM VITAE 303 - xii - LIST OF TABLES Table 4.1 Business performance of AnGiang Construction... developers, subcontractors and suppliers, an extensive and complex regulatory framework, high interest costs, severe competition, multi-work locations, fluctuating workforce, and large turnover of workers In addition, companies in the construction industry have faced various risks including availability of funds for repayment of borrowings, availability of skilled labor and fluctuation of material costs and interest... Enterprise - ACE) in Vietnam; (2) To develop a performance measurement for ACE using BSC; -4- Chapter 1 Introduction (3) To develop a dynamic BSC (DBSC) model for improving strategic performance of ACE by integration of SD and BSC; and (4) To experiment and evaluate the possible effects of ACE’s strategies in the real word with very low costs as well as risks 1.4 Scope of work The study focuses on two management... enterprise goal and objective due to learning and growth perspective 113 Table 5.7 The formal set of validated KPIs 114 Table 5.8 Summary of KPI weighting 123 Table 5.9 Summary of KPIs by type, source, and formulation 127 Table 5.10 Results of KPI data collection 132 - xiii - Table 5.11 The summary of KPI by result, score and analysis method 135 Table 5.12 Summary of performance. .. monitoring and understanding The terms performance management and performance measurement were used interchangeably (Armstrong & Baron, 1998) by many researchers In modern management, performance measurement is defined as “the process of quantifying past action, in which measurement is the process of quantification and past action determines current performance (Neely, 1998) Therefore, “a performance. .. term performance management’ afterwards, was the first term that indicated a need for business to understand performance Over time this term was -9- Chapter 2 Literature review replaced with the term performance management’ This term implied that business performance could be controlled and therefore better managed This view of performance evolved further during the 1970s and 80s, with a focus on performance . for the Degree of Doctor of Philosophy Measuring and Improving Strategic Performance of Contractors by Luu Truong Van Interdisciplinary Program of Construction. Engineering and Management The Graduate School Pukyong National University February 2009 Measuring and Improving Strategic Performance of Contractors (건설계약자들의 전략적 수행을 개선과 측정) Advisor : Prof Summary of the ACE’s performance scale computation 141 Figure 5.7 Summary of performance levels of each perspective and the overall performance of ACE 146 Figure 6.1 The dynamics of the enterprise