Analysis of a contruction company

High School ・Business ・APA

The construction industry as a high-risk investment

The construction company is one of the high paying industries for investors especially now where real estate development is high in demand and low in supply. However, as one of the basic principles of finance states, the higher the risk the higher the return, the higher returns of the industry do not turn in as easily as one may think; the construction industry is characterized with high risk of investment coupled with huge capital requirements for startups. Unlike other industries such as the retail industry and fashion industry that do not necessarily require technical and skilled approach to operational tasks, the construction industry is in high demand for skilled and technical approach to its operations. It is due to these two sides of the industry (high returns and high risk) that demands the necessity of undertaking an analysis of the five forces for a rational and substantial decision of investment by a prospective investor in this industry.

Threat of new entrants

The construction industry is one of the industries that present high threat of entrants. A number of factors contribute to this threat; one, the capital requirement for initial investment is high or huge. An investor in this industry ought to have the basic and necessary equipment for the job though it’s dependent on the level of construction that one wants to focus on. Construction equipment and especially the modern equipment is expensive to acquire. Two, the list of legal requirements for entry into the construction industry is almost endless in addition to the complexity of meeting these requirements. The third issue is the technical requirements of the industry as far as human resource is concerned. Developing a capable and competent human resource in the industry is capital intense.

Bargaining power of buyers

The bargaining power of buyers is increasing becoming with the rising demand of real estate development. The number of construction companies is rising with the growth of the real estate thus giving buyers or real-estate developers more choices to make between the construction companies to contract for their jobs. Moreover, most construction companies making great out the industry are the widely established ones due to their high preference by consumers. In this case therefore consumers can negotiate down with high power of bargain citing low level of establishment of the company. This as well doubles up as threat to new entrants.

Bargaining power of suppliers

Established and well-known companies in the construction industry are the most sought by real estate developers. Owing to the fact of huge capital investment, there fewer established companies than the demand. This on the other hand gives them higher bargaining power as consumers have fewer options for competence, quality, efficiency and effectiveness.

In conclusion, as lucrative the industry may seem, it is not advisable for a startup with low financial capability however with huge financial muscles that promises sustainability before break-evening it’s a great industry to invest in. it is important to note that there is less that a startup can do to minimize the impacts presented by the three discussed forces of the industry since they form the basic fundamentals of the industry.

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