Barratt Development plc, a national house builder in the UK construction industry, listed in the FTSE 250, is the second largest house builder in the UK by revenue and by market size (LSE 2010). Like its two biggest competitors, Taylor Wimpey plc and Persimmon plc, it has within the last two years been badly affected by the recession which hit the UK economy in 2008. Before then the company, which was founded in 1958 in Newcastle upon Tyne, had enjoyed relative boom in the UK house building sector, culminating in the acquisition of Wilson Bowden plc in 2007. This acquisition enabled the company to effectively expand its commercial property development arm. As at present, Barratt Developments is represented in all house sectors in the UK, with Barratt Homes in the residential housing market, David Wilson Homes in the up-scale housing market, Ward Homes (a regional brand operating in Kent and south-east), and Wilson Bowden Developments in the social housing and commercial property development market. The onset of the recession has however presented unprecedented challenges to Barratt’s operations, causing it to have to rethink strategies and policies in a bid to reduce mounting debts and cope with falling house prices and a drop in sales due to falling demand for new homes.
Political, economic, social, technological, legal and environmental factors in the UK have in the past determined strategies adopted by Barratt Developments plc and will continue to do so. Political decisions determine economic and regulatory policies which have to consider in formulating strategy. For example, the government’s Home Owners Mortgage Support Policy Scheme assists home owners who have met certain criteria and are unable to meet their mortgage commitments to pay off their mortgages by providing up to 80% of total interest guaranteed (Communities and Local Government 2010). This policy will in some way determine part of Barratt’s strategy because the more people who can afford mortgages, the more houses developers like Barratt will sell.
Social and Legal Factors
Social and legal factors also affect the strategies Barratt adopts because change in patterns of living may dictate what type of houses become more in demand, (for example, family style houses as opposed to flats or vice versa), while changing laws and regulations also have to be satisfied in the course of carrying out their core business activity.
The main focus here however is on the prevalent economic factors and how Barratt responds in term of strategy. Let’s look into the GDP and unemployment rate, the GDP has been fall even seriously compared to the previous recessions, most sectors of the economy are still struggling with the effects of the down-turn. The result, coupled with high unemployment rates, is that people have less money to spend, and tend to spend their limited resources on essential commodities. This invariably means that the high end market where Barratt is represented by the David Wilson brand may suffer. However, the government has made efforts to ensure that more credit is available for people through the banks by issuing bailout funds. These measures may yet still be inadequate, as depicted in a recent Financial Times Online article, where Barratt called for banks to increase lending and review current stringent mortgage criteria (FT 2010). These developments also means that Barratt may have to sell its considerable stock of built houses at prices far lower than were originally estimated, in order to raise cash and improve liquidity.
Porter’s 5 Forces
Depends on individual buyers. Barratt sells to individuals and groups and the government.
Individual customers have less bargaining power, while groups and government have more bargaining power.
Many suppliers and therefore high competition, several alternative materials are available. Suppliers depend on the major house building firms like Barratt for repeat work and are likely to agree price discounts.
Threat of substitute products
Most products in the market are known already. Barratt is at the forefront of developing new products, so the threat of new products is relatively low for now.
Taylor Wimpey: Largest sales revenue, market size of 130,000
Persimmon Group: 3rd largest sales revenue, market size of 12,000
Berkeley Group: 4th largest sales revenue, market size of 6,000
Threat of new entrants to the market
Barriers to entry: High capital requirement, land acquisition expertise, economies of scale, depresses property market.
Strengths (internal positive factors)
These will include Barratt’s diverse product portfolio which allows it to switch products with demand.
The board of Barratt consists of five executive and five non-executive members from diverse.
Barratt’s leading role in innovative house building technology is an advantage.
Weaknesses (internal negative factors)
Lack of adequate finance and debt is a continual setback to the survival of the company.
Timing of merger with the Wilson Bowden brand has affected Barratt negatively in terms of finance within the last few years.
Unsold stock of houses is still a problem as it ties up much needed cash.
Opportunities (external positive factors)
Advancement in technology and emphasis on sustainability means that Barratt can take advantage of its innovativeness to gain competitive advantage.
The underdeveloped nature of the specialized retirement home market means that Barratt can expand to that market.
The economic forecasts show that the recession has technically come to an end. Barratt can position itself to take advantage of the recovering economy when it fully sets in.
Threats (external negative factors)
Government plans to cut spending in future could hamper Barratt’s ability to reach full recovery.
While is still tries to return to profitability, some of Barratt’s competitors are already profitable. This could pose challenges to Barratt’s progress.
Consumer confidence in the market may not return to pre-recession levels long after the recession reverses.