Analysis of Lendlease Corporation

Lend Lease is one of the Australian construction companies that presently operates on an international level. The company was founded in 1958 with the main vision being to start and run a company that offered a combination of the successful application of investment, construction, and development. The company’s current headquarters are in Sydney, Australia however operations are spread across the Americas, Europe, and Asia (LendLease, 2018). The international scope of the company indicates that the company is exposed to different social, economic, and political factors that affect all other companies that focus on global markets

Currently, Lendlease has an approximate staff population of 12,740 in all its worldwide subsidiaries combined. In addition to the headquarters in Sydney, Lendlease manages its international operations from regional head offices in London, Singapore, and New York (LendLease, 2018). The distribution of head offices present Europe, Asia, and North America as the company’s strategic markets outside Australia meaning that all strategy formulations must focus on the specific factors affecting all these four markets at any given time (Lendlease, 2018).

Structure and Activities

A company’s structure plays a profound role in its strategic direction and also to its overall performance. It is also important to be aware of the fact that activities in any company influence the kind of structure employed and that is why it is important to consider activities and structure together. Lendlease specialises in the development of infrastructure and general real estate on an international level. Lendlease Corporation is the umbrella body under which the smaller entities, such as Lendlease Trust, operate. Specific segments on which the company focuses on are investment management, construction, infrastructure development, and general property development (Reuters, 2018).

The investment management line of business is concerned with functions such as the management of assets and property including investment management in infrastructure and property investment (Reuters, 2018). The construction division, on the other hand, is concerned with the provision of construction services including engineering and project management while the property development section focuses on the improvement of urban and suburban developments such as retail centres, commercial offices, apartments, and healthcare facilities, among others (Reuters, 2018). In its global operations, the company offers its services under a number of trade names including Lend Lease International Pty Limited, Lend Lease Investments Pty Limited, Lend Lease Primelife Limited, Lend Lease Residential Pty Limited, Lend Lease Retail, Lend Lease Solar, and Lend Lease Structures Pty Limited (ABN, 2018).

Different business lines operated by the company are an indication that it is exposed to competitors and other environmental threats in multiple sectors of the different economies it operates in. A good understanding of all these lines of business will thus offer appropriate basis for the company’s external and internal environment later on in this report.

Business Community Perceptions

Lendlease runs the springboard program through Lendlease foundation which is a program aimed at the professional development of employees while at the same time creating a socio-economic impact for the community. Through the springboard program, the company has put in place initiatives to positively impact employees’ personal lives and aiding local communities through a number of charity programs. The program has been able to bring economic benefit to the company since lendlease currently makes an SROI of AU$3.60 for every AU$1 invested. In a period of two years, the company has made an income of AU$20.1 million as a result of the positive social image the program has brought to the company (LF, 2016).

Internal and External Analysis

In analysing the local environment the company operates in, it will be necessary to look at different internal factors that are important to its performance. These include both tangible and intangible resources. The Porter’s Five Forces Framework, on the other hand, will be essential in revealing some of the external factors that affect the company’s performance. All this information will then be brought together in a SWOT analysis that will finally enable an informed analysis of the current strategy and also provide the basis for recommending a better strategic direction for the company.

Internal Analysis

Financial resources

The company’s 2013-2014 financial statements show a 6% increase in revenues from AU$11.5 billion to AU$12.2 billion. The share of equity profit increased by 15% in the same period representing but there was a marginal decline in ROE from 13.6% to 13.5%. In terms of contribution to the revenues, the construction division came first with total revenues of AU$10.5 billion followed by development which brought in AU$1.16 billion. Investment management division declined from AU$336.6 million in 2012-2013 to AU$185.7 million in 2013-2014, with profits and EBITDA showing similar declines within the same period (Lendlease, 2013).

In the 2014-2015 financial year, a 5% growth in revenue was recorded which is almost equal to the 6% growth in the 2013-2014 financial year. This shows that the company is experiencing steady growth in its different business functions each year. Looking at the ROE for the same financial year, shows a 32% decline in growth meaning that 2014-2015 performed poorer than the preceding year for investors (Lendlease, 2015). The 2015-2016 financial year recorded the highest increase in revenues. An increase from AU$13.2 billion to AU$15.1 billion was recorded between the two financial years representing a 14% rise. The company’s net profit also increased by almost the same margin. ROE grew from 12.4% to 13.0% which represents a 5% appreciation.

According to Cranston (2018), LendLease Australia seems to be maintaining its growth trajectory with the results for the half-year ended 31st December 2017 showing that the company had made a profit of $ 425.7 million which represents 7.8% improvement compared to a similar period the previous year. The company’s share price also showed a 6.5% appreciation which is an advantage to shareholders. In corroboration of this information, financial statements presented by the company show that the company had a net profit of $425.6 million and an ROI of 13.8% between June and December 31st, 2017. The performance of the investment and development segments saw the operating EBITDA appreciate by a massive 11%.

Such financial performance was attributed to the completion of residential buildings in Europe and Australia (Lendlease Group, 2018). Looking forward, the group is expected to keep up the good financial performance as a result of an increase in both Australian and international projects (Lendlease Group, 2018). The optimistic outlook is in line with projections in UN (2014) which shows that urbanisation is increasing thus leading to a high demand for general infrastructure and commercial and residential buildings. The company’s financial position will increase significantly in the short run. However, much of the increased spending on construction that is projected by Woetzel et al. (2017) will mostly be in markets such as China and India which implies that the long-run profitability of LendLease will depend on how well it will penetrate these markets.

Other than the company’s overall profitability, the company’s stock price has shown more-or-less consistent growth over the past three years. Figure 1 (Lendlease, 2018f) shows share price trends from August 2015 to August 2018. The share price is seen to have stared at around AU$16.5 per share and then spike towards the end of 2015 to over $18.5 per share. This spike would however be followed by a great decline in 2016 where the price between AU$15.5 and 16.5 per share. The period between mid-2016 and August 2018 is seen to have had positive outcomes for the company’s shareholders as the share price is seen to have experienced a constant rise to over AU$ 21 per share which is the higest share price over the three year period (Lendlease, 2018f).

Figure 1: Lendlease stock price trend from August 2015 to August 2018 (Lendlease, 2018f)

Physical Resources

Lendlease has sufficient resources to enable delivery at the same pace as the expansion in urban areas in Australia. Some specific physical resources presented in ACA (2018) include precast facilities, fleets of construction equipment capable of carrying out projects of the largest scales ever achieved in modern times, and general civil engineering assets that enable the construction of infrastructural facilities such as ports, dams, railways, tunnels, bridges, and roads. LendLease (2018c) confirms this by pointing out that the company owns a massive fleet of earth-moving equipment that enables the company to take up projects such as the construction of dams. Of profound significance, however, is the fact that the company owns the latest simulators in their facilities that assist in the training of new employees.

Even though ACA (2018) and LendLease (2018c) present LendLease Australia as possessing immense physical resources, especially those used for construction, Cranston (2018) presents some contradicting information that casts some doubt on whether really the present construction resources will be able to help the company take full advantage of increasing demand. This is because; in 2017 the company incurred huge losses in Australia as a result of a number of failed construction projects (Cranston, 2018). LendLease thus has to evaluate the capacity of the current resources alongside the expected projects in Australia so as to establish whether the ability to meet unexpected demand exists or if the some of the profits should be used in acquiring more physical resources to boost construction capacity.

Intangible Resources and Capabilities

According to Nelson (2017), a partnership between Lendlease and StartupAUS which is the Australian body that advocates for the development of technology start-ups in the country promises to give the company access to the state-of-the-art construction technology that will change the game both in Australia and abroad. Some of the technologies being looked into include the use of 3D printing, drones, research into smart buildings, application of machine learning in design, and the adoption of Building Information Modelling (BIM) technology. This partnership will afford the company a very high level of R&D capabilities that will enable it to find cost-effective measures that will further improve on its profitability. In addition to the capabilities startupAUS will add to Lendlease, the company has made its own efforts toward becoming an innovative construction company. This is seen from the fact that the company launched its new innovation lab in 2017 where construction ideas for the future are expected to be developed (Lendlease, 2018d).

Even with such a technological focus, the organization still needs a skilled and motivated human resource. Lendlease Graduate training program emerged position 1 among construction and property services companies in Australia. Overall, the company was ranked 40th

which is a very good performance considering the many companies operating in all sectors of the Australian Economy (Leldlease, 2018e). The ranking presents Lendlease as a company that is very keen on training its employees so as to get the highest quality of service delivery. In addition to training employees from the bottom up, the company in 2013 started a program aimed at developing business leaders in all its business segments (DDI, 2015). This, as shown in DDI (2015) has resulted in highly effective leadership that is dependable and has the relevant ability to lead the talented individuals at the lower levels. Comparing this information with employee reviews at Indeed (2018) however, presents a rather different scenario altogether. First of all, the company scores an average of 3.9 out of 5 in 289 reviews. For a company that was ranked position 1 in terms of employee development, this figure too low. In the context of leadership, a former employee who had given a score of 5/5 pointed out that one of the drawbacks of the company was that it had a very bureaucratic system of governance. Another employee pointed out that there was a lot of work and very little support. Streamlining the organizational structures would be a good starting point if Lendlease is to effectively perform well going forward.

External Analysis:

Lendlease operates in the Australian construction and property management industry. According to AI Group (2015) the construction sector is the third largest industry in the Australian economy. As a result of that the industry is affected by a number of external factors in the market. The PESTEL framework will provide an all-round view of the different market factors that come into play in the company’s decisions.

PESTEL Framework

Political Factors

Australia is one of the global leaders in democracy and has enjoyed a very stable political climate for a very long time (USDS, 2018). In addition to being a member of the commonwealth and thus under the British monarch, Australia enjoys good international relations with major countries in Europe. The country also enjoys close ties with the United States (USDS, 2018). The stable internal political climate plus the good international relations presents Australia’s businesses with immense opportunities in terms of both internal growth and globalisation.

Economic Factors

In the 2014-2015 financial year, the construction industry contributed 7.8% of the country’s GDP. The contribution of the sector 10 years ago was 6.5% which is an indication that the demand for construction services in the country has been increasing (AI Group, 2015). This trend is an indication that the current economic conditions will favour the growth of Lendlease and other competitors in the industry.

Social Factors

There is increased need for companies in Australia to disclose their social and environmental sustainability impacts (PB, 2013). This increase in pressure in social circles results from the increased public awareness of the need to conserve the environment. The social trend of holding businesses accountable has made companies in the construction sector such as Lendlease put in place CSR activities (LF, 2016) and sustainability programs (Lendlease, 2018b) so as to remain in the face of this social pressure.

Technological Factors

A survey presented in GT (2016) showed a very strong correlation between the use of technology and growth of construction companies in the Australian economy. This positive outcome associated with technology results for the fact that technology significantly improves efficiency a different stages in the construction process (GT, 2016). This factor presents both an opportunity and threat to Lendlease because while adoption of technology will lead to the said efficiencies, faster adoption of technology by competitors poses the threat of reducing the company’s market share.

Environmental Factors

A number of changes have occurred in terms of environmental conservation. There is increased global pressure for organisations in all sectors to ensure environmental sustainability in their activities. In response to this pressure, lendlease has been investing more in ensuring compliance with environmental regulations both in Australia and in international markets (Lendlease, 2017).

Legal Factors

The legal environment in an international context presents a number of challenges to Lendlease. A report in the New York Times by Rashbaum (2012) reveals that the company has to pay fines due to noncompliance with the different legal frameworks in the US. Operating in different countries in with different laws and regulations means that the company has to incur extra costs on order to comply with all the different regulations.

Porter’s Five Forces Framework

Industry Rivalry

Lendlease Australia is the biggest construction firm in the Australian market. Data presented on Owler (2018) shows Lendlease is leading in its business sector in terms of revenues by a very big margin. While Lendlease had revenues of AU$12.8 billion in 2017, Simon, which came in second managed revenues of AU$5.6 billion while Walsh and Mortenson managed $AU5.1 billion and AU$3.8 billion respectively. Even though the data indicates that Lendlease is well ahead of the competitors in terms of financial muscle, industry rivalry is still high and cannot be ignored. The Walsh Group, for example, presents a major threat to lendlease because it has been in operation for only twenty years and has been able to expand its services form refurbishment to full construction projects within this short duration (Walsh Group, 2018).

Looking at the expected dynamics of the competitive landscape, it is first important to note that construction projects are increasing with increasing urbanization in Australia and beyond (UN, 2014). This information is available to all the competing firms meaning that each one of them has a strategy and resources in place to take advantage of the opportunity. Industry rivalry will only increase both in the short run (1-2years) and in the long run (3+ years). The strategy employed by Lendlease must be sustainable in the long run so that this threat can be effectively dealt with.

New Entrants

According to Valence (2012), the huge investment involved in the construction industry is a major barrier to the entry of new small firms in this industry all over the world. The Lendlease financial performance presented in the previous section supports this point. To match such revenue levels, a company must be big enough to command confidence in the market. Other large companies from overseas would thus be the new entrants that would pose a significant threat in this market. However, data presented by Woetzel et al. (2017) shows that most companies are focusing on the developed world where there is expected to be more construction expenditure so as to bridge the existing infrastructural gaps. This implies that new entrants are unlikely to establish business in Australia and this implies that Lendlease is currently safe from this threat. However, the situation may change in the long-run as firms become more and more concentrated in developing countries.

Substitute Services

Due to the high amounts of money involved in construction projects, switching costs are very high meaning that customers do not readily shift from one company to another when it comes to construction projects. For that reason, the threat of substitutes is very low. This explains why Lendlease has been the market leader in the Australian construction industry for such a long time. Looking forward, the impact of this threat is not likely to increase in the short run or in the long-run.

Supplier Bargaining Power

According to Wilkinson (2015), bargaining power of suppliers increases with a decrease in their number and decreases when the number of suppliers increases. There are relatively few suppliers in the industry because the switching costs are relatively high (Wilkinson, 2015). For that reason, suppliers have a moderate to high bargaining power in the Australian construction industry. However, with the increasing demand for different developments in new urban areas, new suppliers are expected to enter the market thus significantly lowering the bargaining power in the long-run.

Buyer Bargaining Power

Buyers in this context are private entities requiring construction and civil engineering works and/or the government. According to the urbanization trends presented in UN (2014), the number of construction work clients is expected to increase each year up to 2050. Their switching costs will, however, remain almost constant meaning that their bargaining power will be moderate throughout this period. This notwithstanding, it is important for Lendlease to be aware of the fact that there are many competitors in the industry who might influence switching costs with the aim of winning a chunk of the market share enjoyed by the leading companies.

SWOT Analysis

Strengths

The main strength enjoyed by Lendlease in Australia is that it enjoys a big market share that enables it to have more revenues than all the other close competitors. Also, the company operates in different global markets and can thus benefit from experience drawn from different markets. Finally, the company has created a very good reputation for itself in the local market by emphasizing sustainability in all its construction projects worldwide (Lendlease, 2018b).

Weaknesses

From the Porter’s Five Forces Analysis Presented in the previous section, employee reviews show that the company has a profound leadership problem. If this problem persists then the company might lose some of its best employees or it may talented entry-level employees to competitors. In addition, there is a hint that the company’s physical resources are not being utilized effectively which has resulted in the construction failure pointed out by Cranston (2018).

Opportunities

Data presented in UN (2014) and by Woetzel et al. (2017) shows that there is a global increase in demand for infrastructure and real estate. Also, as shown in the discussion on the financial resources, the company is well endowed with the necessary finances to boost its capacity so as to take advantage of increasing demand. As a result, the company is in a very good position to develop and implement strategies that will enable it to take advantage of these opportunities.

Threats

From the discussion on industry rivalry, it has been established that the company operates in an industry that has a significant number of competitors that are working hard to win the largest market share in the country. What makes the threat even more serious is the fact that a number of these competitors have the necessary finances to compete aggressively against Lendlease. For that reason, the company has to constantly evaluate any new strategies employed by these competitors so as to respond appropriately.

Strategic Direction and the Global Market

The internal and external analyses are very important in that they help in determining the most appropriate strategy that a company should adopt. However, it is also important the current strategy be studied so that an informed recommendation can be made.

Lendlease Current Global Strategy

According to the company website, LendLease’s main strategy is to enter the global market by first focusing on the major global cities and economic hubs in different continents. The second step in the company’s internationalization strategy is to grow from the strategic cities to the other major cities in the different continents it has set base in. A major driver of this strategy is the company’s focus on delivering at an optimum level with regard to safety, cost-effectiveness, and sustainability (Lendlease, 2018b). This focus on strategic cities can be seen from the previous discussion on the company’s scope where it is pointed out in Lendlease (2018a) that the company has its head offices in Singapore, London, and New York. This focus as pointed out in Lendlease (2018b) is meant to position the company in a better position to take advantage of the ‘Six Major Trends’ that are key for success in the global construction industry.

Six Major Trends

Rapid Urbanization

The first trend that Lendlese is positioning itself to take advantage of is the increasing urbanization. According to UN (2014), only 30% of the global population lived in cities, in 2014 the figure had risen to 54% and this is expected to increase further to 66% by 2050. The rural population, on the other hand, is set to decline from around 3.4 billion people in 2014 to around 3.2 billion people in 2050. It is important to note that much of the expected urbanization will take place in Asia and Africa where there is still a significant fraction of rural population at the moment. Nigeria, China, and India are expected to collectively contribute a combined 37% of global urbanization between 2014 and 2015 (UN, 2014). Comparing this information with the strategic locations Lendlease head offices as pointed out in Lendlease (2018a) presents a major discrepancy because the company has focused on already established cities instead of focusing more on the developing markets of India, Nigeria, and China.

Increased Spending on Infrastructural Development

With the rapid urbanization pointed out above, it is imperative that many countries in the world have increased their spending on the development of infrastructure both in the public and private sector. According to Woetzel et al. (2017), infrastructure spending amounts to around 14% of the world’s GDP. This notwithstanding, a 2013 research study by the McKinsey Global Institute found that gaps still exist in the current infrastructural development drive meaning that the current investment level will have to be increased in order to bridge these gaps. One very good thing for Landlease is the fact that the lion’s share of this expenditure has always been in the real estate sector thus implying that expansion of the current spending should benefit the company immensely. The figure 2 (Woetzel et al., 2017) puts this argument into persepctive.

Figure 2: Expenditure on different infrastructure categories (Woetzel et al., 2017).

Taking a keen look at figure 2 (Woetzel et al., 2017) shows that social infrastructure and real estate represent significant fractions of current infrastructure expenditures, and these are very important areas for Lendlease. With the data presented above in mind, it is important to look at the infrastructure spending by country in order to establish the best strategic focus for Landlease. The figure 3 (Woetzel et al, 2017) below, confirms the information presented in UN (2014) that Asia is currently leading in infrastructural development globally. As presented by Woetzel et al. (2017) China and India are currently leading in the development of infrastructure but China presents a greater opportunity since it still has a 2.5% deficit that still needs to be addressed in future. Location of Lendlease’s head offices in New York and London as bases for outward expansion as pointed out in Lendlease (2018b) in the context of the data in the figure 3 below presented by Woetzel et al. (2017) does not seem to have much promise because the United States and the United Kingdom are not among the top countries in infrastructure spending. In addition, both countries have already exceeded their infrastructure spending needs and thus present very little growth opportunities for Lendlease.

Figure 3: Infrastructure spending in and expenditure gap in different countries (Woetzel et al., 2017).

Revolution in Asset and Wealth Management

The increasing net-worth of individuals all over the world has been increasing the demand for asset management. One of the important factors for Lendlease in that regard is that is that this growth will be uneven depending on specific regions. The lowest rates of growth will be experienced in the developed markets while very high rates of growth will be experienced in developed markets. While in North America and Europe growth will decelerate from 5.7% and 8.4% between 2016 and 2020 to 4.0% and 3.4% respectively between 2020 and 2025, growth rates of 8.7% will be experienced between 2016 and 2020 in the Asia Pacific, and later 11.8% between 2020 and 2025 (PwC, 2017).

Figure 4: Increase in the demand for asset management services in different regions (PWC, 2017).

Figure 4 from PWC (2017) shows that in the context of growth in the demand for asset and wealth management services are highly consistent with data presented by Woetzel et al. (2017) on infrastructure spending and projections presented in UN (2014) on rates of urbanization. There is a straightforward correlation between urbanization and increase in infrastructural expenditure. Increased expenditure means that the need for asset management will only increase. Consistency can also be seen from the fact that the highest rates of urbanization and consequently infrastructural expenditures can be attributed to Asian countries. The accelerating rate of growth in the demand for asset management in the Asia Pacific pointed out in PWC (2017) is justified by data presented by Woetel et al. (2017) and UN (2014). This further emphasizes that Lendlease might have to change its focus in terms of the location of its head offices in order to take advantage of this trend.

Urbanization and Climate Change

The increased proliferation of urban areas all over the world has its downsides. One of the main disadvantages that have been associated with urbanization is climate change. Climate change in the context of urbanization, according to UN Habitat (2011) has resulted from the fact that the building of new infrastructure and buildings means that the natural ecosystem has to be disrupted through the clearing of vegetation and moving of animals. In addition, the buildings constructed need to consume energy through air conditioning, while factories consume energy and also produce greenhouse gases. Data presented in UN Habitat (2011) shows that urban population in the developing world will increase from the current fewer than 2.6 billion people to over 3.8 billion in 2030 which represents a growth of almost 5% compared with a 3.4% increase for the developed world. This growth and the associated climate change is pushing companies in the real estate and infrastructure development sector to think more about sustainability just like all other major firms in other sectors of the global economy.

In the context of sustainability, Lendlease will stand to benefit as being one of the sustainability-conscious developers in the 21st century. This is because the company has set out a clear sustainability strategy that will benefit both the developed countries and the developing countries where it is supposed to place more emphasis on. The company has had a very long history of engaging in projects within the requirements of global sustainability standards (Lendlease, 2018b). It is this sustainability-conscious approach to development that has made the company be hailed as the most sustainable developer of residential buildings in the United Kingdom. The study that led to this ranking by NextGeneration assessed over 80 criteria that looked at projects of real estate developers in terms of environmental, economic, and social sustainability (King, 2017). A case study published in 2006 confirms the fact that sustainability by Lendlease has been a major consideration for the company for a long time in that Lendlease has been involved in some of the most sustainable projects in Australia. Some of the notable projects pointed out include the Australia Square which was constructed in the 60s, MLC Fit out which Lendlease refurbished in the 90s creating internal spaces that were very comfortable for workers, and finally, the company installed energy-saving features in Newington towards the 2000 Olympic Games (Orsato, 2006). The focus on sustainability places the company in a very good position to lead the drive for sustainability in constructing future urban areas, especially in the developing countries.

Construction Tech

Another important trend in the context of the construction industry is the increasing number of deals between construction companies and tech companies. This trend results from the realization that technology is very useful in making construction work more efficient thus meaning that the involved personnel will be more productive (CBInsights, 2016). The need for efficiency can be seen to be in line with the projected rapid urbanization pointed out in UN (2014) and the currently increasing construction expenditure pointed out by Woetzel et al. (2017). In addition, technology can be a very important resource when it comes to predicting the environmental impact of developments through the use of modeling software to analyze different factors such as emissions and effects on the ecosystem (CDInsights, 2016). By focusing on partnerships with technology companies, Lendlease will be in a better position to take advantage of increasing demand for real estate and infrastructure in both Australia and Asia since this will boost efficiency and consequently the speed in the completion of projects