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A note at Nordnet 2007 by Lauri Palojärvi Lic.Sc., Doctoral Candidate

ON MANAGING RISKS IN INTERNATIONAL GROWTH BUSINESS OF FINNISH CONSTRUCTION FIRMS AND BUILDING PRODUCT SUPPLIERS. A note at Nordnet 2007 by Lauri Palojärvi Lic.Sc., Doctoral Candidate TKK Construction Economics and Management, P.O. Box 2100, FIN-02015 TKK, Finland,

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A note at Nordnet 2007 by Lauri Palojärvi Lic.Sc., Doctoral Candidate

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  1. ON MANAGING RISKS IN INTERNATIONAL GROWTH BUSINESS OF FINNISH CONSTRUCTION FIRMS AND BUILDING PRODUCT SUPPLIERS A note at Nordnet 2007 by Lauri Palojärvi Lic.Sc., Doctoral Candidate TKK Construction Economics and Management, P.O. Box 2100, FIN-02015 TKK, Finland, e-mail: lauri.palojarvi@tkk.fi Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  2. AIMS OF THIS NOTE • Motivating with ’growth’ background • Posing challenging research issues • Pointing out to the pioneering literature review and its insights • Testing with the exemplary case • Concluding with an imperative for future research efforts Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  3. AUTHOR’S BACKGROUND AND RATIONALE • Author, Lauri Palojärvi, born in 1946, has worked over 30 years in the top management positions of Finnish construction industry – Lemminkäinen, Partek, and Metsäliitto/Finnforest. • He has also served Finnish Government first in Brussels, when Finland joined the EU, and then as CEO of state-owned Kera Corporation (later Finnvera) - Public risk financing company. • He has lived 13 years in Africa, the Middle East, the South East Asia, and Western Europe. • He has completed a licentiate thesis (1986) on risk management in construction project export. • Growing international construction business contains major risks. In January 2007, this fact triggered the author to begin a related study with the aim of achieving a Doctoral degree. • First insightful findings of the literature review and the case study are now being shared at Nordnet 2007. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  4. FROM A SCRATCH TO FAST GROWTH Figure 1. Value of foreign operations of Finnish construction contractors between the years 1971-2006 (Source: RT). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  5. PRODUCT BUSINESS BECAME MUCH „MORE INTERNATIONAL” Figure 2. Value of the foreign operations of the Finnish construction industry as a whole between the years 1980-2005 (Source: RT and VTT). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  6. BY 2013 , FINNISH FIRMS´ INTERNATIONAL BUSINESS EXCEEDS THEIR DOMESTIC BUSINESS Figure 3. Actual value (1993, 1998, and 2003) and forecasted value (2008 and 2013) of the foreign operations of the Finnish construction industry (Source: RT). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  7. CHALLENGING RESEARCH ISSUES • Practical experience and relevant literature suggest that, with sound risk management, severe losses can be avoided and/or opportunities can be seized. • Key question : How can Finnish construction firms and building product suppliers manage risks in their growing international businesses? • Research problem : What are the respective main risk types and how can such risks be managed effectively? • Hypothesis: Main risks arise from (i) the competencies of key management and (ii) the contractual arrangements in international businesses and projects, respectively. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  8. PIONEERING LITERATURE REVIEW ON ENLARGED RISK MANAGEMENT • Review on literature, published in English in 2000-2006, was conducted on traditional risk management plus overlapping uncer-tainty, complexity, and crisis management • Book search resulted in 3247 hits • 388 books were assessed by TKK/CEM risk research group • 64 books were reviewed for a publication • Complementary article search on enlarged risk management identified app. 150 articles; thereof, 52 articles were eligible for a publication Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  9. NO BOOKS ON FIRM/PROJECT CHARACTERISTICS, INTERNATIONAL BUILDING PRODUCT BUSINESS NOR COMPLEXITY – ON CRISIS, FEW ONLY Table 1. Distribution of 116 references published mainly between 2000-2006 by the four risk-related views and the non-construction vs. construction-related contexts (Source: Ahonen et al. 2007). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  10. LITERATURE REVIEW FINDINGS • Risk is defined to arise from uncertainty by assess-ing – either rationally or intuitively – a probability and an impact of an uncertain event (e.g. Flanagan and Norman 1993). • Crisis is a consequence of mismanaged risk (Loosemore 2000). Crisis is a low probability, unexpected, high-impact event that is not covered by contingency plans (Booth1993). • Complexity is a characteristic of a system arising from interactions between its elements. Project complexity depends on ´a number and varieties of elements, and interconnection among them´(Shenhar and Dvir 2004). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  11. AUTHORS’ REVIEWED INSIGHTS • Uncertainty prevails, when a decision-maker has no historic data - e.g. “a group of instances” - relating to a situation for e.g. an event, conditions etc. to occur (Knight 1921). • Uncertainty is defined as “a lack of certainty” and uncertainty management as “managing perceived threats, opportunities, their risk implications, and also various sources of uncertainty which give rise to and shape risk, threat, and opportunity” (Chapman and Ward 2002). • Some Norwegian authors consider uncertainty manage-ment as a project owner’s means to tap opportunities, while risk management is a domain of PM (Langlo 2003). • Herein, it is defined that uncertainty is an everlasting framework of all events, including risk events. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  12. AUTHORS’ REVIEWED INSIGHTS (continued)… • Risk is a possibility that expectations are not met (Lifson and Scheifer 1982). In project business, risk usually was understood as a possibility of an event with negative consequences. – Later ‘risk arises from uncertainty by assessing a probability and an uncertain event’s impact’ (Flanagan and Norman 1993). • Crisis is a low probability, unexpected, high-impact event that is not covered by contingency plans. Mismanagement of crisis may result into disaster (Loosemore, 2000). - In more common words, crisis is a consequence of risk, which is not properly managed. • Complexity has a linear impact - the more complex a project or a business is, the more risk is there to be managed. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  13. Table 2. Main findings of the literature review: “Top 10” enlarged risk management concepts (Source: Ahonen et al. 2007). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  14. Table 2. Main findings of the literature review: “Top 10” enlarged risk management concepts (continued). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  15. 1980s’ UNDERSTANDING - NO MAJOR CHANGES BY EARLY 2000s Figure 4: Prime event, risk event, and the consequences of risk (Source: Palojärvi 1986). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  16. 1980s’ UNDERSTANDING - NO MAJOR CHANGES BY 2000s Figure 4 (continued): Prime event, risk event, and the consequences of risk (Palojärvi 1986). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  17. FLOW CONCEPT WITH ”SUCCESSIVE PRINCIPLE” FOCUSES ON RUDEST ESTIMATES Figure 5 : Successive principle(Source: Lichtenberg 2000). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  18. COMPETENCIES MUST BE MASTERED FIRST AT HOME!! – EXEMPLARY CASE ”FMO TAPIOLA” • Case in a “nutshell” and its background in light of uncertainty, complexity, and risk management • Actors´ expectations at the relevant stages • Actions of risk management (if any were carried out) • Comments on the occurred risks and the actual risk-specific management •  Discussion and findings of the case Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  19. Figure 6. Pioneering architectural outlook of Case FMO Tapiola in Finland. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  20. BRIEF OF AN EXEMPLARY CASE OF FMO TAPIOLA PROJECT (table 3) Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  21. FMO PROJECT IMPLEMENTATION Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  22. FMO TAPIOLA CASE BRIEF: • BUSINESS AND/OR PROJECT OBJECTIVES • Early (strategic) business objectives were to enhance the company’s brand as “an overall pioneer of building with wood” and “to enhance the internal cohesion” (2002) • Project objectives included the competitive building cost (frame 23-25 M€), short schedule (15 months), and high quality to attract investors (2003) Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  23. Table 4. FMO Tapiola Case - Major risk breakdown structure for the developer’s view (applying Hillson 2002). Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  24. Figure 7. Perceived degrees of a competence diamond in FMO Tapiola Case Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  25. Figure 8. Project organization in FMO Tapiola Case during the implementation stage. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

  26. CONCLUSIONS AND SUGGESTIONS • Review provides an understanding of the theoretical bases of “enlarged risk management” as part of managing international construction businesses and projects. • Literature confirms: Professional contractual arrangements and solid management competencies belong to success factors. • Likewise, the exemplary case study (to highlight the case method) confirms the paramount importance of proper risk identification, calling for proactive risk management, and that management competencies and contractual arrangements are the likely sources of major risks . • For further case review, ca. 10 real cases will be presented with the author in a definite role in them. Ex post, author is now assuming the role of an action researcher to explain further the un- or quite successful management of risky business/project level characteristics in international contexts. Initially, it seems that some of project risk management techniques can be applied onto firm/business level, too. Lauri Palojärvi (2007) On managing risks in international growth business of Finnish construction firms and building product suppliers. Nordnet 2007. Reykjavik, Iceland, 26-28 September 2007

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