The Determinants of Competitive Advantage in Real Estate Services: Some evidence from the UK and US

amonn D'Arcy and Stephen Roulac

(Corresponding author) Centre for Spatial and Real Estate Economics, Department of Economics, Faculty of Urban and Regional Studies, The University of Reading, PO Box 219, Reading RG6 6AW, England e-mail: p.e.darcy@reading.ac.uk

The Roulac Group, 709 Fifth Avenue, San Rafael, California, U.S.A e-mail s.roulac@roulac.com

Paper Presented at the 2002 AsRES/AREUEA Joint International Conference Seoul, Korea, July 3 6, 2002

Session H2: Real Estate Services and Institutions

(Conference draft. Please do not quote without the authors permission)

The Determinants of Competitive Advantage in Real Estate Services: Some evidence from the UK and US
Abstract This paper examines the determinants of competitive advantage in real estate services (RES), drawing on case study evidence from the leading real estate service firms in the United Kingdom and The United States. The shifting nature of competitive advantages is examined in terms of the firms specialized knowledge of markets and clients. This is analyzed from the perspective of specific drivers of change such as the shifting demand for RES, best practice notions of innovation and product development and issues of organizational structure. From this the paper develops a profile of the determinants of competitive advantage in the global RES marketplace and assesses the strategic implications these hold for the future development of the sector. Keywords: Real Estate Services; Competitive Advantage. 1. Introduction

In recent years the industrial organization of the professional real estate services (RES) sector has undergone a very significant period of change driven largely by the desire of the largest firms in the sector to create global delivery platforms. This has resulted in the emergence of up to ten potential global players embodying diverse traditions of service provision from a variety of business cultures. However, real estate is in essence a business which is highly location specific, where local market knowledge will always be the principal input into the majority of service products and where as a consequence the sector as a whole, despite this process of globalization remains fragmented with the global players accounting for at best ten percent of the total market. This organizational structure suggests that firms of varying sizes are capable of coexisting in the same sector reflecting an ability to exploit a variety of competitive advantages. However competitive advantage is not a static concept but rather one that is continually changing in response to market conditions. The emergence of the first global firms in the sector reflects a significant shift in competitive advantage in RES. This paper examines this shift through an investigation of the determinants of competitive advantage drawing on case study evidence from the leading real estate service firms in the United

Kingdom and the United States. Such an investigation provides a number of useful contributions to both our current knowledge of competitive advantages in professional business services in general and RES in particular. Firstly, it provides insights into how a very local orientated business service can develop advantages, which can be exploited globally. Secondly, it provides a range of models of competitive advantage in the sector and finally it provides important insights into the future organizational structure of the sector, in particular the extent to which the global firms can exploit existing advantages to increase their total market share with obvious consequent implications for the smaller players in the sector. The paper is structured as follows. Section two provides a review of contemporary thinking on the determinants of competitive advantage in professional business services. Section three reports the results of an interview survey of business strategy conducted with the leading RES firms in the UK and US with particular reference to issues of competitive advantage. Section four draws together these results contrasts them with the issues identified in section two and constructs a number of models of competitive advantage in the sector. The paper concludes with an analysis of their implications for the future organizational structure of the sector. 2. Competitive advantage in PBS.

2.1 General Trends The last three decades has witnessed the development of significant transnational corporations (TNC) in services previously considered non-tradable. Reflecting this foreign direct investment (FDI) in services now accounts for over fifty per cent of the total stock of FDI from a base of less than twenty five percent in 1970. A key factor driving these trends has been a variety of technological developments, which have facilitated an increase in the tradability of services. Previously location bound competitive advantages related to the firms ownership of intangible assets such as organizational skills, technological knowledge and organizational capacity have become

more tradable from one country to another within the firm. Within the context of developing service TNCs the creation accumulation, transfer and protection of knowledge becomes a major source of competitive advantage. In very general terms technological developments have contributed to shifts in the location-specific advantages of countries and the ownership-specific advantages of TNCs in services. Structural changes in national economies have greatly increased the importance of services and consequently the size of markets for services thus stimulating FDI in services. Service firms across the spectrum have responded by creating and strengthening their competitive advantages for investing abroad and the strategies they adopt for internationalization in order to have the competitive strengths necessary to compete directly with local firms delivering the same service. Policy markers have also facilitated this process through the creation of an increasingly liberalized market for trade in services removing many of the impediments to foreign entry and operation. Finally the direct effects of technology in particular, the rapid development of telecommunications and data technologies have significantly reduced the costs of trade and FDI in information and knowledge intensive services such as PBS.

2.2 Competitive advantages and the eclectic theory of internationalization Most conventional discussion of competitive advantage and the internationalization of services have taken place within the framework provided by the ownership, location, internalisation (OLI), or eclectic, paradigm of international production, developed originally to explain foreign direct investment by manufacturing industry (Dunning 1977, 1995). The OLI framework essentially addresses the capacity to transfer the tangible or intangible assets of firms between countries. In the case of PBS firms, this means the transfer of their largely intangible assets across national boundaries. Following the OLI model, PBS firms develop a specific set of ownership advantages in their home market which they subsequently seek to exploit or enhance at an international

level. It is these ownership advantages that effectively constitute the firms intangible assets. They form the basis of any competitive edge that firms may currently have, or believe they can acquire, over local firms in other countries. As such, they provide the main springboard for internationalization. These ownership advantages can be employed to differentiate between service providers, to explain why some firms internationalize more rapidly and more extensively than others. However, they can also operate to distinguish groups of firms or entire sectors, for example where they collectively share some national or professional characteristic which is internationally tradable. Second, locational advantages refer to the location attributes that the firm currently enjoys or is seeking to secure through internationalization. For service firms, locational advantage depends on the type of service offered, the extent to which the service is tradable, and whether it is location bound in terms of either access to the client or access to specialized local knowledge. Finally, internalization advantages determine the organizational mode by which PBS firms choose to transfer their intangible assets across national boundaries. However, the operational development of service TNCs increasingly questions the conventional one way analysis of the determinants of competitive advantage in terms of firms exploiting host country generated ownership advantages through optimal locational and internationalization advantages as suggested by the OLI framework. Significant increases have taken place in the information and knowledge content of service products which have created a pattern of ownership specific advantages in favor of firms which have been at the forefront of such changes. These in turn have been further enhanced by direct experience in foreign markets and the economies associated with international operation. All of these represent new sources of firm-specific intangible assets generated outside of the traditional framework. The reduction in the costs of international operation associated with technological advances have increased both the spectrum and complexity of locational and internalization advantage arguments. Attempts to create strong brand image or to develop a distinctive quality image have increased the tendency for competitive advantages to be

more firm specific. The increasing importance of created-asset seeking investments 1 as an impetus for FDI over and above traditional market-seeking and client-following has further changed the service landscape by increasing the scope for significant intangible asset creation which is largely divorced from home country ownership advantages. One important implication, which emerges from these changes, relates to the nature of the link between the advantages of firms and their home countries and the competitiveness of firms. The emerging dominant model of PBS internationalization is likely to increasingly weaken the link between the location advantages of home countries and the ownership advantages of firms. Foreign activity in PBS weakens the links between the headquarters and the affiliates and consequently the impact of home countries on the competitiveness of the TNC as a whole. The requirements of local market and client knowledge may rule out the possibility for tight control of the headquarters over affiliates. The existence of a multiplicity of corporate governance structures within the one company may further inhibit headquarters linkage. A final and related implication is the fact that knowledge as an intangible asset is not necessarily generated, nor is it necessarily accumulated, at headquarters. In the contemporary service TNC multiple nodes of knowledge generation exist with the obvious implication that successful knowledge transfer across many countries and cultures within the organization has become the major component of firm-specific competitive advantages. As a consequence it is important to also explicitly consider the idea of knowledge as competitive advantage in all its dimensions.

2.3 Knowledge As competitive advantage Grosse (2000) contends that knowledge is the key competitive advantage of the PBS firm. It is the critical element in the creating and sustaining competitive advantage yet in
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Created-asset seeking investments refer to attempts by service firms to exploit the availability of created assets primarily skilled and talented human resources at reasonable cost- to produce services not just for the domestic market but for export.

most cases it cannot be protected by patents, trademarks or copyrights. Strong empirical support for this view is provided by an interview survey of one hundred and ten multinational service affiliates (Grosse, 2000). When asked to identify the key determinants of their competitiveness they identified knowledge related capabilities as the most important. The only non-knowledge related determinant of importance cited was the firms size as represented by the global scope of its affiliate network. However, this also has obvious indirect knowledge related implications in terms the economies of scale and scope generated by the network. The key knowledge advantages identified relate more to products than to processes or management, with knowledge of clients and relationships with them identified as the most important. The firms tended to view relationships with clients as the single most important kind of knowledge that gives them competitive advantage, specifically the knowledge to deliver products that best serve client needs but also knowing the clients and their needs. Three levels of client relationship were identified as contributing to the service providers competitive advantage: individual relationships, team relationships and long-term, historical dealings that develop client-provider trust and satisfaction in maintaining the relationship. Knowledge of the business was identified as the second most important source of competitive advantage. In particular, knowledge of the market in which clients operate, general principals of client management and knowledge of how to produce the service required. Much of this knowledge is non-codified and embodied in the firms personnel making it a very vulnerable source of competitive advantage. The third type of knowledge-based competitive advantage identified relaters to the existence of a proprietary methodology for producing the service reflecting the desire of service firms to protect competitive advantage through greater codification. The only non-knowledge based source of competitive advantage identified, the possession of a global network of affiliates has as outlined previously significant indirect knowledge related implications.

The focus on knowledge as a source of competitive advantage raises a two key issues about its management. Firstly because of the fact that key knowledge is largely uncodified in nature the human resource strategy of the firm must become a first line of defense in protecting competitive advantage. Use of teams, sharing information, codification of proprietary knowledge all reduce the vulnerability of the firms competitive advantage to the loss of key personnel. Moreover the human resource strategy must also act to facilitate knowledge creation within the firm. Secondly the issue of effective knowledge transfer within the firm becomes very important in the ability of the firm to exploit its knowledge competitive advantages and also to exploit any scale advantages it has. 2.4 Summary This section has highlighted a number of important issues in the determination of competitive advantage in PBS firms. Competitive advantages have become increasingly firm specific over time with ties to the country of origin or particular business cultures becoming less important. Technological advances have facilitated this shift with the potential for knowledge creation increasingly decentralized across the firms network. Experience of operating a multinational organization has becomes a significant source of advantage and likewise the associated economies of scale and scope. With strong empirical support for placing knowledge related advantages as key determinants of competitive advantage, the effectiveness of both human resource strategies and connectivity within the firm become key issues in the maintenance and creation of competitive advantage in service firms. 3. Perspectives on the determinants of competitive advantage in RES

The views reported in this section are drawn from a wider interview survey of business strategy issues conducted with senior executives in the twenty largest RES firms in the United Kingdom and the United States. In all cases the person interviewed was at board level with functions ranging from chief executive officer to senior vice president. The objective was to develop a profile of business strategy in the sector in order to construct a

benchmark of contemporary best practice and provide a reference point for the future strategic development of the sector. Only the results, which have relevance to the issue of competitive advantage, are reported and are arranged by structured interview topic ordered from factual to strategic. 3.1 Factual business strategy issues Corporate governance and ownership Changing forms of corporate governance were cited as being particularly important at certain key points in time as a determinant of competitive advantage. In particular, the switch from private to public ownership was cited as fundamental in getting access to sufficient financial capital to create global or national service platforms. Likewise the decision by some firms to return to or remain in private ownership was viewed as an advantage by such firms over those remaining in public ownership due to the significant time and resource costs associated with satisfying a wide range of stockholders. Complicated legal forms of ownership were perceived as inhibiting the firms ability to be competitive in global terms, especially if the only way it could become global was through a process of merger. All the firms that experienced significant merger activity in recent years have struggled to successfully exploit the economics of scale and scope expected to flow from the creation of global entities. Many have implemented significant programmes of rationalization in order to ensure that their new corporate entities match the size of their businesses. In attempting to exploit the competitive advantages related to size firms, have taken two distinct routes. One group of providers have invested heavily in integrating their business on a number of levels from putting in place basic intranet information systems to the exchange of key professionals between offices and across business cultures. The other group has allowed the constituent components of the firms to continue much as they were, with little or no significant policy of integration. Factors cited underlying this latter strategy ranged from issues of flexibility and protection of brand images to preserving market niches in certain countries. In some cases this situation simply reflected the fact

that the firms in question still contained more than one form of corporate governance post merger. Both groups made arguments to suggest that their chosen route provided them with significant competitive advantages Service Provision The firms all clearly recognized their product mix as a source of competitive advantage but one that could be very transitory in nature. A key issue highlighted by the majority of interviewees centered on a desire to increase the value-added of their existing service offering. As part of this a number of firms suggested that they were likely to abandon the provision of certain categories of low-value added routine services in the future. Others outlined strategies to increase the value-added of previously low-value activities or strategies to use the information and client advantages generated in the provision of these services to better effect in the creation of new higher-value added products. The majority of firms interviewed, identified service provision in the areas of investment consulting and corporate outsourcing as key sources of both future business growth and competitive advantage. Most firms suggested that they were willing to commit significant resources to developing future advantages in these areas. The breath of real estate service provision was cited as a significant source of competitive advantage by most firms while a minority perceived that advantage lay in been large niche players specializing in the provision of a very narrow range of service. Most of the firms regarded in-house research as very important in creating a competitive edge with some regarding outsourced research as sufficient. None of the interviewees expected to gain any competitive or market advantages by diversifying their business out of real estate services and into related categories of professional business service. Employment and training approaches The interviewees exhibited a much greater variation in their approach to employment and training related issues. The spectrum ranged from very significant resource commitments by some firms to little or no encouragement to employees to invest in human capital in

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others. The majority of firms lay somewhere in the middle. A clear distinction in approach was detected between firms that regarded effective management of human resources as a core determinant of competitive advantage as compared to those who placed less stress on the competitive aspects of the human resource function. Of the former group emphasis was placed on graduate recruitment, encouragement of various forms of continuing professional development, sponsorship of university based company teaching schemes and re-education programs to expand the horizons and fluidity of function of employees in more traditional forms of real estate services such as brokerage. In contrast the latter group was more concerned with the ability of employees to do specific job functions with on the job training as a key focus. Some of these firms provided financial assistance to do part-time MBA type courses but the majority cited the possibility of an employee leaving as the principal reason why they provided little assistance to employees in improving their human capital. A number of firms stressed the importance of the education and training guidelines set by professional bodies as a key influence on their approach. Some suggested that professional designation represented a badge of quality with consequent implications for reputation. However, the UK based firms in particular, suggested that professional designations represented increasingly little value added in the sector. The benefits of maintaining professional designations were seen as more a way of satisfying client expectations than serving any particular quality objective of the firm. Not surprisingly in the firms which have become more multi-professional, specific real estate related designations have becomes less important. The traditional role played by professional bodies as an arbiter of reputation in the sector has increasingly been replaced by the development of strong concepts of firm specific corporate culture and identity. The combination of all there factors have served to significantly weaken the links between professional bodies and the leading firms in the sector, thus creating new challenges for such bodies in define their role and objectives in the sector. A specialized real estate education as a background for new employees was regarded as important only by a minority of firms. A general business education was deemed more

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important. In the case of UK firms a strong preference for graduates emerging from conversion type postgraduate courses was expressed in addition to graduates in economic and finance. For UK firms with clear strategies of better integrating their European business through the compulsory exchange of professionals between offices, language skills were we regarded as essential. 3.2 Perceptions of strategic stance Interviewees were asked to provide a perspective on their strategic stance on a number of interdependent core business strategy issues such as corporate culture, human resource management, innovation, client relations, business development and competitive advantage. A considerable diversity of responses was received but in general it was very clear that such strategic thinking was relatively new in the sector. A key impetus for this was the recent experience of merger activity that generated much strategic thinking designed to underpin the creation of new corporate global entities. Also there was a widespread belief in devoting resources to strategic planning as an essential input into improving competitive advantage on a number of levels. Examining the specifics it was clear that the development of a strong corporate culture were regarded as providing the type of advantages once associated with those of professional designation. In particular it might be seen as developing a sense of belonging, pride or family within the firm and where implemented effectively could enforce quality. For the majority of firms their strategic stance on the one issue of human resource management underpinned competitive advantage. Getting the human resource strategy right unlocked the key to other issues such as innovation, client relations, strategies for growth and the development of competitive advantage. A minority of firms ascribed no such function to human resource strategy. Not surprisingly the concept of innovation and the ability to be innovative was linked clearly to achieving effective human resource management in the majority of firms. However, a number expressed the view that innovation in the sector lagged far behind

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that of other PBS especially as compared to financial services. Others suggested that innovation was a function of client requirements. All recognized the implications of changes induced by information technology in the wider business environment and their implications for business practice in the sector. However, most firms had a negative experience of investing in information technology to directly improve product delivery and introduce process innovations related to property services. It is fair to conclude that the human resource function has largely displaced information technology as a chosen route to innovation. Again the human resource function was seen as core to client relationship strategies. This has been further underpinned by the increasing prevalence of partnership or secondment arrangements in the sector. Likewise with firms identifying a clear shift to higher-valued added functions as the key to future growth and business development the importance of the human resource function is further underpinned. In particular the expectation of significant business growth in the area of outsourcing provides a notable case in point. When questioned on the central issue of the determinants of competitive advantage most of the interviewees placed human resources above more traditional answers related to knowledge of clients and markets. A minority of firms expressed the view that market knowledge was the sole source of competitive advantage in the sector. 4. Concluding Remarks

This paper has examined the concept of competitive advantage in PBS and in the RES sector in particular through an interview survey of business strategy issues conducted amongst the leading players in the sector in the UK and the US. Overall the results confirm the increasingly firm specific nature of competitive advantages in PBS reinforced by the use of explicit strategic planning tools. This provides a significant challenge to the future role of professional bodies in the sector. The experience of the RES sector suggests that competitive advantages related to the economies of scale and scope offered by globalization have taken some time to emerge and in many cases require further rationalization and merger activity before that can be achieved. Moreover, few

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firms in the sector have the capability to exploit the potential for creating intangible assets at multiple nodes within their network. The single most important result to emerge has been the use of human resource strategies as a linchpin in developing competitive advantages. For the majority of firms in the sector human resources have become a key determinant of advantage in conjunction with more traditional sources centering on the knowledge of clients and markets. This reflects a significant shift in strategic thinking in the sector. However, the results in themselves provide a paradox in that they also suggest a less that committed approach to education and training across the sector, an issue which must lie at the heart of any attempt to create competitive advantage on the back of human resources. References Aharoni, Yair (2000) The Role of Reputation in Global Professional Business Services. In: Aharoni, Yair - Nachum, Lilachs (ed.) Globalization of Services. Routledge, London, Aharoni, Y. ed. (1993a) Coalitions and Competition, The Globalization of Professional Business Services, Routledge, London. Aharoni, Y. (1993b) Globalization of professional business services, in Coalitions and Competition, The Globalization of Professional Business Services, (edited by Y. Aharoni), Routledge, London, pp 1-19. Aharoni, Y. (1993c) Ownerships, networks and coalitions, in Coalitions and Competition, The Globalization of Professional Business Services, (edited by Y. Aharoni), Routledge, London, pp 121-142. Arkell, J. and Harrison, I. S. (1987) A Sectoral Study on the Relevance of the OECD Conceptual Framework to International Trade in Consultancy Services, OECD, Paris. Ascher, B. (1993) Business and professional services: competing in a more mobile world, in Coalitions and Competition, The Globalization of Professional Business Services, (edited by Y. Aharoni), Routledge, London, pp 20-31. Baden-Fuller, C. (1993) The globalization of professional service firms: evidence from four case studies, in Coalitions and Competition, The Globalization of Professional Business Services, (edited by Y. Aharoni), Routledge, London, pp 102-120.

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