Timothy O’Shannassy for teaching strategy in MBA programs Case Study

Acknowledgement: 

This case has been prepared by Timothy O’Shannassy for teaching strategy in MBA programs in the College of  Business and Law at RMIT University. Copyright 2022. 

MBA Programs Strategic Management Case Study Series Editor-in-Chief: Dr Timothy O’Shannassy, Senior  Lecturer, Graduate School of Business and Law, College of Business, RMIT University, 379-405 Russell Street,  Melbourne, Victoria 3000 Australia, Telephone +61 3 9925 0111, tim.oshannassy@rmit.edu.au 

Introduction 

Australian Stock Exchange (ASX) listed AV Jennings was established in Caulfield, Victoria in  1932 by Sir Albert Victor Jennings and has a rich 89 year history. The current Head Office of  this iconic Australian brand name is in the inner city Melbourne suburb of Hawthorn and the  business is now a majority owned subsidiary of SC Global Developments Pte Ltd, the luxury  real estate developer based in Singapore.  

AV Jennings have a clearly defined business model, a quality product pipeline in Australia and  New Zealand, and have just appointed a new Chief Executive Officer Mr Phil Kearns. Prior to  this appointment Kearns had been a non-executive director of AV Jennings for two years and  has had a relationship with the business for 10 years. Kearns is a former Australian Rugby  Union World Champion and very well connected across the Australian community in sport  and business (Australian Property Journal, 2021).  

Jim Chalmers the newly appointed Treasurer in the Albanese Labor Government calls the  inflation spike in the Australian economy and the drop in the real wages of Australians a ‘once in-a-generation challenge’ (Wright & Clun, 2022, p. 1). Inflation is currently at a 21 year high  of 6.1 per cent in Australia and is forecast to lift to 7.75 per cent for the three month period to the end of December; this is having major implications for interest rates on home loans for  borrowers with the Reserve Bank of Australia (RBA) currently aggressively lifting rates(Wright  & Clun, 2022). The Reserve Bank of New Zealand is also aggressively lifting interest rates, and  this is impacting business and consumer confidence (Craymer, 2022). The cause of the  inflation spike is mainly global factors such as the war in Ukraine and supply chain bottlenecks  in China. These dramatic economic and political development have implications for the  building and land development industry in Australia and New Zealand. 

AV Jennings are conscious of ongoing shifts in customer tastes and preferences, so change  and innovation are strategic priorities looking to the future, as is business growth. There is a  challenging future agenda for AV Jennings in some of the most difficult economic conditions  seen for a generation. 

External Environment Challenges 

The Covid-19 pandemic has seen a shift in the community to a preference for workplace  flexibility including the choice to be able to work from home some or all days of the week.  The roll out of Covid-19 vaccines and better medical treatments are assisting the community  to return to something more normal (AV Jennings, 2021). 

There have been two big social trends that have impacted house design in Australia since the  1950s. Traditionally post – World War 2 (WW2) Australians lived in English homes with two  or three bedrooms, a good living room and a separate kitchen. In the 1970s the return of  women to work added much needed income to the Australian household, but it also created a need for change in the floor plan of the Australian home. The traditional separate kitchen and  lounge room became outdated and was replaced by the large kitchen family room with an island  bench from which parents could cook, have a conversation with children or guests, or watch  television (Salt, 2021). Another change to home design came with the arrival of migrants from  Mediterranean countries (e.g., Italy, Greece) who adapted quickly to our Mediterranean style  climate with the enjoyment of an indoor-outdoor lifestyle. The adaptation to home design led  by these migrants was the alfresco (Salt, 2021).  

Population growth is an important driver of the home building and land development  industry. Australia’s population was 25,766,605 at the end of 2021 with annual growth of 0.5  per cent (Australian Institute of Health and Welfare, 2022). Population growth in Australia has  been impacted by the Covid-19 pandemic, with growth slowing. Australia’s population is  projected to be 29.8 million people in 2033; the major population centers will continue to be  Greater Melbourne, Greater Sydney, and Greater Brisbane inclusive of the region from Gold  Coast to Noosa Shire. Auckland’s population is expected to reach 2,000,000 people in the  early 2030s from the current 1,700,000 (StatsNZ, 2021). 

The European Union economies are being impacted adversely by the reality of the war in  Ukraine and ensuing political and energy market turmoil. The risk of Russia cutting off gas  supplies is real and could push the European Union into recession (Dulaney & Fairless, 2022).  There remains tension between China, Taiwan and the United States over the political  situation in the west Pacific.  

The weaker Euro against the United States (US) dollar also in part reflects the strength of the  US currency, which now has more buying power compared with overseas currencies than it  has had in the past two decades (Dulaney & Fairless, 2022). The central authorities in the US  have indicated they are favorably disposed to a strong US dollar as it helps to ease  inflationary pressures while they are raising interest rates (Dulaney & Fairless, 2022). The  European Central Bank has been slower to increase interest rates compared with the US  Federal Reserve. This week the United States (US) Federal Reserve increased interest rates a  further 0.75 per cent (Wright & Club, 2022). The RBA has the cash rate at 1.35 per cent after  the July Board Meeting with further increases likely in coming months (RBA, 2022). The  Reserve Bank of New Zealand has also been increasing its cash rate in recent months and is  currently at 2.5 per cent since its July Meeting (Craymer, 2022).  

On balance the coming 12 to 36 month period will be difficult for mortgage holders in  Australia and New Zealand whose variable home loan repayments will be impacted by these  cash rate increases if and when fully passed on by lenders. Business and consumer confidence  is also now falling (Craymer, 2022). 

Organizations in the building and land development sector need to use the internet and social  media for effective integrated marketing communication, and computer software solutions  to coordinate and control resources. Computing capability is an important driver of success  for organizations managing significant assets dispersed over a vast geographical area such as  Australia and New Zealand. Software as a service (SaaS) enterprises are able to customise  solutions to customer requirements providing easy to use integrated software that can be readily supported. This allows a business such as AV Jennings or an industry rival to focus on  running its business and the software provider to implement, support and run the software  with regular research and development updates (TechnologyOne, 2019).  

The ASX and the Australian financial services scene is overseen by the Australian Securities  and Investment Commission (ASIC) and the Australian Prudential Regulation Authority  (APRA). The Australian Competition and Consumer Commission oversees (ACCC) looks over  trade practices in the marketplace. The tax rate for companies in Australia is comparatively  high at 30 per cent, compared with the United States at 21 per cent. The Corporations Act  details director’s duties in the Australian legal jurisdiction. The Commonwealth Work Health  and Safety Act 2011 informs occupational health and safety compliance requirements. 

Building and land development industry players can have a significant impact on the natural  environment including land topography, vegetation, biodiversity, water supply, water run off, potential for hazardous chemicals emission, risk to indigenous heritage and artefacts, and  more. As a consequence, industry players need to be conscious of a range of environmental  challenges including compliance with statutory requirements, including environmental  considerations in planning and development projects, and delivering environmentally  responsible communities and homes (AV Jennings, 2021).  

The Building Industry 

The building industry is an important sector of the economy. Several builders (e.gProbuild,  Langford Jones Homes) have collapsed in 2022 due to higher costs, fixed price contracts with  slim margins, and lengthy delays due to the COVID-19 pandemic caused by factors including labor shortages and supply chain challenges. Several of these builders in difficulty in 2022  were supported financially by the government in 2020 and 2021 at the height of the pandemic,  resulting in fewer insolvencies in those years. There appears to be a correction in progress  with the uptick in insolvencies in recent months (Clun, 2022).  

The Australian Government JobKeeper program has assisted many Australian citizens to keep  their employment during the worst moments of the Covid-19 pandemic (AV Jennings, 2021).  

Buyers are confronted by an industry with major challenges, with large builders such as  Metricon showing signs of financial stress and Snowdon Developments going into  administration in July with 550 uncompleted homes (Clun, 2022). The impact on customers in  this situation can be financially devastating, including new home cost increases potentially  well beyond the original fixed price contract if a new builder has to be contracted to finish the  incomplete job. This reduces the bargaining power of buyers significantly. 

Industry analysts note that there is a market shift in progress to townhouse and high-density  apartment construction, and small block detached housing (Kelly, 2022). Demand for low density housing is in decline due to the influence of higher interest rates and withdrawal of  government support (Kelly, 2022). 

CPA Australia currently argues that home builders who get into an insolvency situation due to  external factors should be allowed to keep trading to avoid a domino effect throughout the  industry (Clun, 2022). 

The HomeBuilder scheme and low interest rates provided a significant stimulus to land prices  over the past five years (Kelly, 2022). Land for high-density development close to transport is  more expensive than land for low-density housing developments (Kelly, 2022). It is expected that demand for low-density residential housing will decline in the short term due to higher  interest rates and withdrawal of government support (Kelly, 2022).  

Supply of skilled labor (e.g., carpentry, bricklayer, Hebel installer, plumber) has been tight  but is easing, though the cost of that skilled labor is expected to contribute to inflationary  pressure in the short to medium term. 

The building industry is an entrepreneurial sector of the economy. The building industry  includes many small operators with new builders emerging and practicing builders going into administration and insolvency - so there is ease of entry and the incidence of exit.  

The modern home is central to lifestyle, and this is well known to be important to Australian  society (Salt, 2021). Substitutes for a home are limited and include a caravan or a tent.  

It is a difficult year for the building industry. Ease of entry and exit, and the range of products  from prestige to budget makes the building industry a highly competitive market, but it differs  significantly from a perfectly competitive market. Reasons for this include this differentiation  of product from prestige to budget, unequal information access for buyers and sellers, lead  time for planning and building, access to credit and interest rates.  

There are 78 real estate and property companies in this sector of the ASX including household  names such as Goodman Group, Stockland, Mirvac Group, Sunland Group, Servcorp and more  (ASX, 2022), and there is intense rivalry. Recent research reveals that industry players are  staging the release of land in master-planned communities to obtain the best price results  and avoid a supply-led decline in prices. This helps developers preserve their profits  (Fitzgerald, 2022). 

Reflecting challenging industry conditions, major builders Probuild, Langford Jones Homes,  Snowdon Developments and now Caydon Property Group have failed in recent months  (Johanson, 2022). A consistent message in relation to these failures from builders is the  impact of construction cost inflation, supply chain challenges, difficulties getting access to  skilled labor, builder insolvencies, higher interest rates and a decline in house price  sentiment (Johanson, 2022; Kelly, 2022). This is making trading conditions tough for all players  in the building industry, with builder insolvencies particularly painful for industry players  including trades (e.g. electrician, plumber) not being paid 100 cents in the dollar in some  scenarios. It is the preference of the Housing Industry Association (HIA) that builders receive  government aid before they are rendered insolvent by these difficult industry conditions  (Clun, 2022). 

AV Jennings Strategy Situation 

AV Jennings Strategy 

Covid-19 pandemic has been a challenging period for the board and executive of AV Jennings  with changes in identified risks requiring shifts in strategy. The greatest risk was to the health  and safety of employees, suppliers, customers, and the wider community as well as the  financial well-being of the business during the Covid-19 pandemic. AV Jennings was able to  ensure business continuity to enable customers to purchase and build homes during this  difficult period (Cheong, 2021). 

In the most difficult days of the pandemic there was a real identifiable risk that potential  customers would defer a home transaction. This had the potential to create some difficulty  for AV Jennings maintaining their pipeline of home projects, including an acceptable level of presales, impacting business continuity. The Australian Government HomeBuilder initiative  provided stimulus to the customer community to pursue a home transaction (Cheong, 2021).  

The executive and board are monitoring market trends to ensure they are aware of shifts in  buyer preferences; they like to see a spread of projects and contract sales across the  Melbourne, Sydney, Brisbane and Auckland markets (Bleby, 2022). This was assisted by a shift  to a national structure at AVJennings which helped to reduce overheads by $1.5 million in  2021 and assisted operational decisions, efficiency and flexibility (AV Jennings, 2021). 

AV Jennings are renowned for a strong housing and community focus articulating their market  position as: 

…one of the most recognised and trusted names in quality, affordable  housing…our reputation has been built on…meticulous design and  connectivity for our customers, whilst operating in a socially and  environmentally responsible manner. Our focus is to create a lasting,  positive legacy…(AV Jennings, 2021, p. 18). 

AV Jennings appreciates there are environmental risks in residential development activities,  hence the focus on managing risk and minimizing impact in this sensitive area. 

AV Jennings Governance Matters 

The Chairman of the board of directors is Simon Cheong; there are eight non-executive  directors and one executive director. AV Jennings risk management responsibility rests with  the board of directors, overseeing a whole risk management system including periodic review  (AV Jennings, 2021). 

AV Jennings takes Environmental, Sustainability and Governance (ESG) seriously and their  ambition is to deliver a high level of customer service, be sensitive to the environment, and a  quality partner to a range of stakeholders including suppliers, business partners and  communities (AV Jennings, 2021). 

Cultural heritage management is respectfully undertaken when heritage items or sites are  identified in consultation with local indigenous communities. A Reconciliation Action Plan is  in development to guide engagement with indigenous peoples in Australia and New Zealand (AV Jennings, 2021).  

AV Jennings Functional-Level Situation 

A strong pre sales position was an important starting point for the AV Jennings 2021 financial  year (Bleby, 2020); the 2021 results show revenue growth of 18.6 percent to $311.1 million,  with strong contract signings performance (AV Jennings, 2021). In a sign of strong marketing  and sales performance there was an increase in contract signings to 953 in 2021 (2020 697  contracts signed) worth $327.7 million compared with the 2020 and $241,2 million in contract  signings. These numbers were assisted by revenue achieved at Ara Hills, Auckland and GEM  Apartments, Waterline Place, Williamstown, Victoria (Summers, 2021). 

AV Jennings has 12,180 lots under control including land under option, with 1,537 lots in progress (AV Jennings, 2021).  

AV Jennings published its first Modern Slavery Statement in 2021 and has developed a  company policy in this area; the goal is to ensure there is no infiltration of supply chains with slavery (AJ Jennings, 2021). A Code of Conduct for suppliers is in development (AV Jennings,  2021).  

There is a strong pipeline of projects across Victoria, New South Wales, Queensland, Western  Australia and New Zealand (Bleby, 2022). A snapshot of the largest projects with more than  500 lots with the exception of the largest project in Western Australia at Kardinya are  provided in Table 1 below: 

Table 1: AV Jennings Major Project Pipeline (AV Jennings, Annual Report, 2021, p. 9) 

In 2019 AV Jennings committed to a five-year contract with TechnologyOne to rebuild their  major enterprise applications, with implementation expected October 2020. The focus of this  digital strategy project has been to give AV Jennings a simple, unified, technology that can  be used by a mobile workforce dispersed around Australian states and New Zealand. AV  Jennings have struggled in recent years with several legacy software applications causing  unnecessary complexity. The software application developed assists management of  documents, capital, financials, and assets (TechnologyOne, 2019).  

AV Jennings embraces diversity and inclusion in their workforce, with 45.5 percent of the  workforce female. On the senior executive team female representation is 22 per cent and on  the board of directors 12.5 per cent. Employee engagement in the annual survey was strong  at 4.2 out of 5; employees described the workplace culture as positive, friendly, respectful  and fun (AV Jennings, 2021). Wellness resources are available to employees through the AVJ  Wellness Hub, and in 2020 a mental health support program for employees was established.  Flexible work arrangements, a mentoring program, and paid parental leave is available.  Regular Workplace Health and Safety inspections are undertaken on work sites, with 96 per  cent compliance on built form inspections (AV Jennings, 2021). 

AV Jennings has a strong balance sheet position, with the directors relieved to have seen off  the worst moments of the Covid-19 pandemic in 2020 and 2021 (Cheong, 2021). The directors  target a gearing range of 15 to 35 per cent with current gearing reported at 20.1 per cent with  net debt currently $125.4 million (AV Jennings, 2021). Summary financial data is provided in  Table 2 below showing a broad improvement in key financial indicators in 2021 including a  4.1 per cent improvement in net assets:

Table 2: AV Jennings Summary Financial Data (AV Jennings Annual Report, 2021) 

The Future for AV Jennings 

Following the appointment of Phil Learns as CEO, can AV Jennings ‘supercharge’ growth? Or  should AV Jennings maintain a steady, incremental rate of sales growth? How can AV Jennings  improve their ESG performance? What functional improvements can AV Jennings make to  make the business more effective? Can AV Jennings improve diversity and inclusion on the  board? In what Australian states, cities and locations can AV Jennings improve its landbank and contract signings? Is AV Jennings rate of contract signing sufficient? Is AV Jennings  commitment to the indigenous community, indigenous culture, and indigenous employment  opportunity sufficient, and fast enough?