Environmental Scanning

RUNNING HEADING: ENVIRONMENTAL SCANNING

University of Phoenix

MBA/501 Forces Influencing Business in the 21st Century

David Lantz University of Phoenix Faculty

March 9, 2008

Environmental Scanning

Introduction

In the following pages, discussion will take place on the construction industry, including a clear description of the industry and the business environment problem. This paper will be broken down into several parts starting with the introduction. Next key macroeconomic variables that affect the construction industry will be identified. The macroeconomic variables and the corresponding industry variables will be graphically represented for the last five years. Information will be integrated from the text and outside sources to illustrate the effects of the economic variables on the construction industry. The paper will conclude with a look at the challenges and opportunities that exist for construction firms in the operating environment.

Industry Overview

This paper will focus on the construction industry, NAICS code 236115 - New Single-Family Housing Construction (except Operative Builders). This U.S. industry comprises general contractor establishments primarily responsible for the entire construction of new single-family housing, such as single-family detached houses and town houses or row houses where each housing unit (1) is separated from its neighbors by a ground-to-roof wall and (2) has no housing units constructed above or below. This industry includes general contractors responsible for the on-site assembly of modular and prefabricated houses. Single-family housing design-build firms and single-family construction management firms acting as general contractors are included in this industry. (NAICS, 2008)

Description of the Business Environment Problem

Housing starts, are one of the most closely followed measures of construction activity. From 2002 – 2005 the housing construction industry was spurred by some of the lowest mortgage rates in recent memory, leading to a strong rise of housing starts, which reached 2.1m units in 2005. Low mortgage rates also inflated house prices, which recorded double-digit 12-month rises since mid-2004. Since 2006, however, the housing market has cooled considerably, with home sales falling sharply and house price inflation slowing. Besides a sharp fall in housing starts the construction industry must also work through a backlog of unsold homes. The rising number of foreclosures will also have an impact on housing prices, which until now have merely stabilized or fallen slightly. And lastly with the liquidity in the sub-prime market drying up—through stricter lending standards and rising risk aversion by more mainstream lenders—demand for housing will fall considerably in 2007. Repossessions will also add to the stock of unsold homes that builders are trying to work through. Residential construction contracted by 13.4% in 2007, a 25-year low, and a further 1% is predicted for 2008.

Macroeconomic Variables that Affect Construction Industry

One of the major variables that affect the housing construction industry is interest rates. As stated above, from 2002 – 2005 the housing construction industry was spurred by some of the lowest mortgage rates and inflated house prices in recent memory , leading to a strong rise of housing starts.

Combinations of monetary policy are used in times of inflation and recession,