Real Estate in Corporate Strategy

In recent years, business managers have focused on improving their use of resources, particularly by making use of technology, human resource management, financial and fiscal measures, and information management to make their operations more efficient and customer-focused.

This chapter shows in greater detail how many businesses have been spending large amounts on real estate without knowing whether the expenditure supports their profitability.

The body of corporate strategy literature only goes back 25 years (Andrews, 1971). Since 1980 the ideas of Porter (1980), which focus on the competition within industries, have dominated. In the last few years, Hamel and Prahalad (1994) have been very influential, with their ideas of breaking new ground so as to get a business to the future first. The approach being promoted by several writers now focuses on reviewing resources and capabilities and using them to gain advantage in the competitive environment (Collis and Montgomery, 1995). Mostly they have given little thought to real estate.

Real estate is a major contributor to many business operations. Action to assist one function can hinder another. Corporate strategy must strike a balance — not a mid-point between conflicting interests, but a solution that will drive the business forward.

New technology developments have underpinned many of the more recent organisational changes in strategic management. Therefore, understanding the key changes in new computer and communications technologies aids appreciation of the possibilities open to the corporate strategist, especially in relation to real estate.

Theoretical ideas for business strategy can seem very distant from the day-to-day issues facing corporate real estate managers. This chapter reviews the practical changes in real estate provision which are the result of corporate real estate and business managers activating their new strategic plans.

A company’s annual report may not appear very strategic, yet it is here that the results of strategic policies become public, where the financial consequences of the activities of the business are recorded for all to see.

Nearly all business managers face a choice between owning and renting real estate. In the past, many did not give it much thought as long as they had buildings from which to run the business. Now that the value and potential of real estate to enhance the business’s success have been appreciated such decisions are rather more significant — they can generate the most productive use of this important resource.

Building obsolescence has a way of striking unsuspecting building owners, especially those who generally ignore the role of real estate in their business. It can be hidden by a variety of situations. In this chapter, ways of addressing the apparent unpredictability of the onslaught of building obsolescence are discussed.

To successfully activate the use of real estate resources in order to improve business performance, the presentation of the strategy and its successful implementation are essential. The contents of this chapter are generic and apply whether the real estate strategy is presented as part of the overall corporate business strategy or separately.

This chapter is about obtaining the management information necessary to make the strategic decisions and supporting day-to-day policies to ensure that real estate resources are contributing to business effectively. It is additional to the ideas in specialist texts on the preparation of corporate strategy (e.g. Reading, 1993).

This chapter covers an important consideration when seeking to make the best of real estate — its management in the context of its contribution to corporate strategy.

Each of the following seven chapters is about a company that has included real estate as a component of corporate strategy. The companies have been selected for this book because they illustrate ways in which real estate can contribute to business success. Each makes a different contribution and each shows the value of strategic vision.

IBM UK Ltd was one of the first UK companies to make significant real estate savings. It did so as part of a corporate strategy which turned the business round following a drop in sales and declining profitability. Had the market for mainframe computers not declined, or had the decline been forecast in time for new products to have seamlessly taken their place, the real estate team at IBM UK would not have been at the vanguard of change.

BT is one of the largest companies in Europe. Not surprisingly, although not a property company, it has one of the largest commercial property holdings in the UK. During the period from 1990 to 1995, real estate operating costs began at around £1.2 billion per annum and reduced to £980 million per annum — amounts larger than the turnover of many businesses. But this is in the context of a turnover for BT of £13.67 billion in 1994, which dwarfs most businesses.

The real estate management team at Marks & Spencer plc (M&S) cannot remember a time when real estate did not play a significant role in corporate strategy. Most retailers are very aware of the importance of location, but few are as committed to real estate as M&S, which has focused on retaining ownership of retail sites. This is a different strategy from that of other retailers, and shows that there is not just one ‘best way’ of using real estate within a business. This emphasises the importance of making decisions that best suit each business and therefore the importance of including real estate in the strategic decision-making process.

This chapter focuses on one event in the use of real estate by J Sainsbury plc — the way in which it developed an investment market for supermarket and superstore premises through the use of sale and leaseback. This happened at the end of the 1980s, so it is already historic, but this does not detract from the fact that it is a valuable example of the pivotal role of real estate in the finances of major corporate real estate users. It illustrates the importance of being able to conceptualise a different situation that will benefit a business and then taking the action to make it happen.

The Boots Company plc incorporates various subsidiary companies, of which Boots The Chemists Ltd is by far the largest. The others include various healthcare companies, Halfords, Homestyle By Fads (A. G. Stanley Ltd) and a property company, Boots Properties Ltd.

The Conrad Ritblat Group plc is a commercial property services consultancy offering professional and agency services to property owners, investors and users. It is a practice used by many corporate property owners and occupiers. Its core business comprises services related to real estate. It has been included in this book because it has actively used real estate-based strategies to gain competitive advantage in a difficult market-place.

UK corporate business has begun to appreciate that real estate decisions can be of strategic importance. Some leading companies involve real estate experts in their strategic planning teams and on their main boards so that their corporate strategy incorporates real estate considerations and vice versa. However, many companies have yet to take this step.