Getting Strategy Right: What Contractors Do Wrong and How to Fix it
Amidst ever-shrinking profits, increasing labor shortages, and decreasing productivity in the construction industry, companies are trying to solve new problems with old strategies. Industry profitability for most specialty contractors, including electrical companies, has consistently experienced 5-year compound annual growth rate (CAGR) net income declines of 6.1 percent. A labor gap in the United States of 1.6 million workers, an aging workforce where more than half of its workers are over 45 years old, and a lack of interest for entrance from younger generations (43% said they would not enter construction irrespective of compensation) has increased costs and left companies unable to satisfy building demand.
Leading companies in the industry are trying to combat these issues by changing hiring practices and adopting technologies such as Procore, Bluebeam, and Building Information Modeling (BIM) to become more predictive, effective, and efficient in their operations. However, despite such innovative initiatives, companies are struggling to capture value due to a fundamentally flawed approach to strategic decision making.
What Has Changed
1. VALUE DRIVERS HAVE CHANGED
In the past, winning companies were those who had access to financial capital and physical assets. These two value drivers allowed firms to out-invest their competitors and gain a competitive advantage through economies of scale and greater market share.
However, since the 1990’s, capital has become more abundant due to forces such as falling costs of capital,low tax rates, increased central bank intervention, and growing global financial markets. This new superabundance of capital has been the catalyst for two emerging value drivers – human capital and intellectual assets. Despite this shift, construction companies are still trying to win with traditional strategy that is based upon old value drivers.
A large Midwest contractor with an annual revenue of $430M believed its competitive advantage was defined by its strong balance sheet. Although this capital asset did provide strategic benefits, nowhere in its strategic plan did the company mention initiatives to attract and retain top talent or build competencies of its current staff.
2. TECHNOLOGY IS DISRUPTING BUSINESS MODELS
The results of one recent study illustrate how the construction industry is one of the least digitized, relying heavily on archaic paper processes. During an interview with an executive of a multibillion-dollar top ENR general contractor, the topic of technological innovation surfaced. This experienced leader proudly discussed how his firm was on the cutting-edge and recently rolled out a mobile plan room for most of its construction sites. However, the mobile plan room merely consisted of a metal box that contained a router, computer, and printer, which allowed craft labor to print off the most current set of plans.
Leading firms are benefiting from new business models that incorporate technology across business activities.
One multi-national construction firm is taking the lead by partnering with Autodesk to build systems that
incorporate big data from multiple touch points across the customer journey to become more predictive.
Such collaborations are allowing organizations to leverage BIM and data to reduce construction costs and speed up project completion times by 20 percent. Now owners can make faster decisions because every element of the design is tied to the cost estimate through advanced modeling software and virtual reality.
3. BOTH CUSTOMERS AND EMPLOYEES HAVE MORE OPTIONS
Access to information and transparency from social networks are making customers and employees savvier and more demanding. With quick, transparent data at their fingertips, power has shifted to these stakeholders, giving them more options when selecting a company to work with.
Traditional strategies are rooted in internally generated mission, vision, and value statements that are centered wholly on the company, not the customer. Based on a Coltivar Institute study of the top ENR companies, we found the same generic platitudes plastered across contractor’s websites – integrity, quality, safety, excellence, value, etc. As contractors strive to be unique by stating such generic, inward looking terms, they do the opposite – they become ubiquitous and competitors converge. When contractors cannot differentiate themselves, procurement decisions default to low price providers in a zero-sum profit game.
Customers and employees now have the power to choose. If the overall experience a company promises to
deliver is not relevant and exceptional, decision-makers will go elsewhere. This shift is causing contractors to
rethink how they design experiences to satisfy the values of their customers and employees, not just their own.
What Contractors Get Wrong
As described above, traditional strategy is premised on two core value drivers – financial capital and physical assets, which in recent years have shifted. Furthermore, traditional strategy is founded on two underlying assumptions – that industries are predictable and stable. Therefore, such an approach is not sufficient for the construction industry, one that is characterized as unpredictable and volatile based on economic swings.
Based on research performed by the Coltivar Institute, 61 percent of construction industry executives reported
that their firms engage in strategic planning sessions, at best, once per year. Only 12 percent reported reviewing strategic plans monthly. This long-term planning cycle is the symptom of the traditional approach, which mistakenly assumes the best steps to formulate strategy includes analyzing, planning, executing, and controlling.
In our practice, we have come across contractors both big and small applying a variety of traditional strategy frameworks. With such applications, the outcome is almost certain – management struggles with implementation and employee morale decreases with the introduction of disjointed initiatives. In fact, an executive of a mid-size general contractor we interviewed admitted to launching over 80 strategic initiatives after its annual strategic planning session. “Our strategic planning sessions are more like a peprally followed by a strategic laundry list exercise,” the leader announced. “Employees walk away inspired but then become disheartened by the list of to-dos that seem unfocused and unrelated to the growth of our company.”
Even worse than applying the wrong strategy approach, companies are adopting internally-focused strategies that put customers and other stakeholders, such as employees, subcontractors, and consultative partners, on the back burner. This “us against them” approach is destructive to an ecosystem that requires collaboration and orchestration. Leading companies realize a customer-centric strategy is paramount and are taking steps to disrupt themselves before they get disrupted.
In the book Delivering Value - A Holistic Approach to Strategic Powered Growth, this point is illustrated with what is referred to as Big Rs and Little Rs. Instead of defining strict boundaries through command and control, empowered employees can become intrinsically motivated to act within the confines of Big Rules and Little Rules to deliver unique value to clients while, at the same time, capturing value for the company.
How Contractors Can Fix the Broken Strategic Process
Adaptive strategies are tailored for companies competing in unpredictable, unstable, and non-malleable industries. Instead of making long-term plans based on haphazard assumptions and a false sense of security, adaptive strategies require firms to become agile and responsive to market conditions. This does not imply that companies should change their strategy based on the hottest trends, but they should operate from a core strategy that is flexible in its business model.
One large contractor successfully implemented an adaptive strategy by engaging in monthly strategy review sessions, incorporating real-time analytics to become more predictive and responsive, and empowering employees through custom academies designed around topics such as boosting financial IQ and customer experience. As a result, the company has reduced employee turnover by 35 percent and has improved net profitability by 19 percent within 18 months.
In Coltivar’s white paper, Strengthening Strategic Advantage Through Shared Value in the Connected Economy, we introduce the pattern for companies adopting a collaborative approach to strategy. Specifically, collaborative
firms thrive in industries that are unpredictable and unstable, yet malleable. The collaborative strategy is
implemented through a 4-step approach: empathize-orchestrate-engage-evolve.
A general contracting firm applies this approach by adopting a construction management software that allows
subcontractors to access real-time, job-specific information with the ability to upload change orders directly to
the system. The CEO of this company has shifted from a command and control leader to a catalyst who allows
the ecosystem of players to operate freely without being actively involved in its management. The collaborative
approach allows the general contractor to assume an orchestrator role that is often lacking in the construction industry.
The restorative approach to strategy creates a focus on allowing the firm to remain viable and survive during difficult times. Companies that can correctly apply a restorative approach often emerge from such hardship as stronger, more resilient strategic organizations.
DARE TO BE BOLD
Regardless of their current strategic position, companies can adopt new approaches to boost cash flow, improve
employee morale, and enhance the client experience. Irrespective of past investments in strategic plans, the worse thing companies can do is to make future decisions based on historical, sunk costs.
Future-oriented firms will lead the future by making big bets that are supported by data and analytics, only after they adopt the right approach to strategy.
Steve Coughran is the founding director of Strategy at the Coltivar Group. He created the Strategic Financial Leadership (SFL) program under the Coltivar Institute, and he teaches an undergrad version of the program at the University of Denver’s Business School. Steve is a national speaker, published author, and expert to companies on developing and implementing corporate strategy, strategic finance, enhanced customer experience, and innovation. He holds degrees in accounting and finance, and earned his MBA at the Fuqua School of Business at Duke University while studying abroad in Asia, Europe, and South America.