- Features | October 2, 2017
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