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 large general contractors hovers between 1 to 2 percent, all while risk and owner demands intensify. Specialty contractors are not immune to profit fade and have consistently experienced 5-year CAGR net income declines of 6.1 percent[1]. 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[2], and a lack of interest for entrance from younger generations (43% said they would not enter construction irrespective of compensation[3]) 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 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?

The realization that construction companies are using the wrong approach to strategy has emerged from working directly with some of the top companies in the industry, speaking at national conferences, and collecting empirical evidence from qualitative and quantitative research over the course of a decade. From this collection of experience, we have discovered the following patterns that have made traditional approaches to strategy irrelevant and ineffective for architects, engineers, and construction companies alike.

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. Companies with access to capital secured positional advantages by winning larger projects that disqualified smaller organizations based on working capital and bonding requirements. 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 mid-west contractor with annual revenues of $430M believed its competitive advantage was defined by its strong balance sheet. Nowhere in its strategic plan did the company mention initiatives to attract and retain top talent or build competencies of its current staff. Instead, the company pursued a “get big and dominate” approach where revenue trumped profits, and relationships with subcontractors were controlled, not built. These tactics epitomize traditional strategy and demonstrate the fundamental flaw in the industry.

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 multi-billion 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. Although innovative, the construction industry needs more digital solutions to boost productivity. 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. Other technological innovations that capture real-time data are helping contractors to analyze upcoming resource requirements to make better decisions about work flow and scheduling. As companies adopt predictive analytics such as these, optimization will occur to maximize workloads and minimize inefficiencies.

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. To this day organizations use dependent leadership structures that rely upon command and control tactics. These structures are crumbling as values are shifting and a lack of differentiation among contractors have left companies scrambling. 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 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.

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