Disruption

Disruption

Thomas C Schleifer, Ph.D.

For the past eight weeks we have been focusing on managing under disorderly market conditions. The feedback I have been getting from industry leaders is that they believe this current disorderly market is a temporary phenomenon caused by the COVID-19 pandemic. However, our discussion last week on the long-term shortage of skilled labor plaguing the industry is just one example of the impact of trends on the construction business. At the beginning of the pandemic, McKinsey and Company published extensive research on the long-term trends disrupting the construction industry. It is time for us to review their findings and understand that the disruptions we are experiencing in the current market are not temporary and will not dissolve naturally as the pandemic recedes. 

Disruption

The recent McKinsey research entitled, The Next Normal in Construction – How disruption is reshaping the world’s largest ecosystem – was published just as the pandemic was getting under way. 

This research highlights long-term trends that McKinsey calls disrupters to the normal course of the construction business. They make the point that these disruptive trends are not temporary incidents caused by the pandemic that will dissolve as the economy stabilizes but rather long-term trends (e.g., the shortage of skilled labor) that are disrupting how construction companies have always been run. Here’s how McKinsey summarizes its findings:

“Construction, which encompasses real estate, infrastructure, and industrial structures, is the largest industry in the global economy, accounting for 13% of the world’s GDP… A closer look at its underlying performance highlights the industry’s challenges in good economic times, let alone in times of crisis…The COVID-19 crisis unfolding at the time of publishing this report will accelerate disruption and the shift to a “next normal” in the construction ecosystem…We expect a set of nine shifts to radically change the way construction is done. Companies that can adjust their business models stand to benefit handsomely, while others may struggle to survive…This research analyzes how the entire ecosystem of construction will change, how much value is at risk for incumbents, and how companies can move fast to adapt to and, in fact, create a new industry structure.” 

McKinsey’s Findings

  • Construction is the biggest industry in the world and yet, even outside of crises, it is not performing well. 
  • Nine shifts will radically change the way construction projects are delivered. 
  • The COVID-19 crisis is accelerating change that has already started to occur at scale. 
  • To survive and thrive, incumbents must respond. 

Trends

Trends in the construction marketplace have been reshaping how business is done for some time. Because trends are gradual but enduring, we often don’t see them clearly until extensive research reveals their impact. Many of these “trends” we have been discussing for years, but here McKinsey identifies them in the context of disruption and management strategies.

  1. Rising customer sophistication and total-cost-of-ownership pressure from tight public budgets and housing-affordability concerns imposing “commodity” pricing on construction services.
  2. Persistent scarcity of skilled labor.
  3. Increasing sustainability requirements and demands for safety performance.
  4. Industrialization and modularization – off-site production automation and on-site assembly automation.
  5. New materials – Innovations in traditional basic materials like lighter-weight materials such as light-gauge steel frames and cross-laminated timber enables simple factory production of modules.
  6. Digitalization of products and processes – enables better collaboration, greater control of the value chain, and a shift toward more data driven decision making. 
  7. New entrants – Start-ups and new funding from venture-capital are accelerating disruption of current business models. 
  8. Product-based approach – An increasing share of structures will be delivered as standardized “products”.
  9. Specialization – To improve margins companies will start to specialize in target niches and segments such as luxury single-family housing or hospitals.
  10. Value-chain control – Companies will move to control activities along the value chain such as design and engineering, select-component manufacturing, supply-chain management, and on-site assembly.
  11. Consolidation – Growing need for specialization and innovation will require significantly larger scale than is common today.
  12. Branding – With productization and specialization having a compelling brand that represents an organization’s distinctive attributes will take on added importance.
  13. Investment in technology and facilities – Productization implies a need to build off-site factories.
  14. Investment in human resources – As specialization increases the importance of retaining in-house expertise, players will be compelled to invest more in human resources.
  15. Sustainability – Physical climate risks are already growing and will require a response.

Nine Strategic Shifts

The construction industry has no option but to begin to execute the following nine McKinsey strategic shifts as a response to the 15 disruptive trends listed above. 

  1. Product based approach
  2. Specialization
  3. Value Chain Control
  4. Consolidation
  5. Customer centricity and branding
  6. Investment in technology and facilities
  7. Investment in human resources
  8. Internationalization
  9. Sustainability

For the next few weeks, we will discuss the importance of executing these nine strategic shifts.

Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge  https://bit.ly/3G9ornf.

For a deeper look into the disruption I the construction industry, read more here: DISRPUPTION

For a broader view into construction industry trends, read more here: TRENDS

To receive the free, weekly Construction Messages, ask questions, or make comments, contact me at research@simplarfoundation.org

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