Wednesday, 14 September 2016

The Global Construction Industry

 Ducks In a Row

These days, the review of the global construction industry done 25 years ago by an American business academic, David Hawk, would be called a foresight exercise. The project was called Conditions of Success: The Internationalization of Construction and began in 1989. He interviewed managers from the world’s largest firms about their strategies and aims for the future, with 18 of the then 20 largest construction firms, the largest private real estate developer and the largest building materials producer participating. Since publication of the report those 60 firms involved became, through mergers and acquisitions, 25 firms by the time of Hawk’s 2006 follow-up published in Construction Management and Economics.

Importantly, his ten recommendations from the project resonate today. What is also interesting are a few recommendations that were deeply prescient (3, 6) while others have faded over time (2, 9), although all ten remain relevant. Hawk described the strategic challenge for management as “getting your ducks in a row” in addressing the issues he identified:

  1. Embrace changing consumer ideals: Construction will need to be inventive in how it accommodates changing consumer values and expectations. Being innovative necessitates changes in how and where firms seek their clients, how they negotiate with clients over mutual realities, and how to maintain long-term relations around products with multiple shortcomings.
  2. Seek new business ideas in new customer relationships: New opportunities for adding value emerge in new markets. Firms need to respond by being able to create more obvious value via more fluid operations. This is seen in industrial clients requiring their home-based construction firm to accompany them when they require facilities in other countries. At this point this is seen as more negative than positive for the construction firm.
  3. Add new value potentials via innovative design and procurement processes: Value-adding is clearly central to the relationship between builder and customer but the value definition process is just as clearly changing is significant ways. An important area of untapped potential is seen in processes and products of design. Design in construction was once limited to the activity architects were paid a fee to go off and “do,” prior to the real men’s work of producing a building. In this study design is seen as an emergent activity that needs to be seen in a more general way, and one which needs to involve all participants in the process. Design can be used to pre-problem-solve and post-opportunity-create. There are additional opportunities in redesign to include new social processes and technologies for production, sales, distribution and use.
  4. Use of global construction to discover new local visions: Even a global construction industry needs to be associated with the reality of the local. Real estate is the basis for all construction thus its products cannot have the economic mobility of autos, drugs and electronics. This offers special advantages to the industry but the mind-set behind the design of its products will need to be different. Construction needs to innovatively by-pass the dilemmas of the national while tapping more securely into the long-standing potentials of the local.
  5. Accommodate diversity while embracing the contradictory: Much executive discussion centers on whether a construction company must accept the diversity it continually encounters, or can find ways to simplify its situations by redefining its core, or even defining away complexity.
  6. Adapt and adopt new design and production processes for construction products: Construction clings to crafts and trades tradition. It resists some important concepts and practices that have been successfully applied to problems in other industries. Redesigning the idea of product and the tightly defined rules of traditional project management, to gain new opportunities for improved results, provides exciting alternatives for finding a more effective industry.
  7. Find and organize new knowledge for the industry: Construction needs to invest in a stronger scientific-technical base for its continual improvement of the quality and efficiency of what it does. This could be seen as a renewal of the importance of R&D, or as developing a basis for renewed knowing in an industry that is often too proud of doing and not reflecting. Construction, as well as others, seems to suffer from the dilemma of knowing standing in the way of learning.
  8. Innovatively avoid the Limits in Traditional Hierarchical Structures: Some construction activities can continue to operate effectively as autonomous, small-scale fragments. Others become much more efficient as part of an organized system. Finding management systems that can accommodate autonomy alongside complexity presents a great challenge.
  9. Integrate the mutual strengths of the Asian and European models: The Asian model of construction offers an interesting philosophy and approach to future construction operations of European firms. Its strength lies in how it places high value on details, quality and collaboration between the stakeholders in the total process. A current shortcoming is seen its ethnocentricity. The western model has taught a great deal to eastern-based firms but has been seen to give too much emphasis to big ideas that are too often vacuous and end up being controlled by the vagueness allowed in speculative finance.
  10. Learn to learn: Construction firms traditionally hire physically robust people proud of their low to moderate education and then place them in a stable value-adding stream. The assumptions behind this practice are breaking down. New challenges facing the industry’s clients and new untapped potentials in the industry are now called for. The industry needs to find ways to manage their employees so as to use more of their brains than brawn. This pushes construction to become like its clients and expect more of its employees.

Hawk does not mention globalisation, the study was done before it became the defining feature of the 1990s, but implicitly the report was about how to be a successful participant in an emerging global construction industry. This industry was not confined to activities on-site, but covered everything from design to material to construction to finance. The challenges successful firms were responding to were new technologies and organisational structures, and changes in the products and services they delivered to expand and create new markets.

Two other important issues were responding to changing consumer expectations such as higher quality, lower costs and improved environmental sensitivity, and finding new business ideas and customers by providing environmental sustainability, one-stop shopping, intelligent buildings, PPPs and innovative linkages to other industries. The over-riding theme was how to add value through integration of the total process and respond to the advantages opened up by the globalisation of the world economy.

In terms of the process of construction, Hawk emphasised industrialisation of on-site activities by replacing the crafts tradition with organisation by industrial concepts, and investing in a scientific-technical base for continual improvements to support it. This would create the preconditions for replacing the traditional hierarchy system with a system based on decentralised decision making. He argued organisation of the firm needs to allow small autonomous groups to efficiently function within large companies to link the operational advantages of smallness to the symbiotic advantages of integration.

Hawk concluded international construction was entering a new stage. Global construction firms were becoming more similar to other global businesses, in other industries, than the traditional, small scale, low technology service industry which it had left behind. The changes in how these firms functioned were so radical that Hawk called it the development of a new industry, the new international construction industry. This new industry would have a small number of large firms producing, not a service (project management) like the rest of the industry, but a product in a business model that owes more to conventional manufacturing than to traditional building and construction.

From Hawk, D. Conditions of Success: A platform for international construction, Construction Management and Economics, 2006.

Therefore Hawk’s new construction industry would not compete with the traditional fragmented building industry, which will continue to provide largely undifferentiated management services, allocated on price, to erect buildings designed and financed by the client, in a local or regional, or sometimes national market. It will continue as a low-technology industry in an environment where new technology is restricted to the process itself, and where product technology has to be financed and driven by suppliers and clients. The old and the new industries could be so far apart that it is possible there will be few technological spillover effects from the new industry.

Hawk concluded the new industry would be a global manufacturing oligopoly, where a small number of large firms compete in a global market. Their products will be packages, complete buildings, designed, financed, built, maintained, operated and possibly also demolished, as increasingly demanded by the clients, or rather customers. The firms in the new industry will exploit economies of scale and new technologies to grow. Partly that growth will be in turnover, partly in geographical coverage, and partly in new services and products. Mergers and acquisitions are likely to continue to be a major strategy for generating this growth. The consolidation will be ongoing.

Hawk’s report was published as Forming a New Industry: International Building Production in 1992. Long out of print, it used to circulate as samizdat copies at conferences. What is striking, however, are the similarities and differences in the global industry today to the industry Hawk envisaged.