The construction industry and its broader ecosystem erect buildings, infrastructure, and industrial structures, creating the foundation of our lives and economies. It has successfully delivered unique, challenging projects, from skyscrapers to undersea tunnels. However, the construction industry has underperformed for an extended period in many regards. The COVID-19 pandemic and high inflation for materials may be more crises that wreak havoc on an industry sector that tends to be particularly vulnerable to economic cycles.
Making change difficult and slow, many external market factors have plagued the construction industry combined with complex and fragmented industry dynamics and an overall aversion to risk. Decades-long lags in productivity and the current skilled labor shortage are also causing challenges. The COVID-19 crisis, without a doubt, is accelerating the ecosystem’s disruption that began before 2020. In such times, it is essential for construction firms and their partners to find their north star for the path forward and make the bold, strategic decisions that lead to successful business outcomes.
Below are ten critical areas expected to be disrupted where the ripple effects may achieve long-term impacts on value chains within construction.
1. The COVID-19 crisis will accelerate change in construction that has already begun at scale
There are many concrete signs of disruption, and no more visible is the increased modular and offsite construction market share in North America, which has grown 50% from ’15-’18. With this, R&D by the top construction companies worldwide has increased 77% since 2013, with new players blazing a trail. In addition, the new normal is pushing digital technologies for the entire value chain (remote work, design, labor optimization and materials management, etc.) to build.
Moreover, many sources indicate that COVID-19 is accelerating the transformation with increased raised investment by tech startups.
2. Productization of construction: Product-based vs. Project-based Approaches
Soon, an increasing share of structures and surrounding services will be delivered and marketed as standardized “products.” This includes builders promoting branded product designs with standardized but customizable features that improve each generation. The standardized components and modularized elements are produced at offsite shops factories. Production consists of assembly line–like processes in safer environments (fabrication shops) with a significant degree of repeatability.
Finally, each customer’s prefabricated modules and parts will be shipped and assembled to the jobsite. Those who embrace off-site fabrication will reap a competitive advantage over their peers.
3. Specialization in construction market segments
To improve profit margins and levels of differentiation, construction firms will begin to specialize in specific niches and market segments (e.g., hospitals, single-family residential, processing plants, industrial, high-rise commercial, or multi-story residential buildings) to establish more competitive advantages. Material specialization is another key for serving subsegments and mastering construction methods. Shifting toward more specialization will require firms to continue developing and retaining more profound expertise, domain knowledge, and capabilities to maintain competitive advantages. Market players will need to carefully weigh the increased specialization’s brand positioning, efficiency, and effectiveness against the potential risk or the cyclical benefits of a more diversified portfolio.
4. Value-chain management control & industrial-grade supply chain integration
Owning and controlling more important activities along the value chain is a disruption expected by large construction firms. Some of these activities include:
- — Design and engineering
- — Select-component manufacturing
- — Prefabrication
- — Supply-chain management
- — Jobsite assembly
Firms are positioning themselves to achieve this goal through strategic alliances, partnerships, and vertical integration and relying on collaborative contracting and more closely aligned incentives. Digital technology alters the interaction model: BIM models will lead to decision-making early in the design and construction phases. Distribution will migrate toward online platforms. Logistics management and end-to-end software platforms will enable firms to control and integrate higher value and supply chains. Value-chain integration or control will reduce interface frictions (manual processes, etc.) and make innovation more agile.
5. Value Chain Consolidation
Growing needs for specialization and investments in innovation—including new materials, digitalization, technology, facilities, and human resources—will require a substantially larger scale and focus than today. Product-based approaches will further gain scale with higher standardization and repeatability. As a result, the construction industry will likely see a significant degree of consolidation across and within specific parts of the value chain.
6. Customer-centricity and construction branding
With productization—turning development, engineering, or construction services into easy-to-market products or solutions—and specialization in the industry, a compelling brand representing an organization’s distinctive attributes and values will add importance. As in traditional consumer industries, a strong brand can tie customers more closely to the construction company’s or supplier’s products and help establish and attract new customers.
As with brands in other manufacturing industries, construction brands will incorporate product and service quality, with greater value on delivery timing, reliability, service-maintenance offerings, and warranties.
7. Investment in technology and prefabrication
Productization implies investments in plants, manufacturing machinery and equipment (e.g., robotics to automate manufacturing), and technology to build and run offsite factories. Many examples already exist where modular is not used. The construction jobsite is becoming more capital intensive with advanced automation equipment, scanning tools, robotics, and drones, among other technologies. In addition, R&D investment will become more critical for firms specializing and productizing their portfolios. As a result, firms are likely to increase spending to develop new, innovative products and technologies.
8. Investment in human resources
Innovation, digitization, technology use, value-chain control, and specialization in the office and field segments increase the importance of optimizing the workforce. Another disrupter will push into human resources with risk management and other current capabilities decreasing and be replaced by emphasizing supply-chain management and other areas. Companies need to invest in their workforces to build the necessary capabilities further. This becomes even more important in light of the transition to the future of work. Most incumbents struggle to attract the digital talent they need and will need to raise excitement about their future business models, most notably among the Great Resignation.
9. Building across geographies
Greater standardization brings lower barriers to operating across geographies. As scale becomes increasingly crucial to gaining competitive advantages, players will increase their footprints—both for low-volume projects in high-value segments such as infrastructure and for winning repeatable products in demand. The COVID-19 pandemic might slow down this development, but not for construction firms who embrace technologies that minimize face-to-face interaction.
10. Sustainability
While sustainability is already a critical decision factor, we are only at the beginning stage of increasing rapid construction development. With growing attention to physical climate risks and carbon abatement, a micro-and-macro level response is required. Companies will need to consider the environmental impact when sourcing materials, manufacturing will become more sustainable (for example, using electric machinery), and optimized supply chains for sustainability and resilience. In addition, the jobsites will need to change from hostile to non-hostile, making construction radically safer. Water consumption, noise, dust, and waste are also critical factors.
Today’s project-based construction process shifts radically to a product-based approach. Instead of building uniquely designed structures using traditional methods on the jobsite, companies will execute their production at offsite construction facilities. Standardized sub-elements and building blocks will likely be developed in-house in R&D-like functions. The elements will be manufactured separately and then combined with customization options to meet bespoke requirements. Developers, manufacturers, and contractors must specialize in end-user segments to produce efficiently and learn through repetition. As a result, data-driven business models will emerge, and the process may resemble manufacturing in other industries such as shipbuilding or car manufacturing.
There is rationale to believe that a winner-take-most dynamic will emerge. Companies that fail to adjust quickly risk seeing market shares and margins erode until they eventually go out of business.
Summary
The Construction industry is not the first to encounter lagging productivity and substantial disruption across the value chain. However, we can learn significant lessons from other sectors, including shipbuilding, commercial aircraft manufacturing, agriculture, and car manufacturing. Clear patterns of disruption are reasonably evident in all of them, where value shifted to those businesses that adjusted the best. Innovation in production technology and newly designed workflows led to successful disruption. Today, construction investment continues to push innovators across segments, many focusing on digitalization and data-driven products and services to replace antiquated manual activities.
For example, the commercial aircraft manufacturing industry began highly fragmented, where airplanes were built from scratch in a bespoke and project-based manufacturing process. Industrialization was a shift toward assembly-line manufacturing, which later became highly automated. As a result of standardization, the commercial aircraft industry entered a phase of consolidation that led to the rise of two major players, Boeing, and Airbus. The transformation brought a significant shift of value to customers. However, this transformation journey took roughly 30 years to complete, as commercial aircraft manufacturing faced barriers to change similar to those now confronting the construction industry.
To survive and thrive, incumbents must respond. All construction value chain players will need to develop strategies for dealing with or leading disruption.
