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A Good Strategy is the Enemy of a Great Strategy Script

Even during the previous construction boom many industry practitioners were frustrated because tough competition was driving down profit margins.

Albert Einstein defined insanity as doing the same thing over and over and expecting to get different results. In construction the insanity has been that when practitioners aren't making enough profit, they lower their prices to obtain more work. This approach doesn't increase profits, but certainly lowers profit margins. Just because conventional wisdom says that the construction industry must compete for low bids doesn't make it true.

A book written 2,500 years ago by one of history's greatest strategists offers a better approach.  General Sun Tzu wrote in The Art of War, "Those skilled in war subdue the enemy's army without fighting. Their aim must be to take all under heaven intact through strategic superiority."

In other words, if you want to escape the highly competitive marketplace and watch your profits increase, then you need to create a strategy superior to your competition.

Oh, but you don't think business is about fighting wars?

Really! What do you call a price war?

True, in construction we typically don't shoot at each other, but price wars still leave the landscape littered with casualties. The emphasis of competing on price has created an environment with a high turnover of business and declining profit margins for decades.  It's true that a major contribution to the industry's decline in profit margins has been the result of increased competition.

While the number of contractor more than tripled between 1960 and 2003 the dollar volume of work in 1960 dollar remained virtually constant. With the increased number of contractors chasing the same volume of work, something had to give, and it was profit margins.

In 2005, the return on investment in the construction industry was 9.7 percent, or a little more than half the 16.9 percent average of all U.S. industries.  What makes this low return on investment even worse is that it occurred in the middle of a construction boom.

There are those that would use the above evidence to reinforce their belief that they have no choice but to compete for the lowest bid. However, the most profitable companies don't accept this as a fait accompli. Instead they developed a superior strategy that differentiates them from their competition. Sadly, too many contractors, including construction managers, don't do this and settle for "me too" strategies that force them to compete for lower and lower margin work.

One obstacle to developing a superior strategy is the trap of success. In his bestselling book, Good to Great Jim Collins opens with: "good is the enemy of great." After observing industry businesses attempting to create their business strategy, I've expanded Collins's idea to "a good strategy is the enemy of a great strategy."

Since most construction businesses are launched during a construction boom, when plenty of work is available, virtually any strategy appears to work. The trap is this early success prevents the development of a truly superior strategy that avoids the price wars. While price is always a factor, highly profitable businesses develop strategies that deliver superior value for their clients.

Jim Collins explains in Good to Great that the great companies focus on what he calls the "hedgehog concept." In his research, he identified three critical factors of this concept. They are:

1)      What are you passionate about?

2)      What can you be the best in the world at?

3)      What drives your economic engine?

The first should be obvious, because if you are not passionate about something, you will never be great at it. But the idea of what can your company be the best in the world at, may raise a few eye brows. In the fractured construction industry, being the world's best may not be necessary. But not trying to be the best doesn't make sense, because Collins reports trying to be the best doesn't take more work than it does to just be mediocre.

The problem is that typically industry practitioner merely picks something in which it has experience. It has built several hospitals, so it decides to chase hospital work. This isn't good enough, instead it needs to understand what specific service or expertise it can perform that will make its service unique.

The last factor, the driver of the company's economic engine, is a little more subtle.  Not every expertise can be turned into high profits, because sometimes the client simply doesn't value that expertise. Highly profitable companies focus only on the services their client places a high value on, because that's what generates high profits.

The "hedgehog concept" explains that the area where these three concepts overlap is where a company has a supreme advantage. In others, selecting a service that has all three factors simultaneously. Clearly defining this area takes work and constant tweaking as the business environment continues to change.  However, the better an individual construction manager defines its "hedgehog concept" the more unique and profitable it will be.

However, to escape the price wars it's important for the construction manager to go on the offensive, which means to avoid waiting for the client to initiate the project. This approach has two advantages. Initially, it allows the construction manager to eliminate its competition by going where no one else is going. Secondly, after the construction manager develops a reputation for results, it is often contacted by potential clients that find those results desirable.

The number of possibilities is virtually limitless. The key to this process is not restricting the focus to just the construction activities, but by taking a more holistic view of the project and its long-term values. Considering that construction costs only account for about 10 percent of the lifetime cost of a building, why not focus on the other 90 percent. Below are several examples of how a construction manager can take a proactive approach to shaping its marketplace, instead of sitting back and merely reacting to the marketplace.

  • Energy-saving contractors are clearly on the leading edge of this concept. They approach business owners who had no intention of installing energy-saving devices and offer them a deal they find hard to refuse. They explain how certain modifications will reduce their energy consumption and provide a rapid payback. In many cases they even offer to finance the improvements or obtain incentive payments from energy providers. Providing a comprehensive service that covers all aspect of energy-savings would be an ideal service for construction managers.
  • As a construction manager instead of merely managing the construction of a factory for client, Why not manage the entire investment. Design a factory for a client that would maximize energy efficient, provide lower maintenance costs, provide a factory layout that would improve the client's operational efficiency, and even provide the funding.  Instead of waiting for the client to approach you, why not develop the package and take it to the client and explain how this new facility would improve its profitability. How could they refuse?
  • There are plenty of public works projects that are sitting there waiting for funding.  Why not approach these government agencies with a private-public-partnership solution where you not only do the construction work, but provide the funding with the help of an equity partner.
  • One large general contractor, instead of bidding on the construction of an oil refinery, simply built the refinery, then sold the completed refinery.  Asked why it took this approach, the contractor responded. "We earned a higher profit."

To maximize your profitability, you must maximize the value you deliver to the client, because the reality is you can only charge a percentage of the value delivered. The greater the value delivered the greater the profit potential for the construction manager. To maximize the potential delivered the construction manager must provide more than just installation expertise -- it must provide a complete package of services for the client. The possibilities are out there, you just need to use your knowledge in your area of expertise to identify them and develop a superior strategy.  Armed with your superior strategy you will eliminate the competition and watch your profit margins increase. The ball is in your court -- don't miss it.

 

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Ted Garrison is a construction expert who writes, speaks and consults on the future of the construction industry. He is also the host of the Internet radio program New Construction Strategies. He can be reached at Ted@TedGarrison.com.  To listen to the radio programs go to www.NewConstructionStrategies.com.

 

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