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Ted’s Blog: Discussing critical industry issuesThe Garrison Report #2007-10
Is Your Company Management Approach Poised to Destroy Your Company?
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While the title may seem provocative, Harvard Professor Clayton Christensen advised that this is a question every CEO must ask. Everyone has read about companies that failed because they were bureaucratic, arrogant, planned poorly, had inadequate skills and resources or were just plain unlucky, but Christensen wasn't discussing those companies.
Instead, Christensen is concerned about the well-managed company that has been listening to its clients and investing in its workforce and technology. He explains that disruptive innovation is the source of the threat. He offers two examples related to the construction industry. The first is where the steel mini-mills brought down the integrated steel companies. The second was the demise of the cable-actuated power shovels that were crushed by hydraulic excavation technology.
Fortunately, the situation is not hopeless, but a different perspective is needed.
Christensen writes in The Innovator's Dilemma, managers need to be able "to judge when the widely accepted principles of good management should be followed and when alternative principles are appropriate." This is critical because Christensen provides example after example of successful organizations that were destroyed or severely damaged because they didn't adapt to a new client paradigm even though they could see it coming. When they did respond, it was usually too late.
To understand your possible vulnerability, it's essential to appreciate that by performing as good companies are supposed to"”namely taking care of your most profitable customers and investing where profit margins are the most attractive"”you are performing as required for sustainable innovations. The problem is this leaves you exposed to disruptive innovation.
In the construction industry, the minefields of disruptive innovation are found hiding in concepts such as building information modeling, integrated services, LEED and best value to name a few.
These are disruptive innovations because they represent significant change from the design-bid-build method of delivery. Numerous studies have reported significant waste within that project delivery method. During an interview on New Construction Strategies with author and consultant James Lewis, he reported that 30 percent waste is common in the conventional project delivery method.
Since the industry is highly fragmented with low margins, practitioners find it difficult to invest in improving the process, despite the potential gain, because with current delivery methods, most of the improvements would go to the client. In other words, as Peter Beck, the managing director of the Beck Group, wrote in the November 9, 2005, issue of DesignIntelligence, "The bottom line is that the industry is slow to adopt innovative practices because participants are not rewarded for doing so in a high-risk environment."
Since a relatively small number of clients are actively using each of the above innovations, many contractors and designers feel they can't afford to invest time and money in these approaches. Unfortunately, continuing to simply respond to the demand for lower prices only results in pouring more grease on an already slippery slope. When clients focus on the low-bid price, contractors find it difficult to invest in the disruptive techniques that would produce greater efficiency and effectiveness by eliminating waste. Yet to improve contractor profits while delivering lower costs and/or to improve the value delivered to the client, this is what's needed.
Disruptive innovation finds an easier home in a fractured industry because individual contractors don't need to find a large number of clients that want to embrace the new technology in order to be profitable. Once the contractor finds a few clients interested in the new methodology, it is able to provide a new product to the marketplace that increases customer satisfaction. Peter Drucker explained in The New Realities why this is so important when he wrote, "The product of a business is a satisfied customer." In other words, if a contractor can find a few clients that embrace the new disruptive techniques, that contractor can afford to invest in developing the necessary skills and experience. As the contractor's skills increase, value delivered to the client increases, and the relationship between the client and the contractor strengthens.
As later adopters of innovation begin to express interest in the new techniques, the contractors that have mastered the new innovations find themselves in a powerful position. Al Ries and Jack Trout explained why in their book Positioning. They declared that positioning is a battle for the mind. Therefore, once a contractor has positioned itself as the leader in something, it becomes very difficult for others to dislodge it.
As the contractors that are employing these techniques start to compile data that proves their performance is superior, their credibility and desirability increase. When I talk to contractors that employ the new innovations, they constantly tell me that they are being awarded more and more projects over other contractors simply because they are more qualified in the desired new technology. In other words, when the innovative contractor has proven it is able to deliver what the client wants, the client focuses on the contractor's position as the measurement of future performance, instead of focusing merely on a bid number.
Innovating contractors have an advantage in the early stages of development of new innovations because they know how to thrive in the initially small marketplaces. As the marketplace for the innovation increases, these contractors find themselves positioned for large growth. When the contractors that avoided the new innovations in the beginning finally decide to jump in, they may learn it's too late.
In the early days of an innovation, it's often easy to find projects where a client wants the new innovation but no contractors have experience. This allows the innovative contractor to gain that critical experience. However, as more and more contractors gain experience, it becomes more and more difficult to be selected for projects requiring the desired innovation experience. This may result in a contractor finding itself locked out despite its history of success on what clients now perceive as old technology.
The moral of the story is contractors who change to meet the client's new priorities will survive. This doesn't mean you should abandon your primary approach today or even tomorrow, but it means smart contractors that embrace the new realities are profiting from them. While change can be scary, it can also be exciting.
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