If real estate is all about location, location, location, then construction is all about timing, timing, timing. It is no secret that construction is a highly cyclical business.
One client describes being in the right place at the right time as “catching the wave.” The analogy could not be more accurate. Successfully exploiting market dynamics is exactly like catching a wave. One has to be alert, prepared and experienced and the conditions must be right. A little bit of luck doesn’t hurt either.
Those Who Don’t Learn From the Past are Doomed to Repeat It
The mid-2000s represented a zenith in construction markets. With demand for construction services greatly outstripping supply, margins went through the roof. Contracting firms clamored to take advantage, growing backlog revenues by leaps in bounds. Accompanying all of that growth was a fairly universal loosening of the grasp on solid business fundamentals. In some markets, it simply didn’t matter if firms experienced margin erosion on their projects. The profits were so great that any cost overruns had a negligible effect on overall business performance. Quite simply, some construction firms got lazy. The effects of the downturn were disproportionately worse for those firms that were least prepared to participate in hyper-competitive markets.
The fact is, maintaining sanity in the construction space requires a certain level of eternal optimism. Contractors were blind to the boom; even if they saw signs of the collapse looming on the horizon, they chose to believe otherwise. Today, as markets begin to loosen and margins creep back to a level that can support profitable organizational growth, how clairvoyant are today’s leaders of the construction? Most in the industry agree that 2007 was an aberration and that we will never see times as dire as 2009 to 2011. That may be wishful thinking given the volatility and uncertainty of the global economy. Factors presenting uncertainty right now include:
- geopolitical unrest;
- domestic policy discord;
- slowing growth rates of the BRICS economies;
- global oil and gas markets;
- acceleration of technology diffusion;
- increase in creative destruction (disruptive innovation); and
- dearth of skilled workers.
But volatility is not all bad. Increased volatility simply means that the window of opportunity is shorter and that firms must act faster to take advantage. It can also mean that wave amplitude will be greater (i.e., larger swings, both positive and negative, in markets).
Key Questions to Ask Right Now
How can a construction firm prepare for the next upturn or downturn?
It could be approaching much faster than anticipated. The most successful construction firms today are not only strategic, but also agile and prepared to pivot strategy as soon as market conditions experience material change.
How agile is the firm? If market conditions changed significantly tomorrow, how long would it take the firm to react?
Experienced contractors have an intuitive sense of how and when the next market waves will develop. But intuition alone is not enough to justify the significant investments necessary to be successful in most construction markets. Prudent investors in the construction space require objective information on top of gut feel. Leading firms in the construction industry today are spending more on industry information to get ahead.
What information is the firm using to stay abreast of changes in the marketplace? Does the company have an information budget? How much is the company willing to invest?
Odds are, the company has a ledger account for almost every conceivable type of overhead expenditure. But is there one for “market research” or “industry knowledge?” Market intelligence is critically important to the success of any business. Why not track what is spent on information and set an annual budget based on historical consumption and future expectations/needs?
Harvard Isn’t for Everybody
Determining the true value of a college education is a common story in the media today. How does the firm value information and the knowledge that flows from it?
Large multinational firms are willing to pay big bucks for Harvard-level information. But smaller, regional firms simply can’t afford the associated price tag, nor is that level of information necessary to compete successfully. At the other end of the spectrum, many construction firms do not invest enough in information. They invest in “online university-level” information. This type of information is relatively inexpensive and available to almost anyone. However, because everyone can access this level of information, it doesn’t offer any exclusivity or competitive advantage. For most contractors, the right level of information lies somewhere between Harvard and online university (a state university level, perhaps).
The final question construction firms should be asking is how to measure return on investment in knowledge. If the company invests in information, and if that information affords knowledge regarding what is most likely to happen in a core market(s) in the next 18 months, would the company adjust its strategy accordingly? Of course! Construction firms react to information and try to position their firms for market success. Better, more timely information provides contractors with competitive advantages in the marketplace.
There are countless stories of dropouts who have become huge successes: Jobs, Gates, Zuckerberg, the list goes on. The fact is, education does not equate directly to success. The same can be said for market intelligence. Just because a firm spends money on industry information does not mean it will automatically be successful. Companies have to be able to leverage that information and take action.
All too often, strategic thinking is thought to be reserved for C-suite managers. They are the ones who seek out information, digest it and lay awake at night thinking about what to do next. However, there is too much information out there to be monitored by a select few managers in a given firm. Thirst for knowledge is a trait to be nurtured throughout the organization. At every level of a company, managers should be tasked with researching innovation and trends in the market as they relate to their role/function in the business.
With the entire organization thinking about maintaining profitability by taking advantage of shifting market dynamics, a company will be much better prepared to successfully leverage information and take action. It takes much too long for executives to disseminate information down through the ranks and spoon-feed it to their managers. By the time a company gains consensus on what the information is telling it and what to do about it, the opportunity may have evaporated.
Organizations become nimble by fostering a sense of continuous learning and research. In addition, managers must be given autonomy to seek out information and make investments in market intelligence. If every dollar spent on industry information has to be rubber-stamped by the CFO, the manager will quickly become apathetic toward finding new ideas and opportunities.
The construction market will undoubtedly shift in the next 12 months. What remains to be seen is how and when it will shift. The question for construction executives is: “How early will they know relative to their competition?” The construction industry moves in waves. For every crest, there is a trough. It’s time to learn how to surf.