Long term “trends”, not temporary disruptions, are reshaping the construction industry. Last week we cited research that identified 15 construction industry long-term trends. Let’s examine four of them more closely:

1. Specialization – To improve margins companies will start to specialize in target niches and segments such as luxury single-family housing or hospitals.
2. Product-based approach – An increasing share of structures will be delivered as standardized “products”.
3. Consolidation – Growing need for specialization and innovation will require significantly larger scale than is common today.
4. Branding – With productization and specialization, having a compelling brand that represents an organization’s distinctive attributes will take on added importance. (McKinsey)

Specialization

• For contractors, the tendency to specialize is almost a natural impulse that has been around since the beginning of time,(as we practice any activity, we get better at it and feel more comfortable doing it). However, the same contractors’ unquenchable need to prioritize growth has led many of us down the diversification path, increasing risk and endangering profitability.
• A successful building contractor specializing in schools and office buildings bid aggressively on a big downtown hospital and buried his company under a pile of lawsuits and eventually failed. (For readers unfamiliar: Hospital construction is very highly specialized with little in common with school or office construction) When I asked him why he bid the hospital in the first place, he replied, “Our type of projects had matured in our market, and we couldn’t grow fast enough sticking to the same old work.” 
• What he failed to consider was that his company was recognized as one of the best building contractors in their market, and his work often commanded a premium price. He was at the leading edge of a trend that is taking over the construction industry. His many years of specialization in schools and office buildings had resulted in a distinctive competence that was recognized by a marketplace that considered his company a premium brand. He was already where every other contractor in his market was trying to go.

Product Based Approach

• Our building contractor was also a trend setter by producing quality work on time and on budget. Again, this product-based approach is nothing new in some types of work, but commercial contractors and infrastructure builders are beginning to adopt the standardized product approach that has made specialized contractors successful for many years.
• When I asked our building contractor how he had been so profitable for so many years, he replied that specializing and standardizing his products enabled him to build them more efficiently and consistently, thereby increasing profitability and gaining a reputation for quality that was a boon to sales. (But he tried something totally new anyway.)
• Imagine the future of construction when contractors that specialize in hospitals, for example, offer their clients documented on time performance and quality at a competitive price.

Consolidation

• The specialized contractor who is branded as the highest quality producer often grows his or her company by buying out weaker competitors and taking over their market share.
• Years ago, I confirmed this trend by doing extensive research on “survival of the fittest” consolidation within the construction industry. The specialist in the market who was the most profitable always increased market share at the expense of less competent contractors in the same market. In other words, the most efficient contractors did not have to diversify their product line or venture into unfamiliar types of work in order to grow. They simply expanded their share of the existing market or expanded geographically.
• What’s more, when the existing market is expanding externally, they are always in the position to take advantage of the additional work and grow their firm by increasing their share of an already expanding market. “Survival of the fittest” consolidation is an intensifying trend taking over the construction industry.

Branding

• Specializing in a product category and building a reputation for excellence is rocket fuel for branding.
• Having a compelling brand that represents an organization’s distinctive competence completely changes a contractor’s fortunes. Once you have established a “brand”, you no longer have to be the low bidder on every job to get work. Contractors who have established their brand are often invited to propose.
• A branded construction organization has reduced risk and enhanced profitability. The “branded” producer is often the only qualified bidder for specific projects and eventually begins to gobble up lesser competitors.

All Good News

Talking about “trends” that are “disrupting” the way contractors do business seems like bad news at first glance. However, the four trends discussed above all bode well for contractors who are alert enough to see the inevitable future and nimble enough to adjust their company’s strategic plan to go with the flow into the next normal.