Learning how to navigate the waves of the construction market.
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.” We’ll give him a pass for inserting laid-back surfer lingo into the highly competitive, often extremely stressful realm of construction. But the analogy could not be more accurate. Successfully exploiting market dynamics is exactly like catching a wave. You have to be alert, prepared and experienced, and the conditions must be right: not too choppy, the break not overcrowded, strong flood tide, stiff offshore wind. And a little bit of luck doesn’t hurt.
Those Who Don’t Learn From the Past are Doomed to Repeat It
To steal a quote from Dickens, “It was the best of times, it was the worst of times.” 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 hypercompetitive markets.
Many contractors tell us today, “I knew it was too good to be true.” To which our response is, “So why didn’t you do anything about it?” 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 industry?
The vast majority of folks in the industry agree that 2007 was an aberration. “It will never be that good again…at least not in my lifetime,” remarked a speaker at a recent industry association event. However, as a corollary, many also believe that we will never see times as dire as 2009–2011. 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)
- 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 will your firm prepare for the next upturn or downturn?
It could be approaching much faster than you think. 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 your firm? If market conditions changed significantly tomorrow, how long would it take your firm to react?
Just as experienced surfers have an intuitive sense of how swells will behave, 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 a layer of objective information on top of their years of experience and gut feel. Information is knowledge, and knowledge is power. Leading firms in the construction industry today are spending more and more on industry information. They are doing so in order to get ahead — to spot the next swell advancing towards the break.
- What information is your firm using to stay abreast of changes in the market place? Does your company have an information budget?
- How much are you willing to invest?
Odds are, your company has a ledger account for almost every conceivable type of overhead expenditure. But do you have one for “market research” or “industry knowledge”? Market intelligence is critically important to the success of any business. Why not track what you spend on information and set an annual budget based on historical consumption and future expectations/needs? Beyond subscriptions to industry publications, in what other sources of information does your firm invest?
Harvard Isn’t for Everybody
It is difficult to put a value on knowledge. As prestigious as Harvard University is, it is hard to believe that the average student really gets his or her money’s worth ($200Ks for four years) in terms of actual knowledge (clearly, the value of Harvard on your resume extends beyond the learning experience). So how does your firm value information and, therefore, knowledge?
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 what I will refer to as “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 can you measure return on investment in knowledge? If you invest in information, and if that information affords you knowledge regarding what is most likely to happen in your core market(s) in the next 18 months, would you adjust your strategy accordingly? Of course! Just as a surfer spots the next set of swells on the horizon and paddles his board into optimal position, 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.
Leveraging Your Education
There are countless stories of dropouts who have become huge success stories in their business endeavors: 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 your firm spends money on industry information does not mean that you will automatically be successful. You have to be able to leverage that information and take action.
All too often, strategic thinking is thought to be reserved only for C-suite managers. They are the ones that 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 how to take 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 rubberstamped by the CFO, the manager will quickly become apathetic toward finding new ideas/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 you know relative to your competition?” The construction industry moves in waves. For every crest, there is a trough. It’s time to learn how to surf. Q
Tyler Paré is a consultant with FMI Corporation. He can be reached at 813.636.1266 or via email at tpare@fminet.com.
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