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Digital Transformation

Nine shifts that will disrupt the construction industry ecosystem

McKinsey & Company recently surveyed 400 construction industry leaders for their report The next normal in construction: How disruption is reshaping the world's largest ecosystem. Of those surveyed, a majority believe these nine disruptions will impact the industry within the next five years.

McKinsey & Company
7 July 2020

To improve their margins and levels of differentiation, companies will likely increasingly specialise in target niches and segments (such as luxury single-family housing, multi-storey residential buildings, hospitals, or processing plants) in which they can build a competitive advantage. And they will specialise in using different materials, subsegments, or methods of construction. The shift toward specialisation will also require companies to develop and retain knowledge and capabilities to maintain their competitive advantages. Obviously, players will need to carefully weigh the effectiveness, efficiency, and brand positioning that greater specialisation enables against the potential risk and cycle-hedging benefits of a more diversified portfolio.

Value-chain control and integration with industrial-grade supply chains
Companies will move to own or control important activities along the value chain, such as design and engineering, select-component manufacturing, supply-chain management, and on-site assembly. Companies will be able to achieve this goal through vertical integration or strategic alliances and partnerships by using collaborative contracting and more closely aligned incentives. Similar to other manufacturing industries, controlling the supply of key components will be critical to securing just-in-time delivery of right-sized inputs to manufacturing, as well as the supply of goods to on-site assembly. Digital technology will change the interaction model: BIM models will lead to more decision making early on in the process, distribution will move toward online platforms and logistics management, and end-to-end software platforms will allow companies to better control and integrate value and supply chains. By successfully integrating a five-dimensional BIM model with the value chain, for example, companies will be able to link activities from formulating the initial concept to producing the finished product. Value-chain control or integration will reduce interface frictions and make innovation more agile.

Growing needs for specialisation and investments in innovation – including the use of new materials, digitalisation, technology and facilities, and human resources – will require significantly larger scale than is common today. In addition, larger and more professional investors will seek more sizeable, more sophisticated companies to be their counterparties. As product-based approaches, with a greater amount of standardisation and repeatability, further increase the importance of gaining scale, the industry is likely to increasingly see a significant degree of consolidation, both within specific parts of the value chain and across the value chain. Globalisation will further increase scale effects as future winning products will be fashionable and in demand across the world.

Customer-centricity and branding
With productisation – that is, turning development, engineering, or construction services into easy-to-market products or solutions – and specialisation in the industry, having a compelling brand that represents an organisation’s distinctive attributes and values will take on added importance. As in traditional consumer or B2B industries, a strong brand can tie customers more closely to the construction company’s or supplier’s products and help to build and maintain relationships and attract new customers. Similar to other sectors, such a brand will encompass, among other aspects, product and service quality, value, timing of delivery, reliability, service offerings, and warranties.

Investment in technology and facilities
Productisation implies a need to build off-site factories, which requires investments in plants, manufacturing machinery and equipment (such as robotics to automate manufacturing), and technology. Where modular is not used, the construction site also will likely become more capital intensive, using advanced automation equipment and drones, among other technologies. R&D investment will become more important for specialised or more productised organisations, so companies are likely to increase spending to develop new, innovative products and technologies. Across the entire value chain, investment in digitalisation will continue to rise.

The shifts outlined in this piece will likely require companies to reskill their workforce. This becomes even more important in light of the transition to the future of work. Most incumbents struggle to attract the digital talent they need and will need to raise excitement about their future business models.

Investment in human resources
Innovation, digitalisation, value-chain control, technology use, and specialisation in end-use segments all increase the importance of developing and retaining in-house expertise, which will compel players to invest more in human resources. In addition, the shifts outlined in this piece will likely require companies to reskill their workforce. The importance of risk management and some other current capabilities will decrease, replaced by an emphasis on others, such as supply-chain management. To build the necessary capabilities, companies will need to invest further in their workforces. This becomes even more important in light of the transition to the future of work. Most incumbents currently struggle to attract the digital talent they need, and will need to raise excitement about their future business models.

Greater standardisation will lower the barriers to operating across geographies. As scale becomes increasingly important to gaining competitive advantage, players will increase their global footprints – especially for low-volume projects in high-value segments such as infrastructure – although the Covid-19 pandemic might slow down this development.

While sustainability is an important decision factor already, we are only at the very beginning of an increasingly rapid development. Beyond the carbon-abatement discussions, physical climate risks grow as the scale increases. Companies will need to consider the environmental impact when sourcing materials, manufacturing will become more sustainable (for example, using electric machinery), and supply chains will be optimised for sustainability as well as resilience. In addition, working environments will need to radically change from hostile to non-hostile, making construction safer. Water consumption, dust, noise, and waste are also critical factors.

The construction process is expected to undertake a radical shift toward an industrialised setup by moving from a project-based to a product-based approach. The current complex and fragmented construction ecosystem will transition to a more standardised, consolidated, and integrated construction process. Not all parts of the construction industry will be equally affected by the shifts.