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Digital Transformation

What can the construction industry learn from disruption in other industries?

Last week, we listed the nine disruptions that, according to McKinsey & Company, will radically change the construction industry over the next five years. This week, we look at how comparable industries have managed those same nine disruptions.

McKinsey & Company
15 July 2020

Construction is not the first industry to encounter disruption across the value chain. McKinsey & Company has analysed shifts in four industries with similar attributes: shipbuilding, commercial aircraft manufacturing, agriculture, and car manufacturing. By studying these industries, clear patterns emerge regarding how the construction industry can prepare for disruption.

Product-based approach

In shipbuilding, commercial aircraft manufacturing, and car manufacturing, players shifted to a product-based approach for which production facilities became assembly sites. The most famous example is Ford’s innovation of the assembly-line manufacturing process for its Model T. Most of the auto-manufacturing industry adopted the process within ten years. In this model, prefabricated and modularised subcomponents are inputs, and ships, airplanes, and cars are outputs. 

While the manufacturing process was significantly standardised, products remained customisable because subcomponents could take various forms and sizes within an industry-wide, standardised framework. When early movers boosted their productivity and profit margins, competitors adopted the innovation over time. Toyota’s lean manufacturing and use of robotics, and further innovations in the assembly-line manufacturing process boosted the company from a small player to one of the largest in the industry. 

Specialisation

As industrialisation started to reform these industries and processes became standardised, companies targeted specific niches and segments (for example, tankers, freight ships, and cruise ships in shipbuilding and budget, luxury, and utility autos in car manufacturing). As a result of this specialisation, players created a competitive advantage by developing knowledge and scale in their market segment. 

Value-chain control and integration with industrial-grade supply chains

As ship, aircraft, and car manufacturing shifted to assembly lines, the supply of critical components was increasingly important. In many cases, those components were the basis of differentiation: in car manufacturing, for example, the quality of engines could be a distinctive factor. Therefore, it was important to control the supply. Vertical integration or partnerships along the value chain were common in each industry. In commercial aircraft manufacturing, engines were, and are, produced by external suppliers but, in order to develop better-quality and more efficient engines than their competitors’, manufacturers hold integrated partnerships in R&D and testing. Also, Boeing recently decided to build the 777X wing internally (formerly outsourced) and has also set up an internal avionics division to reduce reliance on suppliers of navigation, flight controls, and information systems. 

Consolidation

As industrialisation emerged in the four industries, companies started to consolidate in order to gain scale. In agriculture, land reforms in combination with industrialisation (such as standardised seeding and harvesting) resulted in the industry’s transformation from a large set of small and local farms to one dominated by regional and global players. In manufacturing industries, standardisation spurred a large wave of consolidation. In commercial aircraft manufacturing, several companies consolidated into Airbus and Boeing. The defence sector also consolidated over the past 50 years, with several large deals made to align companies’ services and product portfolios. 

Customer-centricity and branding

Following specialisation in end-use segments, companies invested heavily to build strong brands within their market niches and segments. In car manufacturing, brands tell stories that are centred on the customers – and customers let the products shape their lifestyles. Given changes in how consumers acquire and use cars, automakers have emphasised their use of technology and innovation to enhance the customer experience. 

Investment in technologies and facilities

Industrialisation created the need to invest in technology and facilities: manufacturing plants needed to be built, machinery to be acquired. Product and manufacturing innovation became important sources of competitive advantage, which led players to boost R&D spending significantly. In the four comparable industries, greater R&D spending led to short-term gains and advantages for the companies, while customers have benefited over the long term. Consider that the current cost of a car or airplane has changed little in the past ten to 20 years, but both cars and airplanes have significantly more value-adding technologies and other features. The trend has continued with investments by original-equipment manufacturers in the electric-vehicle-battery market – from R&D and packaging to cell production. Volkswagen recently invested in a battery-cell factory that it is developing in partnership with SK Innovation in Germany. It has also struck major supply deals with LG Chem, Samsung and Chinese battery maker CAT. Overall, the company’s ratio of R&D spending to total revenues is now close to 6% compared with an average across the construction sector of less than 2%. 

Indeed, Volkswagen alone invested more than $13 billion in R&D in 2019 – equivalent to the combined amount invested by the 25 largest construction and building materials players, according to the 2019 EU Industrial R&D Investment Scoreboard. And although that level of R&D spending may converge to the current automotive-sector average of almost 5%, it would still represent a significantly higher commitment to R&D than is typical in construction. In sum, across industries, winners continue to heavily invest in technology, many with a focus on digitalisation and data-driven products and services.   

Volkswagen invested more than $13 billion in R&D in 2019 – equivalent to the combined amount invested by the 25 largest construction and building materials players.

Investment in human resources

Employee attraction and retention became a priority when industrialisation affected the four comparable industries at scale. First, players built up their technical knowledge in order to create a competitive advantage. Second, improved production processes have, over time, resulted in a need for constant retraining of the workforce.

Internationalisation

Industrialisation ushered in the standardisation of processes, which was adopted across geographies. Internationalisation enabled companies to expand beyond their borders in pursuit of scale, gave them access to new markets, and resulted in operations cost savings. For example, in an attempt to increase commercial aircraft sales in China and the Mideast, Airbus and Boeing set up local final-assembly lines in China. 

Sustainability

The growing global emphasis on sustainability is being felt across industries. Most notably, automotive has already embarked on a material transformation toward zero-emission vehicles. In Norway, airport operator Avinor and Widerøe Airlines vowed to fully electrify all domestic flights by 2040.