Clemson professor Dennis Bausman reported in an NCS Radio interview that contractors with a strategic plan were 35 percent more profitable than those without one. Despite that fact, he found that 25 percent of contractors doing more than $50 million in volume a year did not have a strategic plan. To listen to the entire interview go to ow.ly/t5MUO.
Just as important as having a strategic plan is having the right one. Unfortunately, contractors’ poor strategic planning has contributed to an industry that has consistently underperformed financially. For example, in 2007 the Construction Financial Management Association reported that the average after-tax profit margin for contractors was 1.8 percent compared to 5.5 percent for other industries. In 2006 Ken Simonson, AGC’s chief economist, reported that 40 percent of contractors didn’t make a profit and that the construction industry had the second highest failure and bankruptcy rates of all industries. These two years are significant because they were in the midst of a construction boom.
Based on the evidence, too many contractors don’t have a good strategic plan. The result is they end up fighting over price. Sun Tzu wrote in the Art of War, “Those skilled in war subdue the enemy’s army without fighting. Their aim must be to take all under heaven intact through strategic superiority.” So if you are forced to compete on price, then it might be a safe assumption you don’t have a superior strategy.
For contractors to create a superior strategy that allows them to compete profitably in the today’s hypercompetitive construction industry, they must learn how to outthink their competitors instead of attempting to outmuscle them in a price war. Contractors must understand that to reach their financial potential, they must compete on value instead of price regardless of the delivery method. Of course there are more opportunities to compete on value in a negotiated environment, but even in the design-bid-build arena, contractors can learn how to outthink their competitors to compete on value.
Design-bid-build contractors must develop a strategy that allows them to deliver a product at a lower cost, not simply a lower price. When contractors can lower their costs, they are able to lower their prices without lowering their profit margins. Unfortunately too many contractors merely lower the price without lowering the cost to win the bid. This strategy has resulted in declining profit margins for the entire industry. However, contractors that develop a superior strategy are able to make profit margins above the industry average and sometimes even significantly above the average.
The question then becomes, How does a contractor create a superior strategy? It requires strategic thinking because otherwise our strategic plans tend to be a retread of an early plan. Think of the old saw regarding the definition of insanity: “Doing the same thing over and over and expecting different results.” In the book Strategic Thinking, I defined strategic thinking as follows:
“Strategic thinking is an intensified exploration of strategy from new directions that create new concepts. It’s a thinking process, an exploration process, and a discovery process.”
Strategic thinking is not just used to develop a company’s strategic plan. It also enables contractor to better plan their projects and solve problems. A mechanical contractor who used strategic thinking to revise its business plan was able to increase its profit margin by 4 percent. An electrical contractor used it to improve its project planning, and that resulted in a 30 percent reduction in labor costs. How can you afford not to improve your strategic thinking?
However, effective strategic thinking offers much more:
- It enables everyone in the company to not only understand the company’s current strategy but also to buy into it.
- It makes the company more flexible and responsive to the rapidly changing market conditions.
- It helps to inspire people to take initiative and respond in an empowered manner.
- It creates an environment where it’s easier to hold on to key people after investing time and money in their development.
- It helps develop your future leaders, so they will be available when you need them.
However, for a strategic thinking initiative to consistently produce outstanding results, a system is required. In my book Strategic Thinking, I explore a five-step system that when followed can produce outstanding results:
- Get the right people involved. Jim Collins refers to this as getting the right people on the bus in the right seats.
- Define the problem. Neglecting to clearly define the problem is the number one reason for project failure and lack of success.
- Develop possible solutions. One should develop as many possible solutions as one can come up with to ensure the best solution is uncovered. A common mistake is to stop searching for solutions as soon as one possible solution is revealed. Of course, if it were that easy, it would already have been solved.
- Identify the right solution. Once all the possible solutions have been identified, then the various ideas can be examined to determine the one with the greatest potential.
- Execute the strategy. If the idea is not put into action, nothing is accomplished.
If you want to learn how you or your organization can improve your strategic thinking, it is suggested that you read Strategic Thinking by Ted Garrison. The book’s executive summary is available for free, and you may order and download the book at: ow.ly/sLi8i.
by TED GARRISON
Ted Garrison, president of Garrison Associates, is a catalyst for change. As a consultant, author and speaker he provides breakthrough strategies for the construction industry by focusing on critical issues in leadership, project management, strategic thinking, strategic alliances and marketing. Contact Ted at 800-861-0874 or [email protected]dGarrison.com. Further information can be found at www.TedGarrison.com.