A Framework to Prioritise the Right Trends in a Changing Construction and Building Materials Sector

Executives within the sector are being asked to accommodate a broad range of changes in their business strategies, including improvements in material characteristics, increases in digital engagement, new methods of installation and adaptive supply chain processes. These are changing the speed of construction, the performance of the end product and the efficiency of business models. The sheer number and range of these trends make the collective impact incredibly broad and disruptive, but not all will have lasting impact on the organisation. Some may be delayed by the COVID-19 crisis, while others will surge ahead at an even greater rate. It is crucial for organisations to understand which of these trends will affect their business and in what time frame. Companies that ignore the changes around them and do not evolve are at risk of disintermediation by innovative businesses, loss of advantage in cost position or wholesale change to the business model.

However, it can be difficult for organisations to determine where to focus their attention given the volume of changes afoot. Through recent work within the construction sector, primarily in Australia, Europe and the U.S., we have identified six macro themes with global relevance and reach, underpinned by 25 trends that have specific implications for participants. Recognising that organisations have finite resources to respond to their external market, L.E.K. Consulting has developed a prioritisation framework that supports executive teams across the construction value chain and in any jurisdiction, to select the most important trends for their business and to provide confidence on where they should commit their resources in the future.

What are the key trends driving the construction industry?

The global economy has undertaken massive development in the past 30 years, and the drivers that have changed our world are continuing to have an impact. In conjunction with a global population that has grown by nearly 50%, we have seen an increase in the basic wage for many countries, a significant reduction in interest rates leading to a disproportionate appreciation of real estate assets relative to financial ones, increasing awareness of the limitations of our planet’s natural resources, a step change in global expectations for managing the health and safety of workers, and revolutionary advances in technology. The expectations and habits of our populations today are fundamentally different from what they were, and they will continue to adapt in the future.

These global changes are expected to have an increasingly significant impact on the construction sector, and L.E.K. has identified 25 unique trends in the construction sector across its full value chain. While each on its own has the potential to disrupt individual firms within the value chain, the breadth and co-ordination of trends introduces an increased level of complexity for firms in the sector. These trends can be aggregated into six macro themes that span social and environmental trends, material and processes innovation, and the digitisation of business models. Figure 1 details this hierarchy.

Each of these trends shows existing signs of development, but the rate of change, jurisdictions of focus and expectations for the future differ markedly.

Demographic shifts

According to the UN, the proportion of world population over 65 years old is rising and will reach an expected 9.7% by 2050. However, this figure hides a number of societies where the proportion is already markedly higher and will continue to be so (e.g. 18% of the UK population is over 65¹ and 20% of the Thai population will be over 60 by 2021²). An older population underpins significant spend in aged care facilities and co-living arrangements, but it also impacts average workforce age and availability. In Australia, retirement village units grew at c.12% p.a. between 2012 and 2014 and are expected to double in number between 2015 and 2025³.

Demographic shifts impacting the rising cost of housing relative to income (for instance in the US., where the median home price was unaffordable for the average wage earner in 66% of counties in Q1 2020⁴) will drive demand for lower-cost materials and affordable housing. In Malaysia, the national government intends to build 1 million affordable homes in the next 10 years under the PR1MA programme. Build-to-rent business models will also be increasingly incorporated into government policy. The UK government introduced its build-to-rent initiative in 2012 to combat its housing crisis, using government funding to support the development of large housing projects built specifically for renting⁵.

Housing costs will also support the demand for multi-residential and community living, and we are starting to see rapid changes in government policy in some markets (e.g. new rent controls and associated implications in multiple markets).

Environmental protection

Consumers increasingly are environmentally conscious and demand products and services that consider resource scarcity, although the level and pace of the change varies by end market. For instance, a 2019 survey found that c.78% of Australians were concerned about climate change, up by 12% from 2014⁶. And a recent report from the Asian Development Bank estimated that climate change could shave off 11% of the Gross Domestic Product in South East Asia by the end of the century⁷.

For products such as cement, which contribute almost 8% of global greenhouse gas emissions⁸, companies are responding to consumer demands through the use of alternative cementitious products (such as blast furnace slag, fly ash and pozzolan materials). Further, they are reducing primary energy consumption through the use of waste products (such as car tyres). Recycled materials, such as railway sleepers, are becoming increasingly adopted, and government policy continues to increase the requirement for energy efficiency in buildings. This is a significant opportunity given that the buildings sector accounts for 36% of global final energy use⁹.

Water can be both a scarcity issue and a quality issue, depending on the jurisdiction. Further, consumers care about the scarcity and quality of water; c.87% of US consumers said clean drinking water is very important to them¹⁰, resulting in government action such as the inclusion of water conservation in California’s Building Efficiency Energy Standards. This measure alone has led to a step change in requirements for companies and illustrates how change can suddenly accelerate.

Health and safety regulation

Societies are becoming less tolerant of risks to the health and safety of workers and consumers. An increasing focus on the safety of building materials for residents has led to a shift away from certain products, such as use of volatile organic compounds. Similarly, there is greater attention towards the safety of workers. For example, Safe Work Australia has set a specific target of a 20% reduction in the number of worker fatalities due to injuries to be achieved by 2022¹¹, which has implications for how construction projects are managed and the products and training that are required. While enhanced safety has usually been about continuous change, step changes in regulations such as these can require building products companies to make more rapid changes.

Materials/product innovation

The rising cost of housing and an increasingly competitive building materials industry have driven significant materials and product innovation as companies seek more cost-effective materials to gain a competitive edge. As an illustration, the global market for engineered wood, which saves cost and time compared with traditional materials, is forecast to grow at c.25% p.a. to $41 billion by 2022¹². Further, customer demands are driving greater customisation and are enhancing the relative importance of key categories. For instance, in recent years there has been a greater focus on outdoor living. Finally, innovation in building design and construction is delivering additional utility and features for end users (e.g. technology integrated into products), with a potential to change the frame of competition for some product categories (e.g. adoption of rooftop solar changing the roof purchase decision). As innovations occur in sensors, voice recognition and drones, there will be implications for construction in areas such as the adoption of technology in kitchen appliances and drones detecting deterioration in external building products, with potential flow-on to areas such as product warranty.

Modernisation of construction supply chain

For many years, industry players sought to reduce costs and minimise rework through building information management (BIM) systems. Recently, industry participants have been increasingly leveraging technology to reduce costs and/or address skilled labour shortages. Builders are expanding ways to conduct more processes off-site, with prefabricated construction components or through modular and semi-modular construction. The global modular construction market is projected to grow from c.$92 billion in 2018 to c.$130 billion by 2023, at a CAGR of ~7%¹³. Although at an early stage, automation of construction methods is being developed, and the global construction robots market is expected to increase from $60 million in 2017 to $166 million in 2023¹⁴. Above all, trade tensions and the ongoing impact of COVID-19 are forcing manufacturers, distributors and builders to determine how to optimise their supply chains, which have become truly global.

Digitalisation

Digitalisation has changed many interactions, and the manufacturer/contractor relationship is no exception. A recent L.E.K. survey found that 74% of contractors access manufacturer websites directly. Contractors are also exploring online marketplaces, and the same survey found 42% of US residential contractors use online-only retail sites. Other models have emerged to serve the digital contractor, such as small format stores that are integrated with ecommerce (e.g. Fastenal, an industrial distributer, has 65% of its national account customers use its ecommerce services¹⁵). Consumers are interacting digitally with manufacturers and are engaging with online content, increasing the portion of DIY sales. Manufacturers are also applying digitalisation to their own operations through automation and digitisation in design and manufacturing. Virtual reality/visualisation, 3D printing technology and other automated processes are being introduced within the manufacturing process. For instance, WinSun in China built ten 200-square-metre houses in a day by using an industrial-scale 3D printing machine to print walls in a factory for assembly on-site¹⁶.

Seeking the insight among the noise

It is obvious from the short discourse above that the potential disruptive change is both broad and deep, and participants in the construction sector need to be selective in the way they respond to the largest potential changes in their markets. The global trends have influence in many markets, but their importance to each individual company will vary, in some cases having a transformative effect and in other cases being less relevant. These trends may also impact several parts of an organisation — and so while the operations team is busy managing a loss of cost advantage, the marketing team may be completely overwhelmed by the sustainability needs of their customers. This matrix of impacts creates challenges in identifying and then responding to the most critical trends across business units and/or geographies.

To support executives, L.E.K. has developed a prioritisation framework (Figure 2) as a means of focusing the organisation’s resources and then developing the appropriate response to the most critical trends that shape the market for each participant.

Executives across the value chain in the construction sector should ask themselves three key questions in order to identify the key trends and build the optimal strategic response.

• Is the trend meaningful and relevant within the environment where my business participates?

Not all trends will be meaningful in all geographies. The impacts of each trend will be different depending on market value chain dynamics, competitive intensity, regulatory environment and other barriers to change, and possibly even regional endowment of specific resources. It is key for executives to consider the risk of a trend becoming a reality in their local market.

• Does the style, scale and expected timing of change create an urgency for response?

Executives will want to get ahead of any situation where an urgent response is required against a trend that has created a large-value, step-change disruption in their market. Executives should therefore look to understand how and when each relevant trend will impact their market. Some trends will evolve slowly and response can be incremental, while others will create step changes in business model or customer offer, creating first mover advantage for innovative companies. The timing of that change will differ for each trend in a geography, and an assessment of the drivers of and barriers to growth is critical to determine the likely time of impact. Finally, the scale of impact will be different by geography, and identifying those trends with the highest likely impact will ensure effective prioritisation.

• Are there sizeable value creation opportunities available for either offensive or defensive response?

In most cases, executives have two broad options in responding to each trend, depending on their existing strategic positioning: seek to benefit from opportunities within new profit pools, or defend the status quo. Both can impact future profitability. And while the participation itself is important, an assessment of the offensive or defensive value to be gained, capabilities required for, and risks of implementation is also required before a company can embark on determining a strategic agenda in response to the priority trends.

By honestly and proactively assessing their specific organisation against the 25 trends identified, companies give themselves the best chance of finding the most important trends likely to impact their sector in the medium term. Not only can companies then seek profitable growth over that time horizon, but they also can avoid the need to defend their turf against a fast-moving competitor. With the key trends identified, companies can develop the detailed action plan that ensures an effective response to their potential future environments and then delegate accountability to the most suitable teams for executing the new strategy.

The value of swift and effective action

Executive teams that respond to these globally significant trends in an incremental fashion, preferring to maintain a broadly status quo strategy in the face of potential market disruption, risk the competitive positions that they currently enjoy. While many trends will be incremental for some sectors, proactive assessment of those that may quickly accelerate or create larger impact on the organisation will allow the organisation to both prepare for and take advantage of the opportunities presented.

For instance, housing affordability, after being a ‘slow burn’ issue in many markets for a decade or more, has had some sudden government action, such as statewide rent controls in New York and California. Other examples include innovative major building developments that have been required to devote a portion of units to affordable housing, such as build-to-rent initiatives in the UK and Kiwibuild in New Zealand. Similarly, innovation in building products has been forced to accelerate to match customer needs and expectations. For example, flat pack kitchens are a disruptive product that offers a lower-cost, quick-to-install alternative to custom-made kitchens. They have achieved high market share in Europe, with almost half of kitchen renovations in Denmark and Sweden using flat pack kitchen cabinets²¹. The COVID-19 pandemic is expected by some commentators to accelerate outdoor living (for instance, IHS Markit estimates that lawn and garden may be one of the few categories to experience any real growth in 2020).

Given the speed at which the world is changing, investments and actions required to address trends need to be taken in advance to ensure that the customer proposition, key organizational capabilities and new business structures can be implemented before the trend becomes most apparent. Organisations that can successfully prioritise their activity towards the trends of greatest opportunity (and risk) should find themselves best able to secure future profits and competitive position in their markets.

Conclusion

The building materials industry is complex, with an ever-changing landscape. L.E.K.’s construction trend prioritisation framework offers a structured approach for organisations to quickly identify the most important trends in their local jurisdiction and build a strategic response that provides the best chance for profit growth in the medium term.

Executives who can quickly identify the most important trends, build the required capability to address them and offer distinctive value propositions to customers will fend off disruption to ensure they continue to win in their market.

Endnotes
¹UK Office of National Statistics, Principal projection — UK population in age groups, October 2019
²Thailand NESDC, The Twelfth National Economic And Social Development Plan (2017-2021), January 2017
³Property Council of Australia, National overview of the retirement village sector, October 2014
⁴ATTOM Data Solutions, US Home Affordability report, March 2020
⁵The Telegraph UK, The dawn of a build-to-rent revolution, October 2017
⁶Roy Morgan, Press Release Special Poll: Finding No. 8145, September 2019
⁷IMF, Finance & Development, vol. 55, no. 3, September 2018
⁸Chatham House Royal Institute of International Affairs, Making Concrete Change — innovation in Low-carbon Cement and Concrete, June 2018
9UN Environment Programme, 2019 Global status Report for Buildings and Construction, December 2019
¹⁰Nestle, Perspectives on water survey, August 2018
¹¹Safe Work Australia, Australian Work Health and Safety Strategy 2012-2022, April 2018
¹²Allied market research, Global Engineered Wood Market opportunities and forecasts 2014-2022, January 2017
¹³MarketsandMarkets, Modular construction market by type — global forecast to 2023, August 2018
¹⁴MarketsandMarkets, Construction robot market by type and geography — global forecast to 2023, May 2018
¹⁵Fastenal, Annual report, February 2020
¹⁶BBC News, The country building a ‘new London’ every year, June 2020
¹⁷IBISWorld, Prefabricated home manufacturing industry in the US — market research report, March 2020
¹⁸L.E.K. analysis
¹⁹Japan Prefabricated Construction Suppliers and Manufacturers Association; Planetzen, “Lessons on the Future of Prefab Housing from Japan”, November 2017
²⁰World Green Building Council, World green building trends 2018, November 2018
²¹Houzz, Overview of Kitchen Trends in 2017-2018, January 2018