The construction and building technology industry is a major force in the global economy and it will continue to be a critical sector as the world navigates through the coronavirus pandemic and emerges into the next normal. In addition to accounting for 14 percent of global GDP, it also fuels broader economic growth and drives employment. Across construction’s residential, commercial, infrastructure, and industrial asset classes, expenditures are tied to basic materials, construction machinery, advanced lighting and cooling systems, building maintenance, and much more.
Despite its significance, the construction and building technology industry showed relatively weak performance from 2002 to 2018. As a whole, companies within the industry trailed the S&P 500 during that period in return on invested capital (ROIC) and profit margins based on earnings before interest, taxes, depreciation, and amortization (EBITDA) (Exhibit 1). Recovery and value creation have been slow, even after the 2008 financial crisis, because of high fragmentation and slow adoption of technology. Low productivity is also a factor. In other industries, including agriculture, manufacturing, and mining, productivity has as increased since 1990. In construction, by contrast, productivity dropped.
Despite the industry’s struggle with value creation, there were some strong performers that managed to achieve good returns. Our analysis of more than 1,000 global construction and building technology companies over 16 years reveals that companies that rose to the top quartile based on ROIC, which we termed leaders, outperformed other companies, including laggards that remained in or dropped to the bottom quartiles over time, by assembling a playbook of four imperatives:
- achieving higher quality of revenue by focusing on the uniqueness of their offerings and their positioning with customers
- aggressively pursuing margin through a relentless focus on efficient profit-revenue spread and operating leverage
- leveraging M&A more actively to enter new markets or build scale in core markets
- increasing free-cash-flow by systematically driving down the cash-conversion cycle
Leaders tended to increase their advantage over time, with those outperforming the pack in the early 2000s having an even greater edge from 2013 through 2018 (Exhibit 2). If current players emulate these moves, they may also position themselves for long-term success.
In addition to looking at performance, we also attempted to identify recent trends that could enhance performance within the construction and building technology industry. Our research suggested that five shifts were critical to healthy growth through 2019, including rapid urbanization, greater “green” building activity, automation of buildings, increased use of technology to improve operational efficiency, and the creation of integrated offerings, new channels, and innovative pricing models. Before the coronavirus pandemic, which has already decreased productivity and created economic global turmoil, our estimates suggested these trends could help construction-related spending grow 3.5 percent per year over the next ten years, a compound annual growth rate that would enable it to reach $5 trillion by the end of that period.
Is the industry well positioned to capture this growth via the opportunities presented by the trends? The answer will vary based upon the starting point of the companies. For laggards, it is imperative to focus first on closing the performance gap with leaders. To do so, they must keep a strong focus on adopting and executing on the winning playbook of leaders.
For leaders to thrive in the future, they would need to enhance their traditional playbook by considering industry trends that might create opportunities. The playbook would describe:
- new business models and product innovations that deliver greater growth in quality of revenue
- next-generation technologies for operational improvements
- using programmatic M&A to enhance digital and product capabilities
- using digital tools to reduce product uncertainty and increase working capital
As companies move ahead, speed will be essential. In the past, more than four in ten successful players achieved 60 percent of their margin expansion in less than two years. Significantly, companies that move quickly to double down on margin growth, tech-enabled efficiency improvements, and flexible operations will have the edge. An accelerated performance transformation may be the best way to achieve rapid results.
For more information on the construction and building technology industry, including performance-improvement strategies and future trends, download our report, Construction and building technology: Poised for a breakthrough?