Cost Efficiency as a Strategy
Cost efficiency is the strategic choice for many construction companies. When clients are well aware of what they want, and when there are many rules and regulations guiding the buyer and the seller, competition on price prevails. What strategies are feasible when it comes to price competition?
“Competitive forces are beyond the control of most individual companies and their managers. They’re what you inherit, the reality that you have to deal with.” This quote is from Cynthia A. Montgomery’s The Strategist: Be the Leader Your Business Needs, a book that I can recommend if you are interested in strategic thinking. Montgomery points out that when making strategic decisions you must understand and take into account the competitive forces in the industry. To be successful you must pick playing fields where you can win and position your business to work with, not against, the forces.
Cost efficiency as a strategic choice
Construction companies have several choices for their main strategic driver. They can be customer-oriented, competition-oriented, or resource and skills-oriented. Most construction firms are competition-oriented. As such they can choose one of four competition-oriented drivers:
- Cost efficiency
- Attack, defense, or diversion against the competitors
Most companies in the same market seem to choose cost efficiency as their main strategic driver. This is based on their view of the clients’ priorities. The contractor who gets the job is among the two to three cheapest bidders. Clients often point out that the price is not the determining factor. The contractor’s solution, how it is presented, and its track record are considered. Between equal contractors, the cheapest bid will win
How to be profitably cost efficient
Cost efficiency is one aspect of financial management and business that can become quite confusing. The following simplified diagram demonstrates three positions in the quality/price matrix. Quality in this context denotes the benefits that the customer gets when buying from a company. Higher quality usually means higher price. The dotted line on the chart is the “industry profitability line.” Companies positioned under that line are not operating profitably in the long run.
When analyzing your company’s performance in relation to the competition you could, for example, come to the conclusion that you are at mark A on the chart. B and C are your two main competitors. What choices do you have to improve your situation? Your main choices are:
- Increase your cost efficiency, but offer the same or lower quality or lower price. This increases your profits for the same price, positioning you as a low-cost provider.
- Try to improve the value that your customer perceives with the same cost efficiency. In this case you should be able to offer some benefits that your customers value, for example, faster output or lower risk than the competition. Some companies are able to build an esteemed brand that allows them to charge higher than the industry average.
- Improve both your efficiency and customer benefits. This is a demanding path that requires innovation or quite radical action inside the company.
Ways to boost your company’s efficiency
There are many ways to become cost efficient. Efficiency is a combination of doing more with less. Just paying less to your employees is possibly not a sustainable solution.
An average company spends 55 percent of its revenues on goods and services. In construction that percentage can be well over 70. Being efficient in purchasing and subcontracting can therefore make a considerable effect.
The client-contractor combination affects the cost efficiency of the contractor. Some studies have shown that the profitability of similar types of project varies depending on the client and the contractor’s project manager. Revamping client-contractor relationships and cooperation would be mutually beneficial.
Lean construction – the elimination of process and material waste – is a promising methodology that can increase efficiency once implemented in a systematic manner. Integrated Project Delivery (IPD) has also shown potential for improved process quality and efficiency.
Information management is the common denominator between all the above-mentioned efficiency boosters. BIM and collaborative, networked communication are key ingredients in that respect.
Find your winning combination
There is no silver bullet that alone will make a contractor cost efficient. You’ll need a well-managed combination of tools and techniques. Technology alone will not solve anything. Having the right people doing the things that they love and are enthusiastic about is the secret sauce that will make all the difference.