Why the Construction Industry Needs to Innovate 1

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Friday, July 3rd, 2015
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Business leaders are constantly told that innovation is ‘essential’ to business growth, competitiveness and productivity in a world of increasing competition and depleting natural resources.

A recent McKell Institute Report declared that firms must “innovate or perish” and that executives are faced with a fundamental choice. They can either take “the ‘low-road’ of narrow cost-cutting and an unwinnable ‘race to the bottom’ or they can take the ‘high road’ of innovation to position themselves at the top of the value chain in an increasingly knowledge-based economy.

These claims are backed up by evidence which shows that innovative businesses are twice as likely to report increased productivity compared with businesses that don’t innovate. And this reaffirms other research by influential organisations such as the Grattan Institute which has identified a lack of innovation as a key area of reform needed to raise national productivity performance.

Innovation will allow us to continue our unprecedented 23 years of continuous economic growth and prosperity, only matched by one other advanced country – the Netherlands, which experienced 27 years of uninterrupted growth between 1981 and 2008. While this still may be the envy of many developed nations, we cannot afford to be complacent. The Business Council Of Australia has long argued that Australia has taken its eye off the ball, and there is worrying evidence that we are moving in the opposite direction and not innovating as fast as our competitors. During the 1990s, due to numerous economic reforms, Australia’s productivity grew at an average of 2.2 per cent annually, but during the 2000s it slowed to 1.5 per cent.

How is Australia’s construction and engineering industry doing? A recent CEO forum for construction at UNSW shows that its performance reflects this malaise with a comparative analysis of international productivity and cost performance data suggesting we may have lost our international competitive advantage over last decade. Other countries’ construction industries appear to have a much stronger sense of vision, leadership, vitality and appetite for innovation and continuous improvement. Australia and its construction industry needs to improve its innovation record,. Otherwise, we will be left behind.

Innovation is one of the latest management buzzwords that it used by many but understood by few. In simple terms, innovation is the process of bringing new creative ideas to reality, in an attempt to take advantage of what might lie over the horizon or to create an entirely new future which no one else had imagined. The iPad is perhaps the most vivid example of disruptive innovation in recent times and the rewards to those who can create them are enormous. Apple’s share price has risen 23,639 per cent from its first trading day and made history recently by being the first company in history to reach a market capitalisation of US$710 billion, more than double that of its rival Microsoft.

However, history shows us that we are constantly caught-out by the future. Predictions of the paperless office, personal jetpacks and holidays to the moon are just a few examples of many wide-eyed predictions which have been proven to be completely wrong, even by the greatest thinkers of our time.

Although our attempts to predict the future often fail, it doesn’t make crystal ball gazing worthless. History also tells us that businesses which attempt to anticipate, understand and organise for the future will tend to succeed, no matter how far from the truth their predictions were. Thinking about the future allows firms to capitalise on future potential opportunities, even if they may be different to those anticipated.

Below are a few selected insights into many over-the-horizon trends that may affect companies that operate in the construction industry in the future.

Political and economic trends

The International Monetary Fund (IMF) recently pointed to two profound changes taking place in global politics and economics. First, political and economic power has been moving inexorably east. Second, we are in a prolonged period of economic instability brought about by an increasingly interconnected world.

Many people in the Australian construction industry have never experienced a serious economic downturn, creating institutional blind spots and poor preparedness for such an eventuality. Furthermore, while Western Europe and the United States have dominated political and economic agendas for the last century, over the next 20 years the emerging E7 countries (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) are expected to grow by 50 per cent more than the current G7 countries (US, Japan, German, UK, France, Italy and Canada). Other countries with high growth potential rates into the future include South Africa, Nigeria, Philippines, Bangladesh, Saudi Arabia, Malaysia, Thailand, Pakistan and Iran.

These global shifts in economic prosperity and power present many risks and opportunities for the Australian construction industry, for which many are not prepared. As we have seen in recent months, overseas construction firms are increasingly active in the Australian market, competing for projects and acquiring local businesses. They are bringing their clients, innovations and supply chains and the government is encouraging this in an attempt to improve what they have long seen as a problematic, low innovation and low productivity Australian construction sector.

To thrive in this new world, it is critical that Australian business see themselves as regional rather than domestic players and be adaptable, flexible, resilient and creative in their thinking. New relationships, knowledge and skills will need to be developed. We will need to hunt as a pack and be as ambitious as our overseas counterparts in exploring the new opportunities this brings.

Technology

IBM’s CEO Inni Rometty said history has produced only three computing eras. The first era during the 1950s produced machines that could count, tabulate and calculate. The second era of ‘programmable computers’ which started in the 1960s continues to this day. The next ‘cognitive era’ will produce machines that understand language and generate hypotheses to learn, refine and perfect their responses over time.

The predictive capabilities of this new technology coupled with the large amounts of data now available through ‘the internet of things’ will transform business. Not only will it allows firms to effectively manage ‘big data’ in a way that they could previously never do, but it will also open the way for a new generation of robots which will act like ‘virtual humans’ serving as customer support slaves which can engage in real conversations with customers, through analysing conversation patterns and the context and profile of the person they are interacting with. It is estimated by some that in 50 years, 30 per cent of the working population will be made up of these robots. They are reliable, they don’t complain, they don’t ask for wage rises and they don’t get ill!

How this new technology will affect construction is largely unknown. However, we do know that construction has always lagged behind other industries in this area. This is despite evidence that productivity increases of between 30 to 40 per cent could be achieved by the adoption of these new technologies. Some of the more immediate technologies on the horizon which are promising to transform the construction industry include new smart, super-strong and sustainable materials, new energy technologies, GPS, BIM, virtual and augmented reality, robotics, 3D printing, wireless, ultra-mobile, wearable computers and new touchscreen APPs.

While we must clearly be aware of the many risks of new technology (obsolescence, cost, security, integration, skills and training and so on) recent research shows that existing skill levels in the construction industry are not advancing fast enough to use this new technology, that there are problems of synergies and interoperability with existing technologies and that work processes have been slow to change to accommodate them.

Social and ecological trends

The Federal Government’s recent Intergenerational Report anticipated that at current rates of migration, Australia’s population will grow from about 22 million in 2009 to 36 million in 2050. The population is also aging with the proportion of the population aged 65 years projected to rise from around 12 per cent today to 25 per cent by the year 2051 as the peak of the baby-boom generation reaches retirement age. The proportion of people of working age will also reduce by 50 per cent over this period, and improvements in healthcare and changes in attitudes towards retirement will also mean that a larger number of older workers will be engaged in the workforce.

These demographic changes will have profound implications for the make-up of the construction workforce and way in which we manage human resources. They are already starting to happen as companies are forced to look for new non-traditional sources of labour to fill the void, such as migrants, women and the disabled. While migrants are well represented in construction for many reasons, women have fallen from 17 per cent of the Australian construction workforce in 2006 to just 11.6 per cent in 2012, the lowest of any industry. The disabled are even less represented.

Increased urbanisation and population growth will also place greater stress on our energy supply, natural and human resources and infrastructure (hospitals, roads, ports, rail, energy and water). This will be exacerbated by climate change and an increasingly educated, informed and empowered community who expected the construction industry to protect the communities and environments in which it builds.

Vast quantities of carbon emissions are generated by the construction production process, by the resources and materials used during construction and in the electricity and transport required to enable buildings to function. Melbourne has set out plans to be carbon neutral by 2020 and new skills, materials, designs and technologies will be needed to address these challenges in the future. Prices of carbon rich materials and processes will also rise and with estimates of up to 80 per cent of a firm’s carbon footprint imbedded in its supply chain, large companies are already putting pressure on their suppliers to reduce carbon footprints and emissions.

Many of the challenges are clear. It’s up to us to innovate to meet these challenges head-on.

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  1. Paul

    Your article is absolutely spot on Martin and you have raised some fundamental issues. European construction companies and in particular the UK ones started Innovating with Offsite nearly 20 years ago, and the ones that came through the recession in Europe the strongest are the ones that embraced Offsite. They seen the efficiencies that came with offsite. Factory operatives are 250% more efficient that site based ones. They also learned that if they did not become more productive others may take their marketshare who were, and from not just inside the UK but from other countries as well. 50% of the bathroom pods used in the UK are manufactured outside the UK, some 20,000 a year. Many European contractors see the USA and Australia as target markets for their expansion and bringing with them Offsite skills learned over the years.
    Thanks for the article.