Our industry has been disrupted. The extent of the impact of COVID-19 will not be known for some time, but one thing is certain; the construction business will not be as usual. Finding the elusive strategic balance for leading your company and structuring for success is essential.
As leaders we must adapt and adjust. The firms that are agile and embrace change will be the most resilient and emerge the strongest. Leaders of construction firms need to take this opportunity to pause and reflect on their business. We all have reacted and addressed social distancing, safety and productivity, but we must consider how our business needs to adapt. During the next several months, we are going to be faced with considerable societal, economic and political change.
For many, preservation and sustainability will be key to surviving. For others, focusing on opportunities and growth will be the key to thriving. How we approach the next several months will help define our companies for the next several years and even longer.
While most of us have not faced a global pandemic in our lifetime, history can be a guide for us. The U.S. economy has endured economic pressures, significant downturns, and recessions.
Following economists and reading industry publications from ENR and GroundBreak Carolinas can provide some insight into how our industry is being impacted, but nothing can provide a certain foundation upon which a strategy can be built. However, by developing an agile approach, construction companies can emerge stronger than ever.
Developing scenarios for how your firm will respond to different economic scenarios will help define your business approach. Scenario planning should consider various trajectories for your key market segments and clients. The analysis should apply a lens that addresses how the depth and length of an economic downturn will impact specific market segments and clients.
With history as a guide, we can see that firms that were aggressive during previous recessions emerged stronger, and companies that cut faced long-term declines. In Roaring Out of A Recession, which appeared in Harvard Business Review (HBR) Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen did a study focused on how companies reacted during a recession. While this research is a decade old, its findings are still relevant today.
Seventeen percent of the companies didn’t survive a recession and went bankrupt, were acquired, or became private. Other survivors were slow to recover as 80% did not regain their pre-recession growth rates for sales and profits three years after a recession. Only a small 9% of the companies flourished after a downturn – many outperforming their competitors by at least 10% in sales and profits growth. So why did these companies’ results differ? More importantly, what did the 9% of companies do that enabled them to thrive and out perform their competitors?
The Harvard researchers classified companies into the following four categories:
Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
Promotion-focused companies, which invest more in offensive moves that provide more upside benefits than their peers do.
Pragmatic companies, which combine defensive and offensive moves.
Progressive companies, which deploy the optimal combination of defense and offense.
Gulati, Nohria, and Wohlgezogen determined that few prevention-focused companies did well after a recession. In fact, they significantly trailed other companies. Companies that focused on promotion aggressively pursued competitors’ clients, made strategic hires, and didn’t address their costs. While these companies did perform better, some were blindsided by balloted cost structures.
Pragmatic and progressive companies outperformed their peers by achieving the elusive balance. Pragmatic companies realized that cost cutting was necessary to survive a recession, and investment is equally essential to spur growth. The companies that managed both at the same time emerged as post-recession leaders.
So how does a company achieve that elusive balance?
As Gulati, Nohria and Wohlgezogen noted, many companies implement aggressive cost and staff reduction plans to survive a recession. But companies that focused on improving operational efficiency performed better than those that focused on reducing the number of employees. The researchers noted that employees at these companies appreciated management’s commitment to them, and they were more creative in reducing costs as a result.
Progressive companies also focused on their clients’ needs and invested in key assets, including acquisitions, equipment, people and marketing. While these investments may only have provided modest benefits during the recession, they added significantly to sales and profit growth after the recession.
There have been over 30 recessions since 1854, and the average recession lasted 10 months. While each economic downturn was unique, there was one thing in common – they all ended. So the question remains, where will you be when this disruption ends?
Brian Gallagher, CPSM, has served in strategic, marketing, sales and technology leadership positions with architecture, engineering and construction organizations. His current role is Vice President, Corporate Development for Graycor. Gallagher holds a bachelor’s degree in Marketing from Towson University and an M.B.A. from Loyola College. He also has served as an Adjunct Professor at Loyola College. He’s a certified John Maxwell speaker and coach. He has served in leadership roles for the Associated Builders and Contractors (ABC), the American Concrete Institute (ACI), the Concrete Industry Management (CIM) Program.