By: Kay Plantes
A compelling example from the commercial construction industry showcases the power of business model innovation to transform your business.
With the construction market likely to slow down in the next year or two, Finfrock Industries, a construction market subcontractor, wanted to win work on a large office park development in Orlando, Florida. The Orlando company makes custom-engineered precast-prestressed concrete components – akin to the Lego™ blocks of commercial construction.
Finfrock called on the developer’s project manager, showing how Finfrock could pull months and millions of dollars out of the project by building in precast rather than the solution the project architect had proposed. The developer was ecstatic – less time and less cost spelled higher project ROI. The sales team left the meeting certain that Finfrock would be sole-sourced.
Two weeks later, however the project general contractor’s bid documents were in Finfrock’s mailbox, with a stapled copy of the drawing Finfrock had shared during the sales call. Finfrock’s CEO was livid – not at the sales team, but at himself. “We just made this developer millions more in profits and we’re not going to get paid one more penny for all our knowledge. We’ve let our company get commoditized!”
- The CEO did not do what most CEOs and leadership teams do when revenue and profits fall short of goals:
- Reduce costs. Finfrock was already highly efficient and had no desire to move engineering to India.
- Create a new product. There were few unmet needs in this mature industry.
- Disrupt the industry. New entrants had already created a low-cost on-site version of precast for simple jobs called tilt-up.
- Push sales by increasing the forecast. Finfrock knew he already had a strong sales team doing their best.
- Consolidate the industry. For Finfrock to pursue this strategy, outside equity investment was needed. The CEO wanted to pass the company onto his sons, so he was unwilling to give up 100% control.
Instead, Finfrock decided to reinvent his business model. The business model describes how a company will deliver value to a group of customers and at the same time earn an attractive profit for itself. Finfrock’s business model was not unlike that of his competitors, selling components to general contractors. As a high-quality precaster, Finfrock was selected based on “least risk” at a competitive price. Finfrock made its profits largely in strong markets when demand outstripped supply, driving up prices.
Finfrock’s CEO decided that the larger risk was sticking with a broken business model. The company now sells to owners and developers as a design-build contractor vertically integrated into precast. Its value promise is faster completion, less schedule risk and more money left over for design features, all of which increase ROI to building projects. Finfrock’s revenue increased over twenty-fold with an even greater percentage gain in operating profits.
The insight to change the business model came from recognizing that Finfrock could pull enormous time out of a building project if only it (versus the architect and general contractor) could control a project’s design and schedule. In what they viewed as an idealized world, they would create simplified ways of dealing with the subcontractors (plumbers, electricians and heating-ventilation-air conditioning) whose work is highly interdependent with the structure. This control would pull time, schedule risk and cost out of a building project.
Finfrock’s new business model is hard to copy. While there are virtual design-build teams, none will have the close alignment of sales representatives, internal architects, engineers, precast manufacturing leaders and construction project managers, all focused on pulling time and cost out of a building project.
The company has added new business models as well. It still sells to large general contractors, completing parts of large developments (e.g., all the parking decks). Its software system to streamline design and project management is now sold to other builders. A new licensable building component is in development; once Finfrock started doing entire projects, it saw ways to fundamentally improve precast.
The basis of competition is moving to business models. Are your innovation skills prepared?
About the author
MIT-trained economist Kay Plantes is a strategy consultant and author of Beyond Price: Differentiate Your Company in Ways that Really Matter (Greenleaf Book Group, 2009). She writes a blog on business model innovation at plantescompany.com/blog.
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