Digital business models in construction industry

I was interviewed by Aarni Heiskanen for the AEC podcast on the topic of digital business models in the construction industry. Admitting that I know very little about construction, thinking about the business models and changes they may cause in the industry was quite fascinating.

I see business models as a construct of four elements: value proposition, processes, resources and revenue model. Writing a dissertation on business model experimentation I am very well aware that there are multiple interpretations of the concept, the most well known being Alex Osterwalder’s business model canvas with nine elements in it. Other researchers have different definitions, however, and here’s the academic reasoning behind my definition:

The business model has been defined to consist of three core components, resources and components, organizational structure, and propositions for value delivery (Demil & Lecocq 2010); or four elements: a customer value proposition, a profit formula, key resources and key processes (Casadesus-Masanell & Ricart 2011); and four interlocking dimensions: customer value proposition, the profit formula, key resources and key processes (Johnson, Christensen and Kagermann 2008). The business model answers to the following questions: who is the customer, what does the customer value, how do we make money in this business, and what is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost (Magretta 2002). McGrath (2010) sees the business model building up from two components: basic “unit of business” that customers pay for and process or operational advantages that yield performance benefits. The description of the mechanisms enabling it to create value through the value proposition made to clients, its value architecture and to harness this value in order to transform it into profits and profit equation (Moigneon & Lehmann-Ortega 2010). Also the content, structure and governance of transactions designed so as to create value through the exploitation of business opportunities. Amit & Zott (2001) and Zott & Amit (2010) describe business model as a system of interdependent activities that transcends the focal firm and spans its boundaries. Business model development includes the following elements: customer value proposition; target market segment; revenue model; partners’ network; key resources; key assets; cost structure; and estimation of profit potential (Dmitriev et al. 2014).

Looking at the four elements of business model and thinking about the possible changes digitalization may have on construction industry is intriguing. The industry is very concrete and the product delivery must happen locally. Everyone has to live somewhere and the construction of houses has to happen in areas people want to live in. People also need services close to their homes and places to work in. Looking at the longer perspective I see the need for new constructing decline, however. The need for shopping malls and brick & mortar stores is falling as the internet is fulfilling our needs more efficiently. Also, the paradigm of ownership is changing and people give more value to using goods than to owning them. This can change the need for owning your house, summer cottage or other buildings too, which will provide opportunities for new revenue model innovations for some companies. Airbnb is the obvious game changer in the hospitality industry increasing the usage of people’s homes and decreasing the need for hotels. The processes will definitely get more efficient with digitalization as well as the distribution of resources.

Even if everything mentioned above indicates toughening competition, there are new opportunities coming with digital business models as well. My understanding is that here in Finland we are very good in construction engineering and design related issues. Digital business models transfer the value from the manual construction work upward to construction and engineering expertise. With digital tools this expertise suddenly has much bigger market as the need for local presence diminishes. If one can design and think of all possible aspects of constructing a building in frozen Finland, how hard can it be to replicate that in any other place on the planet? 3D printing is one interesting new technology possibly providing even wilder perspectives to this, but I don’t have enough knowledge to talk about that further.

As a conclusion, I see the business models in construction industry changing sooner rather than later. All companies planning to thrive should be ready to experiment with their business model and try out new ways of doing things. The changes don’t have to be radical, but there needs to be enough agility in companies that allow them to react when the change is needed. I see the value of manual construction work declining and the value of engineering, design and architecture expertise increasing. This provides great opportunities for those that can capitalize on them. The disruption is not imminent yet, but the changes are coming. Stay firm, stay agile.