Business Models Facilitate Strategic Transformation in Construction Firms

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This entry is adapted from the peer-reviewed paper 10.3390/su151713022

A business model represents an organisation’s value logic with a value proposition as the central dimension. The construction industry has been categorised as fragmented, slow to move and destructively competitive, idealising only cost-based perceptions of performance; however, the trends indicate a paradigm shift in the sector emphasising value-based perspectives such as early engagement, design for manufacture and assembly, and a lifecycle approach by promoting a conscious discourse on business model innovation.

business model strategy construction industry

1. Introduction

The construction industry is grappling with many pressures, chiefly the demand for green and sustainable building practices and a critical need for enhanced productivity, requiring industry players to adapt and innovate rapidly. The industry is making an attempt to improve project efficiency, reduce waste and enhance worker safety through technological innovation, including but not limited to the use of Building Information Modelling (BIM), 3D printing, drones, and artificial intelligence-powered software ^[1]. Additionally, adopting green technologies like energy-efficient materials, renewable energy systems, and smart building solutions is aiding the industry in reducing its environmental footprint and making strides towards a more sustainable future ^[2]. However, as an industry, construction has its own idiosyncrasies; its fragmented nature has hampered performance, improvement, and continuous learning leading to poor value for money over other sectors ^[3]^[4]^[5]. There are three dimensions of fragmentation found in the construction sector: horizontal, which occurs in the trade-by-trade, competitive bidding environment of traditional project deliveries; vertical that occurs over the duration of the project from design to construction and operation; and longitudinal, which occurs due to the temporal nature of project organising ^[6]^[7]. Such a plurality and fragmentation have limited concerted efforts toward strategic collective action ^[8], and construction still remains one of the least digitalised industries ^[9], leaning towards a conservative attitude in relation to innovation and showing a lack of agility in adjusting to shifts within the industrial landscape ^[10].

Industries that are front-runners in creating value through technology have realised very early on that transformation occurs only when innovative technology is paired with a transformative business model ^[11]; technological innovations that have fundamentally changed their respective industries in the form of service aggregators such as Uber, AirBnB and Netflix, have all emerged as new and transformative business models ^[12]^[13]. Numerous efforts have been made to determine the essential characteristics of long-term change, and central to these features are business model innovations ^[14]. Conventional management techniques focus on “nominal” factors like resources over time, but when confronting a transformation, these methods fall short, and firms must contemplate superior systematic organisational traits like business model innovation that evaluate experiences over time ^[15].

It is often said that the term ‘business model’ could be one of the most misunderstood terminologies in the literature and in practice; however, if understood in the right way, a good business model leads to successful organisations, whether a start-up or an incumbent ^[16]^[17]. Gordijn, Osterwalder ^[18] and Osterwalder ^[19] proposed that systematic strides towards the evolution of business model research should begin with defining terms, and the field would be considered mature when possibilities for applying business models within specific domains can be examined. Drawing from them, Abeynayake, Perera ^[20] proposed a definition of a construction business model as “a simplified conceptual representation of a construction business that performs value creation according to client requirements with key resources, considering the appropriate level of involvement of relevant stakeholders in the key processes towards revenue and profit generation while expressing the company’s strategic choices with the awareness of the changes required and opportunities available”. However, they elucidated that further research should be concerned with understanding how business model innovation can solve the industry’s problems which would make practitioners keen on its uptake. The academic discourse underpins a crucial interdependent relationship between technological innovation and business models, shifting from purely cost-based perceptions of performance to shared value creation ^[21]. The industry’s evolving value perception underscores the significance of broader, socially responsible, and environmentally sustainable business models. Contemporary annual reports show that leading firms are integrating Environmental, Social and Governance (ESG) criteria, signalling a strategic transformation in priorities as the modern investment landscape increasingly values ESG performance. Companies with business models that are ESG-aligned often find favour with institutional investors who prioritise sustainable and responsible investments. Therefore, a profound understanding of what constitutes business models and their utilisation is indispensable to navigating the emerging priorities of construction organisations.

2. Terminologies

While the terminology of “business model” and “strategy” are frequently fused within professional discourse, it is important to recognise that these terms represent separate, albeit interconnected, notions in the realm of business management.

Business Models—An early definition of a business model in the literature describes it as an architecture for the product, service, and information flows and the roles and benefits of the various business actors ^[22]. Mahadevan ^[23]’s definition introduced the term ‘value’ to the definition and articulated that a business model is a blend of three streams critical to a business: the value stream, revenue stream and logistical stream. As the era of technological innovation was ushered in, the definition of business model expanded and was conceived as a focusing device that mediates between technology development and economic value creation ^[11].

Despite the evolving definition, the perception of ‘value’ remains a constant in the conversation around business models; Fielt ^[24] conducted a review of all historical definitions of a business model to arrive at a simple working definition as a representation of the value logic of an organisation in terms of how it creates value and captures customer value.

Strategy—The definition of strategy has also evolved over the years, much like the definition of business models. Porter’s ^[25] definition, which defined strategy as creating a unique and valuable position involving a different set of activities that are different from rivals, remains classic. Several researchers in the strategic management literature associate strategy with competition ^[26]^[27]^[28].

In the context of business models and strategy, Coes ^[29] stated that “if you understand all the components of an airplane doesn’t imply that you can fly it”. Even though a business model can give the architecture of what a firm is expected to do at a given point in time, it cannot build a story of ‘how’; strategy, however, allows drawing inferences from experiments with testable assumptions ^[30]. Therefore, it can be comprehended that a business model reflects a firm’s realised strategy ^[31]; while strategy is in the real-world, the business model is its abstraction ^[32].

3. Business Models Facilitate Strategic Transformation in Construction Firms

3.1. Elucidating the Terminology of ‘Business Models’ in Construction

Early research that mentions business models in the construction-related literature does not contextualise business models as schoalrs have defined earlier, “…a representation of the value logic of an organisation”, and instead refers to it as a means of justifying the cost, or in other words, a commercial model ^[33]^[34]. Varied interpretations of business models are also found in the recently published literature. In Lamptey, Owusu-Manu ^[35], the terms ‘business model’ and ‘business process’ are interchangeably used, and in Lin, Lyu ^[36], the emphasis is on a procurement model, which are recent examples of articles that deviated from contextualising business models as the “value logic of an organisation”. Brady, Davies ^[37] presented one of the first articles that analysed business models in construction from the perceptions of value, systems integration, and integrated solutions by extending the notion of value beyond just ‘cost’ to include ‘use’, ‘esteem’, and ‘exchange’. They utilised this expanded interpretation of value from the management literature to develop their claim that integrated solutions that cater to construction clients from development to decommissioning would require newer business models; thus, the first instance of understanding business models in construction emerged out of the need to integrate its fragmented supply chain by adding value upstream. This eventually led to learning from the manufacturing sector; Li, Guo ^[38] contextualised business models as an inherent value logic when they studied the virtual prototyping methodology engaged in IKEA’s lean production process and its underlying business model to implement it in a real-world construction project.

Adding a new dimension to business model research in construction, Rottke, Schiereck ^[39] mentioned business models in an organisational context as they examined the vertical expansion of construction companies into the real estate value chain through mergers and acquisitions to improve their market position. Aho ^[40] wrote one of the earliest articles to emphasise that it is a business model that authentically links price and profit to the tangible value delivered to the consumer and the broader community. However, even though there were traces of evidence of business model research in construction, Morrissey, Dunphy ^[41] stated that new business models and business model innovation are still of very low priority for construction organisations because they are in a ‘survival mode’ going from project to project to maintain viability with minimal resources to spare in business model innovation. It can be said that only with the advent of industrialised house building in the Swedish context did the narrative of business model research in construction completely coincide with being the ‘value logic of an organisation in terms of how it captures and delivers value to its client’ ^[42]. The evolution of business model research in construction reached its current state when the pressure to become more sustainable prompted the development of circular business models that initiate reform in each stage of the value chain ^[43].

3.2. Business Model Research in Construction—Focus Areas

3.2.1. Industrialised House Building

Industrialised House Building (IHB) or offsite construction involves the prefabrication of components in a factory instead of the conventional on-site building method. IHB enhances the speed of delivery, quality of the buildings delivered and removes the ‘project-centric’ issues such as fragmentation of the supply chain ^[44]. The concept of offsite construction has been around for a long time, but its uptake has been restricted. Business model researchers in construction are of the opinion that the reason behind this is a lack of understanding of how industrialised building fits into the overall company’s business model; Girmscheid and Rinas ^[45], whose research was in the Swiss context, stated that IHB involves a complex system of cooperating players and new business models are required to empower the players to be free from opportunistic behaviour and maximise their contribution to the client’s value creation process; Goulding, Pour Rahimian ^[46] stated that the uptake of IHB would require the evaluation of alternate business models to produce effective solutions; and Uusitalo and Lavikka ^[47] found that IHB involves technology transfer between companies and this is feasible only through newer viable business models. In a very recent publication, Dowsett, Green ^[48] stated that wider adoption needs non-technological innovations, including business model modifications and evolved contractual relationships.

3.2.2. Circular Business Models

A circular economy is a restorative or regenerative system used to enable a shift from a ‘cradle-to-grave’ to a ‘cradle-to-cradle’ approach, and firms need to alter their business models to benefit from it ^[49]^[50]^[51]. Circular business models originated from the circular economy approach when corporate social responsibility evolved into creating a shared value ^[52]. Circular business models have been explored in the construction literature using Osterwalder, Pigneur’s ^[53] business model canvas, which is one of the well-established business model frameworks. Mokhlesian and Holmén ^[50] modified the nine elements of the business model canvas proposed by Osterwalder, Pigneur ^[53] and determined that ‘value configuration’ and ‘cost structure’ were the business model elements most impacted when scholars shift to circular business models followed by the ‘partner network’. They found that circular business models require radically distinct value configuration, i.e., the arrangement of activities and resources, thereby altering the cost structure significantly; this additional cost could either be absorbed by the construction firm or passed on to the customer, which creates a new vision of sharing environmental and societal benefits along with profit making. Mokhlesian and Holmén ^[50] claimed that this could be achieved if the partner network acts as a source of knowledge sharing and innovation.

Selberherr ^[54] presented two perspectives of a circular business model: an outside view that concerns the market positioning and a holistic consideration of sustainability in the new offering and an inside view that deals with the organisation and processes within to create a new offering. In a way, this is similar to the framework that was presented by Brege, Stehn ^[44] related to IHB, where the market position coincides with an ‘outside view’ and the operational platform coincides with an ‘inside view’ of the company’s business model. However, unlike IHB business model research, circular business model research had a global approach and was not specific to any country, which is probably due to the presence of overarching constructs such as the United Nations Sustainability Development Goals (SDGs) ^[43]^[55].

In the preceding sections of this discourse, the intersectionality of IHB and circular business model attributes has been established. This integration has been recognized by Heesbeen and Prieto ^[56], as they have proposed two archetypical circular business models that blend the principles of IHB with a circular economy focus: (a) “Adaptable building”, a model that delivers adaptability and facilitates technical, functional, and spatial flexibility and upgradability in order to extend user satisfaction; (b) “Never-ending building”, a model that delivers longevity, durability, easy maintenance and repair, seeking to reduce end-user dissatisfaction by fostering a timeless quality. The burgeoning fields of circular business models, deconstruction, and supply chain management present substantial potential for the confluence of circular economy principles and IHB ^[57].

3.2.3. Generic Business Model Research

A growing number of publications have attempted to understand the role of business models in fulfilling organisational objectives ^[58]^[59]^[60]. As mentioned earlier, Brady, Davies ^[37] was among the first to present the ‘Built Environment Solution Provision (BESP)’, a concept of bundling construction products and services into an integrated value chain, enhancing repeatability and standardisation. The BESP can be considered as a predecessor of IHB business models, which operate on the basis of repeatability and standardisation that facilitate the shifting of value-adding activities upstream ^[44].

Verstraete, Jouison-Laffitte ^[61] stated that business models can go beyond start-ups, where they originated, and incumbent organisations can use them. Given this, there is evidence of business model researchers in construction utilising well-established frameworks in the management literature to address questions related to their growth. Ling and Li ^[62] based their research on Porter ^[63]’s cost leadership and differentiation strategies to understand the value creation in Chinese construction firms. They recommended that firms could create value by offering niche/specialty products or services and proposed that one-stop services covering the entire value chain could be one of the possibilities.

3.2.4. Emergent Themes—How Can Business Models Facilitate Strategic Transformation?

Strategic transformation refers to the profound, organisation-wide change that fundamentally reshapes an organisation’s culture, value proposition, or business model to adapt to new market conditions, technologies, or challenges. This form of transformation is proactive and future-oriented, often driven by a need to address long-term opportunities or threats instead of merely reacting to immediate business exigencies ^[64]. A notable example of strategic transformation within a construction organisation relevant to the context would be a decision to identify and aggregate the pipeline of demand and optimise based on repeatability and standardisation.

Theme 1. Business models can be used as a creative tool for strategy formulation.

Using business models as a creative tool for strategy reformulation can resolve an eternal ambiguity in the construction industry ‘who is the customer?’; while developers and owners of assets are considered as the customer to whom buildings must be delivered, the requirements of the occupiers are often overlooked ^[65]. As seen in the case of IHB, using business models as a tool resulted in a strategy that produces competitive end-products aimed at very specific customer segments (niche market), thereby achieving high customer value ^[44].

Theme 2. Strategic partnerships are crucial for newer business models.

The construction industry is characterised as ‘fragmented’ given the multitude of stakeholders with competing interests operating across the value chain. Business models can be used as a lens to analyse the fragmentation in the industry in terms of identifying the conflicts of interest between the business models of the key stakeholders and then formulating a strategy to smooth out the areas of friction by negotiating win-win solutions ^[66]. As is evident in the case of circular business models, stable supply chain relationships facilitate the development of service-based win-win solutions ^[67]^[68]^[69]. The partner network impacts the business model in a two-directional manner, both the considerations of the stakeholders’ expectations and the quality of resources provided by the network ^[61]. While strategic partnerships began as a means of knowledge sharing ^[50], the ongoing digital transformation of the construction industry has spearheaded technology-based partnerships in capacity building ^[70].

Theme 3. The business model is the bridge between technology integration and strategy.

The construction industry remains one of the least digitalised; however, the inflow of significant venture capital into construction technology indicates a strong desire for digital transformation ^[71]. Construction companies are undertaking ad hoc digital transformation initiatives where the technology plays a central role without much consideration for the underlying business model; often, such initiatives cannot be scaled ^[8]. A robust digital strategy for a construction firm should involve new data-centric business models based on wider asset and performance data use, i.e., asset optimisation ^[72]. However, top-down integration of technology through government mandates can only compel construction companies to achieve minimal standards while a great extent of the technology’s potential value remains untapped ^[73].

4. Summary

Thriving on Contradiction

Historically resistant to cultural change, the construction industry has started altering its narrative towards a conscious discourse of business model innovation. In their recent work, Farjoun and Fiss ^[74] state that contradictions often drive strategic transformation if disciplined incoherence is established through strong leadership, shared values, defined boundaries, rules of engagement and safe spaces. In the Scandinavian context, IHB business models stand out as exemplars of business model innovation in construction with disciplined incoherence, which enabled companies to continually learn, integrate, and pivot, leading to a competitive advantage. The wider construction industry comprises many configurations presenting an image of pluralism and thinly spread diversity; however, conflicts often lead to adversarial relationships. Understanding how managers can alter the course for such conflicts by allowing them to foster coopetition over competition, drawing on organisational arrangements, is subject to further research.

The Interplay between Competition and Coopetition

The interplay between competition and coopetition is a fairly well-researched topic in the strategic management literature ^[75]. Dyer, Singh ^[76] stated that the interdependence between the complementary resources of partners is critical in alliance value creation and capture, and often determines how quickly the alliances are formed or might dissolve. To progress towards defining its strategic partnerships that enable new business models, construction research must identify and analyse internal and external factors to the alliance that trigger weakened value creation and heightened competition among partners. The growing significance of technology-based partnerships in construction reaffirms that inter-firm cooperation is a possible avenue for incumbent organisations to respond to discontinuous technological changes ^[77].

Leaping and Drifting

Technology integration through business model innovation may result in improved value creation; however, there is a strong implication that construction firms often consider it beyond their capability or not a priority ^[8]^[78]. It may result from a persistent misunderstanding that technology integration through business model innovation is too complex and always necessitates a resource-intensive “leapfrogging” effort. In the work of Berends, Smits ^[79], two distinct patterns of business model innovation have been identified: leaping, where the business model elements and their interdependencies are created upfront, followed by the business model going into operation and certain fine-tuning based on experiential learning; and drifting, where the emphasis shifts from experiential learning to cognitive search for a reconceptualised business model which allows substantial divergence from the initial business model.

Project-Based Business Model Innovation

A noticeable shortcoming in construction identified through the SLR is the disregard for a company’s business model while selecting and delivering projects. As seen in the case of both IHB and circular business models, project success does not necessarily build into an organisation’s business model. Pekuri, Pekuri ^[80] presented a conceptual framework that associated project selection with two filters: the fitness of the project to a company’s business model and the project’s risk vs. profit potential. While it was a step in the right direction, the model was empirically validated only in the context of Finnish construction companies. There is an opportunity for further research on the business model innovation in construction companies at the project and organisational levels. Such research can potentially inform strategic management research, demonstrating how project-based industries can utilise business model innovation for strategy reformulation.

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Priyadarshini Das

Amer A. Hijazi

Duncan W. Maxwell

Robert C. Moehler

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Update Date: 13 Sep 2023

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