Ted Garrison's March 2013 Report


Blue Ocean Contracting

Earlier this year, Garrison Report #2013-1 provided eight questions that contractors and designers should ask themselves about whether their company needs a new strategy. If you haven’t read that report, I strongly suggest you review it before reading this one. While many companies within the construction industry have adopted innovative approaches to their businesses, it is still true that virtually every contractor and designer could further improve its performance and profitability by putting to use the practices found in Construction 3.0™ Strategies. To assist in this effort, the Garrison Reports from #2013-3 through 2013-6 will discuss each of the four critical practices that make up Construction 3.0™ Strategies. These four practices and their scheduled reports are as follows:
• Blue Ocean Contracting (TGR #2013-3)
• Integrated Project Delivery (TGR #2013-4)
• Lean Construction (TGR #2013-5)
• Best-Value Procurement (TGR 2013-6)

Blue Ocean Contracting
W. Chan Kim and Renée Mauborgne coined the expression Blue Ocean Strategies, which is the title of their best-selling book. Blue Ocean is a euphemism for uncontested market space. The opposite is a “red ocean” that Kim and Mauborgne define as an environment where existing industries and markets have boundaries that are clearly defined and accepted and where the rules of doing business are established. The construction industry’s highly competitive low-bid process is a red ocean. In essence, it has reduced the construction business to a commodity where many of its customers buy based totally on price. Many contractors want to argue that that contracting isn’t a commodity, but it doesn’t matter what they think; only what the customer thinks matters, and clearly many customers’ actions indicate they think constructions services are a commodity. This has created a bloody price war, which Kim and Mauborgne refer to as a Red Ocean. Worse, this approach hasn’t produced happy results for clients either. Instead, clients experience cost overruns, excessive change orders, scheduling delays and performance issues, all of which often lead to litigation. The good news is this provides opportunities to do something different.

Blue Ocean Strategy explains that companies need to create a business where there is less competition. Sun Tzu wrote in the Art of War it’s essential to develop a superior strategy. Both books are suggesting that businesses must outthink their competition instead of attempting to outmuscle them. In construction this means avoiding the low-bid environment.

How to Create a Blue Ocean within the Construction Industry
There are two different ways to create a Blue Ocean. The first is to create a new industry. At first blush that might seem difficult for contractors. However, time is a critical factor that impacts the client’s value. By rethinking the construction process, it’s possible to significantly increase construction speed. H. B. Zachary was able to build the 485-room Palacio del Rio hotel in San Antonio in only 12 months by using a modular design. The rooms arrived on the site with the furniture already installed. The Starr Electric Company builds super skids, prefabricated electrical rooms that they can drop into place quickly. The Chinese are talking about prefabricating a 220-story building with only a seven-month construction schedule. So yes, the construction industry could be redefined as a totally different industry than the built-in-place approach most common today.

However, in construction the most likely approach to create a Blue Ocean would be to merely redefine the construction process. We need to avoid thinking of the construction process existing from the time the contractor breaks ground until the keys are turned over to the owner. Instead the construction process needs to be defined as beginning at the inception of a project and lasting until the project is torn down. The cost during the short period of actual construction represents about 10 to 20 percent of a building’s total lifetime cost, only a sliver of the total lifetime of the building. By expanding the definition of construction, there are many more opportunities to add value and, therefore, differentiate oneself from the competition.

The construction industry needs to avoid focusing on how to do the construction cheaper and instead seek ways to do it better and even ensure it is building the right project. For example, three general contractors were competing on a factory project. Their initial bids were all over the budget. Two of the contractors went back to their offices and attempted to value engineer savings out of the factory’s design. The third thought that was a waste of time. Instead, this contractor hired a lean-manufacturing expert to go into the prospect’s current factory. The consultant came back and said they didn’t need a 100,000-square-foot building. They needed only 90,000 square feet and he could layout the factory work so the operation would be more efficient and profitable going forward. In addition to saving the client construction costs with a smaller building, the contractor generated a savings over the life of the building that probably exceeded the cost of the factory. How much work could you generate if the savings you created exceeded the cost of your services so you were essentially constructing the building for free?

The concept of Blue Ocean Contracting is about how to increase value for the client in such a way as to differentiate your business and eliminate the competition. There are probably thousands of approaches, but that allows contractors and designers to focus on areas where they have an advantage. This allows them to compete based on value instead of price.

To get the process started, businesses in the construction industry should ask five questions:
1. What can we reduce to add value by lowering the cost?
2. What can we eliminate to add value by lowering the cost?
3. What can we change or substitute that would add value?
4. What can we increase that would add value?
5. What new service would add value?

There are probably thousands of answers to these questions. However, if you want to create the highest impact, you need start by talking to your clients and prospects to determine their problems and needs. Once you have identified the client’s problems, you begin to work on finding superior solutions that will differentiate you from your competitors. If you offer better solutions than your competitors, you will be able to compete on ideas and value instead of price.

Look for next month’s report when I will discuss Integrated Project Delivery.

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