Industry Fragmentation – the barrier to innovation & change

Tony Wells, CEO at Merit

The construction industry’s declining productivity means projects are becoming expensive and unaffordable. Productivity for building, specialist installations & Architectural and Engineering (AE) firms in particular, are significantly below the UK average.

Industry fragmentation is the fundamental problem that is preventing the implementation of system level disruptive innovation, as Levitt (2007) quoted “Fragmentation presents a “never-ending stream of problems that require local incremental innovations”.

The scale of fragmentation in UK construction is truly staggering, with 914,475 companies of which 99.8% have <50 employees. This concentrates power to a few large companies who are invested in supressing change & disruption.

Manufacturing achieved productivity growth by embracing industrial revolutions in mass manufacturing, factory automation and digitalisation which construction largely ignored and now must catch-up on 120 years in one step to deliver productivity, profitability and wage growth.

Historically, as building complexity rose, builders chose to subcontract specialist systems. This fragmentation process continued to include even the works originally self-performed by the builders. Hyper-fragmentation of design, and delivery yielded short-term cost benefits but created an industry unable to evolve and implement systemic innovation.

Fragmentation results in ‘deferred engineering’, where design firms produce high level concepts, which the supply chain interpret and develop into something that hopefully works for the lowest price. In academia, this is known as a ‘mirroring trap’ and blocks innovation diffusion.

Collaboration is championed as the solution; however fragmentation and deferred engineering makes this impractical and academics and government end up engaging ‘top down’ with the same few large incumbents who promote existing business models.

Sir John Egan also championed collaboration, however unlike in manufacturing – where we see Keiretsu relationship enhance productivity – research from Salford University showed that fragmented construction demonstrated a productivity decrease after Egan as tier 1’s had less competition.

McKinsey’s well-regarded report ‘The Next Normal in construction’, sets a transformational future vision. Value chain vertical and horizontal consolidation, investment in factories and digital technology and the development of a ‘product-based’ approach is key. McKinsey envisions a potential 45% shift of value away from tier 1’s, specialists, design and logistics towards offsite manufacturing.

This would be transformational, to develop factory manufactured product-based solutions with minimised automated site assembly enabled through Industry 4.0 digital transformation.

Switching to factory-based Design for Manufacture and Assembly (DfMA) is poorly understood in construction – it needs 10x the design content compared to traditional prototype design approach.

A repeatable platform design solution linked to a manufacturers production system is required, which guides DfMA choices through a set of rules to configure customisable building products.

AE design firms currently deliver summary level details, relying on contractors and craftsman ‘to work things out in the field,’ a vastly different process to manufacturing where every component is pre-specified, tested and 3D modelled as a true digital twin; since a robot on an assembly line can’t ‘figure out the details’ for itself.

A product-based approach allows for development and upgrades including clear benefits for building safety, just as it has been successfully implemented in aircraft design, and the development of innovative net-zero solutions.

A successful platform design must allow both architectural freedom to deliver site and/or project variability, but with highly pre-configured, ‘Configure to Order’ (CtO) factory manufactured modules that can achieve broad market reach. This would be a new concept in construction going far beyond pre-fab MMC, site assembled Kit-of-Parts and traditional modular.

Platform designs are typically modular or integrated. Work by Professor Clayten Christensen – The Innovator’s Solution – demonstrated that where new product development and the implementation of disruptive innovation is required, integrated platforms become the dominant business model where a firm controls all interfaces.

Since modular platforms favour incumbents according to Christensen – it is no surprise to see MMC and ‘Kit-of-Parts’ platforms currently being championed, but the reality is the integrator strategy is traditional fragmented delivery with new branding and there is conspicuously little hard evidence that ‘Kit-of-Parts’ has delivered tangible productivity improvement.

Katerra’s ‘Kit-of Parts’ attempt in the US ended in $2bn bankruptcy and reports from ‘The Forge’ flagship P-DfMA project, extensively referenced in the product platform rulebook as the exemplar case study, suggests no cost or time improvement.

To seed the industrialisation of the construction industry through government projects is the right strategy, but the most likely route to the implementation of disruptive new products and manufacturing technologies, is by new market entrants with highly digitalised integrated platform products as Christensen suggests.