CHANGING BUSINESS MODELS: IMPLICATIONS FOR …

1 CHANGING BUSINESS MODELS: IMPLICATIONS FOR CONSTRUCTION. TRANSFORMING CONSTRUCTION NETWORK PLUS. DIGEST SERIES, NUMBER 1. RESEARCH PROGRAMME INTRODUCTION. TRANSFORMING CONSTRUCTION NETWORK PLUS WHY BUSINESS MODELS? The Transforming Construction Network Plus (N+) mobilises a new movement in the construction community, bringing The UK Government's Transforming Construction a structure for exploring how their BUSINESS models can together experts from a range of disciplines to tackle the most pressing problems across the digital, energy, construction, Agenda is encouraging firms in the industry to re- think be changed. To do so, the digest summarises influential and manufacturing space. how they create and deliver whole life value through ideas about BUSINESS models from industry and the application of digital technologies and new academia. It begins by clarifying what BUSINESS models The N+ is funded by UK Research and Innovation, an investment supported by the Industrial Strategy Challenge Fund.

2 Manufacturing techniques. Firms in the construction are, goes on to describe a framework for thinking about The N+ is a joint project between The Bartlett, UCL Faculty of the Built Environment, Imperial College London and industry should be considering how their current analysing BUSINESS models, and ends by exploring how WMG, University of Warwick. BUSINESS model can help them address the risks and organisations can change their BUSINESS models. opportunities arising from this transformation, and The N+ research team is working to contribute to the body of knowledge that informs future construction practice and whether they need to change their BUSINESS model to As we describe below, CHANGING BUSINESS models policy. As well as the digest series, the team will be developing academic papers and case studies exploring BUSINESS deliver on construction client expectations sustainably. in construction can be challenging. We hope that model and industry change. We hope you find this digest useful, and welcome any questions or feedback you may In practice, we see quite a bit of confusion about what a businesses use this digest as a starting point to think have.

3 You can reach the team at BUSINESS model actually is. about their own BUSINESS models, because this could help them take the first step towards transformational We have created this digest for businesses wanting to change. understand more about BUSINESS models, and to provide ABOUT THE AUTHORS. Dr Kell Jones, N+ Research Fellow Dr Kell Jones is a Research Fellow at The Bartlett School of Construction and Project Management, UCL. Professor Andrew Davies, N+ Co-Investigator RM Phillips Freeman Chair and Professor of Innovation Management at Science Policy Research Unit, University of Sussex BUSINESS School. He is Honorary Professor at the Bartlett Faculty of the Built Environment, London. Dr Luigi Mosca, N+ Research Fellow Dr Luigi Mosca is a Research Fellow at the Department of Civil and Environmental Engineering, Imperial College London. Professor Jennifer Whyte, N+ Co-Investigator Laing O'Rourke/RAEng Chair in Systems Integration, Department of Civil and Environmental Engineering, Imperial College London.

4 Professor Jacqueline Glass, N+ Principal Investigator Professor in Construction Management, The Bartlett School of Construction and Project Management, Vice Dean Research, UCL Faculty of the Built Environment. RECOMMENDED CITATION. Jones, K., Davies, A., Mosca, L., Whyte, J., Glass, J., 2019 CHANGING BUSINESS Models: IMPLICATIONS for Construction, Transforming Construction Network Plus, Digest Series, 3. 2. WHAT IS A BUSINESS model ? WHAT IS. A BUSINESS model ? Figure 1: The five interlinked elements of BUSINESS models SUPPLY DEMAND. The use of the term BUSINESS model ' became common There are five interlinked elements to BUSINESS models A FIRM'S BUSINESS model SIDE SIDE THE MARKET FOR. during the dotcom boom in the late 20th century, when (Figure 1): CONSTRUCTION. Including ASSETS. digital entrepreneurs needed a simple way to explain Market segment how their BUSINESS would make money1. Since then, Value proposition STRATEGY Price point Revenue model MARKET. firms have applied the idea as a way to think about, Strategy Market message DEMAND.

5 And communicate, how they operate. While there is no Capabilities and assets single, agreed definition, a BUSINESS model can be seen Value delivery mechanism Including . as describing the way a firm creates value, and captures Value capture capacity CAPABILITIES Knowledge AND ASSETS Processes a portion of the value for itself2. Relationships VALUE MARKET. Physical assets PROPOSITION DEMAND TARGETED. Including . Collaborating firms'. VALUE DELIVERY capabilities & assets MECHANISM Delivery configuration MARKET. Communications DEMAND. A firm's value proposition is the customer need, or The value delivery mechanism defines whether, Contracts, governance demand, that the firm has decided to address to deliver and how, the firm will work and communicate with Including . value. The more precisely the firm meets that need, the others to deliver value by combining or integrating VALUE CAPTURE Bargaining power CAPACITY IP protection better3. For example, an architect's marketing positioning complementary assets and capabilities.

6 This could Switching costs as a sustainable design practice demonstrates clearly range from vertical integration of capabilities into one Replicability their specific value proposition. Organisations can have firm, through to an arm's-length licensing model18. multiple value propositions at any one time, enabling Value chains and networks are examples of these value These five elements will be present in all businesses, to understand, capabilities4 include less tangible things, them to meet multiple market demands. delivery mechanisms19. A value delivery model should but they are rarely stated so clearly. For example, an such as knowledge, processes, routines, technologies, set out the contractual links, communication and architect is unlikely to describe their BUSINESS model as skills, and relationships with suppliers and customers. The strategy describes how the firm will approach the governance needed to deliver value to the customer. using their design capabilities with the complementary These capabilities may have developed over many years, market.

7 This includes identifying target market segments assets of a software provider to co-create and deliver and can be seen as potential competitive advantages. A. and associated price points, a suitable revenue model A firm's value capture capacity explains how it will value to a private individual client, attracted through network of contacts, for example, can provide a good be it leasing, licensing, selling, or franchising and seek to retain some of the value created in the face of the development of an on-line reputation. Yet this is an opportunity to win more work, but can be hard to replicate. describing how the firm aims to establish itself as the competing claims from other firms involved in value accurate description of what they do when they design Firms gain competitive advantage by innovating, moving provider of choice to its target customers. delivery. The ability of a firm to capture value depends using computer-based modelling tools and present out of some activities and investing in new assets on a range of factors20 including bargaining power, their project portfolio on a web-site.

8 And developing capabilities, allowing them to deliver The BUSINESS model describes the capabilities and replicability of its assets and capabilities, the cost value to new customers, or additional value to existing assets a firm needs to deliver value to the customer. involved in moving to another supplier, and the ability BUSINESS models therefore help to clarify how an customers, in a more efficient way. However, the Capabilities are the skills, knowledge and experience to protect intellectual property and control flows of individual BUSINESS creates and captures value by development of radically different capabilities might be that firms develop to gain competitive advantage, such information. describing these five BUSINESS model elements, and considered to be competence destroying'5, or rather, as technical engineering or programme management exploring their interplay. Firms with a BUSINESS model that investing in something that undermines the firm's skills. Together with the firm's physical assets, these is clearly understood are likely to be better positioned current BUSINESS model .

9 Because of this, incremental capabilities influence a firm's opportunities for value to respond in times of change. innovation is more commonly adopted in construction. capture and determine the costs that they will need to The fragmented nature of the market in construction incur to enable them to create value. Firms should develop a detailed understanding of how makes this problem worse, as innovation happens at the their key capabilities, asset base3, and processes create product or process level, rather than at a system level6. and capture value. While physical assets are quite easy As a result, the scope for disruptive innovation shrinks. 5. 6. 4. WHY IS IT SO HARD IS IT POSSIBLE TO CHANGE BUSINESS MODELS. TO CHANGE BUSINESS MODELS? IN THE CONSTRUCTION INDUSTRY? Over time, a firm develops what is called a dominant There are five main reasons why firms might want to The Transforming Construction Agenda is, in part, been made in the UK housing market by Goldman logic'. This is a set of understandings and beliefs that change their BUSINESS models3: seeking to change the nature of demand, for example Sachs, and Japan's biggest house builder, Sekisui House.

10 Shape decision-making in accordance with an existing by promoting the presumption for offsite manufacture BUSINESS model . For example, in listed companies, An unmet or changed demand in the market11; of buildings, which may change how value is effectively Firms hoping to meet the challenge of new market shareholders' expectations of returns are a key aspect A new solution opens the market to new delivered. Reacting to these changes is challenging entrants can follow one of two routes. One is to of this logic. The dominant logic operates, coordinates customers previously excluded from the market; because construction is a mature, competitive, industry continue to operate as before, relying on the firm's and regulates the firm's operations, somewhat like the The emergence of new technologies that characterised by large, complex, and risky projects. existing dominant logic, and adjusting their BUSINESS immune system in a human body. In the presence of this reshapes value delivery ( the internet); Many construction firms have also been around model only slightly to allow them to continue for a dominant logic, decision-making tends to support the To fend off competition, often from low-cost for a long time and have well established dominant while.