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FMI Quarterly/December 2013/December 1, 2013

Globalization of the Engineering and Construction Industry

Tech1_imageUncharted by many American design and construction firms, the global business environment has grown significantly during the last 10 years. Along the way, it has pushed engineering and construction (E&C) companies of all sizes to begin “thinking globally” and performing business outside of their traditional domestic borders.

The opportunity is real. A 2009 report published by Global Construction Perspectives and Oxford Economics estimates that construction in emerging markets — including Asia, Latin America, the Middle East and Africa — will double within the next decade and become a $6.7 trillion business by 2020, accounting for some 55% of global construction output. These projects represent significant opportunities for global-minded E&C firms.

In response to this seemingly endless demand for more infrastructure, large, multinational E&C companies are broadening their global footprints and strengthening their competitiveness by securing strategic positions in high-growth emerging markets. Competition is intensifying with new players from China, Brazil and India, proving them as a new class of powerful, emerging market multinationals. Just how adaptive these construction companies are, however, remains to be seen, as they expand into an increasing number of highly regulated markets.

ADOPTING A GLOBAL MINDSET

Today’s global E&C industry is changing rapidly. Barriers to global trade have been reduced significantly, enabling capital, labor, goods and technology to flow freely across borders. This has increased business opportunities exponentially across the globe. However, globalization has also vastly increased the complexity of the E&C business environment. Changing customer demands and new funding mechanisms are driving industry players to diversify and seek mergers and acquisitions in new markets around the world to gain access to new expertise and project opportunities.

To compete in today’s uncertain, dynamic and interconnected business environment, design and construction firms, both home and abroad, will need to stay focused on key trends shaping their external environment. Understanding trends, and how they interplay and shape the contours of an industry’s operating environment, has become a vital skill in today’s business world. Insightful leaders anticipate and systematically observe, spot and act upon emerging trends to capture market opportunities, test risks and spur new ideas. In a world where the playing field of resources, competition and customer demands is constantly changing at an ever-increasing rate, company leaders must look beyond traditional performance measures and near-term thinking to define their corporate strategies.

Ron Magnus, managing director of FMI’s Center for Strategic Leadership, explains, “Today’s corporate leaders need to have a sense of what they think could impact their local markets. For example, if China’s economy continues to slow down, or if Israel attacks Iran tomorrow — what are the implications for the local market in Denver, Colo.? These types of events would have an overnight effect on specific market segments; therefore leaders need to evaluate their portfolios, understand their risk and be ready to respond quickly if necessary.”

Following are six recommendations on how firms can prepare for and deal with a global design and construction environment, regardless of company size or type.

View Competitors as Potential Collaborators
Despite the overall trend for large multinational E&C firms to shift focus onto high-growth emerging markets, FMI expects to see increasing competition from international organizations working within the United States in the coming years. Hugh Rice, senior chairman of FMI, states, “Although the U.S. design and construction market has slowed significantly, we still see many foreign companies with a lot of interest in expanding their presence in the United States. That’s particularly true of the European and Asian firms, including Japanese, Chinese and Korean companies.” Though larger firms might muscle in on smaller-sized contracts, smaller firms can prove complementary on a larger contract, where they bring niche capabilities or knowledgeable staff to the table. Likewise, smaller companies may offer specialized staff or capabilities to a larger project that a firm is looking to shepherd.

Understand the Cost and Risk Barriers to Entry
Companies considering doing business on a global scale need to have strong balance sheets and solid bonding capacity as well as a deep understanding of the risks involved. The cost of entry is typically much higher than anticipated. Risk management becomes a prime factor in strategic planning. The intricacies of risk allocation often present new ground for contractors to cover when doing business in a new country. Public-private partnerships (P3s), in particular, can be very challenging and often bring with them greater risk in terms of a longer life cycle, larger scale of liability and heightened vulnerability to changes in external dynamics as the project progresses. Magnus Eriksson, senior vice president, Skanska Infrastructure Development Americas, emphasizes the novelty of new arrangements. “First of all, you have to understand the difference in risk allocation — the additional risk in a P3 project you are required to absorb as a contractor (especially if you’re an American contractor) — it’s probably something you’ve never seen before.”

Think Strategically and Understand Your Connection Points to the World
Strategic thinking goes beyond the creative process of understanding and adapting to a changing environment. It also encompasses a different perspective and approach to dealing with the current and future environments we are all operating in — as individuals and organizational leaders. Jake Appelman, director of FMI’s Executive Coaching Practice, explains, “Many of the leaders we work with are realizing that one source of enduring competitive advantage is their ability to read their environment clearly, make sense of it and respond — to think strategically.” Do not lose sight of the big picture by trying to solve all challenges at hand. Be ready to flex and react to rapidly unfolding scenarios, while also retaining a clear vision over which judgments should be made. Focus on the risks and questions — the connection points to the world — that are most likely to affect your company and how they are actually likely to do so.

Collaborate and Innovate
Many of today’s international design and construction jobs are highly complex, huge and collaborative in nature and therefore cannot be run in a silo-type manner. New emerging technologies, as well as owner demands, are pushing design professionals and contractors to work as a cohesive team from the outset, communicating and approaching projects more holistically. As part of this effort, it is key to build strategic alliances with reliable partners and to develop a deep network of companies that are team players, open-minded, and innovative. Magnus adds, “Strategic alliances are the main entrée to the global playing field. Very few go alone … core competencies in building strategic alliances are mandatory.”

Position Your Firm for Success in Multiple Markets
In this slow economic recovery, no one is taking his or her backlogs for granted. As many firms look to reorganize and rebuild by bringing on new staff a few years after deep cuts to their operating budgets, the opportunity arises to diversify into new markets and geographies, reducing risk and resting profitability on a larger base for the future. Christian Büscher, vice president of corporate development and risk management at Flatiron, adds, “Diversification means investing in areas you can control (e.g., the work types, the kind of business you do), but adding geographical areas to it. Say ‘Let’s have a second leg to stand on.’”

Create New Adaptation Strategies and Core Competencies
In order to adapt to ongoing globalization trends and succeed in the long term, companies should consider the following adaption strategies:

  • Develop a deeper understanding of financing alternatives.
  • Practice niche marketing by finding pockets of prosperity and aggressively pursue work in those areas.
  • Work with diverse teams and adapt quickly to changing social and political environments.
  • Strive to become a firm driven by design execution and field productivity.
  • Invest in talent. Continue to develop technological skills.
  • Empower the younger generation of leaders to shape their own destiny (“star-making”).

With the incredible “shrinking” of the globe, fast-growing firms from the emerging markets are set to challenge established Western industry leaders in the future. As new competitors enter the scene domestically and internationally, both local and global design and construction firms are responding with new business approaches, stressing greater involvement of clients and suppliers and reassessing their risk and capital allocation. Emphasis on greater efficiency and innovation, in particular, will ensure that industry players can rise to the challenge of the new competitive landscape — both at home and abroad.

Lastly, today’s successful industry players are professional services firms, offering top-notch human resources that understand the importance of hiring the best professionals with risk management capabilities, market knowledge and an in-depth understanding of client behavior and job-specific challenges. These companies are tuned deeply into their “connection points to the world” and maintain a global outlook on whatever they think and do.


EIGHT STRATEGIES FOR GROOMING GLOBAL LEADERS

Globalization presents unique leadership development challenges for companies in the construction and engineering fields. Grooming leaders who can look beyond traditional, domestic borders and adopt a global mindset takes time and requires an entirely new learning approach. Here are eight strategies to use when cultivating global leaders.

Develop “cultural empathy.”
Global leadership development needs to focus heavily on enhancing emotional intelligence, empowerment and self-awareness, promoting empathy and respect for different opinions and viewpoints.

Develop a diverse mindset and worldview.
Start building a workforce today that encourages diversity, understanding of different cultures and aptitude across new languages.

Understand customers in new geographic markets.
This is particularly true in emerging economies that require diversity across the highest levels of the organization. Opportunities at the highest levels, including C-suite and CEO, must therefore be open to people of all national origins.

Focus on decentralized leadership.
Today’s global leaders do not act like traditional hierarchical managers. Through emotional intelligence and self-awareness, they are able to lead a diverse workforce and align employees around their organization’s vision, goals and values. Rather than focusing on hierarchy, they concentrate on values and empower their local (geographically dispersed) teams to run their operations in ways that align with local cultures, governments and communities.

Broaden the reach of leadership development.
Giving future global leaders the opportunity to live and work abroad is a great way for them to broaden their mindset. This approach helps to: 1) Self-select whether or not they can handle leading abroad (this is the primary reason for expatriate turnover); 2) Learn another language, culture, business model, regulations, etc.; and 3) Provide the organization with insights into whether or not that region or location is worth targeting.

Stretch assignments across continents.
Give leaders a typical assignment (e.g., design a building, order materials, etc.), but base it in the United States. Once they have completed the task, have them go through the same process in three or four different countries, all with varying cultures (e.g., China, Russia, Brazil, Dubai, Mexico, Australia, etc.).

Leverage cross-training opportunities.
Train leaders in differing skills within the organization. Chances are, they will need to have some knowledge of each area in order to run an international office. After all, overseas locations are typically much smaller offices, where people wear multiple hats on a daily basis.

Use organizationwide training on the same initiatives.
The goal here is to get everyone rowing in the same direction by making sure that all future expatriates are all working towards the same organizational vision. If they are not, or they have stronger self-interests, then things can go wrong quickly.


Sabine Hoover is a senior research consultant with FMI Corporation. She may be reached at 303.398.7238 or via email at shoover@fminet.com.

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