(Based on an original article by Steve Coughran, CFO for EMJ Corporation, USA)
According to Nicholas Bloom’s Harvard Business Review article on profit, “Corporations in the Age of Inequality,” a slim percentage of top-earning companies actually earn significantly more profit than their rivals in what’s been deemed the “winner-takes-most” economy. As leading companies earn more, there is less profit remaining for lagging companies, only widening the gap.
So, what does the construction industry in particular look like? In research between the Construction Financial Management Association (CFMA) and Coltivar Group, a representative sample of 363 industrial and nonresidential U.S. construction companies ranging from $1 million to over $1 billion in revenue were studied. Profitability and return on investment were used as an objective lens to compare the companies.
While 50% of companies had a competitive advantage, defined as the ability to earn above-industry-average economic profits, the calculation revealed that companies in the top 20% earn nearly 83% of all economic profit, fulfilling the Pareto principle, or the 80/20 rule. The remaining 80% of companies are confined to the dog-eat-dog environment of the lower deciles, where they contend for leftover scraps of industry profit.
How did these successful contractors achieve the initial success to advance up the curve? Though many assume that size automatically leads into bigger profit percentage levels, a company’s size is a negligible determinant of profitability decile. Growing the top line in the short term does not necessarily result in margin improvement over the long term. The differentiator must therefore be strategy. The top three strategies that seem to be common across the top performers were: competitive advantage, know your numbers and execution.
Build From Advantages
Building a clear competitive advantage over your competitors is fundamental to achieving and sustaining business success. That might be in cost, service, technology or other areas of core business foundations. Some companies capitalize on unique capabilities, bundling individual skill sets, managerial techniques, company culture, team ability and expertise to execute.
Through building information modeling (BIM), project management software and automation, construction companies digitize their processes to cut costs. Once a company determines its advantages, whether it be assets, industry position or capability, they are better equipped to make decisions that result in higher profits.
Understand Key Financial Levers
Financials are often obscured by the owner’s struggles to discern the story behind the numbers. They mistake profit for cash (or visa versa) and run out of fuel for the business.
Driving economic profit requires companies to understand what profit truly is. Companies must know the levers that they can pull to achieve results. Financials reveal insight into strategic operations, indicating areas of strength and weakness and guiding company focus and procession. Business is a machine impacted by every individual. A strong base of organization-wide financial knowledge is the start to growing the bottom line.
Build Mechanisms to Execute
Finally, high-performing organizations instill discipline into their cultures. While mission, vision and values may point companies in the right strategic direction, it needs to be put into action to achieve real improvement. Contractors in the top deciles forge accountability. These contractors don’t grow profit by making it the focus of their strategy. Rather, their spot on the curve is a testament to their unique, customer-centric advantages; their financial prowess; and a firm commitment to putting their strategies into action.
Regardless of a businesses size, the focus should be on winning within their relative market region, earning their fair share of economic profit and steadily advancing up the profit ladder.
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