Business Model Innovation and Sustainability in Construction 4.0

This article was co-written by Giso van der Heide MSc., Senior Customer Outcome Executive EMEA -AEC Strategic Accounts, Autodesk & Olivier Lepinoy, Senior Global Business Development Executive – Platform Subject Matter Expert, Autodesk

"Successful business is increasingly about understanding the challenges and opportunities linked to society’s transition towards sustainability and, e.g., being able to innovate, design and build business models that are functional in this context. However, current business model innovation and design generally fails to sufficiently embrace the sustainability dimension. Typically, the business case of sustainability is not understood profoundly enough.” - César França, Strategic Sustainable Development, Blekinge Institute of Technology Karlskrona (Sweden), “An Approach to Business Model Innovation and Design for Strategic Sustainable Development”

Delivering purposeful business model transformation in Architecture, Engineering, and Construction (AEC) is essential to the future of the industry. But with so much uncertainty, it can be challenging. This article will focus on meaningful environment- and social outcomes, business- models and outcomes.

Today, we break down how to achieve business model innovation in construction by understanding your environment, connecting your business model with the United Nations’ Sustainability Development Goals (SDGs), and the Autodesk Industry Outcome Framework (IOF). This will help you to analyze, prioritize, plan, and implement construction solutions such as Autodesk Construction Solutions (ACS).

Business model resiliency, navigating a VUCA world

Nowadays we are facing social and environmental challenges; climate change, population displacement, wealth inequality, and the demanding need for resources such as food, energy, and water to keep up the rapidly growing population. At the same time, we are in the fourth industry revolution that is characterized by unprecedent innovations in business models and new technologies.

The acronym “VUCA” originated in the military to describe the Volatility, Uncertainty, Complexity and Ambiguity of general conditions and situations. Disruptions are continuously happening around us. The COVID-19 pandemic perfectly demonstrated the VUCA world we are living in. What will happen next? A global economic recession?  All come and go within natural cycles, and after a downturn there is always an upturn. The waves of the “unpredicted” seem never-ending.

“The losers are companies who are not liquid or whose business model is unsuited to the zombie world.” - Mark Thomas, “The Zombie Economy: Leadership in Times of Uncertainty”, PA Consulting 

Companies that have strong leadership and are quickly adapting their business models seem to be “VUCA resistant.” The sudden appearance of the COVID-19 pandemic has shown that digital network orchestrators like Uber, Airbnb, and Booking.com were almost whipped away by this unpredicted event. So, would you bet your existence on a “one-horse” business model?  Or would you anticipate and prepare a portfolio of business models to be more resilient in the future? Here is what you need to take into consideration:

• Strong leadership must articulate the short-term and long-term goals for the company.
• Firms need to think beyond “just being reactive” and adopt a proactive approach.
• Business leaders must be able to define future scenarios and look beyond actual markets, technologies, and macro trends.
• Business leaders must transcend complexity and derive the right priorities.
• Society demands that companies not solely focus on financial performance but also on addressing environmental issues, drive social benefits, and lead with purpose.
• Diversification of business models is the best way to be agile.
• Leaders manage a well-balanced mixture of the following types of business models: Asset Builder, Service Provider, Technology Creator, and Network Orchestrator.
• Built and manage a resilience portfolio of “defensive and offensive” business models to be able to quickly respond and pivot the business.

Breaking down the VUCA complexity

Leaders must NOT simply respond to the shifting landscape, they must take their destiny into their own hands: build a portfolio of business models, experiment with new ways of working, develop awareness, and ultimately shape their future landscape. This is the only way they can anticipate the unknown and future proof their businesses.

“With the volatility, uncertainty, complexity and ambiguity (VUCA) of today’s world, resilience may be the single most important criterion for successful businesses this decade. Data, automation and new insights are empowering innovators in architecture, engineering, and construction to achieve the ‘new possible,’ enabling new business models that bolster resilience and profit by addressing the complexities of sustainability. Today’s technology is helping AEC companies accelerate the adoption and implementation of UN Sustainability Development Goals deeper into their business models and realize the benefits of doing so throughout the entire design and make process.” - Lynelle Cameron, Vice President Sustainability at Autodesk, CEO of Autodesk Foundation

How do you simply eat spaghetti? Often a challenge, right? If you do it a structured way by using a fork and roll it up in bite-sized portions, you will finally finish up your plate. To understand the VUCA world and how it relates to your business you must abstract and model it in bite-size portions (figure 1). You need to break it down in different abstraction levels and elements.

• Firstly, start with defining “VUCA” future scenarios. These scenarios are driven by importance vs impact analysis using PESTLE elements (Political, Economic, Social, Technology, Legal and Environment). This is one of the methods used to understand the impact of society on organizations.
• Secondly, once the scenarios are prioritized, and more clearly described, you can make connections with the Sustainability Development Goals (SDGs) and test which scenarios are influencing one or more of these SDG´s.
• The third level is to understand your actual business model health, and where to improve and innovate parts of it. For example; that can be achieved through a renewed value proposition, new focused activities, shift in resources, etc. The business model canvas from Strategyzer is an ideal tool for that.
• Once we know which business model variants are candidates, we can establish business use cases, outcomes, initiatives, and capabilities to work out an implementation roadmap from strategy to implementation.

The figure below emphasizes the importance of having a contextual perspective of our changing world, and how this requires the organization to be very responsive. This is an outside-in approach. We can also take an inside-out approach, starting solely with new technologies. Research has shown that often a technology push will become a failure because of not correctly addressing the business model elements. The risk is to ignore some untapped market potentials and to miss a “landing strip” in terms of organizational change.

Figure 1 Business portfolio, containing the diverse objects across the system levels. Technology by itself has no single objective value, the economic value of technology remains latent until it is commercialized in some way via a business model. (Source: Giso van der Heide)

Delivering meaningful outcomes

On September 25, 2015 all United Nations members signed up to the Sustainable Development Goals (SDGs): a set of solutions for the biggest problems the world is facing. Targets are being set for 2030, just a decade from today. One of them is reduction of global emissions by 50%.

“Only 40% of companies are reporting on SDGs. In terms of understanding the SDGs, companies tend to underperform with a D ranking, in making a business case (where there is one) for SDG actions. Discussing the SDGs in leadership was ranked a C and is considered relatively low-hanging fruit in terms of improvement effort required. Companies collectively were ranked A-; in terms of assessing the business’s impacts on the SDGs, largely because only positive outcomes are reported, while areas of negative impact garner less (or even no) mention in the report.” - KPMG report, How to report on SDGs, what good looks like and why it matters

 It is strongly recommended that companies seriously start embedding the SDGs within their core strategic initiatives. Business models, corporate governance, and social responsibility play a significant role in that. In order to make the SDGs more tangible for AEC firms, it is worthwhile translating them into meaningful outcomes and, if possible, have measurements that can be baselined and monitored (SMART - specific, measurable, achievable, relevant, and time-bound). The figure below lists 12 of the 17 SDGs. The SDGs least commonly prioritized are Life on Land (SDG15), Zero Hunger (SDG2), and Life Below Water (SDG14). Only 10% of companies has set specific and measurable (SMART) business performance targets related to the global goals. 

Figure 2: Example of meaningful SDG outcomes for AEC, 12 out 17, clear goal description and measurements (Source: Giso van de Heide)

Measuring sustainability performance is complex. It leads to a lot of confusion among producers and users of sustainability information and makes it difficult to report non-financial information. To resolve this confusion and simplify corporate reporting, several frameworks and standards for sustainability reporting have been developed. The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced in 2020 their agreement to merge into a unified organization, the Value Reporting Foundation. This is another step towards a more simplified corporate reporting landscape.

The business model

No matter what value you receive, a business model exists behind. It is invisible, but it is the very important mechanism that enables an organization to create and capture value, generate profit and to stay relevant. The grocery store, the pizza delivery, etc., all have a business model and are usually part of a bigger network, generally called the value chain. AEC firms are no exception. They operate their activities through various business models.

“A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts.” - Steve Blank - Silicon Valley entrepreneur who launched the Lean Startup movement

• The business model acts as the blueprint of the business and a roadmap for its success (or failure). It is the only documentation that makes clear:
• The business concept; the market opportunity the business capitalizes on.
• The target market the business caters to.
• The problems the business intends to solve.
• The solution the business offers and how it creates customer value.
• How the business gets its customers.
• The operating model the business follows.
• How the business makes money and what are the costs incurred. 

Business model diversification

As mentioned earlier, you need to consider diversifying your business models. Why? A recent study by BearingPoint and OpenMatters demonstrated that a balanced mixture of the following business model types; Asset Builder, Service Provider, Technology Creator, and Network Orchestrator gives an average 5 year CAGR (Compound Annual Growth Rate) of 8% and 2.5 times market capitalization, compared to ”mono” type business model with 5 year CAGR of 4% and 1.8 times market capitalization.

A pure Network Orchestrator business model drives volume and massive economies of scale. With customer data as a source of insight for innovating new adjacent services but also a source of advertising revenues, within 5 years, CAGR is roughly 20% and average profit margins reaches 32%. Network Orchestrators are seeing two to four times higher market valuations and market capitalization growth at around 200%.

Figure 3 Business model types and market capitalization

AEC business model cornerstones

According Tony Singarayar, Analogy Partners, the business model can be described by six essential business fundaments, called cornerstones. To deliver reliably superior performance than the competition, a company must be better at some or all of the 6 cornerstones of their business model.

Figure 4 Six Business model cornerstones for AEC

1. The Value Proposition is driven by two cornerstones: Architecture, Engineering & Construction Services is to identify which customers you try to serve and contains the collection of products and services (key activities) the business offers to meet the needs of customers and Revenue-Profit the way you make income from each customer segment (monetization) vs the cost of acquisition (using key resources).
2. The ability to Generate Demand is driven by two cornerstones: Brand-Reputation and your Professional-Other Influencer Relationships find a scalable way to get new customers and how the business will keep customers using its services and grow its revenue from its current customers.
3. The ability to make and Deliver what you Promise is driven by two cornerstones: Construction & Contracting cultivate buyer-supplier relationships so you can focus on your core activities and deliver through different channels, and Customer Experience and Lifecycle ensure the survival and success of the business. You must identify the untapped market and the type of relationship you want to create with your customer segments.

We can provide insights into the current health status of your business model by assessing each cornerstone and its performance. These insights can be used to:

• Uncover weak cornerstones in the business model, and act accordingly with the appropriate initiatives.
• Compare health results of different business models, e.g., diverse business units, or compare with “best in class” performer.
• Use it for annual performance reporting, by keeping track of improvement initiatives.

AEC Business Model Health

To understand the business model health, each cornerstone will be exposed to several questions. By using a maturity score on a 1-10 scale. Answer: from “1 = Worse at all aspects” to “10 =Extremely better.” These scores will be rolled-up to calculate a health score (percentage). Here are some of the questions related to each business model cornerstone (30 in total):

• Does your Architecture, Engineering, & Construction Services have superior differences that makes it more attractive to potential buyers/owners and make them prefer to choose it versus competitor offerings?
• Do your key business processes (such as business development, design & engineering, marketing, construction, aftersales, etc.) require less capital investment than your competition?
• Does your brand inspire more confidence in customers than your competitor’s brand? The real test here is to understand if customers pay a price premium because of your reputation.
• Do your most valuable influencers actively promote your more Architecture, Engineering, & Construction Services?      
• Do your contractors bring you more valuable innovations that significantly improve your construction and contracting than your competition’s contractors?
• Do you have a higher customer Net Promoter Score (NPS) than the competition?

Below is a business model health example with scores displayed. It helps to raise the following questions:

• How can I capture more value via my revenue - profit model?
• How can I create value to build strong partnerships with influential experts?
• How can I create value by better construction and contracting?
• How can I create emotional value that rapidly grows demand by superior branding?

Figure 5 AEC Business model with the six cornerstones and individual health scores

” Why is it so difficult for established companies to pull off the new growth that business model innovation can bring? Here is why: they don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.” - Clayton M. Christensen, “The Innovator’s Dilemma”

AEC business model shift patterns

The firm Strategyzer researched hundreds of business models and discovered diverse patterns, called business model shifts. They derived the four following shift patterns.

Value proposition shifts - offensive play

Aimed to play offense; typically controlled by Market explorers and Platformers. They are focusing on the following three business model corner stones.

1. Architecture, Engineering & Construction Services
2. Revenue-Profit
3. Customer experience

Typical shift scenarios are (or vice versa):

• Product to service
• Low tech to high tech
• Sales to platform

Front stage driven shifts - offensive play

Aimed to play offense; typically controlled by Activity Creators and Gravity Creators. They are focusing on the following three business model corner stones.

2. Revenue-Profit
3. Brand & Reputation
4. Customer Experience

Typical shift scenarios are (or vice versa):

• Niche market to mass market
• B2B to B2C
• High touch to low touch

Profit formula driven shifts - defensive play

Aimed to play defense; typically controlled by Revenue Differentiators and Margin Masters. They are focusing on the following three business model corner stones.

2. Revenue-Profit,
3. Construction & Contracting
4. Customer experience

Typical shift scenarios are (or vice versa):

• High cost to low cost
• Transactional revenue to recurring revenue
• Conventional to contrarian

Backstage driven shifts - defensive play

Aimed to play defense; typically controlled by Scalers and Cost differentiators. They are focusing on following three business model corner stones.

2. Revenue-Profit
3. Professional-Other Influencer relationships 
4. Construction & Contracting

Typical shift scenarios are (or vice versa):

• Dedicated resources to multi-usage resources
• Asset heavy to asset light
• Closed to open IP

AEC business model & industrialized construction

When thinking about Industrialized Construction (IC) and running an offsite construction business for modular and panelized production, you basically need to completely redesign your business model. You must rethink your value proposition, the way you generate the demand and the way you deliver the promise. The “traditional contractor” business model will be disrupted because you must move from B2B to B2C and start serving a mass market against low cost while considering high CAPEX vs OPEX of running a factory.

Modern production factories embrace Industry 4.0 that implicates even higher investments due to “configure to order” production flexibility and IT technologies to operate 24/7 around the clock. Moving to IC has a positive impact on multiple SDGs: waste reduction, safety improvement, labor increase, consistent quality, affordable assets, and higher productivity.

The diversification of an IC business model is also important. You want to run a Network Orchestrator platform that brings you straight towards the “mass market” and clients? This will require that you add new services and technologies to your existing assets. How will you establish such a platform? Through acquisition, alliances, or new ventures?  

Starting with IC, you must consider the following questions:

1. How large and attractive is the untapped market potential you are going after?
2. Do you have large-scale and, ideally, direct access to our end-customer?
3. Do you own key resources that are difficult or impossible to copy and which give you a significant competitive advantage?
4. Do you create significant value for customers because you perform and configure activities in disruptively innovative ways?
5. How rapidly and how easily can you grow your business model without substantial additional resources and activities?
6. Do you use strong revenue streams and pricing mechanisms to monetize value creation for customers?
7. Is your cost structure conventional or disruptive?
8. Do you have strong margins from low costs and high prices?

AEC business model and the sustainability dimension

How would under-performance of the business model influence corporate SDGs? When we connect the twelve most relevant SDGs to the corresponding business model cornerstones, the below model is created. For AEC firms, connecting business models and sustainability goals is the best way to meet the highest standards of social and environmental performance. It is also a great way to build public transparency and legal accountability to balance profit and purpose.

Figure 6 Connecting the twelve SDGs goals to the six cornerstones of the business model (Source: Giso van der Heide) 

In every industry we witness a shift in business culture, exemplified by the B Corp movement. In the future, we might see more AEC firms strongly consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. As Christopher Marquis writes in his book “Better Business: How the B Corp Movement Is Remaking Capitalism”,  businesses have a big role to play in a capitalist society, they can tip the scales toward the benefit of the few, with toxic side effects for all, or they can guide us toward better, more equitable long-term solutions.

Autodesk Industry Outcome Framework

Autodesk works with a wide variety of companies across many industries and markets. While every company is unique, we see many common goals. Decades of experience have helped us understand which technology and capabilities can have the biggest impact. In this new era of Convergence, Autodesk Outcome Engineering helps you measure your current capabilities, define better workflows, and capture more value using the Autodesk Industry Outcome Framework (IOF). This scalable method guides you on how to set the right priorities, establish a solid program, and quickly achieve clear business outcomes. To put it another way, we help you find a recipe, a repeatable sequence for success.

Figure 7 Autodesk Industry Outcome Framework for Construction 

We add the dimension that contains business outcomes from the Autodesk IOF to the business model cornerstones and the SDGs. The result is six business model cornerstones vs. twelve SDGs and twenty-four business outcomes. With this new model, you are able to visualize the business model, the targeted SDGs and the related business outcomes, all together.

Figure 8 Combined Business model, SDGs and Business Outcomes (Autodesk Industry Outcome Framework) (Source: Giso van der Heide)

Outcome driven customer case study

We share an example of a national oriented construction company which went through this process. This company has three major business units: residential, non-residential, and infrastructure. The results in the figure 9 below are from the residential division. This is the output of the business model health assessment and it shows the underperforming cornerstone: Revenue and Profit with a 28% score. The business model cornerstone Customer lifecycle and experience has a health score of 73%. It seems logical, as the residential unit is critical in B2C business. 

The other cornerstones are matching average health scores but still have a lot to gain and could be improved. This construction company’s strategic intent (included in the annual report) is to contribute to the following SDGs:

• SDG 7 Affordable and clean energy; Goal: Affordable urban services
• SDG 8 Decent work and economic growth; Goal: Higher productivity
• SDG 9 Industry, innovation and infrastructure; Goal: Accelerate R&D spending
• SDG 11 Sustainable cities and communities; Goal: Affordable living and commuting
• SDG 12 Responsible consumption and production; Goal: Cutting diverse waste

Figure 9 Business model results from Residential business unit, health, shifts, and market comparison

When we focus on the company targeted SDGs and the matching underperforming cornerstone, we can simply select the business outcomes to work with:

• SDG 8 Higher productivity; Improve Cost Control
• SDG 8 Higher productivity; Increase Bid Efficiency
• SDG 12 Cutting diverse waste; Reduce Non-Recoverable Cost
• SDG 12 Cutting diverse waste; Reduce Errors and Rework

And we can consider the following questions (from the business model health assessment):

• Are your gross margins better than your competition?
• Are your company’s major resource-consuming processes and functions (such as business development, design & engineering, marketing, construction, aftersales and so on) effective? Do they excel at delivering the critical results you need to win?
• Are your major resource-consuming processes and functions efficient? Are they operating with little wasted effort, rework, time, money, and headcount?
• Are your revenues growing faster than your competitors?
• Do your key business processes (such as business development, design & engineering, marketing, construction, aftersales, etc.) require less capital investment than your competition?
• Do your key business processes require fewer people than your competition?
• Are your most valuable and productive assets (such as key functions and processes, capital, knowledge, brand) difficult for your competition to imitate/hire/acquire?

Given the scoped-out business outcomes, we can drill down into the Autodesk Industry Outcome framework. It recommends on the needed capabilities and thereafter we can work-out an implementation plan with Autodesk technologies and solutions. So, in this customer case study, one of the targeted outcomes is Increase Bid Efficiency. Autodesk had recommended to improve the following capabilities: Bid Management, Estimating, Quantification and Fabrication Planning. Bid Management had the priority for this client, we proposed to consider Autodesk Construction Cloud BuildingConnected as solution including a full-blown adoption plan.

Conclusions and next steps

Your business models, and the way they are being executed and innovated are critical success factors in order to survive today’s VUCA world. It is not solely about acquiring technologies but finding a scalable way to acquire customers and monetizing them at a significantly higher level than your cost of acquisition. That is the key principle of having a successful business model.

Running one business model is quite unsafe and our advice is to build a portfolio of multiple business models. We also have seen that diversification of the business model itself brings the best value in terms of CAGR and market capitalization. With a business model health assessment, you can understand the actual status of your business model and identify the weaker parts, in the context of your company strategic directions. And when you are thinking about running a factory for prefabrication you must completely redesign your business model. 

It is also important to include sustainability in your business model and to make sure your related activities are SMART (specific, measurable, achievable, relevant, and time-bound) and managed through one common reporting framework.

Whether you play defense or play offense, you need to be able to measure the results of your activities and make sure you unlock the potential of Autodesk Industry Outcome Framework. The best way to do this is to think in terms of business model performance, SDGs, and outcomes: tangible and measurable business results that you want to achieve, in order to improve the environmental responsibility and performance of your business.

If you’d like to engage in an in-depth discussion on how business transformation in construction can help firms wade uncertainty, let’s discuss. You can contact Giso van der Heide on LinkedIn here, and Olivier Lepinoy here.