Innovation, Strategy and Risk in Construction

Turning Serendipity into Capability

Martin Loosemore

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780415676007
• eBook ISBN:
  9781136673542
• Topic: Architecture
• Subtopic: Business Strategy

Innovation, Strategy and Risk in Construction integrates insights from business and government leaders with contemporary research, to help built environment professionals turn serendipity to their own advantage by building greater innovative and adaptive capacity into their operations. Accessible and full of practical examples, the book argues that traditional business strategies which seek to systematise innovation and eliminate uncertainty need to be balanced with more flexible approaches which acknowledge and harness uncertainty.

The missing key to innovation, it is argued, is to turn serendipity into capability. The author proposes a simple model which allows managers to tap into the increasingly dynamic and interconnected nature of the construction industry. Innovation does not occur in isolation within individual firms, but through collaboration. Each stakeholder in the construction industry has a responsibility to drive innovation, and this book will be key reading for consultants, contractors, subcontractors, suppliers and clients, as well as policy makers and all serious students of construction management.

1 Serendipity and innovation

Once we rid ourselves of traditional thinking we can get on with creating the future.

James Bertrand

Introduction – grass roots innovation

In its simple terms innovation is the process of bringing new creative ideas to reality. As Theodore Levitt, former Editor of the Harvard Business Review succinctly put it, creativity involves thinking up new things while innovation involves doing new things. A more formal definition of innovation is provided by the Organisation for Economic Co-operation and Development (OECD) which describes innovation as the creation of new products, services or business processes that create wealth or social welfare. This definition is much more useful for a number of reasons. First, it links innovation to ‘value-creation’. Second, it recognizes that the concept of ‘value’ is much broader than the short-term economic interests of corporations. Third, it is a departure from traditional notions of innovation which portray it as a highly linear, laboratory-based process which is best measured by Research and Development (R&D) spending and the types of initiatives found in high-technology industries such as manufacturing. Innovation in the construction sector rarely happens in this way, meaning that the construction sector has been widely overlooked in national innovation statistics. This has left many with the misleading and highly damaging impression that it is a rather backward industry which is slow to change and adopt new ideas (Gambatese and Hallowell 2011).

As we will see in this book the construction sector does innovate. Furthermore, traditional ideas about innovation are outdated and many business leaders are becoming disillusioned with the low return on investment from their R&D activities. For example, while significant growth in the number of R&D personnel working in US firms over recent decades would appear to indicate a more innovative economy, the average R&D worker in 1950 contributed about seven times more to US total factor productivity than an equivalent worker did in 2000 (The Economist 2013). In response, many business leaders are adopting a more ‘grass-roots’ approach to innovation. This approach seeks to harness the talents and experience of their workforce and to capitalize on their unique relationships with key business partners who may have previously been seen as ‘outsiders’. This is the approach to innovation which is advocated and explored in this book. Not only does it more closely reflect the way that innovation occurs in the construction sector, but it offers considerable potential in tackling the many challenges which face contemporary business and society.

A challenging future

Much of the recent interest in innovation has been driven by a growing chorus of economists and business leaders who believe that the world is running out of ideas to deal with the huge challenges which lie ahead. Recent ‘Futures’ reports like the World Economic Forum’s Global Risks 2013 are enough to make any manager crawl under a stone. Problems of chronic labour market imbalances, rampant climate change, depleting natural resources, contagious financial markets, computer and human viruses and digital wildfires which could reap global havoc are just some of the threats business and society faces in the near future (WEF 2013). According to The Economist (2013), the rate of global innovation in responding to such challenges has been declining for decades. Furthermore, the impact of future innovations are likely to pale in comparison to those of the past, such as electricity, internal combustion, plumbing, petrochemicals, the telephone and computers. According to Peter Theil, a founder of Paypal, innovation in the US is somewhere between dire straits and dead. And some commentators believe that the global financial crisis masks a deeper and much more disturbing ‘stagnation’ of new ideas in the business world. Such arguments are supported by productivity data over the last two centuries which show output per worker steadily growing at a rate of 1 per cent per year in Britain, Europe and America during the nineteenth century. By the middle of the twentieth century it was 2.5 per cent per year and average incomes doubled every generation. However, by the 1970s output per worker had dropped to 2 per cent per year and by 2000 it was back to 1 per cent. While optimists argue that rates of innovation have always ebbed and flowed and that the rise of the developing world will magnify the impact of future innovations by spreading the benefits across a larger number of people, pessimists argue that recent rates of progress in travel, living standards, communications and health have slowed considerably compared to the early and mid-twentieth century. Potential causes which have been muted include an insidious tide of poorly crafted government regulation which discourages risk taking and reductions in government funding for R&D. Globalization has also been blamed for encouraging firms to offshore their operations in the search for cheap labour rather than investing in productivity-improving innovations at home.

The innovation imperative

Whether one is an optimist or pessimist, contemporary business rhetoric is that managers ‘must’ innovate to survive. Business leaders are constantly told that innovation is ‘essential’ to business growth, competitiveness and productivity in a world of increasing competition and depleting natural resources. For example, a recent McKell Institute Report into productivity in Australian industry declares that firms must ‘innovate or perish’ (Green et al. 2012: 12). According to the report, executives are faced with a fundamental choice. They can either take ‘the “low-road” of narrow cost-cutting and an unwinnable “race to the bottom”, or the “high road” of longer term dynamic efficiency gains in a knowledge-based high-wage, high-productivity economy’. Evidence is presented to show that innovative businesses are twice as likely to report increased productivity compared with businesses that don’t innovate. And this reaffirms other research by influential organizations such as the Grattan Institute which have identified a lack of innovation as a key area of reform needed to raise national productivity performance (Eslake and Walsh 2011).

In highly homogeneous industries like construction, where there is little to differentiate competitors, innovation is especially important. Many competitors in the construction sector draw from the same pool of suppliers, subcontractors and consultants. In this type of business environment, where cost-bases are broadly the same, innovation can provide significant competitive advantage by enabling firms to increase relative productivity or offer clients a better value-proposition to their clients. Yet, according to government statistics and many independent research projects, innovation appears to be concentrated in a small number of firms in high-tech industries such as manufacturing, electronics and pharmaceuticals, which are renowned as ‘persistent’ innovators. With very few exceptions, firms which operate within the construction industry are conspicuous by their absence from published lists of these firms. For example, BRW’s recent list of the thirty most innovative businesses firms in Australia includes none from the construction sector (Mills 2012).

Innovation in the construction sector

Given the above, one could be forgiven for thinking that the construction sector is a low innovation sector. However, as we will see in this book, more recent research has begun to question this simplistic perspective, revealing that a considerable amount of innovation does occur in the construction industry, even though it is often hidden from view (NESTA 2007; Abbot et al. 2007). Although the construction industry undoubtedly has a ‘long tail’ of poorly managed firms where performance could be improved significantly, leading firms in the construction industry innovate daily to successfully deliver highly complex projects in dynamic and uncertain environments – a capacity which is justly admired by leading firms in many other industries. The construction industry clearly has a lot to be proud of and it is important to recognize this. Furthermore, although construction is widely regarded as a hard-nosed and highly commercial industry, recent research shows that the drivers of innovation in the sector are not purely selfish. Increasingly, as Loosemore and Phua’s (2011) critical analysis of corporate social responsibility in the construction sector showed, the construction industry is playing a critical role in addressing the world’s most profound social and environmental challenges such as poverty, urbanization, pollution, resource depletion, population growth and climate change.

In this book we will discuss the many organizational, institutional, cultural and psychological challenges which leaders in the construction sector face in responding to these complex challenges. We will also discuss the political and social aspects of innovation in what Beck (1992) insightfully described as an increasingly paranoid ‘risk society’. Today, the public is better informed, educated and empowered than at any time in history to understand and influence the impact of business activities on their lives. Consequently, the activities of many high-impact industries like construction have come under increasing public scrutiny, presenting new challenges for managers which are not well understood. It is clear that managers can no longer be absolved from the wider social and ecological implications of their decisions. The challenge then, is not only to increase levels of innovation in the construction sector, but to ensure that firms in the industry contribute to social well-being and are seen to be doing so. As Fox and Hooper (2011) correctly point out, today’s true leaders operate at the intersection of business and society.

Evidence-based strategy

Like all fashionable topics in business, the subject of innovation has attracted its fair share of self-proclaimed gurus who have generated literally thousands of articles, books, websites and blogs. While there is certainly plenty of information out there, the problem for leaders is that much of it is based on nothing more than shallow opinion-based surveys, anecdote and hearsay. Many management consultants make a very good living out of this questionable information and it is no coincidence that the most dubious information often appears first in any web-based search on the subject of innovation. While personal experience and intuition is often interesting and might occasionally be of substance, it is very hard for managers to separate rhetoric from reality. Consequently, as a recent article by Lafley et al. (2012: 57) in the Harvard Business Review pointed out, ‘few managers succeed in marrying empirical rigour with creative thinking’.

There is plenty of evidence to show that firms in the construction sector are equally susceptible to this deception and that many have mistakenly fallen for the miraculous promises of business success which accompany it. As Dainty and Loosemore’s (2012) critical review of human resource management practices in the construction sector illustrates, the consequences of following this faulty advice can be catastrophic for the firms and employees affected. To avoid this happening, the aim of this book is to help managers working in the construction sector to sift the good information from the bad, so that they can base their innovation strategies, as far as possible, on fact rather than fiction.

Building agility

With so much being written about the subject of innovation, it is very easy to simply regurgitate what has already been written about the subject. What quickly becomes apparent when one reads the literature in this area is that it is highly repetitive. The normal approach is to portray innovation as a highly mechanistic and predictable process which is best planned well in advance. Uncertainty and unpredictability in the process are widely portrayed as a waste of resources and as a sign of managerial failure. Innovation is seen, like many other contemporary areas of management, as a key mechanism to help managers deliver ever more challenging growth targets and to satisfy the seemingly insatiable appetite of increasingly dispersed shareholders for short-term financial returns.

On the contrary, this book argues that innovation has a neglected political and social dimension and is not just about financial and productivity returns. Furthermore, in an increasingly dynamic, uncertain and interconnected business world, managers need to better embrace uncertainty and learn to recognize and harness the spontaneous and unpredictable nature of the innovation process. The alternative approach to innovation being offered in this book does not advocate the model of the ‘mad professor’ accidentally stumbling upon something new. And it doesn’t argue that innovation should be left to chance. These approaches to innovation do not represent a practical and sustainable business model for any organization. However, this book does argue that planned approaches which seek to ‘systemize’ innovation need to be balanced with flexible strategies which can harness the largely untapped unpredictable and serendipitous opportunities offered by the new world order (or disorder). Serendipity means ‘finding something when you are looking for something else’ and as we will show in this book, many entrepreneurs say that serendipity has played a large part in their success. They openly admit that their first business plans were not always where they ended up. It wasn’t their plans that led them to innovate. Rather, it was their open-mindedness, sensitivity, alertness and willingness to adapt those plans and respond to the unexpected.

This book is about how we can build this agility into the construction industry. It is of relevance to every firm that is involved in the industry from clients through consultants to contractors, subcontractors and suppliers. Based in rigorous research and in conversations with some of the industry’s leading global innovators from across the supply chain, one of the resounding messages to emerge from this book is that innovation does not occur in isolation within individual firms but through collaboration. Everyone in the industry has a collective responsibility to drive innovation and a high dependency on others in the industry to do so. The idea of organizing for serendipity might seem like an oxymoron. And a business strategy which relies, even in part, on serendipity might seem like an unsustainable and somewhat frightening idea. This book will show that these responses are a consequence of an outdated way of thinking about business strategy which has developed to eliminate and suppress uncertainty, avoid risk raking and promote business unpredictability as a sign of managerial failure. The dangers of this approach are clearly evident in the construction sector. Nowhere is this more vividly illustrated than in the all-pervasive subcontracting model which has fragmented the construction industry, leading to a multitude of problems which include abuses of human rights, corruption, underinvestments in people and knowledge development and a confrontational culture of risk transfer where there is little incentive to innovate and where risk is passed to the point of least resistance and lowest capability (Dainty and Loosemore 2012). The negative effects of this traditional approach to management which is designed to suppress uncertainty have also been well documented by leading scholars outside the construction sector. For example, the well-known Lebanese American scholar Nassim Nicholas Taleb shows that the critical issue in the lead-up to the financial crisis was business and governments’ artificial suppression of volatility (the ups-and-downs of life) in the name of economic and political stability. According to Taleb and Blyth (2011), what happened in the global financial crisis, and subsequently in the political upheavals of Libya, Egypt and Syria, is the inevitable result of suppressing risk in complex systems. It seems that complex systems, which have artificially suppressed volatility, become increasingly fragile over time while exhibiting no outward signs of stress until the hidden risks accumulate and explode into an uncontrollable and seemingly unpredictable ‘Black Swan’ event. According to Taleb and Blyth, managers and policy-makers who seek to reduce variability in complex systems unwittingly do the opposite by ironically increasing the chance that the system will eventually collapse.

This book builds on this line of thought by exploring how managers can better harness the opportunities which lie untapped in the problems of randomness, probability and uncertainty which increasingly characterize their decisions. In doing so it exposes the problems of rigid organizations that suppress unpredictability and illustrates the benefits of agile organizations which acknowledge the inevitability of unpredictability. By integrating rigorous research with the real-life insights of leading innovators in industry, it presents a new evidence-based model of innovation which can be used to drive the future development of industries like construction which are distinguished by their unpredictability.

Serendipity in the innovation process

Unfortunately, because of serendipity’s association with the rather mystical, mysterious and unmeasurable concept of luck, the traditions of science and management have driven underground discussions about its role in the innovation process. Yet its contribution to the advancement of civilization throughout history is plain to see. Famous examples of where scientists or innovators seem to have stumbled on a new insight or idea are all too easy to find. These include:

1. Alexander Fleming discovered penicillin when a petri dish of bacteria accidentally became infected by a mould which killed the bacteria.

2. Vulcanized rubber was discovered when Charles Goodyear accidentally left a piece of rubber mixture with sulphur on a hot plate.

3. Safety glass was discovered when a French scientist accidentally knocked a glass flask to the floor and observed that the broken pieces were held together by a liquid plastic that had evaporated and formed a thin film inside the flask.

4. The microwave oven was invented when a scientist was walking past a radar tube and noticed that the chocolate bar in his pocket melted.

5. Ink-jet printers were made possible when an engineer at Canon accidentally put a soldering iron on a pen and superheated the ink.

6. Post-it notes were created when secretaries in 3M discovered a use for non-sticky glue which had been abandoned as a useless idea by managers.

7. Teflon was invented accidentally in 1938 in attempting to make a new CFC refrigerant.

8. Viagra was discovered from treating the side effects of hypertension.

9. Anti-wrinkle creams emerged out of experiments to treat acne with Vitamin A.

But perhaps more than any other modern innovation, the World Wide Web is the most vivid example of how serendipity can change the world. The World Wide Web was just one of many hundreds of transformative ideas to emerge from CERN in the 1980s. CERN is the European Organization for Nuclear Research and remains one of the world’s largest and most respected centres for scientific research into fundamental physics. In the 1980s a Technology Transfer Office was created to forge connections between CERN’s many global laboratories which were working in relative isolation. Since its formation, this vast new knowledge network has spawned thousands of new serendipitous insights for CERN, releasing an enormous amount of creative energy which had previously gone untapped by the knowledge silos which historically characterized CERN’s organizational structure. And it was unexpectedly, out of the collaborative technology networks created by this office, that the World Wide Web was born. As Muller and Becker (2012) point out, CERN’s approach to business is a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• Acknowledgements
• 1 Serendipity and innovation
• 2 The innovation process
• 3 Innovation in construction
• 4 The history and future of innovation in the construction industry
• 5 Strategy and innovation
• 6 Organizing for innovation
• 7 Managing the risks of innovation
• 8 Conclusion – we need a reality-check
• References
• Index