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Is construction Amazon's next target for disruption?

Amazon has already made inroads into the construction industry and experts speculate that there will be more to come. Construction companies, among the digital laggards, must adapt to the digital era to survive.

The construction industry has long been ripe for digitalization. And if some of Amazon's early moves offer any clues, the company will influence how that transformation unfolds.

Consider that revenue from Amazon Business, the company's commercial-focused marketplace, will hit $31 billion by 2023. That's up from $1 billion in 2015, according to RBC Capital, which noted strong performance from the maintenance, repair and operations (MRO) vertical within the Amazon Business suite. MRO performance -- along with its sales of tools and hardware supplies, and its foray into home services such as smart security systems -- has fueled speculation that the company plans bigger moves into construction.

Analysts have already advised construction industry executives to prepare for what may lay ahead. This industry lags behind nearly every other one in terms of digitalization which makes it prime for disruption.

"We don't want Amazon to take over everything, but industries have to do a better job than what they're doing right now," said Subodha Kumar, a professor at Temple University's Fox School of Business. "They're killing themselves, it's not Amazon killing them."

What's unclear is who will lead the way -- Amazon, an industry insider or a newcomer.

A prime example

Amazon has not disclosed plans to jump into the construction trades just yet, but some of its actions have signaled its intended direction. Kumar identified Amazon smart devices, such as the Alexa virtual assistant, its Smart Home store, its Ring home security system and its Key smart home-entry system, as probable steppingstones toward offering more integrated, building-type services for property owners.

"If Alexa is already talking to all the different devices in your house, it makes sense for Amazon to install everything in the house and then it makes sense to get into home construction," Kumar said.

Kumar doesn't expect Amazon to start its own architect firm or trades divisions. Rather, the company will likely use the power and size of its platform to combine elements within a building project to create a new digital experience for property buyers and owners, he said.

Based on its existing consumer-focused approach, Amazon could deliver a seamless, comprehensive buying experience. "You could be buying a house through Amazon; you'll buy the products and services from Amazon," Kumar added.

Amazon did not respond to multiple requests for comment. But others have also noted Amazon's growing influence.

"Amazon has already changed our industry in ways that we have yet to tackle," wrote Michael Copp, executive vice president of the Plumbing-Heating-Cooling Contractors Association in 2019. "They are impacting supply chain management, online ordering and returns, offering one-day and same-day shipping, and doing all of this while shifting customer expectations of brick-and-mortar stores to match online expediency."

Copp added that Amazon has changed customers' expectations of what it's like to work with contractors.

A digital slowpoke

Construction businesses have little appetite for risk, and profit margins tend to be limited, which has led them to fall behind most other industries in terms of technology adoption, according to a McKinsey & Company Global Institute analysis.

McKinsey & Company found that large capital projects typically take 20% longer to finish and are up to 80% over budget compared to initial plans. Moreover, R&D spending in construction is drastically lower than it is in other areas: less than 1% compared to 3.5% in the automotive industry and 4.5% in aerospace.

The consulting firm also wrote in a June 2020 report: "Construction is the biggest industry in the world, and yet, even outside of crises, it performs poorly. The ecosystem represents 13% of global GDP, but construction has seen a meager productivity growth of 1% annually for the past two decades. Time and cost overruns are the norm, and overall earnings before interest and taxes (EBIT) are only around 5% despite the presence of significant risk in the industry."

The industry has begun its move into the digital era, though, said Jose Luis Blanco, partner at McKinsey & Company and leader of the firm's engineering and construction work in North America.

"There are things converging that make me confident that disruption in this industry is not only occurring but is actually accelerating," Blanco said.

Blanco said he sees more use of digital tools, such as job site management platforms and construction design technologies. There is also more investment in innovation, and a growing number of digital-native workers are entering the field as older workers retire, he added.

The question then becomes: Who will drive the transformation?

"The industry is already disrupting itself, and there's an opportunity for new entrants," Blanco said. "But when you see all these things happening, that also attracts the attention of companies that are by nature disruptors, those companies who make their careers out of disrupting legacy industries."

A lesson for all industries

The construction industry must overcome numerous obstacles in this changing landscape. To succeed in the digital era, it must:

  • create a better customer experience for both commercial and residential customers;
  • predict expected outcomes more accurately;
  • create more visibility into the process and the impact of changes to the process;
  • control costs; and
  • streamline the supply chain.

"The smartest strategy for executives is how to anticipate customer expectations as they're emerging, [whether those] expectations are for more information, more transparency, more personalized service, or faster service," said Juan Riboldi, principal and president of Ascent Advisor, a management consultant and author of the upcoming book Strategic Transformation: How to Deliver What Matters Most.

Amazon tends to have an advantage when it comes to anticipating customer needs. Its core competency involves building platforms that bring people together, and then creating ecosystems around them, Kumar said.

"What the industry is, doesn't really matter to Amazon," Kumar added. "They want all procurement to be done on their platform, regardless of industry."

Customers and companies could both benefit from Amazon in the construction industry, experts said.

"There's a lot of demand/supply mismatch in many industries, including construction," Kumar said. A platform like Amazon's could create more seamless experiences for customers, give smaller well-performing companies increased market presence and opportunities, and improve overall efficiencies for both sides.

Executives across all industries should pay attention and plan to meet changing customer expectations -- or lose to Amazon and other companies that do.

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