Making Sense of Shifting Markets

Making Sense of Shifting Markets

A market's size and characteristics have been primary indicators of any industry's health since the early 20th century. Understanding changes in such markets is an important element of any company's ability to perform profitably and productively. Market share is a measure of the performance of an organization relative to its competitors in a particular industry. In order for any organization to develop

A market's size and characteristics have been primary indicators of any industry's health since the early 20th century. Understanding changes in such markets is an important element of any company's ability to perform profitably and productively.

Market share is a measure of the performance of an organization relative to its competitors in a particular industry. In order for any organization to develop a strategy that will allow it to expand or recover its own share of the market, the entire economic market size and its trends must first be correctly and consistently recognized and compared using a common definition. Then, to regain or expand market share, all the root causes of erosion or shifts have to be addressed.

Through a research grant sponsored by Electri International (a nonprofit electrical construction organization based in Bethesda, Md.), MCA, Inc., Flint, Mich., recently developed a methodology to accurately measure the electrical construction market size and its trends. This method uses data from the U.S. Census Bureau (i.e., construction put in place or CPIP) as the basis for construction market size.

From there, the high correlation between CPIP and data from the Energy Information Administration (i.e., electricity end use or EEU) are used to scale the market by categories (Fig. 1). The construction value ratio is used to calculate each specialty contractor's portion of the construction market. The data necessary to apply this methodology is publicly available at the national, state, and county levels. By collecting the electrical market dollars available in each category, the total electrical market size is defined, and can be similarly defined for other specialty subcontractor markets.

The market shift. The market measurements developed show a very clear shift in the construction market in the early 1960s (click here to see Fig. 2). More than 50% of the dollars spent in the construction market in 1955 were spent on industrial construction as compared to a mere 28% in 2005 (Fig. 3).

Mirroring the trend in the construction market that saw a shift from industrial to commercial/residential construction in the 1960s, the electrical construction market made its own shift from more than 50% industrial work to more than 50% commercial/residential work in the late 1990s (click here to see Fig. 4). Over the next 20 years, the expansion of the market will continue to be in the commercial/residential area. In fact, an article that ran in American Demographics titled “The Next 25 Years” as well as the “2006 Buildings Energy Data Book” from the U.S. Department of Energy predicts a doubling of the current commercial floor space by 2025, as the American population is expected to increase by another 20% to 25%.

Effects on competition. The electrical contractors' historic approach to market dominance was that of supply-side control. This practice was useful during the era when the industrial work, which required a specialized workforce, dominated the electrical market. By controlling the number of electricians entering and remaining active in the workforce, the unions controlled the market and pricing.

The recent market shift, however, has drastically reduced the requirements for the threshold of entry and level of expertise. Supply-side control is no longer as effective as it once was because a commodity market is driven by demand-side control. The expanding commercial/residential market is driven by the customer's demands for growth and does not require the same proportion of specialized electricians. Fast timelines and less specialized work allow new players to enter the market with less technical expertise, thus increasing the competition and tightening margins while simultaneously developing the long-term relationships needed for future work.

Effects on profitability. The market shift has had a dramatic effect on the profitability of the electrical contracting profession due to the nature of the new markets as well as the skills required by different types of work. The profitability and productivity levels from the various markets are fundamentally different between the types of work. Geography also plays a role.

For example, using the market size calculations to compare the electrical construction markets in Georgia to those in Alabama, we initially see that the two states have very comparable markets in terms of total dollars available. Further investigation, however, shows that even though the market size in 2005 of both states was comparable, their characteristics — and therefore available profits — were fundamentally different. Table 1 (click here to see Table 1) compares the two states side by side, showing that Alabama still retains its profitable industrial heritage with nearly 75% of the available electrical construction dollars going into industrial work as compared to only 46% of the market in Georgia.

Another influential factor on market shift relates to the various types of construction having different amounts of associated electrical work. Nationally, every dollar of industrial construction contains an average of 13.2 cents of electrical work; 9.0 cents of every commercial construction dollar is tied to electrical; and only 3.3 cents out of every residential construction dollar is tied to electrical work (Table 2 on page C15).

The portion of electrical work for each type of construction varies greatly according to location and the characteristics of the available work. In Alabama, for example, 19.5 cents of every dollar spent on industrial construction is tied to electrical, significantly more than the national average. Georgia is slightly below the national average with only 12.9 cents of every industrial dollar going into electrical construction. Both Alabama and Georgia are below the national average in terms of electrical work generated by commercial construction; Georgia at 8.5 cents per dollar and Alabama even lower at 6.5 cents per dollar. In the residential market, Georgia is slightly above and Alabama is slightly below the national average, realizing 3.6 cents of electrical work per dollar of construction, and 3.1 cents, respectively (Table 3).

Not only is the amount of electrical work generated by each type of construction segment different, but there are also significant differences in the profitability of the available electrical work. Table 4 shows an example of the differences in potential profits available for electrical contractors on a $10 million construction job. This data is based on the Construction Financial Management Association's annual financial report and supported by comparable information from the National Electrical Contractor's Association. Due to the differences in the local markets — and depending on whether the job is industrial or commercial/residential — the gross profit margin for an electrical contractor varies considerably. More than half of Georgia's available electrical market comes from the typically less profitable commercial/residential segment, whereas three quarters of Alabama's electrical market is tied to the more profitable industrial market segment.

Effects on the labor force. The measurable shift in the electrical construction market from industrial work to commercial/residential work has had the following effects on the electrical labor force:

  1. Commercial/residential electrical construction work does not require as many specialized electricians per dollar as does industrial work. Appropriate use of a less technically skilled labor force allows an electrical contractor to more easily expand into the commercial/residential market.

  2. Portability and crew composite ratios play a much bigger role in the commercial/residential environment than in the industrial environment.

  3. Management of the workforce in the commercial/residential work environment is much more critical than in the industrial arena. In addition, the commercial/residential work environment requires a contractor to offer its workers training and education in the areas of managerial skills (including material management and handling), personnel management, and time management.

Strategic planning for the market shift. Recognizing the significant differences in the key market segments noted throughout this article should be a core part of the strategic plan for any electrical contracting firm. The national shift in the electrical market from the highly specialized industrial segment to the production environment of the commercial/residential segment has created a large commodity market.

In a commodity market, electrical contractors can only be profitable if they are low-cost providers. But note that low cost is not the same as cheap. Low-cost providers provide high-quality work at a lower cost by relying on higher system productivity. In a commodity market, low-cost providers can offer profitable market-based pricing, enabling them to increase their sales. Increased sales will increase employment. Better use of specialized electricians will allow the contractor to increase the portion of the labor market it controls. Therefore, its market share will increase, presenting the opportunity for additional collaboration. Higher profits enable better training and usage of technology, lowering the costs of providing services and increasing the funds available for strategic expansion.

An electrical contractor's strategic plan that allows for sustaining, regaining, and expansion of its market share requires careful investigation of:

  1. Environment (markets)
  2. People (skills)
  3. Process (management)
  4. Material (handling)
  5. Tools (technologies)

Each of these five factors should be handled differently, depending on what type of work the firm does and in what market segment it works.

Changes in the local environment may now provide a different mix of work than was available in the past. Rural areas supporting new residential developments and the corresponding commercial support facilities, new power plants or mega-manufacturing facilities in formerly undeveloped areas, and urban revitalization and renovation projects all create new business environments. Each of these changes can have any number of effects, ranging from tighter margins, faster schedules, and increased competition for available work from companies with more or less experience than your firm.

“Following the work” can bring a new set of issues — new regulations, taxes, workforce, and management needs. New processes may need to be put into place to respond to the demands of different material needs and faster delivery schedules. Processes and technology must also be integrated into legacy systems to fit the new work environment.

Automated tools, smart technology, and a “plug-and-play” generation of materials have shifted the focus from individual expertise levels to a company's ability to effectively plan, handle, receive, store, and distribute materials. Every one of these factors significantly affects every contractor's ability to succeed and will need to be examined in light of these shifting markets. Other industries have found that maintaining former levels in a specialized area while the market grows and expands has the inevitable effect of lost market share — and with the loss in market share comes a corresponding loss in competitiveness and profitability.

By recognizing these shifts, and adapting to them through a well-defined plan that addresses the strategic goals of the company, an electrical contractor can realize its own profitable and productive future.

Daneshgari is president and CEO and Wilson is director of research with MCA, Inc., Flint, Mich.

TAGS: Construction
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