Citation
Engstrom, D. and Stehn, L. (2014), "Design creating value for systems building of housing", Construction Innovation, Vol. 14 No. 2. https://doi.org/10.1108/CI-06-2013-0028
Publisher
:Emerald Group Publishing Limited
Design creating value for systems building of housing
Article Type: Editorial From: Construction Innovation, Volume 14, Issue 2
Introduction
Construction in Sweden is changing. The development from ad hoc project-based logic to increasing awareness of processes and product logic is a paradigm shift. Winch (2003) argues that what primarily sets construction apart from other industries is that production mainly takes place on the site where the end product will be used. In systems building (construction inspired by industrial processes), large parts of production are moved to earlier phases. Site production is turned into the final assembly of prefabricated components. Construction is then no longer fundamentally different from other industries, which means that we can use theories from these fields to understand our own industry. This research is ongoing in Sweden. Work on industrial methods for construction is ongoing at Lund Institute of Technology (Lessing, 2006), the Royal Institute of Technology (Gerth, 2008) and Luleå University of Technology (Meiling, 2010).
In construction, the knowledge and skills that systems builders learn are spilling over into regular construction. Reasons for this can be found in the movement of key staff members to new companies and the tendency of institutions to adapt their structures to their peers (through institutional isomorphism, as described by DiMaggio and Powell (1983)). Even though we still have some way to go before we are in control of industrial methods, most disciplines are adapting to the new context. The industry is learning from industrial methods in fields like production planning (e.g. last planner), production methods (e.g. modularisation), logistics (e.g. just-in-time), purchasing (supply chain management) and information and communication (e.g. building information modelling).
However, some parts of the industry are lagging behind, notably the client role (Engström, 2012; Hedgren, 2013), knowledge management (Johansson, 2012) and design. This paper addresses the role of design in systems building. It is the opinion of the authors that the Swedish construction industry is still struggling to find ways of using industrial methods in design. If it is difficult to apply industrial methods or business set-ups to traditional construction, it is equally hard to use traditional construction methods or contractual agreements in systems building. The need to find ways to create customer value in design with a revenue/cost model adapted to systems building is however, even more important. One example of this is the segregated value chain in which design is bought on the basis of lowest hourly rate. This is fundamentally ill-suited for a systems approach (Erikshammar, 2011). One practical outcome of this is that a design company interested in learning from and contributing to systems building will probably need to change its attitude to what constitutes “value.
Systems building
Modern systems building is based on standardisation and repetition, not necessarily of the product but of the processes, building parts and methods. The building system is a key asset in systems building (Johnsson, 2011). It is the carrier of the collected knowledge of the company when it comes to best practice for the market segment in question. Utilising this asset requires the ability to predict the development of a chosen market share and the courage to invest based on those predictions. In other words, in systems building, the production strategy is chosen before the system meets a client, as opposed to traditional construction where the production strategy is chosen based on the client brief. In systems building, the choice is based on the market share in question and on the resources available to the company. A choice is made of whether to offer minor or major opportunities for the client to request adaptations. Instead of delivering a project, the systems builder delivers to each unique client a predetermined product, adapted to the level that is decided on.
Systems building can be described as a new business model in construction. The concept of business models has been widely used since the rapid growth of internet-based companies during the 1990s. Generally, a business model describes the alignment between the environment, the offering of a company and its internal and external resource base and activity systems (Osterwalder et al., 2005) to create value (Kindström, 2010).
The offering is perhaps the most important part of the business model, as it ends up in a value proposition – the value a company offers to segments of customers to generate profitable and sustainable revenue streams. The traditional business model for contractors can be said to work by providing flexibility, capacity and adaptation to changing demands to meet any customer. When it comes to the investments in work procedures and building systems made by the systems builder to reach segmented market positions, it is crucial to get the mechanisms of revenues versus costs right. It is perceived that, value creation is one such critical issue for making the business model of systems building work.
Another closely connected issue is working out the connection of value creation (traditional design) to the critical concerns in the new risk profile (for the predetermined product). Traditional contracts are based on the clients specification, with teams of experts helping clients to specify these specification targets. Provided the terms of the building contract are met, the risk of increased resource costs can actually be transferred back to clients (Gruneberg and Hughes, 2011). In systems building, houses become pre-defined products which, in terms of specifications, reduce the need for detailed documentation, or project-specific configuration, by a designer (these documents are produced in the product development phase). These pre-defined products alter this traditional risk taking and allocation at the expense of increasing the systems builders liability and risk.
A practical example is now given of a systems-based value proposition, where the value generation and revenue streams work well because of product logic. One example is a sports centre[1] developed by NCC[2]; one of the major building contractors and developers in Sweden. NCC agreed with the Swedish Handball Federation to develop a simple sports hall for childrens handball practice. The development was based on a given brief, developed by NCC: “A simple sports centre for practice and lower-tier matches, for handball and similar sports, with the emphasis on young athletes. The inter-disciplinary group at NCC identified the key characteristics needed in order to match the brief, including: a full-sized court, proper lighting, the right sports floor, sufficient ventilation, good acoustics and a safe sporting environment. Everything unrelated to these traits were scrapped. The cost of this product is typically half the price of a traditional sports centre, but covers the briefs of the majority of the sports centres NCC is asked to build. The key to cutting the price by half is the product logic; the supplier learns the drivers for the clients in the market segment they are looking to address, and designs a reproducible product that suits that segment.
Clearly, the practical example provides evidence that the higher degree of completed specifications in systems building calls for co-creation between designer, user/client and contractor for a total benefit in product logic. This in turn creates demands for a new risk allocation and revenue models other than those based on price or an hourly rate. Instead, it is proposed that business/revenue models should be based on service logic founded on value creation in industrial processes for the benefit of all the stakeholders in systems building.
Production strategies
Winch (2003) identified four different production strategies based on how far the preparations have come when the client enters the process. The “Engineer-to-order production strategy is based on codes and standards, “Modify-to-order is based on generic product structures, “Configure-to-order is based on standard parts and modules and, finally, “Select variant is based on standard products. The customer order comes in at the earliest in the value chain at “Engineer-to-order and, at the latest, in “Select variant. “Engineer-to-order (generic product structures) is the strategy most used in traditional construction, while the modern systems building addressed here is likely to apply modify-to-order (Gerth, 2008; Winch, 2003).
With “Engineer-to-order, detailed design is based on procedures and a set of predetermined methods and components. This production strategy uses a traditional workforce in a traditional organisation, which makes it possible to address multiple value chains with the same workforce but makes it difficult to define and measure success. Platform development is a minor part of the design process, which ostensibly takes the format of traditional design. The difference is that the options available for technical solutions, layouts and so on are more limited. There are pre-defined rules for building geometry and standard operating procedures. Software and formats which might require investments on the part of the designer are available. Some Swedish examples of systems with generic product structures are platforms from the contractors JM, NCC, Skanska (called XChange) and PEAB (called PGS[3]).
Moving production strategies from generic product structures to standard parts and modules, makes design become a two-stage activity: generic product development and project-specific configuration, especially if the system is based on parametric components, where the component rules and interfaces are defined. The solutions that are suggested must be developed in close correlation with the building and production system; even if a certain solution, for heat exchangers, for example, might suit a particular building better, components cannot be chosen from outside the set of pre-defined components. Both product developers and project designers work in close collaboration with the system builder and should expect to invest considerable effort in understanding the drivers behind the solutions. It is likely that they will need to identify individuals to work with the system and they will often have a hard time finding the perfect designer, because the requirements are rigorous and demand a combination of expertise, drive, and the will to interact and adapt to others. Some recent Swedish examples of systems with standard parts and modules include Bau-How and NCC Complete (which have both been abandoned), Lindbäcks Bygg and Moelven Byggmodul.
Creating value in design
This paper addresses the creation of value by designers in the context of the business model for the systems building of housing, especially for systems with generic product structures. The introduction of these systems is a major trend in Swedish housing construction. To put it simply: what do systems builders pay designers for? In the traditional ad hoc production strategy based on generic codes and standards, is a business model based on hourly rate that has been widely accepted. This is a model in which specific tasks are passed downstream from the contractor (or client) to the designers. In return, a fee is paid to cover the labour cost for the time it took to fulfil the task. If there are changes, the fee is increased to cover the increased labour costs. Since the tasks are expected to flow, having already been defined, from the contractor/client to the designer, the only incentive for designers to think about the context of their work is that they might “sell more hours. In fact, a solution that requires more work on the part of the designer is preferable to a simpler one. This business equation does not include the consequences for the client/contractor of the solution that is chosen.
However, in systems building, the relationships between the building, information and production systems are so complex that the consequences of the solutions are pivotal. The consequence of making mistakes or finding optimal solutions can be multiplied over many projects. In the co-creation of systems building, tasks from the client will be affected by the information that flows back from the designer. Long-term relationships are needed to build understanding and rational working methods to implement business models that drive collaboration for the good of the system. Arguably, finding the most suitable design partner to work with is more important than finding the partner that spends the least time on the problem. The work of Grönroos (the Hanken School of Economics, Helsinki, Finland) supports a more modern approach to understanding value creation: service logic.
According to Grönroos and Voima (2011), value is a question of the clients experience of quality. A supplier is successful if the customer buys its products/services and is pleased both with them and with the companys way of working. They argue that product value is not inherent in the product itself but is incorporated in the value it can assist the customer to create (for example, the only value in a 3D model of a building is in the use the customer can make of the model). From this perspective, and in this case, it follows that designers are usually unable to provide value, but are able to assist the customers value creation.
Value can be described from the customers perspective as the ratio between perceived quality and sacrifice:
In order to increase customer value, designers should work to either increase the numerator or reduce the denominator (or both). It is of course possible to choose different strategies in order to obtain the greatest benefits for the least effort; work to enhance the customers experience of the quality, or reduce the customers sacrifice.
The positive – the numerator: perceived quality
The perceived quality depends on the outcome (what the customer receives) and the process (how the customer experiences the process), where the process includes aspects of the designers attitudes, behaviour, availability, punctuality, confidence and ability to deal with problem situations. One consequence of this approach is that the development of a conceptual framework for value creation cannot be allowed to focus solely on the outcome of the process or structure, but must also include the way the process is handled by design staff in relation to customer expectations. Designers would do well to remember that customers expectations affect their experience of product quality. Quality can be a very subjective experience in meeting expectations (promises the suppliers made) and experiences (how the suppliers have lived up to their promises in the past).
The negative – the denominator: customer sacrifices
Customer sacrifice is the sum of the price and additional costs to be entered into a relationship with the designer:
Relational costs are sacrifices apart from the cost that the client must bear in order to make use of the business relationship with the supplier. They can be direct costs (e.g. investments or running costs) or indirect costs (unexpected problems because of this specific relationship). They can also be psychological costs (the worry and angst over failed commitments and abused trust). Like quality, relational costs contain large measures of subjective experiences in relation to expectations.
Discussion
The main consequence of the Grönroos approach to creating value is that the value stream based on an hourly rate does not support creating real value, not even in traditional ad hoc construction. It might even be argued that it is counterproductive, since it puts the goals of the designer in conflict with the goals of the client. The incentives for the designer lie in increasing the denominator (the fee), which the client wishes to reduce. The way to find common incentives is for the goals to coincide, so that the designers fee is related to the value created for the client. Since this value is subjective (as discussed above), there is no way to find quantitative metrics for this value and no way to measure objectively what the basis for the designer fee is. This has an impact on trust and long-term business relationships.
The main consequence of putting the service logic of Grönroos into the context of the systems building product business model logic is that the negative effects of the hourly rate are aggravated. The interaction of building system, communication system, production system, local variations in requirements and cost pressure is so complex and long term that the technical solutions need to be developed, from the viewpoint of what the consequences are, (not how long it takes to develop them). Designers in systems building should expect to do their homework on the systems builder drivers and systems, and they will be expected to contribute to the long-term development of the system. This is only feasible if there are common goals to meet, i.e. shared risk from failure and shared profits from success. The hourly rate does none of this.
It will be a challenge to define new models of the revenue streams that are credible in our segmented industry, because they will all be based on subjective experiences of quality, service and trust. They must be based on the value that is being created and this is subjective, not measurable quantitatively. However, many options are available. For example, using the business model canvas language, Osterwalder and Pigneur (2010) provides the following models of revenue, with examples added by the authors:
* * Unit sales. Sell a product or service to customers (general electric).
* Advertising fees. Sell others the opportunities to distribute their message on your space (Google).
* Franchise fees. Sell the right for someone else to invest in, grow and manage a version of your business (McDonalds).
* Utility fees. Sell goods and services on a per-use or as-consumed basis (electric utility companies).
* Subscription fees. Charge a fixed price for access to services for a set period of time (gyms).
* Transaction fees. Charge a fee for referring, enabling, or executing a transaction between parties (visa).
* Licence fees. Sell the rights to use intellectual property.
* Fees. Provide professional services on a time-and-materials contract (any consultant).
Conclusion
The revenue streams of design firms in Sweden have not changed significantly for a very long time. We still assume that the value created for the client by the designer is proportional to the amount of time the designer spends on the problem.
It is therefore advocated that the Swedish housing market is ripe for a new breed of designer consultancies. Before we know it, systems building will have opened up a lowest-cost industry for best-value players. Feasible options are there for the testing. The question is “who will be first to step up to the plate?
http://www.ncc.se/sv/Projekt-och-koncept/byggkoncept/bollhall-sporthall/
http://www.peab.se/Produkter-tjanster/Industriellt-byggande/PGS/
Dan Engström, Lars Stehn
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Further Reading
Segerstedt, A. and Olofsson, T. (2010), “Supply chains in the construction industry, Supply Chain Management: An International Journal, Vol. 15 No. 5, pp. 347–353
About the Editors
Dan Engström is a leading engineering specialist with NCC Engineering and Adjunct Professor of systems building at LTU. He liaises between research and industry in the context of industrial construction. Dan Engström is the corresponding author and can be contacted at: daneng@ltu.se mailto:daneng@ltu.se
Lars Stehn is a Full Professor of timber structures at LTU. He has an extensive experience of developing and researching value streams in the production of timber-based housing.