Survival of the Creative, Informed and Pragmatic
Thoughts on Successfully Managing Your Building Products Manufacturing Business in an Economically Challenging and Ever Evolving Commercial Building Environment
By Doug Bevill – Bevill and Associates

Business news has never been as dramatic and confusing as it is today: The potential impact of short and long term strategic decisions made by corporate leaders are more critical to the health and survival of their companies than ever before. From General Motors filing and then emerging from bankruptcy 61% owned by the government to Goldman Sachs paying back $10,000,000,000 in TARP funds and reporting a $3,500,000,000 profit in the most recent quarter, devastating as well as an increasing number of encouraging stories are emerging. General Motors, once the shinning icon of American business prowess and a company that virtually on its own created the American middle class, is now a government controlled entity. Between the necessary corporate restructuring and the closing of forty percent of its dealer network, GM will displace another twenty thousand workers and this number does not include secondary suppliers and their related sad employment statistics. On the other hand Goldman Sachs took advantage of government incentives and in eight months, given creative leadership, have emerged as a shining example of what must be accomplished by business. Having been a business consultant to the construction industry and building product manufacturing executive for the better part of thirty years I have learned one important lesson; in order to survive and ultimately thrive in any market you must: understand and adapt to the changing economic conditions of your market segments; you have to be among the most creative and pragmatic business leaders; and you must have a focused, and closely managed business strategy.
Before Setting a New Course You Must Know Where You Are Compared To Your Goals
This paper is aimed at the building product segment but many of my next few observations could be applied to any industrial manufacturer. As the former Chief Operating Officer for a global building products manufacturer I understand the need to provide strong return for stock holders “it is your job”. However it is imperative that you continue to maintain and grow your market share in order to insure sustainable growth in revenue and operating profit. Over the years it has been my experience that many building product manufacturers did not have accurate and dependable business intelligence models that could tell them with any accuracy:

• The potential for their product or mix of products.

• Their share of the market for each product compared to the competition.

• True profitability for each product, by both percentage and pure margin dollars.

• Whether prices were sufficient to remain profitable.

• Which products make the most significant contribution to the company’s operating margin and which ones are a drag on operating results.

• That your independent demand models are providing you with efficient inventory levels, maintaining satisfactory customer service, without tying up precious excess cash.

If you have not developed a Business Intelligence Platform to provide you with the satisfactory answers to the bullet points above, you are certainly not alone. In reality as C- level executives we should know the answers to these points and behind the answers are many more questions.
Fiscal Responsibility Coupled With Vision

As chief executives a poor economic environment can be very frustrating; especially for creative leaders who are driven as much by the vision of what our company can be vs. our day to day fiscal responsibility which is currently all consuming. The reality is that we must plan that the commercial market place has yet to see the worst of this down turn. As unemployment continues to rise, federal, state and local tax bases will shrink, which will impact the most profitable construction sectors. Namely educational, correctional institutions and more than likely, most infrastructure projects will continue to be scarce as we wait for the Federal Stimulus Package to become more stimulating. With more and more people finding themselves unemployed there will be increasing hotel and office vacancy rates, depleting the need for new square footage. In other words we face a challenge never before experienced by our generation of building product executives.

Here are a few areas that leaders in our industry need to manage closely, especially in times like we are experiencing.

• Market Share – Given that the project universe is only a fraction of what has been over the last few years there are more companies chasing this smaller universe. In times such as these, sales leaders and their teams can become discouraged and distracted, it is important that you work on ways to increase your share and not lose any ground. This means keeping your sales leadership motivated and focused on closely managing field sales activities. Depending on the size and makeup of your company, even one point in share either way could represent millions in precious revenue and margin. Market Intelligence and channel relationships are never more important than in slow economic times.

• Product Specifications – It is important that your company has a solid architectural sales strategy to insure that your products are represented in the building specifications. My experience and research has shown if your product is “specified” it increases your odds of winning the project by roughly seventy-five percent. It also sells at prices as much as sixty percent higher than if you try to “bust the specification”. This is true for both custom and commodity products such as hinges, fiberglass panels, ETC.

Opportunities to lower Operational Costs & Position Your Company For The Future – Given the drastic market contraction that we are experiencing there is considerable pressure to maintain profitability. In the building product and industrial sectors the most expensive item that we have is people and the number of people that we have is the direct result of our respective organizational strategies. In the past, it was sufficient to decrease the work hours of non - exempt employees and a minor reduction in force to somewhat offset lost revenues in a soft market. As mentioned, this is a completely different economic environment: In reality it will be several years before the commercial and residential construction industry reaches its 2006 and 2007 levels, especially given the continuing raw trauma being experienced in the aftermath of the financial meltdown. New Federal Banking Regulations are being created that will bring sanity back to lending, however, in the immediate future and for an indefinite amount of time, lack of lending will constrict the building universe. This combined with the ever changing and more efficient design and specification processes make it an ideal time to rethink your business and organizational strategy. Institutional as well as private building owners and developers have and will continue to demand accelerated turnaround in the project lifecycle. This will apply considerable pressure for dramatic cost reductions in building products and services.

As Dr. Spencer Johnson in his book “Who Moved My Cheese” logically points out: If we just sit around and wait for things to change we stand a better chance of starving, then if we take action now to insure that our enterprise is positioned to thrive in a much different construction universe. Given that you are highly likely to be under pressure to reduce headcount in order to generate satisfactory profit, why not pull your executive group together and discuss how the company should be organized for sustained future success. Change is needed from the front to the back office. If done correctly, your new strategic plan will point to intelligent and productive areas to apply your precious human and financial capital, while at the same time identifying cost and headcount savings. Execute properly and your company can be positioned for future prosperity, making itself ready and able to capitalize on the eminent recovery. With poor execution, your company will fall victim to these most trying times. Results will be at best disappointing.

Important Considerations For Building Product Executives

It has been my observation and personal experience that it does not take much for a C – Level executive to lose touch with critical parts of the business. There are many critical decisions made on a daily basis. Disruptions such as a law suit, the annual budgeting process, a plant shutdown, or an economic crisis and it is easy to lose touch with other critical areas of the business. It seems like we are always putting out fires leaving little time for more enjoyable and constructive pursuits. Do you assume that your departmental leaders are managing in the way you expect?

Have you clearly communicated to them your expectations recently? As Louis Gerstner said in his book “Who Says Elephants Can’t Dance”; “People Do Not Do What You Expect, They Do What You inspect.” Become intimately familiar with your marketplace, the current and future dynamics of the market should be at the center of your business and organizational decisions. Stay contemporary as it relates to new technology that can affect and/or help your business expand and run more efficiently. Example of such technology includes:

• Building Information Modeling (BIM) – This new technology is going to have the most significant impact on the construction industry since the introduction of CAD and web based product content distribution. It is quickly being adopted by architects, engineers and general contractors and will compress the time from design to construction considerably. BIM will elevate the importance of product specifications making product substitution and approval very difficult after the plans have been finalized. Given that most architects are pulling product content from the internet it is important that you insure that your web site content is compatible with the BIM process. Most corporate websites at this point are not.

• Channel Penetration and Customer Relationship Management – It has always been important for a sales organization to work with all applicable channel factors; owners, architects, engineers, general contractors, and suppliers. It is even more critical in today’s environment. In order to empower your sales leadership group, it will be necessary for them to closely manage the activities of the sales force to insure that projects are being followed from planning to award. If you have not done so, your company should invest in a web based customer relationship management platform. These systems will allow your sales force to communicate across territories and to quote projects online. This will provide you with a built in forecast that should be integrated into your organization’s sales and operations planning process. Ideally you’re CRM and ERP framework should be linked for more seamless integration and access to actionable business intelligence.

• Process Costs and Product and Client Profitability – In today’s environment it is imperative to understand how human capital costs are affecting product and client profitability. Without this added dimension of information, business strategies are based on guesses and intuition. Given process costing technology, a company gains an added competitive edge. Human capital strategies are made based on solid input. Your employment decisions are made on facts while your competitors rely on luck.


My name is Doug Bevill. Founder and President of Bevill and Associates; a consulting firm created to help building product manufacturers realize full corporate potential. To discuss in more detail how our firm can help you in the evolution of your strategic direction, please feel free to contact me via email; dbevill@bevillassociates.com, or by phone: 314-422-3177. Also visit us on the web at bevillassociates.com.

An Update on the US Construction Economy
Review of 2009 and Forecast for 2010 & 2011
Analyzed, Written, & Illustrated By Doug Bevill – President of Bevill & Associates
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Overall US Economic Summary

2010 is starting out like one of those crazy roller coaster rides from your favorite Florida theme park that twists and turns then takes you through a cave every moment or so, leaving you completely disoriented. The overall economy is still showing some signs of life through quarterly growth in the US Gross Domestic Production; the unemployment rate dropped below the ten percent mark this week while the Dow Jones Industrials is starting to mirror more of the reality represented in the Global Economy. At the macro level there are mixed opinions as to the staying power of what is a jobless recovery and the instability of the global financial markets. Many of the economists that I hold in high esteem feel that if there is not more discipline placed on the gluttonous behavior on Wall Street and a second round of federal stimulus for job creation, we are on our way to a critical financial relapse. The new nine point seven percent unemployment has been labeled as both a sign of recovery and just a sign that people have been unemployed for so long that they are dropping off of the radar. I feel that it goes without being said; there is no good news in these unemployment numbers and you will see this as I provide a more focused outlook for the construction economy.

2009 Construction Economy Postmortem

Heading into 2009 it was clear that the impact of the subprime elements which was wreaking major havoc in the residential market was going to make its way into the commercial real estate and construction space. In mid 2008, as The Chief Operating Officer of a Global Manufacturer I had predicted that the market was ripe for a natural downturn in the commercial construction cycle and knew that the subprime lending problems were going to push commercial construction lower than a natural cyclical correction. However, there was no way that I or any of my contemporaries could have forecasted a complete global financial meltdown on the horizon; with the failure of Lehman Brothers and the need for the Federal Reserve to step in to save AIG, General Motors and others to prevent another global depression. The residential crisis which started to affect the US economy earlier had already started to push the unemployment rate higher, therefore the sale of cars and other consumer goods had started to suffer. The same toxic lending practices, which had caused the housing bubble, extended well into the commercial real estate market. This brought the construction of lodging, office, and commercial/retail projects to a screeching halt. Starting at the end of 2008 and through 2009 the US jobless rate sky rocketed from six to ten percent. This level of unemployment began to place a considerable amount of pressure on local and state tax coffers. This level of public sector revenue shortfall resulted in the loss of thousands of state jobs, services and the eventual deterioration of the highly valued school and healthcare construction sectors which represents more than fifty percent of all architectural construction.
The graph below illustrates the rapid deterioration of the commercial sector and the slow but eventual constriction of the educational and healthcare sectors over 2009.

As you can see from this graph, income or investment driven construction spending fell into negative territory for January and with the exception of a pause in March, it continued to spiral downward. In 2009 the only sectors that remained positive were education and healthcare and this came to an end in August as the funding for these projects became exhausted from the shortfall in state and local taxes.
However, it is a mistake to look at the market by percentage change alone. It is important to remember that even though lodging showed the most significant loss of forty five percent, the value in this sector is much lower than the commercial/retail and institutional sectors. This is illustrated on the next slide.

The Commercial Construction Crash of 2010 and 2011

As you can see in the pure value of construction the forty five percent decline in lodging does not have the same negative financial impact on the industry as commercial, healthcare and education. This is why 2010 will be a significantly more challenging year than 2009, due to the increased constriction in all architectural segments. Education (the largest architectural sector) will see double digit percentage losses throughout 2010 and healthcare will not be much better and this is all related to long term high unemployment. The best estimates for improvement would be an unemployment rate of eight percent for the next two years and this is optimistic; and either way, virtually apocalyptic.

In a column by David Brooks of the New York Times, he put it all in perspective by pointing out that in order to get back the 2007 unemployment rate, the US will need to add ten million jobs. Below is chart showing the employment trend from January of 2008 through January of 2010. Just as damaging, if not more so, is the continued months and years of high unemployment. This is particularly true in the construction industry; it depletes the need for offices, lodging and commercial/retail construction and will magnify our already terrible state fiscal crisis further, making the construction of needed schools and healthcare implausible.


The Underemphasized Human Toll

The most understated and heartbreaking fact which goes virtually unreported in the media is the human toll which these numbers represent. The overall US employment rate of ten percent is very misleading, as most of you know, the rate of unemployment is calculated by those who are on the radar because they either have applied for or are receiving benefits. Many of the experts in the area of employment such as former US Labor Secretary and current Berkley professor Robert Reich feel that the jobless rate is closer to twenty percent; because many people have already exhausted their benefits or have just given up of on finding employment.
The construction industry is a good example of where unemployment is taking a bloody human toll: Twenty five percent is our current rate of construction unemployment which is more than twice the national average. Construction has in the past been one of the top three employers. Please note the next graph.

What in the Hell Happened!

During the nineteen nineties commercial and residential construction followed the largest economic expansion in US history. This was temporarily slowed by a correction in the market by the .com bust in the late nineties. My good friend and mentor Robert Murray, VP and Chief Economist for McGraw Construction, put it very well at one our customer sessions in the mid to late nineties when he stated “if you were not making money in this construction economy, you had better find another line of work.” History is starting to tell us that banks had started taking more risk during this period of time in both the residential and commercial construction sectors.
Please note, however, that the .com bust and overall economic correction did not last very long during the early part of the first decade. However, a key piece of legislation passed in 1999 called Gramm–Leach–Bliley Act which repealed the Glass – Steagall Act. The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control the financial speculation which caused the first Great Depression. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.

Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley act, which is what lead to the catastrophic financial collapse of September 2008 and it is the gift that keeps on giving. This being said, there has been no real effort to reform our banking system and AIG this morning reported a nine billion dollar loss in the fourth quarter of 2009. It is very likely that they will request an additional infusion of cash from the Federal Reserve “because they are too big to fail”. This is what the Glass – Steagall Act was meant to prevent.

The irony of this particular “super-recession” is that it started with a bubble in our industry that was just being fueled by unsecured loans in both the residential and commercial construction sectors, based again on financial speculation especially by companies like AIG, Lehman Bros and others . Please note the in the graph below which illustrates the total construction trend from 1993 through 2009.

Construction Forecast

In quick review, total architectural spending in 2009 fell fifteen percent to compared 2008. However, as my graph illustrates it will get much worse. As I have been saying in my past articles, the recovery in the construction industry will start when the overall unemployment situation starts to drastically improve and the construction of new homes begins to show signs of life. The inventory of unsold existing homes continues to grow as housing foreclosures stay steady which means that the need for new homes will be virtually nonexistent. Given the probability that the employment picture is not going to show much, if any, improvement in 2010, I see no reason for the housing sector to do anything but continue its constriction, probably at a slower pace: But how much more can it shrink! The continued high level of long term unemployment will continue to decimate the commercial/investment properties and unemployment will keep the state tax coffers dry; meaning a more exaggerated downward spiral in institutional construction, especially in the education sector.

On the next page I have included a recent article by Kermit Baker, the chief economist of the American Institute of Architects which removes any promise for turnaround in the commercial and institutional sectors anytime soon. In short, design work is still slipping which means that architectural construction is going to continue spiral a downward spiral.

Downturn taking its toll
By Kermit Baker, PhD, Hon. AIA
AIA Chief Economist

The national architecture billings index (ABI) rose slightly to 43.4 in December from 42.8 in November. Readings have been in the low 40s range for most of the past 10 months, indicating that billings at architecture firms are falling modestly from the prior month. However, revenue levels have been declining every month for almost two years, so the cumulative effect on revenue levels has been devastating for most firms.
The length and magnitude of this downturn in design activity has put tremendous financial pressure on many firms. Almost 90% of respondents feel that this downturn is more severe than the downturn of the early 1990s, with almost 60% rating it as much more severe.
Most firms have seen the impact first hand, as the overwhelming majority of firm’s report that at least some firms in their area have closed since the downturn began or are likely to close over the next several months. Of those that personally know of firms going out of business, the share tends to vary across respondents. In addition to the 30% that report no firm closings, about 40% of respondents indicate that fewer than 10% of firms in their area have closed or are likely to close. However, that still leaves 30% of firms reporting that at least 10% of firms are have closed since the recession began, or are likely to close over the next several months. Firms in the Northeast were more likely to report smaller shares of firm closings, while firms in the West were likely to report higher shares.



Time for Experienced, Strong, and Creative Leadership

As a consultant I get invited to speak at national meetings for those companies who can still find the money to have such conferences. In addition, I get to consult companies from various parts of the building product and distribution sectors. Over my one year as a consultant I have visited with many different personalities and performed the duties they have hired me to do. Some companies have fared very well, actually maintaining and slightly growing sales in the face of a fifteen percent constriction in the 2009 architectural market. One company that I recently worked with grew their business seventeen percent in 2009; and there are other companies whose sales were off thirty percent and higher. In the case of the company that grew their sales seventeen percent this converts into a thirty two percent increase in market share: Outstanding!!. This company and others like it had one thing in common: Strong, smart and creative presidents and CEOs who were able to read the market then create and execute successful enterprise strategies which made their companies more attractive to deal with than their competition. On the other hand, I have worked with a few companies whose sales were off thirty percent or more which means a loss of at least fifteen percent in market share. These companies were operating as they have for years and have very weak inexperienced leadership at the top without any strategic vision. Here is my question: If your revenues were off by thirty percent or more in 09 vs. 08, can your enterprise afford to shrink by another fifty percent or more in 2010? It is not a question of farness; one of my clients refers to our present environment as, “the new normal”. We have entered into a classical Darwinian phase in our industry and only the Creative, Informed and Pragmatic will be standing in the end. We will never see 2006 levels of construction again. The time to adjust your strategies is now!

Charles Darwin

My Purpose for Writing Economic Articles

Many would say that my reason for writing articles of the economy is to draw attention to my business. “ARE YOU KIDDING ME?” This stuff is hard! Well, it is true to some extent because it is hopefully information that you find useful for your business and because of my opinions some of you have hired me to work with your companies. For this I am grateful: I have many years of expertise in reading these tea leaves; I was lucky enough to be trained by the best and the brightest at McGraw – Hill. This said, I also feel that you need to see articles like this written from the perspective of someone who has spent many years in the industry. As a former building product executive, I know how to apply this data to real life situations and it gives me pleasure to report this data not as an analyst; but to provide you with useful experienced opinions as a building product executive. In all of my years of experience I have never seen an environment like this and a group of Politician’s on both sides of the aisle so unfocused and caviler about a country in crisis. For us it is the “new normal” accept it or expire; unfortunately there is not going be enough room in this new economy for all of the companies currently operating in the construction sector. There have been many consolidations and failures and 2010 will bring even more. The silver lining is, that as we all start to battle for survival, there will be new and more effective strategies created to survive and thrive in this new global economic environment.
Bevill and Associates was created to help companies create and execute contemporary and flexible enterprise strategies. If you feel that our firm can help your company we would surely like to hear from you. Visit us at www.bevillassociates.com or call; our phone number is 314-422-3177.
Finally, I am recommending a book which all business leaders should read. It is titled The Ten Commandments for Business Failure By Donald Keogh, the former President of Coke. It is a quick, informative and fun read at only one hundred and seventy pages.
The Eleven Commandants for Failure

1. Quit Taking Risks.
2. Be Inflexible.
3. Isolate Yourself.
4. Assume Infallibility.
5. Play the Game Close to the Foul Line.
6. Don’t Take Time to Think.
7. Put All Your Faith in Experts & Consultants.
8. Love Your Bureaucracy.
9. Send Mixed Messages.
10. Be Afraid of the Future.
11. Lose Your Passion for Work - for Life.