My recently completed doctoral research project, entitled Sources of Competitive Advantage in U.S. Engineering Firms, sought to uncover important factors affecting performance in design firms. Drawing upon a survey of the largest 300 firms from ENRs Top 500 Design Firms, in-depth interviews of senior executives and CEOs of firms, and a detailed postal survey, I evaluated a series of strategic factors that included:
- The importance of geography, such as proximity to the client.
- Diversification of markets, services and geography as a growth strategy.
- The role of partnering.
- Utilization and investment in technology.
- Key sources of market and technical information and knowledge.
- Firm-specific sources of competitive advantage.
- The process of internationalization (and if a firm did not internationalize, why not).
There are interesting differences between high and low-growth firms, those with less than 10% revenue growth. Low-growth firms revealed a public-private market ratio of 44:56, the exact opposite of high-growth firms, which favor public clients. Low-growth firms also showed a stronger propensity to engage in price competition, while high-growth firms preferred to be selected on qualifications and found ways to differentiate their services.
High-growth firms also were more likely to use proprietary technology as opposed to the off-the-shelf technology favored by low-growth firms. For both categories, the highest use of proprietary software is in the marketing function.
High-growth firms demonstrated a much more robust pattern of diversification as a growth strategy and focused on market and geographic expansion, while low-growth firms opted for client diversification. Finally, low-growth firms were more concerned about recruiting skilled professionals in the future while high-growth firms expressed concern about the availability of managerial personnel.
The top five sources of competitive advantage of the 25 studied are personal relationships with the client, firm reputation, understanding project objectives, firm capabilities and the project team. To build competitive advantage, firms must engage in a process of continuous improvement and innovation. Innovation in engineering firms can be found in human resource practices, service delivery, marketing and organizational change. Typically, innovation is nonlinear, incremental and continuous.
Long-run innovation and business performance increasingly will rely upon a firms ability to interpret client needs and the dynamic changes in market demand. While technology is necessary to drive innovation, it is rarely the product of innovation in engineering firms. Engineering firms adopt and adapt technology to meet the specific needs of their clients and markets.
Technology enables firms to access both low-cost production partners and high-value-added and specialty services anywhere in the world. In essence, technology enables firms to splinter a project along its life cycle, accessing the most advantageous cost and quality resources across regions.
Firms forge their advantage from primarily tacit and intangible factors and processes. No longer will advantages related to explicit or codified knowledge offer long-run, sustainable advantage. If functions can be automated they will be, and they will be subject to relentless price competition and outsourcing.
Core competencies related to conceptualization, unique project delivery methods, complex problem-solving, marketing and business development will be important to conveying a long-run advantage. However, this advantage must be continually strengthened and nurtured, and successful firms will engage in strategies that are costly and difficult for competitors to replicate.