The Road That Lies Ahead

Where is the home building industry headed over the next five to 10 years on the issues of growth, consolidation and supply chain management?

The answers to these and other questions were documented in Reference Point, our periodic study of management practices in the home building industry. This year’s study, undertaken jointly by the Service and Administrative Institute and Greene, Hollister Inc., was conducted among a select group of building companies, including the CEOs of the nation’s 400 largest builders listed in Professional Builder’s 1998 Survey of Housing’s Giants.

Growth Strategies
We asked the Giants to compare the current size of their operations with where they would like to be in five to seven years. Their answers are not all that surprising considering the direction housing is going -- almost three-fourths of the Giants surveyed predict that their building operations will become even larger. Almost everyone else (27%) predicts that their operations will remain about the same size. In the next few years, downsizing is not an option.

But how will all of this growth materialize? Limited to choosing only one strategy, 41% of the builders surveyed said they would expand into new geographic markets. About as many, 39%, said they would target a higher market share within the markets and buyer segments where they are already successful. The remaining 21% said they will seek a new market share and additional buyer segments.

Not a single respondent identified "vertical integration" -- a decision to supply more of the component parts themselves -- as a primary strategy.

Consolidation
At separate points in the study, we asked two questions designed to determine the extent to which industry consolidation -- a combination of growth, merger and acquisition -- will reduce the number of active building companies.

Our first question was whether those surveyed could foresee, over the long term (10 years and beyond), the type of widespread consolidation that has already occurred in other industries. Overall, almost three-fourths (71%) foresaw such a consolidation coming.

We then asked these senior managers whether they thought the number of home building operations in their markets would increase or decrease in the next five to seven years. The dominating opinion was that competition will weed out the weak -- almost half think there will be fewer building companies, while just more than one-third think the number of building companies will remain about the same.

Supply Chain Management
We finished by asking two questions related to distribution channels and supply chain management. We wanted to know whether builders view these two issues, which are related to change in many other industries, as something the home building industry will need to address within the next 10 years.

When we asked whether they could foresee widespread changes in the way homes and communities are marketed -- including the circumvention of established delivery systems -- the overall view was quite divided. A slight majority (54%) believes it will be an important issue in the next 10 years.

The question on distribution channels in the 1997 study requested a yes-no-maybe response, and 61% of builders agreed that the possibility for change existed. Forced into a yes-no response this year, builders who had been on the fence are evenly divided.

On the matter of supply chain management, they agreed more strongly. When asked whether they could foresee home building companies taking the lead in collaborating with suppliers and subcontractors to manage all of the activities in the process of creating the housing product -- similar to the effort Wal-Mart has made to manage its supply chain -- an overwhelming majority (80%) expects the industry to move in that direction.

Well, it should be an interesting ride. Below are our observations and comments on what our builders have been telling us about growth, consolidation and supply chains.

Life on the Serengeti It seems obvious that the demand for housing in the next five to seven years cannot support the aggregate level of anticipated growth if three-fourths of these builders aim to significantly increase the size of their operations.

A couple of scenarios come to mind. One possibility is that some of the demand is transferred by acquisition or merger, but beyond that, everyone settles for less growth than they would like -- too many lions, not enough zebras, everyone is still hungry, but no one’s starving.

The other possibility is that some of these builders might actually develop (or acquire) the capabilities that will allow them to redefine operating and financial performance as we know it. In that case, the current level of industry consolidation begins to pale -- and we will be looking at a group of bigger, stronger, faster lions, capable of eating zebras to their hearts’ content.

In the past, builders have taken refuge behind walls of fragmented supply chains and insulated markets. But the winds of change are blowing. Consider this bit of news: On the same day this past fall, three Internet-based companies, each backed with major funding from venture capitalists and strategic partners, announced plans to introduce services designed to consolidate and streamline the bidding and ordering process.

The Road Less Traveled
Even if builders reject the notion of mass consolidation and the outright circumvention of established delivery systems, the dependence of so many builders on growth strategies aimed at geographic expansion and higher market share in current buyer segments ought to raise red flags.

Assuming that a strategy based on expansion into new markets represents real growth (and not just the transfer of demand through acquisition or merger), it will force more competition on the existing level of demand. The first victims will be the builders who can’t compete for the available lots -- but then what? How will the builders who survive assert themselves in the market?

A strategy based on capturing a higher share of the market in current buyer segments asks a more naked version of the same question: How do builders acquire more business? And perhaps more important, can those types of gains be sustained?

Growth fueled by a strategy of geographic expansion and higher market share in current segments is essentially a strip-mining operation -- an attempt to create value out of something a mile wide and an inch deep. But what choice do builders have? As an industry, we have outsourced almost every value-added activity in the building process. Moreover, we can talk all day about the need to increase productivity, but that’s difficult when someone else is doing all the work.

Rather than look to expand their operations, perhaps builders ought to look within. Gaining more control over the value stream is likely to result in a more sustainable source of competitive advantage, yet it’s a strategy being mostly ignored by the builders in our study.

Under the right circumstances, there is a ton of opportunity in good old-fashioned vertical integration, particularly when a resource is a constraint in the system. In fact, new techniques like even-flow production work much more effectively when the entire production process is controlled.

Ownership isn’t always feasible, but control doesn’t always translate into ownership. Partnering is an option, provided that it’s not the garden-variety attempt aimed simply at tighter scheduling and better levels of understanding and cooperation (joined-at-the-hip would be a more appropriate description).