Builder of the Year: Pulte Homes, Inc.

Which builder has the most ideas you can use?

That’s a critical question we ask, on behalf of every builder in this country, as we deliberate our selection for the oldest and most prestigious award in the American housing industry, PB’s Builder of the Year. Our editors make that call, and they form a tough, cynical board of electors. They search for proven profitability in an innovator on the leading edge of the trends shaping the industry. Perhaps more important, they look for ideas and business practices that can be adapted for use by all builders.

The 2001 honoree is Pulte Homes Inc., which might come as no surprise, given the number of major headlines the firm has generated this year and its working base - 50 consecutive profitable years (18.8% gross margin last year) and nearly 20,000 homes closed in the United States in 2000 for more than $4 billion in revenue. Some might say the honor is long overdue, given founder Bill Pulte’s status as one of the true pioneers of production home building during the entire second half of the 20th century. But this Pulte is very different from the one we saw even a few years ago. The changes propelled Pulte to Builder of the Year.

A Unique Vision
The industry’s recent consolidation trend complicated our choice. As a small number of publicly held Giants, including Pulte, grow to massive national (and even international) operations via acquisitions and mergers, there’s a widening gulf between their world and that of the vast majority of home builders. It is now more difficult for such Giants to pass that litmus test of having ideas and operating methods that all our readers can emulate.

Imagine our interest, then, when we discovered a Giant the size of Pulte with impressive ideas about how to pull customers into close, personal, long-lasting relationships. Such relationships are the currency of America’s most successful custom builders, with immense power to drive referral sales and repeat business. But it’s hard to maintain ongoing relationships in a production builder, let alone a big national firm.

First, you must deliver a great home at closing. That’s harder for production builders because their homes are produced by large-scale operating systems rather than the craftsmanship of a small-scale individual builder exercising personal control. Second, and perhaps even more daunting, big national builders have a hard time with the personal aspect of such relationships. Employees move from one job to another, from one market to another. Customers move from town to town. Value - bang for the buck - has always been the production builder’s hole card, not personal relationships.

But what if the national builder cracks the quality nut with superior systems and then trains employees and trade crews to build and maintain relationships for the brand, even in the face of personnel changes? What if the company has operations all over the country, in virtually every price and product category, so it has the potential to sell buyers a succession of homes - even if they move all the way across the country? And what if the firm can instill in home buyers the same brand allegiance many people have for automobiles?

That’s Pulte’s goal, and it’s getting close to it, closer than any national has before or any other home builder is today. "Never lose sight of the fact these guys are headquartered in a suburb of Detroit," says management consultant Scott Sedam, a PB columnist and former senior executive of the Bloomfield Hills, Mich.-based Giant. "Pulte was one of the first in our industry to embrace total quality management because they saw what it did for Ford in the 1980s. Now they’re focusing on branding and customer relationships. This is a company that makes connections on what works from the auto industry to the housing industry very quickly."

Of course Pulte has all the positives that come with immense size, such as national identity, large-scale buying power, an impressive Web site and expensive e-commerce initiatives. So when we learned about its attempts to maintain tight relationships with customers, we were intrigued. If these ideas and management methods work at Pulte’s operational scale, they ought to be relevant to any builder because relationships are certainly easier at 20 or 200 units a year than 20,000. Our investigation showed that Pulte Homes is further down this road than anyone else in the big-builder arena. We believe that much of what it’s up to does apply to small and midsize builders.

Long-Range Plans
This is a huge company - 9,200 employees - but it has much more in common with mainstream builders than the others in the billion-a-year club do. Despite pulling off the biggest acquisition deal of 2001, it is a remarkably quiet company, just emerging from a long history of internally driven growth. For most of that time, Pulte operated on a distinctly local scale - more a network of local firms than a national behemoth.

It also is a firm that, during the past 12 years, developed an improved ability to fix its sights on long-range goals - way beyond the shorter horizons of shareholders and Wall Street analysts. Pulte knows what it wants to be when it grows up.

An example: For years Pulte operated with an extremely decentralized structure. Division presidents ran their fiefdoms as local entrepreneurs with almost total autonomy. Headquarters served as a banker for this network. Bill Pulte saw home building as a local business and refused to allow a corporate bureaucracy to impede that entrepreneurial zest.

However, immense geographic growth (from 19 markets to 40 in five years during the late 1980s and early ’90s) prompted the insertion of a layer of regional senior management (in 1990), while advances in computer and communications technology began to make centralization of many business functions feasible. Pulte studied this changing picture carefully and developed a long-range strategy to move to corporate those functions that should be centralized, enhancing the division presidents’ ability to concentrate on land, product and customer satisfaction. In the late ’90s, when Pulte began to nurture customers toward long-lasting relationships, this more robust corporate level was in place to take the lead in creating a uniform customer experience nationwide.

"You can centralize the science of this business; the art you can’t," says Mark O’Brien, Pulte’s president and chief operating officer. "We’ve centralized payroll, purchasing, information technology, marketing, human resources, and our quality program had its birth here at corporate. But the choices in locations, products and pricing, and the execution of those strategic decisions, have to stay in the hands of local managers."

In a similar progression of thought, Pulte moved from growth via greenfield startups to a merger-and-acquisition strategy. "I look back and say, ‘Thank God we did it [internally] at first,’ because we’re now in 41 markets with Pulte-trained people, and we’ve got a unified brand," chairman and CEO Bob Burgess says. "When we say something in Pulte lingo, everybody knows what we mean. We’ve got one unified financial system. But in the future, you’ll see us use acquisitions more."

Having reached a perceived critical mass in size and maturity in culture, Pulte had the confidence in recent years to shift gears - first with the acquisitions of Radnor Homes in Tennessee and DiVosta & Co. in Florida, and then with the breathtaking deal that shocked the industry this year.

Pulte’s $1.7 billion acquisition of Del Webb Corp. put the firm on the cutting edge of the consolidation trend. The blockbuster deal, unveiled in May and closed July 31, combined the No. 2 home builder in PB’s most recent revenue rankings with No. 8 Del Webb.

The deal will test whether Pulte’s culture is strong enough to absorb 3,500 Del Webb employees without diluting its focus. Del Webb was a highly centralized company, almost a direct opposite to Pulte’s history. But they share one important trait - the focus on nurturing relationships with customers. Del Webb is a recognized leader in this area because its targeted active-adult/retiree buyers take longer than any others to make a purchase decision.

‘Homeowner for Life’
Introduced in the late 1990s, that’s the label Pulte puts on the centerpiece of its business strategy and corporate culture. While it’s bursting into fruition this year, the seeds were sowed long ago.

Led by the triumvirate of founder William J. Pulte, 69 (chairman of the executive committee), Robert K. Burgess, 57 (chairman of the board and CEO), and Mark J. O’Brien, 59 (president and COO), Pulte is reaping the benefits of management initiatives begun in the late 1980s. Lesson No. 1 from these Michigan moguls: Patience is a virtue.

Pulte doesn’t rush anything, but when it finds something it believes in, it sticks with it. The company grabs goals by the pant leg and hangs on with bulldog determination. That goal-focused drive is evident throughout the organization, but it comes straight from the top. "I don’t think I’ve ever gone to work a day in my life," Bill Pulte says. "I have always gone to play ... but I’ve always had a goal and a plan to reach that goal. ... By 2010 I want to be at least $15 billion in annual revenue. I will be very disappointed if we don’t hit that target and if we don’t do at least 20% margin."

You might be tempted to dismiss such talk as bombast. But consider this: In 1990, Pulte operated in 21 markets in 12 states and closed 5,706 sales for revenue of $769 million. Today, Pulte operates in 41 markets in 25 states (as well as Puerto Rico, Mexico and Argentina) and has revenue projected by Wall Street analysts to reach $5.1 billion for the U.S. operations alone, without the full integration of Del Webb.

The plans to reach those goals for 2010 are already in place, extending those that brought the company to the achievements of 2001. Building block No. 1 is Bill Pulte, especially the values he infused into the company from the day he started his first house in 1950.

A big part of the corporate culture is his determination to build his brand into an instantly recognized icon. Ask any Pulte manager about the plan to do that, and you’re likely to hear that the brand platform is "three I’s on quality" - involvement, integrity and innovation, all of which are prominent qualities of Bill Pulte. Make no mistake, this is still his company.

Building block No. 2 is quality process control. "We’ve been working on quality in earnest since the mid-1980s," Burgess says. "We’ve instilled in our organization that this is what we are all about, so when J.D. Power came along in 1999, we already had our customer satisfaction measurement system [CSMS] in place, and J.D. Power mirrors our measurements. So we weren’t surprised when we did well when J.D. Power measured our markets."

J.D. Power and Associates’ most recent customer satisfaction surveys show that Pulte and/or new subsidiary Del Webb rank among the top three production builders in seven of the 10 markets surveyed. Pulte ranks first in Charlotte, N.C., Denver and Las Vegas, and second in Chicago and Southern California. Del Webb ranks first in Southern California, second in Las Vegas and tied for second (with Pulte) in Chicago. J.D. Power identifies customer service and home readiness as the factors that most influence customers’ overall satisfaction.

That confirms something Pulte discovered through its long TQM journey and its internal CSMS studies: Customer satisfaction depends as much on the quality of relationships as it does on the defect-free condition of sticks and bricks. "We’re not just measuring the number of defects in the house," Burgess says, "we’re measuring the kind of experience people have through the full length of the home buying process, all the way out to 11 months after closing."

The implications of this are huge, and they apply to all builders. It’s a phenomenon that quality control maven Philip Crosby called "the cost of noncompliance." Pulte has learned there are costs associated with a declining level of customer satisfaction, even years after closing the sale.

"We measure customer satisfaction at 30 days after closing with a very robust questionnaire that we’ve used for 10 years," says Alan Laing, vice president/e-business, supply chain and customer satisfaction. "Then we measure again at 11 months after closing. We also do an inspection of every home at three months and 11 months after closing.

"What we’ve learned is that the house needs to be delivered complete and free of defects in all the major elements and systems. That gets you close to where you want to be. But to really get over the top, you need personal relationships. They’ve got to know you."

Good personal relationships, Pulte found, will overcome the small glitches that arise in large-scale production home building. If customers have confidence in the builder’s brand, and know and trust the people building their houses, the need to touch up paint or rehang a door will not bother them. "They’ll say, ‘My home is complete, and Joe, my builder, he did the greatest job,’" Laing says. "And they will say that to all their relatives and friends."

Homeowner for Life grew out of understanding the not-so-obvious benefits of an extended positive relationship with buyers and the not-so-obvious costs of losing such a relationship. For instance, Laing says the risk of financial liability for product failure does not end with the sunset of warranty coverage on the home. "It stretches to 12, even 14 years," he says. "And it’s huge cash. This impacts our insurance costs and our ability to get good trade contractors. The best ones don’t want to work for substandard builders because the risk for them is huge. It also influences our choice of materials and products that go into the home. We think brands are really important. We’re looking for a lot more than price - product performance, lasting quality, the ability to deliver, and now we’ve added service to our requirements. If you don’t get product quality right, at some point it will catch up with you."

What Laing leaves unsaid is that huge companies such as Pulte have deep pockets and offer inviting targets for trial lawyers with an interest in stirring up construction-defect claims even decades after closing.

But there’s another side to this relationship issue, and the possibility of selling additional houses to the same buyers over and over is just one element. "Following people through the stages of their lives is only part of it," Burgess says.

"Referrals are now 35% of our sales, and when you look at the impact of that on our bottom line, which we are just starting to measure, it’s huge. [Pulte vice president/marketing] Jim Lesinski dug into the statistics we have and figured out that every happy customer generates 5.5 new customers. That’s a new algorithm for the industry."

People Are Really Important
From the tight interweaving of quality and customer relationships, Pulte drew a lesson of importance to builders of all sizes: It all comes down to having the best people. That’s building block No. 3.

During the past dozen years, Pulte has become far more professional in its hiring practices. Bill Pulte gives credit to Burgess. "When I first came to Pulte, we were hiring a lot of retreads," Burgess says. "There was no college recruiting at all."

Burgess changed that quickly. He brought in the cadre of managerial professionals who transformed Pulte from a network of cowboy entrepreneurs to the stable, growing Giant it is today. "I hired the very first human resources person we ever had," he says. "We had a $700 million company, and we hired people off the street.

"This is an entrepreneurial organization, and we’ve got to have an entrepreneurial spirit. But interestingly enough, the first thing I did when I took over in 1985 was to fire three or four entrepreneurs. We were kind of proud of them. But we didn’t know what they were doing. They weren’t going to listen to anybody."

Contrast that with an organization that now recruits every year from top college management schools. That recruiting takes place regionally, under the auspices of the presidents who lead Pulte’s five geographic groups. West Group president John Gallagher describes what he looks for in recruits:

"We want people with the capacity to respect others and themselves. We look for fact-based critical thinking. Too many people today are learning what to think instead of how to think. We look for personal drive, the will to win, character and loyalty. We’d like to see a certain persona - confidence, ego and mental toughness. We want quickness of thought and action. Focus. Communication skills. And passion. If they have passion for something, we think we can turn it into a passion to succeed in the home building business."

Training is the next step. You can’t just tell people to form personal relationships with buyers. Training people in interpersonal skills as well as technical expertise is making a difference for Pulte. And training doesn’t stop with employees.

"We include our trade contractors whenever we do quality training," Laing says. "After all, we can’t do anything without them. They’re the people who actually build the homes. You’ve got to treat them like employees or it just doesn’t happen. And what we learned is, they want to make a difference. Quality is important to everyone.

"Gary Grant, construction manager of our Minnesota division, is a legend within our company. He’s a masterful trainer. He’ll take a trim carpenter, show him a piece of defective trim and ask, ‘Does that look right to you? How would you feel about that if your mother were going to live in this home? You know, that’s who we’re building this house for - everybody’s mother. When you work, think of her.’ And he generates real excitement among the trades to build houses the Pulte way."

Top Gun Training
One new management initiative puts Pulte into a class of one among big national builders. Building block No. 4 is Top Gun training, modeled after the famous U.S. Navy fighter-pilot training program.

Think about the challenge of trying to standardize a superior customer experience across the country, in 426 selling locations, in housing products that differ dramatically. Pulte is meeting this challenge while driving down its training costs.

Leo Taylor, Pulte’s vice president/human resources and sales development, explains that strange dichotomy: "We were spending $6.5 million a year on training, and the reason it was so high was that every business unit was doing its own thing. To get consistency, we needed to train employees in a common set of values as well as a common way of relating to customers. Sales training is where we started."

The next move was true genius. Rather than employ outside trainers, Pulte trains its best salespeople and sales managers in the new "Pulte way" and then rolls it out to the company by having those Top Guns mentor new hires. Top Gun training was so successful with salespeople that Pulte extended the concept to the construction side. The construction training takes into account regional variations - concrete block walls in Florida rather than wood frame, basements in the Midwest while Texas houses are slab-on-grade. "There’s a technical component, but what’s really important is the process," Taylor says, "What we really concentrate on is the way our construction supers relate to the customer. When they do a pre-construction meeting, there’s a way to do that, with the salesperson. When they do a pre-drywall walk, there’s a precise way to do that. Same with the follow-up inspection 11 months after closing."

Pulte now has a nationwide program to codify the customer experience. Sales, construction and customer service personnel work as teams through a series of meetings that translate corporate values into action buyers understand.

Beginning with a pre-construction meeting where the salesperson and construction superintendent confirm all colors, selections and options, Pulte mandates the process: formal pre-drywall inspection, followed by a pre-drywall orientation at which homeowners see how the home is built, including the high quality of materials and systems employed. Standardized quality assurance checklists are then used in an inspection conducted before a pre-closing orientation, at which the quality features and mechanical systems of the home are demonstrated. Two to four weeks after the new owners move in, post-closing visits are made to every home to reinforce the commitment to providing a defect-free home. (The goal here is to force any warranty issues to the surface.) Three-month and 11-month inspections focus on cementing a positive, ongoing relationship.

"We’ve really worked at moving best practices throughout the company and developing standard processes to delight customers," Northeast Group president Jeff Croft says. "We’re very disciplined about how we communicate with buyers and how we deliver homes. As a result, we can bring a super from Texas to New Jersey and have that person be completely familiar with the steps we go through. The home and how we build it may differ, but the touch points in our relationship with the customer will be the same."

Bottom line: Pulte has the premier training program in the industry, with a price tag lower than $650,000 a year.

Branding the Future
Last year marked a demarcation point for Pulte in its quest for national brand identity. From a historical perspective, Pulte looks gargantuan today. But the national market share of even the largest home builder is microscopic, so Pulte has a long way to go to threaten Nike’s swoosh. But Bill Pulte is undaunted. It looks like an opportunity to him.

Big builders are the new growth industry, he says, predicting that consolidation is in its infancy. "Drugstores have already done it. Hardware stores have done it. Grocery stores did it first. Now builders have started. We’re going to be very big." How big? "We want to be General Motors in 1950 with 62% market share," he deadpans.

Pulte launched its brand-building campaign last year with the introduction of a new logo, a float in Macy’s Thanksgiving Day Parade and a national sweepstakes to give away $250,000 toward the purchase of a Pulte home. The company also changed its name from Pulte Corp. to Pulte Homes Inc.

All of these efforts, however, probably had less impact than the brand buying Pulte accomplished in the Del Webb acquisition. Webb is probably closer to national brand identity than any other builder, and Webb’s Sun City is another strong name. Of course, that was part of the attraction.

Lesinski is a pro in the brand-building business, having cut his teeth with Volvo in the auto industry. "We certainly picked up a brand with tremendous equity when we acquired Del Webb," he says, "and when you look at the traditional home building side of the business, there really aren’t any strong brands."

When Lesinski surveyed consumers to find out how much brand knowledge exists in the housing market, he was shocked. "Sixty percent of consumers can’t tell you who built the home they live in," he says. "And 35% of buyers living in new homes couldn’t tell us who they bought the home from. It astounds me. Imagine if you couldn’t recall what kind of car you own or where you bought it.

What’s Lesinski’s plan? "Bill Pulte is a living legend in home building, but the average consumer never heard of him. If we can transfer some of Bill’s status to our brand, that’s going to be very powerful. ... [But] long term, the winners in this business will be those companies that differentiate themselves on process rather than on product."

Like so many of Pulte’s leaders, Lesinski uses auto industry analogies. "If a Saturn-like business model is introduced into this industry, it could have a profound effect on the way consumers view the world. Consistency in process linked to consistent identity. We are beginning to build the infrastructure for a great brand."

But Pulte now has three brands with the acquisition of the Del Webb and Sun City names. How to handle that?

"Actually, we have four," Lesinski says. "There’s some pretty good equity in the DiVosta brand in Florida. The reason we decided to retain that identity was not just that it was a very successful, high-image builder, but more that it’s a company with a very different process for handling customers. DiVosta does far less hand holding than Pulte delivers. It’s a very different customer experience. If we had changed the name to Pulte, any customer who had a previous experience with Pulte might find the experience with DiVosta disconcerting and say, ‘This is not the way Pulte does business.’"

So Pulte will leave strong brands it acquires in place, at least until it builds enough strength in its own brand to take up the slack, which Lesinski concedes might take awhile. But Pulte began deploying special brand-development resources this year to two markets, Houston and Phoenix, where new advertising campaigns are linked to sophisticated tracking systems. Among the experiments: movie theater ads.

"It’s grass-roots guerrilla brand building," Lesinski says. "It’s free from competing clients, has big-screen impact and the ideal demographics right in the neighborhoods where we do business.

"To really get where we want to be, we still need a little more rigor around our processes, executing them on a more consistent basis. And we’re working right now to establish real, tangible proof points around the four elements of our brand platform - quality, involvement, integrity and innovation."

Opportunity Knocks
For many of our readers, Pulte’s ideas and operational methods will spur both excitement and fear. Excitement that there’s so much universal truth in what Pulte does. Fear that Pulte is already a competitor or soon will be.

Bob Halso, Pulte’s Midwest Group president, stokes the fires of fear: "I don’t know how smaller builders are going to compete without our capital structure and the ability we have to hire the expertise we have on staff. Approval processes in our markets are already running into years. Just the tree surveys can run $100,000."

We, however, tilt more toward excitement.

Despite the millions Pulte is pumping into e-commerce innovations and its position on the cusp of major breakthroughs in materials and technology, the foundation on which this mammoth corporation is built is still the same as when Bill Pulte built his first house - a caring, personal relationship with the buyer.

Who can say that a young Bill Pulte wannabe won’t launch the next great multinational home building behemoth out of the back of a pickup tomorrow?

A Smooth Transition
Pulte Homes chairman and CEO Robert K. Burgess announced his Dec. 31 retirement from the company several months ago. Pulte’s board of directors named current president and chief operating officer Mark J. O’Brien to be the next CEO effective Jan. 1. Also effective that date, company founder William J. Pulte will assume the role of chairman of the board, a position he held previously. He will continue as chairman of the Executive Committee of the board of directors.