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Home Builder Success and the Fragility of Good Things

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Home Builder Success and the Fragility of Good Things

All successful builders are alike. Each unsuccessful builder fails in its own way


By Scott Sedam, Contributing Editor October 3, 2020
Ceramic model house teetering on Jenga blocks, danger of falling and breaking
Just like a game of Jenga, one piece can make all the difference in whether a company succeeds or fails. | Photo: Victor Moussa / stock.adobe.com
This article first appeared in the September/October 2020 issue of Pro Builder.

I learned a lot of “old pilot sayings” from my late father, a highly decorated World War II fighter pilot. But the one most steeped in irony is, “Any landing you walk away from is a good one.” That’s true in the most basic sense, although your spouse, your boss, and especially your insurance company may disagree if you leave the bird in a heap of smoldering wreckage. 

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So, what makes a truly good and successful flight? (That is, a flight where you reach your destination on time, in one piece, with no drama.) From my 35 years of piloting experience, I’d cite the basic requirements as: a well-trained, competent, healthy pilot; a capable, well-maintained aircraft; a well-planned route; flyable weather; and more than enough fuel to complete the flight. In that sense, all good flights are alike. There may be additional factors that make it better—great scenery, good company, or a special occasion—but they’re icing on the flight cake. 

 

Failure Factors, Whether It's Flying or Home Building

Bad flights, however, result from a multitude of shortcomings, including poor training; poor planning; botched takeoffs; messy landings; equipment failure; fuel starvation; flying beyond the plane’s capability (such as overloading); pilot error (such as “controlled flight into terrain”); and bad weather, including fog, clouds, icing, thunderstorms, or wind shear, among many others. This brings us, surprisingly enough, to Anna Karenina.

Tolstoy’s novel Anna Karenina is beautifully written yet extremely long, painfully detailed, and overly melodramatic. It vividly depicts the fractured, tenuous society of prerevolutionary Russia. As one reviewer describes it, “Anna Karenina is a great holy mess of a book,” after which he goes on to extol its virtues. The novel’s opening line is often quoted: “All happy families are alike; each unhappy family is unhappy in its own way.”

I happened upon that quote right after reading an article about a fatal airplane accident, which had me musing over the seemingly endless unfortunate factors that can bring a plane down and how every good flight requires the same basic elements. 

Shortly after, I read another piece on bankruptcies in home building, and soon I was thinking of the more than 250 builders I’ve worked with over more than three decades and wondering: Does this “Anna Karenina Principle” about families also apply to home building? Are all happy (successful) builders alike, while each unhappy (unsuccessful) builder fails in its own way? Thus, I began my list of factors that combine to result in a successful, and happy, home builder. But a bit more study was required.

 

Finance and Zebras 

In my research, I discovered that the Anna Karenina Principle has been applied in many fields, beginning with statistics, where it helps to explain confidence intervals. Over time, the concept has migrated through multiple disciplines including finance, marketing, product development, ecological risk assessment, and even cultural anthropology. 

Regarding this last discipline ... I came across a multiple-award–winning book, Guns, Germs, and Steel, by Jared Diamond, which explores how humankind has evolved—a fascinating read. Diamond uses the Anna Karenina Principle to illustrate why so few wild animals have been successfully tamed and domesticated throughout history, with major impact on societal evolution. 

Diamond found that a deficiency in any one factor, or combination of the six factors listed below, makes an animal species impossible to domesticate. Conversely, animals that are successfully domesticated do well on all six factors. (As you read the list, consider the difference between cows and grizzly bears, or sheep and lions.) 

1. Diet—not finicky, easy to feed, with plentiful food. 

2. Growth rate—Fast growth, which enables economic feasibility.

3. Captive breeding—Breeds well in captivity. 

4. Disposition—Doesn’t pose a danger to farmers, herders, or keepers.

5. Panic response—Responds to danger by freezing or herd mingling, not bolting.

6. Social structure—Well-defined social hierarchy, not solitary.

Think that through and the logic is clear. Every successfully domesticated animal scores highly for each requirement, but a bad score on just one of those factors prohibits domestication. A perfect example is the horse, which scores well in all six categories, versus the zebra, which has resisted every attempt to tame it, despite faring well on every factor except No. 4, Disposition.

Zebras are just too damn mean. Attempts over centuries to breed this characteristic out of them have failed. Unlike the horse, given the choice of a) a carrot, b) an apple, or c) a severe bite to anyone nearby, the zebra will choose C (which stands for “chomp”) every time. (Having grandchildren, I note—with some irony—how the zebra is always portrayed as a lovable creature in children’s books.) 

Before reading further, a productive exercise is to—on your own or, even better, with your team—develop a list of characteristics all highly successful builders share, remembering that a deficit in any one will bring the builder down. But there’s a caveat about the definition of “success”: You know of builders considered successful by the outside world simply because they’re profitable. The question is: How profitable and sustainable are they, and at what cost? 

A builder I know made just over $5 million in profit last year. Successful, right? Hold on ... that was actually just 2.5% net profit, with a miserable return on invested capital. Another builder clears 10% pretax net on each sold unit, but with cycle time twice as long as the best competition, leaving a fortune on the table. Another makes 12% but is nearly out of land. What happens next year? Twelve percent of nothing is still nothing. Yet another builder that’s quite profitable today has staff turnover more than twice the acceptable rate. What are the implications? Still another has strong margins due to some great land buys but is nowhere near the “builder of choice” with suppliers and trades. What becomes of profit when you’re fighting for crews at the bottom of the barrel? Are these builders truly successful beyond a short-term profit haul? 

So be careful here. Unsustainable success is no success at all. 

 


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8 Factors All Happy Builders Share

Thus, step one in the success exercise demands you and your team create a shared, clear definition of what that looks like. Here are my Anna Karenina factors—the elements all truly successful home builders share. Failure on any one will bring a builder down. 

1. Strategy

Quite simply, the best builders know their strengths and weaknesses and how they fit with the local market. Their default option is to play to their strengths and walk away from deals that don’t leverage their abilities. However, if an opportunity develops that’s out of their usual sphere, they go all out to develop that strength quickly. No faking it. And when conditions change, these builders are always the first to adapt and respond.

2. Market

Without a ready market to buy your product, you’re wasting your time. Yet this is always balanced against the competition. For example, Atlanta, Dallas, and Phoenix have long been hot markets, but go into those and you’re competing with every national builder, a host of strong regionals, and more locals than you can count. In my home market of Detroit, which few consider a good market, there are just a handful of nationals and a few smaller regionals. Strong locals have done well. The mega markets may have five times the number of permits, but 10 times the competition. So, which is the better market for you? The best builders know their strengths and always address any chosen market effectively. 

3. Financing

Whether it’s your money, borrowed funds, or investment by others, it must be sufficient to procure land or lots; finance construction; keep your suppliers, trades, and staff paid; and deal with the ebbs and flows of moving dollars from your customers’ bank accounts into your own. There is no simple formula here, with myriad approaches to securing money, but the strongest builders always stay on top and in front of their needs.

4. Product

On one hand, product development is simple. Plans are readily purchased from a wide variety of sources. On the other hand, developing a line of coherently designed, efficiently built product that appeals to buyers at a chosen price point in a particular market remains elusive for many builders. Product has a huge impact on how a builder responds to market needs. Even in a super-hot market, there will be underserved segments, especially by price point, small market segments, or geography. Solve for those and success comes much easier, something the best builders consistently do.

5. Operations

This is a big catch-all for which I was tempted to break out critical factors such as schedule, systems, and processes. At the end of the build cycle, however, they all contribute to daily operations, both in the field and office, that get houses built. 

I’ve been a judge for the National Housing Quality Award for more than 20 years, and having strong, efficient daily operations with a palpable “rhythm” is a hallmark of the very best builders. People are productive, barriers between departments are low, communication is continual, the schedule flows, houses finish on time. People know their jobs and support one another. 

There are a number of acid tests for great operations. Internally, take a strong measurement of variance. Having said that, few know how to measure it fully and accurately. But a smoothly operating builder runs very low variance—regardless of product. (Email info@truen.com to request a PDF of my four-column series on variance.)

Externally, assess the schedule. The short route is to pick 10 trades at random and ask the right questions. That quickly gets to the heart of the matter. The best builders are the best schedulers, and the best schedulers are the best builders. No exceptions. 

6. Trade base/supply chain

We could also put this under Operations, above, but it’s just too important not to stand on its own. More than 30 years ago, I learned a principle from two of my greatest mentors, Gary Grant in Minneapolis and Mike Rhoads in Chicago, both VPs of construction who came up through the ranks. Their mantra was simple: There’s nothing more important than becoming the “builder of choice” for your suppliers and trades. This is a common characteristic of the best home builders. They do what it takes, every day, to get not just the best trades but the best crews. It makes all the difference, but (caution) this status can’t be demanded, it must be earned. Answer this question every day: “How do we help our suppliers and trades be more profitable—without writing them a bigger check?” Solve that, and you’ll soon become the builder of choice. 

7. People/culture 

I was asked recently to describe the single defining characteristic of the latest National Housing Quality Gold Award recipients. The word “culture” quickly came to mind. These companies have developed a culture that continually grows, nurtures, and gets the best out of their people. That much is true, although the ways these companies go about it can differ considerably. Regardless, the people in these cultures will go about the daily care and feeding of all the elements in the Anna Karenina list. They understand that to neglect one is to risk the entire enterprise.

8. Leadership

I have worked for and with many excellent leaders as they shepherd successful companies. I’ve also observed, sometimes at too-close quarters, some bad, even destructive, people in leadership positions who aren’t really leaders at all. I won’t attempt to describe in a single paragraph what constitutes effective leadership, but I will say it’s not personality or style, since I’ve watched effective leaders who, on the surface, bore almost no resemblance to one another. 

One thing you’ll always find in a great leader, however, is the willingness for people to work hard; to do whatever it takes to fulfill a common vision. Another warning is needed here, though: by that standard, during World War II, Roosevelt, Churchill, Hitler, and Stalin were all effective leaders—for a time. They brought their people together, totally focused on a cause—even if we find that cause horrific. Two of those men, however, clearly failed the sustainability test.

In creating this list of home builder success factors, I considered several more that didn’t make the cut. But I suspect many of you are now thinking of one I neglected that would round out the list. If so, please email me the factor you think should be included, but remember: the failure of that one item must doom the builder—by my standards, if not their own.

 

The Fragility of Good Companies

In his book Catastrophe Theory, Vladimir I. Arnold describes the “Principle of the Fragility of Good Things”—a logical extension of Anna Karenina and Diamond’s list—that all good families, companies, systems, perhaps even countries, must simultaneously meet a number of requirements to be successful, and failure in any one will bring them down. That is, by definition, incredibly fragile. 

That’s a good description of how I’ve been feeling about our industry and, truth be told, in these times, about life itself. So terribly fragile. The burden is on all of us to strengthen our companies to function well in this environment. Study the elements listed above, add your own, draw back the curtain, and make a brutally honest assessment of where you stand. Just how fragile is your organization? Let’s resolve to overcome any weakness we find and get stronger and more robust each day.  

 

Access a PDF of this article in Pro Builder's September/October 2020 digital edition

Written By
President

Scott Sedam is president of TrueNorth Development, a consulting and training firm that works with builders to improve products, process, and profits. A senior contributing editor to Pro Builder, Scott writes about all aspects of the home building business and won the 2015 Jesse H. Neal Award, business journalism's most prestigious prize, for his commentary in Pro Builder. Scott invites you to join TrueNorth's Lean Building Group on LinkedIn and welcomes your feedback at scott@truen.com or 248.446.1275.

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