The Road That Lies Ahead . . . and The Road Less Traveled

Posted May 20, 2018 By Fletcher Groves

(initially published on Escape from Averageness® in January 2011;  updated, revised, brought into the present here, to reflect the thinking that came out – the thinking that is still coming out – of the 2018 Housing Leadership Summit, held May 14-16, 2018, in Laguna Nigel, CA)

“Where is the homebuilding industry headed over the next five to ten years on the issues of growth, consolidation, and supply chain management?”

Despite what you are thinking, this is not a current battery of questions.  At the dawn of the current century, these and other questions were posed in a volume of Reference Point™, which was the study of management practices in the homebuilding industry we periodically conducted among the C-Levels of a select group of larger building companies.

Now, almost 20 years later, as we more clearly face what I then termed “the inevitable assertion of power that will herald the Era of Consolidation” – the point at which publicly-held homebuilding companies (and large privately-held building companies, and now investors, from both within and without the industry) got serious about consolidation – I thought it might be worthwhile to look back and summarize some of what builders told us then, and how we observed and commented on the findings at that time:

 

GROWTH STRATEGIES:

“ . . . almost three-fourths (71%) of these executives predicted that their own building operations would become ‘much larger’;  almost everyone else (27%) predicted that the size of their operations would remain about the same . . . these findings were very consistent with the findings from an earlier Reference Point™ study.

“We thought it would be interesting to see how all of this growth was going to materialize.  When we asked these executives what primary strategy they would use to meet their growth projections, 41% identified ‘geographic expansion into new markets’, 39% selected ‘higher market share in current markets and buyer segments’, and the remaining 21% identified ‘new market share in additional buyer segments’;  not a single executive we surveyed 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 – some combination of growth, merger, and acquisition – would reduce the number of active building companies in the years ahead.

“We asked them whether, over the long term (10+ years), they could foresee the type of widespread consolidation of operations and market share that has occurred in other industries.  Overall, more than 70% of these executives said they could foresee the circumstances for such a consolidation.

“We then asked these senior managers whether they thought the number of homebuilding operations in their markets would increase or decrease in the next five to seven years.  Overall, almost half (49%) thought there would be fewer building companies, while more than one-third (38%) thought the number of building companies would remain about the same;  about one-in-ten (13%) believed the number of builders would actually increase.

“Their responses differed in significant respects from those expressed in our previous studies . . . at that time, less than one-in-ten (9%) thought there would be a significant decline in the number of builders . . . for those who thought there would be an increase . . . the situation has been reversed.”

So – ponder the implication of this combination of facts:  seven out of ten executives surveyed thought their own companies would be “much larger”, but five out of ten also thought the overall number of homebuilding companies in their markets would increase or remain the same.

 

SUPPLY CHAIN MANAGEMENT:

“We asked two questions related to distribution channels and supply chain management.  We wanted to know whether builders viewed these two issues – closely related to change in many other industries – as something the homebuilding industry would need to address within the next 10 years.

“Asked whether they could foresee . . . changes that could include the circumvention of established delivery systems similar to what has occurred in other industries . . . a slight majority (54%) believed the industry would have to deal with this issue in the next ten years;  the rest did not see this as an important issue.

“On the matter of supply chain management, there was much stronger agreement.  Asked whether they could foresee homebuilding companies taking the lead in collaborating . . . to manage all of the activities in the process of creating the housing product . . . a Pareto-esque majority (80%) expected the industry to move in that direction.”

We then offered the following comments and observations:

 

THE ROAD LESS TRAVELED:

“Even if builders chose to reject the notion of widespread consolidation and outright circumvention of established delivery systems, and dismissed the level of growth projected by such a high percentage of builders as collective boardroom fantasy, the dependence of so many builders on growth strategies aimed at geographic expansion and higher market share in current buyer segments ought to raise a couple of red flags:

“First, assuming that a strategy based on expansion into new geographic markets represented real growth, and not just the transfer of demand through acquisition or merger, then it would have the effect of forcing more competition on the existing level of demand.  The first victims would be the builders that could not compete for the available lots.  But, then what?  How would the builders that survived assert themselves in the market?

“Second, a strategy based on capturing a higher share of the market in current buyer segments asked a more naked version of the same question:  how would builders acquire more business – in the same buyer segment, in the same geographic market?  Could those types of gains be sustained?

“Growth fueled by a strategy of geographic expansion and higher market share in current buyer 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 would builders have?  As an industry, we have outsourced almost every value-added activity in the building process.

 “Moreover, we could talk all day about the need to increase productivity, but (1) that would be a difficult proposition when someone else is doing all the work, and, (2) there would be no real point in improving productivity unless a productive use could be found for the additional capacity.

“And, besides, just where would all that additional production capacity be invested?  In more expansion?  In higher market share?

“When we look at it in these terms, there has to be a better way.”

“. . . There is a clear and simple message in all of this:  The road ahead is difficult and uncertain, but there is opportunity along with the danger.  Do not be complacent.  Do not follow the crowd.  Do not waste your time and effort on things that do not create value.”

 

Fast-forward to 2018.  In the time since this study, consolidation has clearly occurred in the homebuilding industry.  In 2003, the 100 largest builders (by closings) had a 34% market share;  today, the 100 largest builders have a 63% market share.

I concluded with this point, 18 years ago:

 

LIFE ON THE SERENGETI: 

“It seems obvious to us 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 current operations, even if we factor in a continuation of the current level of acquisition and merger activity and reason that our group of builders might be a particularly aggressive strain.

“On the other hand, we do not see any reason to doubt their intent.  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 still hungry, but no one is 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 . . . “

 

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Part III: “Failure is not an option.”

Posted May 5, 2018 By Fletcher Groves

(excerpted from The Pipeline: A Picture of Homebuilding Production, Second Edition©, initially posted on EFA® in January, 2011)

“I am going to make this clear, to all of you:  cynicism is pointless;  get over it.  This is the direction in which RB Builders is headed”, said the CEO, “and your choice to continue your cynicism has a life expectancy of about 30 more seconds.”

The intrepid, results-based consultant looked over at the senior superintendent, shrugged, and said, “Talk about a speech.”

“I do agree with your point”, she said, turning her attention back to the CEO.  “But, you know, it is possible to fail, without being the least bit cynical about its prospects.  I will say this:  Whether you are cynical or not, change is up to you.  Whether any of this works or not, is up to each of you individually, all of you collectively.

“If I did not believe RB Builders would make it work, I would not be here, my firm would not accept you as a client.  We would not waste our time.  After all, my firm and I have a bigger dog in this fight than anyone else.

“When we started out on this little adventure, I told you that my consulting firm would be compensated on the same performance basis as everyone else”, she reminded them.  “I told you that there was no limit to the time and effort my firm – and I personally – would expend to achieve the outcomes we targeted together.

“I told you that I would work hand-in-hand with you, and do whatever it takes to achieve those goals.

“I assured you that I would do whatever it took to foster a willingness and capacity for change, create a sustainable capability for implementing the things that would continuously improve operating performance and business outcomes, increase innovation and learning, and make you less dependent on all of your consultants.

“I told you, from the standpoint of how the credit was attributed, that I was content to remain in the background.

“Those were the assurances I gave you”, she said.  “In return, I sought and received assurances from you.

“You agreed that this was a true client-consultant partnership, and that – because my firm’s compensation was completely results-based, of finite duration, and self-funding – my firm was assuming the higher level of risk.  You agreed that this new, results-focused consulting arrangement we were jointly undertaking provided ample incentive to everyone for taking action, making changes, and improving operating performance and business outcomes.

“I told you that I was as serious as a heart attack about getting results.

“I made it clear that I had no intention of wasting my firm’s time and effort. I told you that you did not have to do everything I told you, but that you did have to come to terms with me, take action, make needed changes, and do whatever it took to achieve the targeted results.  Although I have grown rather fond of most of you, I made it clear that, if there was no action, no change, no results, then – out of principle alone – heads needed to roll.

“A couple of stories.

“My younger sister played NCAA Division II soccer in college.  As a junior and senior, she was one of her team’s captain;  her junior year, before the season began, a reporter for the local newspaper asked for her prediction about the season – specifically, what kind of W-L record she thought her team would have – as a measure of success.

“My sister replied: ‘I don’t plan to lose any games’.”

“When my dad was younger, he sailed a lot of offshore races.  According to him, it would get dangerous, sailing offshore at night, in rough seas.  He says that they all used to remind each other, only half-jokingly, I think, that – where they were – if their boat went down, no one was going to blame them if they drowned.

“But – they knew they would still be dead, if they just sat there.

“Trust me, no one outside of RB Builders cares whether you succeed or not.  No one cares whether you separate yourselves from your competition.  No one cares whether you keep your jobs. Nobody cares about your livelihood or your future.  Nothing new in that revelation.  Back in the ‘Age of Homebuilder Entitlement’, nobody cared, either.  It was just never an issue, because being good enough was good enough.

“Success is no longer such a foregone conclusion.  No one cares, but no one is going to blame you if you fail.  That does not change the outcome.

“I can just hear it now”, said the intrepid, results-based consultant.  “’Poor things.  What a great company RB Builders could have been.  It was all just too much for them to handle, housing’s version of The Apocalypse. But, it is not their fault’.

“Nope.  Nobody is going to blame you, if you go out of business.  But, that is just what you will be – out of business.

“Failure is not an option. Not for me. Not for any of you.”

 

      

(excerpted from The Pipeline: A Picture of Homebuilding Production, Second Edition©, initially posted on EFA® in January, 2011)

 

“I am the one who is saying it, but plenty of us are thinking it.  This approach may have merit, but it does not mean that it will work here, not the way this company has operated in the past”, the superintendent said.  “So, I want you to tell me how this is going to be different.  I want you to tell me how this is going to work, now, in this company.”

“Your concern – your issue – has nothing to do with production principles, or with production systems”, said the intrepid, results-based consultant.”

” . . . ‘your issue has nothing to do with production principles’. Profound, as always”, said the CEO.  “Tell us something we don’t already know.

“Clearly, it is more foundational than that.  This is about giving teammates a reason to care, and about inspiring the confidence to follow where we are leading this company.

“So, one point at a time.

“Regarding your first point, the steps we have already taken to create business savvy-ness, to impart decision-making accountability and responsibility, and to provide a real financial stake in the business outcome are radical by industry standards.  Collectively, they give all of us – and I mean all of us – reason to care deeply about improving the operating performance that drives that business outcome.

“Secondly, in terms of inspiring the confidence to follow, some of us are charged with an official responsibility of leadership, by virtue of our management positions in the company.  Fair enough.  I think that the leaders of an enterprise are there to serve, not be served.  But, leadership is not fundamentally about the position that you hold, or do not hold.  The way I choose to describe leadership, it is a matter of personal character and courage.  It is about the credibility that flows from demonstrating integrity.

“It comes from trusting one another.  It means sticking to agreements and keeping commitments.  It means going beyond the expectations and responsibilities of your individual job.  But, it also means speaking and hearing the truth.  Expressing candor, like this”, he said, nodding to the senior superintendent, “comes with the territory.

“It means pursuing goals that are worth pursuing, even if they are difficult to achieve.  No. I will re-phrase that.  It means pursuing goals that are worth pursuing, precisely because they are difficult to achieve.

“It comes from inspiring the type of optimism that sees every situation as we choose to make it, not as we are told it must be.  Or, how some long-standing, so-called industry experts tell us it should be, if we were willing to settle for so-called industry best practices.  Somehow, I just do not see industry best practice guidelines as the path to competitive separation.

“The assessment of current reality that underlies everything?  That is where we are.  The production principles we have instituted?  Vetted, to get us to where we want to go.  Team-based performance compensation?  The focus on Gross Income?  Same thing.

“This is the direction in which RB Builders is headed.

“For whatever reason in the past, such an understanding of leadership has been absent.  At best, it has been an obligation and a title, for some, and an excuse for everyone else.  It is a situation that predates me, but it is a situation that stops with me.  Repairing the damage will not happen overnight.  That is the thing with integrity and credibility.  It is difficult to build and it is really easy to destroy.

“But – the situation is going to change, that I promise you.

“Based on past performance, I will not argue with your conclusion”, said the CEO.  “Nor will I blame you for being – as you put it – skeptical-bordering-on-cynical, about the prospect for change, the approach to production management we are committed to, or the requisite leadership I have just explained.  The right amount of skepticism can be healthy;  the possibility for pessimism is always there, but it has to be overcome, if anything worthwhile is to happen.

“I am going to make this clear, to all of you:  cynicism is pointless;  get over it.

“This is the direction in which RB Builders is headed, and your choice to continue your cynicism has a life expectancy of about 30 more seconds.”

 

The Pipeline: A Picture of Homebuilding Production©, Second Edition is available through the publisher’s bookstore, and from any of the main booksellers (amazon.com, barnesandnoble.com, or booksamillion.com).

virtualbookworm.com/the-pipeline-a-picture-of-homebuilding-production

 

      

Part I: Push-Back

Posted April 21, 2018 By Fletcher Groves

(excerpted from The Pipeline: A Picture of Homebuilding Production, Second Edition©, initially posted on EFA® in January, 2011)

 

“May I say something?”

The question came from RB Builders’ most experienced, capable, and respected superintendent, someone not known for his excess commentary.  The conference room grew respectfully silent, expectantly silent.

“Sure”, replied the CEO.  “Speak your mind.”

“Nice speech.

“When I first heard about this arrangement”, he said, “it made me want to throw up.  What was it?  Oh, I remember:  Partnering and learning, participating in the financial outcome with a consulting firm on a series of projects with short timeframes and targeted, focused results, in pursuit of an overall company goal.

“Really?

“This stuff is intriguing, even the idea of some type of team-based performance compensation.  However – that is as far as I would ever let it go.  In terms of expectations regarding the outcome, I have always been skeptical, bordering on cynical.

“I still am.

“This sounds just like every other program the company has embarked on in recent years.  None of them have worked, either, not the way they were supposed to.  Over-promised?  Badly-executed?  Focused on the wrong thing?  Not for me to say, but I doubt that this program will be any different.  Like the rest, it will just take up a lot of our time, sitting in meetings like this, that ultimately lead nowhere.

“What was it that was said? ‘ Think globally, act locally’?  I like the second half of that statement.

“My response to this stuff has been to put my head down and do my job.  I have become good at doing that.  As far as I have been concerned, this company consists of my job, nothing more.  I have relationships, but that is not about my work.  That is about friends and associates.  I have argued in favor of individual performance compensation, not because I disliked team-based performance compensation, rather, because I knew I could achieve the performance that triggered the individual bonus, without having to depend on anyone or anything else.

“Give me a cycle time to achieve, and I will achieve it.  Give me a quality standard to meet, and I will meet it.  It does not matter what others do, it does not matter what RB Builders does.  I get my job done, and I get myself paid.  I am not willing to sacrifice what I know I can do personally, for what I do not believe we can do as a team.

“As for my job, I know what it takes to do it.  You can have the rest of it. I do not need it.  I could care less about production systems.

“I am the production system.

“My problem is not that I think this new stuff is the wrong approach.  To the contrary, it makes compelling sense to me.  It is the way we should be doing it.  My problem is that this approach is bound to fight a losing battle against what I consider to be a pervasive attitude of complacency, entitlement, laziness, and resignation.  All of you so-called leaders – those of you taking down the six-figure salaries and failing to produce results?  Well – it leaves me a little cold.

“RB Builders is a pretty good company, actually one of the better homebuilding companies to work for.  But – its management has historically lacked the willingness, capacity, and capability to change.  Management says it has vision.  It does not know what it sees.  All we ever wind up doing is tying ourselves into knots, all the while declaring the latest change we need to make.

“In the end, my skepticism wins out.  I am simply not going to be stupid enough to risk my own performance compensation on something in which I have no confidence.”

The superintendent looked directly at the CEO.  “In the past, it did not matter.  But – like you – I do not think average performance defined by so-called industry best practices is going to cut it any longer.

“I commend you, and her”, he said, pointing to the intrepid, results-based consultant, “for putting it out there.  There is a lot that this new approach gets right.  Regardless of what we choose to call it – an analogy, a concept, a visual reference, whatever – I do think our production system is a pipeline.

“I do think we need to understand the connection between the decisions we make every day and the business outcomes that protect our livelihood.  I do think we should focus on optimizing the performance of the overall system, instead of the performance of its individual parts.  I agree that there is a distinction between processes and projects, between process management and project management, and that we need to understand both.

“And – I hate to admit it – there is a part of me that wants to be part of something that is bigger and more important than me.  We have talked about the need for a savvy, accountable, and motivated homebuilding team, comprised of savvy, accountable, and motivated teammates.

“I want to base my work on the ‘want-to’ attitude that it takes to own and run a homebuilding business, not just the ‘how-to’ mechanics of selling, starting, and building houses.  I want to share accountability and responsibility for the decisions and the results.

“And – yes – I want to have a serious financial stake in the outcome.  I want to be in the business of homebuilding, not just work in a homebuilding business.

“Wishful thinking about RB Builders does not erase the past.  It does not dissuade my concern that this company lacks the willingness and capability to enact these changes.

“I am the one who is saying it, but plenty of us are thinking it.  This approach may have merit, but it does not mean that it will work here, not the way this company has operated in the past.  So, I want you to tell me how this is going to be different. I want you to tell me how this is going to work, now, in this company.”

 

The Pipeline: A Picture of Homebuilding Production©, Second Edition is available through the publisher’s bookstore, and from any of the main booksellers (amazon.com, barnesandnoble.com, or booksamillion.com).

virtualbookworm.com/the-pipeline-a-picture-of-homebuilding-production

It is always carried in-stock on amazon.com:  http://amzn.com/1621378047

 

      

In the broadest sense, we want BuilderVelocity™ to become an industry movement.

We want this movement to be members of the homebuilding supply chain – the concerned, connected members of the new home construction value stream – coming together to unravel traditional industry best practices and challenge conventional industry thinking, in order to create sustainable competitive separation for their homebuilding enterprises.

In embracing BuilderVelocity™, they would be acknowledging that sustainable competitive separation is likely a position reached only by doing what their competition will not do, what their competition cannot do:  things that are too tough, that require too much rigor, too much discipline, too much resolve.  They would be in agreement that it as a competitive position reached by doing the hard work to achieve operational excellence on the velocity side of Return on Assets, on the productivity side of economic return.

What is BuilderVelocity™?  Why is it relevant?  Why is it essential?

First of all, BuilderVelocity™ is a system for managing production.  It expresses the principles and disciplines of production management in terms that reflect the unique characteristics – and the particular requirements and context – of residential construction.  It is an industry-specific application of underlying universal principles and disciplines of production – physics rooted in the laws that govern all production systems.  It is about using the tools that work for homebuilding production, without regard to the consulting religion from which they come.

It creates a visual image of homebuilding production;  it connects operating performance to business outcomes;  BuilderVelocity™ enables builders to “see” production from a different perspective, it enables builders to see production from a “more-for-less” mental model:  more revenue, more closings, in less time, with less work-in-process, and less overhead.

It treats the workflow associated with homebuilding for what it truly is:  project portfolio management – multi-project management – with embedded and supporting processes.

BuilderVelocity™ addresses production management as a system, and it aims to increase the productivity of that system, by maximizing the closings and Revenue it generates with a planned, finite, and controlled level of work-in-process and capacity, with less waste and less variation;  it establishes velocity accelerators – a set of actions that increase productivity.

 

BuilderVelocity™ flows from a book.  The Pipeline: A Picture of Homebuilding Production, Second Edition© tells the story of how RB Builders learned the principles of homebuilding production in the turbulent years following the end of the period known as the Age of Homebuilder Entitlement®.  It is a story told in the exchanges of dialog between RB Builders’ team members, senior management, and its trusted, results-based advisor/partner.

 

BuilderVelocity™ is also the namesake of the event management website (www.buildervelocity.com) for Pipeline workshops™, the series of open, sponsored (and other channeled) two-day workshops and one-day seminars on production management developed by SAI Consulting, Inc., in cooperation with BUILDER, BuilderMT, Specitup, and other sponsors.

Pipeline workshops™ are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused specifically on homebuilding production management.  They are not a lecture series.  They make extensive use of a proprietary business case and management exercises.  The material is comprehensive, the learning is intense, the format is interactive and competitive.

Pipeline workshops™ use a progressive series of production scenarios, known as Pipeline games™, that simulate homebuilding production in the real business world, in an environment of variation and uncertainty, where operating decisions produce economic results – sometimes good, oft-times bad, sometimes meeting or exceeding the budgeted performance, oft-times not.

Pipeline games™ are both a production simulation and a business game;  they are completely unique in the approach they use.

 

And, finally, BuilderVelocity™ is a LinkedIn forum.  It is a group for those charged with the responsibility of managing – or managing the interaction with – production as a system at some level of a homebuilding enterprise and driving results.  It is a group that asks builders to participate, to share knowledge, to challenge ideas, to ask questions, to use their voice.

Join the movement.  Join us at a Pipeline workshop™.  Read the book (it is always carried in-stock on amazon.com, and is usually available from the other bookseller sites).  Join the BuilderVelocity™ group on LinkedIn;  contribute to the discussion.

Come.  Participate.  Learn.

 

Request to join the group:  https://www.linkedin.com/groups/6571634

Register for a workshop (when registration is open):  http://buildervelocity.com/

Purchase the book:  http://a.co/bclXi3b