Archive for July, 2013

The Modern Builder Welfare State

Posted July 28, 2013 By Fletcher Groves

This post was originally published on Escape from Averageness in August 2011, under the same title.  Updated and republished here, as part of our retrospective Above Average:  The Best of Escape from Averageness, 2009-2012)

In early 2009, the very first entry to SAI’s Escape from Averageness weblog asked this question:  “Does the world really need one more average homebuilding company?”  Prior to 2006, during the roughly ten-year, halcyon period that I describe as The Age of Homebuilder Entitlement, the answer may not have been a resounding “yes”, but there was acquiescence to that fact.  There was a sense of entitlement to volumes and margins that were too easy to achieve;  builders did not have to be good, they just had to be there.

At the time [August 2011], John Caulfield’s well-written, well-researched feature in Builder (“Debt-Ridden Nation Takes a More Skeptical Look at Its Investment in Promoting Homeownership”) had clarified the positions we had witnessed this industry taking, aptly described by the term “entitlement”.

It is a sense of entitlement now characterized by an obsession with maintaining government support of homeownership, and – by extension – the homebuilding industry.  The industry’s position on everything is filtered through the obsession.

Somehow, the federal government, directly or indirectly, was supposed to assure, insure, provide, or otherwise be responsible for any number laws, regulations, and policies, including a continuation of an affordable 30 year fixed rate residential mortgage instrument, a QRM standard with few requirements, a viable secondary market for mortgage securities, higher conforming loan limits, a continuation of the current system of public housing finance, five-year loss carrybacks, mortgage restructuring assistance, homebuyer tax credits, continuation of the mortgage interest deduction, foreclosure mitigation.

And, it all worked so well for us, didn’t it?  With yet more to come.  It remains, at its core, an unreliable dependency – a dependency that takes the form of feudalism;  we are vassals dependent on our lords, except that our lords are ineffective, incompetent, misguided, and overreaching, with nothing ever at risk.

As an industry, do we not think we can do better than this?

Here’s a different approach:  The homebuilding industry collectively tells its trade organization, its lobbyists, its members of Congress, and the White House that we don’t want the modern builder welfare state.  Any of it.  Get rid of it.

In its place, give us:  significant, permanent reductions in marginal personal income tax rates, and an elimination of most of the deductions;  a simple personal federal income tax structure that requires every wage earner to pay some income tax;  lower tax rates on capital gains;  elimination of the corporate income tax;  dramatically lower levels of government spending, including meaningful, effective, and fair entitlement reform;  minimal government involvement in housing finance;  a wholesale reduction in business regulation.

There is a natural, sustainable demand for what we do – developing new communities, selling and building new homes – if there is a viable, growing economy in which to do it.  Our government needs to get out of the way.  It needs to give us an economy that will grow and be globally competitive.  It needs to give us back market forces – in prices, in interest rates, in risk, in mortgage terms, in securitization.  It needs to let the secondary mortgage market correct, heal, and restore itself.

It needs to give us a simple, elegant, non-conflicting set of rules.

We will figure the rest out on our own.

There will be yet more pain.  The landscape of residential mortgage lending will change.  We will wish we had done it sooner.  But, if we don’t do it, we continue to be at risk of losing far more than our entitled existence.

The comfort of entitlement is an illusion.

 

“Focus”

Posted July 21, 2013 By Fletcher Groves

(excerpted from The Pipeline)

 

“The system’s constraint is whatever limits the system’s overall capacity to do more of what it’s designed to do, to produce more of what its purpose is to produce.

“Do you understand?”

The dazed looks and silence said it all.

Finally, the CEO stood up, walked to the erasable board, wrote a single word, and underlined it for emphasis.

FOCUS

The CEO paused before he spoke:

“What I think she wants us to understand is that this world of systems in which we must operate – this world of systems in which our understanding of production management must exist – does not provide us with promises of unlimited capacity, resources, capital, and opportunities.

“Which means that our efforts to improve, to solve problems, to manage constraints have to be prioritized.

“It means that our efforts to improve have to be focused.  It means that solving some problems, eliminating some constraints, and exploiting some opportunities has to wait on solving more important problems, eliminating more important limitations, and exploiting better opportunities.

“It may appear that RB Builders has a lot of ‘problems’, and we can see all of the undesirable effects stemming from those problems”, he said.  “Likewise, it may appear that we have many so-called ‘limitations’.  However – not every problem and not every limitation we face is the one that determines the ability of RB Builders to achieve more of its purpose, nor is our ability to achieve our purpose determined by the sum of the capabilities and the capacities of individual teammates, departments, or any other parts of a whole.

“So what?  Here’s what.  Trying to improve most of the system will be counter-productive.  It will consume too many resources and produce too little improvement.”

“He’s right”, said the intrepid, results-based consultant.  “Systems are not a set of equally-important-but-independent, related-but-isolated measures.

“The way we improve a system’s performance – the way we improve productivity, improve operating performance, achieve desired business outcomes – is not by spending time and effort improving the outcome of each and every part.  We cannot improve everything, everywhere, at the same time.  Everything cannot be the root problem, everything cannot be the cause of the problem.  Every limited or constrained resource cannot be the system’s constraint.

“If we try to solve our problems this way, we will spend all of our time and effort treating the outward, visible symptoms of the problems, without ever resolving what caused it.

“If we try to manage constraints this way, we will spend all of our time and effort increasing the capacity of resources that do not limit the capacity of our production system, without ever identifying and effectively managing the constraint that does.”

“She’s exactly right”, said the VP of Construction.  “If we try to solve our problems and manage our constraints by dealing with things in isolation, we might improve performance in some areas and temporarily relieve a few of the symptoms and effects of the problems, but we will never solve the core problems, and we will never optimize the production capacity or maximize the productivity of the system.  We will almost certainly add capacity, but it won’t be capacity that makes a difference, capacity that increases Throughput.”

“I suppose it is better to be exactly right, than it is to be merely right”, said the intrepid, results-based consultant.

 

(The Pipeline: A Picture of Homebuilding Production is available on the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com), as well as amazon.com and barnesandnoble.com)

 

“Do you understand?”

Posted July 15, 2013 By Fletcher Groves

(excerpted from The Pipeline)

 

“We said that we live in a world of systems.  What do we mean?”

“For our purposes, I think we’re talking about the relationship and interaction between dependent parts that comprise a whole”, offered the CEO.  “It is about the order of things, about relationships of cause-and-effect.  It is about structure defined by parts and processes.  It is about understanding dependencies, and how things work together.  You can say that systems are a generalization of reality, but that’s the only way we understand that reality.”

He wrote:

NATURAL ORDER

CAUSE AND EFFECT

STRUCTURE

“As long as I have been in homebuilding”, he continued, “I have constantly been amazed at the way the industry tries to do things:  Lurching from project to project, from deal to deal, acting like we’ve never done any of it before.  Details without any context.  Treating symptoms of the problem, not the problem itself.  Trying to improve the performance of the individual parts, but not the performance of the whole.”

“Sounds like whack-a-mole”, said one of the sales representatives.

“When we use the term ‘systems-thinking’, what we mean is a way of reasoning, a way of problem-solving”, said the intrepid, results-based consultant.  “It is a way of thinking.  Systems-thinking teaches us to think globally while acting locally.  It teaches us to focus.

“The homebuilding industry, the housing and real estate market, and the local and national economies in which RB Builders operates – they are all part of a hierarchical system”, she said.  “The business environment in which we must operate – it’s a system.  These production principles and disciplines are part of that system.

“It is a hierarchy of goals, and the conditions required to attain them.

“RB Builders is not some loosely-connected set of independent and unrelated parts – a collection of processes, departments, systems, resources, policies, and other isolated pieces of a whole”, she continued.  “Like everything else, RB Builders is a system – a hierarchical set of interdependent parts that must work together to accomplish a stated purpose.

“Our understanding of production principles and disciplines is rooted in this way of systems-thinking”, she explained.  “Rooted in an understanding of cause-and-effect relationships, rooted in the interdependent nature of its parts, rooted in the ordered behavior of the business environment in which we must operate.

“It is rooted in the way things work.  It is rooted in the way problems are solved, rooted in the way constraints are managed.

“Systems-thinking is about improving the performance of the entire system, not the performance of its pieces or parts – not any of the parts, not some of the parts, not even all of the parts, independent of one another.”

The intrepid, results-based consultant made a numbered list on the flipchart, then paused and moved forward slightly for additional emphasis.  “Listen.  The way you improve a system is by focusing the improvement efforts on the two areas that determine the performance of the entire system:

1.   SOLVING THE CORE PROBLEM

2.   MANAGING THE CONSTRAINT

“What is the problem?  What is the constraint?  Those are the two questions that have to be answered in order to improve the performance of any system.  The system’s core problem – its root problem – is the problem that causes the majority of the undesirable effects, the symptoms of the problem that permeate much of the system.  Variation, for example.

“The system’s constraint is whatever limits the system’s overall capacity to do more of what it’s designed to do, to produce more of what its purpose is to produce.

“Do you understand?”

The dazed looks and silence said it all.

 

(The Pipeline: A Picture of Homebuilding Production is available on the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com), as well as amazon.com and barnesandnoble.com)

 

The Antidote to Size

Posted July 7, 2013 By Fletcher Groves

Before we concede the inevitable assertion of overwhelming power heralding a new age in homebuilding – with an inexorable and irresistible shift in favor of a relatively few Big (for the most part publicly-held) Builders – we might want to ask whether such an era would likely occur, without this industry – with its notoriously fragmented supply chain – finally acquiring the consolidated share-of-market profile of almost every other industry.

In 2012, the three largest homebuilding enterprises by units sold (DR Horton, Pulte, and Lennar) had a 13.3% market share, up from 9.0% in 2003.  The Builder 100 had a 44.2% market share in 2012, up from 34.4% in 2003.  But even with the recent consolidation, the industry still has nowhere near the market share profile of most verticals, where the top three companies would likely have over 50% market share.

We might also want to ask what type of business operating model would be required, in order for a homebuilding enterprise to permeate every SMSA, not just the 20 largest housing markets – or five of those markets, or 10 of those markets;  otherwise, industry consolidation is just circles on a map, with vast areas excluded.

Consolidation of that magnitude and extent has a long way to go.  If it ever occurs, we don’t know how many Big Builders that will represent;  we don’t know how many de minimis Niche Builders will remain.  What we know is this:  Given the parameters – the characteristics – of the homebuilding industry, consolidation of this magnitude and extent will occur only if it is allowed to happen, only if someone capitulates to the outcome.

More to the point:  Whether consolidation of this magnitude and extent occurs or not, the dynamics and imperative of dealing with the core issue doesn’t change.

From as far back as July 2000, in a Professional Builder feature article titled “The Road That Lies Ahead”, to as recently as April 2010 on Escape from Averageness in a post titled “Get busy living, or get busy dying”, I have analogized this question of expansion and consolidation as the prospect of Life on the Serengeti.

The analogy begs the question:  What happens to the lions when there are no more zebras, impalas, or wildebeest?

What happens when there aren’t any more easy targets?

Would big still be good enough?  How big?  Would well-financed be sufficient?  How sufficient?  Cash-laden Balance Sheets?  How much?  Access to equity markets?  Adoption of so-called “industry best practices”?  The relatively easy existence found in a “more-for-more” proposition, in which an increase in the number of units built and sold simply requires commensurately more work-in-process and more production capacity?

Progress achieved only on the margin side of economic return?

Necessary, but not sufficient.

True, sustainable competitive separation is the result of doing what your competition will not do, what they cannot do.  Things that are too tough, that require too much rigor, too much discipline, too much resolve.  Margin is important, but it is not the difficult part;  it is the more natural part, where builders’ inclination lies.

True, sustainable competitive separation requires much more;  it requires the difficult part, the part to which builders are less-inclined.  It requires continually and relentlessly finding ways to become more productive, finding ways to do more with less.  It requires being as proficient on the velocity side of Return on Assets as the margin side of ROA.

In and of itself, size has not a single attribute that is to be coveted, or any advantage that cannot be overcome.  From a competitive assurance standpoint, size assures nothing.

Velocity is the antidote to size.