Part III: “Get Busy Living Or Get Busy Dying.”

(this post appeared on EFA® in April 2010;  reposted here, with the same title, as the third of a three-part series.  It is about creating competitive separation;  written well-before the book was published or the workshop was created, this is what The Pipeline: A Picture of Homebuilding Production© Second Edition is all about, what Pipeline workshops™ are all about)

“I guess it comes down to a simple choice.  Get busy living.  Or, get busy dying.”  (The Shawshank Redemption, Castle Rock Entertainment, 1994)

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If his only object was to exist or survive, I suppose that Andy Dufresne would have become like everyone else in Shawshank, and settled for whatever business-as-usual constitutes in that setting.  It took him twenty years to dig out of prison for a crime he did not commit, but Andy Dufresne did not choose to merely exist.

Get busy living, or get busy dying.

If a homebuilding enterprise will not go after higher productivity – if it will not tackle the velocity side of Return on Assets – it is left with only the margin side of ROA, left only with higher margins as a way to carve out sustainable competitive advantage.  Left with the same approach as virtually every other homebuilder.

Yes.  Margins are important.  Yes, value needs to be extracted from direct, variable costs wherever possible, with better houses (better designs, better quality, lower costs, fewer defects), more desirable and affordable communities, and – somewhere along the way – a better homebuyer experience.

But, margin is table stakes.  It is the easiest of the conditions that are necessary to generate the type of economic return that creates sustainable competitive separation.

Margins are necessary, but they are not sufficient. There is more to the equation for measuring economic return than simply maximizing how much money a building company can make on each house it builds;  Return on Assets is also a function of how many homes can be built for the investment a builder makes in its production capacity, every operating period, in order to build homes.

Return on Sales x Asset Turn.

Margin x Velocity.

Call it what you want, but the cost of production capacity is all the money a builder spends each and every year in indirect, non-variable cost.  Money that will be spent, regardless of the throughput that it generates.

Much of which will be wasted.

Wasted as a result of unstable schedules with hidden safety in every task, wasted as a result of too much inventory, wasted as a result of uneven sales, starts, and closings, and wasted as a result of the failure to manage a homebuilding company for what it truly is – the management of a portfolio of projects with dependent and shared, limited outside resources.

Not convinced?  Try to calculate a breakeven point from margin alone.

The mandate is higher productivity.

The mandate is to find ways to do more for less, and with less.  The mandate is to exploit the velocity side of ROA.  The mandate is to eliminate the need for working capital to support building operations.

Particularly true if you are not a big public builder, for whom better access to cash and financing is supposedly such an overwhelming competitive advantage.  Like any homebuilder, the publics will readily go after the margin side of ROA.

However, with margin as table stakes, velocity becomes the antidote, what you do if you are a privately-held builder, what you do if you are not positioned for cash and financing like a publicly-held builder.

As I have said on earlier occasions, elsewhere in this column, access to cash and financing only creates financial capacity, it does not create production capacity that gets utilized or make the publicly-capitalized builders that have better access to it more productive.  Unable, or unwilling, to compete on the velocity side of ROA, creating competitive separation for a public builder is reduced to geographic expansion, a quest for market share, and competing on margin.

Because that is all they have.

And, unfortunately, that will be enough, if smaller, privately-held builders choose to compete head-to-head with larger, publicly-held builders on those terms.

“I guess it comes down to a simple choice.  Get busy living, or get busy dying.”