The Antidote to Size

(first published on Escape from Averageness® in July 2013, published in BUILDER (builder-on-line) in June 2014, updated and republished here, with additional insights)

In 2013, I suggested that, 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 the homebuilding industry – with its notoriously fragmented supply chain – finally acquiring the consolidated share-of-market profile of almost every other industry.

A year earlier (in 2012), the three largest homebuilding enterprises at the time (DR Horton, Pulte, and Lennar), had a 13.3% market share, measured by units sold, up from 9.0% in 2003.  And, according to the resources I referenced, the builders comprising the BUILDER 100 had a 44.2% market share in 2012, again, measured by units sold, compared with a market share of 34.4% in 2003.

John McManus, former Senior Editor at BUILDER, now the CEO and Editor in Chief at The Builder’s Daily, wrote in TBD last week that, in 2020, the builders listed in the BUILDER 100 had a market share of 49.3%, up only slightly from eight years before (47.5% in 2012) and up from 36.5% in 2003.  McManus also reported that, in 2021, the index of all publicly-held builders had a total market share of 42%, up (according to the graphic chart) from 31% in 2013 and 27% in 2003;  there are a few minor discrepancies related to sources, but nothing significant.

There are more publicly-held builders now (as of 2021) than there were in 2013 and 2003, so a higher market share would be expected.  The BUILDER 100 is comprised of both publicly-held and privately-held builders;  the unifying feature is that all of the BUILDER 100 builders are large builders.

However, even with the consolidation over the past two decades, the industry still has nowhere near the market share profile of most industry verticals, where the top three companies would have over a 50% market share, likely more.

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.  Large “national” builders, regardless of how ownership is held, are basically collections of regional building operations, even if some of the components of those building operations have been standardized (and many have not).

The main factor that plays into this situation is that homebuilding, as it currently exists, is not manufacturing, either onsite or off-site;  the value stream, from a Lean perspective, is not unified, is not integrated;  it is almost completely outsourced, thus Big Builders have to compete for the required resources with every other building operation in every market.

Component manufacturing is a consideration, but it would a consideration best made answering the overall question of the feasibility of an integrated building model;  outsourcing tends to level the playing field, without producing sufficient competitive advantage.  We now take the time, at every Pipeline workshop™, to compare the operational considerations and business outcomes of both outsourced and integrated BOMs (building operating models), using versions of the Pipeline game™.

Consolidation of the magnitude and extent described at the beginning of this post 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 current parameters – the current 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 does not occur, the dynamics and imperative of dealing with the core issue doesn’t change.

From more than twenty years ago (July 2000), in a Professional Builder feature article titled “The Road That Lies Ahead”, to as recently as twelve years ago (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 through merger and acquisition 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 are no more easy (and, in this case, willing) 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 without more.  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.