The Antidote to Size

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.