The Pipeline: Why read it?

The Pipeline:  A Picture of Homebuilding Production is a business book.  It is about the principles and disciplines of production management, as they relate to – and as they are applied toward – the specific conditions, requirements, and parameters found in the homebuilding industry.

I am told that the Introductions written for business books typically answer two questions, first-and-foremost:  Why should you purchase this book?  In the case of The Pipeline, I would say it’s because improving performance on the velocity side of the ROA equation is the best path – perhaps the only path – to achieving sustainable competitive separation.

The issue is not whether the margin side of ROA is less important than the velocity side of ROA;  margin is neither unimportant nor less important.  Gross Income derived from increasing how much you make on each house you build (margin) has the same contributory value, dollar-for-dollar, as the Gross Income derived from building more houses with a finite and controlled amount of inventory and capacity (velocity).

Nor is it necessarily a choice.  Sometimes the circumstances favor one or the other, but we don’t necessarily have to choose between efforts to increase Return on Sales and efforts to increase Asset Turn;  margin and velocity are driven by different aspects of the business, and they generally don’t react to, or adversely affect, each other.

It is, simply, that higher margin – while as desirable, beneficial, and important as higher velocity – is not a strategy for creating a lasting competitive advantage;  between higher margin and higher velocity, higher margin is the easier, more common strategy.  The same is even more true of the opposite to higher velocity, which is higher capacity.  Adding production capacity (and the inventory for it to work on) is a “more-for-more” proposition.  It’s the easy, well-traveled road;  anyone can resort to adding production capacity, but don’t expect it to set you apart.

As a business strategy, either or both – higher margin or more capacity – can be co-opted.  True, sustainable, competitive separation comes more from doing what your competition will not – or cannot – do.  Like finding ways to become more productive, to “do more with less”.

Consider the plight of RB Builders, the homebuilding company portrayed in The Pipeline (and chronicled earlier in The Saga of RB Builders), facing the world at the close of 2007, at the end of the halcyon period known as The Age of Homebuilder Entitlement:

In many ways, RB Builders was a product of that age, just another homebuilding company satisfied with occasionally adopting other builders’ “best practices”, content to be good, no-better-but-no-worse than the other builders with whom it competed, a building company with a middle-of-the-road approach to delivering the value its homebuyers demanded.   

The previous 10 years had been good for RB Builders.  But, it was becoming a dangerous approach to business, because – as the saying goes – “the only thing in the middle of the road are yellow lines and dead armadillos”.   

It was becoming a homebuilding no-man’s land. 

Locked into an operating model – into organizational structures, management systems, processes, cultures, and employees – that could not deliver extraordinary levels of distinctive value, the company found itself dumped into a teeming mass of homebuilders that all looked the same, sounded the same, and priced the same.  Indistinguishable from other builders, and unable to create any type of competitive advantage, RB Builders was trapped and sinking – like a modern-day dinosaur – into the tar pits of average-ness. 

The world doesn’t need any more average homebuilding companies;  it has enough of them, plenty of them.

 

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