November 7, 2017 at 12:00 am
by George Casey, CEO of Stockbridge Associates, LLC
“Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”
“Ticking away the moments that make up a dull day You fritter and waste the hours in an offhand way Kicking around on a piece of ground in your home town Waiting for someone or something to show you the way Tired of lying in the sunshine staying home to watch the rain You are young and life is long and there is time to kill today And then one day you find ten years have got behind you No one told you when to run, you missed the starting gun”
Pink Floyd — “Time”
Okay. So where is this going? A mid-eighteenth century English titan of letters and a late-20th century iconic rock band contemplating past actions (or inactions) and the now-apparent future inevitable consequences of those choices.
What does that have to do with home building today? Let’s see.
My observations at the time were that, in the trajectory of the recovery of the US housing industry, it was becoming obvious that multiple factors on both the supply and demand side of housing were pointing toward the need for a full rethink of the whole topography of the industry, the players, and the business models that historically have been used to create housing for the country.
I am even more convinced that we are at a true inflection point in the journey between the old and the probable future.
Driven by a lack of sufficient trade labor willing to come into the current structure of the industry, we are finding ourselves more and more supply constrained. In a demand environment that indicates that there is a current demand for probably between 1.6 and 2.0 million housing starts per year, we seem tapped out in the 1.2-to-1.3 million range.
Furthermore, the current methods of building housing are inadequate and costly, meaning that the more affordable segments of the demand cannot be serviced profitably on a national basis.
The waste and inefficiency of the current model were brought into full relief in a February 2017 white paper by the McKinsey Global Institute on construction productivity worldwide entitled “Reinventing Construction: A Route to Higher Productivity”.
The study, in looking at construction productivity in the US noted that, since 1945, productivity in retail, manufacturing, agriculture and other major segments of the US economy had grown 1500% in that period. However, the US construction industry has had ZERO productivity growth in that period and since 1960 has gone BACKWARD.
It even gets even worse when the industry is segmented. The larger construction companies (Turner, Bechtel, etc.) have had some productivity increase in the period, but it gets pulled back by what goes on in the world of specialty trade contractors and smaller construction companies.
It finally notes that there is an opportunity to improve productivity by 5 to 10 times if we moved from the current model of construction to factory built manufacturing environments instead.
These models exist in Japan, Thailand, Ireland, England, Sweden, Germany and other countries for detached residential homes and commercial projects, such as apartments and hotels.
In the past six months, we have observed Japanese builders familiar with this industrial model purchase US home builders. We have watched some of the manufactured housing giants like Clayton Homes begin to dip their toes in the water of more “standard” home building by purchasing several homebuilders. We are seeing Silicon Valley interest in “disrupting” the current housing ecosystem and new players beginning to gain traction and raise significant capital on new ideas of how to restructure the industry.
For existing home builders, this is the pending hanging moment that should focus the mind of Boards and C-Suite executives, for it is becoming evident that unless there is acknowledgement of the threat to the enterprise no action can be contemplated or taken in time to have meaningful effect.
In many ways, the starting gun has already been missed and there is a major strategic hole that has already been dug. The margins and unleveraged returns on assets of the major builders have been slowly declining over the past several decades, despite the consolidation in the industry. Reinvestment in a new business model from existing players is becoming more difficult.
It is easier for new players to spin a de-novo story and access capital and talent than existing players to convince the market that the same people, processes, and business model will produce a markedly different result than the organization, strategy, and business model have been producing.
Credibility around significant change of this magnitude is in short supply.
And it is no surprise that we are here.
Organizations tend to do the things they are organized to do.
The people, titles and portfolios of responsibility that are highlighted to the public tell an interesting story of what an enterprise thinks to be important. Annual reports, organization charts, and titles are a window into the thoughts and priorities of a company and highlight their true DNA.
Look at most of the builders and you will see CEOs, COOs, CMOs, CFOs, CIOs, Division Presidents, HR executives, and sometimes someone charged with sustainability, investor relations, or governmental relations.
Nearly universally, there is no one highlighted as responsible for strategy, research and development, or technology development.
Yet go to almost every major manufacturing company or service provider, particularly those who are driving innovation and new forms of business, and you will find very senior people with these portfolios and responsibilities. Check out: Adobe, Apple, Boeing, Ford, Home Depot, IBM, Intel, John Deere, Johnson & Johnson, Masco, and Salesforce.com.
If no one is responsible for looking over the horizon at the future and where there are opportunities and threats, organizational stasis becomes the default.
If no one is figuring out radically new ways of looking at the business and how it meshes with the anticipated future, new technologies and business models are never created, tested, and perfected.
Sears in a world of Amazon.
If current builders want to have a chance to avoid the hanging in the fortnight, very quickly both a short game and a long game must be developed and executed simultaneously.
In the short game, much more attention must be spent getting more out of the existing business model. A much different relationship with existing trade contractors should be formulated, focusing on collaboration, waste reduction and meaningful cycle time reduction in the creation of the home.
I am not sure whether this imperative and laser-beam executive focus is currently important for many of the larger builders, both public and private.
In the long game, organizations must re-calibrate to give greater focus to strategy and technical innovation, particularly in the form of automation and modular solutions. Whether it is developing solutions in-house or partnering with others who are already up to speed in this space, either way this change of business model for production must be embraced.
If both are not done, there will be no game left for the current crop of builders.
Acceptance of reality by those who govern and drive the enterprise is the first step in the journey ahead. I am still waiting for the speech by my mythical CEO in the “Elephant in the Room” to be given, for it will be the first tangible sign that there is a will to live and prosper in the new world.
“We recognize that this industry cannot operate any more like it has historically. The days of abundant and qualified sub-contract labor seem to be coming to an end.
We cannot afford to embrace a business model that thinks it is okay to deliver homes in 6-12 months and where we have little control over who builds our homes each day.
We have looked at other industries and see that on our current track we are destined to extinction in the face of a surging demand that our current business model does not permit us to meet at levels of margin and capital return that are acceptable and industry leading.
We, instead have chosen to take a different path that will involve some short-term pain, but will position us as a leader in the new housing economy.
We are going to take a meaningful portion of our cashflow and, rather than reinvest it back in land or stock buy-backs, instead will be investing in new methods of producing our homes, using a high degree of automation, new materials, and a dedicated workforce that are full-time team-members of our company.
We will use the best people and ideas from other manufacturers and homebuilders from around the world to help drive this innovation. Our belief is that we can deliver homes in under 60 days from the day the customer signs a contract with us and at net margins and returns on assets that our over twice what we have currently.
Even more, we are choosing to reorganize our company to continue to invest in the research and development needed to drive the continuous innovation and improvement that we see will be needed to keep us at the top of the competitive heap.
We will be innovative in our use of technology, materials, business systems, and people in this drive.
We know that, if we do not make these fundamental changes, we have a high risk of extinction and we will not ignore that fact.”
I do know that others are attacking the opening left by the inaction of the current crop of industry players with gusto, relish, and intensity each day and that they have not missed the starting gun.
So, to the owners, investors, boards and senior management of our building companies: what are you doing about it?
Originally published in Builder Online on May 2, 2017 and can be found at http://www.builderonline.com/builder-100/strategy/change-or-die_o?utm_source=newsletter&utm_content=Article&utm_medium=email&utm_campaign=BP_050217%20(1)&he=acb26dfc22037f8627bb26d072d9871f0bba5969
Categories: Maine Real Estate Insider