Growth Strategies

The homebuilding industry will struggle to absorb the Giants' forecast increase in production capacity.

By:
Fletcher L. Groves, III
Vice President
Service and Administrative Institute

An overwhelming majority of the country's 400 largest builders plan to significantly increase production capacity and market share over the next five years, and they believe there is a strong possibility that the industry will undergo the drastic consolidation in independent building operations and outright circumvention of established delivery systems that has occurred in other industries.

These and other views were documented in Reference PointÔ, our annual survey of management practices among the chief executive officers of homebuilding companies listed in Professional  Builder's Survey of Housing's Giants.  This year's survey, conducted in the fourth quarter of 1997, was cosponsored by American Metro/Study Corporation.

When asked whether they felt the number of homebuilding companies in their markets would increase or decrease in the next five to seven years, these executives were divided in their opinion (Figure 1), but inclined to believe that there would be fewer builders.  On the other hand, more than two-thirds said their own building operations would grow significantly within the same timeframe (Figure 2).

The companies forecasting significant growth placed a high emphasis on geographic expansion (76%), higher share in current market segments (73%), and new market share in additional segments (66%), while almost half (46%) planned to increase land development operations.

On two longer-term issues, these managers were in even stronger agreement.  More than three-fourths felt that it was at least possible and a significant percentage thought it likely that the industry would see both a drastic consolidation in the number of homebuilding operations and an outright circumvention of established delivery systems within the next ten years (Figures 3 and 4).

In an industry that already has too much retail (builder) capacity, any level of increase in production would place excruciating pressure on already-thin profit margins, and might make the long term view of industry consolidation a self-fulfilling prophecy.

The accepted view of growth and consolidation has always been somewhat Darwinian that certain types of building operations (mid-size builders, for instance) would face extinction.  Our own view is that this type of expansion can only occur as a result of higher productivity (as opposed to more production capacity) and higher value generation.

From that perspective, the playing field will always be level.  The marketplace always rewards better performance, and that is the turf of well-run companies builders that manage their processes well, make good strategic decisions, and provide strong leadership.

Fletcher Groves is a Vice President at Service and Administrative Institute.  He can be reached at (904) 273-9840.  Randy Warner is Director of Florida markets for American Metro/Study Corporation, which cosponsored this year's Reference PointÔ survey.  He can be reached at (813) 273-6200.