BUILDER's Local Leaders analysis of the top 10 leading builders is a study in deep operational scale concentrated in markets economically on the move.
Among all of the top 50 home building markets in the United States, only three are competitive arenas where the top 10 home builders command less than 32% of the market share. In the top 10 markets, Local Leaders clout was dramatic, with an average of 56.5% market share among them.
Through what looks to be the first two-thirds of housing's current recovery trajectory, clout paid dividends. Geographically spotty economic momentum accelerated growth for a relatively select few markets, with stingy gains in many others. With lots and capital, a builder could serve as trade magnets, giving them visibility into the months ahead, a consistent paycheck, and added leverage to negotiate better hourly pricing among builders whose projects were on lumpier timelines.
So, we saw growth among big builders in the bigger markets, as they sought and leveraged ever deeper operational scale. Have a look here at Fortune's ranking of home builders among its annual Fortune 500 company rankings. Technically, six builders--D.R. Horton, Lennar, Pulte, CalAtlantic, NVR, and Toll Brothers--made it into the top 500, while 13 publics qualified for rankings in the top 1,000 enterprises.
Those big builders crave deep market share because it creates a virtuous cycle of access--to land deals with land sellers, to laborers with reliably and predictably steady work-streams, to efficiencies in products and materials distribution to job sites, to locally compelling architecture, to sounder relationships with local real estate agents, and (of course) to the lion's share of capital moving in the market, from banks and investors, into the communities and the end-user home buyers.
Operational scale has served the bigger players through 2016 on protecting margins to some extent--and now that more entry-level communities are opening up in gradually expanding peripheries of the hotter metros--higher volume big public builders expect scale to support the unleashing of higher-velocity growth.
The issue is this. Operational scale is not the only benefit of amassing greater market share in a metro's competitive arena.
Range of proximity for trades and distributors, efficiency, lower windshield time rates, greater levels of capability to physically manage processes, better intel on off-market land deals, better relationships with local officials and knowledge of local rules ... the more iterative workflows become the more elegantly simple and manageable they can be on repetition.
Still, that's not the whole answer, especially when it comes to preparing for the next "turn" of the cycle, and cadencing investments for the one after that.
Here, John Hagel III and John Seely Brown, two Silicon Valley bright lights, offer a fresh take on scale perfect for home builders to apply. In a piece they contribute to the Harvard Business Review, "Great Businesses Scale Their Learning, Not Just Their Operations," Hagel and Brown write about where scalable efficiency hits up against limits of usefulness, which scalable learning bounds over:
Scalable efficiency doesn’t just demand conformity among the individuals within the institution. It also seeks conformity among those it serves – that’s the path to scalable efficiency.
Scalable learning on the other hand is driven by the desire to learn more about those who are being served by the institutions and then to provide ever more value to those constituencies by tailoring products and services to address the individual and evolving needs of those being served. That learning is a prerequisite to understanding how to deliver more and more value to those being served. Becoming more responsive to the evolving unique needs of the individuals being served by institutions could help to restore the trust that has been eroding.
Consolidation and greater clout in home building's stronger market places will continue to strengthen margins, the velocity, and the resilient, sustainable profitability, which will likely drive at least a few of the home builders up the charts in the Fortune 500.
