The problem is leadership matters. Effective leadership matters as much to a home builder's success as ineffective leadership matters to a home builder's failure. Effective leadership from an organization's CEO matters more, according to Business Week (“CEO Conundrum,” June 15, 2009), “in bad times than in good.”
The industry is mired in an unprecedented economic downturn. It is impossible to grasp the impact, as single-family sales have fallen 81 percent since peaking nearly four years ago.
In “How the Mighty Fall,” Jim Collins writes, “In fact our research shows if you have been practicing the principles of greatness all the way along, you should get down on your knees and pray for severe turbulence, for that's when you can pull ahead of those who lack your relentless intensity.” Early in the book, Collins states, “Most companies eventually fall. Yet, our research indicates that organizational decline is largely self-inflicted and recovery largely within our control.”
The catastrophic downturn plaguing the home building industry is not solely a result of the industry's actions. Still, here's the key takeaway: As a result of a company's individual actions, one home builder will outcompete and outperform another.
Collins argues that often a company's downfall begins with its success. Arrogance leads to overreaching; overreaching leads many firms to fall. Collins notes, “The companies in our analysis showed little evidence of complacency when they fell. Overreaching better explains how the once invincible self-destruct.”
Rapid, out-of-control growth for the sake of prestige is dangerous to long-term success. Collins argues: “Growth that erodes consistent tactical excellence can just as easily send a company cascading through the stages of decline.”
“If anything, people went too far—too much risk, too much leverage, too much financial innovation, too much aggressive opportunism, too much growth” is how Collins describes the economic meltdown. Investment banks, commercial banks, and mortgage companies are guilty of such sins, but so are many home builders. The race to 100,000 annual units, land inventories that stretched seven or more years, aggressive acquisitions, and off-balance sheet financial engineering all played a role in leaving builders exposed beyond their zone.
This brings us to people and Packard's Law. “Packard's Law states that no company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company.
“You begin to break Packard's Law and begin to fill key seats with the wrong people; to compensate for the wrong people's inadequacies, you institute bureaucratic procedures; this in turn drives away the right people; this then invites more bureaucracy to compensate for having more of the wrong people, which then drives away more of the right people; and a culture of bureaucratic mediocrity gradually replaces a culture of disciplined excellence.”
The rapid growth of our industry forced companies to hire weak performers to fill seats. How did corporate management address this situation given the local nature of home building? They centralized one critical task after another. Bureaucratic mediocrity ensued.
As companies decline, they look for the “silver bullet.” “The key point is that they go for the quick, big solution or bold-stroke to jump-start a recovery, rather than embark on the more pedestrian, arduous process of rebuilding long-term momentum.” I couldn't help wondering about Pulte/Centex or the move for extending the tax loss carryforward or the demand to extend the housing tax credit. Might these all be “silver bullets?”
“How the Mighty Fall” insightfully addresses many of the shortcomings facing our industry. It's about leadership and people. What our industry needs now are leaders capable of recruiting top talent, resolved in building long-term value through hard work, innovation, passion, and creative problem-solving.
Jamie M. Pirrello is CEO and president of Berkeley-Columbia Partners and acts as CFO and San Antonio division president for Michael Sivage Homes & Communities. He may be reached at email@example.com.