Almost every home builder would agree our industry is hypercompetitive—a result of too little demand being chased by too many builders. For the most part, builders from the large publics to the small privates have focused their attention on cutting costs and reducing overhead in an attempt to improve operational effectiveness. They are centralizing many functions, reducing the number of floor plans, and cutting staff. Is it working? Is profitability increasing? Is the financial health of our industry improving?
Michael Porter's work on competition and strategy is renowned. I recently reread one of his classic articles, “Operational Effectiveness Is Not Strategy,” from Harvard Business Review's November/December 1996 edition. It had me thinking about our industry.
Porter argues, “Hypercompetition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.” Porter's position is there are two keys to superior financial performance: strategy and operational effectiveness. Yet, operational effectiveness and strategy “work in very different ways.”
“Operational effectiveness means performing similar activities better than rivals perform them. In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways.” Porter's position is, “Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient.”
“The most obvious reasons for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers' needs.” Herein is the link to the home building industry in our current state. “Operational effectiveness shifts the productivity frontier outward, effectively raising the bar for everyone. But although such competition produces absolute improvement in operational effectiveness, it leads to relative improvement for no one. The pursuit of operational effectiveness is seductive because it is concrete and actionable.”
What Porter argues is what I see happening in our industry. The benefits of the effort to drive operational effectiveness is accruing to the benefit of our customers in the form of lower prices, higher incentives, and a greater number of features and to our Realtors in the form of higher commissions. A hypercompetitive environment forces builders to drive sales by offering the savings from operational effectiveness to customers and Realtors—“hypercompetition is a self-inflicted wound.” There are very few, if any, builders who are seeing meaningful improvements in profitability from the many years of focusing on operational effectiveness.
If operational effectiveness is not the sole key to superior financial performance, what is? Porter argues, “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.”
Porter cautions against “the failure to choose” and “the growth trap,” arguing “the greater threat to strategy often comes from within. A sound strategy is undermined by a misguided view of competition, by organizational failures, and, especially, by the desire to grow.”
It's not that operational effectiveness is not a critical task for each and every home builder.
As Porter shares, the seductive nature of operational effectiveness should not mask the critical importance of maintaining a strategy that differentiates you from your competition. Successful financial performance and profitability demands it.