Adobe Stoce / cacaroot

Competing at an advantage over others, Harvard guru Michael Porter tells us, is essential to making money in business.

"Porter's five forces" have long been required knowledge, as basic to strategic work today as they were when he organized them into a business standard in a pioneering 1979 Harvard Business Review essay. They may, in fact, be timeless.

What's not timeless, however--and is clearly a riddle many home builders have yet to solve--is which of those five forces carries the most weight at any given moment. Which of Porter's five forces do home building leaders need to focus on to be successful in today's mixed-signal, fundamentally fluid housing economic landscape, where there are bigger and bigger gaps between what home builders produce and what households can pay for?

Or, look through the same lens from the opposite direction, which may be more motivating. How great a threat is it for a home building strategist today to set competitive focus on the wrong forces?

Here's four takes on dialing in competitive force focus that we can observe from navigational maps of housing economic cyclical behavior in the past 100 years or so.

  • In the best of times, new home builders compete with each other.
  • In more challenging, economically ambivalent periods, new home builders compete with existing home sales.
  • In tougher periods of economic instability and higher unemployment, new home builders compete with bank-owned property sales, and single-family and multifamily rental options.
  • In deep recession and mass layoff periods, new home builders compete with each other at convincing Wall Street and lenders to become the preferred capital partner for opportunistic work-outs and distressed deals.

In our view, you'd safely characterize most home builders if you asserted they were setting competitive sights for 2020 and beyond on taking market share from one another and competing with resales as priorities No. 1 and No. 2.

And, in our view, there's a huge risk in that focus.

Judge for yourself.

National Association of Home Builders chief economist Rob Dietz is dead-on in his assertion that narrowing the "New Vs. Used" gap between median new and median existing single-family home prices is a must. Dietz writes:

While a smaller gap is a challenge as construction costs continue to rise, from a macro perspective limiting the size of this gap is key to increasing overall home construction volume. Policy would help, of course. As NAHB research has shown, for a typical newly built single-family home, about one-quarter of the final sales price is due to regulatory costs and burdens. Lowering such costs will help reduce construction expenses and improve housing affordability.

Broadly, the Michael Porter "five forces" bucket that would align with new home builders competing with existing home sales may be "Bargaining Power of Buyers." Customers leverage, vis a vis their disposition to consider "new vs. used" increases the greater the gap between what they get in resale options and what they'd pay for a new home.

That's a materially important focus area--as is the focus on competing with new-home rivals for local market share and concentrated scale, affirmed in today's announcement that Taylor Morrison has agreed to purchase William Lyon Homes for $2.4 billion--for builders.

But let's look a little closer at the Porter diagram for competitive road-mapping, and unpack what we feel are two critical realities that should inform every strategist involved in new-home investment, development, and construction value chain decisions.

There's a saying, "The difference between theory and practice is always greater in practice than it is in theory."

Competing successfully with and among rival new home builders in a concentrated geographic market for local scale may theoretically add clout to bargaining power with local suppliers--including land sellers, materials suppliers, building trade crews, and maybe even capital investment flow into that market arena. In practice, more volume and product offerings in a given geography--taken in isolation--is no guarantee to greater leverage with those suppliers.

In theory, the delta between median-new homes and residential resale properties may be the primary area of focus for builders. In practice, builders' focus on "bargaining power of buyers" may be better placed on how local economies can produce more customers period--ie expanding their buying power--than on the "new vs. used" dynamic. That relationship is like using an old map to try to navigate new territory. This is one of the two critical realities for builders as they try to fix their competitive focus for what's ahead.

The other takes shape as a "shadow" phenomenon of Porter's "bargaining power of suppliers" bucket. Among "suppliers" builders need a competitive advantage in dealing with are sources of money, of capital, either debt or equity, or some hybrid.

Now builders know they need to reduce costs. One area that occurs to them is on the operational excellence side, via greater productivity, less waste, more efficiency. Another opportunity area--a commonly identified "culprit" for all the pain builders experience and pass along to their customers in their asking prices--is regulatory burden costs.

What nobody seems to be looking at is the cost to builders and their customers of non-value producing finance, which benefits only the very few in financial management and investment. If a quarter on the dollar of an average selling price goes to regulatory costs--including local fees, entitlements, permitting, building codes, inspections, etc. (which could be said to have at least X-percent value to the buyer)--how much of what home buyers pay buys them nothing, but pays investors and lenders, and shareholders their pound of flash on every transaction?

A competitive advantage in dealing with that point of friction should be where many more strategists set their strategic focus. Non-value-producing costs--the finance and transaction costs, the legal costs, the insurance carrying costs--is definitely an opportunity area for an edge versus rivals. The ones you see and recognize, and the ones you don't see and wouldn't recognize if you bumped into them.