What’s Your Core Competitive Strategy?

by Mark Hodges, Senior Avid Advisor

There’s no one-size-fits-all-markets game plan for builders that want to grow, but guiding principles can offer direction.

In his seminal 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter proposed that all companies must compete through one of three core competitive strategic approaches.

  1. Be the low-cost producer. There will always be a market for the lowest-priced product, particularly if it stacks up to the competition. Companies selecting this strategic position focus on improving operations, such as production methods and efficiencies. Case in point: Toyota’s success in providing high-quality, feature-rich cars at affordable prices.
  2. Differentiate your product. Companies selecting this approach must focus their energies on unique value, exclusive features, or specialized services using a combination of competencies that set them apart. Case in point: Dell’s unique “build your own computer” model.
  3. Focus on a distinct market or customer base. Companies taking this tack focus strategy, product development, and organization to serve a specific customer demographic, or they limit themselves to a very specific marketplace. Case in point: Southwest Airlines’ early focus on cost-conscious flyers traveling short distances between second-tier cities.

Porter points out that companies that try to be all things to all people risk forfeiting the strong competitive advantage that’s possible only with a focused competitive strategy. And so, choosing one of these strategic frameworks requires discipline and commitment. It’s done by making all decisions based on the competitive advantages the chosen approach can provide.

But What About Builders?

Porter’s principles have been widely embraced, but applying them to our industry is tricky. For most businesses, the product is the product (a golf ball is a golf ball; a laptop is a laptop), regardless of geography. There, a universal strategy devoted to industry dominance can work.

But in home building, our product is tied to land as well as to specific markets, each with its own competitive landscape, demographics, and market conditions. For single-market builders, these principles can apply, since they can devise one competitive strategy unique to their one market. A word to these builders: Pay close attention to Porter’s advice and settle on one core strategic approach.

And What About Multi-Market Builders?

How does a builder operating in many markets devise a single competitive strategy for the entire company? How does it select from one of the three core strategic options? Perhaps the answer is, “It can’t.” A multimarket builder shouldn’t expect that a single competitive strategy will be successful in every market in which the builder operates.

Imagine a division whose headquarters announced a companywide low-cost-producer strategy. The division then had to compete in a market dominated by one or more highly efficient, cost-effective competitors that have already carved out that niche. Think of the division head who is directed to become Phoenix’s active-adult leader, fighting for market share with industry pros already deeply entrenched in that product segment.

If a builder settles on one core strategic approach, it likely means a shift in focus. Decisions will be more about which markets to enter, which to exit, or in which markets it needs to shift its current competitive position in order to match that universal competitive strategy. This may be a risky proposition. Entering or exiting markets is expensive, and doing so solely on the basis of a newly devised competitive strategy may be unwise, particularly as market conditions change over time.

I believe that while builders may be able to create a universal framework for competitive position, individual market leaders must be allowed—and directed—to create a market-specific strategy for competitive leadership, based on that market’s unique considerations, limitations, and opportunities.

Local Strategies + National Reach = Natural Tensions

And yet, a market-specific approach creates a strategic puzzle: The more distinct competitive strategies become in different markets, the more difficult it will be to come up with consistent organizational models and to prioritize corporate initiatives that a singular competitive strategy enables.

Some builders act as more of a holding company of smaller local builders via a growth strategy driven by acquisition. Local leaders are permitted to operate more independently, as long as they meet the company’s growth and financial goals. There’s nothing wrong with this model, provided you recognize that a universal competitive strategy is nearly impossible to put into practice in this case.

Other builders aim for a standardized operating model, where all local operations are required to adopt standard processes, products, and organizational models. Naturally, the more standardized a company’s model, the more it can assert a global competitive strategy. But too often, the one-size-fits-all approach to strategy fails to take into serious account the challenges and opportunities unique to each market.

If you struggle with this philosophical question, you’re not alone. Local leaders are better able to understand their markets and the forces that drive competitive leadership, but corporate strategies demand a focus on compliance, creating significant conflict. Local leaders who are instinctively entrepreneurial yet faced with financial and growth targets bristle at corporate directives that make competing in their markets more difficult, even burdensome.

A way to address this strategic conundrum is to:

  1. Establish a core set of organizational targets and priorities. All divisions should be required to adopt it by creating “local” strategies intended to meet those targets.
  2. Require each division to submit a formal plan of action. This is essential in meeting those targets based on local competitive considerations.
  3. Monitor division performance over time. This will ensure that action plans are being executed and that competitive decisions are in consideration of the corporate objectives.

For example, to leverage economies and powers of scale, each division may be required to achieve a certain percentage of market share, in a certain amount of time. Then unique blended strategies are devised in each market aimed at achieving that goal. This is what Jack Welch did at General Electric, driving its many different businesses to achieve market dominance or to exit that business. Now that’s focus.

All growing builders need to contemplate these questions, earnestly debate them, and decide on a competitive strategic approach that they can commit themselves to with conviction. Then they need to guide decision-making in each market to implement that approach. In other words, Porter’s strategy is spot on—as long as we’re selling golf balls.

Mark Hodges is a Senior Avid Advisor for Avid Ratings, a leading provider of customer loyalty research and consulting to the homebuilding industry. Through the Avid system, industry-leading clients improve referrals, reduce warranty costs, and strengthen their brand. He can be reached at mark.hodges@avidratings.com.

*This article was originally published in ProBuilder Magazine in January 2018. Click here to download the original article.

A Road Map for Strategic Growth

by Mark Hodges, Senior Avid Advisor

I overheard two builders commiserating the other day. It went like this:

“This market is really tough. I’m having trouble sleeping.”

“Not me. I sleep like a baby.”

“Really?”

“Yep. I wake up every two hours and cry.”

While recently talking with some other builders, I asked each to describe their strategic plan for growing their companies in the years ahead. One replied, “I need to buy 200 to 300 single-family fully developed lots within three years in infill locations.” Another said, “We need to grow our top line by 10 percent year over year, and our bottom line by 15 percent over the same periods.” A third offered, “My plan is to keep my bank happy by making my loan payments, period!” All seemed satisfied that their answers had articulated sound plans for growth.

Certainly, those replies address key elements of a strategic growth plan. Land is our most essential raw material, and setting acquisition targets is vital. Establishing financial performance goals and ensuring that funding is available are both important, too. But these alone don’t comprise a strategy. Many home builders would benefit from developing the knowledge and skills necessary to create a more comprehensive strategic growth plan on which to act.

1. WHERE ARE YOU TODAY?

The strategic planning process begins with a thorough examination of your company as it exists today and the business environment in which you operate. Ask: What are you good at? What makes your company unique? What are your particular competitive advantages? Who are your competitors and what advantages do they possess? How do you differentiate yourself from them? What’s happening in your market and how will you take advantage of any changes? What are the threats that imperil your company’s future growth?

Until you can answer these and other questions, and can articulate your strengths, weaknesses, opportunities, and threats, you’re not ready to begin planning your strategy for the future. But most companies completely skip this step and consider only where they want to go, without understanding where they are now. Begin planning by conducting an honest assessment of your company and your market(s).

The Walmart phenomenon is a classic example. Once just a small regional discount retailer competing against industry leader Kmart, Walmart catapulted to the top in just 10 years, leaving Kmart in its wake. And it got there by understanding its business and the competitive landscape. With just 230 stores in 1979, compared with Kmart’s 1,900, Walmart knew it had to find a way to compete on price without the economies and powers of scale that Kmart enjoyed as the industry Goliath.

2. WHERE DO YOU WANT TO GO?

The next step in the planning process involves defining, in specific terms, where you want your company to be in one year, three years, and five years. Will you expand into new markets? Will you broaden your product array? Will you change your competitive position? Will you change your organizational structure? Will you develop new business processes? What will be your growth trajectory? What performance metrics will you use to monitor operational execution?

At the end of this step, you should be able to spell out where you plan to take your company; define your specific financial, growth, and performance targets; and describe in detail what your company will look like and how it will operate in the future. You should be able to describe, in specific terms, the unique competitive advantage you’ll create or expand upon and how you’ll develop the core competencies and operating processes to enable that advantage.

Walmart decided that it would become the world’s largest discount retailer by perfecting distribution and inventory management processes through long-term partnerships with its supply-chain manufacturers. Effective application of this strategy would lower costs and allow Walmart to offer the best pricing every day while achieving profits more than twice those of its nearest competitors. (Walmart consistently achieves 8 percent profit margins as compared with Kmart’s 4 percent.)

3. HOW WILL YOU GET THERE?

The third step in the planning process is the most difficult and demands the most discipline. Here, you need to determine, in precise terms, how you’re going to achieve the goals set in Step 2. What resources will you need to achieve your plans? What financial investment will be required? How will you attain the new skills you’ll need? Who will take on the big projects? And how long will they take to complete? How long will it take to get your organizational structure in place? What will you improve about your operation, and how will you go about it?

Without this step—and the intensive oversight needed to ensure that you can achieve your plans—your strategic plan will simply be a wish list.

The real work begins when you’ve thoroughly and compellingly articulated where you want to go. Figuring out exactly how to get there and then doing it is the biggest challenge. You’ll need to create a disciplined follow-up oversight regimen to monitor progress. How are the projects coming along? Are project leaders meeting time targets and milestones? Do you need to change course or add more resources? Are you beginning to see the results you were hoping for?

Walmart developed a clear, compelling strategy and the organizational mechanisms to support it once the company fully understood its competitive environment and agreed on an objective of global domination in its business. The retailer settled on the principle of “Everyday Low Prices” and then created the processes to achieve it. Walmart mastered the distribution system by heavily investing in a fleet of trucks and distribution centers, allowing it to fill depleted shelves four times faster than Kmart does. It engaged its vendors in a comprehensive shared strategy to streamline product delivery processes. It invested in complex sales data systems, allowing store managers to effectively track sales and inventory. It added profit-sharing incentives and achieved a revenueper-square-foot metric that was more than double Kmart’s flagging performance. Walmart’s wild success and ultimate dominance was the result of targeted strategies and investments that no one could match.

If you don’t yet possess the skills for strategic planning, know that they can be developed. The key lies in understanding the process outlined above and crafting a detailed road map to follow. Otherwise, you may find yourself in the same position as so many others: thinking that strategy is nothing more than finding the next great land deal.

Mark Hodges is a Senior Avid Advisor for Avid Ratings, a leading provider of customer loyalty research and consulting to the homebuilding industry. Through the Avid system, industry-leading clients improve referrals, reduce warranty costs, and strengthen their brand. He can be reached at mark.hodges@avidratings.com.

*This article was originally published in ProBuilder Magazine in August 2017. Click here to download the original article.

It’s All About Expectations

Setting clear and proper expectations can be the difference between a customer being a Raving Fan, or being raving mad.

by Mark Hodges

Recently, I was talking with an Avid client whose Avid Reports indicated a serious gap in their homebuyers’ assessments of “being kept informed” and “communications” throughout the buying process. Further analysis of their buyer profiles gave us a good indication about why this gap was occurring. We learned that over 60% of this builder’s customers were first-time homebuyers.

Why was this discovery important? Because the experience of buying a new home is not only emotional and scary, it is also entirely mysterious. And because anxiety and frustration occur more intensely whenever someone doesn’t know what to expect from an already anxious experience.

I asked about the builder’s formal interactions with their buyers, and how they went about setting expectations for what the new home buying experience would entail. The short answer was not much. They didn’t conduct Pre-Construction Orientation Meetings, for example, and all other communications were informal. Their buyers were for the most part left to set their own expectations which were, unsurprisingly, lofty and unrealistic.

This neglect was a formula for the results they were experiencing – customers who were unhappy, not so much with their homes, which they rated highly, but with the entire experience from contract to closing and beyond. The builder wasn’t so much doing a poor job building the homes, but they were doing too little to help their customers know what to expect throughout the buying process.

Building a home of high quality is a minimum requirement for a successful homebuilder. It’s a ticket to entry in terms of achieving customer loyalty, nothing more. What sets great homebuilders apart from merely good ones is their programmatic focus on providing a great homebuying EXPERIENCE for their customers. And a great experience begins with setting clear and proper expectations, particularly for buyers who are purchasing a new home for the first time. (Which in my anecdotal experience is MOST new homebuyers!)

So, how do great builders go about setting clear and proper expectations? They do so by institutionalizing formal interactions with their buyers throughout the buying and building process. They instruct buyers on “What to expect at the Design Center”, “What to expect during the construction process”, “What to expect if you want to make changes during construction”, etc.  These formal, scripted events take the mystery out of the process, clearly explain what the buyers’ obligations are, and what could go wrong (like snowstorms or permitting delays) – essentially a list of what the buyers can and should expect while their home is being built. An informed buyer is much better prepared for the uncertainties and occasional issues that can arise during this complicated process. It’s your obligation as a builder to make the processes clear and understandable.

As Paul Cardis noted in his book Service Certainty, setting clear expectations and preparing buyers for some of the uncertainties of the buying and building process can “inoculate” your buyers against the unexpected, better preparing them for the occasional and inevitable disruptions that can cause great anxiety for the uninformed.  In short, the more they know about the process and their role in it, and what could happen, the better able they are to deal with unwanted surprises.

As I mentioned, the builder we spoke of above doesn’t conduct Pre-Construction Orientation Meetings, instead leaving the buyers to wonder why construction hasn’t started (permit delays), why they can’t change their cabinet selections even though their first choice hasn’t been installed (lead times), or why unaccompanied site inspections are prohibited (safety), etc.

Our Avid Advisors can help your company to discover best practices of effective expectation-setting and communications, and help you to implement them in your business. All you need to do is ask. We’re here to help you to create Raving Fans of your customers, and to avoid making them raving mad!

 

 

How the Homebuying Experience Has Changed!

by Mark Hodges

Reflecting on my early days in the homebuilding industry (yes, you have to go back to 1983), I was struck by just how much things have changed in the way homebuyers go about shopping for a new home.

In “the old days,” potential customers went to the one source available to them to find new home communities in their area – the Real Estate section of the newspaper. There they found ads usually showing one elevation, perhaps a floorplan, and other basic information about the community. Armed with only that information, they hopped in the car and traveled to the sales office. There they met me (or someone like me) who introduced them to the builder, community, products, features, and site plan, hoping to find the right home with the right features, on the right home site, built by the right builder. In short, they came knowing very little, and the sales process took weeks.

Fast forward to today (really fast) and the experience is completely different. Today, homebuyers first “travel” to the builder’s website, where they find virtual tours of all the available homes, information on each home’s features, available options, and site plans with all available home sites. If the builder uses GoTour®, they find Star Ratings and other important information about the builder, and even information about the products the builder installs in each home. In short, when they finally decide to visit the community, they have already chosen the best home for them, identified the right home site, and even chosen many of the features they want in their new home.

Imagine just how much better informed today’s buyer is before they set foot in the sales office. Instead of asking basic questions about the community, home styles, and features, they can now come asking about the Elm model and about home site #16. They’ve already reviewed the builder’s Star Ratings thanks to GoSocialTM (if the builder is smart enough to use this product) and they know pretty much what they want. Now it’s just a matter of confirming their needs and matching them to the home and features they’ve already selected. Wow!

While we don’t have the data yet to confirm it, I strongly suspect that sales conversion rates are much higher when a customer visits a community to confirm what they’ve already explored via GoTour®. Imagine how much more smoothly the sales process can go when a prospective buyer arrives with a wealth of information – much more than could be found in a newspaper ad!

Now, consider the process of selecting options. In my day, my “design center” consisted of some Formica counter chips and a few cabinet doors lining the walls of the laundry room in the model home. There was no such thing as today’s design centers, where buyers tour literally hundreds of displayed products in gorgeous galleries. Now imagine that they’ve viewed all those products (and their Star Ratings) on GoTour® before their first visit to the community. All builders know that option sales contribute greatly to bottom line profit, and our research shows that buyers spend on average 20% more on options they’ve seen on GoTour®!

Today’s homebuyers are much better informed, much more interested in real consumer feedback about the builder and the products they use, and much more prepared to make a buying decision, much more quickly. This is the power of Avid’s industry-leading products – GoSocialTM, GoTour® and GoSurvey®. A builder who chooses to invest in all these services has a much greater chance of making the sale, selling more options and improving the customer experience by acting on feedback through the GoSurvey® process.

The only question is, why would a builder leave it to chance? Meeting the needs of today’s information-hungry Millennials and greeting well-informed buyers to their first visit at your community is worth the investment many times over. One thing’s for sure – using these valuable tools beats even the most clever newspaper ad, every time! If you’re not already using these products, you should learn more about them as soon as you can.