Self-Taught MBA: Know the Battlefieldcomments (0) April 17th, 2014 in Blogs
When anyone asks me for advice about becoming a successful contractor or homebuilder, I generally tell them to start by getting to know their home town very, very well. This means learning about the architectural history of the area, the waves of immigrants that populated the historic neighborhoods three generations ago and the emerging neighborhoods today. I encourage the would-be builder to visit open houses on weekends, read the real-estate advertisements for clues on what homeowners find attractive in housing, and befriend a couple of realtors and interior designers. Realtors have a frontline pulse on the market. They know relocation trends and what homeowners seek in their new homes. Meanwhile, interior designers know the architectural preferences of real people much better than many architects and builders do.
In essence, I suggest a new builder get to know the territory, or the battlefield where he or she plans to make their mark as a successful entrepreneur. I tell them, it's possible to hire very good tradesmen, but a business owner must take strategic command, and just as a racecar driver walks the track observing and memorizing every detail, a general contractor must know his builder's battlefield. Know the terrain so well that you can be the first to spot an emerging threat, such as a downturn in the market, or a new opportunity, such as a large number of homebuyers relocating from an area with markedly different tastes that you can cater too before your competitors take notice.
I know that some people dislike combat analogies, and you could view the competitive marketplace as a game instead, with a playing field and rules of engagement. But I prefer the correlation of conflict, because unlike the fixed outlines of sports, with clear boundaries, foul lines, and umpires to enforce them, the realities of the building business are always changing, and there are no umpires to enforce the rules. Business in a competitive economy, like it or not, is a lot like war. And your job, at the helm of your company, relies on making wise and informed strategic decisions just as any battlefield general, avoiding threats and exploiting opportunities--that's why they call you General Contractor!
I am not a fan of business planning because it can lull a young entrepreneur into complacency. Strategic thinking involves planning, but it's not about executing a choreographed set of tactics. The strategic thinker is always refining the plan, and sometimes tossing it out the window. But I do find great value in the section of the plan most of us dispatch quickly or even gloss over--the section that requires thorough study of the marketplace and analysis of our competition.
You study the marketplace to understand its dynamics and quickly spot changes. You study the competition to learn what has worked and how things are done. In this process, we often focus on the big players in town, learning something about their history and market niche, and can make the mistake of emulating the more successful. We become conventional thinkers, and conventional thinking rarely leads to a competitive advantage. Unlike the established players in town, who generally remain heavily invested in strategies that have worked in the past, a new business has the advantage of flexibility and innovation.
Every successful company, from Google to Pixar, has built success on innovation. It's harder to find examples of successful innovation within the tradition-bound real-estate business, but by and large the companies that survived and thrived in the Great Recession occupied unique niches and took a decidedly contrarian approach to the building business. We have profiled several of them in this blog, and will continue to feature stories of successful builders with innovative approaches. Among the trends, green building stands out as a niche once outside the mainstream that gained momentum during the recession. Traditional builders went out of business while net-zero and Passive House builders sold out and took on more projects.
Something similar happened in the hyper-competitive food industry. The growth segment now lies in the organic-food aisle. Even Wal-Mart has gotten in the organic game. The future is always difficult to see in the present. Not because it lies ahead of us and out of sight, but because it's here and now in the shadows.
Because things are always changing and business trends remain dynamic and fickle, you can almost guaranty that what worked in the past will fail in the future. Even Warren Buffet's shine has tarnished, and he has not beaten the market since 2008, while new "oracles" you've never heard of, such as Robert F. Smith, have emerged with new strategies to reap large returns for investors. Builders such as KB Homes, which is now the nation's leading green builder, with Pulte close behind, cater to a growth segment first spotted and exploited by small, idealistic builders. Only recently in the shadows, green building has become more than a niche, it now defines the regulatory climate. Nowadays, green building has become conventional thinking--everyone does it.
If It Isn't Broke, Fix It!
Strategic thinking represents the opposite of "if it ain't broke, don't fix it." Strategic thinkers know that what worked, won't and what will work is very difficult to spot. This is especially true if you're an expert at doing it the old way. Your business requires constant refinement and improvement.
Some examples of trends that can affect your building business include changes in code, such as your community adopting the 2014 IRC. Unless you've been building to high-level certification standards already, you're in for a painful learning curve. Demographic changes can also affect your business. Large numbers of people moving from other areas with different preferences, negotiating styles, and markedly different cultural needs can create both conflict and opportunity. Conflict for traditional builders, who resist change (almost all of us fall into this category). And opportunity for those builders that quickly adopt and cater to the newcomers.
Those that cater to a new trend are in the enviable position of first mover, with limited or perhaps no competition. You own that segment of the market. Years ago, I built a successful business model catering to the 10,000 Vietnamese families in my city, a segment most of my competitors not only ignored, but actually shunned. However, if you tried to imitate this move today, you would find lots of competition. Eventually everyone jumps on board a successful model and that model no longer represents innovation.
Just as important, or perhaps more important than spotting trends is spotting trouble. Changes in the market not only provide opportunity, but also peril. Consider Kodak, the company that invented the first digital camera, but remained so enthralled with its hugely successful old business model that management completely ignored the devastating effect of its own invention. The company is now trying hard to redefine itself and may yet rise from the ashes, but Kodak still represents a cautionary tale. Never fall in love with your business plan. As Napoleon said, "The moment of greatest peril is the moment of victory." When you think you have it figured out, you've just lost your way.
The kinds of changes that can negatively affect builders are economic changes, evolution in consumer preferences that you have not prepared to address, and changes in codes. Again, constant engagement with your community and emerging trends can help you prepare for changes before they become devastating.
My friend Michael Bland in Montana had lost his building business to recession in 1984 and did not want to go through the same again in 2008. As soon as he noticed a downturn in the market, he made changes, selling his heavy equipment, shutting down the office, and radically refocusing his business strategy from a builder of mid-price homes to buying and running a couple of mobile-home parks. At the time, it seemed like he'd lost his mind, but in truth he had studied trends and knew his market very well. He was among the very first to cater to the oil-exploration boom in neighboring North Dakota, leasing low-cost housing at very high rates to temporary oil field works. He's doing fine.
Sometimes knowing the battlefield not only provides an advantage in the attack, but the wisdom of a timely retreat. Max Gunther, author of "The Luck Factor," once said, "If you are losing a tug-of-war with a tiger, give him the rope before he gets to your arm. You can always buy a new rope."
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