The Harvard Home Builder Study

It’s a few years old, but I am just catching up with the 2012 book Bigger Isn't Necessarily Better: Lessons from the Harvard Home Builder Study, by Frederick Abernathy, Kermit Baker, Kent Colton, and David Weil. For those interested in the US home building industry, it’s a vital resource with significant findings.

The authors surveyed 88 home builders in 2005. This was the peak, when home construction “surged” from 1.2 million units/year in 2000 to 1.7 million in 2005. In other words, the industry had just grown by 142% in six years! It was “wildly profitable” to be a large home builder.

What did they expect? The authors figured that, during this boom time, large US home builders would take advantage of their scale to innovate and become more efficient. This is a basic principle of capitalism. Think of Ford in the 1920s, or Walmart in the 1990s. So large home builders should have improved their construction management processes, and developed better supply chains, and adopted new technologies, both in the field and the office.

What did they find? The title is the conclusion: Bigger Isn't Necessarily Better. The large home builders simply did not pursue innovation, and “did not outperform their smaller competitors” based on key measures such as construction costs, construction project time, and customer satisfaction (p. 29).

“For many of the nation’s largest builders, efficiency was simply not a priority” (p. 69).

In construction management, for example, large home builders should have consolidated their subcontractor base in order to drive efficiencies. But “no major home builder experimented with even small modifications that might have improved construction cost or cycle-time performance” (p. 57). Likewise, contrary to expectations, few large home builders developed specialized software for cost estimating (p. 84). The phrase “entrenched practices” is used frequently.

In other words, if you’ve ever encountered a home builder justifying a poor practice by saying “we've always done it that way,” it may be comforting to know that Harvard research says, in essence, that this attitude is characteristic of the whole industry. The culture of home building is deeply conservative, resistant to innovation. This is a fundamental problem.

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You might wonder: Since the study was conducted in 2005, and the bubble burst in 2007–09, hasn’t the home building industry likely changed quite a bit? While there is some evidence of innovation (or at least, interest in ‘disruption’), I’d argue that the salient features of the home building industry—decentralization and low-productivity*—haven’t changed much since 2005. Additionally, most home builders, large and small, are more properly characterized as land developers because they make more money on the land than on the houses. This too is a fundamental problem.

These are the largest (publicly-traded) home builders in the US, by market cap, today:

Homebuilder chart.jpg

That kind of capital could drive tremendous innovation, if the right kind of leadership existed.

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*Construction productivity has been flat for decades, according to a 2015 McKinsey article. The National Society of Professional Engineers said the same in 2014 (link to pdf).