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Can Davids Compete With the Industry's Goliaths?
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Local builders need flexibility, speed, local knowlege and strong, local relationships to successfully compete with the national builders. | Can local and regional builders compete with the big guys?
According to Scott Sedam, founder of TrueNorth Development, a training and consulting firm based in Northville, Mich., they can ― handily.
Maybe not head-to-head, per se. But local and regional builders can survive and thrive in a market shared with the nation’s top 20 builders.
When it comes to successfully competing with national builders, Sedam, who helps builders and others in the industry improve their business and increase customer satisfaction, believes that the locals hold more cards than they think — to say nothing of a sling.
Locals, he said, have the advantage of flexibility. They have less bureaucracy and can generally react quicker than larger builders. They also have closer ties to the communities in which they work.
Speaking at PCBC in San Francisco last month, Sedam presented a scorecard of “10 key success factors” and explained how astute local and regional builders hold the advantage in almost every one — now and in the future.
Here’s how Sedam’s scorecard read:
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Key Success Factors |
Current Advantage |
Future Advantage |
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Top 20 |
Locals |
Top 20 |
Locals |
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Capital — access and cost |
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√ |
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√ |
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Talent ― acquiring and retaining |
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√ |
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√ |
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Customer Care |
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√ |
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√ |
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Supply Chain — material costs |
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√ |
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√ |
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Trade Relationships ― labor supply |
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√ |
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√ |
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Land Acquisition — large parcels |
√ |
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√ |
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Land Acquisition ― small parcels |
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√ |
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√ |
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Market Segmentation |
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√ |
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√ |
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Company Culture |
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√ |
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√ |
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Entrepreneurship |
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√ |
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√ |
Sedam stressed, however, that most of the advantages do not apply to all small and regional builders. Only the best 25% of the locals, those who are willing to put in the extra effort to create companies that have the culture, flexibility and quickness to operate in today’s business environment, will be able to consistently compete with the national builders.
Capital — Advantage Locals, Really
While many in the industry believe the cost of getting money is 2% cheaper for national builders than it is for locals ― that big builders have a 2% advantage — Sedam said that no advantage existed. Instead, most local builders can get the capital they need at rates comparable to or less than that of the big builders, he said.
He pointed out that the national builders generally are funded through stocks, bonds and large banks while the locals are funded by local banks or private investors, or are self-funded. This gives the smaller guys quicker access to capital as well as comparable rates.
Sedam went on to say that the short-term focus of Wall Street was a hindrance to capitalization for the large builders. Because they are publicly traded firms, he said, need does not necessarily determine fund allocation, which can leave the national builders in short supply of funds for a particular project.
Finally, Sedam said locals do not require as much funding as the national builders primarily because their projects are smaller.
Talent ― Slight Advantage to Locals
The lure of working for a big-name company and moving up the ladder used to be a big plus for top 20 builders, but Sedam said that “corporate resizing” during the last decade has leveled the playing field. More managers, he said, are moving away from the bigger players — opting to work, instead, for the locals.
The reason for this change, according to Sedam, is trust. He said the “conventional wisdom” about big business is that big companies no longer value trust and loyalty. True or not, that belief is also finding its way into the building industry.
Besides that, Sedam said today’s younger workers cannot fathom working for one company for an entire career like previous generations have done. He cited his grandfather who worked at General Electric for 50 years, starting as a packing boy at the age of 15 and retiring as a plant superintendent at 65. College-age workers today cannot conceive of that kind of work scenario, he said.
The opportunity for advancement may still be greater with the national builders, but Sedam said loyalty is stronger for the locals. He pointed out that the national builders are also experiencing a higher turnover rate than their smaller counterparts ― 18% versus 5% respectively.
Customer Care — Slight Advantage to Locals
The key to customer care is training, Sedam said. Locals can gain an advantage, at least public perception-wise, if they train their personnel to provide a high level of customer care.
In addition, even though top 20 builders my find themselves up high on, or at the top of, the JD Power consumer survey rankings, when it comes to customer care, the nationals present a bigger target. Whether justifiable or not, small numbers of disgruntled buyers nationwide have easily banded together and created Web sites denouncing particular national builders, Sedam said. Such efforts are generally not directed at locals
Supply Chain — Slight Advantage to Locals
While Sedam acknowledged that the nationals usually can command better prices and service because of sheer volume ― 40,000 faucets gets more attention than 400 ― he said locals can increase their buying power by ordering supplies and materials through buying groups.
He also said that the distribution costs and inefficiencies in supply chain management can negate some of the cost advantages the nationals have over their smaller competitors. “Do the ‘truck test.’ Ninety percent of their trucks are empty or almost empty,” he said while noting that, for big builders, distribution costs are the “mother load.”
Trade Relationships — Advantage Locals
Sedam said that, in general, locals develop and maintain much stronger, more productive relationships with suppliers and trades than do national builders and that the more locally-oriented builders have closer ties with the community and the people who work in it.
They don’t expect to move on, Sedam said. They have to live with whatever they create and they are more attuned to building stronger relationships. Consequently, the better suppliers and trades prefer to work with the better local and regional builders, he said.
Land Acquisition ― It Depends
Sedam believes that four factors — relationships, local knowledge, speed and money ― give locals an advantage over their national counterparts when it comes to land acquisition. He said that locals are able to build stronger relationships with brokers, owners and community representatives, primarily because they are part of the community. Because they are local, they can develop local knowledge, and because they are smaller, their flexibility enables them to respond quicker than the nationals.
Sedam said this is a clear advantage for the locals when the parcels are smaller (five to 25 acres), scattered or infill land. National builders might not be as interested in these parcels and might not be able to find them or buy them as quickly if they wanted to.
With mega-parcels, however, goliath gets the nod. The national builders have a better ability to buy land for projects of 1,000 or more units, Sedam said.
Market Segmentation — Advantage Locals
As with land acquisition, Sedam said locals are better able to develop market niches and to thrive and survive in those niches than their larger counterparts. The national builders must pursue larger projects and work toward higher volumes, he said, while the smaller builders “can prosper in developments as small as 20 or 30 units.”
In addition, Sedam said that local builders can also position themselves as the “true expert among potential customers” because of their ability to develop a small market niche. The national builders, on the other hand, have to appeal to wider market segments and offer more choices.
“Everything is harder for the big national ― training, purchasing, land acquisition, managing plans and options, getting trades up to learning curves,” Sedam said. “Life can be simple and highly profitable for the local builder of choice in a well-defined market niche."
Company Culture — Advantage Locals
As with customer care, Sedam said that locals can achieve a “high performance, quality-focused culture” far easier than the nationals can. Doing so, he said, will result in lower turnover and reduced costs. Higher retention means less recruitment and training costs.
Entrepreneurship ― Advantage Locals
Sedam said that the locals, by nature, have everything on the line — many have put second mortgages on their homes to make payroll at one time or another. Also, by nature, they are always looking for ways to make themselves better and more profitable.
Consequently, he said, they have built companies that are quicker to respond to opportunities and challenges ― which makes them able to successfully compete with Goliath.
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