Residential Construction: Industry Analysis

1. INDUSTRY SITUATION ANALYSIS

1.1 Dominant Economic Char. of the Industry Environment

* Market size and growth rate

The residential housing industry accounts for more than $325 billion and is increasing quarterly (1.). This is due partially to a constantly increasing population and increasing immigration. This industry is in the beginning stages of maturity with a slightly declining growth curve.

* Scope of competitive rivalry

Most major players in this industry compete on an international level. However, some of the smaller competitors focus on specific regions to keep costs low. Having an international presence makes it easier for a building company to gain a sustained competitive advantage. When the industry lags in one country it may be booming in another. In essence an international company has an effective way of hedging their investments around the world.

* Number of rivals

The industry has several major competitors seeking national and international markets, with many smaller companies trying to tap smaller local markets.

There is a growing trend of the smaller competitors being bought out by some of the larger companies in the industry.

* Buyer needs and requirements

Residential home buyers are looking for a reliable, well known company with a professional face and a quality product. Customers often want to know the specifics of where the building supplies come from to ensure a quality end result in their home. Price is also a factor in this industry with building costs and interest rates on the rise. The residential building industry is based highly on customization. Essentially buyer's needs change with each individual customer. However, the basic needs of the average family home are constant.

* Production Capacity

The home building market is large enough for the major competitors to compete without having to drop prices and profit margins to entice customers.

The industry has enough customers to support the competitors at this point. However, major competitors are always looking for a larger market share and thus have the ability to nudge out smaller organizations in local or regional markets.

* Pace of technological change

Technology that is constantly changing aides this industry in a myriad of ways. First it helps the workers save time and money through the development of new tools and techniques in the building process. It also helps draw in customers through use of the internet or other forms of media.

Competitors in this industry make use of available tools and equipment to achieve building goals in the most efficient way possibly, but do not specifically develop these tools themselves. All competitors in this industry have to stay somewhat up to date on technology to ensure they are developing a quality end product and to stay within local government regulations

* Vertical Integration

Most of the major competitors in this industry are either fully or partially integrated. They integrate lending and insurance service into the building industry. While the lending and insurance industries that many home builders integrate into their business require large initial investments, in the long both of these integrations can prove to be major revenue providers.

Companies that are fully/partially integrated can provide more services to the customer and therefore gain a sustained competitive advantage.

* Degree of product differentiation

The major competitors in this industry specialize in different types of home development. For example, Lennar Corp specializes in retirement communities while Centex Corp specializes more in first-time and move-up buyers homes. While both companies are capable of competing in all aspects of residential building, they choose to focus on certain products that they can build efficiently and profitably (1.).

* Economies of scale

Economies of scale play a role in this industry because large multinational companies can partner with building suppliers like Home Depot and Lowe's to keep their cost of production low. Large scale companies have a definite cost advantage over smaller businesses in this industry because larger organizations can get larger discounts on all the different supplies that need to be purchased for each building project.

* Learning and experience curve effects

More experienced builders in this industry have definitive advantage in this industry because in some instances a very small mistake can have astronomical financial implications in the end. The more mistakes a company makes, the more mistakes it learns how to avoid. Companies that employ the most experienced and knowledgeable employees will have a cost advantage over a company with less experienced employees. Also, a company that specializes in a certain type of building or building method will be able to produce the end product more efficiently than other companies that have less experience

1.2 Competition Analysis (fierce, strong, moderate or weak)

1.2.1 Rivalry Among Competing Sellers

Rivalry among the major competitors in the home building industries is moderate. The competitors try to entice customers by using well known suppliers like Home Depot and Lowe's for their supplies. They also target specific markets in which they know they have a competitive advantage.

1.2.2 Threat of Potential Entry

There is a strong threat of new entrants into this industry. The pool of potential entrants is fairly small due to the high capital investments required to build homes. However there is steady growth in the industry and moderate to high profit levels are almost guaranteed.

1.2.3 Competition from Substitutes

Competition from substitutes is becoming a strong threat. Prefab houses are becoming more popular and construction quality is also on the rise (4). In many cases the cost is more attractive for a prefab home than a home that is stick-built