Monday, July 13, 2015

Competing in the Stagnant Modular Housing Industry

Every industry that has ever been born has eventually moved into life in a stagnant market. Automobiles, clothing, banking and for the past 2 decades Modular Housing has joined the stagnant industry crowd.

Admittedly, in certain years demand for modular housing has increased and in others price increases and high interest rates have led to pronounced declines. When overall home construction rises so does modular housing but while there may be some years when demand is buoyant, it is just wishful thinking that modular housing is no longer stagnant.

We must accurately assess the long-range prospects and face the problems of competing in a stagnant marketplace. Management’s acceptance of the reality of a continuing slow demand is a prerequisite for developing successful strategies.

The unpleasant reality is that competition in modular housing is usually more intense in this stagnant market than in those industries  that are growing rapidly. A company can substantially increase its sales in a rapidly growing industry without taking market share from competitors. In fact, often it takes all of a company’s managerial and financial resources just to meet growing demand. The major problem is expansion, not competition. When modular housing growth slows, however, factory growth can be achieved only at the expense of others, and competition increases.

As competition intensifies, the number of factories competing in the industry usually declines, and the market shares of the largest factories increase. Remaining a bit player in modular housing trying to compete head to head with these larger factories on their turf could eventually fatal. Consolidation on both the factory side and the builder side is inevitable.

But modular housing does have another reality, and one that is often overlooked, is that changes in products, technology, production process, and distribution still occur in stagnant industries. Some innovations, notably in the manufacturing process, tend to occur more frequently as a market matures. Stagnant demand, then, does not prevent significant changes.

Failure to recognize these realities can lead to competitive strategies that seem logical but are seldom successful. This is most likely to occur when stagnant sales are viewed as “a marketing problem” instead of as a fact of life. Rather than increasing total demand, typical marketing solutions such as brand proliferation and heavy advertising tend to not be useful for declining industries and individual factories.

There are three business strategies that have succeeded in stagnant industries: they identify, create, and exploit growth segments within their industries; they emphasize product quality and innovative product improvement; and they systematically and consistently improve the efficiency of their production and distribution systems.

Growth Segments
It can be argued that by competing in growth segments factory management has merely figured out how to avoid competing in a stagnant industry. And this is precisely the point. Choosing what market to compete in is at the very heart of the strategy formulation problem, and the best strategists spend considerable time analyzing their industries in an effort to identify emerging or growth segments.

Merely listing and thinking about segments, however, is not enough, for detailed breakdowns of industry statistics along the relevant dimensions are also required. Having factory owners and managers sit around a table and decide what they think is a great segment or niche to go after is not effective and usually doesn’t change anything.

The information needed to find a segment the factory can target is seldom publicly available and requires a research investment to collect and analyze it. For example, just considering customer grouping, simply to obtain a breakdown by age, sex, geographic location, economic status, and buying motivation may involve considerable effort. It may not be unusual for one or two staff people to work full time at collecting and analyzing such data. Thus a creative management that is willing to view its stagnant industries as being composed of smaller segments and to collect and analyze detailed industry data is much more likely to identify segments with growth potential.

Another characteristic of successful strategies in stagnant industries is the pursuit of high-quality, innovative products. Such products allow the company to avoid some of the price competition that often typifies stagnant markets. Product innovations have the further advantage of being difficult and expensive for competitors to imitate.

Factories have over the years introduced innovative products to the their builders and in almost every case it has failed with management swearing they will never do that again. Spray insulation, innovative flooring, Energy Star, Hers Rating, net zero are all things that have been kicked around and then kicked out of some factories because the decision was made at the factory imperial round table and not discussed with production, sales staff or most importantly, the home builders.

Innovation without a buy-in from the people that manufacture it, sell it and build it almost always spells disaster.

Operating Efficiency
When an industry is stagnant, like modular housing, one of the best ways to increase profits is to pay constant attention to cost reduction. The most common way to achieve lower costs seems to be by improving the manufacturing process. Often these improvements stem from constant and systematic attention to efficiency.

It has been brought to my attention many times that most factories don’t know their true cost of manufacturing a module. Looking strictly at the bottom line or number of modules produced while might have been good in the glory days is not as relevant as knowing where each of the costs occur on the production line and investigating ways to improve them and save money.

Management’s Role
Modular home factory owners and top managers do influence business unit strategy through the reporting system, compensation system, planning system, organizational arrangements, and personnel selection.

Reread the above paragraph several times and you will soon become aware that competing in a stagnant market like modular housing means a big investment of time, talent and money researching and implementing these systems.

It doesn’t happen overnight, it won’t happen quickly and it won’t happen without losing some people along the way but if you want your factory to increase its share of modular housing pie, you need to step up today and begin the process.

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