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Changes in house construction markets present opportunities and challenges for lumber producers.

By Peter Milley

Changes in Canada’s trading relationship with the United States appear to have become a long-term—perhaps permanent—part of the operating environment for the wood products industry. However, the industry’s understandable focus on this issue has perhaps obscured another, potentially more significant change in the key market for Canadian softwood lumber. The “industrialization” of the North American residential construction industry is accelerating. Data assembled by the USDA Forest Service shows that use of modular and panelized construction has increased by almost two-thirds over the past five years, representing 15.3 per cent of housing units constructed in 2001.

The same data estimates that use of wood-based components will increase by approximately 20 per cent over the next four years. Labour shortages in the construction trades, cost advantages associated with the use of modular and panelized components, reduced construction site waste and the financial imperative of streamlining inventory and reducing construction cycle time are all factors that contribute to this trend. The result is that major homebuilders are becoming assemblers of pre-constructed modules, rather than builders employing traditional, stick-based frame construction techniques.

In effect, larger homebuilding companies are evolving towards a manufacturing-based business model that has more similarities to the auto industry than to the traditional general contracting and co-ordination of sub-trades and labour that has historically characterized residential construction. Product opportunities implied by these changes can be readily identified:
• Demand for complete, pre-assembled major components (such as walls and floors) will increase.
• Increased demand for increasingly standardized parts and sub-components for the major components.
• Increased use of standardized parts and components can be expected to create market opportunities for engineered and laminated products, which are well suited to production in standardized sizes with predictable and verifiable performance characteristics.

Finding a successful strategy for the industrialized homebuilding value chain will require developing an understanding of the entire wood-based building products value chain. This entails determining where the individual producer fits within that chain—from its beginning as commodity lumber to its culmination with purchase of a home in a lifestyle community. Suppliers must understand not only their customer’s key business drivers, but also the business drivers that are critical to their customer’s customer. More importantly, success for producers in the value chain will be driven by their effectiveness in demonstrating how their product/service offering will improve their customer’s value proposition to his customer. Differentiating product/service package attributes against those offered by competitors will also be an important success factor.

The builder generates value from delivery of a complete house, not from carpentry or electrical and plumbing installation. Use of sub-system modules simplifies the business model for the builder, accelerating the capture of value. These are key business drivers for the builder and suppliers can benefit from enhancing their impact in this area for the builder. Sales success in this changing environment will be driven by market presence and development of direct customer relationships. Sales and distribution strategies that work for commodity products will not be effective. These changes constitute a fundamental transformation of the homebuilding value chain, necessitating changes in strategic direction for many companies pursuing opportunities in these markets.

Developing new strategies that align with financial objectives, customer value propositions, internal processes and systems, organizational culture and employee skills will be key success drivers. Achieving necessary alignment, and successfully executing strategy, requires a “systems view” of the organization that demonstrates how financial, market, process and people perspectives work together to create a “virtuous success cycle.”

In that cycle, satisfied, profitable customers generate the positive financial results needed to support investment in new capabilities. That investment, in turn, drives improvements in technology and workforce capabilities, which enables improvements to products and services.

Those improvements facilitate effective targeting of satisfied customers, which renews the success cycle once more. Implementation of the “success cycle,” however, is dependent on a “performance culture,” in which:
• All employees understand the organization’s mission and priorities and how they contribute to achieving them.
• Every employee is encouraged and motivated to use this information to act within recognized limits of authority.
• Individuals and teams take responsibility for monitoring and managing their own performance against agreed objectives, measures and targets.
• Employees receive the tools and support they need to do this.

The performance culture and systems view of the organization are essential building blocks of a business planning process that integrates strategy and budgeting and which facilitates putting the strategy to work effectively.

Peter Milley is a founding partner of LMCI - Lawrence & Milley Consultants Inc based in Halifax, Nova Scotia. He has more than 15 years consulting experience in market research and strategic market and business planning and specializes in helping clients identify, evaluate and develop new market and product opportunities. He can be reached at 1 (800) 264-3580 or by e-mail at Peter.Milley@LMCIconsultants.com.


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