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EVOLUTION OF MANAGEMENT TECHNIQUES AND GROWTH OF RESIDENTIAL CONSTRUCTION COMPANIES

Matt Syal and Jay Christofferson

Construction Management Program

Colorado State University

Fort Collins, Colorado

Introduction

The residential construction industry represents a unique segment of the Architectural, Engineering, and Construction (AEC) industry. This industry is characterized by a large number of relatively small firms (NAHB 1992). Most of the residential builders start out as small builders but continually make efforts to grow in size. A vast majority of these builders do not approach their growth in a systematic fashion and as a result, end up struggling for their survival (Robson 1992; Schleifer 1990).

The research presented in this paper is based on the analysis of the successful survival and growth of a large residential builder, through the application of the existing research on the growth process (Village 1993). This company is presently involved in building 500-600 homes per year with an approximate annual volume of $100 million. It has grown from 50 homes per year to its present size in 10 years.

This paper introduces the existing research related to the growth process of residential construction companies. The existing research provides the basic four components of the managerial proficiency levels in proportion to various growth levels. The paper proposes subcomponents for each of the four components of managerial proficiency. By analyzing the growth process of the case study, the critical component is identified and its subcomponents are quantified with respect to various growth levels. Finally, a revised growth model suitable for residential construction companies is proposed.

Management Growth Model

The growth process of organizations has been a strong area of interest for management science researchers (Greiner 1972). Early studies in this area focused mainly on manufacturing and/or sales businesses. There has been some work done related to the growth process in construction organizations (Schleifer 1990). Among construction companies, residential companies demonstrate a unique set of parameters. It is well known that entry into the residential industry is relatively easy, primarily because start-up costs are low and because of the general perception that it takes little management and technical skills to run a small construction company. As a result, almost all of the residential construction companies start out as small businesses, operating from "the back of a pickup truck." Once they start functioning, most of these companies begin to make efforts to grow in volume.

A critical question arises with respect to residential companies, that is, what characteristics will be required if a company desires to grow from a small volume builder to a much larger volume builder? Willenbrock, Syal, and Music (1992) provide a growth model which attempts to identify the management proficiency of residential builders at various levels of growth (Figure 1). This model indicates that there are different levels of management sophistication required to achieve different levels of output. Management plateaus or "Stability Zones" are achieved when the managerial proficiency level is equal to that which is necessary for the output requirements. The companies go through the "Transition Periods" when they grow and make an attempt to reach the next management plateau. The transition periods represent a period where company's management proficiency is no longer suitable for their existing or desired level of output. Generally, this period is a time of stress and confusion in the company.

Management proficiency represents the overall management sophistication for an organization. It consists of four components that are readily identifiable within any residential construction company, irrespective of its size. The overall evolution of management in a company is determined by individual evolution of the four components (Music 1985). The first component is Management Systems, which provide the tools that are used to transform external data, such as market analyses, into a workable set of parameters and objectives so that construction activity can occur. The second component, Management Techniques, are the leadership styles that characterize the way management personnel manage the company. The third component deals with the Educational Attitudes of the builders. The fourth component, Organizational Structure, constitutes the business relationship the employees have with each other.

Subcomponents of Managerial Proficiency

The various subcomponents of managerial proficiency are outlined in this section (Lauzon 1993). Subcomponents of Management Systems represent many of the tools used for doing business and include:

Business Planning

Office Management

Estimating

Cost Control

Scheduling

Subcontracting

Quality Control

Customer Service

Safety

Accounting and Financial Systems

Labor Relations

Purchasing

Legal and Regulatory

Subareas of Management Techniques are:

            Management Focus

            Top Management Style

            Control Systems

            Management Reward Systems

These represent the leadership styles and the methods managers use to accomplish the work in their organization. More will be said of management techniques later. The third major component of managerial proficiency is Educational Attitude. Subcomponents of this category may include:

Hands-on Learning

Individual Self-Study

Group Learning Lecture (audio)

Demonstration (visual)

Since most people prefer one style of learning above another, the style used to teach should be adjusted to learner preference. Because most teaching is done in groups and because people gain unique views of a topic if taught in different ways, a variety of teaching styles will normally be the most effective way to communicate an idea. In all cases, concept review and application will solidify one's understanding.

Organizational Structure, an important area of managerial proficiency can be classified into the following types of structures:

Vertical Structure

Horizontal Structure

Matrix

Hybrid or Combination

The type of organizational structure adopted by a company will influence the way people interact with each other, receptiveness to change, and responsiveness to critical situations. The composition of the organizational structure may change as the size and needs of the company grows.

Managerial Techniques

From the four components of managerial proficiency; management systems, management techniques, educational attitude, and organizational structure; we have chosen to discuss management techniques. Each of the four components are important parts of the model, but Management Techniques pervades all areas of managerial proficiency. This characteristic was very pronounced during the analysis of the case study company. The four components are different in scope and application but all work jointly to improve efficiency. We would like to emphasize that no one area in and of itself, can initiate the improvements necessary to meet output demand. For example, without the supporting management techniques, implementing a well designed safety program may be a failure even though all other components are present.

The four subcomponents of management techniques are management focus, top management style, control systems, and management reward systems. Each subcomponent has been broken down into its constituent parameters in relation to the various growth periods (Lauzon 1993).

Management Focus deals with the areas within the organization to which management gives attention (Figure 2). Period 1 of Management Focus is characterized by owners who's total capacity is directed toward making and selling a product. They are technically capable of meeting that goal. Management activities take time away from production and are therefore ignored. A period 2 focus would be on efficiency of operations. These managers concentrate on marketing their products. Specialized job descriptions are made and work standards are adopted. Period 3 managers focus on expansion of their product market. Because of time restrictions, they begin to have less frequent personal contact with employees and more and more communication done through correspondence. Period 4 managers encourage problem solving and innovation in the company. The main office is more heavily staffed, company-wide programs of control and review are typical, and conferences and educational programs are frequently held with key managers.

Management Style includes the leadership styles used by managers at each of the four periods (Figure 3). The period 1 manager is individualistic and entrepreneurial. His competitive edge in making his product is his creativity. This manager is informal and makes decisions based on past experiences and 'gut feeling'. In the period 2 style, the manager is more directive and is a capable leader. Communication begins to be more formal and impersonal. Positions are given titles and become hierarchical. The next management style (period 3) is delegative. These managers manage by exception. They give more responsibility to managers. Employees receive infrequent communications from the top. A period 4 manager is characterized by his participative style of management. At this stage problems are solved through team action and managers encourage experimentation with new practices to find more efficient and productive methods.

Control Systems vary among the 4 periods (Figure 4). In period 1, decisions are based on market results. The company quickly reacts to customer needs. Crude accounting methods generally used. Period 2 marks the beginning of standards for systems. Management begins to be cost oriented. Budgets are adopted for better control of spending. A business manager is installed and accounting systems are put in place for inventory and purchasing. In period 3 managers implement formal systems of management. They receive periodic reports from the field and the control systems are computerized. In period 4 there is mutual goal setting, centralized data processing with real-time information systems. Daily operating decisions are decentralized and capital expenditures are carefully weighed and parceled out. Management is oriented toward planning and investments.

Modest salaries and a promise of ownership in the company are attributes of period 1 of Management Reward Emphasis (Figure 5). In period 2, rewards are given through salary and merit increases and also through incentives. Period 3 rewards are profit oriented often in the form of individual bonuses. Profit sharing, stock options, and team bonuses are methods of rewarding employees in the highest period (period 4) of proficiency.

Revised Growth Model

To meet increasing product demand, a company must push itself, by proper planning, through a transitional stage to a higher level of proficiency. This transition will involve increasing the numbers of skilled employees to meet growing demands, additional training for employees, added equipment and new technology. In some cases this will require a change in organizational structure. Each organization will have a slightly different transition threshold based on the technical and organizational skills of individual employees. If the demand pressure outstrips management proficiency, output will be reduced and in some cases, where the adjustment isn't timely, may cause the company to fail. If a company begins the transition stage too early, the added overhead created by new acquisitions and added employees can make the company top-heavy which can consume the profits from current production.

In our growth model (Figure 6), we have identified three output modulation points or transition thresholds of residential construction output based on the number of units sold and built. These numbers are an approximation of the maximum number of homes that can be built within each period of managerial proficiency. As a company reaches a certain output, the increasing pressure to produce eventually surpasses management's ability to control the organization. A gradual change through the transition is the easiest and least expensive path to take. A rapid change is usually the most difficult and expensive. Equipment and technology purchases are often made spur-of-the-moment without the cost benefits of comparative shopping. Snap decisions are often poor ones. There are any number of intermediate paths that can be taken through the transition stage. Proper evaluation can assist the manager to plan the best time to make the growth transition.

We agree with Schleifer (1990) that if a company is not progressing, it is going backward. There are not proficiency levels per se, but only times when a company does not increase its proficiency on a gargantuan scale, for example, through the transition stages. Greiner (1972) describes a company's growth path as stages of evolution and revolution where the revolution stage is comparable to Music's (1985) transition period in his growth model but the evolution periods contrast the managerial proficiency levels in that they are inclined and not level. The amount of inclination is dependent upon market variables. A company cannot really increase its output without improving proficiency in some way. Increasing output through the periods of evolution is realized by making more efficient use of existing resources rather than massive increases in equipment, personnel, financing, etc.

Summary and Conclusions

A vast majority of residential builders would like to constantly grow but do not approach their growth systematically. As a result, the construction industry as a whole, and the residential construction segment in particular, has a very high percentage of business failures. By recognizing various stages of transition during the growth process, a company can plan for a smoother and less stressful change. Based on the existing research and analysis of the case study company, it is evident that in order to achieve successful growth in a residential company, all four components of managerial proficiency have to evolve individually. It is also evident from the detailed breakdown provided in Figures 2-5, that management techniques can be a controlling factor in the overall equation of growth. The importance of management

Figure 6 Revised Growth Model techniques is primarily due to the influence of management's leadership style on the implementation of other components.

Acknowledgments

The authors would like to thank Village Homes of Colorado for providing funding, access to their operations, and other relevant information needed for this project. ,

References

Greiner, L.A (1972) Evolution and Revolution as Organizations Grow. Harvard Business Review Jul-Aug. 1972, 37-46

Music, W. A. (1985) Managerial Aspects of Residential Construction. Unpublished master's thesis. The Pennsylvania State University Graduate School. Department of Civil Engineering, University Park, Pennsylvania.

Robson, K.F., Syal, M.G., and Murphy, J.D. (1993) Strategic Planning: A Critical Element For Continuing Growth For Small To Medium Size Contractors. Proceedings of the Associated Schools of Construction. 127-135

Schleifer, T.C. (1990) Construction Contractor's Survival Guide. John Wiley and Sons, New York, N.Y.

Lauzon, D., and Christofferson, J. (1993).Managerial Proficiency of Residential Construction and Village Homes. IS 560 Class Project, Construction Management Program, Colorado State University, Fort Collins, CO.

Willenbrock, J.H., Syal, M.G., and Music, W.A. (1992). Management Growth Model for Residential Construction Firms. Building Research Journal. Building Research Council, University of Illinois, Urbana-Champaign, IL., 1(1), 13-20.

Village Homes (1993). Development of Management and Production Assistance Manual for Village Homes. Research Proposal submitted to Village Homes, Denver, CO.

NAHB (1992). The Future of Home Building 1992-1994 and Beyond. Department of Economics and Housing Policy, National Association of Home Builders, Washington D.C.