KB HOME CORP solution

Closing Case

KB Home Corp.: Its Business Is Building

With over $5billion in sales, Los Angele-based KB Home Corp. is the nation’s largest home builder. KB has been creating homes for over 45 years and it build more than 25,000 houses in 2002 alone.

How does a company like this manage to survive and grow in an industry that is subject-quite literally-to the winds of change? For instance, weather conditions, from average rainfall to outright disasters such as hurricanes and tornadoes, affect the rate at which homes can be built in a given region. General economic conditions, such as interest rate or unemployment, affect whether people can afford new homes. Demographics can even affect the fortunes of home builders. For example, people tend to purchase their largest and most expensive homes in their mid-to late forties, near the peak of their earnings and when they still have children at home. The majority of the 80milion strong baby boom generation were in their forties during the 1990s and into the early part of the twenty-first century. Little wonder that during that period the housing industry set new records for homes built.

Competitors are another important factors that affects home builders. Although KB Home Corp. is the largest builder in the United States (and even builds homes in France), is still faces stiff competition not only from other large builders, such as Lennar and Centex, but from local builders who are successful because they know their suppliers and the customers personally. Bruce Karatz, CEO of KB Home, takes the competition seriously. When KB’s land purchase committee reviews a proposed land deal, one of the important considerations who the local competitors are.

KB also has to keep an eye on substitutes for single family homes. To compare with rental units and condominiums, it has a line of less expensive homes and develops neighborhoods with smaller lots to ensure the overall purchases price is competitive while offering the better value of one’s own yard and privacy versus sharing a wall, ceiling, or floor with a neighbor in a condominium complex.

KB also has to keep an eye on customers. Managers not only have to keep track of how economic conditions are affecting customers’ purchasing power but on their taste and preferences. For example, KB has significantly modified many of its floor plans by offering larger closets and bedrooms and increasing the number of bathrooms in homes. However, cities and their citizens are increasing against rapid growth and sprawl of homes and want less density and more open and green space within communities. KB has had to change from being a home builder to being a community and neighborhood designer. This creates a need not only to keep in touch with public sentiment but the potential to try to influence it. Gary Garczynski, President of National Capital Land and Development, put it this way. “Two things people oppose most are growth and density. However, we have to remind the public that houses are where jobs go to spend the night.”

Looking forward, KB faces some important challenges in the external environment. As the first home builder listed on the New York Stock Exchange, it has to worry about the up-and –down cycles in its business. Shareholders want steady and growing earnings. One help for KB compared to other builders in this regard has been that it has had a mortgage company for over 40 years. Even if homes sales move up and down, the revenue from past purchasers as they pay of their loans is a bit more steady. Also, the entry barriers for new competitors are fairly low. Anyone who can get a contractor’s license can start a home building company. Stuart Miller, CEO of Lennar Homes, put it this way, “The history with Wall Street is, they have seen (builder) valuations as a roach motel: Anyone can get in it, but no one ever leaves. That’s the perception we are up against.”

While KB started in California and builds more homes there than elsewhere, it has expanded into many other states. Because not all states’ economies, especially regarding housing, move up and down together, this can help smooth out earnings. However, home building is a local business in many ways and KB managers face the decision of how much more they should expand into other states.

Technology is also an emerging issue. Clearly, e-commerce and the Internet present opportunities for closer links with suppliers. For example, by holding “reverse” auctions, where suppliers bid in real time against each other for KB’s business needs, KB’s purchasing managers can extract lower prices, enhancing the company’s profits.

The Internet also presents selling opportunities. Prospective buyers can look at community plans, home floor plans, pictures, and even videos tours on the Internet. They can get a free credit report, figure out how much they can afford to spend on their home, and add up its cost including selected upgrades without ever leaving home. A mix-and-match design feature even lets potential buyers pick out different home elements like floor plans, carpet, and cabinet colors to see how they will look together. All of this helps pique the interest of buyers.

KB survived the economic downturn in 1991 and faced another in 2001. But record-low mortgage rates in even though unemployment was up. Also, as housing development restrictions increased, demand outstripped supply, which raised prices in congested but popular real estate markets in California. Because prices rose faster than KB’s costs, it helped profits. The industry was also consolidating. Large home builders were buying up smaller ones to leverage economies of scale such as buying power. In response, small, local companies were emphasizing their community roots and commitments compared to the impersonal and profit-driven “big boys” such as KB. These and several other environmental factors had to be considered and analyzed before KB Home managers and executives could effectively move the organization and their people toward the future.

Questions

  • Which do you think are the most important environmental forces for KB Home? Why?
  • Are there environmental forces besides those mentioned that you think KB management needs to focus on?
  • How should KB manager address the issue of aging baby boomers?
  • Based on your analysis of the external environment, what changes do you think managers at KB should make?

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