Monday, January 11, 2021

An Experienced Modular Housing Veteran Explains the Problems Facing Vertical Integration

When I wrote the article “Will Consolidation and Vertical Integration Work for Modular Housing” a few days ago, I received this response from someone that has experienced integrating all the different procedures within the modular housing industry.


Gary, your article just scratches the surface of a complex issue, not just in the modular industry but in all sectors of business around the world. Just so I don’t go too deeply into the minutia, I would recommend the interested reader study 


https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp and, for more depth, read Michael Porter’s Competitive Strategy. (Yep, it was first published in 1980 and is still relevant.) 


Having said all that, I have managed vertically integrated operations; i.e., modular manufacturers with captive retail builders, and witnessed the IBS failure first hand. I now serve as a modular developer/builder. 


The simple takeaway is either vertical or horizontal integration can be executed successfully but an organization must go in with its eyes wide open. 


Vertical Integration Simply stated, this is just grasping more of the margin in the entire value delivery chain. While it sounds easy, it is not. Often the competencies which lead to success in one part of the value delivery chain; i.e., engineering, procurement, manufacturing, finance, planning/permitting, site prep, foundation, transport, set, MEP, trim out, etc., may be totally different from another. 


Moving into an adjacent function is easier said than done. But it can be done and some companies, notably Clayton, are moving strongly in that direction. Clayton benefits from strong financing, a well-defined product strategy and a host of other strengths. (Note Clayton’s approach avoids the long-distance problem cited in your article. 


Having shipped from VA to MT during the downturn, I would not recommend it.) Horizontal Integration Horizontal integration can be particularly successful in the realm of scalable and location-independent functions; i.e., finance, procurement, IT/process control, engineering, etc. 


Production, although usually tied to a location, can benefit if processes are defined and controlled. (In a previous life I was part of the company which manufactured all of the fryers for McDonald’s. If you ever want to discuss scalable process control, meet me at the local McD’s, buy a large fry and block three hours.) 


Step one for horizontal integration is to do it right in a single location first. Get the processes completely under control, standardized, documented and repeatable. Then replicate. 


This is the antithesis of uninvolved consolidation; just buying a number of plants and hoping to conform them to standard procedures can drain cash in a hurry. Also, Katerra is not a consolidation; it is a massive startup with yet-to-be-proven processes. 


Lastly, the IBS failure was a financial management failure, not necessarily a failure of horizontal integration per se. Admittedly, the horizontal integration could have benefitted from stronger process management and control but leadership was not empowered in that realm. 


Process integration requires rigorous central leadership or it is doomed. (A great example is Norman Schwarzkopf; see Desert Shield and Desert Storm at https://en.wikipedia.org/wiki/Norman_Schwarzkopf_Jr


Another example is Jack Welch, albeit the leader of a conglomerate not a consolidation. A modern day example is Jeff Bezos. Note all are engineers.) I welcome other comments on this interesting subject. Or meet me at McD’s.



Written by Dan Hobbs, Vice President of Quartz Properties.

Contact him at jdanielhobbs@gmail.com

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