Pulte’s Richard Dugas Builds a Better Mousetrap

THE CHALLENGE

You took the CEO spot at one of the nation’s largest building companies in 2003. In the runaway real estate market that follows, everything you do turns to gold. Then, the housing bubble pops and it all goes pear-shaped. Between 2008 and 2010, the company’s home-building revenue tumbles 60 percent and you find yourself laying off a whopping 80 percent of your employees. Perhaps worse yet, you’re holding a great deal of land now valued at far less than you paid for it and likely to stay that way for a decade or more.

THE CONTEXT

Atlanta-based Pulte Group builds a variety of home designs, from single-family homes to condos and townhouses, typically buying and developing large parcels of land, then marketing the new construction to home buyers. Like many building companies, historically, the company thrived by relying heavily on appreciating real estate values for its profits. “For a long, long time our focus had been about growth, growth, growth,” explains Richard Dugas, Jr., CEO of Pulte Group, recounting the humbling revelation he experienced in the wake of the downturn. “I remember pounding the table with investors saying land is the asset. The truth is land is an asset—but it’s also a liability if you have too much of it or it’s in the wrong location.”

That epiphany prompted a re-evaluation of the business model. Dugas tapped an internal employee to take a hard look at the business. The result was a strategy shift for the future: Pulte Group would look to profit from what it actually does—building and selling homes.

THE HURDLE

To his consternation, Dugas soon discovered that Pulte, like many building companies, was actually not all that efficient at building. “We were leaving tens of thousands of dollars on the table per home in terms of inefficient construction, undisciplined pricing practices and simply not operating the day-to-day business as well as we could,” he recounts. For example, on a metric dubbed “throughput per floor plan”—or the number of times a year any given floor plan was actually built and closed upon—Pulte averaged around three compared with a competitor’s range of 70-75. Dugas soon discovered the reason came down to simple math: Pulte offered thousands of floor plans but was only closing on 15,000 to 16,000 homes a year. To realize the efficiencies and benefits of scale, that would have to change.

THE RESOLUTION

“Having every location design their own floor plans was not a very efficient way to run a company making $5 billion worth of housing a year,” notes Dugas. Instead, Pulte began leveraging customer feedback on things like the need for more storage or “drop zone” entryways with a place to deposit boots, coats and bags. They needed to develop suites of floor plans suitable for specific areas of the country. Next, the company huddled with subcontractors to find ways to build those homes more efficiently. The result? In the regions where it practices this “commonly managed homes” approach, profitability per floor plan is significantly greater.

THE ENDGAME

Three years in, the strategy has made a big impact. “Over 24 months, we have taken our balance sheet down from a debt-to-capital ratio in the mid-to-high 50 percent—one of the highest in our industry—to 31 percent,” reports Dugas. “We paid down well over $1 billion of debt and reintroduced a dividend to our shareholders, one higher than we’ve ever paid before. Our profitability has mushroomed.”

Perhaps most encouraging of all, the strategy is still playing out. As of last quarter, only 16 percent of Pulte’s homes were commonly managed, which means the company has a lot of runway before it maxes out in the 60-70 percent commonly managed. “I don’t think we have any idea yet how good we can become because we have not—not only as a company, but as an industry—ever operated this way,” says Dugas. “We don’t believe we’ll ever get to 100 percent commonly managed, but there’s an awful lot of efficiency and profitability to be gained just by migrating from 16 percent up to 70 or 80 percent.”