Table of Contents I. Introducing the organisation KB Homes Company Profile II.

Environmental Analysis Industry Overview Construction-Home building Market analysis Porter’s Five Forces Analysis Competitive Rivalry Threat of Entrants Power of Suppliers Bargaining Power of Buyers Threat of Substitutes Overall attractiveness of the Industry SWOT Analysis III. Results and Implications of the analysis

Executive Summary In this report we have review the current position of KB Home Construction Company and the overall Construction-Home building Industry. KB Home is one of the leader companies in home building industry in South California. The home building is a cyclical industry and its growth rate is steady. The five forces analysis of the homebuilding industry showed that the market is attractive and fairly competitive. Internal analysis showed that KBH competitiveness is at a medium level, since it main strengths with the trends of the market. Also, there are different kind of

Thus a strong competitive advantage should be the primary focus. It was the first company to be traded on the NYSE as a home builder and is a Fortune 500 company.competitors that KBH has to face. threats and opportunities were different and KBH should take them into great consideration. KB Home is a lending partner with and offers complete mortgage services through Countrywide Home Loans. Weaknesses were various and some of them very significant.140 families in the United States and France and had revenue of over $9 billion. In fiscal 2005.R Horton. Its headquarters are in Los Angeles. California. founded in 1957 as Kaufman & Broad. the company delivered homes to 37. of course its main competitor is D. Introduction Company overview KB Home is a homebuilding company based in the United States. Since the market is growing steady. . Business plan objectives The objectives of this business plan are the following: • • • • To provide a review of the company’s present position To describe the industry the company operates within To analyse the competitiveness of the market To make specific proposals I.

Georgia. Partnerships. and California (Southern) provides an especially appealing locale to homebuyers.Countrywide KB Home Loans. professionally and To keep a high quality in services and to increase its productivity. Southwest—Arizona. Environmental Analysis Construction-Home building Market Analysis Industry Overview It is extremely important to analyze why this industry is so appealing to KB Home Company. thus cultivating the mutual trust needed on both sides in order to reach its aims.kbhome. To maintain a good collaboration level with its suppliers and all its collaborators. provides mortgaging services. The “booming” homebuilding market and increase in demand by homebuyers in that area makes California (Southern) is the second largest place in the country besides Florida for homebuilding activity (William. 2005) Homebuilders are extremely concerned about location and that is what distinguishes by offering the best possible prices for high quality services . Illinois.KBH has divisions. Subsidiaries-Kaufman & Broad S. North Carolina. Indiana. Southeast— Company’s Objectives: • • • • To foresee and satisfy the needs and requests of its clients. Central— Colorado. Nevada and New Mexico. South Carolina and Virginia. Maryland. Louisiana and Texas. (www. partnerships and subsidiaries are the following: 1. For this purpose To offer its employees satisfactory working conditions as well as the possibility of a professional development by merit criteria. • To keep its high social and environmental standards by taking part actively in social programs and environment protection campaigns.kbhome. (www. Divisions-West Coast—California.A a French subsidiary KBH’s Mission: Built to Order quality homes with focus on customer satisfaction KBH’s Vision: In the future the company wants to expand into new II. The purchase of a home is typically the single biggest investment an individual makes in a lifetime.

Thus. but the economic outlook and the possibility of increasing interest rates in the future could slow the growth of this industry in the domestic market (Harmon. out of the top 100 homebuilders. The growth rate of homebuilding has been steady indicated by the compounded annual growth rate (CAGR) of new homes in the US from 1995 to 2004 was approximately 6. interest rates have been low and a source of strength to homebuilder’s and also has pushed up home ownership in the US to 69%. job growth and consumer confidence that affects the demand for homebuilding. the market is becoming more concentrated. Homebuilding is essentially a local business. In conjunction with these factors. One of the most fragmented industries in the United States is homebuilding.000 new homes were sold according to a Builder Magazine home survey. Rising interest rates are correlated to periods of increased job growth and growth in consumer confidence and vice versa. KBH is poised to take advantage of this market plagued by high demand that exceeds supply with its significant presence in the California market. These variables are longterm interest rates. and every location is different and poses a different degree of risk to the homebuilder (Dunlop. Many times. such as KB Homes have hedged the cyclicality of the domestic market by also operating subsidiaries in international countries. builders.000 homes last year. 2005) There is little evidence of oversupply in the homebuilding industry. the ten largest homebuilders in the nation only make up 20% of the home sold in 2004 compared with the 1990’s only 10% of the homebuilding market. 2000). but there can be common elements that can transfer over to homes in other regions. approximately 449. such as KB Homes’ operations in France. but not rapidly. There is a correlation among the three economic variables. In the past few years. there are other economic characteristics that affect the individual builder and their geographic area. 2004). Low . In 2004. and for homebuilders it is greatly affected by economic trends and the industry’s outlook. DR Horton is the number one homebuilder in the nation. As it is shown in the Appendix I. Conditions of the Industry Homebuilding in general is a very cyclical industry.5% (William. selling over 43. Given the cyclical nature and also the length of years from land purchase to home sales in that industry.KB Homes from other homebuilders of residences in California (Southern). it is necessary to analyze long-term economic trends that will affect demand for homes.

Porter’s Five Forces Analysis According to Porter (1985) the state of competition in an industry depends on five basic forces. another economic factor affecting the demand for homes is the revival of consumer confidence. Individuals buy more homes when they have a more positive consumer attitude (William. Lastly. there is supposed to be an increase in job creation leading to greater financial security for individuals so they can now afford a home. II.interest rates make home purchases more attractive to buyers. to mild in industries where there is room for quite high returns. The limited growth in the actual number of competitors is merely a related effect of the costly barriers to entry. It ranges from intense in industries where no company earns spectacular returns on investment.The baby boomer generation are now buying tradeup homes or second homes that this generation is age 40 to 50 years old. . It usually takes six to 12 months before a change in interest rates affect the homebuilder’s bottom line. Through 2008. the strength of which determines the ultimate profit potential of the industry. This rapidly growing portion of the market is estimated to have the greatest population gains between 2005 and 2010 for the homebuilder industry. The large amount of initial capital required to build a home leaves the entire homebuilding industry to large companies that have sufficient capital or to individuals who have and are willing to risk the required amount of money. 2005). A five forces analysis of the constructing-home building sector is analyzed in the following section (See also Appendix II): Competitive Rivalry The growth rate of the California homebuilding market is high but limited in many respects. The growth for the demand and the production of homes in California (Southern) is enormous. Labor markets from August 2003 to June 2005 have rebounded with net payrolls increasing by 3. but the growth of the actual number of homebuilders in California (Southern) is much smaller. Another major factor contributing to the sales of homes is the revival of the labor markets and stronger incomes for homebuyers. 2005).7 Million in the last 22 months (William.

2005). the limited number of large builders (an oligopoly) leads to the conclusion that the market is mature and fairly saturated. capital requirements. Southern California homebuilders have not yet reached that “seismic tremor and overbuilding”. homebuilders need the ability to negotiate and work with the zoning commissions and the other governmental commissions to be successful. Not only are the dollar costs high. but the especially when done on a large scale. The economies of scale realized by large homebuilders make it almost impossible for new entrants. Massive ecological and environment surveys must be done before companies can begin development (The California Real Estate Journal.The market is both mature and developing at the same time. Homebuilding is a very capital intensive industry. Only with the experience and the capital is it possible for a new entrant to seriously compete with the existing large homebuilders. KB Home competitive strategy will determine its future success and the future level of competitive rivalry in the Southern California Homebuilding Industry. Economies of scale. however. said that the future real estate development market will only continue to yield above-average profits to firms that “operate with a strategic purpose”. knowledge it takes to build homes on a large scale is also difficult to acquire. Sourcing a parcel of land large enough for a development project requires a lot of capital and expertise. Moreover. product differentiation. Southern California homebuilders face strict environmental concerns like for instance. Michael Porter (1989). Moreover. much of Southern California is considered “environmentally sensitive land” (The California Real Estate Journal. The maturity of the market can be illustrated by the complex legal system that has evolved to curtail any development of homes that are not in strict compliance with zoning code and other legal barriers to development. Even with the active. 2005). switching costs and government policy all affect California Homebuilders. Power of Suppliers . Threat of Entrants Identifying the possibility and probability of new entrants in an industry is critical because they can intrude on market share and profitability of existing competitors. intense rivalry of the Southern California single-family market these homebuilders are still making large profits. The required capital and the ability to work with zoning commissions are the two primary barriers to entry that make large-scale homebuilding in the Southern California Single Family Homebuilding Industry very difficult. Additionally.

gasoline. As a consequence.Power of suppliers is analyzed though supplier concentration. Suppliers in this industry are not concentrated and they act as separate groups competing for the same project through the bid system. On the whole. contractors’ associations say “it’s particularly crucial during times like now when commercial and residential construction is in high demand” and this strong supplier power of construction workers leads to high costs of labour (Scripps Howard New Service study. the fragmented nature of the supplier market in all other construction supplies to homebuilding companies severely limits supplier power. 2005). which affect all companies equally and do not lead to a strategic advantage for suppliers. steel and other raw materials. the Homebuilding industry is supplier intensive in a very industry-specific sense. 2003) Supplier power is limited in that land prices fall within reasonably accepted ranges and buyers will typically not negotiable outside of those ranges. are very competitively priced. oil. although keeping labor costs high. importance of volume to supplier. Volume is a significant concern to these homebuilders. large homebuilders do not spend a disproportionate amount of revenues on raw-land acquisitions (DR Horton. subcontractors . the subcontractors must build these variable costs into their homebuilding bids. 2005). a necessary input in homebuilding is labour. differentiation of inputs. First. concrete. thus. switching costs of firms in the industry and others (Porter. Although the supply of land is discrete. requires a large number of inputs beyond land including wood. including KB Homes. it initially seems that suppliers have very little power in the California Homebuilding industry. hence the amount paid to subcontractors for a winning bid. Also. The construction industry has issues with worker shortages (Scripps Howard New Service study. 1985). suppliers exercise little control in the industry. Raw materials. land is required and is either owned privately or by government. In addition. the price of gasoline and oil. on one hand. Prices for some of these materials are non-negotiable. does not represent a significant problem to the homebuilders directly. all necessary components in homebuilding. gravel. The shortage of skilled construction labor. require a specific amount of steel. Therefore. Every homebuilder. for instance. skilled construction workers have supplier power. Still. In spite of this. plastic. Unlike subcontractors. concrete and wood for the homes and on the other hand. large California homebuilders are not affected in terms of supply volume giving suppliers any leverage.

2004) Low mortgage rates were a positive influence on housing demand during 2004 and 2003. Because of the fact that there are many buyers competing for houses from few suppliers. labor costs are only a fraction of material costs to both KB Homes and DR Horton. Each home purchaser competes individually for the best price. during a period of generally weak employment levels (KB Homes’ 10K Report. Bargaining Power of Buyers Although. Southwest and West regions (KB Homes’ 10-K Report. household formations and changes in home ownership rates were the primary long-term factors driving this housing demand.bear this cost through reduced margins. Population growth. buyers have relatively low power. due to flexible financing terms and low down payments. with particular strength in our Southeast. demand for new homes is continually increasing.” a state wide campaign aimed to make it easier for developers to build new. 2004). Homeowners rarely get together to negotiate a “good deal if we buy 50 homes at the same time. citizens are buying homes in Southern California at relatively high rates. said that the short supply of housing should keep prices strong for the remainder of 2005. the costs for a buyer to switch homes is normally prohibitive.The Copley News Service (2005) found that 21 of the nation’s 25 leastaffordable metro areas were in California and Alan Nevin. Despite this high demand for new housing. affordable homes. 2005). Of course. buyers have very little power and are extremely fragmented. homebuyers usually do not have the ability to choose between suppliers of new homes. Also. Moreover.S. demographics. among other things (The Press Entriprise Co. homebuyers reserve the option of purchasing existing homes on the secondary market or renting. Since homes are such a monumental investment (usually the largest purchase a person makes over his or her lifetime). new home prices are high and buyers have very little room for negotiation unless they choose to purchase existing homes. immigration.. According to following reports. Threat of Substitutes . the “Campaign for California Homeownership. Furthermore. the California building association’s chief economist.” Also. buyers do not have much power buying new homes. U. believes buyers are paying too much for homes because the supply is limited by zoning restrictions.

another possible substitute to large single-family homebuilders is the individual homebuilder or smaller boutique homebuilders. the lower the profit potential for the firms. dominated by a few large homebuilders. KB Home and DR Horton have been able to successfully expand in their markets because they are the low-cost provider (only two ways to make profits: be the low cost provider or differentiate your product). Apartments and other rentable units are substitutes to homes. homebuilders mainly watch out for a decreased demand for homes in lieu of apartments. advantageously. and the required down payment on a home will continue to affect how viable substitutes seem in contrast to outright homeownership. Furthermore. extremely low interests rates have enabled individuals to continue to purchase ever-more-expensive properties even with stagnant income levels. Apart from that. A major change in the last ten years that has emerged in the Condos and apartments do not serve as a permanent substitute to a home. and fourth actually building good homes. However. The stronger the competitive forces in an industry. and resemble more of a . more importantly. An advantage for these companies is that they are not building large tract homes with similar. this industry needs to be competitive both regionally as well as nationwide. access to the capital markets to raise money quickly and efficiently. but uniform characteristics and styles. When home prices become exorbitantly high. temporary substitute. third the ability to negotiate large dollar contracts quickly and. the actual threat of substitutes is weak given that it takes many things to build homes on this level of cost-savings is first.The threat of substitutes entails a consideration of such things as switching costs. and apartments and condos are considered plausible substitutes. In order to be profitable. government programs encouraging first time homebuyers. Interest rates. there is a striking disadvantage as well: when homes are differentiated from one another that increase costs. Thus. Most individuals would like to make a permanent investment with the purchase of a home. and fairly competitive. These barriers to entry will keep the industry resembling an oligopoly. buyer inclination to substitute and the price-performance trade-off of substitutes. second an established reputation for quality. Overall Attractiveness of the Industry Porter’s Five Forces analysis of the Southern California Homebuilding Industry illustrates that the overall the industry is attractive.

KB Homes experience has resulted in the company being the leader in the Southern California homebuilding market (KB Home 10-K Annual Report. 2004) One of the primary reasons that KB Homes has become the leader in Southern California is its growth strategy. not only the short-term trends that impact the homebuilding market. giving the majority of power to the homebuilders and making the industry more competitive to potential entrants. 2000) Rivalry among firms increases with the consolidation and the capital intensity of the industry. 2004). who will take market share away from small and mid-sized builders. 2003)More recently. KB Homes is able to replicate its core business practices with ease in its current markets and those nearby.kbhome. Most of KB Homes’ growth comes from its existing markets and areas directly adjacent to existing markets (KB Home 10-K Annual Report. The barriers to entry are high. The buyers in the Southern California possess very little power because they are at the mercy of the existing supply and demand. the large builders will maintain a dominant share of the market because of their ability to ride the wave of an economic downturn with their greater financial strength (Dunlop. and currently the demand exceeds supply. but the long-term forces as . There has been an emergence of the larger builders. KBH also focuses on providing its customers excellent customer service and first-rate home warranties. KB Homes has begun to make acquisitions of smaller homebuilders in order to expand into new markets not directly adjacent to its current area (KB Home 10-K Annual Report. Overall. and live through. SWOT Analysis of KB Homes KBH Strengths KB Homes has been in the Southern California market for nearly 50 years has provided them the opportunity to observe. Growing into adjacent business space is one of the ways “successful companies” are able to “outperform their competitors”(Zook and James. Firms are competing against each other with their availability of resources which lead to the highest profitability. Economic factors tend to affect most competitors equally and therefore have a greater impact on the industry rather than individual homebuilders. KBH prides itself on providing high quality homes with innovative architecture (www.i In running its business.homebuilding industry is the division of the market. 2004). While being a fragmented market.

The alliance also allows each firm to “share the risks and the resources” involved in the business and allows KB Home to take advantage of Countrywide’s capabilities (Hoskissin et al. KB Homes will likely find it difficult to keep growing by replicating its current business into other areas of the Southern California market. they are relatively inexperienced in building smaller tracts. Finance Company Profile). KB Homes is expected to grow earnings at an annual rate of 18% over the next five years (http://finance. Nonetheless. exposes KB Homes to regulatory risks. 2004). (See also Appendix II for SWOT Summary) III. 2004) This complexity increases legal and accounting fees to the KB Home Mortgage Company (Yahoo. and in a more efficient manner (www. before planning is finalized. 2004). This subsidiary allows KB Homes to take advantage of the next logical decision that faces one who purchases a newly constructed home.kbhome. The corporate structure of KB Homes is very complex. Rivalry intensity is likely to increase over the next several . Much of KB Homes’ experience has been gained through building the very large developments. Opportunities and Threats Opportunities and threats are analysed extensively in the Appendix IV. KBH Weaknesses KB Homes has recently changed one of its strategies in the Southern California homebuilding market: While historically KB Homes has invested in very large developments more recently they have focused on smaller-scale investments (KB Home 10-K Annual allows KB Home Mortgage to provide a much larger portfolio of financing options to its customers. as well as the learning curve employees and investors experience in attempting to understand the business. The strategic partnership between KB Home Mortgage Company and Countrywide Home Loans. involving dozens of subsidiary corporations and limited liability companies (KB Home 10-K Annual Report. KB Homes has a stake in the mortgage writing business through its wholly owned subsidiary. one of the largest mortgage companies in the nation. Results and Implications of the analysis Overall.kbhome. the decision of how to finance the purchase.KBH promotes trust: KBH has a corporate ethics policy that is fundamental to its management ( the purchase of the land or the purchase of the option.

on a national scale. Moreover. However. reason for heightened intensity of rivalry is the slowing of industry growth. these KB home produces very similar products with D. the number of geographic regions that they find themselves in direct competition with each other broadens market commonality and creates multi-market competition. its major competitor. A customer expects a long-lasting. In the long run. Additionally. markedly homogeneous. Another major concern is the price of the home. is likely to increase highly in the future. it will not be at the same speed as the previous five years. and aesthetically pleasing home. the same raw materials and expertise are needed by KB Home.years due to several reasons. First. KB Homes’ experience and current dominance of the Southern California market virtually precludes DR Horton from taking over the leading position. competition and regulatory pressures will increase. Second. As both firms continue to grow. the competitive rivalry. Thus. but a homebuilder has the economies of scale to provide premium product design for lower prices than standalone residences not built by homebuilders. and offer the same mortgage services. KB Homes will be forced to concentrate its efforts on areas adjacent to Southern California or on growth through acquisitions. Many owners are also concerned with the potential long-term increase in value of their home. The lack of differentiation and seemingly low switching costs (assuming before home purchase) makes for fiercer competition. As open space declines. sturdy. the Southern California market is simply running out of open real estate. The Southern California market is very mature and little growth can be accomplished through acquisitions.R Horton. meaning that resource similarity is . A customer must analyze the economic outlook and the industry carefully in order to make a successful purchase. Even though the Southern California market will continue to grow. Homebuilders can be successful in this industry if they focus on accumulation of land in a good location and the consumer’s needs and changing preferences in a single family residence. A trend among consumers is to purchase property when financial lending terms are favourable and mortgages can be obtained at good rates coupled with encouraging interest rates.

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