BW 50: A New Blueprint At Pulte Homes

CEO Dugas' plan for insulating the red-hot homebuilder from downturns

Richard J. Dugas Jr., the chief executive of Pulte Homes Inc. (PHM ), has become an unlikely interior decorator for the company's chairman and founder, Bill Pulte. Dugas has littered the 73-year-old's Bloomfield Hills (Mich.) office with window frames, floor tiles, a display of faucets -- even a kitchen sink.

There's a good explanation for the visual chaos: Pulte Homes is choosing a common set of fixtures to use nationally, and Dugas has been sending the samples. It's one part of the company's ambitious effort to rethink the homebuilding business for the 21st century. Dugas wants to exploit Pulte's size, making broad decisions from the Michigan home office in a bid for more efficiency and cost savings. That's a big shift in the hidebound home-building industry -- which has resisted centralization while catering to widely varying regional tastes, zoning restrictions, and weather. "Dugas is a leader, and he thinks his way out of the box," says Pulte. "That's what it takes today."

Clearly, Dugas has the founder's support. It helps that the CEO, at the helm since 2003, has the company on a roll. Pulte Homes stands out in an industry thriving on low interest rates and skyrocketing home prices. Profits rose 61% last year to $987 million and increased 60% more in the first half of 2005. Orders for new homes rose 19%, to a record 25,650 units in the first six months of the year, while the value of those orders rose 28%. Pulte's $11.6 billion in homebuilding revenue leads the industry. Investors have enjoyed a total return of more than 200% over the past three years. Such results helped land Pulte Homes the No. 12 spot on the BusinessWeek 50 list of top corporate performers.


But Dugas knows that the housing market won't be red-hot forever and has plotted his strategy accordingly. Like other homebuilders, Pulte has bought growth: The 2001 acquisition of Del Webb Corp., the top builder of homes for the swelling ranks of active retirees, boosted the bottom line by 33%. It also added geographic and demographic diversity. Pulte's 28-state spread should cushion it from a regional real estate slump. Just as crucial, though, is Dugas' push to bring a corporate discipline to Pulte's operations. "The homebuilding industry is still run like a mom-and-pop business," Dugas says. "There are huge opportunities to streamline." He expects a more efficient Pulte to expand its 4% share of U.S. new-home sales to more than 10% within a decade.

Of course, centralizing what has always been essentially a local business carries risks. After all, houses in a suburb of Albuquerque are necessarily different from those outside Boston. Managers in Michigan need to choose carefully as they narrow the number of floor plans and home amenities to be sure they account for regional tastes. "They'll either have a great head start on the rest of the industry or be behind the eight ball," says Stephen East, an analyst at Susquehanna Financial Group LLC in Bala Cynwyd, Pa.

In rethinking what a modern homebuilder should look like, Dugas has plucked ideas, buffet-style, from all over the business world. From manufacturers such as Toyota Motor Corp. (TM ), Pulte is borrowing the notion of reducing product variation to save money and remove complexity. Dugas is whittling the number of Pulte floor plans from 2,200 to 600 by yearend, keeping only those that have proven popular from coast to coast. Another Toyota lesson: make upscale features standard to get economies of scale. "When you buy a Lexus, you get leather," Dugas says of Toyota's luxury division. "They don't bother with vinyl or fabric." Now, luxury carpets and top-notch appliances are de rigueur in Pulte houses -- making purchases simpler for buyers.

Dugas also seeks to use Pulte's scale to build a more efficient supply chain, using Wal-Mart Stores Inc. (WMT ) as his model. Homebuilders usually let subcontractors buy materials and fixtures. Now, Pulte buys directly from manufacturers in bulk, using its heft to get a better price. Steven C. Petruska, Pulte's chief operating officer, estimates that offering fewer options, and buying on a national scale, will save 5% to 10%. Like Wal-Mart, Pulte will use regional distribution centers to deliver materials for a house just when they are needed.

To ensure his big ideas will be implemented properly, Dugas has aggressively raided companies with strategies that he admires, recruiting 50 new managers in the past three years. For instance, he's lured a hospitality whiz from Sandcastle Resorts & Hotels Inc. to head customer relations, and a Wal-Mart logistics guru, as Pulte tries to import the retail titan's legendary supply-chain discipline.

Engineering a smooth transition with all the new faces will be a management challenge for Dugas, 40, who wasn't even a twinkle in his parents' eyes when Bill Pulte began building houses in 1950. But the CEO has now put in 11 years at Pulte, after working as a marketer at Exxon (XOM ) and a logistics manager at PepsiCo Inc (PEP ). And despite Dugas' urbane manner and slicked-back hair -- a contrast to the less-polished founder -- "He has gotten his boots muddy," Bill Pulte says with obvious pride in his protégé.

With profits soaring, Dugas has momentum on his side. But rising interest rates are worrisome, since higher mortgage rates would discourage some home buyers and dampen sales growth. And anything that cools the housing market would hurt the value of Pulte's $8.9 billion inventory of land and unsold homes.

Then there's the competition. Other big homebuilders are trying some of the same tactics -- though none are reconceiving strategy as completely as Pulte. For instance, KB Home (KBH ) is standardizing components such as window frames, and working to create a steady flow of construction, using some of the same lean-manufacturing techniques. Toll Brothers Inc. (TOL ) and Centex Corp. (CTX ) are manufacturing some housing components off-site to boost efficiency.

That's one reason Dugas feels such urgency about transforming Pulte, despite the many potential pitfalls. Avoiding change until sales slip would be a huge mistake, says Dugas. "We're attacking this while we're strong." In an industry that is consolidating rapidly, he's betting that a reinvention is the surest way for the Pulte name to stand the test of time.

By Kathleen Kerwin in Bloomfield Hills, Mich.

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