Disruptive Innovation Part III: The Home of the Future With Certainty

Understanding the future of housing is simply a matter of connecting the dots between the market-ready innovations and the crises they mitigate.

This is Sam Rashkin’s latest in a series of articles based on his second book, “Housing 2.0: A Disruption Survival Guide.” It is intended as a roadmap for high-performance builders to become the most successful in the industry.

User experience (UX) optimization ensures a product that exceeds buyer expectations with best practices that also extract cost savings by eliminating waste, optimizing simplicity, and integrating systems. 

There are three elements: 

1. Mass customization, which integrates world-class expert solutions into optimized building blocks that cost less through their use on many projects.
2. Digitization, which creates virtual twins of mass-customized homes that are UX optimized and include an automated bill of materials and construction instructions that enhance productivity and reduce costs.
3. Offsite construction, which reduces reliance on a decreasing workforce for trades while using advanced factory production methods and systems for superior productivity and quality. 

These innovations have been sitting on the sidelines for too long and can no longer be ignored. The process begins with every builder transitioning to a UX optimization business model that delivers better homes for lower cost.

As these innovations are adopted, a clear version emerges for “What” the home of the future looks like with certainty. And not surprisingly, it tracks the latest disruption in the automobile industry to faster, better, and cheaper electric vehicles (EVs). 

This includes: 

Replacing obsolete 100-plus-year-old platforms. Just as EVs replace the century-old internal combustion engine with battery-powered electric motors, housing will replace 100-year-old fossil fuel equipment with advanced electric technology. 

Meanwhile, 150-year-old framing technology will be replaced with advanced offsite enclosures. In both cases, these new platforms provide the foundation for compelling faster, better and cheaper performance. 

Loading up with tech. EVs are fully integrated with advanced technology, including controls, cameras, sensors, smart components, and batteries all linked to smart phone operation. Similarly, all-electric homes will include these advanced technologies integrated with onsite or offsite renewable energy. 

The resulting performance benefits are too compelling to ignore: a whole new level of comfort, convenience, safety, health, resilience, durability and entertainment, and freedom from costly energy bills. 

Ensuring a superior UX. Just as EVs provide a transformative UX relative to design, performance and quality, the housing industry must follow suit with new zero-energy homes (ZEHs). In addition, location is uniquely critical to housing, which therefore must also optimize the community experience. The outcome will be homes that live, work and last better. 

Curating expert packages. EVs feature simple choices to customize the exterior and interior across multiple product lines that dramatically lower total cost of ownership. While there will always be a significant market for custom homes, the housing industry must follow suit with mass-customized solutions for mainstream home buyers. The results are ample consumer choice, as well as lower cost, stress and complexity in product configuration. 

Own the customer for life. Where EVs include simple and paperless transactions along with ongoing online services for desired upgrades, so will the housing industry. This ensures companies own their customers for life with services that continually improve the UX, cultivate a value-based relationship, and provide ongoing revenue streams.

How Innovation Happens: Crossing the Chasm

Important note: I’m not delusional. Remember, I have already conceded that the housing industry is profoundly resistant to change. This is because of the following three roadblocks to innovation:

1. Extreme fragmentation. There are tens of thousands of builders and trades, which results in a complex web of enterprises delivering new homes. This creates substantial challenges adopting innovation related to complexity, burden and cost.
2. Variable cost business model. Builders minimize fixed costs by relying on trades to provide the labor, materials, tools, and equipment needed to construct homes. This is done to minimize carrying costs during down cycles and maximize resources available for land acquisition. There is no product without land. As a result, there are minimal to no resources available for meaningful investments in innovation, even among large national builders. One study—“Business Research and Development and Innovation: 2008-2010,” from the U.S. National Science Foundation—found that the research and development investment as a percent of revenue was more than 15 times less for residential construction than the median for 17 other representative industries (0.4 percent vs. 6.7 percent).
3. Low risk tolerance. As discussed earlier, builders are regularly confronted with a huge array of risk factors that are totally outside their control. This creates what is often a crippling resistance to change. When engaging builders, I can hear them thinking, “I’m so overwhelmed, I’m just staying with what I know.” Some come right out and say it to me. As a result, any additional real or perceived risk with innovation is too often a bridge too far. 

Any attempt to introduce significant innovation into the housing industry must start with a healthy appreciation for this daunting challenge. Personal success-leading national programs were significantly informed by research on effective market transformation in the technology sector. 

One outstanding resource helped me understand that the commonly depicted smooth exponential growth curve for technology market diffusion is a myth. Instead, there is a deep chasm blocking the smooth transition from early adopters to mainstream users (see Figure 2). 

The reason for this chasm is the completely opposite market behavior tendencies for mainstream users compared to early adopters including: 

• Discretely using new ideas rather than gambling on future rewards
• Extensively deliberating about the unknown rather than being venturesome to embrace change
• Resisting rather than coping with uncertainty
• Requiring “whole product” solutions rather than being willing to resolve challenges using new technologies with innovation cliques
• Needing proven tried-and-true solutions rather than being willing to accept setbacks 

This insight helps explain extensive personal observations of housing innovations routinely failing to tip past the inflection point on the path to exponential growth. The outcomes are a complete failure (Katerra and Entekra are prominent examples of offsite companies that recently went out of business), or flatlining at a few percent market penetration, as shown by the dotted line in Figure 2 (e.g., modular construction, structural insulated panels, pre-cast concrete foundations, geothermal heat pumps). 

The four housing innovations presented in this article have also struggled to cross this chasm, which I attribute to the following failed market diffusion strategies:

• Lack of a compelling UX to get past discrete use of new ideas and extended deliberation. This includes:
  • Missed opportunities to invest added cost in world-class expert solutions and features that are “sure thing” for transformative UXs, which can be more than offset with right-sizing, simplicity, waste reduction, systems integration, and mass customization.
  • Designs not aligned with offsite production constraints to minimize waste and cost.
  • Misalignment of standard CAD software with offsite construction plant software needed to run automated systems, resulting in duplicative digitization costs.
  • Not integrating world-class designs and advanced technology in mass-customized products with offsite construction and digitization services. 

• Lack of “whole product” options and proven solutions. Examples
  include:
  • Offsite construction options that only provide partial enclosure solutions rather including materials and labor for foundation, walls, roof, openings, building science control layers (air, thermal and moisture), systems (mechanical, electrical, plumbing), and smart home technology. 
  • But offsite construction options do not include enhanced warranty coverage and services that are uniquely possible with their inherently greater quality control processes.
  • Based on this analysis, critical housing innovations too often fail to reach mainstream builders. In particular, the innovations are dead on arrival if they impose any risk of losing hard-earned trade relationships or require significant added burden and costs for training, coordination, and negotiation of reduced scopes of work. A new housing business model is required to cross the chasm.

The Innovation Aggregator Business Model

No one thought it was remotely possible that a start-up car company could compete with the big players. An impressive list of failures backed up this belief (e.g., Tucker, DeLorean, Fisker, Bricklin, Treser). 

Then, Tesla came along and disrupted the automobile industry with a completely new business model. This includes the all-electric platform, extraordinary performance, enhanced product mass customization, comprehensive technology package linked to smartphone operation, simplified transaction process, and ongoing services. 

Several players within and outside the housing industry are in a position to “Teslarize” homes by taking the ultimate consumer product to a whole new UX level. This includes large national builders, a new entity I call Digitization as a Service companies (DaaSCOs), or large offsite companies. Each of these entities can deliver at scale to other builders or directly to consumers. Figure 3 shows how the innovation aggregator business model works. 

It starts with the five crises exerting severe pain (on the left). Then, moving left to right, the aggregator would provide a completely turn-key solution for home builders that removes the pain with a superior product at lower cost. The innovation aggregator services include:

• A world-class expert product development team that includes design, technology, health, zero energy, quality systems, and community planning.
• A large offering of UX and offsite construction optimized designs, fully digitized into exterior and interior building blocks that can be mass-customized into diverse options for homes or entire communities.
• A full array of builder services, including design, construction documents, bill of materials, virtual walkthroughs, and offsite “whole product” solutions.
• Self-learning continuous improvement implemented by applying AI to data collected from smart technology integrated into all sold homes and ongoing services.

The full details for deploying an innovation aggregator business model are the subject of a much longer article that is still under development. For readers who are interested in learning more about an actual example, I encourage reading about the Swedish offsite home-building industry in the last chapter of “Housing 2.0: A Disruption Survival Guide.”  

These builders have captured 85 percent of the new home market with a business model that closely aligns with the innovation aggregator described above. I look forward to ongoing work with key players in the U.S. housing industry who embrace innovation, and sharing more on this subject as key milestones are achieved. 

Wrapping Up

As a matter of full disclosure, I’m completely biased. I love housing and believe it may be the most important of all business endeavors. After all, this is where people spend 70 percent of their lives. What product can have a greater impact on the human experience? 

This has led to a long career where I’ve had a unique opportunity to passionately observe the industry I love across the entire country. This includes the privilege of leading two national certification programs that have transformed the housing industry to high performance: ENERGY STAR Certified Home and Zero Energy Ready Home (ZERH). 

The wonderful bonus has been extensive engagement with thousands of builders, home energy raters, building science experts, architects, and manufacturers, all of whom have inspired a much larger understanding of changes ahead for the industry. 

This article summarizes the results from my Housing 2.0 book and workshops (Click here to see the next set of in-person and virtual classes.) The unique guidance at the core of this program is an extensively vetted framework for adapting to disruptive changes looming ahead rather than being left behind. 

The exciting outcome is an industry that delivers high-performance homes faster, better and cheaper. It can be done; it will be done. If you don’t do it, someone else will.

This Housing 2.0 presentation is sponsored by:  Jinko Solar,  Panasonic, Schneider Electric and LG HVAC