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 / Summer 2013 / Issue 71(originally published by Booz & Company)


Building a Flywheel Business

The third rotation began with JCI’s acquisition of Prince Automotive (which made auto interiors) in 1996. Now the company could leverage its growing capabilities across a larger proportion of the vehicle. It provided instrument display clusters, dashboards, sound-cushioning headliners, and trim, in addition to the safety and comfort-critical seat system. Having gained control of all the key aesthetics of a car’s interior, JCI opened a new technology center in 1998 complete with an “idea factory” and “comfort lab.” It expanded its conjoint analysis to consider trade-offs among extra cupholders and dashboard features. JCI could now help a program manager make the right decisions throughout the car interior.

JCI continued to increase the momentum of its flywheel by expanding its product and geographic scope. In 1998, it added to its portfolio an automotive interior part producer, the Becker Group, with 70 percent of its revenues in Europe, and the Italy-based Commerfin SpA, a maker of door systems. Taking another page out of the Japanese playbook, in 1999 JCI launched a keiretsu-like partnership with Genetex, Jabil, and Microchip Technology to develop integrated electronics for car interiors. And in 2000, it expanded into Japan by acquiring Nissan’s stake in Japanese seat manufacturer Ikeda Bussan. By 2005, JCI had renamed the business unit the Automotive Experience group. It was now a global flywheel business with annual revenues of nearly $19 billion.

Create Scale in New Markets

In 1950, unable to afford an architect, a startup contractor named Bill Pulte used a plan from the Detroit Times’  Home of the Week section to build his first house—which he sold for $10,000. By today’s standards, that may sound cheap, but the median home price in Michigan that year was only $7,500. Over the next decade, his company, which is today called PulteGroup Inc. (of which Pulte Homes is a subsidiary), operated like every other builder in the country. It built individual, custom-designed homes for a particular price niche in a local market—in Pulte’s case, the high-end home market of the Detroit suburbs.

But Pulte recognized an opportunity to create a flywheel business of national scale by offering his high-quality craftsmanship at more affordable prices through modular design and prebuilt components. In 1959, Pulte shared his vision for the future in the plans for Concord Green in Bloomfield Township, Mich., the company’s first subdivision project. He priced the homes at $29,000—well more than double the $12,000 median price in Michigan at a time when median family income ran less than $6,000—and tapped the aspirational dreams of a growing upper middle class.

Pulte created a superior alternative to the then dominant models of suburbia. From experience, he understood that the custom model incurred additional costs for the buyer and uncertainty for the seller beyond the true value of the finished product. He also saw the flaws of the mass-produced subdivision model pioneered by Abraham Levitt and his sons, William and Alfred. Launched in 1947 to target soldiers returning from World War II, the Levitts’ original planned community in New York consisted of 2,000 rental homes employing a common, single-floor house plan. The homes could be built at the astonishing rate of 30 per day. By 1949, they had expanded the quality of the homes and introduced a new “ranch-style” design for sale at $7,990, well below the statewide median of $10,152. It was offered in five models defined by only slight differences in window placement and exterior colors. By 1951, what had become known as Levittown encompassed more than 17,000 homes—organized in huge subdivisions full of nearly identical “boxes.”

At Concord Green, Pulte sought to achieve the scale economies of the low-end, mass-production approach while providing the variety demanded by the more discerning upper-middle-income customer. His modular designs eliminated the need for expensive architects but, unlike the Levitts’ homes, provided generous variation in design throughout the subdivision. The company also built design tools to allow homebuyers to customize where it mattered most, in the interior. Customers could choose from a wide range of paint colors, flooring, countertops, and lighting and plumbing fixtures. The unique capabilities Pulte developed for the Concord Green project powered the first rotation of Pulte’s flywheel, enabling the company to reach an underserved market.

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