Housing Innovation Alliance's Podcast

Strategy, Innovation + M&A with Brendan Fitzgerald, McKinsey & Company

June 23, 2020 Housing Innovation Alliance Season 1 Episode 8
Housing Innovation Alliance's Podcast
Strategy, Innovation + M&A with Brendan Fitzgerald, McKinsey & Company
Show Notes Transcript

Calling all executives and investors who want to think more about strategy, innovation, and M&A! "The stage is set in the home building industry for innovation...there's just so much potential. I think it's up to us to go and capture it." 

Learn more about McKinsey & Company and connect with Brendan.

Many thanks to our partners at the University of Denver for their editing and post-production talents, specifically Lija Miller and Lisette Zamora-Galarza.


The University of Denver Franklin L. Burns School of Real Estate and Construction Management, teaches the full life cycle of the built environment. From integrated project leadership skills to a cohesive understanding of the built environment ––experience the only school of its kind!

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Eric Holt (00:06):

You're listening to the housing innovation Alliance podcast in partnership with the university of Denver's Franklin L burns school of real estate and construction management. The housing innovation Alliance is a nationwide community of game changers driving the future of home delivery through crowd accelerated innovation. We represent thought leaders from Burt to dweller with a focus on the production builders business environment.

Dennis Steigerwalt  (00:34):

Hi, this is Dennis Steigerwalt president of the housing innovation Alliance, and you're listening to our podcast series. I'm joined today by Brett and Fitzgerald associate partner at McKinsey based in their New York office. How you doing today? Brendan? Fantastic. Thanks for having me, Dennis. Yeah, thanks for joining us. I'm excited to introduce you to our community in a, in a big way, you know, as the leader of the North American building product service line and a core partner in the private equity practice, I think there's a lot of value you can bring to our community and the conversations we're having about driving innovation in the space.   and of course we've, there's, everybody's talking about the recent report that McKinsey launched. So I'm sure we can tie some of this discussion back into, into that as well as we, as we get to introduce you to the community.

Dennis Steigerwalt  (01:15):

One of the things that also interests me is you have a global view. You've had a chance to work in a couple of key locations around the world. So why don't you just give us a little background about,  you know, how you started out your career and how you landed in,  where you are today? 

 

Brendan Fitzgerald

Yeah, absolutely. So I guess I kind of come at, you know, where I am now and, and focusing on housing and building products in a little bit of a roundabout route. I mean, originally I started out my career as a lawyer,   working in M&Aand finance kind of transactions focusing on that realm of things, you know, moved over to McKinsey.   worked, worked for McKinsey in Australia, Southeast Asia, and now the U S and my, my core focus over that period of time has really been, you know, M&A, and with a specific focus on private equity investors.

Brendan Fitzgerald (02:02):

And then I think there's been a lot of crossover,   over the years between investors and what they're looking at, and, you know, seeing a lot of,   opportunity and, and a lot of appetite to invest in, you know, building products, construction services, you know, the frankly the whole kind of construction value chain and, you know, through that have ended up spending a lot of time in the space. you know, and, and now,  , have shifted that as well into working directly with, you know, a number of,   building products, players, construction, software players,   construction services players, you know, other people in that value chain,   you know, on em and I, of course, but I'm also thinking through with them topics like what their strategy strategies should be over the next five years, you know, how should they approach innovation? And, you know, what's the right way to kind of organize your corporate resources, you know, behind innovation, how much should you be in that?

Dennis Steigerwalt  (02:59):

And frankly, what are the areas that you should be prioritizing from a kind of board level CEO level view, and, yeah, and then, so that's kind of my kind of journey to, to now and to, and to focusing on the space.   and, you know, I, I guess it's just a really exciting place to be. I think,   I probably don't need to convince you or any of the listeners about that, but,  , that definitely something that, you know, where I see a lot of opportunity and,  , you know, just a lot of potential and, and disruption over the next couple of years. So it's why I kind of get excited to wake up in the morning and, and work on these topics.

Brendan Fitzgerald (03:31):

No, that, that falls right in line with some of the conversation, you know, I've had in the past about, you know, kind of how rewarding you find working in the, in the home building industry itself, and being able to kind of create something as tangible as a place for people to call home and an environment where they can, they can thrive as individuals, as families and communities. And that's certainly something that we're all about. So as we, as we talk about innovation in residential construction, I, you know, we've, we've mentioned before that there's, there's certainly challenges the industry space, but you know, some of the things we've gone through recently, and there's been an accelerated, there's been a trend of, of adoption and of new thinking in the industry. You talked to us a little bit about why you think innovation has been so challenging and why we're heading in the right direction. Yeah,

Brendan Fitzgerald (04:10):

Absolutely. I mean, I think that there's a number of reasons for this. Probably the biggest ones I'd call out that have come up in conversations with clients. And some of the research we've done would be, you know, it is a cyclical industry,   and it's, it's a competitive industry. It's also a very kind of fragmented industry. So, you know, combining these things, it's hard for people to,   have the scale and the certainty to really make the large and kind of longterm commitments that are needed to,   to drive longterm innovation. I'd say that's one factor. And then, you know, frankly, the, the fragmentation makes it difficult to have wide scale adoption throughout the value chain. You know, when you think about how many different players there are going from the products manufacturer through the different distribution channels, through to, you know, the home builders, the subcontractors, the developers, and, you know, how it kind of splits at each branch of that chain.

Dennis Steigerwalt  (05:07):

I think there's just a huge number of stakeholders.   you know, each of which for a whole variety of, I think very good reasons, you know, I used to doing things in a certain way.   and cause they see that that works and it's delivered quality and, and, you know, there's a risk of changing from that point. Right. And so that kind of fragmentation, as well as the kind of risk aversion, as well as the cyclicality, I think it's, it's kind of a combination of factors that, you know, have really combined to make it harder to make some of the big moves that, you know, perhaps other industries have.

Dennis Steigerwalt  (05:37):

So do you have any examples you can share of evidence that we're, we're kind of turning a corner here and that we're, we're starting to think a little bit differently about taking on some of these new ideas and implementing them within our organizations?

Brenden Fitzgerald (05:48):

Yeah, absolutely.   so one of the things we look at when we're trying to understand, and I think it's,  , something of a leading indicator of, of innovation,   is really studying the investment landscape and the startup landscape, you know, tracking how much venture capital,   money, and also even just kind of corporate MNA money is going into the space and, you know, that's kind of doubled or even tripled over the last five years compared to the five years before that. And, you know, also just the kind of number of companies, you know, that,  , that are emerging in the space, you know, across construction and construction technology. I mean, we see some very real kind of hot spots, you know, across a number of different areas to kind of sell for in technology space as being one of them. I think kind of what I'd call the labor saving,  , category, which comprises modular,   three D printing robotics as well. You know, we see a number of kind of clusters like that, that,  , you know,  , really kind of pockets of emerging innovation. And I think we'll know shine the way towards where the industry could be heading on some of these topics.

Dennis Steigerwalt  (06:53):

Great. So if we think about it, you mentioned a few of the themes that we've heard consistently throughout your reports, and as recently, you know, in some of the articles that you've, you've, you've coauthored, as well as,  , the most recent report, you know, it's all about digitization there's disruption. We have new partnerships, new production methodologies, kind of looking through the lens of more of an industrialized, industrial engineering approach within the industry. You know, where do you see some of the, where is some of that low hanging fruit that you would advise someone to focus on?

Brenden Fitzgerald (07:22):

So from the perspective of a, like a product manufacturer, someone who's looking to focus their innovation efforts, correct. Yeah. Yeah. It's an interesting question because while I very much believe that some of these larger trends and disruptions,  , where the industry is going overall, I think, you know, what's underlying your question is perhaps it's a harder move to make from the perspective of an individual player in the value chain and it's,   what risks do you really take to, for instance, bet behind, you know, modular or bet behind kind of digitalization and what does that even mean for a components manufacturer, for instance, for a building products manufacturer.   and so, you know, certainly some of the approaches that we've talked about with clients on this topic are to, you know, keep an eye on the broader disruptions in the space, but then take a very kind of practical lens on your product for portfolio, your capabilities and your customers, and, you know, picking what are the kind of two or three areas where you should kind of focus your innovation efforts and look at them over time.

Brenden Fitzgerald (08:30):

You know, the, the, the, the jargon reduced to that as swim lanes, right? So it's not picking, this is the innovation itself that we're going to try and focus our efforts behind, but it's that, you know, we make roofs or siding or whatever it happens to be. And, you know, one of the things we see in the market,   and this is true, I think is that labor shortages are going to be an ongoing, an ongoing challenge for the, especially for skilled labor covert, notwithstanding. And so what can we do to solve those problems and directing our research and directing our kind of focus on solving the labor problem as it relates to our product portfolio. And there's probably some incremental steps that we can take, like making the product more user friendly, removing one or two of the, of the steps in terms of installation rather.

Brenden Fitzgerald (09:19):

And they're probably then kind of more, you know, meaningful,  , you know, disruptive steps that that could enable maybe that means that longer term, we retool some of our products in a way that better fits into the production line of a modular builder. You know, maybe that means we,   look at some partnerships or some M and a further down our kind of innovation pathway to acquire new capabilities, to integrate better technology into our processes,   and kind of make our own processes more efficient, you know, so, so I think it's about kind of picking the areas of focus that, you know, aligned to your capabilities, but also aligned to the large trends and then, you know, treating it more as a, more of a journey rather than a kind of, okay, here's the one product that we're going to do next.

Dennis Steigerwalt  (10:01):

So it, it seems to me a big part of it is understanding, really getting to understand your customers and the job they're trying to complete, right? The job to be done by them and continuing to deepen those relationships and not only look at what they're solving for today, but what they're going to need to solve for three, four, five years out. Right. And how you do that through your collective, do a, do a collective it's gonna data. You know, it comes back to a lot of what we're our organization is all about is we don't, you know, the margins may be tight, you know, many of the organizations in our they're risk averse. So it's, how do we come together collectively to allocate shared resources, to kind of drive some of these conversations and then bring them back, you know, bring our, what we can do. What's in the collective good, right. Instead of our own self interest,

Brenden Fitzgerald (10:42):

I think that's a really important point that you make there, because if people are not like the changes that are required in the industry,  , step changes, right. And, and being able to carry those out. I mean, I don't think personally will be the result of a kind of lone ranger approach, where someone comes up with the next disruptive thing and is suddenly able to get everyone else to adopt it. It's a, you know, it's a fragmented value chain where you need to bring people along with you rather than drive it yourself and doing that means collaborating and listening and doing it in an inclusive way rather than trying to accomplish everything on your own,  , fully agree with you, Dennis.

Brenden Fitzgerald (11:23):

So now building on that a little bit. So if we look at some, some of the lessons learned over the past few months with, with the shock, we've all had to our economic and social systems, do you believe that organizations in the building construction industry have become more responsive to these fluctuations in the market and to the volatility of the market? Or do you think that there's still a lot to be learned?

Dennis Steigerwalt  (11:43):

It's a good question. I think certainly everyone has changed what they do and change the way they work in pretty dramatic ways. I know we were talking earlier about the degree of uncertainty that companies are operating under now being, you know, orders of magnitude greater than what's happened in the past and a very, very different kind of environment to the, just roll out the annual plan again from last year. So I think there's been a certain amount of adapting. This have to happen. That's had to happen of necessity, probably most acute in the space around kind of technology, you know, both the construction technology players, themselves seeing significant uptake in adoption, you know, changes in the way people work on the job site, obviously integrating a lot more of the,   you know, video collaboration tools that, you know, we've, we've all been using. You know, I, so I think that's probably the, kind of at the forefront know bot, and I'm not sure about this, but I would hope that, you know, even some of the more traditional players, the home builders, the,   that the building products manufacturers have been able to kind of use this as an impetus to change some of their internal processes.

Dennis Steigerwalt  (12:52):

Right. I think using the disruption in the overall market and the way that they've had to adapt to kind of question, you know, what have we been doing, because it's just the way we've done it before. And actually like, where are we now that we can try something different that, that will allow us to be more successful in the future

Brenden Fitzgerald (13:10):

Right on, so extend that a little further, even, and looking back at one of the reports today, or an article that you coauthored a few about a year ago now, you know, another area of focus was going to be on the talent strategy. So can you share some thoughts on how, what we've gone through may affect the Italian strategies for some of these organizations?

Dennis Steigerwalt  (13:26):

Yeah, absolutely. Look, I think there's a, there's a lot of thinking still to be done that we're all in the process of doing together around, you know, the way that kind of COVID and a post COVID world can change the way we work and operate. I mean, I think it's not really a novel point to say that, you know, remote working will become a larger part of that and allowing people to be more flexible. I think there are still pretty substantial challenges around collaborating and creating the right kind of environment and atmosphere to, to really kind of do exciting things together. So just personally I would be, I still think an impersonal element is very important that it probably does give building products, players, construction players, a little bit more flexibility to think about, you know, some of those really kind of hard to get peace, like, you know, really hard to get top talent, right. You know, people who may be tied to certain urban areas, which is not where these companies are based people who are very mobile themselves and want to return reserve that flexibility. I mean, I think it kind of gives a bit more flexibility to think about how you attract and retain people like that who could be part of driving your innovation strategy.

Brenden Fitzgerald (14:38):

Yeah. And it would be interesting to see how some of the, well, the industry itself adopts or adapts to, you know, the unemployment numbers that we were discussing earlier. And, and is there the ability to kind of transfer some of the unemployed into the industry and upskill them to, to deliver to that for the trade base? And again, what does that also mean as we move to a more offsite manufactured environment and, you know, we'll kind of know what's the new job to be done and the new classification around those employment opportunities. So I think there's a, there's a lot to be explored on that front. I think it really represents the fact that we're at, we're at, we're at a kind of this great tipping point for a lot of the things that we've talked about over the past few years to kind of really take traction specifically in the home building industry.

Dennis Steigerwalt  (15:19):

Absolutely. I mean, just to, just as a, as an anecdote on that, you've probably saw it in our latest report, but when we pulled, you know, executives on what they think is going to happen to, you know, the macro trends we see in the industry as a result of covert to two thirds of them, believe that it would accelerate them. So I'd say there's a kind of a consensus in the industry that, you know, it's not about going back to business as usual, that, that the kind of the next normal that we're going into after COVID, you know, will be different to what it was before. And that it does represent an opportunity to kind of drive some of the change that I think people have been trying to do, you know, over the past number of years, I need to accelerate that and actually kind of make more out of those trends as we're able to.

Brenden Fitzgerald (16:02):

Yeah. I liked the idea of,   I saw a cartoon, it's the two gentlemen talking and one of them said, I can't wait until things go back to normal. And the other guy looked at him and said, well, why would you want to go back? Let's go ahead. Right. And I, and I think that's exactly it. We have a chance to kind of architect our future,   and, and for the industry. So let's kind of design what we want that to be and work into it. You know, it's not going to be an easy path, but, you know, at least we have a kind of, a bit of a fresh mindset from the starting point that we're at and that we can build into, you know, one of the things that we, we, we started to hear more conversation about within our organization within our community is kind of around some concepts related to the environment specifically. So look at more sustainable building materials, higher level of awareness around climate change and the impact that has on the types of materials that we're going to be developing and deploying in the marketplace. And then from a manufacturing kind of perspective, the circular economy. So I just want to just kind of know there's a lot of, those are three kind of big pieces there, but I'm just kind of curious to get your take on what kind of conversations you're having with your clients or within your organization around those topics and themes.

Dennis Steigerwalt  (17:09):

No, absolutely. And, and I guess, let me start by saying, I think personally it's a very important topic for the industry and one that has got a lot of attention, but perhaps potentially hasn't got the attention that it deserves. I think construction plays such a large pot in the overall economy that if the industry isn't pulling its weight to kind of help, you know, advance some of the environmental objectives that I think we need to hit then, and then I think there are challenges, right? And, and so it's a really important topic and, you know, is, is definitely one of the things along with, you know, some of the other topics we've touched on already around, you know, industrialization kind of integration into the along the value chain potentially that really does really, should be kind of rising to the top of outlook for the industry over the next number of years.

Dennis Steigerwalt  (18:00):

I think the challenge on, you know, sustainability has always been the cost it takes to comply versus what people are willing to pay for, you know, and for many product categories, for many products that go into the house side, for instance, I think there's not much visibility for the consumer into the end home and rather into what that product is and how it's made and you know, how sustainable it is. Right. So I think it's just being harder to, to drive greater adoption to the extent that it's going to cost more when people don't have visibility into what's going into the home. I, you know, in, in categories where there's a little bit more of a hormone focused branding, then I think it's probably easier, but it's still challenging because people have got different preferences and there's a wide variety of views out there on, on doing what's important.

Dennis Steigerwalt  (18:52):

And, you know, at the end of the day, it's a, it's a very kind of significant and expensive purchase,   someone's house. Right. And,   for a lot of people that don't have the luxury of paying more to have a green choice, even if they wanted to. So, I mean, I think for, for a number of reasons, I think it should be a focus of the industry. I think it's been challenging. And one of the things that I'm kind of interested in personally is trying to work out, you know, what are the ways forward to, you know, meet sustainability objectives in a, in a way that, you know, makes sense for, you know, the cost and for what consumers want

Brenden Fitzgerald (19:27):

I need. Yeah. I think, you know, the public health challenge that we're emerging from now, it's, it's kind of really shined a light on the need for this kind of concept around health and wellness within the home and ending, and has really created a higher level of awareness for, for many consumers that they need to be thinking about these things. And the nice thing is if you think about healthier home, that typically ties back to a better overall performing home, which can expect to a lot of what we're talking about here. So no matter which leads with that conversation, I think it's, it's great that we're going to start having more of it. And we're hearing that from a lot of builders in our community. I think one of the elements of that is, is how do they better educate themselves because as a consumer, how do I know that I'm getting the best value for what I can actually, if I'm going to stretch my dollar for my home purchase, where am I actually going to get the most bang for my buck?

Brenden Fitzgerald (20:12):

And, and, you know, is it, is it the windows? Is it air filtration? Is it at the installation? And, you know, even all the way down to, and if you do all of this, making sure you put the right furnishings inside of it. So you hit on, you know, bringing it, you know, you don't go through all the expense on the shell and the envelope, and then you bring in the wrong, wrong type of products. So I think, you know, seeing an emergence of different marketplaces that allow consumers to better understand what's out there, I think, and being able to make a better decision will be great. And then just continuing to arm, you know, the builders in our community with the right level of content, to be able to inform and, and even create it as it's not add on. Now, it's a standard,

Dennis Steigerwalt  (20:48):

Right? I mean, these are the things that are better for us and better for society. So ultimately these, this is how we should be building. And I think we'll start to see a lot more of that emerge out of this you're right. And I think that the, the education and information component is a really important unlock here because at least my feeling is that people don't just don't necessarily know what to trust or even kind of how to think about it. What, when the, when they're looking at whether something is green or not, like how, you know, how do you tell between what's marketing and what substance? And as you said, your marginal dollar, you know, if you care about having a greenhouse, where should you best spend it, what's really gonna make the difference for you. And I mean, I think there's potentially a role for organizations like yours and for other kind of industry bodies to help guide the conversation there and really, you know, look at what are the highest impact ways that we can make house building a, you know, a green industry and where, where are the kind of the things that we should be going to now?

Dennis Steigerwalt  (21:49):

Yep. No, well, that's a challenge we're willing to accept and we'll, we'll continue to play that out with your, with your support. Certainly I know there's a few other kind of strategic industry partners that we collaborate with on a regular basis that are, that are more involved in certain elements of that than we are, but we can serve as a great connector of some of these conversations. So probably a great opportunity down the road to pull you into some of that discussion. You know, Brandon, this has been great, really appreciate the time you've given us today and letting us pick your brain a bit and share your thoughts with our community before we part ways. Anything else you, any final words to share with our community?

 

Brenden Fitzgerald

 I just think, you know, recapping some of the things we talked about already, you know, I think the stage is set in the home building industry for innovation. (22:31):

  I think after a long time where things have happened, but not much has happened, we've got the necessary kind of conditions in place to really kind of accelerate at any, you know, drive the next wave of innovation and performance improvement and productivity improvement. And, you know, I think the challenges out there, so all of us who spend our time here to, to use the current crisis and indeed the years ahead to kind of be part of accelerating that change, you know, and there's just so much potential. I think it's, it's up to us to kind of go and capture it. 

 

Dennis Steigerwalt

Alright, that's great. I love it. The stage is set and now's our time to have a voice and lead it forward. Thanks a lot, Brandon. We really appreciate the time.

Brenden Fitzgerald (23:11):

My pleasure 

 

Eric Holt:

on behalf of the housing innovation lions and the university of Denver. This is dr. Eric Cole. Thank you for being part of our journey. This is where innovation calls home.