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Open House Co., Ltd. Single-Family Homes Division

2016 16th Porter Prize Winner Manufacturing and sales of single-family homes
“Let’s find a house in Tokyo” is the motto of Open House. The company focuses on the Tokyo area, and specializes in reasonably priced single-family homes for first-time homebuyers. Open House has created highly efficient operations, undertaking everything from land acquisition to the design and sale of new single- family homes.
openhouse_2.jpgOpen House's value proposition is to provide single-family homes for middle-income families in the Greater Tokyo Metropolitan area. Open House aggressively procures pieces of land that are located within a 10-minute walk of a train or subway station. The company intentionally hunts for: 1) irregularly shaped properties instead of the usual rectangle or square properties; or 2) properties that lack direct road access (with only a narrow path leading out to the street). Open House's architects will design a house to fit the shape of a specific piece of land, to ensure the most efficient utilization of the land. Sales activities, which focus on stimulating latent demand, target potential customers among apartment dwellers and others living in the vicinity of a particular land site. The assumption is that a person who has chosen to live in a certain neighborhood has made that specific location one of their highest priorities. Open House's high asset turnover rate (for real estate and housing stock) is the result of vertical integration. (Open House handles every stage of the process, from land acquisition to the sale of new homes.)

Open House was established in 1997, and the company began selling newly built single-family homes in February 2001. The company was listed on the First Section of the Tokyo Stock Exchange in September 2013.

Unique Value Proposition

Open House's product is new single-family homes, offered at a reasonable price in extremely convenient, prime urban locations. Most of the houses are three-story wooden structures that maximize the efficiency of land utilization. Furthermore, the company avoids using top-of-the-line materials (like marble for the floor in the entrance hall). Open House considers "very convenient, prime urban locations" to be sites located within a 10-minute walk from the nearest subway or train station. Compared with the average market price for homes within a 10-minute walk from the station, the price of Open House's homes (per square meter) are lower by 5% in the Sakura-Shinmachi Station area (Tokyu Den-en-toshi Line), 10% in the Togoshi-Ginza Station area (Tokyu Ikegami Line), and 14% in the Jiyugaoka Station area (Tokyu Oimachi and Toyoko Lines). (This data covers the last five years, according to Open House.)

Open House's target customers are people who want the convenience of an easy commute to downtown Tokyo, but who consider a single-family home to be beyond what they can afford. The majority of Open House's customers have an annual income of between 5 million yen and 10 million yen.

Open House can sell new single-family homes for less than the average market price due to the following reasons. The first reason is that Open House only buys land priced below the average market price for land in that area. This is a key point, because the price of land is very high in prime urban locations, and the price of land is the primary component that drives up the cost of a new home. Open House focuses on irregular properties, including irregularly shaped pieces of land (i.e. land in shapes other than a square or a rectangle). It is not easy to build a house on an irregular piece of land. Limitations that contribute to a property's lower price include restructured road access (i.e. the land might be facing a slightly narrower road, or it might be connected to the road by a narrow path). Size limitations also have an impact on the price, when the piece of land is too small for a garage, for example. Another possibility is that strict building regulations might limit the height of buildings(*1) or the setback line(*2). Otherwise, the property might be leasehold land. The second reason why Open House can make new single-family homes for less than the average market price is due to its strategy to offer homes built on a smaller-sized plots of land. The types of irregular properties described above are not only less expensive, these properties are more difficult to develop. Such properties do not easily accommodate standard house plans. A customized design is required in most cases, and customization frequently results in higher costs for design, materials, and construction. Open House, however, absorbs such incremental costs by utilizing the land much more efficiently. For example, Open House can find a way to build five three-story homes on a piece of land when other companies would build only four homes on that same property. This is possible for Open House because of its accumulated know-how and experience in the design of three-story homes on smaller-sized plots. (Three-story homes have to meet more building regulations than two-story homes, such as setback requirements, and design know-now makes a significant difference.) The third reason is that Open House avoids unnecessary extravagances. (Open House will eliminate the space for a garden and use imitation marble for the entrance hall floor instead of real marble, for example). The fourth reason is the company's quick turnover for properties with houses. All activities--everything from land procurement and home design to the management of construction and the sale of new homes--are conducted internally, thereby minimizing handover loss (i.e. the loss that might result when parts of a project are outsourced).

(*1)City Planning Act sets height limit on buildings in some areas.

(*2)Building Standards Law Article 56 limits the building's height by drawing a line from a neighboring object, such as a road, a river, and a park. The slope of the oblique line that determines the height of a building is governed by the zoning regulations set by the City Planning Act.

Unique Value Chain

Open House's value chain flows in a smooth and continuous process: 1) Acquire a piece of property; 2) prepare the land; 3) design the house; 4) manage house construction; 5) sell the house. This smooth process results in a higher turnover of assets, improved cost competitiveness, and reduced risk resulting from price fluctuations in the real estate market. This value chain has been built in accordance with the company's clear strategy of providing target customers (householders with annual incomes of 5 million to 10 million yen) reasonably priced new single-family homes that are located in prime urban locations, with convenient access to central Tokyo. Finally, it should be mentioned that Open House's unique human resource (HR) management system supports its value chain.

Land procurement
Open House purchases pieces of land from real estate agents. Open House assigns a member of its procurement team to a regional territory, but does not assign individuals to a specific real estate agent. Each member of the procurement staff visits 25 real estate agents a day, with several procurement staff members visiting the same agent in a single day. When visiting an agent, each procurement staff member tries to find the most effective approach for developing a relationship with the agent. Frequent visits improve the possibility of finding land soon after it becomes available on the market. If Open House wants to take advantage of a good deal, a purchase decision must be made quickly. Open House has streamlined the approval process so that the entire process can be completed half a day. This process starts with obtaining information on new properties that are up for sale, and ends with Open House submitting an offer to purchase a particular property. Sometimes, Open House can sign the contract for the property (on what is known as "the contract issue date") on the same day that it first hears about a property. Open House is willing to purchase leasehold land and irregularly shaped properties, the kind of land that other developers are reluctant to purchase. As a result, real estate agents have come to trust in Open House's ability to deal with such problematic properties. This confidence in Open House makes real estate agents more willing to let Open House know about such properties when they come on the market.

With regard to the procurement of construction materials and the placement of construction orders, Open House has a designated section that works directly with the construction companies. The staff of this section has reduced procurement costs by centralizing and streamlining the procurement process. Open House has been rapidly growing its business in recent years. As a result, the volume of orders are also increasing rapidly. In order to take advantage of improved economies of scale, the purchase price is revised every three months.

Design of Single-Family Homes
The company's in-house architects spare no effort in converting problematic properties into residential real estate. Open House avoids outsourcing the design function as much as possible in order to accumulate know-how in the design of homes. These architects are assigned to the procurement division. Their ability to handle more challenging cases contributes to the division's performance.

Construction management
To improve land utilization, Open House often designs three-story homes with partial basements, although this results in a more complicated design and increases the variety of designs. This, in turn, leads to variations in the type and amount of construction materials used. Unavoidably, construction becomes more difficult, and longer construction periods are required. Longer construction periods result not only in higher costs and inventories, but also increased exposure to price fluctuations.

Open House divides a long construction period into smaller processes, and sets a fixed period for the completion of each process in a very precise manner. (Each process is to be completed in a day or two.) However, each construction project is different. For example, the schedule for the preparation period is significantly impacted by the structure of the existing building already on the property and the building regulations for that area. Preparations include the demolition of old buildings, clearing of land, building of boundary fences, and ground improvement (through the addition of sand and drains). Open House comes up with a tentative construction schedule (including a target date for completion), taking into account an extensive check list of 10 to 20 items. Open House then makes the achievement rate of this target a major performance measure for the team in charge of managing the project's first stage, which includes land preparation. Since making the achievement rate a performance measure, the time needed to complete the first stage has been shortened by 65% (from about 90 days to 30 days).

Sales
Open House's homes sell themselves because of their price competitiveness. Therefore, a strong sales force is not required. Instead, the top priority of the sales force is to sell "more rapidly."

In Japan, most people working in metropolitan areas who chose an apartment closer to the city over a single-family home in the suburbs put priority on a shorter and easier commute to work. From their experience of apartment hunting, many people assume that a single-family home in the area where they live is beyond what they can afford. Ideally, they would like to stay in the same area, because they have already settled in there; they have established a network of friends and acquaintances, and their children attend schools in the area. The sales staff of Open House must find a way to approach potential customers (targeting latent demand), and arouse an awareness of their need for a single- family home. The sales staff's mission is to raise awareness of the existence of reasonably priced single-family homes in the area, and get potential customers to consider making such a purchase. This is done by touting for potential customers within the vicinity of the property up for sale, and by canvasing for prospective customers at shopping malls and shopping streets in the area. Open House calls this sales approach "selling at the source." This on-the-ground, hitting-the-pavement type of sales pitch made directly to people out shopping accounts for 30% of the company's total sales.

Sales staff are not assigned to specific geographical territories. For example, a sales person working at the company's Akabane Center can sell a house listed in the Shibuya area. (Akabane is on the northern outskirts of the Greater Tokyo Metropolitan area, while Shibuya, which lies between Tokyo and Yokohama, is a much more central location, situated in the southwestern corner of Tokyo.) This arrangement encourages sales staff to pay keen attention to new property listings, and generates competition among the company's sales staff beyond the scope of individual sales centers.

Open House divides sales operation into three steps: 1) Attract customers; 2) give tours of the property; and 3) get the contract signed. Sales people specialize in one of these three steps. Specialization is a quick way to help the sales staff develop their expertise. Half of Open House's sales staff have worked at the company for less than one year. Members of the sales staff make up for their lack of experience by giving detailed reports to their managers (including details about their conversations with the customer), and getting their advice. Each manager studies the available properties and makes a recommendation regarding listed properties that might be appropriate for a specific customer. Managers also handle the actual closing of the contract.

It usually takes one or two months from the time that a property is put on the market until the closing contract for that property is signed. Open House's timeline for this process is much shorter. The company tells customers who have seen some of Open House's properties to make a quick decision about the one they like, because if they don't it might be sold to someone else.

Half of the real estate properties that Open House sells come with new built-for-sale homes. The other half consist of a piece of land without a house on it. The sale of land-only properties are better in terms of asset turnover because payment for land is made sooner than payment for a home. Unfortunately, the kind of properties Open House that offers are not quick to sell. Actually, a property like that is hard to sell without a house on it. Customers have difficulty envisioning how a house would look on a piece of land that has only a path connecting to the road. They need to see how a house can be built on a piece of land like that. Open House must train its sales staff on how to communicate to customers the merits of such properties (i.e. less noise, more privacy). The company must also prepare a proposal for the planned house and a conceptual drawing to help customers make a decision. In the case of built-for-sale houses, Open House builds a house at cost and earns a profit on the land only. In order not to put those customers at disadvantage who buy only land, and who would like to wait for some time before placing an order for construction of a house, Open House can build the house at cost.

After Sales Services
Members from the company's Customer Satisfaction Comprehensive Promotion Office visit customers within three months after completion of a sale, and ask for customer feedback. Customers are asked to rate the house, the sales staff, the architect, etc., using a five-point scale. Open House does not provide any kind of maintenance services.

General Management
Open House has developed an IT system for the in-house management of all processes, including land procurement, the demolition of old houses, new home construction, and sales. Control over every process helps to reduce loss resulting from poor communication and inefficiencies during the hand-over of a project (between the different processes). Such control shortens the time between land procurement and the sale of that property, and improves the asset turnover rate.

Human Resources Management
Open House's procurement and sales processes require highly motivated employees because numerous tasks are involved that on the surface look deceptively simple. At Open House, employee evaluations are based on performance, and high-performing employees are often given recognition. There are opportunities for promotion every three months. High performers are promoted quickly. For example, it is possible for an employee to be promoted to manager within 5 years after starting work for Open House. The manager leads one organizational unit, made up of 3 to 4 members. It is possible to be promoted to deputy general manager within 10 years. The deputy general manager leads a small business unit with 7 to 10 members, or else provides support to the general manager, who leads a larger business unit with 70 to 80 members. At Open House, the average salary level is among the highest in the industry. (Sales people who have been hired by the company straight out of college are an average age of 26.7 years old, with an annual income of 7.65 million yen, on average. People at this salary level account for the top 1% of all members of this same age-group in Japan.) Employees report on their performance directly to the CEO, (this practice helps to keep them very motivated). Managers oversee three or four members of the sales staff. Because the managers' own evaluations depend on the team's performance, they put much effort into helping the members of their team perform well. Every new employee who entered Open House in April 2016 has successfully closed at least one contract for land procurement or the sale of property within their first three months. (In the industry, if new employees can close on one contract sometime during their first year they would receive a favorable performance evaluation). The experience of successfully closing a contract helps to motivate new employees.

Property sales staff work 5.5 days a week, and their busiest workdays are weekends and holidays. They can take 10 consecutive days of summer vacation, and 15 days of vacation for the New Year's holidays. (These vacation options were officially introduced in the fiscal year ending September 2016). Except for employees with extenuating circumstances, nearly 100% of Open House employees took these days off as their vacation. For the past two years, Open House has been making greater efforts to reduce overtime work. All employees are now required to go home by 9 p.m. at the latest.

When interviewing potential candidates, the company looks for people who resonate with its corporate mission and possess the unique capabilities that would enable them to excel at Open House.In order to hire 200 employees, the CEO conducts 1000 interviews, screening all the final candidates himself to confirm each individual's suitability for a specific position, and to determine whether that person will fit in well at the company. New graduates and mid-career hires account for 50% each.

The turnover rate, which is currently declining, was a bit over 10% in the fiscal year ended September 30, 2016.

Fit among Activities

The activities of Open House's Single-Family Homes Division are chosen to realize the key concept that guides the company's strategy: "Let's Find a House in Tokyo." This phrase is a simple expression of the company's value proposition, which is to provide new single-family homes in very convenient urban locations, and offer these homes at a reasonable price, targeting householders with an annual income of between 5 million and 10 million yen. Core activities are: 1) the procurement of irregular pieces of land (although such properties are less expensive to acquire, extra effort is required to prepare these properties for residential use); 2) the adoption of sales practices that aim to realize a quick sale (i.e. appealing to potential customers "at the source," in other words touting single-family homes to pedestrians who are out shopping); 3) the achievement of high asset turnover; 4) the cultivation of highly motivated employees, and the active development of employees' skills and abilities; and 5) the selection of "rapid growth" as one of its primary management targets. (Please refer to Open House Co., Ltd., Single-Family Homes Division's activity system map, which appears at the end of this report.)

Innovation that Enabled Strategy

  • A seemingly contradictory value proposition of selling single-family homes in very convenient, prime urban locations at a reasonable price, to householders with an annual income of between 5 million yen and 10 million yen.
  • Aiming to grow rapidly by specializing in properties that require extra effort with regard to design and construction, and aggressively acquiring such properties.
  • Land acquisition is achieved through frequent visits to real estate agents. Several members of the procurement staff must visit the same real estate agent.
  • Property sales are conducted "at the source" (i.e. sales calls are made regarding specific properties, or in another case, sales pitches are made to shoppers who frequent neighborhood shopping arcades and other commercial facilities). The aim is to arouse in potential customers a recognition of their need for a single-family home.

Trade-offs

  • Does not choose the following customers as its target customer: individuals who want a customized design; customers who want to live in a larger house and don't mind having a longer commute; people who work in suburban or rural areas, where they can easily find a single-family house nearby their workplace.
  • Does not pursue the following when designing a new home: extravagance beyond the necessities, a sophisticated design sense, and a house that is fully designed and made to order.
  • Does not try to procure land with the following features: square plots that are easy to design and build on; large pieces of land; areas that have been rezoned for two-story houses; properties that are located more than a 15-minute walk from a train or subway station; a property that would not require Open House's distinctive know-how and competencies, or a property that would result in the same kind of plan for any home builder (such as properties with size limitations that would make it impossible even for Open House to build two houses on a single piece of land).
  • Does not rely on relationship-based marketing activities for land procurement. The same agent may be visited by several members of Open House's procurement staff.
  • Does not assign land procurement staff to specific geographic territories or real estate agents.
  • Property sales staff are not assigned to specific geographic territories. They can sell a property that is located outside of the scope of their own sales center.
  • Does not conduct property sales by relying on advertisements. Puts a priority on conducting sales "at the source" (i.e. directly approaching pedestrians at shopping centers or on neighborhood shopping streets to tout single-family homes).
  • Does not allocate tasks in the style of a case manager. Open House assigns the less experienced members of its property sales staff to undertake sales at the source (on the street), as this involves more contact with a larger number of potential customers. Managers with much more experience, who follow the cases handled by the newer sales staff members from beginning to end, are responsible for closing the contract.

Consistency of Strategy over Time

Since the foundation of the Single-Family Homes Division in 2001, Open House's value proposition has been consistent--to provide new single-family homes built in very convenient locations in metropolitan areas, at a reasonable price. Open House has developed its value chain and activity system to implement this value proposition. Even now, Open House maintains its original definition of a very convenient location as being a site that is within a 10-minute walk from a train or subway station. Since the beginning, its geographic coverage has been limited to Tokyo's 23 wards, the western part of the Greater Metropolitan Tokyo area, and the cities of Yokohama and Kawasaki. Open House has worked to increase its market share within these areas rather than expand into suburban areas.

Profitability

Both the five-year average return on invested capital and the return on sales exceed the industry average by a wide margin. (Profitability analysis was conducted by PwC Japan.)

Activity System Map

Winners PDF

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