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A discussion paper presenting an overview of
innovation in housing: how it works, what facilitates it,
what constrains it, and how it might be stimulated.
IN N OVATION IN TH E
H OU S IN G IN D U S TRY
INNOVATION IN THE HOUSING INDUSTRY
Copyright © 2002, National Research Council of Canada.
This paper, entitled “INNOVATION IN THE HOUSING INDUSTRY”, is a discussion paper that has been prepared by Holmen Enterprises Ltd. under contract for the National Research Council of
Canada, Institute for Research in Construction (NRC) and with the support of the Canadian Home Builders’ Association, Canada Mortgage and Housing Corporation, and Natural Resources Canada. Permission to reproduce:
This publication may be reproduced, in part or in whole and by any means, without charge or further permission from the National Research Council, provided that
· due diligence is exercised in ensuring the accuracy of the materials reproduced;
· the National Research Council is identified as the publisher of the material and Holmen Enterprises Ltd. is recognized as the author of the material;
· the support of the Canadian Home Builders’ Association, Canada Mortgage and Housing Corporation, and Natural Resources Canada is recognized;
· the following Disclaimer is included, in substantially the same form, in all reproductions; and that · the reproduction is not represented as an official version of the materials reproduced, nor as having
been made in affiliation with or with the endorsement of the National Research Council, Canadian Home Builders’ Association, Canada Mortgage and Housing Corporation, or Natural Resources Canada.
Disclaimer:
The information in this paper has been authored by Holmen Enterprises Ltd. None of the National Research Council, the Canadian Home Builders’ Association, Canada Mortgage and Housing, or Natural Resources Canada is responsible for the views expressed in the paper, or for the accuracy, reliability or currency of the information set out in this paper. Users wishing to rely upon this information should consult directly with the source of the information.
INNOVATION IN THE HOUSING INDUSTRY
Submitted to
Institute for Research in Construction National Research Council of Canada
Prepared by Holmen Enterprises Ltd.
ACKNOWLEDGEMENTS
The author acknowledges the contribution of ideas from the reports reviewed and the members of the housing sector interviewed in preparing this paper. A bibliography listing the reports reviewed is contained at the end of the document. In particular, the author found the findings and conclusions contained in the report, Diffusion of Innovation in the Housing Industry written by Burton Goldberg and Edward M. Shepherd of the National Association of Home Builders Research Center and published by the U.S. Department of Energy in 1989 insightful, and many of the ideas from this report have been
TABLE OF CONTENTS
Page
Executive Summary ... ii
Introduction ... 1
Explanation of Innovation and Related Concepts... 2
Characteristics of the Housing Sector Relevant to Innovation ... 6
Overview of Factors Related to Innovation in Housing... 12
Review of and Recommendations on Accelerators to Innovation ... 13
Review of and Recommendations on Barriers to Innovation ... 18
Review of and Recommendations on Contingent Factors ... 19
Other Strategic Variables ... 21
Review of and Recommendations on Regulations... 22
General Conclusion... 25
EXECUTIVE SUMMARY Introduction
The Institute for Research in Construction (IRC) and the Canadian Home Builders’ Association (CHBA), in cooperation with Canada Mortgage and Housing Corporation (CMHC) and Natural Resources Canada (NRCan) are examining innovation in the housing industry with a view to fostering more innovation. As part of that process, they have commissioned the preparation of this discussion paper on innovation in the housing industry. It has the following main objectives:
· To present an overview of the innovation “system” for the housing industry, i.e., an explanation of innovation and of the factors which affect it in the housing industry.
· To identify possible actions by a number of players to foster more innovation in the housing industry. The paper will be circulated to industry members to solicit their views. The responses received will be instrumental in the development of policies or actions to foster more innovation in the housing industry. The views presented in this paper are based on a literature review, interviews with a broad range of members of the housing sector and expert opinions.
The paper addresses three issues: 1) innovation and related concepts, 2) characteristics of the housing industry which affect innovation, and 3) factors which accelerate or impede innovation in housing. Explanation of Innovation and Related Concepts
· Innovation refers to the adoption or implementation of new products, processes, services, etc. Diffusion refers to the rate of adoption of innovations. The focus of this paper is more on the adoption of new products, processes and services than on their development.
· The scope of innovation is broad. It can apply to building materials, building products, construction techniques, construction equipment, building equipment, business services and business operations. It applies to all components of the residential environment, i.e., the dwelling unit, the developed land and its supporting infrastructure.
· The main rationale for innovation is economic benefit to private sector companies. Other rationales include fixing problems and achieving public policy objectives.
The rationale for government support of innovation in the housing industry focuses on the social and economic importance of housing, increased societal benefits from improved industry performance, the value of innovation in improving industry performance, the industry’s under-investment in innovation activities due to its characteristics and the need for government funding to offset that
under-investment.
· The main innovation strategies are cost reduction and quality improvement. Other strategies are generally versions of these two.
A key strategic perspective for innovators to understand is that innovations must meet the objectives and interests of the users of their innovation.
· Approaches to innovation refer to various methods or techniques for fostering innovative activities. The following methods have been shown to be effective:
- Utilize multiple approaches to develop or adopt innovations. - Develop a culture of innovation.
- Draw on people as sources of innovation. In the construction industry, little innovation occurs as a result of research. The main driving forces are the ideas of other people, i.e., customers,
management, marketing personnel and production personnel as they focus on fixing problems and developing new ideas.
- Invoke broad staff involvement in all key stages of work on developing or adopting innovations. - Consider as many issues as early as possible in work on innovation projects to assist with the
process of deciding on the potential for success on the venture and determining appropriate methods for development or adoption.
- Adopt an incremental and systems approach to ensure the compatibility of the innovations and management of their impacts.
Characteristics of the Housing Sector Relevant to Innovation
The housing sector is comprised of a broad range of private sector companies, public sector organizations and associations that operate together as a system to provide housing. These components and their relationships are represented in the following diagram:
Raw material producers Consumers Manufacturers (Some relationships of manufacturers are not shown. They include relationships with CCMC and various standards organizations.) Suppliers Sales and rental agents Builders Trades and prefabricators Developers Market researchers Planners and engineering consultants Servicing contractors Market researchers Designers Lenders Municipal land development and engineering regulators Municipal building officials Provincial code authorities National code development authorities; also CCMC
Housing policy, public sector housing R&D and information transfer organizations (CMHC, NRC, and NRCan) Training and education institutions Housing industry associations (national, provincial and local)
Warrantors and insurance providers
Some members of the industry, such as manufacturers and developers, are large, have substantial resources and carry out extensive amounts of research, development and innovation. However, many members of the construction component of the housing industry have characteristics that have negative impacts on innovation in housing. These include 1) variable sales and low profits, 2) mostly composed of small firms that have limited financial ability to carry out R&D, 3) sparse management that does not have the time to devote to R&D, 4) low investment in capital equipment and specialized labour, 5) horizontal fragmentation, 6) vertical fragmentation, 7) geographic dispersal and 8) heavily regulated.
In spite of these characteristics, the housing industry, including the construction component of the industry is innovative. Furthermore, representatives of manufacturers, suppliers, prefabricators, developers, planning and engineering consultants, builders and trades interviewed in this project all placed major importance on innovation as a factor critical to the success of their companies, and reported that their companies incorporated innovation as a critical component of their corporate strategy.
Overview of Factors Related to Innovation in Housing
Some factors that affect innovation define the innovation context in which the industry operates. These include globalization of markets, increased environmental requirements, higher consumer expectations and increased competition. They cannot be controlled and are therefore not included as elements of strategies to foster innovation in housing.
Three sets of factors that affect innovation and are controllable constitute elements to develop strategies to foster more innovation in housing. They are referred to as innovation accelerators (factors which can accelerate innovation), innovation barriers (factors which can impede innovation) and contingent factors (factors which can foster or impede innovation, depending on how they are managed or implemented). Strategies to foster innovation generally consist of actions that reinforce or strengthen accelerators, offset or remove barriers and establish conditions for the contingent factors to be supportive of innovation, as outlined below:
Review of and Recommendations on Accelerators to Innovation
· Research and development (R&D): Housing R&D is an important element in the range of activities needed to foster innovation in housing. The current housing R&D support provided by CMHC, NRCan and NRC is needed and valuable. The recommendation in this area of activity to foster more innovation in housing is to give the housing industry a leadership position in setting part of the R&D agenda. Projects arising out of this kind of initiative should be supported by CMHC. This
recommendation is not intended to preclude any of the main sponsoring organizations from carrying out their own R&D projects to meet their own objectives.
· Information transfer: Effective information transfer is critical to promote the adoption of the new products, processes, services and equipment that are continually being introduction to the housing industry. The private sector, public sector organizations and associations with housing responsibilities have important roles in this field.
The most effective approach is to use multiple techniques, but they should include word-of-mouth (particularly comments from respected peers), seminars and trade shows. Demonstration projects can be an effective form of information transfer, depending on how they are managed. Such projects should focus on leading edge, proven and marketable technologies, built under normal conditions to ensure the transferability of demonstrated features. They should also include documentation of the performance and market response to demonstrated features and allow for a leadership position by the housing industry.
· Training and education: The housing industry has a serious shortage of skilled labour. A skilled work force is critical to companies’ abilities to innovate. Training and education are essential in the development of a skilled work force. Recommendations on training and education strategies are beyond the scope of this study, and CHBA is already working on this issue with government agencies. Recommendations on how to foster innovation in training courses include incorporating examples of innovation into courses and developing courses for supervisory people that expose them to new developments in all parts of housing construction.
· Incentive programs: Some incentives may be used to foster innovation. However, if they are used to offset a systemic problem in the housing system, such as an unnecessarily difficult and costly
approval process, the recommendation is to remedy the systemic problem rather than provide incentives. Some incentives, such as compensation to offset costs of training trades on how to incorporate innovations may be legitimate.
· Allowing benefits from innovations to accrue to innovators: A key motivator for innovators is to garner benefits from their innovations. Some members of the housing industry are able to do this, e.g., manufacturers through the use of patents, and large developers whose innovations are too expensive for many others to copy. Builders and trades usually have difficulty obtaining benefits from their innovations due to copying by their competitors, and this disinclines some of them from innovating. A remedy to this condition is not apparent. Some members of the industry regard the benefit of innovation as getting the job (as opposed to receiving payment for an innovation). This attitude flows from a perspective of continuous innovation as a normal part of business operations. Review of and Recommendations on Barriers to Innovation
· Risk is one of the main barriers to innovation. Innovators face many types of risk, including risk of performance failure, market rejection, delayed or non-approval by regulatory authorities, rejection by trades/labour, liability. All of these risks mean risk of financial loss, and the trend is toward
increasing risk, particularly risk of liability. A key interest in this field is risk management for companies.
Recommendations to companies to control risk include researching innovations to reduce the number of unknowns about them, establishing quality control measures to reduce product deficiencies and training staff to increase their competencies.
Provinces can also control risk by changing its legal basis from the traditional system of joint and several liability to proportional liability. They can also set reasonable time limits on liability.
· The high cost of developing and adopting innovations is a deterrent to innovation. Some of these high costs are due to systemic problems in the housing system. Remedying these problems can reduce the cost of innovation and, at the same time, offset the need for incentives. Some high costs of innovation can be offset by government-funded R&D programs.
Review of and Recommendations on “Contingent” Factors
“Contingent” factors can act as accelerators or barriers to innovation, depending on how they behave or are managed. Each is discussed below:
· Consumers: Consumers can be both barriers and accelerators to innovation. For example, they can be barriers by stopping innovative neighborhood developments, often by lobbying local governments or approval authorities. Consumers are usually neutral with respect to technical innovations because they do not understand them or are not interested in them. In both cases, consumers can be influenced by information about the merits of the innovations.
Consumers are often accelerators of innovations that will provide them with greater comfort, higher levels of convenience, more amenities, reduced operating and maintenance responsibilities, more safety and security, and a healthier environment. The emergence of niche markets and the trend toward consumer demands for more choices mean that consumers can create opportunities for more innovations.
The recommendation to both private sector companies and public sector organizations is to influence consumers to be accelerators of innovations by making them aware of their benefits.
· Labour: Labour can also have varied impacts on innovation. Lack of skilled labour tends to encourage innovations which “dumb-down” products, e.g., fabrication of easy-to-install modules. Organized labour may oppose innovations that reduce work force numbers, change skill requirements, and change areas of responsibility and trade interfacing. The long-term relationship between some builders and their trades enables them to examine and modify areas of responsibility and trade interfacing issues in order to adopt innovations in the construction process.
· Lenders: Some reports explain that lenders can be barriers to innovation because they decline loans for innovative projects if the builder is financially weak to avoid the risk of builder failure and
subsequent loss to the lender. Other comments suggest that lenders are willing to entertain innovative proposals.
Review of Other Strategic Variables
· Attributes of innovators: Innovative companies are more successful than non-innovative companies and have the following attributes: their managements instill a culture of innovation, they emphasize human resource development and marketing, and their personnel tend to have higher levels of education, more central positions in a communications network and stronger linkages to business resources than those in less innovative companies have. Knowledge of these attributes can be used to foster more innovation in companies, and to select innovative companies to work with.
· Attributes of innovations: Attributes of innovations affect their rate of adoption. Innovation
developers who wish to achieve rapid diffusion of their innovations should ensure that they 1) provide significant economic advantage over competitive products or processes, 2) are simple to use, 3) are compatible with existing practices and products, 4) are easy to try and 5) are easy to explain. Innovation adopters can use these guidelines to assess innovations.
Review of and Recommendations on Regulations
The housing industry is heavily regulated by federal, provincial and local regulations governing land use and planning, infrastructure and buildings. The responses of interviewees and other members of the housing industry indicate that regulations are the major barrier to innovation. Three major themes emerged:
· The criticisms of regulations applied to land use and planning regulations, infrastructure regulations and building regulations.
· Concerns about the administration of regulations, i.e., application of the code at the municipal level, were more serious than concerns about their content.
· A major concern was whether the implementation of objective-based codes would be administered at the municipal level in a manner that will achieve their intent to accommodate innovation. In
particular, factors such as lack of mandate to accommodate or foster innovation at the local level, and lack of empathy by local building officials to accommodate innovations were a concern. This paper
acknowledges the work underway to try to administer the codes at the municipal level to achieve that intent, but the concerns remain.
A summary of the main criticisms of regulations, along with possible remedies, is provided below.
Features Hindering Innovations Possible Remedies Land Use and Planning Regulations
Increasing number of regulations Municipalities (primarily) and provinces should keep the number of regulations and their requirements reasonable.
Sequential approval process involving review by independent approval authorities
Municipalities should consider adopting a regulation-development process that amalgamates the regulations and subjects proponents to a single, coordinated review. Limited flexibility in planning and
design solutions
Municipalities should consider adopting a regulatory approval process that includes elements of the process used to develop the National Building Code, i.e., a process that involves a full range of individuals who together represent the relevant expertise and representative interests.
Municipalities should devise methods for accommodating innovation in municipal policies.
Provinces should adopt a policy of proportionate liability among participants in the process (to replace the current joint and several liability policy).
Provinces should pass legislation to protect staff from liability through legislation (this is already done in some provinces and municipalities).
Infrastructure Regulations
Limited flexibility in standards Municipalities should permit instruments such as performance guarantees or
warranties offered by the private sector as part of their requests to provide innovative solutions. Guarantee or warranty requirements should be realistic. Also, municipal policy must be sympathetic to this approach.
Building Regulations
Code compliant solutions rejected. Code authorities should train building officials at the municipal level. Requirements to prove equivalence
or adequacy of alternate solutions with code requirements are difficult.
Code requirements should be limited to essential issues (e.g., health and safety). The development and implementation of objective-based codes should make the process easier.
Code authorities should train designers and building officials about the process and requirements for approval of equivalencies.
Municipalities should permit instruments such as performance guarantees or warranties offered by the private sector as part of requests to provide innovative solutions. These guarantees or warranties should be realistic. Also, municipal policy must be sympathetic to this approach.
Municipalities should incorporate policies to accommodate innovation in municipal planning and development guidelines.
Municipalities should adopt a holistic perspective in assessing innovative proposals. Provinces and municipalities should establish a competitive code administrative system that would give builders a choice of accredited inspectors.
Provinces should adopt a policy of proportionate liability among participants in the process (to replace the current joint and several liability policy).
Municipalities should permit their building officials to make some discretionary judgments in regard to code interpretation and equivalencies.
Provinces and municipalities should protect staff from liability. Requirements are expensive Decisions on code requirements should include cost considerations. General Conclusion
This examination of factors affecting innovation confirmed the need for various accelerators to foster innovation. However, a more important course of action to foster innovation in housing appears to be the removal barriers to industry operations. According to this study, the main barriers appear to be
INTRODUCTION
Rationale and Background of This Discussion Paper
This discussion paper presents views on innovation in the housing industry. It is intended to serve as a vehicle for soliciting opinions from a broad range of members of the housing sector about innovation in housing.
This paper is part of an initiative by the Institute for Research in Construction (IRC) and the Canadian Home Builders’ Association (CHBA), in cooperation with Canada Mortgage and Housing Corporation (CMHC) and Natural Resources Canada (NRCan) to examine strategies to foster more innovation in housing. It arose as a result of another initiative launched some years ago to develop a better
understanding of innovation in the construction industry, and to apply the knowledge gained to foster innovation in, and improve the performance of, the construction industry.
In June 2001, IRC sponsored two forums, one international and one Canadian, to review the results of various studies that had been completed and to solicit ideas from Canadian participants on effective follow-up actions to foster innovation in the Canadian construction industry. Those forums focused on the institutional-commercial-industrial (ICI) sector of the construction industry. CHBA and IRC recognized that the ICI and residential components of the construction industry are different in many ways, and that any examination of innovation in the residential industry should be treated separately. This paper has therefore been prepared to focus exclusively on the residential sector, and more
specifically on that part of the residential sector that builds under Part 9 of the Building Code. It has the following main objectives:
· To present an overview of the innovation “system” for the housing industry, i.e., an explanation of innovation and of the factors which affect it in the housing industry.
· To identify possible actions by a number of players to foster more innovation in the housing industry. The paper will be circulated to members of the industry to generate discussion and to solicit their views. The views received will be instrumental in the development of policies and actions that foster more innovation in the housing industry.
Basis for Views Presented in this Paper
The views presented in this paper are based primarily on three sources:
· Literature: A literature review focused on reports about innovation in the housing industry. It also included some reports about innovation in the construction industry in general, and about innovation in other sectors where the reports contained materials applicable to the housing sector.
· Interviews with selected members of the housing industry: Interviewees were selected from a broad range of private sector companies and public sector organizations. They included
representatives of the producing components of the industry (e.g., manufacturers, builders and trades) and supporting components (e.g., research and development agencies and regulatory authorities). The limited number of interviews conducted does not permit the formulation of conclusions that are representative of all members of the housing industry or of its components. The results can only be regarded as potential indicators or positions of the issues examined. This paper reflects the author’s interpretations of interviewees’ responses.
· Expert opinions: These were drawn from individuals with experience and expertise in housing innovation.
Organization of the Paper
The remainder of this paper is organized in three main parts:
· Explanation of the elements of innovation: This part includes a definition of innovation and related concepts, the rationale for innovation, the scope of innovative activities in housing, innovation
strategies and approaches to innovation.
· Discussion of the characteristics of the housing industry that affect innovation: This part
identifies key components and members of the industry, and explains how they are related and operate as a system. It discusses features of various members of the housing sector that are relevant to
innovation and comments on the innovativeness of the housing industry.
· Factors that affect innovation in housing: This part is organized in several sections on the basis of controllability and impact of the factors discussed. Discussions of controllable factors are organized on the basis of whether they accelerate of impede innovation.
EXPLANATION OF INNOVATION AND RELATED CONCEPTS
The main reason for providing this section is to try to add clarity to the diversity of views about innovation and concepts related to it.
Definition of Innovation and Related Concepts
A useful starting point to defining innovation is to consider the full range of steps from the initial “idea” stage to the full commercialization of that idea, i.e., market adoption. Within this range, there is
reasonable consensus on the meaning of the following concepts:
· Invention: This is idea development stage. It includes activities like research, feasibility assessment, testing and market analysis.
· Innovation: This refers to the implementation or adoption of new processes, products, services, etc. The identification of what is considered new may vary. In one sense, the adoption by a company or individual of a product, process or service is new to that company or individual. However, since companies and individuals vary in their adoption behavior (e.g., early adopters or late adopters), some judgment should be applied in classifying what is new.
· Technology transfer: This is essentially the same as innovation – the transfer of the developed idea to its initial use.
· Diffusion: This is the spread of innovations across a whole spectrum of end users. A key interest in examining diffusion is the rate of diffusion.
Most emphasis in current literature and in discussions about these topics is not about developing new products, processes, services, techniques, etc.; it is about their adoption and their rate of adoption or diffusion by users of innovations. This does not mean that companies such as manufacturers that develop new products and equipment are unimportant or unnecessary. They are obviously critical to innovation because they are primary developers of innovations. Rather, it means that the priority among
commentators on innovation in construction is on inducing users of innovations, e.g., builders, to adopt them.
Scope of Innovation
Innovation is sometimes viewed as applying to products. This view is far too restrictive. Innovations in the housing sector apply to the following objects and functions:
· Building materials and products · Construction techniques
· Construction equipment · Building equipment · Business services · Business operations.
Another tendency is to presume that innovation applies to the design, construction and operation of buildings/houses. This view is also too limited. Other elements of the built environment, such as land development and infrastructure are also areas of potential innovation that are critical to the residential environment.
Rationales for Innovation and for Supporting Innovation
The following rationales reflect a growing consensus that the main innovators are private sector companies:
· The main reason for innovating is economic benefit. This can be reflected in various ways such as increased profit, increased market share, business growth, etc.
· Another reason for innovation is remedying problems. While this reason can be viewed as different from the first reason, it is related since fixing problems results in better performance and economic benefit. One example of this is indoor air quality problems arising out of initial efforts to improve the energy efficiency of houses. Remedying those problems led to a number of innovations that provide healthy indoor air and, at the same time, achieve the goal of energy efficiency.
· A third reason for innovation is to achieve public objectives. For example, energy conservation can be viewed as a public policy objective. This does not mean that energy conservation cannot be a private sector objective but the rationales for it by the two groups are likely different. The public policy rationale for energy conservation may well be environmental preservation; the private sector rationale may be reducing operating costs of homes or businesses.
Other rationales for innovation can be cited, but most of these are related to the core rationale of innovation - economic benefit:
· Improvement (in a product, process, service, etc.): This is not contrary to economic benefit but should be viewed as means to achieve the goal of economic benefit.
· Increased international competitiveness: This rationale reflects growing competition in foreign
markets and competition from foreign sources in domestic markets. Again, increased competitiveness is a strategy to deal with international and domestic competition to achieve economic benefit.
· Response to regulation: This is a different type of rationale. Regulations can be an impetus for innovation. For example, regulations can prevent the use of some types of refrigerants in appliances, and thereby force the development of innovative solutions for acceptable products.
A related issue is the rationale for government support of innovation in the housing industry. This rationale is based on the following linked arguments:
· The housing industry is important to the standard of living of a country because it provides valuable infrastructure and generates considerable employment.
· These social and economic benefits will increase if the performance of the housing industry improves. · Improved performance of the housing industry can be achieved through innovation.
· Parts of the housing industry have a number of attributes (e.g., small size of firms, lack of capital, inability to sustain risk of failure) that lead it to under-invest in innovative activities.
· Governments can offset this under-investment by supporting various activities related to innovation. Innovation Strategies
Companies generally utilize two core strategies to achieve the benefits of innovation: · Cost reduction
· Quality improvement.
Other strategies can be identified but most are alternate methods for implementing one of the two core strategies noted above. For example, the following strategies are all cost-reducing strategies:
· Increased productivity. · Reduced installation costs.
· Reduced materials handling and inventory costs.
Similarly, the following strategies are all related to quality improvement: · Improved health and safety.
· Increased convenience. · Increased market appeal.
· Reduced operating cost for clients.
· Improved product durability. This also reduces costs to the innovator as a result of fewer callbacks. Other strategies can be cited but most are related to the core strategies noted above:
· Improved housing affordability: This is a strategy to increase sales by incorporating cost reducing innovations that allow reduced prices.
· Improved reputation: This is a strategy that is a consequence of cost reductions and/or quality improvement.
· Developing a unique expertise. This is a different strategy to achieve the economic benefits of innovation, but it will only be successful if there is a market for the expertise and if it results in lower cost and/or superior quality than that offered by competitors.
A key strategic perspective for innovators to understand is that innovations must meet the objectives and interests of the users of their innovation.
Approaches to Innovation
This section refers to various methods or techniques for fostering innovation, and highlights some that have been successful. Many of the techniques apply to the whole spectrum of activities involved in developing and adopting innovations. The following comments apply to private sector companies: · Acknowledge multiple driving forces of innovation: Various models have been developed to
explain the forces driving innovation. Some of these models, such as the technology push and market pull models have been rooted in specific disciplines, and have been shown to be only partial
explanations of innovation driving forces. A more accurate and helpful perspective is to acknowledge that innovation occurs – and should occur – due to a composite set of forces – market and economic opportunities and technical abilities. Accordingly, innovation should be accomplished using multiple methods and approaches.
· Develop a culture of innovation: To foster innovation, a company should engage people who have a predilection towards innovation. This leads to a culture of ongoing innovation in a company.
· Draw on people as sources of innovation: In the construction industry, only some innovation occurs as a result of research. It derives more from the ideas of other people, i.e., customers, management, marketing personnel, and production personnel as they focus on solving problems and/or developing new ideas. In other words, most innovations come from the cumulative knowledge of people in or related to a company. Of course, companies must listen to and act on meritorious suggestions to develop or adopt innovations.
· Invoke broad staff involvement: Better innovations are developed faster if key people in a company are involved at all or most stages of their development to avoid problems of discontinuity of
innovative activities, feelings of lack of “ownership” of the ideas and lack of appropriate talents at critical times of development. Feedback should be encouraged from people in various parts of a company.
· Identify and review issues early: Plans to develop and implement innovations should consider as many factors as possible in the early stages of work on innovations to enable more informed decisions on their prospect and methods for development or adoption.
· Adopt an incremental and systems approach: Successful innovations in housing have generally been incremental and cognizant of a systems approach. Incremental innovations help to ensure their compatibility with other housing components and practices. A systems approach helps to ensure that the impacts of innovations on other components of the housing product are understood and that appropriate changes are made to them to accommodate the innovation.
CHARACTERISTICS OF THE HOUSING SECTOR RELEVANT TO INNOVATION
The housing sector is comprised of a broad range of private companies, public sector organizations and associations. Together they operate as a system that provides all of the functions required to produce housing. Those members that are most relevant to housing innovation are listed below along with their roles.
Key Members of the Canadian Housing System and the Roles of Each
Key Members or Functions
Main Roles Related Members and their Functions
Raw material producers
Provide the main inputs for the construction of housing, particularly building materials, but also materials for manufacturing building equipment and construction equipment. Manufacturers Provide construction products, building equipment, and construction equipment.
Suppliers sell manufacturer’s products primarily to trades and builders.
Developers Provide serviced land for housing construction Developers engage the following private sector players:
- Market researchers
- Planners to prepare development plans - Engineers to provide servicing plans - Lenders to finance land purchase and
development
- Contractors to develop serviced land. Developers seek approval of land development plans primarily from municipalities, and, in some instances, from provincial authorities.
Builders (and housing manufacturers)
Design and construct housing Builders engage the following privates sector players:
- Market researchers
- Designers to design the housing to meet market and consumer demands
- Trades/subcontractors to build individual housing components.
- Prefabricators to build and supply elements such as cupboards. Builders are also increasingly purchasing prefabricated portions of houses from housing manufacturers.
- Sales and rental agents to manage the sales and rental process. These agents may be independent or engaged by builders.
Builders seek approval of building plans from municipalities in terms of land use compliance and building code compliance.
Lenders Provide mortgage loans to homebuyers. As noted above, they also finance land purchase and development. They also provide financing of various kinds to builders.
The effectiveness of the mortgage system is enhanced by the mortgage insurance system, which makes mortgage loans available to more consumers.
Policy development
Establish housing policy The policies and programs of CMHC are key determinants of housing policy. Other important players are CHBA, NRC and NRCan.
Key Members or Functions
Main Roles Related Members and their Functions
Regulations Regulations can be grouped into a number of categories, as outlined below:
- Building regulations: The main role of building regulations is to protect health and safety. Building regulations deal with building materials, plumbing, fire prevention, electrical systems, structural sufficiency, heating systems, ventilation and elevators.
- The role of land development regulators is broad and includes areas such as land use, density, neighborhood character, parking requirements, building setbacks and height. - Civil engineering and development standards
for infrastructure (some elements of which are also regulated by fire departments, such as road widths).
- Other regulations: These include financial regulations, utility regulations, health and safety regulations and insurance regulations.
A key element of building regulations is the National Building Code (NBC). It is developed by the Canadian Commission on Building and Fire Codes (CCBFC). It is adopted in whole or in part by provinces and territories. Provinces and territories typically delegate code administration to municipalities.
Municipal land development departments develop this type of regulation.
Municipal engineering departments develop this type of regulation.
Research and development
Improve housing quality and performance, and industry productivity.
Some housing research and development is also carried out to achieve public policy objectives
Manufacturers carry out substantial amounts of housing research. Federal organizations such as CMHC, NRC and NRCan sponsor a lot of housing research as well. Research is performed by consultants, universities, public and private testing organizations and others.
Information transfer organizations:
Make prospective users aware of innovations. Manufacturers and suppliers carry out substantial information dissemination programs. Public sector organizations such as CMHC, NRC and NRCan also perform this function.
Training and education
Train members of the housing industry, particularly in the trades, but also housing managers.
Education for housing company managers is available through some industry associations and warranty programs. Trade training is available through technical institutions, community colleges and trades schools and the apprenticeship system. Warranty
organizations and insurance companies
Consumer protection New home warranty programs warrant builders’ warranty to consumers.
Industry associations:
These organizations provide many of the functions listed above, e.g., develop and support the development of housing policies, encourage housing research and development, carry out and facilitate information transfer, encourage and participate in training and education, and participate in the development of regulations.
CHBA is the major industry association relevant to the housing system, but it includes many other industry associations.
The list above does not include housing consumers. This omission does not imply that consumers are ignored. Consumers are the key drivers of housing demand and therefore critical to the operation of the housing system. In this paper, consumers are considered as one of the factors that can accelerate or impede innovation, and are discussed later in the paper.
Relationships Among Key Members of the Housing System
The following diagram shows the main members or components of the housing system and the main relationships among them.
Key Features of the Housing Industry Related to Innovation
Conventional views of the housing industry stress features such as the large number of small firms, their limited financial resources, their low profit levels and their small investment in research and development. While these features apply to some members of the housing industry, they do not apply to others.
An accurate description of the industry should include features of the whole industry and all of its members. For example, as shown above, the housing industry includes material, product and equipment
Raw material producers Consumers Manufacturers (Some relationships of manufacturers are not shown. They include relationships with CCMC and various standards organizations.) Suppliers Sales and rental agents Builders Trades and prefabricators Developers Market researchers Planners and engineering consultants Servicing contractors Market researchers Designers Lenders Municipal land development and engineering regulators Municipal building officials Provincial code authorities National code development authorities; also CCMC
Housing policy, public sector housing R&D and information transfer organizations (CMHC, NRC, and NRCan) Training and education institutions Housing industry associations (national, provincial and local)
Warrantors and insurance providers
manufacturers. They are generally large, have substantial financial and human resources, and carry out extensive amounts of research, development and innovation. Similarly, developers are often large
companies with substantial resources that carry out large projects involving expensive front-end planning and research.
The characteristics of the construction component of the housing industry, i.e., builders and trades, more closely fit conventional views of the industry. A more detailed description of these characteristics is provided below1. As explained, the implication of these characteristics is that they have a negative impact on the development and adoption of innovations.
· Most housing companies have variable sales and low profits: Both factors constrain research and development (R&D) and other innovation activities. Low profit rates make such investments
impossible and cyclical profits make them inefficient, i.e., stop-start actions are not efficient and “stop periods” result in staff departures and long “re-learn” times.
· The industry is mostly comprised of smaller firms that have limited financial ability to carry out R&D and to participate in other innovation activities. Small firms have limited ability to sustain financial loss, which is a risk with innovation. The housing industry does include some large builders and their perspective towards innovation differs from that of small builders. For example, they focus on innovations that may have a small impact per unit but have an overall large impact on the company due to the large volumes of housing they build.
· Housing companies have small numbers of management staff that do not have the time to devote to research. This makes research more expensive (takes them from normal duties) and makes failure more likely. This makes many managers pessimistic about R&D and innovation. Even incremental R&D is difficult because it will or may threaten (tight) schedules. Lean management has limited time to become aware of innovations and adoption can be disruptive. This means that the cost and risk of adopting innovations are increased.
· Most housing companies have low investment in capital equipment and specialized labour: This characteristic arises partly because of the extensive amount of subcontracting by builders. Research on subcontract work is not of interest to builders. Also, builders’ dependence on independent sub-contractors makes it difficult to keep innovations proprietary and garner benefits from investments in R&D.
· The housing industry is fragmented horizontally: As a result, trades tend to resist innovations that change the scope of their work and coordination requirements. Also manufacturers and suppliers who specialize in certain products may not be interested in R&D on systems and components larger (or different) than their current activity. Horizontal fragmentation limits a systems approach and limits the scope and benefit of innovations.
· The housing industry is fragmented vertically: As noted, the dependence of small and medium-sized businesses on sub-contractors creates difficulties in keeping innovations secret and in realizing returns from investments in innovation. Also, educating and obtaining commitment from people who did not participate in the innovation is difficult. Vertical fragmentation makes adoption of innovations difficult and increases cost.
1
Adapted from Goldberg, Burton and Edward M. Shepherd. Diffusion of Innovation in the Housing Industry. National Association of Home Builders Research Centre. US Department of Energy, 1989, page 23.
The analysis summarized above concludes that these characteristics derive from the cyclical demand for housing. Accordingly, it leads to the suggestion that the housing industry could overcome these
characteristics, and be more capable of innovation if markets were more stable.
The construction component of the housing industry also has the following features that are not
attributable to the cyclical demand for housing, but do have negative impacts on innovation in housing: · The industry is dispersed: This characteristic refers to the industry being geographically spread. The
implications include a limited ability to generate the benefits of “clustering”, e.g., networking, information transfer, and a requirement to diffuse innovations repeatedly.
· The housing industry is heavily regulated: This industry is more regulated than most by a wide range of standards, regulations and legislation administered by three levels of government. · Some relationships within the industry limit the effectiveness of information transfer efforts:
Some trades favour an exclusive purchasing relationship with manufacturers, presumably because of their desire to garner for themselves a mark-up on the prices of the products. This relationship tends to stymie efforts by manufacturers to market their products to builders because the builders are not the buyers.
Analysis of the housing industry has also resulted in the following conclusions related to innovation2: · Construction companies’ adoption of innovations generally varies with their characteristics, i.e.,
adoption varies positively with their size and the extent to which they build manufactured or multiple-unit projects, and negatively with the extent to which they sub-contract work.
· The rate of innovation by industries in a particular stage is dependent on the rate of adoption of innovation at the next stage: This conclusion can be illustrated by an example. In some cases, manufacturers sell their products through their suppliers to trades – not homebuilders and not consumers. In this case and following from this conclusion, the rate of adoption of manufacturers’ products will be the rate of adoption by trades. Similarly, if manufacturers sell their products to builders, then the rate of adoption of manufacturers’ products will be the rate of adoption by builders. This situation arises in part because of the fragmented nature of the industry. It also means that the needs of consumers are often not transmitted back to the players at the early stages of the production process.
One implication of this example is that trades would likely be more inclined to adopt manufacturers’ products if they were convinced that users “down line” from them, e.g., builders and homeowners wanted them, and that they would pay for them. This requirement arises from an earlier comment made that innovations must meet the objectives of the user – whomever that is. If the “user” is a trade, i.e., the buyer of the innovation, it must satisfy the trades’ objective. Insuring a greater profit is one way to meet those objectives.
The assertion that the features of the construction component of the housing industry are negative with respect to their impact on innovation does not mean that they are negative from other perspectives. For example, fragmentation is likely a beneficial feature in terms of enabling the industry to respond well to changing market conditions. The practice of making operations as standardized as possible may not encourage innovation but it contributes to a very efficient construction process which lowers housing
2
Adapted from Goldberg, Burton and Edward M. Shepherd. Diffusion of Innovation in the Housing Industry. National Association of Home Builders Research Centre. US Department of Energy, 1989, pages 4 and 18.
costs and improves housing affordability. This comment is made to provide some balance in the characterization of the construction component of the housing industry.
Extent of Innovation in Housing
This feature of the housing industry is highlighted because of the contradictory opinions about its innovativeness. Some conclusions relating to the slow rate of innovation in the whole construction industry are presumed to apply to the housing industry. Some assessments of the housing industry focus on the construction component of the industry and point to its low level of R&D expenditures.
Other studies come to different conclusions. Some point to the inapplicability of R&D expenditures as a measure of innovation in the housing industry because it is not capital intensive, it is distributed, and it is fragmented. In any case, as noted previously, little innovation in construction occurs as a result of research; it occurs as a result of networking, listening to others, acting on suggestions, fixing problems, etc. Other studies address the issue more directly. They conclude that, in spite of having many
characteristics that constrain innovation, the housing sector does adopt new technologies and that considerable innovation does occur in the housing industry. They point to the adoption of hundreds of innovations in the last decade, and explain that many of them are not recognized because they are invisible or that they are modifications of existing processes or products.
A review of actual innovations in housing also shows a record of innovation. Housing innovations have been tracked since the 1940s. The housing industry has adopted and continues to adopt innovations in the fields of planning and design, housing quality and performance, and the production process. From the perspective of the consumer, these innovations have yielded:
· Housing with greater comfort through improved energy efficient envelopes and mechanical systems. · Housing with a higher level of convenience, amenity and aesthetic appeal through the use of new and
more durable materials, appliances and products (including electronic products).
· Housing that is safer and more secure with the advent of systems and stronger construction techniques.
· Housing that is healthier through use of better ventilation techniques and materials that do not emit noxious gases.
· Housing which is more sensitive to the environment through the use of recycled materials and resource-efficient materials.
In many cases, housing is the context for the adoption of high technologies.
At the same time, the housing industry has adopted and continues to adopt new techniques and equipment that increase the productivity of construction operations and business practices.
Importance and Role of Innovation
All interviewees in this project which included representatives of manufacturers, suppliers, prefabricators, developers, planning and engineering consultants, builders and trades, placed major importance on
innovation as a factor critical to the success of their companies. Most had similar strategies of
distinguish their companies in order to capture more business. Some also focused on cost-reduction techniques as an innovation strategy.
OVERVIEW OF FACTORS RELATED TO INNOVATION IN HOUSING
Some factors affecting innovation are contextual, and cannot be controlled. They can be regarded as parameters and therefore have not been incorporated into strategies to foster innovation. Other factors that affect innovation can be controlled. They are therefore viewed as elements of strategies to foster innovation in housing. It is useful to identify which factors are parameters and which can be controlled and incorporated into strategies to foster innovation.
Contextual Factors Relevant to Innovation in Housing
The following factors help to define the innovation context in which the housing industry operates. Most of the factors are trends. Some are broad socio-economic trends and some are responses to them.
- Globalization of markets: Globalization trends intensify the need for international standards. - Some centralization of large manufacturing companies in foreign countries. This has an impact on
the amount and type of research and development carried out in Canada. In some cases, it may mean that some work of this type may not be done in Canada.
- Continuing growth and impact of information technologies.
- Demographic changes, particularly growth of the seniors population. - Increased performance and environmental requirements.
- Higher consumer expectations.
- Pressures to build more affordable housing. - Increased competition.
- Growing number of new products and innovative technologies. - Increased specialization.
- Increased use of manufactured components in housing.
- Increased emphasis on improved quality assurance and management practices.
These factors are regarded as parameters in this paper – they cannot be controlled, and are therefore not incorporated into strategies to foster more innovation in housing. At the same time, they should be recognized as creating pressure for more innovation in the “direction” of the trends they identify. They constitute one of the reasons for examining innovation.
The trends noted above often create pressures for the early introduction of new products to “beat” the competition. This pressure can conflict with the need for thorough and therefore time-consuming testing to ensure that the new products comply with applicable standards and meet other performance requirements, such as durability and compatibility with other products.
Factors to be Incorporated into Strategies to Foster More Innovation in Housing
The following sets of factors affect innovation and are controllable. They therefore constitute the elements for developing strategies to foster more innovation in housing.
· Innovation Accelerators: These include the following: - Research and development
- Information transfer - Training and education - Incentives
- Conditions that allow benefits to accrue to innovators from innovations. · Barriers to innovation: These include the following:
- Risk - High cost
· Contingent factors: This term is used because these factors can foster or impede innovation,
depending on how they are managed or implemented, or, in the case of participants, what attitudes or perspectives they apply. They include the following:
- Consumers - Labour - Lenders - Regulations.
· Other strategic variables: - Attributes of innovators - Attributes of innovations. Strategies to Foster Innovation
Strategies to foster innovation generally consist of actions that reinforce or strengthen accelerators, offset or remove the barriers and establish conditions for the contingent factors to be supportive of innovation. The following sections of the paper focus on each of these sets of factors. While they have been
discussed separately, they are inter-related.
REVIEW OF AND RECOMMENDATIONS ON ACCELERATORS TO INNOVATION Research and Development (R&D)
As explained at the outset of this report, R&D is not the focus of this project, since it is concerned mostly with the development of innovations and this paper focuses more on the adoption of innovations.
However, since R&D is so germane to the overall creative process and is one of the main forms of
government support to the housing industry it is worthy of discussion. The main issues pertinent to R&D are whether the housing industry needs R&D assistance, and, if so, how it should be provided.
· R&D assistance: The need for housing R&D is not in question. It is essential to the innovative process. However, the need for housing R&D assistance to members of the housing industry varies by their size and, more importantly, the extent of their resources. Large manufacturing companies and developers carry out a significant amount of R&D without government assistance. Smaller
the characteristics of the housing industry lead it to under-invest in R&D and government assistance can offset this under-investment and thereby foster innovation in housing.
· Method of implementing R&D programs and projects: The major public sector sponsors of housing R&D are CMHC, NRCan and NRC/IRC. Most housing research projects are initiated and implemented by these organizations. The projects respond to each organization’s mandate, but they endeavor to ensure that some projects respond to their clients' priorities, including those of the housing industry. The support provided by these organizations is valuable and acknowledged. A proposed strategy for fostering more R&D-based innovation in housing is based on the following two factors:
- Most innovations occur in the private sector, as noted earlier. - The housing industry under-invests in R&D for reasons noted earlier.
A logical response to the first condition is that the private sector of the housing industry should have a leadership or strong role in setting and implementing an R&D agenda. The private sector of the housing industry is in a strong position to identify which innovation strategies will yield most improvements in the housing sector.
A logical response to the second condition is that government should provide financial support for housing R&D and other innovation activities (as it already does).
Two examples of programs that respond or responded to these factors are NRC’s Industrial Research Assistance Program (IRAP) and Alberta’s now defunct Innovative Housing Grants Program (IHGP). These programs respond or responded, in the following ways:
- A leadership position for companies (or the industry): Both programs support or supported projects identified by industry on the basis of rationales and strategies for innovation explained in this paper (as long as they met certain criteria).
- Both are or were implemented with a broad range of assistance, including financial and staff assistance of the sponsoring organization.
The strategies suggested above are not intended to preclude organizations like CMHC, NRCan and NRC from carrying out their own research projects to meet their own objectives.
Recommendations:
· The current publicly sponsored housing research and development programs should continue. · Additional housing R&D efforts should be sponsored, most logically by CMHC, and those efforts
should give industry a lead position in setting and implementing an innovation agenda. Information Transfer
The term “information transfer” refers to many forms of communication and related activities, including marketing, training sessions, seminars, information forums and demonstration projects, and it pertains to a range of topics as broad as the scope of innovation.
The need for effective information transfer is broadly recognized to raise industry awareness and promote the adoption of the large number of new materials, products, equipment, components and systems that are continually introduced to the housing industry. Information transfer also reduces the number of
unknowns about new products, processes and services and thereby reduces risk, a major barrier to innovation.
The literature allocates a large role in the field of information transfer to the public sector. However, the private sector clearly has a large role in information transfer as well in its own self-interest. In particular, manufacturers and their distributors make major efforts to inform potential users about the merits of their products as part of their marketing efforts. Homebuilder associations also play a significant role in information transfer at the local, provincial and national levels by sponsoring forums and trade shows, for example.
All of the interviewees in this study placed importance on keeping current. Recommendations:
Analysis of this topic in the literature and interviewees’ responses in this project leads to the following conclusions and recommendations on effective methods of information transfer:
· Multiple approaches are recommended: Companies, associations and public sector
organizations should utilize a myriad of communication networks because of the different sources relied on by various groups. This suggestion does not mean that some companies or organizations should not focus on particular methods if they have specific target audiences and messages, and know that certain techniques are effective for their purposes.
· Use information transfer techniques that are effective in the housing sector: Information learned by word-of-mouth, and comments from respected peers are reportedly very effective information transfer techniques, especially for the evaluation of new products by potential
adopters. Trade shows, information from suppliers and sub-trades, and seminars are also reported to be effective.
One technique recommended by interviewees from manufacturing companies to builders is to market value-added innovations rather than low price. This recommendation acknowledges that innovations will generally cost more but is based on the premise that consumers will pay more for higher value.
Demonstration projects show proven technologies. These projects can be effective vehicles for transferring information. They can also be very expensive and ineffective methods for transferring information about new products and practices if they are not managed effectively. The following guidelines on a cost-effective approach to demonstration projects are offered:
- They should focus on leading edge, proven technologies that are superior to the current products in terms of price and/or performance, and marketable. Having industry playing a leading role in a project will help to ensure this condition.
- Demonstration projects should usually be houses that would be built anyway – and not just to show a number of special features.
- Demonstration projects should be built under conditions that are normal for the features demonstrated. If this is not the case, the transferability of the demonstrated features will be compromised.
- If demonstration projects are supported by the public sector, they should be cooperative public-private sector efforts. Public sector supported costs can include the cost of the innovative feature(s), including the cost of extra time to train trades to incorporate them, “show” costs, which can include marketing costs and costs to hold the house off the market during “show” times, and costs of documenting innovations, their performance and market response.
· Public sector organizations should continue information transfer efforts but review their approaches: Some literature comments on the limited types of people, i.e. government
representatives and standards committee members, who utilize written reports as an important source of information. This finding was reinforced by comments from interviewees, none of whom cited public sector housing reports as a source. Since public sector organizations like CMHC, NRCan and NRC are major information transfer agents, they should develop an effective response to these findings.
Training and Education
Studies on innovation applicable to a broad range of sectors identify training to develop a skilled work force as extremely important to innovation. The housing literature also notes the importance of a trained and therefore skilled work force.
The housing industry has a serious shortage of skilled labour. Homebuilders and other interviewees in this study confirmed this shortage and called for training to offset it. However, neither the literature nor private sector interviewees in this study offer suggestions on how to provide it.
Comprehensive recommendations on solutions to the need for training and education are beyond the scope of this study. CHBA is currently working with CMHC and Human Resources Development Canada (HRDC) on major training initiatives for the housing industry, and this work should continue.
Recommendations: The recommendations made on this subject are limited and pertain to methods for fostering innovation in training methods. They are based on comments by representatives of two training and education organizations.
· Incorporate examples of innovations in all courses provided.
· Develop courses at the supervisory or project management level that would expose students to new developments in each discipline involved in housing construction.
Incentives
Incentives are sometimes viewed as instruments to encourage innovation. However, they have and can be used for other purposes. For example, municipalities may provide incentives to developers in return for a particular form of development or development in a location that would otherwise not occur. Examples are density bonuses offered in exchange for inclusion of some social housing in new developments, and grants to developers to encourage “downtown” housing. These types of incentives reflect public sector efforts to achieve various public objectives more than efforts to encourage innovation. Another example is the provision of incentives to induce developers, builders, investors or others to build and operate rental housing because the economics of rental projects are generally not viable. These incentives reflect
generic problems in the housing system are not related to innovation either.
Some incentives may be offered to offset the costs of innovation. The following two examples illustrate different rationales for these incentives and point to alternatives to incentives as a strategy to foster innovation.
Incentives may be used to offset the cost of an approval process made longer and more expensive because of the innovation. Some of these costs may be due to an unnecessarily difficult approval process, which
