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Innovating in a Complex System

Updated: Jan 6, 2022

I. Executive Summary

In this article we will address an innovative solution to California’s worsening housing crisis: multi-family steel high-rise modular homes. While we will speak specifically to the issues that California faces, we think this innovation has broader applications, particularly considering such issues as escalating housing costs, challenges in building in high-density urban areas, increased migration due to climate change, and the need for more environmentally friendly housing development due to declining resources. First, we will discuss the inception of modular construction and the networks developed to support this emerging industry. We will then address the concepts of dynamic capabilities and technology brokering in relation to innovative development in housing. Finally, we will share our predictions for the future of modular as it relates to California’s lack of affordable housing.

We argue that while modular design and development requires additional technological capabilities and a change in both thought and practice to become more mainstream for multi-family housing, it is an innovation that has the potential to have a lasting impact on how we design and manufacture homes for the future. This, however, can only be accomplished through the convergence and evolution of the social, technical, and political forces that comprise the current development system.

II. Introduction: The Focal Innovation and its Origins

Volumetric steel modular multi-family high-rise building technology is an emerging innovation. It is a strategy for manufacturing buildings in pieces, which are delivered to a construction site and assembled into a high-rise building. The final building assembly is a hybrid of traditional construction and modules. In the case of a multi-family building, the apartments are typically the manufactured portion. They are delivered to the site finished, including flooring, paint, light fixtures, appliances, and cabinets. The construction approach saves time through manufacturing continuous improvement, but also through the parallel construction timeline. This technology is capable of dramatically reducing the cost to develop housing in urban areas. Lower building cost means that affordable housing projects are able to move forward more often, even with limited budgets and returns.

The innovation of steel modules is part of a greater subset of construction techniques called modern methods of construction (MMC). MMC can trace its origins in the United States back to 1969 when the Department of Housing and Urban Development (HUD) launched a program called Operation Breakthrough. The program sought to increase home production for all income levels. It focused on a variety of different housing types, from single family to high density multi-family. Ultimately, Operation Breakthrough was deemed unsuccessful, citing that the technology for delivering manufactured housing was yet to be developed. Additionally, the way buildings are reviewed and approved by jurisdictions created major inconsistencies in a manufactured product. One result of HUD’s program was to implement a separate factory-built housing code which some states adopted, including California.

The journey for all MMC innovations is a slow burn. This moment in time is the period before the burst. More and more firms are emerging with innovative construction technologies, including panelized, volumetric modular, and hybrids. Many firms are failing and have shuttered their factories, including the giant venture capital backed Katerra. The innovation system is still being developed and understood. Most firms in the space seem to understand the obvious connection between industrialization and production efficiency. Huge investments have been made in factories and manufacturing techniques; the strategy is to transplant the assembly line method developed by Ford into the world of buildings.

Other parts of the innovation system are more difficult to understand. For comparison, the value chain for a traditionally delivered multi-family building is very wide and disjointed. It includes the developers, architects, engineers, community stakeholders, local planning review, local building review, inspectors, general contractors, sub-contractors, labor unions, property managers, and of course, the end users who ultimately decide if they want to live in the building or not (see network diagram). With volumetric steel modular for multi-family buildings, add the state review agency (which is California Department of Housing and Community Development [HCD]) and their inspectors as well. Manufactured buildings need to follow state building codes only for the factory-built portion of the building, which is inspected at the factory before delivery. Local agencies only review the site-built portion of the building. Oftentimes local agencies over-step and enforce their stricter municipal codes even without jurisdiction, withholding certificates of occupancy.

The innovation system network consists of four main categories: industrialization, software and automation, clients and users, and legislative. Volumetric steel modular needs to be able to operate within the current building delivery value chain, while disrupting the parts it can affect. Firms in the space can become more vertically integrated, allowing for more control over their product. This would merge industrialization with most of the clients listed. Firms could buy or develop their own in-house software catered to building design for manufacturing. The legislative component will have to be evolved through government agency shifts over time. Codes are capable of being edited to consider new technologies, but the industry must lobby changes with a consistent voice.

III. Innovation Concepts

Multi-family steel high-rise modular homes are an emerging innovation in the home building industry that have the potential to rectify the current housing crisis in California. Because the issue of increasing home prices and housing inequality continues to worsen, legislators are being called on by voters to find solutions to this issue. Modular builds have the potential to provide a sustainable solution to this crisis. However, many home buyers and developers are still in the knowledge and persuasion stages of the innovation decision process. Many are not educated on the concept of modular construction and have concerns and uncertainties based on ingrained ideas of how homes should be built. For this innovation to gain traction, there are networks and systems that need to further evolve and the industry needs support from diverse sets of stakeholders to progress. This includes not only home buyers and community members, but investors, architects and designers, material manufacturers, housing developers, and regulatory agencies.

As reviewed in the network diagram, construction and building can be extraordinarily complex, involving zoning, community forums for input on projects, funding acquisition, permitting, and the need to adhere to numerous building codes and standards. The development of modular high-rise homes is an example of technology brokering, which Andrew Hargadon and Robert Sutton describe as a process of problem solving through organizing networks that bridge previously unconnected ideas (Hargadon and Sutton, 1997). While manufacturing and mass production of products has existed for over a century, the concept of manufacturing houses bridged two worlds together – home construction and traditional manufacturing. The initial technology looked similar to traditional home building, with prefabricated homes manufactured in a factory and then put together on site, whereas modular high-rise developments take that concept further by building the individual units in the factory and then shipping to the job site for installation. A next step would be brokering from other large scale manufacturing processes, like shipbuilding or aerospace.

A dynamic capability that is paramount to furthering this innovation is design for manufacturing (DFM). DFM is the practice of designing products with a focus on the ease of manufacturing them. This practice can alter the materials used as well as various secondary processes that are involved in manufacturing. A clear DFM strategy will evolve with manufacturing continuous improvement as well as market needs, with the goal of a consistent product. DFM is crucial to master for the entire operation to work, and this capability relates to numerous players in the innovation network.

DFM also ties into ease of manufacturing, which is a key component of creating a more sustainable housing model for many reasons. Reasons include the availability of workers, the cost and speed of development, and conserving both land and resources. The labor market for employees is sluggish and still reeling from the pandemic. Openings for general and skilled laborers sit unfilled as former construction workers either move on to find new careers or retire. Switching from skilled craft to mass production opens the window for two possibilities: increasing automation and machine production and tapping into an unskilled labor pool. Mass production simplifies tasks which are much easier to teach, replacing the need for skilled tradesmen with warehouse and production workers.

Gaining public acceptance is another critical dynamic capability required for modular housing to succeed. On top of the many complexities already addressed, manufactured homes have yet to obtain widespread acceptance and there are stigmas around the concept. Existing home owners worry that high-rise modular buildings that include affordable housing units in their neighborhoods will lead to increased crime or lower their property values. Simultaneously, while they are seeing their home values soar, others are priced out of the market as the housing shortage worsens. Preconceptions around affordable housing leads to uncertainty in the market and a general reluctance towards modular high-rise homes specifically. This is a challenge the industry must tackle to grow.

Overall, there are a plethora of required capabilities and system components involved in the manufactured housing industry. Obtaining these capabilities and connecting various system components will require strategic planning and coordination by industry leaders. Leading change in an existing market is not an easy feat, and the market has proven this as modular structure project proposals continue to get voted down and rejected in some major cities. However, strong strategy and positioning can lead to change in this industry as it stands today.

IV. Predictions

We predict that in the next five years steel volumetric multi-family housing will be responsible for a large market share in California urban centers. Challenges that the industry is faced with include: updating building codes to be more accepting of MMC, acceptance from local jurisdictions and labor unions, a way to combat NIMBY (Not-In-My-Back-Yard) culture, shifting from traditional construction design to design for manufacturing, and market acceptance from architects, developers and end users. This section will focus on three important opportunities: legislative change, combating NIMBYism, and DFM software.

Regarding the legislative portion of the network, there will be two updates to the California Building Code (CBC) in the next five years, one in 2022 and one in 2025. Recently the International Building Code and the CBC have shown acceptance of new building technologies, especially around high-rise technology. The 2019 codes were updated in 2020 to include inclusion of a new construction type. Construction type IVb allows mass timber structure in buildings up to 18 stories. Before 2020, building a high rise in California with anything other than steel and concrete would have been impossible. The mass timber industry created a lobbying and education group called the WoodWorks institute. The institute is funded primarily by the lumber suppliers of the northwestern United States. Through this institute code officials, architects, and developers were able to access the information they needed to make informed decisions and opinions on mass timber. This proves that laws can be changed to benefit the greater cause of accessible affordable housing and sustainable solutions. Similar to the mass timber industry, voices in the MMC industry need to be cohesive to make change happen. Once the CBC is updated care needs to be taken to educate local jurisdictions on the importance of state approval for manufactured housing. State approval is the best way to create consistency in the product, thus maximizing production efficiencies.

Acceptance of modular buildings and affordable housing also needs to be addressed to realize the prediction. Communities are still voting down new developments even if they are not modular and have an affordable component. This is a demonstration of NIMBYism. Modular buildings have a stigma of being ugly, or box like, which further deepens the negative public perception. Firms in the space must prove that their products are equal to or better than traditionally built construction of the same cost point. The legislative part of the innovation network can step in to override local communities as well, and there is recent precedent for this. California recognizes that affordable housing is a public crisis and started to create laws to stimulate affordable housing production. Since 2017 there have been a number of state senate and assembly bills passed that provide a streamlined approval process for affordable housing projects. Senate Bill 35 states that municipalities must accept or provide clear cause for project denial within 60 or 90 days depending on project size. (Updated Streamlined Ministerial Approval Process) Before this bill was passed it could take projects, no matter the construction type, years to pass through robust local planning department red tape.

The final opportunity is connected to the dynamic capability of DFM. This capability is not widespread in the industry due to limitations of software. The existing traditional building industry uses a software by Autodesk called Revit. Within the innovation network for volumetric steel high rise buildings, architects, engineers and contractors are trained that Revit is the industry standard. Revit works great for traditional construction design and documentation, but it does not work well for product design and fabrication documentation. A great manufacturing software would connect product design to a material resource plan or enterprise resource plan software, provide a cost analysis, communicate to manufacturing automation tools, and produce fabrication drawings. The industry needs a software that accomplishes this, while also interfacing with Revit. This could be done through Revit plug-ins. Autodesk has manufacturing focused products in its suite already, like Inventor, however it does not have a way for the two products to communicate. This is a massive opportunity in the market.

When the industry successfully leans into these opportunities, we will undoubtedly see a boom of volumetric steel modular high-rise buildings providing quality affordable housing.

V. Conclusion

There are many challenges the industry faces in mainstreaming multi-family steel high-rise multi-family homes. From the need for new construction and design software, investments in manufacturing infrastructure, and development of alternative building materials to changes in industry organization overall, modular construction still has a lot of opportunity for reimagining building for the future (Krulak, 2017). As Hargadon discusses in his work on sustainable innovation, industry leaders must continue the process of uniting old and new systems, build networks to connect those systems, and adapt to new processes as these systems evolve.

In addition to the issues mentioned above, the transition to modular will also require a shift in perception to gain wider commitment among all stakeholders. One of the main hurdles is to generate support for product simplicity to create efficiencies in the manufacturing process. We think this is not only possible, but expected, as consumers become more aware of the benefits of urban modular construction – availability of affordable housing, creation of livable cities where residents can work, play, and shop without the need for individual modes of transportation, and development of homes that fit the changing needs of both people and planet.

Rethinking housing in the context of innovation structure and strategy overall is integral to furthering the modular construction industry. Building networks and resources that weave together elements of traditional construction with new capabilities is critical to moving modular from the unorthodox to conventional modes of construction. Bringing together the diversity of stakeholders is essential to take advantage of the myriad skill sets, tools, and knowledge available. Reevaluating and integrating the disparate parts of current organizational networks opens the potential to create synergies and change where it may have seemed impossible in the past.


Hargadon, A., & Sutton, R. I. (1997). Technology Brokering and Innovation in a Product Development Firm. Administrative Science Quarterly, 42(4), 716–749.

Hargadon, A. (2015). Sustainable Innovation: Build Your Company's Capacity to Change the World. Stanford Business Books, an imprint of Stanford University Press.

Krulak, R. (2017). Modular High-Rise: The Next Chapter. CTBUH Journal, 2, 50–52.

Updated Streamlined Ministerial Approval Process.

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