Succeeding a much revered founder can be a daunting challenge
for a CEO. Now consider becoming the head of Directed
Electronics Inc., famous among San Diegans for being the company that Darrell Issa (R-Calif.) and his wife, Kathy, built. Creating
further potential jeopardy was the task of repositioning the firm to
move beyond its run rate of $100 million in annual revenue.
In 2001, all of these challenges awaited Jim Minarik, a veteran of
Clarion Corp. as he accepted the role as president and CEO of
Directed Electronics when Issa sold the firm to a venture capital
company following his election to Congress.
Directed Electronics possessed a dominant 50 percent market
share position in a niche electronics business — vehicle security
systems — and was very profitable. As it existed, although tremendously successful, the company was positioned to maintain revenue and profits, but not to increase them.
“My first rule was don’t break what wasn’t broken,” says Minarik.
“It was a tough first six to eight months and quite a challenge getting the employees on board with all of the changes.
“Before, everyone reported to Darrell. My initial thought was that
in order to make the business scalable, I needed to create a business plan and an infrastructure that would support the growth.”
But all of the plans in the world wouldn’t end up meaning much
if the company couldn’t survive the initial change.
As the first firm’s post-entrepreneurial period, Minarik demonstrated that he could successfully follow a politician by using his own political savvy. He set
out to win over the existing staff and to take them along on a journey to the next level — a professionally managed company.
Succeeding with people
Minarik knew he had to change the tone and set new expectations
immediately.
“I wanted to let everyone know that I wasn’t the new ‘daddy,’ this
was now our company,” says Minarik. “I clearly communicated the
risks to everyone. We could succeed from here and take the company to the next level or we could fail if we couldn’t change. The choice
was ours.
“Often what came up was that they hadn’t done things this way in
the past. Coming from a Japanese company, I let the staff know that I
wanted their feedback and I wanted to build consensus because that’s
what I was used to, but that we needed to change to move forward.”
Frequently in entrepreneurial firms, the intellectual capital of the
business is housed in the memory banks of the existing staff and the
processes are inadequate to effectively continue the business if too
many people leave at once. Sensing that might be the case at Directed
Electronics, Minarik decided to add onto the house, not tear it down
to the foundation.
Minarik says he decided to strategically deliver “carrots” to the existing staff to keep them on board by increasing vacation, sick leave,
health benefits and the 401(k) plan.
He also needed to get the employees more involved in decision-making. As is often the case in entrepreneurial firms, decisions and
accountability for results resided at the very top of the organization.
Minarik says that the limited decision-making structure contributed to
a sense of complacency among the staff and a culture where no one
took accountability for results.
To help get the change he desired, Minarik promoted many of the
existing staff into management roles that increased both their authority and responsibility for results including accountability for profit and
loss. Because he wanted to retain the newly promoted employees and
have them build the business, Minarik needed the new managers to
think more like owners than employees, so he also gave them a stake
in the business.
Minarik’s actions were the result of a lesson that he says he learned
early in his career.
“The first company that I worked for was run by an iron-fisted entrepreneur,” says Minarik. “I finally left because he had to make all of the
decisions. The company made it to $100 million and hit a wall.”
A plan and a team
Minarik says he wanted to achieve balance between effectively paying respect to the history of the company and repositioning the firm
to grow through the addition of new product lines. After securing the
base, Minarik’s next steps down the path toward building a high-growth company included creating a more scalable infrastructure by
adding new leadership who could close gaps in the firm’s expertise,
building a cohesive team and teaching the existing management staff
to make decisions through data analysis and process improvement.
Minarik hired a new CFO and a vice president of corporate development from outside the company.
Because blending new hires into an existing company can be difficult, he didn’t rely on gut feel. Instead, he used a system called “top
grading” to help him select the right external candidates.
“Top grading is a defined program for hiring ‘A’ players using formal
candidate assessments,” says Minarik. “It starts with defining the competencies you are looking for and then you develop the questions that
probe into those competencies using several interviewers over three-to four-hour interview sessions. The candidates are scored on their
responses, which quantifies the selection process.”
The next step was to fully engage the newly merged leadership team
into a growth mindset for the company through the creation of a business plan and vision for Directed Electronics. Minarik structured a
senior management committee comprised of the new and old leaders
and led the team in creating the strategy that would take them forward.
The team’s plan called for doubling the business within three years
and hitting $1 billion in revenue within 10 years. Minarik says that he
perceived that the most likely succession scenario for Directed
Electronics would be that the current venture owners would sell to
another venture firm, after realizing some financial gain resulting from
acquisitions and growth. So a near-term public offering was not part
of the initial strategy. Had he envisioned the possibility of going public earlier, Minarik says that in hindsight, he would have added even
more infrastructure to the company to support all that goes along with
being a public company.
“Our plan focused on growth and where we had gaps in our product
lines,” says Minarik. “Once you define them, there are three ways to
fill the gaps: You can close them with existing product lines via organic growth, you can close them by developing strategic partnerships
that will give you access to new products, or you can make acquisitions.”
While Minarik developed a strategic partnership with satellite radio
selling aftermarket equipment, which effectively closed one gap, he
was also armed with venture money to spend. Consequently, the most
obvious route to quick growth was through acquisitions and it was
what Directed Electronics’ new owners were expecting. Based upon
the business plan strategy, Minarik went on a shopping trip looking for
potential acquisitions in the hot home theater speaker manufacturer
marketplace, but first he developed a comprehensive checklist of
acquisition attributes.
“There were three things that were important considerations as we
looked at prospective companies to acquire,” says Minarik. “First, the
firm had to be making money and growing at above-average margins.
Second, they had to possess a defendable market position or brand by
being the industry leader, and third, I was looking for businesses we
could expand so I wanted a lower level of customer concentration
and a strong distribution network. I didn’t want them to already have
90 percent of the customer base.”
By selectively taking Directed Electronics into targeted markets,
Minarik has achieved growth initially as a result of an acquisition and
then subsequently he has achieved additional expansion growth within the brand. The plan is designed to optimize the firm’s smallish infrastructure by making the acquisition digestible initially, and then optimizing incremental sales through the firm’s existing distribution network.
This strategy also helps Minarik achieve growth while keeping debt
and expansion costs at acceptable ratios when related to revenue
growth rates. For the full-year 2006, Directed Electronics reported
revenue of $438 million while generating $27.3 million in net income
representing top- and bottom-line growth achieved both organically
and through new acquisitions.
Fact-based decision-making
Minarik says that management decisions should always be supported by data — not hunch or whim. Given his roots in the Japanese business culture, he’s a proponent of Six Sigma methodology, which uses
the DMAIC problem-solving process to improve quality and productivity. DMAIC stands for: define, measure, analyze, improve and control, and this level of justification for financial expenditure requests
represented uncharted waters for many of Directed Electronics’ staff.
He used real situations to teach employees who were raised in an
entrepreneurial environment how to analyze the facts and then present their requests along with cost justification.
“As an example, the customer service manager came to me and said
that she needed more staff because wait times were getting too long
for customers, but there was no data” says Minarik. “So we established metrics, looked at call volumes and sure enough, the metrics
supported the fact that we needed to add a couple of [employees].
“Under DMAIC you don’t always add to headcount because sometimes you can improve the processes and achieve the productivity
results without increasing expense. The company had systems in
place but in many cases they were just enough to get by and when you
grow, you find that you have really big holes and you have to scramble to get things fixed. I have been doing a great deal of training so we
can get better processes in place.”
As the growth of the company accelerated, the option of going public as opposed to selling to another venture firm became more viable
because costs of both transactions began to equal out. In early
December 2005, going public became a real possibility.
“That’s when the nightmare began because right when we went to
file our S-1, we had to replace our accounting firm and re-audit the
previous three years,” says Minarik.
“I would tell anyone reading this article, if you are even thinking
about going public you should meet with your accounting firm a
couple of years ahead of time. It was absolutely a huge headache.
What gets you through it is a lot of persistence and determination
and in the end it’s worth it because as a CEO I like the way it looks
on our balance sheet, but I wish I would have started a whole lot
earlier.”
HOW TO REACH: Directed Electronics Inc., www.directed.com