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.
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