Volume 9, Issue 5 - May 2008

Trend Tracker

A Second Look
Take Second-Tier Management Seriously
by Michael Collins

Many door and window companies are smaller businesses driven largely by the entrepreneurs by whom they were founded. In most cases, these founders have vision, passion for the business and a deep knowledge of the industry that comes from years of experience. In some cases, though, the leader is so capable that the company has grown despite a hole that exists at some part of the second level of management. This second level would include anyone at the “C” level—chief financial officer, chief operations officer, chief technology officer, etc. It also would include the plant manager and the sales and marketing manager.

Gaps in the second tier of management may not always be problematic on a day-to-day basis. A company may roll along addressing most of the issues and challenges that come its way. Taking a step back, though, it is likely that a company without a strong second tier of management gradually will lag its competitors in profitability and corporate development.

Inability to Share Responsibilities
The reason that a company has a shortcoming at a given point in its second tier of key managers may be a result of the same strengths of the founder that allowed them to build the enterprise in the first place. In other words, the reason these companies lack a strong manager in a given role is that the founding owner has been unable or unwilling to cede responsibility for that area to others. New product development is an area where founding owners often maintain very high levels of involvement. We have encountered numerous examples of companies where the founding owner began the company with a single door or window product that was the right product at the right time, propelling the company’s growth at an unexpected rate. This can establish a pattern where all new products come as a result of the inspiration of the founder.

Problem Areas
Another problematic area may be that of setting the long-term strategic direction of the company. The founder is likely to rely on the reading of numerous industry tea leaves, including the size of the sales backlog at different points in the year, chatter from distributors of the company’s products, the level of interest rates, the pace of new housing starts or other factors. By failing to involve other top managers in his process of charting the best course for the future, the head of a company guarantees that he will be the only one capable of guiding the strategy of the business for the foreseeable future. To put this differently, if the owner leaves, there will be no one else that can steer the organization effectively and navigate the many challenges in the current market environment.

This last point brings us to some of the problems that result from an underdeveloped second tier of management. The first way in which an owner who has allowed holes to exist in his management team suffers is the inability to leave the business for periods of time, including vacations. If you are the head of your company and you received multiple phone calls per day during your last vacation, you probably have either failed to delegate responsibility effectively or you need to fill in gaps in your current management team. 

Another problem with holes in a management team arises when the company seeks to be sold to another in the industry or to a private equity fund. Potential transaction partners are leery of situations in which the founding owner is the main driving force and maintains sole responsibility for numerous key areas. These “one-man shows” will be viewed by acquirers as very risky situations. Financial buyers are unlikely to have a key manager ready to drop in place in a company it wishes to acquire. Such top posts are difficult to fill and having to do so would increase the perceived riskiness of the transaction to the fund. Strategic buyers, on the other hand, often have a capable mid-level manager that would be appropriate to promote to the top job at a newly acquired company. Even these groups, though, will hesitate to acquire a company where the management team likely would be unable to take over if the current owner left. 

The head of every company should make an honest assessment of whether there is enough depth to the second level of management and whether the managers have been given true responsibility for enough critical aspects of the operations. Fixing this problem can be a gradual process of transitioning duties and making new hires or replacements. Drastic overnight changes are not required. Strengthening the second tier of management will pay off in improved performance and an increased ability to eventually take that long vacation known as retirement. 

Michael Collins is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. Mr. Collins’ opinions are solely his own and do not necessarily reflect the views of this magazine.



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