Simpson Strong-Tie’s parent company, Simpson Manufacturing, got publicly taken to the woodshed by an investment firm. In building materials, we rarely get such a behind-the-scenes view like this that illustrates why you don’t want to disappoint or ignore your investors. Most building materials firms are privately owned, so we don’t often get the chance to see their dirty laundry or the opportunity to learn from their mistakes.
I know you can’t wait to read what happened. After you’re done reading it, I invite you to come back and read my thoughts on what you can learn from this to avoid these mistakes yourself.
Here is the letter that the investment firm Iron Compass wrote to the board of directors and made available to the public over PR Newswire. I hope you’ll come back after you’ve read it.
How To Avoid the Mistakes Simpson Made
Number one…don’t become a victim of your own success. Simpson Strong-Tie residential connectors are a great product and a great brand that is very profitable. However, as the inventors of connectors, they created the category and led it for so long it’s possible they started to see themselves as invincible.
They didn’t seem to take the upstart competitor, USP Connectors, seriously until it was too late. A strong leader strategy would have made it a lot harder for USP to take away customers.
Don’t Get Too Full of Yourself
If you are the leader in your category, the lesson here is to take every competitor seriously. Don’t wait for them to become a “real” threat. This is especially important in today’s disruptive atmosphere. It’s the little threats that come out of nowhere and don’t follow the rules who are the most dangerous to a leader.
What do you think Honeywell thought of Nest thermostats initially? The same thing happened to the built up roofing industry when single-ply roofing was first introduced.
It appears that success may have lead Simpson to make the next three big mistakes that you should avoid.
You Can’t Just Move Into Commercial
Think long and hard about your acquisition strategy. Simpson is a residential company that started buying companies whose products are sold in the commercial and infrastructure markets. These are very different businesses with different paths to market, different sales cycles, and different sales skills. I frequently see companies who are successful in one market think that they can just start making sales in another.
It’s not that it’s a bad idea, it is just a bigger job than most companies realize to move from residential to commercial or vice versa. You need a new sales leader and a new sales team for starters. Most companies aren’t willing to make that investment. You also have to be patient, as the sales will take longer than most companies are willing to wait. Customers just aren’t looking to change. It takes time to convince them to switch.
A Leader Doesn’t Know How to be a Follower
Do you know what kind of mindset your acquiring? Simpson bought companies who weren’t the leaders. A company that is number one doesn’t know how to act when they are number three, four or five. It takes a very different mindset to run and further grow a leader company than it does to run a company that is a long way from being the leader.
I don’t know what Simpson did, but most companies in this position take some of their people and put them in charge of these businesses in which they have little to no experience.
The way to correctly make this transition is to buy the company, bring in a leader with growth experience in the category and tell them to locate the new venture as far away from the parent company as they can. There is probably more bad stuff to rub off on the new venture than good stuff.
The Software Mistake – Reacting Isn’t Growth
When you see yourself as an invincible leader, there’s tendency to think you can do anything. It only takes money to make it happen. But you need to continue to lead as you grow. An over-confident leader can miss the opportunity or need to invest in an innovation, like truss software. They are usually pulled into reacting with a solution (and becoming a follower again) instead of innovating.
With technology and software, one can easily be drawn into pouring money into a black hole with little chance of lasting success. In today’s market, however, technology can no longer be just good enough. It has to be ground-breakingly outstanding. When you start out playing catch up, you will never get there as the leader continues to innovate and improve faster than you can catch them. It is usually a better plan to outflank them with the goal to make their technology outmoded and old fashioned.
To be successful, today’s technology has to be driven by customer needs and many building materials leaders often see themselves as smarter than their customer. Instead, you have to hire a visionary leader and let them run with it. A need for control can keep this from happening. There usually is no clear vision and too many internal “people with power” forcing their ideas into the technology. These “people with power” want to be involved in case it’s a success and face no risk if it’s a failure.
My other favorite mistake is letting IT run this adventure. IT should have nothing to with anything that touches the customer. It’s like IT being in charge of your website, CRM or marketing automation; you should just save your money and watch your competition run circles around you.
Technology and software need some very specialized talent that is in short supply. Based on Iron Compass’s review of their truss software, Simpson must have underestimated this. A mindset which overlooks that even the best technology companies have trouble getting world-class talent misses a big component to success. World-class talent will either work for a leader, or many of them will start their own businesses. They want to change the world. Do you think they really want to just design truss software? That means a short-sighted acquisition can often leave you with a group of developers who need a leader with vision.
It’s Not Just Me
I received this response to this article.
Mark – great piece and probably the best financial letter I’ve ever read. I actually approached Simpson at the recent IBS show to inquire of their route to market with an eye on uncovering their potential need for what we do. The guy’s reply to me? “We don’t need what you do, we’re the best in the world and we are automatically specified and required in every contract”. The hubris may be reflective of your observation, below, that “they created the category and lead it for so long it’s possible they started to see themselves as invincible”.
A Mistake You Probably Are Making
As most building materials companies are private, they don’t have a board of advisors that are as smart or passionate and aggressive as Iron Compass. Iron Compass is doing Simpson a favor by forcing them to take a hard look at themselves. Do you have advisors who will speak this frankly or is it simply your accountant and lawyer who don’t have a clue what building materials are?
If you need someone to get in your face before you make mistakes like these, I’m very good at it. When was the last time someone really challenged you? In the end, you may be right, but you’ll have taken a better look at the challenges you’ll be facing and have a better chance of being successful.