Professor Charles McPeak recently asked Steven Goldman to discuss some of his management techniques that have led to the success of Power-One – an OEM manufacturer of power supplies for the electronics industry.
Steven Goldman is a 1989 graduate of the Pepperdine Presidential and Key Executive MBA Program. He is the CEO and Chairman of Power-One, Inc. Since 1995, he has led a leveraged buy-out of Power-One, taken the company public, significantly grown the size of Power-One by acquiring two U.S. companies and two European companies, and completed a secondary offering. Power-One has grown from a $73 million company in 1995 to an estimated $400 million plus in 2000.
GBR: What are the major items that you recommend MBA students take with them from the classroom to the workplace?
SG: There are three primary areas in which the student must be skilled:
GBR: What are the key numbers that they need to know?
SG: If you are leading the company, and you do not understand the key drivers of that company, and how that company generates its cash flow, you put yourself and the company at risk. We are a manufacturing company and I have identified several critical numbers: gross margin, burdened labor rates, material cost as a percent of sales, backlog on a daily basis, and the ratio of debt to earnings before depreciation and amortization. When you are building a product, it is critical that you understand the labor, material, and overhead components; it is equally important to understand fixed costs, variable costs and cost allocations. People have a tendency to ignore some of these numbers because of the amount of outsourcing; however it is important to understand the supplier’s costs so that you can get the best price.
GBR: What can you tell our readers about strategy development and execution?
SG: I believe that a fair amount of time should be spent on developing strategy; however, execution is everything. It is not unusual for a company to spend too much time developing a strategy and never get it executed. I recommend that managers adopt one of the strategic frameworks that they are comfortable with. Then put in place a process which gets key executives and middle management involved before the strategy is implemented because the next major challenge is buy-in. People don’t like to have a strategy handed down from the top. We like to get middle management involved and have them critique the strategy. It is good to let them make some changes. Very often we will be surprised. Some really great ideas come from their involvement.
Immediately after the strategy is developed, I believe in developing an operating plan which consists of a limited number of major projects, probably no more than ten. The most painful step in the process is prioritizing the projects. The purpose of setting priorities is that, in business, choices must be made in the allocation of resources and the allocation of capital. Here at Power-One, we then establish a set of measurements to monitor the key projects. Each measurement has a goal and a trigger point. In summary: (1) develop the strategy, (2) prepare the operating plan, (3) install measurements, (4) continually monitor, and (5) involve the maximum number of people.
GBR: What can you tell our readers about the strategy that you established at the time of the leveraged buy-out?
SG: The strategy at that time was very different from our strategy today. The number one objective was to get the deal financed. Once that was accomplished, the second step was to begin paying off the debt and cover the interest. Third, we knew that we had to increase sales and reduce our leverage from 4:1 to 2.5:1. Step four was to mount a massive internal cost reduction. Step five was to expand our product lines so as to become a one-stop shopping company for our customers. Our sixth objective was to make acquisitions because we knew that we could not develop all of the product lines internally. And the final phase of the strategy was the Initial Public Offering in three to five years.
GBR: You initially stated that there are three things that the student should take to the workplace. You have discussed two of these. What can you tell us about the importance of working as a team?
SG: I took over the company from a management that had a more traditional style. It was somewhat autocratic, although it had been effective in its time. We knew that business was changing and that we had to move towards a team approach. My advice to the students is: don’t assume that people know how to work as a team. We hired an external resource, an industrial psychologist, to help us put this team together. We went through a whole process of training to understand what a team is and what the stages of team development are. After our training, we put together a set of operating guidelines which is essentially a contract among the members of the executive team on how we want to operate. For example, one of the elements of the contract is that no executive can complain about another executive to a third party. Any issues have to be dealt with on a face-to- face basis. Any serious violation is grounds for elimination from the team. In the event that an issue cannot be resolved, it can be brought to me or to the entire team.
GBR: What was the strategy of the secondary offering that the company recently completed?
SG: Through the IPO, we raised $80 million, of which $40 million was used to pay off the LBO debt, leaving $40 million in cash. We subsequently made two cash acquisitions for which we paid approximately $90 million. We were right back where we started from with the LBO, with near $50 million debt. We knew that if we continued to make acquisitions for cash we would become over-leveraged. Our stock price had appreciated to a level that we felt it made sense to raise additional capital. We did the secondary offering for $120 million. We paid off all of our debt and ended up with $60 million cash. Our strategy to be a consolidator in the power supply industry included a leverage/de-leverage approach to fund deals. We have since completed another acquisition and are in the process of finalizing a fourth.
GBR: Of the many things that you and your company have done well, one which indicates great vision, is develop products that would be needed by companies like Cisco Systems at a time when not many people even knew what business Cisco was in. Can you tell our readers about this vision?
SG: We developed a process called Vision-One. We identified companies like Cisco, Hewlett Packard, and Teradyne, companies which we believed were visionaries in their respective fields. These were the companies that we felt would drive their individual industries. We sent our R&D engineers and our marketing people to each of these companies. The concept was that no order books could be taken to these meetings. We were there only to hear about their requirements for the next five years. We went through about fifty of these meetings in an eighteen month period. From this, it became very clear that the industry was going towards datacom and telecom, and companies like Cisco and Lucent would be taking off. We began to put our strategy together to focus on these accounts.
GBR: You have displayed remarkable entrepreneurial skills. What suggestions do you have for those of our students who are aspiring entrepreneurs?
SG: I would make three suggestions:
- Get an apprenticeship or an internship in the industry in which you want to work.
- When looking for the first job out of school, the most important characteristic is not the company but the direct boss. Pick a boss who is going to be a mentor and who is going to invest time and money in you.
- Learn as much about the company and the industry as possible. Take risks in that company. Take assignments that no one else wants.
GBR: What are some of the most significant lessons that you learned in your career that you believe would benefit students?
SG: Know the company’s numbers cold; and know the drivers. Hire the best people; and work around the best people. If you make a wrong decision, especially a wrong hiring decision, don’t wait too long to correct the mistake. The next one is particularly important in a large organization. If you receive a report, always challenge the numbers. Always challenge the source of the data. If at all possible, touch the data, whether it is a product or a service. The bigger the company, the bigger the data base and, therefore, the more important this is.
GBR: How would you describe the types of companies that you believe will be most successful in the next few years?
SG: The first identifier is speed. Companies that can move, change, and adapt are absolutely going to be the winners. This is something we are striving for here at Power-One: improvement of such measurements as cycle times and lead times. The second would be companies with teamwork. Companies are focusing more and more on intellectual assets. Companies that can harness these intellectual assets and pull them together as a team so that one and one make three will be incredibly valuable. Finally, companies who learn to make efficient use of technology will be successful.