I’m frequently asked how we came to select the door and window industry as a market on which to focus. I think the answer to that question is of great relevance to door and window industry participants. The way that an outsider views one’s industry can sometimes provide a perspective on the forest that you miss when you’re standing amidst the trees.

We started by making the decision to focus on some single industry or sector because we believed that companies place a high value on specialized knowledge. Having focused on this industry these past two years, I would recommend specialization to participants in just about any industry. The door and window companies that prosper are those that become known for being excellent at one or two things. In our search for a specialty, we examined industries ranging from community banking to packaging machinery to secondary education centers. Early in our consideration, we made the broad decision to focus on manufacturing businesses because of our knowledge of that space. After that, the filter we applied had multiple stages.

First, we were looking for an industry that was highly fragmented, where the top five or six companies didn’t control the majority of the industry, as is the case in so many industries in our country. While we were seeking an industry with numerous participants, it was important that the industry be headed toward consolidation. There are industries, such as home remodeling, that are highly fragmented but appear they will remain so. In particular, the sector of choice should be experiencing consolidation not only on the part of large buyers in its own industry but on the part of private equity funds as well. We regard private equity dollars as generally being “smart money.” If smart money is being invested in an industry, in addition to the companies already in that industry, we take that to be a very positive sign. The next characteristic we were seeking was permanence. We needed to be confident that our chosen industry of focus wasn’t going to be outsourced to China or India two years from now. Finally, the conditions in the industry had to be such that strong companies could be highly profitable.

Having used that screening process to filter every subsector of manufacturing, the most attractive sector that emerged was building products. Packaging materials and machinery also had attractive characteristics, but building products was clearly a superior sector across all criteria. The question then became whether we could claim to be “experts” on a category as broad as building products. We decided that we could not. To narrow our choice, we applied all the same filters described above to the subsectors of the building products industry. When we did that, doors and windows and flooring emerged as possible candidates. The door and window subsector was clearly superior, though, because the flooring industry is already much more consolidated than the door and window industry.

After that process of filtering, which took several months, we arrived at the door and window industry as our industry of choice. We see it as a fragmented industry that is in the process of consolidating. Both industry participants (strategic buyers) and private equity funds (financial buyers) are buying companies in the industry. This industry is permanent, although we have published a good deal of research on the competitive threat from China. We see imports as attacking, over the next several years, mostly the commodity end of the door and window industry. While foreign companies eventually will capture a permanent portion of this industry, we believe that innovative companies that plan ahead will likely end up with higher sales in the value-added portions of their business that were the most profitable and the most enjoyable anyway. As for the profitability screen, there are certainly companies under a great deal of financial pressure in the current market. There is nothing structural about this industry, though, that will prevent companies from returning to strong profitability when the market recovers, as it eventually must.

I’ll close with a final thought regarding choosing to focus on this industry. All it would take to change our industry of focus would be an announcement to that effect and starting to research a different area and calling on companies in that sector. Given the current challenging environment, I’ve been asked several times whether we have considered such a move. I honestly can say that we have not entertained that thought for a moment. All of the wonderful aspects that attracted us to this industry still exist and we remain steadfastly optimistic about the future performance of the overall door and window industry.