The (Second) Son Also Rises
John Krehbiel Sr. had a small company with one son in a top position and another equally ambitious son about to enter the business. How he channeled their aspirations enabled the company to grow into a multinational powerhouse.
Just one generation ago, Molex Inc. was a small company in a deep rut. Annual sales hit $3 million, then stuck there. Like many family businesses, Molex, a maker of plastic connectors that route electricity through an appliance, knew it had something worthwhile to sell but was unsure how to expand its market. The company had no strategy for growth and no managerial mechanism to implement one if it had existed. For an uncomfortably long time, John Krehbiel Sr. thought he might lose control of the company he'd inherited from his father.
John Sr. faced a second problem. With one son already in a top job in the company, he had to accommodate another equally ambitious son. He knew it was a tricky issue. The natural rivalries between siblings generally are exacerbated when they work side-by-side in a family business; when the scenario involves the possibility of competition for the top spot, the potential for conflict is heightened.
The key to solving both problems suddenly presented itself when John Sr. recalled an exchange he had had with his younger son, Fred, years earlier. Fred, then in grade school, told his father he wanted a map of the world in his bedroom. "I suggested we paint one," says John Sr., leaning back in a chair in his small, spartan office at Molex's Lisle, Illinois headquarters, where the 84-year-old chairman still works five days a week.
The project took two years to complete, John Sr. recalls. The cartograph, which hangs preserved like an icon in his Downers Grove home, contains hand-painted geographic representations that left nothing to chance. Even lines marking longitude and latitude were painstakingly rendered. "I suppose we could have bought a map," he concedes. "But we both learned so much more making one. Back then, I didn't even know where some of these countries were."
The little exercise in father-son bonding had far-reaching effects. In 1967, when Fred joined the family company, his older brother John Jr. was already running most of Molex's operations. What was their father to do with Fred? "I just wanted to find a place for him where he wouldn't be under his brother's feet," John Sr. says.
The solution was to put Fred in charge of Molex's then nonexistent international sales division. It turned out to be a savvy move — in two respects, John Sr. sensed that global marketing might be the answer to Molex's flat sales. And he found a way to play to the strengths and interests of a second son who was entering the business.
As a result, Molex's sales rode the swelling tide of global marketing. More important, John Sr. found a way to satisfy the needs of two ambitious sons. All too often, the patriarch of a family business who has multiple heirs to the throne fails to accommodate his offspring. When that happens, siblings can end up vying for control, possibly by undermining one another's efforts, which leads to a predictable result: the business crashes down on all of them.
How the men at Molex handled things so profitably and so harmoniously provides a textbook example of how to navigate some of the most common problems particular to family businesses.
Like his older brother, Fred Krehbiel, now 49, spent summer vacations as a teenager working at Molex. But unlike John Jr., Fred hated it. He preferred to hang out with his uncle, Bill Veeck, the late owner of the Chicago White Sox, doing odd jobs at the ballpark.
Meanwhile, Fred's older brother was learning the ropes at Molex, preparing himself for the day when, like his father before him, he would take over the business. As a kid, John Jr. worked at almost every job at Molex's plant. By the time he graduated college in 1959, armed with a degree in business administration, he was clearly the heir-apparent.
Foreshadowing a role his younger brother would play years later, John Jr., now 54, quickly began to reshape the company. He organized Molex's first centralized purchasing department and initiated a variety of cost control measures.
In 1963, when John Jr. assumed control of sales management, the company began to move. By 1966, the year before Fred arrived, Molex's sales reached nearly $3.5 million. When Krehbiel relinquished the title of president to his eldest son, John Jr. had already been executive vice-president and general manager for eight years. "He'd done a great job of controlling costs and exercising good business judgment," John Sr. remembers. Appointing John Jr. as Molex's president was, he says, "a natural move."
At the time, of course, Fred wasn't the least bit upset. After all, he had no intention of working at Molex. "I wanted to be a diplomat," he recalls. He studied political science in college and sought a career in government service. After failing to land a job in the public sector, Fred came to the conclusion that "no outside source could give me better opportunities than I could find right here at Molex. Where else was I, at my age, going to be given an opportunity like this?"
Faced with his eldest son's dominance in the family business, John Sr. recalls pondering young Fred's future. At first, Fred labored unhappily during brief stints in several departments. "And then I remembered the map," his father says. "Since he was a small boy, he was interested in geography. I figured that putting him in charge of international might hold his interest. I had no idea that international would become as big as it is. I just wanted to find something for him to do."
Fred jumped at the chance. "It was like a new frontier," Fred says of the day his father offered him a stack of unanswered inquiries from potential foreign clients. Finally, there was a job at Molex that offered the same stimulation he'd found at his Uncle Bill's side. It was glamorous and it involved contact with people.
John Sr.'s intuition was on target. Earlier, he had played to one son's strength by encouraging him to take on administrative responsibilities. Now, he was showing a similar level of respect for the other's interests. The international division posted sales of $54,000 its first year; 23 years later, it generates that much every 53 minutes.
As so often happens when good business instincts are mixed with hard work, the Krehbiels, and Fred in particular, profited by finding themselves in the right markets at precisely the right time. Fred says his customers were starting to manufacture overseas at about the same time he was looking into international ventures. "The timing was right. We got there just in time to grow with them," he says.
Building the international division was, for Fred, a labor of love. He took night classes in exporting at a local college, talked to area experts, and "just tried to get up to speed," he says. The more Fred learned about international business, the more he liked it. "It was a great way to combine my interest in diplomacy — in different people and cultures — with business. It just clicked," he says.
Unsure about how he would develop an international operation from scratch, Fred looked for a local consultant."We recognized that we had no international experience, so we called upon someone who did," he says.
The Krehbiels hired Ed Frume, a veteran export manager. "He was a perfectionist to the extreme," Fred recalls. For years, the two shared a desk, and Frume would critique every letter Fred wrote, every phone call he made, every meeting he conducted. "He was an incredibly good trainer," Fred says, clearly relieved his training period is now a distant memory.
Molex's first foray into global markets was pretty simple."We made up an information package about the company and circulated it around the world," says Fred, who used a variety of lists obtained from public and private sources. Fred and Frume sifted through the replies, looking first for agents who could sell Molex's products abroad.
Remember, this was the mid-sixties. Globalization was hardly the buzzword it is today. Twentyfive years ago, the only ones who had the resources — or the courage — to pursue overseas markets were multinational corporations. Since very few consultants specialized in the field and basic information was so hard to get, firms as small as Molex simply didn't dare to enter the fray.
"We looked everywhere for information. We talked to our customers in the States, asked them how they were doing business internationally, where they got their connectors from, what they needed," Fred says. "I just didn't have the money to race off and stay in hotels to meet with people. I had to do as much as possible at home."
Eventually, after attending a trade show in Europe, Fred signed Molex's first foreign sales representative, a Swiss businessman who wanted to buy Molex's products and resell them in his own market. Enthusiastic about this initial contact, Fred started to build an international sales network, country by country. His costs were low, and customer relationships were established.
In addition, Fred sent cold letters to major manufacturers around the world. It was the response to one such letter, addressed to the president of the Matsushita Trading Company, that played a crucial role in the development of Molex's winning international strategy.
In 1967 a Matsushita executive offered to place a $50,000 order — by far the largest Fred's international division had seen — in exchange for exclusive Japanese rights to Molex's hottest products. (By the late sixties, many of Molex's products were the talk of the industry.) Fred wanted to rush the order through and sign the contract. Frume, however, warned that giving an exclusive contract to Matsushita would preclude any chance of doing business with the likes of Sony or Toshiba.
Fred reluctantly rejected Matsushita's offer. Three months later, however, Matsushita placed an order with Molex. "We ended up with half the order," Fred says, but his company won the battle over exclusivity, freeing Fred to establish Molex's Japanese sales office in June 1970. "By 1969, I had realized that Japan was going to be a huge market," Fred says, "and we had to be there in a big way." Last year, Molex sales in Japan represented the lion's share of the nearly $300 million garnered by the company's Far East division.
The success of Fred's division was due partly to wise business moves. For example, he's hired indigenous executives to run his foreign facilities, a strategic key that has become a staple of the conventional wisdom.
But the Krehbiels must also realize that they partly stumbled into their success. Because money was so tight early on, Fred wasn't able to entertain potential foreign clients in traditional ways: a room at a deluxe hotel and a night on the town. Instead, they stayed at Fred's house, met his family in a relaxed setting, and discussed their cultural similarities and differences. It was an invaluable way to cement relationships both personally and professionally.
Maintaining Molex's global family remains a key objective. The Krehbiels say that they are determined, quite literally, to touch all their employees in a personal way. Every Molex employee will shake at least one of the Krehbiel's hands each year, whether they're working in Brazil or Bangkok, Puerto Rico or St. Petersburg.
Financial incentives also help to keep Molex's extended family intact. While the company's official benefit and stock option programs are impressive, they represent only part of the family touch that has kept Molex thriving. Naturally, higher dividends would enrich the Krehbiels, who own 47.3 percent ofthe company's common stock. Yet ever since Molex went public in 1972, the company has paid only a minimal dividend in order to reinvest as much as possible. "If we paid ourselves higher dividends, we wouldn't have the resources we need to keep growing the company," says John Jr.
One might expect John Jr. to envy his brother's success. If he does, it's well hidden. "He's done an outstanding job," John Jr. says of his younger brother. "Why should I be envious when I can be proud instead? Don't forget, when I took over, this was a very small company," he observes, pointedly but not defensively. "Someone had to fund the international division start-up."
There's no sibling rivalry, say the brothers, because they were never pitted against one another. "Setting things up the way John Sr. did," made the difference, says John Jr. "We learned how to work together, separately. That made a big difference. I was a resource for Fred, but he didn't report to me, and I didn't report to him."
The separation of powers continues to work well. John Jr. still runs the domestic side while Fred runs the international division. The only major organizational change came in 1988, when Fred became the CEO in addition to his vice-chairman position. The moves were made in recognition of Fred's accomplishments but, more important, they were designed to assure overseas contacts that when they dealt with Fred, they were, in fact, dealing directly with the company's top decision maker. With one brother the president and the other CEO, each calling the shots in his own domain, Molex has a twin-headed management. The brothers say that they like the arrangement. And one key reason they like it is historical: They are determined not to allow a rift to develop between them like the one that shattered John Sr.'s relationship with his older brother, Ed.
It was Edwin Krehbiel who, after four decades of working by his brother's side, forced Molex to go public back in 1972. Convinced he didn't have long to live, Ed, then 67, wanted to cash out. Specifically, he wanted $1 million. John Sr. didn't want to buy out his brother and bitterly opposed taking the company public. "A million dollars cash was a lot of money," he says, "and I didn't have it."
So Ed called in investment bankers who crafted a capitalization plan, and his 40 percent share of the company was put up for sale. John Sr. and his sons managed to buy about $200,000 worth of Ed's stock; the rest went to A.G. Becker, a Chicago investment banking firm, where it stayed for six years, then was offered to the public. "That's the best indication that I really had no idea how big this company would become," John Sr. says. "I even told friends that the stock wasn't a good buy."
Ed Krehbiel wound up with $1.2 million, and the brothers never spoke to each other again. Ed died some four years ago; had he held onto his shares, they would have been worth about $450 million.
Today, Fred owns 8.5 percent of Molex's common stock while John Jr. owns 13.1 percent. Their father holds 25.7 percent, and the rest is in public hands. A special offering of a new class of non-voting stock is underway, necessitated by the unpleasant knowledge that one day the Krehbiels will have a substantial estate problem to solve. "It would be better if we can work that through without further diluting the ownership of the company," John Jr. explains.
Analysts expect that the new stock offering, coupled with Molex's strong financial position, will allow the Krehbiel siblings to satisfy most of the estate taxes with non-voting shares, leaving the family in firm control of the company. As for who will take over as chairman when John Sr. retires, the brothers say a plan exists. But they won't discuss it. "We expect Senior to be the chairman for the next 50 years," Fred says defiantly.
It appears unlikely that Fred and John Jr. will ever get in a brawl like the one endured by John Sr. and his brother. The credit goes to the patriarch.
"I push them to work things out by themselves," says their father, who refuses to arbitrate the occasional differences of opinion that are inevitable in a $600 million operation. To that end, he sought out veteran industry managers such as Lewis Platt, a respected and hard-charging vice-president at Hewlett Packard, to join Molex's board as outside directors. Just three of the seven directors who run Molex are members of the Krehbiel clan.
"I beat them up every once in a while," says Platt, referring specifically to a recent issue of employee layoffs, which he felt that Molex's managers seemed too willing to accept. But he adds, "I can't remember a single divided board vote in all the time I've been there [since 1981]. The brothers work incredibly well together," Platt says.
To be sure, there are changes afoot at Molex. Some employees worry that the company has grown too large to maintain the sense of family that has served it so well. But in typical Molex fashion, those fears are not whispered in company corridors. Instead, they're found in a book of employee observations published by the Krehbiels when the company topped $500 million in sales. It's as if by airing their demons, the Krehbiels hope to conquer them.
Similarly, the company, like most operations of its size, has begun to grow by acquisition. The first came in 1983, followed by seven others in 1988, and four during the last two years. While most of the acquisitions were of companies in related fields in foreign markets, one of the recent buys worries John Sr. a bit.
"I don't like it at all," he says candidly about the purchase of 39 percent of Beta Phase, a Menlo Park, California company that sells flexible circuitry for computers and defense electronics systems. His fear is that government contracts might lead to a loss of the focus on commercial markets that he's worked so hard to preserve. Wary of what has happened to many major American manufacturers who relied too heavily on government and defense work, and burned badly during his one experience with the Pentagon years ago, John Sr. has steadfastly refused to go after government work.
"It's easy money," he says, "but you lose touch with the commercial marketplace. I've seen it happen so many times." He shrugs. It wasn't his decision. And the Beta Phase acquisition, after all, represents a tiny fraction of 1 percent of the company's net worth. "It's their decision. I think the boys will be all right."
With that, John Sr. glances at his office wall. A faded, old crayon drawing, a vehicle of some kind, catches his eye. It's the 20-year-old creation of Pete Krehbiel, John Jr's oldest child. Now 26 and a graduate of Dartmouth College, Pete recently began to work full-time at Molex — in the engineering section of the automotive division.
Hal Plotkin, a business writer in Mountain View, California was one of the founding editors of American Public Radio's "Marketplace." Molex Inc.
Business: Manufactures insulated plastic connectors that route electricity through appliances.
Financials: $62.1 million profit, $594.4 million sales in fiscal 1990.
Founded: 1938 by Frederick A. Krehbiel and his sons, John H. and Edwin.
CEO: Fred Krehbiel, 49, the younger of the two Krehbiels who now run the company.
Ownership: John Sr. owns 25.7 percent; John Jr., 13.1 percent and Fred, 8.5 percent. The remaining 52.7 percent is owned by employees and by the public.
Claim to fame: Elder Krehbiel put each son on a different path with major responsibilities, enabling Molex to expand its markets and maintain harmony in the next generation. What the Krehbiels have done right
Much discussion about siblings in family businesses focuses on who will be the boss. The parent — the current boss — too often assumes that all share the desire to lead. "Who will succeed" gets blown out of proportion.
While some are driven by the desire for authority, others are motivated by opportunities for accomplishment and responsibility consistent with their aptitudes and interests. The Krehbiels stress contribution and achievement rather than rank or status. Each brother had the opportunity to build a part of the business, not just maintain what someone else had started. Thus energy can be devoted to business building, not brother battling.
Talented offspring shouldn't just be given jobs, they should be given opportunities and held to high expectations. Too much structure stimulates the`desire to overcome authority and assume control. Fred was fortunate to find himself in virgin territory. He didn't have to do his job "right," he just had to succeed within his resources.
Molex offers other helpful lessons. Fred had an experienced nonfamily mentor who provided the kind of insightful feedback that helped him grow in his job. The father, John Sr., refrains from taking sides as his sons work out differences; moreover, he seems to have instilled in them the kind of values that enable them to work out differences amicably. A board of directors with a majority of experienced outsiders maintains accountability.
The Krehbiels are men of ability and character. They have the "right stuff" and have been able to put that stuff to work at the right time and place. Even successful family businesses must appreciate the contributions of luck to success.
While Molex seems set for the future, challenges remain. IBM's Tom Watson Jr. and brother Dick divided responsibilities for domestic and international business, but their relationship suffered from conflict late in their careers. And, of course, John Jr. and Fred must soon plan for the next generation. If all goes well, their children will benefit from the example they are setting.
— Craig E. Aronoff, Director, Family Business Forum, Kennesaw State College