Look who's out there on the cutting edge....

Small, family owned companies have two secret weapons that can help them compete in today's marketplace.

By Ernesto J. Poza and Donald J. Jonovic

While it may be hard to imagine an American city competing with Hong Kong in the marketing of custom-made suits, the city of Cleveland is, in fact, the center of a revolution in the way the suits are tailored. Even more surprising, the innovator in this revolution was a family owned company: Custom Cut Tech no logies.

The company, which has retail stores in Pennsylvania and Ohio and a manufacturing plant in the heart of Cleveland, has developed a patented system that automates much of the tailoring process. The system uses advanced computer-assisted design and manufacturing (CAD-CAM) technology to manage a customer’s order, from devices that take the customer’s measurements in the store to laser cutting of the fabric for the garment. Even stitching and assembly, while done manually, rely on computer-assisted instructions to produce the patterns and unique fit required by individual customers.

Custom Cut Tech no logies, owned until recently by the Steinberg family, provides compelling value geared to personal tastes and requirements, without the long delays associated with hand tailoring and long-distance shipment, and at off-the-rack prices. What Custom Cut represents, is remarkable: An increasing number of success stories on the frontiers of manufacturing are coming from family businesses.

Consider some other leading-edge manufacturers: Levi-Strauss, Milliken, Bennetton, The Limited, American Greetings, Ford Motor Co., Lens Crafters. All are family owned or family controlled. While family ownership can have disadvantages—witness the rivalries and bitter battles in some families—these companies and many others like them have demonstrated a crucial advantage in today’s changed world. Our experience advising family firms has convinced us that this advantage arises from a combination of commitment and flexibility.

Commitment is critical because much organizational ineffectiveness and poor product quality today can be traced to alienated workers, frustrated middle and top managers, and apathetic owners. Further, conflict between the management and ownership of many widely held corporations has become a significant factor in their competitive decline.

Flexibility has become critical because of the expanding impact of information processing and manufacturing process technologies, which have reduced, and in some cases eliminated, the benefits of eco nomies of scale. Technology has made small runs, individualized products, and tailored services ever more possible and economical. In short, because markets now demand such diversity and rapid turn-around, manufacturing flexibility—organizational flexibility in general—has become a major competitive weapon.

The ownership structure of family companies provides advantages on both counts. The coordination of ownership with management is more natural in firms that are in the hands of family members than in large public corporations with their widely scattered and traditionally passive shareholders.

U.S. textile producers that are globally competitive provide some powerful evidence of the advantages of family control. Just a few years ago, Milliken & Co.’s average production run was 20,000 yards. But competitors in Japan and Hong Kong were efficiently producing smaller lots that enabled them to turn around orders faster and serve many more smaller customers. In response, Milliken built a leaner management organization, developed new technology, and established teams of committed workers to operate its modern, computerized plants. The company is now efficiently producing fabrics in 3,000-yard runs.

The campaign was driven by the family successor, Roger Milliken, chairman and CEO. The result: Milliken has taken the lead in this important advance in U.S. productivity and was a winner of the Malcolm Baldrige Quality Award.

Less well known is the Warren Featherbone Co., an apparel manufacturer in Gainesville, Georgia, led by Charles E. “Gus” Walen, grandson of the founder. Warren Featherbone has managed to become a preferred supplier of sophisticated retailers like Dillard’s by providing accurate, high-quality weekly deliveries—an accomplishment previously unheard of in national retailing. Normal order turn-around in the industry is from four to six weeks, according to a Warren Featherbone executive.

What is happening here? Traditional economics predicts that costs decline 15 percent to 25 percent per unit each time volume doubles. Further, costs are supposed to increase by roughly 20-35 percent per unit for each increase in product variety offered the customer (for example, from one to two colors, or two to four sizes). Traditionally, in other words, markets favor the volume producer.

But that was the old world, in which market demand was predict able and, except for seasonal and cyclical factors, essentially stable. In this world, the U.S. dominated global manufacturing, and the fulfillment of increasing market demand required investment in heavier and more expensive equipment to build barriers against entry by new (smaller) competitors.

The rules have changed, however. Today, companies that have flexible organizations with commitment at all levels—from shareholders to employees—are enjoying a competitive edge. Both factors seemed in short supply during the 1980s when so many large, publicly held corporations were eviscerated by a short-term investor orientation, takeover battles, and constant turnover of shares.

Enter the family firm, which in the 1990s is in a much better position to achieve the required flexibility and avoid the “crisis of commitment” suffered by the publicly held corporation. Instead of economies of scale, these firms benefit from economies of commitment. When those who control the company measure their commitment in years, even generations, rather than quarter by quarter, their dedication to speed, quality, and service becomes a significant advantage.

Obviously this asset, like any other, must be properly managed. The closely held company must continually examine its ownership structure to make sure it is interacting well with management to enhance the firm’s commitment to quality and its competitive position. The touchstone of success in this new competitive environment is a combination of truly “patient capital,” invested in a flexible, innovative organization, driven by people committed by the very culture of the firm to quality and service.

What better description of a successful family owned business—and what better reason to be bullish about its future?

Ernesto J. Poza is author of Smart Growth and president of E.J. Poza Associates, family business consultants in Cleveland. Donald J. Jonovic, is president of Family Business Management Services and director of Family Business Programs at Baldwin-Wallace College in Cleveland.