Strategy is the key to staying in the game

By Peter Davis

Back in the fifties, a Maryland chicken farmer was contemplating how he could make a go of a business that he had taken over from his parents. Chicken in those days was, well, just — chicken; everyone was selling the same commodity and, because there was a glut of producers, prices were consistently low. But our Maryland farmer figured out that by packaging his product uniformly and attractively, he could give his customers something different; he could give them a better feeling about the product's quality and distinguish his chicken from that of his competitors.

Frank Perdue had a vision, and a long-range plan for market leadership. He also had a clear strategy, which made all the difference. A long-range plan specifies where you want to be in a few years. A strategy spells out how you intend to get there. Perdue's strategy was to stop competing on price and start competing on the basis of perceived value. He had to improve the quality and appearance of the product. And he had to build a brand name and image through extensive advertising.

In the history of family businesses, there are countless examples of great leaders who have come along in the second, third, or fourth generations and transformed a modest family business into an enormously successful enterprise. John Searle at G.D. Searle was third generation, as were the Dayton brothers at Dayton Hudson; the current Nordstroms are third generation, and Gussie Busch of Anheuser Busch was fourth. In each case, the leader saw an opening in the marketplace, a "loose brick" in the competitive wall, and by driving a wedge into it was able to build the business by several orders of magnitude.

These great success stories are obviously hard to replicate, but they provide us with some insight on what keeps family businesses alive and well. Clear vision and a well articulated strategy have been central to every one.

When Nordstrom Inc. started to become a major force in department store retailing, the family was powerfully committed to growth, success, and leadership. Their strategy was to flank the competition, to go after high-end consumers, offering them extraordinary product quality, merchandising, and service at a full retail price. To set high standards of service, they had to find a select group of motivated sales people who would be dedicated to customer service. They had to establish a highly talented merchandising team and bruisingly tough standards for their suppliers. Every element of their strategy reinforced the other and spelled out where fanatical attention to detail was needed.

Unfortunately, most family firms don't seem to have a strategy. Too many are hanging in there by the grace of God, just managing to survive year after year. They know their businesses and their customers well. They know how to sell at a price. But they don't know how to compete for long-term survival.

In a recent study of steel distributors, a colleague of mine at Wharton, Murray Low, compared the performance of family owned companies with that of those run by people without any ownership stake. Low found that the family businesses had, on average, lower rates of growth and profitability. He also concluded that more family companies had become "stuck" and were having a rough time changing their way of doing business.

Steel distribution is a boom-or-bust business that turns on the fluctuating price of raw steel and has low profit margins. Competitive pressures are so great that the traditional role of the distributor, to break up large shipments and provide access to small quantities of a product, produces little if any profit. Today the name of the game is total customer service, which has led to a panoply of new approaches such as materials cycle management, just-in-time delivery, and preproduction services. Current strategy focuses on developing leadership as service providers in valued market segments. It requires an ability to respond quickly to individual market segments, to package and deliver a value added service, to manage a lot of different segments, and to innovate.

In the last 10 years, companies that have kept up with this process have experienced a cultural revolution. Family owned steel distributors that have not changed, because of a family stalemate or because the "loyal" management unshakingly resists it, have been slowly dying.

The examples I have cited are of transformational strategies. In each case, the industry is changing and market leaders are slow in adapting to that change. Newcomers seize the high ground by moving swiftly to fill an unmet customer need. Perdue, Apple Computer, Nordstrom, Wal-Mart, and Jacuzzi all grew by means of breakthrough strategies. They all had a better mousetrap and were in the right place at the right time.

Jacuzzi provides an interesting example of how a breakthrough strategy emerges in a family business. Roy Jacuzzi was about the 105th family member to have been employed by his family's plumbing business in California. What Jacuzzi saw was the unmet need for the product that now bears the family name. In developing that product he not only transformed his family business — he transformed an industry.

In some industries today, change is so rapid that the strategic choices are simply to grow, sell, or perish. The drug distribution business, along with many other distribution businesses, has been going through a period of rapid consolidation. Economies of scale have developed that make it virtually impossible for the small company to compete. In 15 years the number of companies in the industry has gone from 300 to 50; roughly 250 family businesses have been sold or have gone out of business.

A few family businesses saw the trend and moved quickly to buy up other companies, staying ahead of the pack. One example is Bergen-Brunswick, which the Martini brothers built into a $4 billion dollar- a-year enterprise. Some other pretty smart operators waited until the consolidation wave grew and then sold their businesses just as the acquisition fever was at its peak — making a bundle. Those who were asleep at the switch during this period missed out.

Distribution has become a game for giants. Most of the niches in the business have been wiped out by technology. But fortunately for family businesses, this is not the norm. There are many industries today in which niches in the marketplace are surviving and flourishing. The demand for specialty in everything from food to bookstores has grown dramatically. Family businesses that occupy a niche, even in a dull market, can do very well. Many have built their franchise over several generations-L.L. Bean, Smucker's, Lemme's chocolates, for example. These niche businesses often are highly profitable but, almost by definition, limited in size. Their key to strategy for niche businesses is to preserve customer loyalty by paying scrupulous attention to quality and service, while keeping the competition out of the niche.

I came across a company several years ago that manufactures the machines that collect and count coins on America's toll roads. The company dominates this $15 million a year niche business because they provide proven machines that are accurate and won't break down. Over the years, they learned a million details on how to do it right. The business was highly profitable, but the niche was small enough that it didn't pay a large company to invest in reinventing the machines to capture a share of the market. Besides, the niche company had a close relationship with the toll authorities that couldn't easily be replaced.

Sometimes family businesses are protected not only by the size of the market, but by legislation. For example, approximately 600 small telephone companies in America are family owned. For 50 years or more, these companies, most of them serving rural areas, have been regulated, protected, and highly profitable for their family owners.

But owners of such niche businesses live in continual fear of losing their franchises. The toll-machine manufacturer is vulnerable to electronic technology; the small telephone companies today must invest in fiber optic technology. Holding on to a niche also means fighting political battles to maintain the protection of regulation. And it means doing all of this without alerting potential competitors to just how good the niche business is.

The possibility of losing the niche should prompt the niche player to diversify. The company needs to use its resources to buy into other businesses and learn to operate them before the cash cow is squeezed dry. (Some companies are so nervous about losing their niche that they constantly ask: "Should we cash out now, while we can still get top dollar?") Again, timing is everything.

A few fortunate family companies are market leaders in their industries and they face their own strategic challenge — how to maintain leadership. Some of the biggest are Milliken, Steelcase, and Anheuser-Busch, but many mid-size firms also lead their markets. A major threat to market leaders is "cherry picking." A competitor comes along and picks out the best market segments, leaving the market leader with the least attractive segments. Another threat is that the market leader will be dethroned by a competitor's technological breakthrough. Timex, for example, was quickly upended from its leading position in the watch market by Japanese electronic watch technology. But the biggest threat to market leaders is that they will lose touch with the marketplace: become too big, too humogeneous, too bureaucratic to survive.

A successful strategy for a market leader involves what Steelcase's chairman, Robert C. Pew, describes as "demassification." That strategy calls for breaking up the bureaucracy, decentralizing operations, adding uniqueness to the offerings in each market segment, and improving response time to changing customer needs. Market leaders have to confront the little guys who try to take away their business. They must have a product, a price, and a service for every segment of the market; if they don't, they may leave gaps for other companies to fill And they must avoid overpricing in and segment, lest they give the impression of gouging and stimulate a competitor to stampede customers with lower prices.

A market leadership strategy can be expensive. Steelcase, a third-generation family business, has poured more than $400 million into the process of demassification, raising some speculation that it may go into debt. Yet the plight of General Motors clearly shows us the fate of market leaders who don't make the necessary investment and changes.

If family businesses have any intrinsic advantage, it is their ability to plan for the long run. Most shareholders are patient, and in most family firms management doesn't have to worry too much about losing control. But this intrinsic advantage is useless unless it is acted upon. Every family business needs a long range vision and a strategy. The vision can be very general, but it must be specific enough in key areas to provide a sense of direction.

The family's vision for the future of the company should be generated by family consensus. For some the vision is to be a global company; for others, it's to dominate a niche. For still others, it's to be a market leader. A strategy shows how the firm plans to achieve the vision. Will it confront the competition, flank it, or engage in guerrilla warfare? What will be its product strategy, and in what markets will it choose to compete? A long-range plan takes months to put together, but a strategy can be formulated in a day.

Over the past 20 years we have learned from the Japanese what a difference good strategy makes. With a vision, patient investors, and a smart strategy, even the most resource-constrained competitor can conquer the world.