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|Three Keys to Immortality for the Owner-Managed Firms
Harvy Simkovits, CMC - Published in Boston Business Journal 3/17/00
With todays rapidly rising IPO corporations and the swallowing up of companies through merger and acquisition, we often overlook what it takes for owner-managed companies to last. From 15 plus years experience of working with owner-managed businesses, I have found that there are three keys to "corporate immortality" that allow business to make it through industry and economic fluctuations, as well as successfully transfer ownership from one generation to another.
Business Immortality Key #1: Business Reinvention
One of the fundamental and increasingly important requirements for business longevity is a company's ability to reinvent itself on a regular basis. It used to be that a company might need to reinvent itself every 10 or even 20 years, but at today's rate of change, companies need to reinvent themselves every three to five years.
Many family businesses dont make it past the first generation because of this. For example, my familys 25-year old business could not successfully make it through the 1970s consumer electronics industry transition from console stereos into component systems. In our misguided attempt to stay loyal to current customers with a low-cost console stereo line, we did not foresee the replacement of that product line with totally different products. It was a hard lesson that led to the eventual liquidation of that business.
Adrian Slywotsky, author of "The Profit Zone," says "A principal goal, and defining characteristic, of reinvention is that it provides value to the customer in a way that's profitable to the provider despite changes in the market over years. In order to maintain a continual competitive cutting edge, businesses must constantly ask themselves: How do we target our customers? How do we determine their needs? And then, how do we provide value in a way that's profitable?" The idea is to repeatedly transition your business over time from one profitable value formula to another.
Sometimes business owners get on a wave of business prosperity by being at the right place at the right time. Yet to ride wave after wave of business success requires always looking into the future to where the next wave is coming from, and to decide when its the right time to plunge onto it. This usually takes a combination of entrepreneurial skill and gut feel of the marketplace.
Business Immortality Key #2: Organizational Redesign
For economic survival, companies continually need to become sleeker and meaner. One distributor wanted to build greater flexibility and economy delivering vendor products directly to its customers retail stores, instead of their warehouses. This change required a major redesign of their distribution operations and logistics so that they could get the right products delivered in the right amounts at the right time onto retail store shelves. The redesign also required the companys management and employees to participate fully in the redesigning efforts. This is because the speed with which things needed to happen on the distributors warehouse floor now required, more than ever, that employees effectively cooperate and make responsible minute-by-minute decisions about how and when product got shipped from the distributors inventory.
Customers will continually demand lower prices and greater customization and flexibility in their vendors operations. Thus, to stay viable for the long haul, every company must learn to redesign its internal workings to remain both valued by their customers and internally profitable.
Business Immortality Key #3: Management Succession
Any company is only as good as its management team. As you think about how your company needs to be reinventing it business strategy, and how it needs to be redesigning its internal organization, can you envision your management team having the right players with the appropriate capabilities to move your company forward into that desired future?
Most owner-managed businesses rely on the leadership of one to three people in order to keep that company moving forward. But unless you make your business more self-managed, and less dependent upon the original founders, then its long-term future will be in jeopardy. Many owner-managers hope to leave their business to one or more of their children. More often than not, however, the children are not capable enough to lead the business forward as the parent heads into retirement. Management succession in owner-managed companies often requires 10 to 20 years of continual effort in planning and implementation. Procrastination in this effort is deadly to business continuity.
Business continuity may not only come from family succession. Barry and Eliot Tatelman of Jordans Furniture recognized this when they recently sold their company to Warren Buffetts Berkshire Hathaway investment firm. With no clear family successor currently in sight, and a need to provide certainty and security to company employees, Barry and Elliot ensured the immortality of their business by selling out to Buffett. Also, knowing Buffetts hands-off management style, the Tatelmans were assured of little interference both in their operating the business and in installing a family successor when and if one was ready, willing and able. Not every business owners can obtain a sweet buy-out deal as the Tatelmans did, but every owner needs to think about, as Barry and Elliot have done, the long-term future of their business.
Only the most fortunate and adaptive businesses last. Longevity requires that the companys businesss strategy be continually reinvented, its operations be continually redesigned, and its management be continually reconfigured. This way, the companys future can become a reality and not just a pipe dream.