Understanding Family Firms

SpringerBriefs in Business

For further volumes: http://www.springer.com/series/8860

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Alan L. Carsrud  •  Malin Brännback

Understanding Family Firms Case Studies on the Management of Crises, Uncertainty and Change

Alan L. Carsrud Ted Rogers School of Management Ryerson University Toronto, Ontario, Canada, Canada [email protected]

Malin Brännback School of Business and Economics Åbo Akademi University Turku, Finland [email protected]

ISSN 2191-5482 e-ISSN 2191-5490 ISBN 978-1-4614-0865-9 e-ISBN 978-1-4614-0866-6 DOI 10.1007/978-1-4614-0866-6 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011935144 © Alan L. Carsrud and Malin Brännback, 2011 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Acknowledgments

We are grateful to the Price Center for Entrepreneurial Studies in the Anderson School at UCLA for their support in the early development of some of the cases in this volume and to the Ewing Marion Kauffman Foundation of Kansas City, MO for their support in the development of those cases developed at Florida International University. Without our students at the University of California, Los Angeles, Florida International University, Ryerson University, Pepperdine University, and Åbo Akademi University, it would have been impossible to bring these cases to life and to make these stories available to a wider audience. We are also indebted to the family firms who allowed us to observe them and contributed their time and energy so others might gain insights.

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Contents

  1 Introduction............................................................................................. Background on the Cases.......................................................................... Managing Crisis, Uncertainty, and Change..............................................

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  2 Reading a Family Business Case........................................................... About Case Types.....................................................................................

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  3 Case One: Today’s Paint and Body – Different Views of Finding a New President.................................................................... Introduction............................................................................................... Chronology of Events............................................................................... Individual Perceptions of Family and Management................................. Bringing in an Outsider to Become President....................................... Organizational Structure....................................................................... Family Dynamics.................................................................................. Value of Outside Expertise in the Family Business.............................. Future Direction of the Firm................................................................. Background Information....................................................................... Bringing in an Outsider to Become President....................................... Family Dynamics.................................................................................. Future of Today’s.................................................................................. Background Information....................................................................... Bringing in an Outsider to Become President....................................... Family Dynamics.................................................................................. The Future Direction of Today’s........................................................... Bringing in an Outsider to Become President....................................... Outside Advisory Board....................................................................... Family Dynamics.................................................................................. What Is Best for the Company?............................................................ Next Stage.............................................................................................

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  4 Case Two: Neptune Enterprises – Dealing with Loss, Turmoil, and Technology Change....................................... Rough Seas Ahead?.................................................................................. The Neptune Adventure: Setting Sail....................................................... New Product Development....................................................................... Tragedy Strikes......................................................................................... A Wise Alternative?.................................................................................. Calling in the Coast Guard........................................................................ Clear Sailing: For a While........................................................................ Changing Tides in Education Publishing.................................................. Rip Tides at Neptune................................................................................. Exhibit....................................................................................................... Biographies of Key Players in Neptune Enterprises.............................

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  5 Case Three: Michael Window & Shutter Company – Disputes in Running the Family Firm................................................... Introduction............................................................................................... The Family and the Family Trade............................................................. Birth of the Family Business..................................................................... The Early Years......................................................................................... The Company Expands............................................................................. Current Situation.......................................................................................

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  6 Case Four: Barton Springs – When Family Members Leave the Business.................................................................................. Introduction............................................................................................... Background............................................................................................... The Products............................................................................................. The Industry.............................................................................................. Competition.............................................................................................. Personalities: First and Second Generations............................................. The Players............................................................................................ Personalities: The Third Generation......................................................... Thinking Succession.................................................................................

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  7 Case Five: Ocean Safari – A Choice of Staying in Business............... Prologue.................................................................................................... Family History.......................................................................................... Entering the Diving Industry.................................................................... Industry Overview..................................................................................... The Family’s Involvement........................................................................ Change in Ownership................................................................................ Ocean Safari’s Birth.................................................................................. Instruction Becomes a Value Added Service............................................ Family Business Developments................................................................

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Terror Affects the Industry........................................................................ A Decision to Be Made............................................................................. The Result.................................................................................................

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  8 Case Six: Siam Chemical – A Father’s Dilemma................................. Introduction............................................................................................... Prologue.................................................................................................... History of Founder and the Firm.............................................................. Shirley, the Woman Behind the Founder.................................................. Dana, the First Child................................................................................. Nancy, the Pseudo-Son............................................................................. Catherine, the Black Sheep....................................................................... Jennifer, the Little One.............................................................................. Leon’s Dilemma........................................................................................

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  9 Case Seven: Marina Cove Ltd. and the Guthrie Family..................... Preface to Case.......................................................................................... Part I: When Family Members Do Not Make Good Employees.............. Introduction........................................................................................... The Story Behind Marina Cove............................................................ Sean’s Luck Runs Out........................................................................... Unfair Expectations.............................................................................. Biographies of Key People................................................................... Exhibit 1................................................................................................ Part II: Terminating Family Employees.................................................... The Board Asks Sean to Step Down..................................................... The Calm Before the Storm.................................................................. Board Enforces the Code...................................................................... The Ultimate Decision.......................................................................... Code of Conduct for Guthrie Family Members.................................... What Happened..................................................................................... Exhibit 2................................................................................................

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10 Case Eight: Lennar Homes – Surviving Death and Recession........... Introduction............................................................................................... Overview: Corporate Strategy................................................................... Management and Operating Structure...................................................... Competitive Advantages........................................................................... Few New Entrants................................................................................. Shifting Power of Suppliers.................................................................. High Intensity from Existing Competition........................................... Power of Customers Increasing............................................................ Substitute Housing Increasing.............................................................. Market Conditions.................................................................................... Industry Outlook.......................................................................................

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Family....................................................................................................... Planning for Succession............................................................................ Stuart Miller, 51, Son of Leonard.......................................................... A Father’s Example............................................................................... Building a Homebuilder Career............................................................ Management Style.................................................................................... Next Generation........................................................................................ Conclusion................................................................................................ History....................................................................................................... Exhibit 1.................................................................................................... Balance Sheets...................................................................................... Income Statements................................................................................ Cashflow Statements............................................................................. Exhibit 2.................................................................................................... Direct Competitor Comparison.............................................................

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About the Authors........................................................................................... 101

Chapter 1

Introduction

In this first volume of a series containing cases on issues facing family-owned and -managed businesses, we look at a variety of situations which require the family and the firm to deal with changes to the external business environment or changes within the family that require action by the family owning and managing the firm. It is the role of uncertainty, crises, and changes and how to respond to these changing situations that link these family business cases together. Crisis events are things that all of us have experienced such as: power failures, epidemics, and natural disasters like oil spills, tsunamis, and hurricanes. These are events that are clearly threats to the survival of a business. But of equal importance are often the stresses that come from having to manage a firm during periods not of crises like an economic recession or depression, but when both the external and internal worlds of an organization are in flux and there is a high degree of uncertainty about what might happen and how to respond to those, as of yet, unclear threats. Then there is the management of change within a family firm that often comes as a response to both crises and uncertainty. It is the management of the family firm during these times that is what clusters these cases together. While succession may be a part of the changes facing the firms depicted in this volume, the driving theme in these cases is the variety of situations of uncertainty and the subsequent changes that a firm faces sometimes as a result of a succession issue. Some of these changes are in leadership; others are focused on the threats that technology brings to family business. Still others are crises related to economic conditions. In most of these cases, the families and firms are faced with multiple issues at the same time, which often interact with each other to increase the challenges that management has to meet these situations. Often is not a maximization routine but an optimization one in which one has to balance a variety of outcomes rather than finding a single best option. In all of these cases, the answer as to what to do is never clear and the options for dealing with these threats or opportunities are fraught with uncertainty.

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_1, © Alan L. Carsrud and Malin Brännback, 2011

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Background on the Cases These cases in this volume initially were developed as a part of the curriculum for teaching family business to both graduate and undergraduate business school students in the United States, Canada, Chile, Australia, and Finland. However, we feel their utility goes beyond the classroom and should be informative to consultants to family firms and family business owners as well. Often reading about the issues others have faced and how they have dealt with these can provide clarity to one’s own issues. The purpose of a case in family business is not to expound on one correct answer to a particular problem. What a case does do is to show the relative complexity of issues facing family firms that depend on a number of players coming to some agreement as to a solution that works for all concerned. Sometimes this is successfully done, in other cases the resolution to a problem is less than ideal. Another reason for cases is to show others in family business that they too are not alone in dealing with similar issues and to provide them with a chance to see how different scenarios can play out within the complex fabric of the family-owned and -managed firm. Many of the cases in this volume, and subsequent volumes, have been de-identified. In others, the cases are on real firms but using only information available to the general public. We hope that by reading these cases, both families in business and students will come to appreciate the issues facing family firms and the complexity of the systems (family, management, and ownership) that interact to influence the decisions made concerning the firm. While some of these cases may discuss events in the past, the issues are as relevant today as they were the day they were first faced by the individuals in the firm. Most of the cases are brief. They are not meant to be a complete representation of the family, the firm, and/or the situation. They are meant, however, to give the reader a feeling for what is being faced in the cases and the people in the case who are going to have to make some decisions with respect to handling crises, uncertainty, and changes that are being thrust upon them. Each case in this volume contains some history of the firm. Information is provided on the relevant family members. Some cases have important nonfamily employees who are also described in the case. Many cases are written from the perspective of a protagonist who is looking upon the situation and trying to decide what to do. As the reader you may, or may not, wish to put yourself in the place of that protagonist.

Managing Crisis, Uncertainty, and Change Management scholars have paid attention to the strategic planning activities of management when dealing with the occurrence of uncertainty, crises, and business interruptions. In addition, there is much known about how to manage change in organizations. While much of this work has been done on large firms, some has also

Managing Crisis, Uncertainty, and Change

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focused on smaller ventures and family firms as well. One could portray this type of management as non-planned reaction to the failure of an intended plan, or as often an intuition-driven process. While this may be true of crises and disasters, in most situations management of uncertainty and change requires being focused on day-to-day decisions, which in some cases may also lead to more formal strategic planning. It will be evident in the cases in this volume that change management in the family firm is not a formula or systematic prevention to a single event but a balancing act that requires juggling variety of events simultaneously. Crisis management in the family firms is often defined as a surprise event that threatens high-level goals and provides little time for family owner-managers to respond. These events could be grouped into seven categories; physical crises, personnel crises, external criminal crises, information crises, natural disasters, economic crises, and reputational crises. The management of change, uncertainty, and/or crises involves planning and coordination to prepare for, and respond to, situations that threaten both the family and their business continuity. Some threats have a low probability of occurrence but are severe in their and the limited time that managers have to respond. The management of change, crises, and uncertainty should be considered a vital activity given the potential for such events to devastate a family firm. Academics have looked as the crisis process often taking a sociotechnical view of causation. Others have classified event types like succession crises. Some researchers have attempted understand postcrisis organizational learning. Students of family business often focus on the succession crises of family-owned and -managed business and whether such crises are inevitable. The dysfunctions of family management, family systems, governance, and decision-making are, as well as external threats, the foci of most family business scholars. Only a few have given attention to the capacity for family firms to build resilience against internal and externally derived threats. We think some of these cases show how resilient family firms are and how they learn to adapt to changing conditions. Despite the fact that there is a long tradition of work on business continuity management with attention to the development of planning and management practices for the prevention and recovery from business interruptions, little of that work seems to have focused on some of the unique situations that often hit family-owned and -managed firms. What is still needed is to provide family firms with a framework for building their resilience through developing effective responses that protects the interests of its various stakeholder groups, value creation processes, reputation, and image. Finally, we hope that in these cases we can move beyond a single contingency focus and show a much broader firm-wide and family-wide holistic approach to dealing with crises, uncertainty, and change.

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Chapter 2

Reading a Family Business Case

Reading a family business case, you will see the unique issues facing entrepreneurs and their family firms. To get the most from these cases, you should ask yourself the following questions: • • • • • •

What is the situational context of the case? Who are the principal players? Who do I identify with in the case? What are the pertinent facts in the case? Have I looked closely at the exhibits? What concepts about family business and management in general should apply to this case? • Does this case represent a situation that I might face? Reading a family business case should help you, the reader, to understand key concepts through self-discovery. In this process you will learn that there is no permanent right answer for any family business situation and that there are many different ways to handle issues facing a family firm. We hope we have developed a series of cases that will have compelling situations so interesting questions can be asked. You will find these at the end of each case under the heading, “Learning Notes.” Our goal is to help you to ask penetrating questions about how you would have handled the situation if you had been involved in this situation. This should help you learn different courses of action, perhaps find a better answer to solve a situation in the case. However, please remember that business cases are often messy and confusing. But, family business cases are even more “messy” just like families themselves. You will discover that firm problems are rarely found in neatly wrapped packages. When reading a case please remember that they are not histories, but often are built in historic fashion. They clearly are stories of a family and their firm and thus are a part of the narrative tradition so much a part of all cultures. We have edited them to reduce the level of “noise of everyday life” but they do represent a selection of facts and inferences that, we believe, presents a learning situation.

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_2, © Alan L. Carsrud and Malin Brännback, 2011

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We have done this to allow the reader to step into the situation/opportunity being faced by someone else. We hope we have created a microcosm of life of a business owning family and of the life within their family firm.

About Case Types Cases are developed by the research team and authors so that the reader has to respond to a situation where there is some form of action required. Often there is a range of possible actions available, which require applying a range of different skills. They are usually written from the standpoint of someone in the case who is the protagonist. While families and firms are highly complex, the writing team, for purposes of clarity, picks a limited set of foci for the situation within the family and firm. Often this is influenced by the current research literature in the field which can be applied to the case. As much as possible this review of the literature helps create an outline of the situation providing a basis for the logical flow of case facts. The authors try to communicate the action of the case in an engaging manner, providing relevant facts and not overloading the case with irrelevant material. You will find in cases things like biographical sketches of players along with financial data, industry information, or other information believed to be critical for understanding the case. In the end we are hoping to tell a story where there may or may not be an obvious solution to the problem. All of these cases are based on real people and we hope that their humanity comes through in what has been written. There are four basic case styles (1) Highly Structured Cases; (2) Short Vignettes; (3) Long Unstructured Cases; and (4) Ground Breaking Cases. We will briefly review each of these so you can appreciate the variety of the cases provided. The Highly Structured Case is typically short, contains no excess information, its problem is well ordered and stated. In such a case there exists a best solution. One can apply known tools or models and within the case there is sufficient data available for solution to be derived. Several of the cases in this series of case books fall within this category. Another variety of cases are those best described as Short Vignettes. These are typically used to introduce a key concept, such as succession planning. They typically offer little excess information. They may be rather short, from 1 to 10 pages. What may be surprising in these type of cases is that the best answer is not derived from simple formula. These type of cases are usually used as a short teaching vehicle to get across one or two concepts. Some of the cases in this series fall into this category, but as with all family business cases, complexity usually is the dominant feature. The next form is the Long Unstructured Case. It is typically 10–50 pages, often with several exhibits including financial data and industrial sector commentary. These longer cases are when the writers want to reflect the reality of a situation with more of its complexity. This is done by providing nearly all needed information about the situation. Because these cases are full of both qualitative and quantitative

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information it is often more difficult to apply financial models to the problem. This is because the underlying problems and/or opportunities facing the firm and family are unclear. These cases do cover terrain where knowledge exists and/or there are preferred practices about how family issues can be addressed. It is these type of cases that should lead the reader to want to explore the existing research literature in family business, entrepreneurship, and general management. There are examples of this type of case in this series of case studies. You will find exhibits in these cases such as financial statements, organizational diagrams, etc. Many times these exhibits are unique or specific to the family business case and some of these may be “uncommon” or surprising. The final type is known as the Ground Breaking Case. They are usually written by and for advanced MBA and doctoral students. This allows students and instructor engaged in joint exploration. From a research standpoint, these are usually the first stage in looking at an under research phenomena where little existing or prior knowledge exists on which to base systematic research. These are the cases which have as a goal, extending the knowledge base. While it would have been nice to put such a case into this series, these frankly end up as books unto themselves or become doctoral dissertations.

Learning Notes At the end of each case you will find a Learning Note. These are typically directed to faculty members to use to direct class discussion, if they are using the case in an educational setting. In these volumes we direct these to the reader as questions the reader should be asking themselves. In some cases the concepts presented are tied to the existing research literature when possible. Sometimes, these notes state the obvious focus of this case. At other times they may also discuss the hidden issues in the case. Hopefully, they will challenge the reader to think about what business skills, or knowledge, they should apply to case. Some of these notes are longer than others and many issues raised in one can be applied to other cases in this series.

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Chapter 3

Case One: Today’s Paint and Body – Different Views of Finding a New President

The research for this case initially was undertaken by Geoff Gilpin, Taka Hayashi, David Hou, Tamara Wolfe, Chris Renner, and Nancy Wong. The case was developed by Alan L. Carsrud and Mark Wisniewski. This case looks not just at firm leadership, but the perceptions of who ought to run a family firm and the differing perceptions of those who are involved both from the family and outsiders.

Introduction The smog created a haze in the sky as the sun beat down upon the windows of Today’s Paint and Body’s corporate headquarters in San Diego, CA. It was May 1992 and Javier R. Tomas (Ric Sr.), the founder, president, and chairman of Today’s Paint and Body, sat in his office contemplating the challenges that lie ahead. He was thinking, “what is best for my family?” To Ric Sr., “…family is first and the business will survive only if the family is happy.” Ric picked up his coffee cup, took a sip, slowly got up, and walked over to the paint and body shop located a few yards from the corporate offices. The paint and body business is a fairly simple operation. First, the cars are sanded to improve the new paint’s adherence to the surface of the car. Second, if needed, body work, such as pushing out dents or replacing parts, is completed. Cars are then masked which involves taping paper over all areas of the car that are not to be painted, lights, windows, door handles, etc. Next, one car at a time is put into the painting chamber whereby a painter dressed in a protective body suit and oxygen mask uses a spray gun to paint the car. Finally, the newly painted car is put into a heat chamber and is heat treated until the paint dries. A typical shop floor at Today’s houses only one paint chamber and one heat chamber. As Ric Sr. passed the masking process, he noticed there was a huge line of cars that were masked and ready to be painted. Just as Ric Sr. was counting how many cars were lined up, an employee who was on the other side of the shop rushed over A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_3, © Alan L. Carsrud and Malin Brännback, 2011

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to greet him. “Hello Mr. Tomas, I am George. I have been a supervisor at another Today’s location for over five years and transferred to this shop about a month ago. I have not yet had the pleasure of meeting you.” Ric Sr. smiled and gladly shook George’s hand. However, Ric Sr. felt uneasy. He realized this man had worked for him for at least 5 years and yet he had never met George. Ric Sr. felt he had neglected his relationships with his employees. It used to be like a family in the early days. That was before Ric Sr. became ill. He was losing touch with his family and the business. Prior to that tragic period, Ric Sr. regularly traveled to all the shops and chatted with the workers. Frequently he even gave them extra money to let them know they were appreciated. Now with over 33 locations and a lower energy level than before, it was increasingly difficult for him to manage the day-to-day operations of the firm, much less get out in the field. As Ric Sr. was returning to his office, Rick Jr. (Ric Sr.’s son), the director of marketing, drove up. Ric Sr. and Rick Jr. were going to meet with Tom and Bob, Ric Sr.’s sons-in-law, and Charles, a long time advisor, to discuss what direction the company should take in the months ahead. In particular, Ric Sr. wanted to know how everyone felt about the four major topics (1) the prospect of an outsider replacing him as President, (2) the structural problems within the business, (3) current family dynamics, and (4) the future direction of the Company.

Chronology of Events 1967 – Today’s Paint and Body was established by Javier R. (Ric) Tomas and Darrell Hammer. The reason Ric Tomas began his business was simple: he lost his job as a manager for Earl Scheib Auto Painting. Yet, the need for an income was not the only motivator for Ric. He knew he had new ideas for the auto painting industry. More importantly, he knew he could do it better than others in the industry and that his way could be successful. As with most people, he often said he wanted to have a business for himself, but unlike most, he actually started his business. To get started he needed financial backing, which came as a loan of $2,000 borrowed from his father. The first location in Gardena was an instant success with sales at $160,000 during the first year. The original price of a paint job was $27.50. 1969 – Despite the best of intentions to create a viable partnership and with annual sales near $500,000, the partnership between Tomas and Hammer dissolved. The five existing locations were divided between the two men. Tomas kept three locations (San Diego, Van Nuys, and Anaheim – these are still in operation today) while Hammer retained the other two outlets. Tomas elected to keep the name of Today’s Paint and Body because he felt it was a name in which he had invested his future. 1970 – This period could best be described as one of extensive expansion and growth. The Ocean Avenue store became one of the company’s largest locations. Its manager, George Madonna, quickly added warehouse facilities to the Center. Ric always willing to extend his employees the chance to succeed personally offered Mr. Madonna a percentage of the business at that time. As with any growth-oriented

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new firm, expansion was funded both by external loans and investments as well as by internally generated profits. 1972 – The operational goals communicated by Tomas to his managers at this time were simple: generate at least 11 perfect cars per day. 1973 – Expansion continued at the rate of two new locations in southern California per year. Prices were $27.50–49.95 per paint job. At this time Today’s began its first concerted marketing campaign, featuring Ric as its spokesman. Following from his Hispanic background, the firm becomes a “family” with a true sense of “belonging” developing among the employees. Employees began to view the ever-present Tomas as patriarch of the Today’s “family,” which Ric seemed to foster with his everpresent “bonuses” to good employees and “loans” to those in need of help. 1974 – Continued growth required the firm to build new corporate offices, which were opened behind the San Diego location. Emphasis on high quality and service remained the marketing focus. The bonus structure became more formal with a 10% performance bonus plan being initiated among the centers. Sales exploded as Today’s rivals Earl Scheib for market in southern California. 1977 – The first out-of-state location was opened in Las Vegas. 1981 – Newer and larger Corporate Offices were opened across from the existing office. 1983 – The company expanded this time by its largest single purchase of six locations from Henderson Paint and Body at a cost of $3,000,000. This was the best year for the Company to date in terms of financial performance. Before tax profits were 17.5% of sales. 1984 – Sales reached $27,000,000. The “Today’s Challenge” marketing campaign was initiated. A Training School was initiated for the purpose of orienting all new management personnel. 1985 – Growth in sales began to level off after record increases in the previous years. Mr. Madonna was reassigned to the position of vice president of Quality Control. Restructuring also took place in the Wholesale and Retail Divisions and North and South Divisions. Vince Nada and Mario Santos began sharing the position of vice president of Operations. Frank Gordon was hired as the first full-time Marketing Director. Ric, exhausted, entered a period of mental depression and stepped down from the day-to-day company operations. 1986 – Arturo De Toro, a Harvard MBA graduate with no industry experience, was hired as the new President to replace Ric. He proceeded to open locations in Tucson, AZ and Albuquerque, NM. Sales began to decline. 1987 – Due to disagreements over his managerial style with Ric who remained Chairman, De Toro left. Though not completely recovered from his illness, Ric resumed the position of President and CEO. He introduced a new line of paint, “Sunthane,” in selected centers to battle the demands for paint products that are less air polluting.

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1988 – Sales began to increase again. A complete re-computerization was initiated in the Corporate offices to improve point-of-sale data. Sales rose for a second year after the declines of 1985–1986. 1989 – The company realized its greatest sales increase in 5 years. Total sales for the 32 locations are over $33,000,000. Office computerization completed.

Individual Perceptions of Family and Management Tom Franco Age:  30 Title:  Vice President of Finance Relationship:  Son-in-law of Ric Sr., married to Marta

Bringing in an Outsider to Become President Tom feels that Ric Sr. has reached a point in his career where he just wants to work on the “fun stuff” and not deal with the problems and headaches of the day-to-day operations. Because Ric Sr. has not been a consistent hands-on president during recent years, the family members have reached a high level of frustration when leadership is needed. Even family members outside the business have criticized the way things are run. Although the family recognizes this problem, there is no one within the Company who is capable of moving into the position of president. Tom feels that if the group commits to the idea of an outsider coming in, it will happen. However, if one or more of the family does not want it to happen, the idea can be easily “sabotaged.” If other aspects of the business become priorities, the search for an outside president can be easily put on the back burner. In comparing the level of commitment of an outsider to a successor from within the family, Tom feels that the level of commitment depends on the individual, the selection process, and how well the person is compensated. He recognizes the need to obtain a successor who has an objective perspective and can work with Ric Sr. as Tom highly doubts that any of the family members would suddenly “decide they wanted to run the company” once the new president is hired. If this happens, he thinks that this family member should acquire a new company or start an outside venture rather than disrupt the organization of Today’s again. Regarding how his role would change with a new outside president, Tom believes once serious discussions about the transition start, he would feel more like Ric Sr. in that he wouldn’t want to give up control of the company to someone else. He says, “The closer you get to making a change, the more you realize that you don’t want it to happen.” But after discussing the idea further with Bob,

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Rick Jr., and Ric Sr., he realizes that he would probably leave the company within 6 months of the transition. “I realize I am spoiled. I run around here and when I  talk, people listen. I  don’t want to be an impossible person for him [the new president] to work with.” After the transition takes place, Tom plans to “…run around with Ric Sr. for awhile.” He has stated an interest to have the time to acquire one or two new companies, which would be entirely separate from Today’s. Although the new venture wouldn’t have to be with Ric Sr., his father-in-law would probably put some money into it and be on the Board of Directors. Regarding Today’s, with a new leader Tom would not have an active part in the business, but he realizes that he could never completely divorce himself from it. In regard to the nonactive family members of the board, Tom thinks he knows their feelings about getting an outsider to become president. “We’ve already talked about restructuring the Board, getting legitimate Board members that will offer direction to the Company. As we head towards that, I think they will still want to be on the Board. But we really haven’t had a Board meeting in two to three years. We could have shareholders meetings, but out of all the Board members, I think Ric Sr. is the only one who can read a financial statement and understand it.” In Tom’s view, the Board members’ lack of business knowledge makes it difficult to communicate the problems of the business and thus, obtain constructive feedback. Tom believes that Rick Jr. is “all for” an outside president because his frustration level is such that he can’t deal with his father. According to Tom, Rick Jr. would like someone to be there on a day-to-day basis to provide leadership and to be accountable for running the operations. Despite Rick Jr.’s verbal support of an outside president, Tom describes Rick Jr. as having a “defeatist attitude.” He believes this stems from having seen the family attempt to find leadership so many times before. At one point Tom thought Rick Jr. was going to take things forward and ask to become president, but he feels that the situation between Rick Jr. and his father is an obstacle.

Organizational Structure To Tom, one of the greatest problems at Today’s is getting someone to take decisions. If someone asks Ric Sr. for a decision, he will always want to get more information. If that person goes ahead and makes the wrong decision, they’re “in the frying pan.” On the other hand, if it works, no one says anything. Family members feel uncomfortable with this process of decision-making. Furthermore, the top management feels like “orphans.” When Ric Sr. is not there to provide direction, managers direct questions to any family member hoping that the subject will be brought to Ric Sr.’s attention. Family members are perceived to have the power and authority to make decisions even when these decisions fall outside their area of responsibility.

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3  Case One: Today’s Paint and Body – Different Views of Finding…

Family Dynamics The family and business overlap to a high degree. Tom feels that he is viewed as “somewhat effective in the company” because he gets some things done. “I haven’t stumbled terribly so I’m in good favor with Ric Sr. The reason why I’ve been somewhat effective is that as a family member, I can tune Ric Sr. out.” For example, when Tom drives down the street with Ric Sr., his father-in-law often points out “zillions” of business opportunities and asks Tom to follow up on them. Tom keeps his sanity by having the attitude, “I’m not going to waste my time on something that’s not going to happen.” Internally family dynamics play a role in the firm according to Tom. For ­example, while Rick Jr. is in charge of the corporate marketing of the company, Ric Sr. has an affection for advertising too. If Rick Jr. was to follow his father, “it would be going in a million directions at once and we wouldn’t get anything done.” According to Tom that’s where Rick Jr.’s frustration comes from. For example, in a short period of time Rick Jr. may discuss ten different marketing concepts with his father. If Rick Jr. does not pick the one that produces optimal results, his father would asks him why he did not choose a different option. Furthermore, Ric Sr. insists that his son use certain vendors with whom his father has personal relationships. Even if Rick Jr. believes that a media firm is not providing adequate service or that they are overcharging Today’s, he cannot really do anything about it. Tom says, “the way things are dictated to him [Rick Jr.], he sometimes feels like a secretary.” Tom claims he does not know the extent of his mother-in-law’s (Marta) influence in the business. Although she has control of 47% of the company, Tom sees Ric Sr. as “the ultimate source of power.” In reality he sees much of the family dynamics governed by their economic dependency and interdependency. “There’s a very high standard of living that we all enjoy and if push comes to shove, no one wants to give it up. Thirty years from now we’ll probably still all be here.” However, Tom believes his involvement in the business is not entirely motivated by money. “I wouldn’t jump to another company for equal pay per say. There’s more than money here, you’re protecting the family fortune. You’re helping Ric Sr. who has a health problem. You’re trying to keep things together. That is our goal.”

Value of Outside Expertise in the Family Business To supplement the “lack of expertise” in certain areas, Today’s has utilized the help of outside advisors. Tom feels that outsiders claim they will always fix the problem, but “it never happens.” In fact, it often times “makes the problem worse.” This was the case with their MIS consultant and environmental experts. Although they have had problems utilizing outside expertise, Tom feels that Today’s management tends to give outside experts more credibility, especially since Ric Sr. is impressed by those with higher education.

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Future Direction of the Firm Regarding the idea of Today’s expanding internationally, Tom feels that Today’s has had a tough enough time expanding to other states. Tom recognizes that there is money to be made by expanding into international markets. However, he says, “I think we could get the resources if we could demonstrate we had the management, but we don’t have the management.” Tom feels the future of the company is difficult to predict especially given the environmental regulations that are getting tougher and tougher in southern California. In some places, local environmental agencies may only issue operating permits for 1 year. These constraints make it hard to grow something long term. He feels Ric Sr. has some good ideas, but does not know if he will actually be able to implement them. Charles Johns Age:  60+ Title:  Former Controller and currently, Outside Advisor Years with company:  12+ Year began with company:  1974 Year retired:  1986

Background Information Charles Johns was (and is) one of the most senior members of the management team. He began with the Company in 1974 and has 12 years of experience with the Company. Charles was the corporate Controller when he retired. Ric Sr. feels that Charles was one of the employees who was most responsible for the success of Today’s. Because of Ric Sr.’s illness and the recent problems that the Company was encountering, Charles was asked to return and help management through a crucial time. Prior to leaving, Charles was in charge of corporate financial planning and reporting. His responsibilities included the areas of accounting, bookkeeping, payroll, insurance policies, workman’s compensation, and many other administrative duties. Charles began working at Today’s at a very exciting time of the Company’s history. The firm had begun to grow and started to establish itself as a major competitor in the automobile painting industry on the West Coast. Revenues had increased from $18,000 to 100,000 per location per month. With such high growth, the need for adequate financial planning and reporting was crucial.

Bringing in an Outsider to Become President Charles feels that the idea of bringing in an outsider to run the Company is not only a good idea but also a necessary one. In the past, the Company was able to get by without a well-trained president because “business was good” and the economy was

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3  Case One: Today’s Paint and Body – Different Views of Finding…

doing well. Now that times are tougher, the need for a strong capable president is vital. The Company has no choice but to bring in a capable outsider as president. Charles feels that the children (Rick Jr., Bob, and Tom) currently do not possess enough experience or ability to successfully manage Today’s. He feels that an outsider who can run the Company will eventually be located. In the past, management has attempted to bring in an outside president. Arturo De Toro, a Harvard MBA, was referred to the Company from a local bank. But it did not work out. Charles feels that management has learned from its past mistakes and is now better able to select a person to succeed Ric Sr. Additionally, Charles believes that in previous encounters with selecting a new outside president, Ric Sr. was not ready to let go of command. Charles believes that the current situation is different. He believes that Ric Sr. is “hurting enough” to step aside. “There are very few alternatives.”

Family Dynamics Charles suggests that the way by which Rick Jr., Bob, and Tom were initially brought into the Company was questionable. He feels that the “boys” should have been brought in at more humble beginnings. Charles believes that Ric Sr. should have made them work their way up the Company ladder. As Charles states, “…you have to put almost the same or tighter criteria on them (the relatives) than outside people brought in.” Charles believes this stricter process would have better prepared the son and sons-in-law to manage the Company. Charles also believes that Rick Jr. was too well taken care of by Ric Sr. “The boss’ son” syndrome created problems from the beginning. Charles asserts that the Company has been run by one person (Ric Sr.) who is an excellent operations manager, but lacks the ability to be a great all around leader that a CEO or president of a large company must be. He believes that the president of a $30 million company must not only understand the operations aspects but also the other essential parts of the business such as finance, marketing, corporate planning, and human resources. In Charles’s opinion, Ric Sr. does not now possess the energy to run such a Company. Charles believes that Ric Sr. can and has run the paint shops extremely well, but to manage a corporation requires a different set of skills. Charles believes also that the boys will not have a problem in taking directions from an outsider. He believes that they are reasonable people, and will accept guidance.

Future of Today’s Charles does not claim to know all the potential future directions the Company should take, but he does believe that expansion is very possible in the southern

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states, especially in Arizona, Texas, Florida, and Georgia. Whether or not any expansion will occur will depend on a successful method of succession, and a strong leader to guide the Company back into higher growth and profitability. Bob McMurray Age:  33 Title:  Vice President of Human Resource Relationship:  Son-in-law of Rick Sr., married to Teresa

Background Information Bob met Teresa (Ric Sr.’s oldest daughter) in high school and eventually married her. Before Bob joined the management team at Today’s, he worked as a sheriff. In 1983, Bob began at the Today’s Oceanside location and comanaged the shop with Rick Jr. With hindsight, having Rick Jr. and Bob work at the same location was not a good idea. They immediately became adversarial. Bob believes that Rick Jr. disliked him because Bob was treated more as a son than a son-in-law. The fact is that Ric Sr. values education so highly and that Bob had graduated from college and received his MBA from San Diego State, while Rick Jr. did not graduate from college, alienated Rick Jr. further. Additionally, the fact that the Company paid for Bob’s graduate educational expenses did not help the situation. In 1983, Ric Sr. began looking for someone to implement a management training program at the Company. Bob was asked to start and monitor this program at the corporate offices. Although Bob and Rick Jr. were now separated from direct confrontation, there was still tension between them. In 1987, Bob decided to leave the Company and start a new business with a friend in the field of computer programming. Bob remained at the Company part time, but eventually the computer programming venture experienced problems, and Bob returned to the Company full-time as Vice President of Human Resources.

Bringing in an Outsider to Become President Bob feels that having an outsider come in to run Today’s is a good decision. He thinks the Company needs a professional manager. Bob believes that no one within the family is ready to take over Ric Sr.’s position and manage the firm. The new president would be involved in both operations and strategy. The new president does not have to be experienced in the auto painting industry, but needs to have enough experience to manage and grow a multi-million dollar company. Additionally, Bob feels that Ric Sr.’s desire to bring in an outside president is a rational decision due to his health problems. In the long run, Bob thinks one of the family members should become the president of Today’s. However, Bob is not interested in becoming the president.

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3  Case One: Today’s Paint and Body – Different Views of Finding…

He says, “…the auto painting business is a great business mainly because competition is not severe, however, I do not enjoy this business and do not want to work at Today’s indefinitely.” Bob plans to attend law school at Pepperdine. He believes that Tom is the most capable family member to manage the business, but that no family member is truly qualified.

Family Dynamics Bob claims that Ric Sr. always treats his children as “children and not as adults.” This type of treatment results in problems for the family members working in the business. Bob wants more responsibility and authority in order to contribute to the Company, but he feels helpless. “Ric Sr. will always take care of everyone in the family [by employing them] because they are his children,” but Bob believes that having a position without the authority and identity that comes with it is frustrating. Although Ric Sr. has good intentions, the way he treats his children hinders their ability to contribute to the Company. Bob believes this particular method of running the family business is ineffective. Given his experience, Bob made a suggestion regarding how to bring in additional family members into the family business. New family members joining the Company should be exposed to as many different job functions as possible. After an appropriate training period, a position could be created or located that matches the family member’s aptitude and interest. In addition, Bob believes in utilizing family counselors to discuss family business issues. At one point, the Tomas Family Council meetings took place 3–4 times a year and included all the family members. These meetings served to bring up issues such as succession, estate planning, and strategic direction.

The Future Direction of Today’s According to Bob, selling the business (not including the $20 million of real estate) is currently not an alternative for Today’s. In 1982, Today’s generated $25 million in sales and $4.5 million in profit. In 1991, however, while sales increased to $27.5 million, the profit dropped to $1.2 million. Although the profit level is up from the previous 3 years, it still has not reached the level of profitability of 1982. Bob believes the goodwill portion of the selling price of the business would be approximately $400,000. This amount is not sufficient for the family to consider selling the business. He also believes the annual profit must be increased to $5–6 million before the family members would be able to attract a reasonable price and be willing to sell the business. To do that, the Company needs to increase its sales to $50 million. One way of achieving this sales level is by adding more than 12 new locations and cutting expenses dramatically. At this point an initial public offering is not a good alternative either. Again, because the Company does not make enough profit, it would probably not be worth

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selling the Company to the public. Furthermore, there are no economic advantages of going public. If the company should need capital to expand, it would be more advantageous to issue debt than to sell equity, especially because Today’s does not currently have any debt. Bob claims that franchising could be a good option. However, the Company may lose some control which Ric Sr. does not want to happen. Additionally, to achieve $5–6 million profit by franchising, the sales would probably have to exceed $80 million which could be very difficult to achieve. Bob claims, if Ric Sr. were to die, the current family members (in management) would have a difficult time running the business. Eventually, the family would sell the company including all real estate holdings. Javier Tomas (Ric Sr.) Age: 60+ Title: President, Founder, and Chairman Relationship: Father

Bringing in an Outsider to Become President Ric Sr. acknowledges that bringing in an outsider to become president does not occur without fear. In this case it is the fear of selecting the wrong person. What if the new president creates chaos among the family members due to personality differences, family dynamics, and control issues. This happened once before. Tom, Bob, and Rick Jr. have become accustomed to making their own decisions and running their own shows. Now someone new will be telling them how to run the show. Furthermore, this person will possess the authority to fire anyone, including Tom, Bob, and Rick Jr. This could create serious problems. Tom, Bob, or Rick Jr., despite their plans to leave the business, might decide to stay. What if they decide at some point that they are ready to become president? According to Ric Sr., “If that happens, I will have to reevaluate the situation. If the president is doing a great job, maybe I could make the interested son (or son-in-law) a CEO. I would hate to disrupt a successful president’s position.” In case the new president does not work out, it might be in the best interests of the Company to groom one of the boys to take over. Currently, none of the boys have the managerial skills or experience, nor the operational skills necessary to run the business. Furthermore, Ric Sr. is not willing to manage the Company at this point in his life.

Outside Advisory Board An outside advisory board has been hired to aid in making a smooth transition. The outside advisory board includes academic and professional experts of entrepreneurship and family business people who understand the inter-workings of

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3  Case One: Today’s Paint and Body – Different Views of Finding…

Today’s. Ric Sr. has great respect for these individuals. In his words, “respect has to be earned, it is not to be demanded.” On the other hand, Ric Sr.’s wife, Marta, fears the outside advisors implementing the transition. In fact, she would like to be on any advisory board. However, she does not possess the necessary operational knowledge of the firm. It recently was decided that the directors will interview the various candidates for president and act as checks and balances throughout the selection process. However, Ric Sr. will still be intimately involved in the decision.

Family Dynamics Ric Sr. has always hoped that someday his only son, Rick Jr., would takeover the reins of the Company as president. However, the only interest Rick Jr. showed in the position of president is when Bob claimed he was going to work his way up to president. When Bob became disinterested in pursuing this, Rick Jr. backed off. Ric Sr. knows that Rick Jr. will not step in and fill the shoes of president. To him, Rick Jr. does not want the responsibility. Ric Sr. has always given everything to his son. He has done this because he wanted to and because he loves his son. However, Marta thinks Ric Sr. gives too much. She feels Rick Jr. should swim, or sink, on his own. However, Ric Sr. disagrees, and his word is final. He feels his son should have the time to evaluate what he wants to do without worrying about money.

What Is Best for the Company? Ric Sr. emphasizes, “What is best for the company, is what is best for the family. I must think of what is best for my wife, Marta; my daughters, Marta and Teresa; my daughter-in-law, Carol; my boys, Rick Jr., Tom, and Bob; my grandchildren and my employees. My employees are my greatest asset. I have always treated myself as an employee, not as an owner. This way, I feel I can make decisions that are in the best interest of the employees and the Company.” Ric Sr. continues, “Happiness is everything. Money is a consequence of success. If you love what you do, then you will be successful. That is why I have always encouraged the boys to do what will make them happy.” Ric Sr. is fully aware of Tom’s plans to acquire a company or start a business on his own. He fully supports Brain’s decision to go to law school and Rick Jr.’s decision to venture out on his own. In Ric Sr.’s words, “My children will always be taken care of financially. They will have the money to pursue their dreams.”

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Next Stage Ric Sr. feels that the succession process must be completed while he is still alive. Whether the new president is an outsider or a family member, Ric Sr. believes it is critical that he (Ric Sr.) is involved in the transition to new leadership.

Learning Notes This case demonstrates that different generations see the situation in the family firm with regard to leadership of the firm differently. This case also shows that succession is often driven by other crises and events, both internal and external to the firm. This case also shows that succession is neither a single event nor one that occurs with ease. Often many different uncertainties exist in these transitions and perceptions of how to deal with those differ widely. The reader may want to ask themselves how they would act if they were in Ric Sr.’s position? Would they act differently if they were either of the sonsin-law? Was the hiring of the Harvard MBA as president a wise choice at the time? What could have been done differently?

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Chapter 4

Case Two: Neptune Enterprises – Dealing with Loss, Turmoil, and Technology Change

Pablo Brezman and Colleen Robb prepared the research for the case written under the supervision of Alan L. Carsrud and Malin Brännback. This case focuses on the challenges industries face when technology shifts occur, often causing turmoil for well-established family firms using traditional methods.

Rough Seas Ahead? As the first winter storm of 1997 blew in off the lake, Andrew S. Pavel sat behind his desk in his cluttered office and wondered how he would survive the dark, cold winter again this year. It was not the weather that worried him. He had lived in Milwaukee for over 55 years and he knew how to handle the wind, cold, and snow. It was the darkness and frigidity of the business landscape that sent chills up his spine. He had somehow managed to carry Neptune Enterprises, Inc. through 20 years of rough seas, but the current storm seemed to be blowing from all directions and showed no sign of abating. Sales of the Perseus Press line of home education teaching ­programs were falling and showed no signs of rebounding despite the growth of home-based schooling in some parts of the United States. The demand for printed encyclopedias, dictionaries, and other printed references had been severely depressed by the proliferation of the home computer and online reference applications. The company was desperately trying to make use of the warehouse space recently vacated by a bankrupt tenant. Even the warm, cozy, family culture that had existed at Neptune for the past 20 years was experiencing a cold snap. The morale among nonfamily members of the business seemed unusually low. Although Andy did not want to retire anytime soon, he wanted to limit his involvement in the day-to-day operations of the ­company and concentrate on strategic issues. He realized that he had lost some of the fire necessary to manage the entire operation. “I sure could use some of that fire on a day like today!” he thought. A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_4, © Alan L. Carsrud and Malin Brännback, 2011

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The Neptune Adventure: Setting Sail In 1976, Andrew S. Pavel (Andy) and his wife, Elaine, had to make a decision that would greatly affect their family’s future. Andy was vice president of the encyclopedia division of one of the largest publishing houses in the United States and the company was moving its headquarters from Milwaukee to New York. Andy and Elaine were both born and raised in Milwaukee. Elaine had a very close-knit family and most of her relatives lived in the immediate area. Both were reluctant to leave the city that brought them together and the relatives who made Milwaukee “home.” Andy was frustrated by the bureaucracy of the large company and saw this as an ideal opportunity to use his business contacts and his knowledge of the publishing business to go into business for himself. He knew, however, that he could not do it alone. He discussed the risks with Elaine and asked for her advice. Together, they decided to take the leap of faith that all entrepreneurs must take and start their own business. Thus, Neptune Enterprises, Inc. was born. The name came from their sailboat kept at a small marina on the lake. The economic situation in 1976 was less than ideal. The country was facing economic hard times. Andrew and Elaine had recently purchased a new home, had two young children, and a third was due in less than 3 months. Neither Andy nor Elaine had the benefit of a college education, but they did have the qualities essential to the success of any family business: initiative, desire, the support of their family, and each other. The first few years were rough. Andy worked out of the spare bedroom in the house and used the family station wagon to deliver books to the post office for shipment. They lived off their savings and did not draw salaries for over 2 years. When asked about those lean years, Andy explained: I must admit there were times when the old bureaucracy was looking pretty attractive! Not a moment passed when I was not thinking about how the business would turn-out, about how I would provide for my family or about what I would do if we did not make it. Elaine and I were scared, but we just kept plugging away.

Soon, their hard work began to pay off. Andy was able to use his business contacts to source product and market specialized reference sets to middle income families. He was able to establish a niche in the direct distribution market; a market that was ignored by the larger publishing houses. Andy commented: We were not large enough to have our own sales force, so we leveraged our connections with other entrepreneurs and targeted the direct home distribution market. Our distributors sold sets via direct mailings, telemarketing campaigns and flyers sent home with school children. Some even went door-to-door like the old Fuller Brush guys. It was kind of crazy but it was a natural fit given our small size.

Business began to take off. By 1979, Andy was able to move Neptune to its own office space in nearby suburb and outsourced the warehousing, packing, and shipping of the product. Elaine Pavel began working at the company full-time, filling the roles of accountant, administrative assistant, order processing clerk, and customer service representative. By 1981, annual sales topped the $2,000,000 mark. Andy thought he was on top of the world.

Tragedy Strikes

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New Product Development With a steady flow of business established, Andy was able to devote some time to developing new products. By utilizing his own creative capacities and partnering with other small educational publishing houses, he developed Neptune’s first product line under the Perseus Press name: the “Steps Ahead” learning program. The program was an integrated at-home learning program that taught preschool and grade school-aged children the basics of mathematics, reading, and writing. Its main components were a battery operated machine, textbooks, and learning exercise cards. Sales of the product took off and soon Poseidon was expanding. In 1985, the “Steps Ahead” program expanded and split into three products: “Steps Ahead,” “The Reading Factory,” and “The Learning Ladder.” The “Steps Ahead” program retained the preschool modules, “The Reading Factory” taught reading via the phonics method, and “The Learning Ladder” program taught grade school mathematics, geography, and science. These three products became the stalwarts of the Poseidon product offering and annual sales reached $5MM by 1987. To accommodate the increase in sales, Poseidon moved into a larger office space with increased distribution capabilities. Sales continued to grow with the new, expanded Perseus Press line and in 1988, Andrew P. Pavel (Andrew Jr.), Andy’s oldest son, joined the firm. The additional help of his son coupled with strong cash flows helped Andy decide to expand the operation and move the shipping and distribution function in-house. In July 1989 Neptune formed a partnership with a local distribution company and purchased a warehouse. All Neptune’s inventory was moved into the warehouse and Andrew Jr. was put in charge of all distribution. Andrew Jr. added part-time workers to staff the warehouse and Neptune seemed well positioned for future growth.

Tragedy Strikes Though it started out promising, 1989 proved to be the cruelest of years for both the company and the family. In September, Elaine Pavel went to the doctor complaining of pains in her shoulder. Given Elaine’s 2-year battle with breast cancer, the family was deeply concerned. The doctor assured her that it was merely tendonitis and sent her home. But it was not tendonitis. It seemed the cancer had lost the earlier battle but was determined to win the war. When Elaine went back for more tests in December, she was told that her cancer had spread and was inoperable. She was given 1 month to live. She passed away only a few weeks later on Christmas Eve. Her husband and family had lost their “rock.” The family and their business were shocked. Everyone had thought that the chemotherapy and mastectomy had taken care of Elaine’s cancer for good. In November, 1989 Elaine looked great and she said that she felt better than she had in years.

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4  Case Two: Neptune Enterprises – Dealing with Loss, Turmoil…

Now, suddenly, she was gone. With one life, the family had lost its mother, wife, sister, and daughter. The business had lost its treasurer, secretary, office manager, and ­collections officer. Andy was heard to say: It was really her company. She was a very strong woman and she was the glue that kept both the business and the family together – She ran the show. I just brought the business in and she did the rest. It was only after she was gone that I realized how much she really did. I did not have any idea what was going on in my own office!

The business began to suffer in both big and small ways. No one knew how to work the computer system that was responsible for processing orders, keeping the books, and tracking all customer accounts. Accounts receivable began to rise. Sales began to decline. Andy was a wreck. “The place was in shambles. I couldn’t sleep or eat. I couldn’t stand to be at home so I tried to spend more time at work. But I couldn’t function there either. I was useless!” Andrew Jr. tried to pick up the slack but he was getting married in June 1990 and had to spend some of his time planning his wedding. Michael, the second oldest son, offered to leave college and help, but Andy would not allow it. John, the youngest son, was still in high school and was having a hard time dealing with the loss of his mother.

A Wise Alternative? At first, Andy did not want to admit his wife was gone. He decided that he needed something to occupy his time and decided to become a partner in a new Greek restaurant venture an old school buddy was starting. He spent a great deal of time at the restaurant. He served as host during the evenings and spent time entertaining clients at the new establishment. “Opening the restaurant probably wasn’t the smartest move I’ve ever made” Andy said later. “I needed something to take my mind off of the grief I was feeling and the restaurant seemed like a good way to do it.” But was this a good business decision? Though the restaurant received good reviews, it had a poor location and was not easy to find. The recession of 1990 did not help matters either. The restaurant survived for about 8 months but Andy was eventually forced to cut his losses and sell-out, posting a substantial loss. In the end Andy wondered if it had really been a good idea to get involved with a business he really did not understand. On the other hand, it had taken his mind off the loss of his life partner.

Calling in the Coast Guard Meanwhile, Neptune was still struggling with the loss of Elaine. Jeanne Christian, Elaine’s sister who joined the company in 1984, was teaching herself Elaine’s job. Jeanne recalled what a tough time it was for her:

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It was very difficult. I did not know the ins-and-outs of the computer system like Elaine did and the customers took some time warming up to me. It was even tougher emotionally. Elaine was my only sister and we were very close. She asked me to take care of her family and I didn’t want to let her down. But I had to walk a fine line. I didn’t want people to think that I was trying to take Elaine’s place. I was just trying to help the people I love.

Jeanne worked long hours and slowly gained the respect of all the employees at Neptune. “She really kept the business running” said Marta Kristos a friend of the Pavel family who joined the company in 1988. “Jeanne assured our customers that the business would survive and quickly learned the order processing and accounting system. She was very inspiring.” Andy did not hide his grief. He placed a very personal dedication to the memory of his wife in Neptune’s 1990 price list. The price list was sent out to over 3,000 customers. He felt his customers should know what the company was going through. By the end of 1990, things were starting to turn around. Jeanne learned the computer system and was able to get the order processing running and reconcile the accounts. She also took a hard-line with delinquent customers who seemed to be taking advantage of the situation. Andy explained: Jeanne really saved the company. She really kept things together when I wasn’t able to pull my weight. She was tough when she needed to be too. She really got our delinquent accounts in line and cleaned up our accounts receivable. Neptune would not have survived without her efforts.

Clear Sailing: For a While By 1991, Neptune seemed to be back on track. Andy was functioning better at work and finally began to bring in new business. Jeanne had the office running smoothly and had mastered the computer system. Andrew Jr. found new tenants to fill the empty warehouse space and the building was finally operating in the black. With all the new activity, the company began to grow once again. Diane Christian, Jeanne’s daughter, joined the office staff as a part-time office clerk. Michael Pavel graduated from college and joined the company as product manager. Tony O’Kelly and Dean Stevens, childhood friends of Michael, joined the company and began working in the warehouse. By the end of 1993, the company had changed significantly. Annual sales topped $10,000,000 for the first time in the company’s history. Tony had performed very well at the warehouse and was put in charge of the facility. Andrew Jr. moved to the office to learn the business from his father. Michael left the company to pursue a career with a large systems consulting firm. Ken Craft, another childhood friend of Michael, joined the company and assumed Michael’s responsibilities as product manager. Jeanne hired Barb Kravitz to assist with office administrative tasks. The period of 1990–1994 saw the company grow from only four key employees (all fulltime) to nine key employees (one part-time and eight full-time).

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4  Case Two: Neptune Enterprises – Dealing with Loss, Turmoil…

Changing Tides in Education Publishing From 1993 to 1996, the education and reference publishing industry experienced many changes. The proliferation of home computers had severely dampened demand for printed material, especially reference material. Online reference services on the World Wide Web and low-cost CD ROMs were much more flexible, dynamic, and interactive than printed references. Computer teaching programs were much more engaging, interactive, and entertaining than the stand-alone, battery operated teaching machines and printed learning programs that Neptune sold. The industry was going through a period of massive consolidation with large publishing houses attempting to catch the technology wave by acquiring smaller, creative, educational development companies. Neptune tried to keep up with the changes by developing new teaching programs, by stepping-up overseas sales efforts, and by acquiring the rights to distribute CD ROM education and reference software from a large publishing house. Andy was skeptical about the new sales mix and Neptune’s future in education software distribution. He said: I’m not sure this is really the business we want to be in. The competition is extremely fierce and we do not have the staff to develop our own content. We are just too darn small to compete with these larger companies. The margins are so small, that it’s barely worth the effort. Besides, I know books, not computers!

Rip Tides at Neptune Though the players at Neptune had not changed since 1994, some of their roles had. Andrew Jr. was now handling all of the day-to-day decisions and headed-up the international sales area. Ken Craft was now in charge of all domestic accounts and handled special projects and promotions. Tony O’Kelly managed the entire warehouse facility including a staff of three dock workers and was in charge of helping outside tenants find alternative uses for idle space. Dean Stevens worked under Tony and handled special fulfillment projects. In 1996, the number of orders flowing through the office decreased substantially. Given the reduction in order volume, Jeanne asked Marta if she could cut her hours from 40 to 24 per week and Marta reluctantly accepted. The office environment had changed. There seemed to be an underlying tension between certain members of the staff. Ken was very curt when dealing with Diane and Marta. Both Tony and Ken criticized Dean’s work ethic and felt that Dean and Diane contributed very little to the value of the company. Ken often complained about the situation to his long-time friend, Michael Pavel, who was attending University of Minnesota to obtain his MBA degree and no longer worked directly in the company.

Rip Tides at Neptune

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Ken said to Michael: I really do not feel all employees are treated fairly and it’s a direct result of Andy Sr.’s generosity. The problem is that he refuses to acknowledge performance or non-performance. My ‘To Do’ list is about 15 items long as is Barb’s. Dean comes in everyday around 10:00am and goes home at 4:30pm, spending some of the time in the middle to take personal calls and read the paper. Diane comes in at 1:00pm, has lunch until 2:00pm, sits on Barb’s desk and complains about life until about 3:30pm, then ‘works’ for an hour (performing a task that could be done by Barb in 10 minutes), and goes home. Or, she spends the afternoon sending out copies of her novel. Yet Dean and Diane each received a bigger raise than Barb or I received last year. There is no way I’d say that Andy Sr. doesn’t treat me fairly every day. He does. The questions start popping in my head, though. If Dean and Diane are rewarded for absolute non-performance, then is my function around here actually making a difference? Does Andy Sr. view me in the same light he does Dean? Insecure, I know, but the evidence points that way.

Michael tried to reassure Ken that his efforts were appreciated and added that his father was never really comfortable dealing with personnel issues. Elsewhere, Marta resented the fact that she was forced to cut her hours while Barbara was not; even though she had seniority over Barbara. Neptune seemed to have lost some of its friendly family feel. However, Andy did not feel that Neptune had many internal problems. He thought to himself: I let everyone know when they are doing a good job and when they need to improve. I gave out solid bonuses to everyone last year despite a mediocre sales year. I think everyone knows what’s expected of them and they know that they can approach me if they have any questions. I care a great deal about everyone at Neptune and I think everyone knows that.

As Andy listened to the wind blow outside his office windows, in his mind he explained his views of the current situation: We’ve been through a lot worse! I am very happy with the way the past 20 years have unfolded. Yes, we’ve made some mistakes and no, we are not the next Microsoft, but our products have held up pretty well. I think we were due for a shift in the at-home education market and we are trying new ways to expand the business. Andrew has been able to move our products in the overseas markets. Heck, we made $3 million in overseas sales last year! We introduced the Mathematics Magician program last year and it has been well received. We added some CD-ROM sales with the licensing agreement with Carson’s Encyclopedia. But this new market is strange. Our domestic sales have really dried up and we can’t seem to reach people effectively via our traditional direct marketing channels. My contacts are not yielding the volume of business they used to either. It’s time for a change but I’m not sure which way to go. Andrew, Ken, and Tony are doing a great job and they seem to have some good ideas, but I’m not sure Neptune has the capital to fund them. I’m letting Ken and Tony run with their idea to take-on outside fulfillment contracts to increase the utilization of our warehouse facility. We’ll see how they do with that. We are at different stages in the business right now. I’m looking to build a legacy and they are looking to build a future.

Andy looked out of his window and wondered out loud, “How long will this storm last?”

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4  Case Two: Neptune Enterprises – Dealing with Loss, Turmoil…

Exhibit Biographies of Key Players in Neptune Enterprises Family Members Andrew S. Pavel, Age 56 Founder and President of Neptune Enterprises, Andrew Pavel is the unquestioned leader of the operation. Respected by all employees for his personal, caring attitude, shrewd business sense, and relaxed style, he feels he has created a truly family-like atmosphere around the office. Sometimes considered “too nice” when it comes to dealing with personnel and delinquent customers, he seeks to avoid any type of confrontation that would create dissension in the ranks and is more comfortable concentrating on business issues than resolving internal conflicts. “Andy Sr.,” as he is known around the office, is the main decision-maker for Neptune. He has recently made efforts to delegate day-to-day responsibilities to others and concentrate more on strategic decisions. Jeanne Pavel, Age 54 Jeanne began working at Neptune in 1985 as an account clerk and now serves as Treasurer and Office manager. In 1991, Jeanne began dating Andy Sr. and married him in 1993. Employees look to Jeanne to resolve internal conflicts at the office and she keeps the office organized and running smoothly. Jeanne is “tough but fair” when dealing with troubled accounts and often encourages Andy Sr. to take a tougher stance when dealing with past due accounts. Andrew P. Pavel, Age 31 Andrew is the oldest son of Andy Sr. and has two children of his own. Andrew joined Neptune after graduating with a B.A. in Communications in 1988 and now serves as Vice President and Director of Sales. “Andy Jr.,” as he is referred to around the office, is eager to grow the business and has recently taken over day-to-day responsibilities from his father. Michael S. Pavel, Age 27 Michael, the second of Andy Sr.’s three sons, has been involved, either directly or indirectly, with Neptune since he was a child. Michael worked for Neptune on a part-time basis through high school and college and worked for the company on a full-time basis for 1 year after obtaining a BBA in Finance from the University of Notre Dame. Though Michael has not worked directly for the company for over 5  years, he is continually kept abreast of the issues facing the company and his advice is often sought by various members of the company. John A. Pavel, Age 21 John, the youngest of Andy Sr.’s three sons, is currently a junior in college. John worked part-time in the company warehouse during high school and has expressed interest in joining the company upon graduation.

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Diane Christian, Age 31 Diane is Jeanne’s oldest daughter and has worked at Neptune on a part-time basis for over 6 years as an office clerk. Diane’s first love is writing and looks to Neptune to provide living expenses while she seeks to get her novels published. Diane graduated with high honors from Loyola University in Chicago with a degree in business but has shown little interest in taking on additional responsibilities at Neptune. She likes her flexible lifestyle and the familiar work atmosphere at Neptune. Georgia Christian, Age 29 Georgia, Jeanne’s youngest daughter received her B.A. in Communications in 1990 and has held jobs in marketing and public relations. She stops by the office to visit her mother and sister but has not shown any interest in joining the company. Nonfamily Members Ken Craft, Age 26 Ken has been friends with Michael Pavel since he was 12 years old. Ken worked with Michael part-time in the company’s warehouse all through high school and college. Ken joined Neptune as an account manager upon obtaining his B.A. in psychology in 1992. In his tenure with the company, Ken has shown tremendous commitment, dedication, and initiative and is currently in charge of all domestic accounts. Tony O’Kelly, Age 26 Tony has been friends with Michael Pavel for over 15 years. Tony worked in the warehouse on a part-time basis through high school and decided to join the company on a full-time basis in 1991. As Director of Shipping, Tony handles all of the “dirty work” and is constantly trying to streamline and improve Neptune’s warehouse operations. Though his gruff manner indicates otherwise, Tony is happy with his position in Neptune and wants to grow along with the company; however, he is sometimes frustrated by the lack of communication between the office and the warehouse. Dean Stevens, Age 27 Dean has been friends with Michael Pavel since they were first grade classmates. A close friend of the family, Dean also worked at the company’s warehouse on a part-time basis in high school. Dean joined the company on a full-time basis in 1990 with the intention of using the job to accumulate enough money to fuel his life-long dream of becoming a pilot. Now married, with a new born baby boy, Dean assists Tony in warehouse and works on “special projects.” Barbara Kravitz, Age 42 Barbara has worked at Neptune as an office clerk for over 8 years. She possesses an in-depth knowledge of the order processing system and is considered a valuable employee. Jeanne, Ken, and Tony all look to Barbara to resolve order discrepancies, to provide customer service, and to perform various other administrative tasks. She enjoys the quiet, relaxed atmosphere offered by the small business.

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4  Case Two: Neptune Enterprises – Dealing with Loss, Turmoil…

Marta Kristos, Age 48 Marta has served as an office clerk at Neptune for over 8 years. Her son was a teammate of Michael Pavel in little league baseball. She uses the job as a second income for her family. Marta was born with the “gift of gab” and she makes sure the office is filled with “activity.”

Learning Notes In this case one can see that crises often come at the same time. Changing markets and radical changes in technology occurred at the same time as the death of a critical family member. When thinking of succession, one needs to keep in mind that succession is often not just about the task leader of the firm, but may also include the loss of a the socio-emotional leader as well. Which crisis to deal with and how they interact to impact the continuity of the firm are the lessons one should take from this case. Ask yourself how would you have handled this rapid change?

Chapter 5

Case Three: Michael Window & Shutter Company – Disputes in Running the Family Firm

Timothy Grahl and Yoni Arrieta did the research for this case which was written under the direction of Alan L. Carsrud and Malin Brännback. This case looks at the transition that occurs when a family trade is turned into a family business. In this case there are disputes among generations in the family as well as nonfamily employees in running the firm.

Introduction As they usually did, the Michael brothers and their families gathered together in Atlanta to celebrate Christmas in their traditional way ever since they moved to Georgia. There were more reasons to celebrate this year than just the holiday. The business had done quite well and the forthcoming future looked very promising. Also invited to the festivities were Tim Wallace, a family friend and business partner, his wife, and his son Daniel. Before dinner and opening of the presents, Eric wanted to have a word with his brothers, Ronald and Jared, and his friend Tim. Eric, 57, had been the manager of at least one of Michael Window & Shutter (MWS) divisions since its start in 1975. Now he was president, general manager, and majority owner. For the last couples of years he had been considering retirement. Upon his retirement he would like to turn the presidency over to his son Eric Michael Jr., manager of the South Carolina division. It was the perfect occasion to communicate his thoughts to his family and closest associate before making the official announcement in the board meeting at the end of the year. Once they were apart from the rest of the family, Eric gave the news to his brothers and colleague; news that was not very pleasantly received. His brothers and Tim sensed that Eric’s period in charge of the company was nearing an end. In their own minds, they had pictured themselves or their respective sons taking over management of the company. Eric’s brothers and Tim questioned how he could make such a decision without taking into consideration

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_5, © Alan L. Carsrud and Malin Brännback, 2011

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5  Case Three: Michael Window & Shutter Company – Disputes in Running…

their feelings. What Eric considered an easy transfer of power turned out to be an unpleasant situation. The argument was soon disrupted by Eric’s wife who called them in to bless the food and have dinner. The conversation was suspended. The pleasant time they were having suddenly changed to one of uncertainty. During the dinner Eric, Jared, Ronald, and Tim hardly spoke to each other; they did not want family members to notice what was taking place. The conversation that Eric started was going to have a definite and potentially dramatic conclusion at the annual board meeting at the end of the year.

The Family and the Family Trade Windows & shutters is a fourth generation family trade within the Michael family. It began in 1914 with Charlie Michael. Charlie, a high-school graduate, worked his entire life as a union window installer in Cincinnati, OH. Charlie had a high sense of value and work ethic. He passed these qualities onto his only son, Robert Michael. In 1937 Robert followed in his father’s footsteps and began working for the same Cincinnati window union. Robert Michael had four sons: Patrick, Eric, Ronald, and Jared. He taught his sons the same value in work and pride in quality as his father did. Robert, feeling a sense of family tradition, mentored his sons in the window and shutter industry. He began by occasionally bringing them to work as children, finding them summer jobs during their high school years, and eventually using his experience to leverage fulltime positions for any of his sons. Like Charlie and Robert, all four brothers graduated from high school, but never attended college. Initially, only Jared and Ronald, the youngest sons, were interested in the family trade. They became third generation union-window laborers in Cincinnati. However, Patrick and Eric, the oldest sons, wanted nothing to do with the industry. Patrick remained in Cincinnati, but began working as a sheet metal worker for a local automotive assembly plant. Eric also wanted to escape from the window industry. Instead, after high school he moved to Atlanta, GA and began working as an electrician. As much as Robert wanted to see all of his sons stay in Cincinnati and work in the window industry, he was accepting and supportive of Patrick’s and Eric’s decisions.

Birth of the Family Business In 1975 Eric was 28 years old and working in Atlanta when the idea of starting a family window and shutter business entered his mind. For several years, while he was doing electrical work, his trained eye watched those doing the windows and shutters. He began to notice the local industry standards. The work ethic of the laborers and job quality were far less than what he had grown accustomed to in southern Ohio. Without having any business experience, he knew if he were to

The Early Years

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offer his level of skill and craftsmanship, he could create a successful business. In order to acquire the talent he wanted, Eric went to his family for support. He proposed the idea to all of his brothers. Jared, the 20-year-old dreamer, quit his job in the window union shop in Cincinnati, OH. He sold many of his possessions, including his beloved Harley-Davidson, in order to join Eric’s vision. With all the money that they were able to generate, they bought only the most necessary tools and equipment and began to seek contracts. Days later they received their first contract for a small bakery in Atlanta’s Peachtree Plaza area as well as several other promising prospects. This gave the two brothers confidence in their business venture. Before starting the first job, Eric and Jared decided to go to a party and celebrate their enterprise. It was there that Eric met Tim Wallace and the two formed an instant friendship. At the party, Eric began talking about his new business and Tim began talking about his dissatisfaction in his current manufacturing job. Eric offered Tim a job as the company’s first employee. Eric did not know what a pivotal, valued, and long-term worker Tim would become. Eric, however, did recognize that the company’s first projects were critical to the business success. They began to work on the bakery windows on a Monday and finished the Thursday of the same week. After completing the job at the bakery, Eric went to the storeowner and asked for payment as they had agreed upon. The storeowner refused to pay Eric because he claimed he would only write out checks on a Tuesday. At first, Eric did not understand the storeowner’s rationale and kindly stated that this was not their agreement. They had agreed that as soon as the job was done, payment would be received. The storeowner again refused to pay and insisted that Eric would be paid the following Tuesday. The argument continued for several minutes. Neither Eric nor the storeowner refused to give in. Finally, Eric grabbed a sledgehammer and gave the owner one last ultimatum. If he was not paid today, he would take the hammer and smash the windows into pieces. Still the owner refused. Eric walked into the store and raised the hammer over his head. He looked at the owner as if to give him one last chance. Seeing the seriousness in his eyes, the owner finally gave in and wrote out a check. This set the tone for Eric’s seriousness toward the business’ success. For the first several months, business was steadily coming in, but the business required many different tools and equipment. As the company’s assets grew, all three employees unselfishly lived off of small allowances given to them until payment for the next job was received. Through all this, the company endured intense sibling rivalry between Eric and Jared. It was not uncommon for the stress of the business to cause Eric or Jared to quit or for one to fire the other. This was their way of settling their arguments and getting out their frustration. Regardless, the next day all of them were at work and ready to start the day.

The Early Years During the first year, the business grew and completed only $75,000 worth of business. By the company’s tenth year anniversary, the business had grown in excess of $2 million and strictly serviced commercial and industrial customers. However, the company

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5  Case Three: Michael Window & Shutter Company – Disputes in Running…

remained relatively small and was seeking ways to expand. MWS’s weakness was the lack of a union. Not having a union prohibited them from placing bids on all federal government contracts and many large-scale private projects. At that point there were only three local companies with a union. In an effort to compete and expand, MWS decided to acquire one of these companies. It was a financial gamble that later paid off when one competitor union went out of business and the other union dissolved. During this time, as the company grew, so did family involvement. Patrick, quit his job as a sheet metal laborer, moved to Atlanta, and began working for MWS. After a short time, both Eric and Jared knew that Patrick was not cut out for the window industry. It was a hard decision, but after discussing with Patrick the idea of family and business, they had to let him go. As a sign of support, Eric, Jared, and Patrick agreed that a better idea would be for Patrick to utilize his skills and expertise by opening up a sheet metal shop of his own. With the initial financial backing provided by MWS, Patrick opened what would become Michael Sheet Metal, which had no affiliation to MWS. Many years later, upon his retirement, Patrick would divide his business equally between his two sons and two daughters. The siblings could not cooperate and the business was soon split into separate divisions. Ultimately the business failed. The company persuaded Ronald to leave his established window career (12 years) in Cincinnati and bring his family down to work in Atlanta. Ronald became a partner as well as a project manager, and became a valuable addition while strengthening the family core in the business. Additionally, Eric’s son, Eric Jr. and Tim’s son, Daniel began working for MWS part-time during college and full-time after graduating with business degrees.

The Company Expands In 1989, a natural disaster brought great structural change to the company. The category 5 storm, Hurricane Hugo, devastated much of South Carolina (SC). The rebuilding effort was massive. The effort, organized by the Federal Emergency Management Agency, enlisted the help of MWS to bring in outside laborers. This was actually a blessing in disguise for the company. MWS was becoming manager heavy. There were approximately 20 employees, 4 of whom served as project managers (Jared, Eric, Tim, Ronald). Eric felt that those making the decisions were becoming too numerous. As a result Jared and Eric decided to keep most of the company in Atlanta to stay with Jared, Tim, and Ronald. Eric, along with eight volunteer employees and sufficient equipment, was sent to South Carolina. After completion of the rebuilding projects, Eric and many of those who joined him enjoyed the closeness and independence of a smaller firm. Eric was torn. He enjoyed his new working conditions, but felt guilty of leaving his start-up company. He gathered together his brothers and expressed his new plans for South Carolina. As he had done with his Atlanta venture, he now wanted again to open up his own window company. Several of the workers remained with Eric, and started Michael

The Company Expands

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Window & Shutter-South Carolina (MWS-SC). MWS, as an umbrella company, would operate under two divisions with completely separate management teams. The original MWS shop would now be labeled Michael Window & Shutter-Atlanta (MWS-A). Eric would keep 50% of the original ownership of MWS-A, become MWS general manager, and obtain 100% of the ownership and management of MWS-SC. Jared would then retain his original 35% of MWS-A, and acquire 100% of the management responsibility. The separation benefited both companies. Eric’s company, MWS-SC, did very well, grossing $4 million/year during the first 5 years. Meanwhile, MWS-A grew from $4 to $12–14 million/year. The year 1997 brought several changes to the management structure. First, Ronald decided it was time to retire from MWS. Jared decided to buy out Ronald’s portion (15%) of the business. As a sign of gratitude for all his hard work and dedication to the company, the current partners gave Tim a 10% stake in the firm. Additionally, Eric promoted his son, Eric Jr. to MWS-SC assistant manager, as a way of securing second-generation control to MWS-SC. By 1999, the initial family business had grown dramatically from its humble beginnings. Unfortunately, for both MWS-SC and MWS-A, their size and lack of proper business procedures began to hinder the business. Accounts receivables were growing and MWS’s long-term success was in jeopardy. The combined company debt was in excess of $1,000,000 and the management was in desperate need of proper business training. Jared do not want to hire outside management, but he did not want to see the business fail either. Thus he made what he considered to be one last effort to save the company. He recognized that the business was built by a group of trained laborers who had no professional business training. Jared and his brothers discussed their options. Eric and Tim felt as though the business was doomed. Jared, however, did not want to give up. At a cost of $250,000, he proposed hiring Enterprise Management Inc. (EMI), a business training-consulting firm. At first Eric and Tim’s response was skeptical. Being $1 million in debt and then spend another $250,000 for training did not appear to be the answer. Jared convinced them to either give the consulting firm a try or to start looking for new jobs, because MWS could not survive under the current conditions. Finally, Eric and Ronald gave in, and together MWS-A and MWS-SC hired EMI. EMI assessed the situation and spoke to the Michael family critically and honestly. The Michael family indeed had no clue how to operate a large business. EMI began to train them from the very basics of business operations. Jared, determined to keep the business in operations, quit the job site duties and gave total attention to management training. The gamble of MWS paid off. Within 2 years they eliminated their debt and instead had over $1,000,000 in net profits. EMI did more than save the company, they helped to revolutionize it. Throughout EMI’s history, they have worked with many different clients. Several of whom were window and shutter companies with similar beginnings and growing pains as MWS. They advised these companies much in the same way as they did for MWS. To the suggestion made by EMI, MWS contacted six other window companies around the country. Soon, Luminare America Corp was formed. Luminare was started as a partnership among window and shutter companies with similar size, age of owners,

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5  Case Three: Michael Window & Shutter Company – Disputes in Running…

bottom-line profit, training, safety, and quality of work. There was no outside interest. Luminare Corp. was purely a partnership among window and shutter business owners, which also assumed any liabilities of the core companies. By 2001, retirement did not satisfy Ronald. Working was his life and his hobby. He had filled his retirement with activities such as golf and fishing, but it did not give him the personal satisfaction earned through a hard day’s work. As a result, Ronald returned to MWS and Luminare looking for work. This time Jared was much more cautious about the idea of hiring another manager and did not want to get into the same situation that the company had previously experienced. Not wanting to ­squander Ronald’s talent and knowledge, the two of them found a solution. Ronald was to become the company’s new disaster relief manager for MWS and the Luminare Corp. Ronald was then able to hire his son Ronald Jr. as the disaster response division assistant manager. Together they did an exceptional job. They worked to make Luminare the industry leader in disaster response following works in need in various locations. Additionally, due to the unusually high frequency of storms that damaged Georgia in 2004, and the hard work by Ronald and Ronald Jr., MWS was able to exceed $43 million in business. The year 2004 brought more dramatic changes to MWS. Jared had his own ambitions to retire, but did not want to leave MWS-A without family management. He brought his concern straight to the original cofounder, Eric. Together they came up with an agreeable solution that would please them both. Jared would retire from his management duties, but keep his ownership in the MWS-A. Eric had wanted to move down to Atlanta, but remained in SC because of the business. Therefore, he became not only MWS’s general manager but also the new manager of the MWS-A division. He then left his son, Eric Jr., to become the new manager of the South Carolina operations (MWS-SC).

Current Situation Eric Michael, an experienced entrepreneur and manager, devoted most of his life to creating and preserving his company. The terrible financial events were in the past and he foresaw a prosperous future for his enterprise. After so much sacrifice, Eric wanted to enjoy the rest of his life beside his wife. The day of his retirement was quickly approaching, and he had been thinking for a long time on his brother’s initial reaction. The main concern for Eric was who should take his place once he retired. His brothers were candidates to replace him, but he knew them very well. Eric had several reasons for not considering them as president. Jared, who was perhaps the most logical choice, recently retired. While Eric may be able to talk Jared out of retirement, he questioned his ability to run the entire company. Ronald was the only remaining brother in the company. However, he has never been put in charge of administrative management. Ronald’s power was in field management.

Current Situation

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The most viable alternative that Eric had was to position his son as the new p­ resident and general manager. Eric Michael Jr. had proved himself successful in the South Carolina division. MWS-SC had revenues over $10 million dollars last year. Eric Jr. had worked in the company since he was in college. He had worked at different positions and gained a clear understanding of the business and its trend. Eric Jr. took many of the responsibilities that his father did when he was absent. He grew up with the culture of the company. Eric saw no other member of the family capable of running the business, even though his brothers and Tim Wallace had another point of view. At the annual board meeting, Eric Michael opened the session giving an update of how the company did in the present year and the market conditions for the coming year. After finishing his presentation, Eric communicated to the members that he was going to leave the company in the coming months and that his son Eric Jr. was going to replace him. If there were any concerns, then it should be communicated immediately. His brothers presented their own arguments. Jared and Ronald have been involved in the business longer than Eric Jr. and together they would run the company as it has operated in the past years. They proposed for Jared to become president and Ronald vice president. Even though Jared had retired from the company, he wanted to return for his opportunity to run the company. He had been with the company from day one and had successfully run MWS-A for several years. Ronald made the firm the industry leader in disaster response and now he is a proven manager. He would then gain the necessary administrative skills by working side-by-side with Jared. Tim presented his argument that his son Daniel had been in the company almost the same time that Eric Jr. had and that Daniel had worked at different positions. Additionally, his managerial background made him a good candidate. None of the family members agreed on one family member to become the president and general manager. In order to maintain the harmony inside the family, the board proposed hiring an outside president. Each of the family members could then continue to manage different parts of the company. They also advised Eric to spend more time to rethink the motives behind his choices and the others presented. These propositions had to be analyzed and discussed in subsequent meetings until a final decision could be made. After reevaluating the situation, Eric could see how Jared and Ronald could be more deserving than his son. Was his decision based on what’s best for the company or what’s best for his family? Maybe Eric Jr. did have more to learn and could become general manager later in his career? On the other hand, both Eric Jr. and Daniel had proved their abilities. Getting fresh management was also very important for Eric. Additionally, the board suggested that hiring outside management could relieve the family tension. Eric truly began to question what was best for the company. The new year began with Eric Michael still running the company. Time was pressing on him to make a final decision. He, as the major owner, only had a couple of months to decide the fate of MWS and ensure that the company that he started remained in a strong business position.

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5  Case Three: Michael Window & Shutter Company – Disputes in Running…

Learning Notes This is a case of a family that entered an industry via having a trade and grew it rather organically into a significant sized firm. One can look at this case as an example of the uncertainty that occurs prior to any succession situation. It shows that as families bring in other family members into the firm the complexity grows, not only in terms of the organizational structure but also the pool of potential aspirants for leadership positions in the firm. The readers should ask themselves, how would they have dealt with the situations faced by Eric Michael in this case? What role should others in the family play?

Chapter 6

Case Four: Barton Springs – When Family Members Leave the Business

Rob Simmons provided the initial research for this case. Pablo Brezman prepared the case with Alan L. Carsrud and Malin Brännback. This case focuses on the challenges of losing family employees and the impact that has on both the firm and the family. This case also shows the issues of when a family becomes extended and multiple branches are involved that the “succession crisis” is really the outgrowth of other issues and often becomes a threat to the existence of the family firm because of external threats from competition.

Introduction John Baxter stares at his desk, exhausted from a long day at work. The employees of the corporate headquarters had long ago left, the only other person left working in the building was the credit officer for the West Coast. John could hear him on the phone down the hall. John was amazed at the discussion he had with his friend, Masters 30 min before. “If George does approach you about being president next week, don’t do this on his word – hire an attorney to help you with a contract to protect your situation.” Masters had told him to get an attorney to protect himself. What a strange thought to need to be protected from the three people, who as owners of the firm had taken him in, given him the opportunities of a lifetime, treat him like family, and now were to about to appoint him as the first nonfamily president of the company.

Background Nick Shield was the consummate wheeler-dealer salesman, yet having experienced the Great Depression, he knew the necessity of frugality and hard work. Nick had started several businesses throughout the late 1930s and 1940s, but none of them

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_6, © Alan L. Carsrud and Malin Brännback, 2011

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6  Case Four: Barton Springs – When Family Members Leave the Business

managed to survive for too long. In 1944 one of these ventures, Barton Springs, was formed to manufacture wire coils for a furniture company that Nick created. The small furniture company was doomed to failure, but the spring company would survive and grow for years to come. After World War II, millions of veterans returned home. Furniture and bedding companies expanded rapidly to keep up with the tremendous growth in demand. North Carolina emerged as a major center for the home furnishings industry. Barton Springs grew along with this customer base, serving them first with springs and regularly adding new offerings. By the end of the 1950s the company had over a dozen locations in the Carolinas, and locations in Tennessee, Arkansas, Mississippi, and Georgia. In addition to wire products such as innerspring units for mattresses, coils, sinuous wire, and fasteners, the company had started pressing metal for “jacknife” sleeper beds and other small mechanisms. In 1959 the company began to pour slabstock flexible polyurethane foam, a new material being used in seat cushioning. By the 1980s the company was pouring over 160 different foam types in more than 7 locations around the country, serving the furniture, flooring, packaging, and other industries. When the firm started in the 1950s the southeast United States was not a developed industrial area. The company therefore had to be vertical integrated even at an early age. Barton Springs had its own trucking fleet from its start, and still maintains hundreds of its own trucks rather than outsource that work. Another example of doing things within the firm early in its development was the decision in the 1960s to began drawing its own wire for springs, and selling wire outside for spring, construction, and specialty uses. By the end of the 1980s, the company had grown to include plants as far north as Michigan and west as Portland. By this time the company had about 60 locations – production plants, fabrication plants, and warehouses, and about 4,000 personnel. The company had expanded the product range enormously: practically every item found in upholstered furniture and bedding was sold or produced by Barton Springs, with the exception of the wood frames and the finished, outer fabric (in the late 1970s the company invested in a textile mill but pulled out in the early 1980s, deciding they could not continue to compete without a full foray into the textile industry). These products included all forms of furniture and bedding springs, construction fabrics, fasteners and fastening equipment, polyurethane foam, polyethylene edgings and weltcord, polyester fiber, custom cushion fabrication, metal mechanisms for recliner chairs, swivel and rocker chairs, and sleeper sofa beds, and molded plastic parts. The customer list included almost every major furniture company in the United States, and the majority of the small mom-and-pop upholsterers located east of the Mississippi River. At no point had Barton ever entered furniture production itself, as they believed the competition would damage their valued relationships with customers. Furniture and bedding has been notoriously low-tech, but on the materials side some investments had been made in the foam pouring, plastics, and wood-carving industries. Barton is often a front-runner with its foam technology (it was the first major producer to completely eliminate ozone-depleting CFCs in its formulations),

The Industry

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and has made some handsome profits from its plastics division, which also makes high margin products for the construction, telecommunications, and toy industries. Other investments such as automated wood carving have been tremendous disappointments, with the company losing substantial money. The West Coast operations were acquired in the 1980s and have been a headache for the company, with some locations chronically deep in the red. Both geographic and product growth have traditionally been on a case-by-case, seat-of-the-pants basis. There has never been a stated central strategy to be a national supplier with a full product range.

The Products Barton Springs buys enormous amount of steel rod and then draws it out to form wire. They sell some wire directly, but the majority is for internal consumption in the manufacture of coils, sinuous wire, mattress innersprings, and various coated wires for the construction industry. This is a commodity product, and price is king. Imports of wire product are almost unheard of, and exports were minimal. Exports usually occurred during price fluctuations in other markets. Barton has two plants that press heavy gauge metal. These plants originally produced only furniture products but are increasingly diversifying into other fields such as the RV industry and consumer products. Currently, Barton is negotiating its first direct sales to some major home furnishings chains for some finished metal products such as stereo stands. Polyurethane foam has two basic components, polyol and TDI. The reaction of these two components, along with water and some additives for desired results, produces polyurethane foam. To be effective in North America, a “foamer” must pour enormous quantities to gain efficient economies as scale, as well as favorable purchasing terms from the suppliers, which are the large chemical and petroleum companies. The foam is poured onto a continuous conveyer belt, which is then cut into “buns,” which are left to cure about 48 hours before being cut and fabricated.

The Industry Upholstered furniture consists of the outer fabric, the wood frame, the metal spring and foam supports, and various fasteners and construction fabrics. The only major equipment investment needed to manufacture upholstered furniture is an automated fabric cutter, which did not exist until the late 1980s. Beyond cutting and preparing materials, upholstering remains a labor-intensive effort and is done much the same way it was done 70 years before, albeit with better organization. Most of the materials cost is in the fabrics. Once a fabric mill has its pattern established, it can basically sell on its own terms. The consumer is aware of the fabric on upholstery more than anything else. A manufacturer has to balance between the dangers of understocking a hot

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fabric and losing sales to a competitor. Another risk is overstocking a line which is unpopular, leaving an unsold inventory of millions of dollars which will have to be drastically reduced at a price to move. Lead times from the manufacturer to the retailer are from 4 to 8 weeks, though there has been increasing pressure to speed this up. Overall, the industry has not been doing well. Prices for finished upholstery have hardly moved since the late 1970s. Most of the savings come from the materials ­suppliers. In some areas, like California and Arkansas, a great number of ­upholsterers have moved or gone out of business. Furniture has been losing out in percentage of disposable income to other products such as clothing or electronics. Although imports are taking a heavy toll on case goods and wood furniture, they are still a minor factor for upholstery, at least through the mid 1990s. Several of the large upholsterers had moved into materials, such as pouring their own foam, with varied levels of success.

Competition Its main competitor, Berger & Wells (B&W), determines a large part of Barton’s identity. As one of Barton’s biggest competitors B&W has become a substantial producer of finished bed products, and is looking into finished furniture, although it is thought unlikely since the upholstery did not offer the automation processes that had been achieved in bedding. B&W started making springs in the late 1800s, and has long dominated this product. In the 1960s B&W went public and began an amazing growth trend that would land it in the Fortune 500 with sales of 2.8 billion by 1995. B&W has always been a bigger, more powerful competitor to Barton Springs, in fact part of Barton’s identity is the “alternative” to the industry giant that sometimes makes other furniture and bedding companies nervous with its domination and potential stranglehold over the industry. B&W’s growth and product development are almost entirely through acquisition. Indeed, by the mid 1990s Barton was the only other significant producer of wire products and metal furniture mechanisms left. B&W has only minor foam operations (leaving Barton Springs as the only company with its full offering of products throughout the country). B&W has made attempts to buy the two largest producers of polyurethane foam in the United States, and it is clear they could soon be a dominant foamer as well (Barton would then be the third largest). In furniture, Barton has held its own against B&W, with over 50% market share in some products, but in bedding it is only a minor supplier. B&W dictates the terms in the bedding industry, and has been very successful in blocking Barton out of some of the market. In the late 1980s B&W began to acquire foreign companies. By the mid 1990s some significant revenue was made in bedding and recliner mechanisms overseas. Barton Springs grumbles that B&W drowns out competitors by selling commodity products to furniture and bedding companies, subsidizing these operations with substantial diversification into higher ­margin specialty products. B&W states on its annual report that it strives to be a full range supplier to the furniture and bedding industries. This was achieved in bedding but is

Personalities: First and Second Generations

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still incomplete in furniture. In general, Barton Springs is considered to have better service than B&W, and to be much more customer orientated. Barton representatives are known to “roll up their sleeves” on the customer’s plant floor to get work done. Historically, there have always been other, major regional competitors in the metal products. By 1995 they were all gone except for two in North Carolina and Southern California. Any other producers were less than 5 million dollars in sales. Barton has three main foam competitors. A former Barton employee Phil Angel founded Angel Foam Corp. in the 1960s; although still on amicable terms Phil has proven to be a tenacious competitor. He has been able to grow quickly by relying heavily on his suppliers for financing. By the 1990s Angel was nationwide and approaching the size of Barton’s foam operations. Foamco and Harriman Foam Corp. are both larger than Barton, and both have several pouring plants overseas.

Personalities: First and Second Generations In the early 1950s Nick’s son George had received an MBA from the University of North Carolina at Chapel Hill. He then joined his father’s business. There he joined his cousin Ed Jacob, who had grown up in the Shield household and was practically Nick’s “other son,” he had already been working for Nick for several years. Early on George and Ed stepped in to run significant portions of the company, Nick was soon more of a chairman and arbitrator than actual director. It is widely believed that Barton would have ultimately been another one of Nick’s failed endeavors were it not for the participation of his son George, his young cousin Ed, and his son-in law James Masters, who joined the company in the mid 1950s. George’s realm of influence was the financial and administrative areas of the company. Jacob directed the sales of the company, and Masters was responsible for manufacturing operations. Technically, all three held the title of Vice President until Nick’s retirement in 1978. Then George became president and two other nonfamily vice presidents were added. However, the three were effectively a triumvirate with practically equal power. Until the 1990s all locations reported directly to one of the three officers. In addition, all three had extensive dealings with each others’ realms of responsibility. This complex relationship between the three owners has determined the complex character of the company’s current organization.

The Players George Shield George is an extremely cautious and meticulous director, in many ways an inverse image of his father. Like his mother, he is very conservative and prefers to have tight control over his operations and employees. He puts great emphasis on the cost reporting systems of the company. A periodic review of a location’s operations with George could be excruciatingly painful for a manager who has not prepared himself for a barrage of detailed ratios and questions, right down to pulling out a receipt for

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6  Case Four: Barton Springs – When Family Members Leave the Business

a purchase of a truck part. He is rock solid in his beliefs, and will burrow down for a nasty argument if challenged. He is fiercely loyal to his closest employees, and displays the same tenacity if their performance or motives are called in question. George’s conservative business practices have enabled the company to survive through some very rocky periods that had brought down many customers and competitors, and those practices have given the company an outstanding reputation among vendors and banks. During economic crises in the 1960s and 1970s when even the directors were doubting the future of the company, banks and vendors maintained the highest credit rating for the company due to its conservative bookkeeping. It was often said that an open credit approval from Barton Springs was more important than a Dunn & Bradstreet credit rating for a new company in the industry anxious for favorable purchasing terms. Even as late as the 1990s Barton’s bad accounts, as a percentage of overall sales, were a surprising 0.2%. Since then they have started to rise slowly. Ed Jacob Ed shares George’s conservative attitude toward money and personnel, and prefers tight control over his locations and functional authority. Like George, he feels information is to be shared on a “need to know” basis only, and carefully at that. Beyond that, the similarities stop. Jacob is gregarious and outgoing. He wears loud clothes, makes polarizing statements in even the most sensitive situations, but will reverse his position gladly at a later stage (with the exception of his closest employees, with whom he would defend regardless of even the most questionable actions). He believes that the company’s cost accounting system is a nuisance at best, and often performs estimates that determined the future of an entire location on a napkin or in his head. Moreover, this approach seems to work rather well, both because of the high uncertainty involved in the decisions and due to his considerable math abilities. A community leader once remarked, “For twenty years I thought Ed Jacob was CFO of Barton Springs, he served on the board of directors at the country club with me and knew every figure and ratio from the books in his head.” Like Nick Shield, Jacob is well known throughout the bedding and furniture industries, and there are few customers who could resist his onslaught of charm and tenacity when Ed is intent on arranging a deal. First Nick and then Ed Jacob have driven the company into new realms of customers and products, constantly on the road, constantly making new deals that have grown the company. Often people thought that Jacob was president of the company. Despite their different natures and epic battles, Jacob and George are very close, and rarely tolerate criticism of each other (unless they are the one leading the complaint). James Masters James met Nick’s daughter Betsy when they were both in school at the University of North Carolina. Nick pushed hard for his new son-in-law to work for the company. Masters was more open minded than his fellow officers, and he was an early follower of the management literature that appeared in the 1960s such as the management guru Peter Drucker. Masters emphasized information sharing for more responsive management teams, and had pushed the company into its larger capital investments to gain competitive cost advantages. The more advanced products such

Personalities: The Third Generation

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as the foam, wire drawing, plastics, and automated wood carving were Masters’ projects. His loyalties were more to the processes and goals, though his managers received his complete support and were grateful to have a more forthcoming boss. With the notable exception of the wood carving, most of the investments that he urged had been successful ventures, and were the only areas in which the company was a leading innovator in the industry. Masters was consistently a positive force for change in the company, not the least of which when he played a leading role in bringing about the issue of George’s succession and John’s candidacy as president. For 4 decades these three officers hustled, argued, and agreed as the company grew more and more successful. On any given issue they would side up differently with each other. This effectively prevented any one of the personalities to rise above the other two. They shared a profound trust but also harbored deep convictions about each other’s weaknesses. It was often joked by their children that they were in a waiting game, “the last one to die wins.”

Personalities: The Third Generation Up until the late 1970s all three families would regularly see each other on Sundays at Nick’s house. After Nick’s death, direct contact between the third generation cousins was minimal, except for a few older kids who went straight to work for the company after college. Contact picked up again between the cousins in the late 1980s when they began meeting bi-annually at the urging of Masters to address future ownership and succession issues. By the early 1990s all but 1 of the 11 third generation children were working for the company. To their surprise, the third generation children communicated well with each other. Although each of the three families had common traits, there was a considerable crossover between the families when votes were taken among the cousins. The three fathers never discussed the topic of third generation involvement with each other, and each father’s hopes for his children became one of the few areas of suspicion between the fathers and between those in the third generation. This suspicion spread somewhat to their children. Employees assumed that a third generation child would succeed George, and often worried that the officers could get in a harmful battle to defend the interests of their offspring. George and Jacob were considered more openly nepotistic and had older children in higher posts, but Nick’s daughter Betsy was famously hard headed and had often stepped in to change the course of the company’s history. She could have been expected to join the fray in her children’s interest before she died in 1986 of cancer. Because of an external consultant, the third generation met regularly. These meetings were ostensibly for succession planning, but came to include central issues such as strategic planning (or lack thereof) and institutionalization of their fathers’ styles of management. Largely because of the third generation and James Masters’ urgings, George instituted Barton’s first corporate strategic initiatives and gave ­himself a due date to appoint his successor. By 1995 it was apparent that none of George’s children would be a strong candidate for president, so George had to make

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an excruciatingly difficult decision between three choices: Eddie Jacob, Jacob’s oldest son, John Baxter, or an outsider. Eddie Jacob Eddie had extensive experience in the company; he and his brother Chris were the only Vice Presidents among the third generation. Eddie had been the VP of West Coast operations, which had been losing money for several years. Eddie had recently moved back to North Carolina, and assumed management of the fibers division. He was considered a very intelligent, hard worker with excellent work habits, and it was questionable if the West Coast operations would be profitable even in the most capable hands. His employees were extremely loyal to him, and he was well liked and respected by his cousins and colleagues. Still, he was not a dynamic leader and had never professed a direction in which he wished to take the company. As far as Eddie was concerned, he was family, he was competent, and he had always done what was asked of him. To many in the family and firm he “deserved” to be president. Eddie would be president only by direct pressure from his father, and Jacob had considerable influence over George, at least for now. Most saw a strong possibility for Eddie to succeed Baxter, after a few more years of experience in a leadership role over a different division. This was no small matter; his father, Ed Jacob, was a hard man, a notorious poker player who had never paused at high stakes. The dream of his son’s appointment as president of the company that he had worked so hard to build was now at stake. Simply overriding the senior Jacob was not possible; he could bring down the house if he decided. John Baxter John was a graduate student in music at the University of North Carolina when he met his wife, Blair. They married and he already had two children when he took a job as music teacher in a local high school. He was very ambitious in building a substantial program, and started organizing trips for his young choir to travel around the United States and Europe. This involved extensive fundraising. The father of one of his students, Eddie Jacob, proved particularly helpful and full of useful advice. Later, as John looked at his future and questioned if a public school music teacher’s salary would support his family fully, he approached Jacob about a job, and joined Barton Springs as a salesman. Baxter proved an effective salesman, and eventually moved up to product management. He gained the full trust and confidence of all three officers, which was rare. Baxter took a lagging product, sofa sleepers, and with exceptional organizational and marketing skills placed Barton as the dominant supplier of this item – a rare event to overcome B&W’s entrenched position. In 1991 Baxter was named vice president of the Eastern Furniture Division, which was by far the largest division in volume and strategic importance. Several nonfamily owners had played integral, central roles in the company, but Baxter was unique. He was at any given time the protégé of all three officers. He regularly overcame their fears and dictums to persuade them to employ new ­procedures in the company. He did as much work selling inside the company as outside. He carried a distinguished presence, dressed impeccably and gained the full attention of any audience he addressed.

Thinking Succession

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He was bold and ambitious. He had long been the director of the town’s choral society, and had assembled an impressive program with joint performances with the Piedmont Symphony Orchestra and commissioned compositions from well-known composers such as Dave Brubeck. He was able to communicate a central, strategic direction for the company, and seemed capable of leading it there. The current situation, however, could not be simply overcome by his charm and ability. Since he had been John’s student, the younger Eddie Jacob had always been close to his music teacher and friend. At one point, while living on the West Coast, Eddie experienced some personal difficulties. John flew out to spend a few days with him under the auspices of visiting the West Coast main office. This relationship changed slightly after George gave himself a deadline to appoint a successor, the two men were now the only candidates in-house. Although both men avoided the topic, there was obviously a rivalry developing between them. Ed Jacob had been almost a father to John, but he knew that his goal was to see his son Eddie as president, and he usually got what he wanted.

Thinking Succession Eddie reported to George. No child–father supervising was allowed; there were a large number of employees’ children in the company. George thought the world of the younger Eddie even though he had failed to turn the West Coast around, To George there was no tangible success or attribute to justify younger Eddie as his successor. George was also nervous that if Eddie was president he would immediately execute his father’s wishes, and endanger the stability in the company that George had worked so hard to preserve against the elder Jacob’s rash ventures. George had served on several bank boards and simply did not trust an outsider to appreciate the delicate situations and ingrained ethics that had developed over the decades. George thought if an outsider was appointed president, the company would be something other than Barton Springs. Masters and some of the third generation had urged George to consider an outsider, but he already stated he would avoid this choice if possible. John Baxter had several concerns, and Masters’ comments today confirmed them. George may appoint John in hopes that he could fully control him. George would certainly not remove himself from the company entirely. Most likely he would become a very involved Chairman of the Board. After 4 decades, many top managers in the company had a close relationship with the officer to whom they reported, and had learned how to “work” them and play upon their loyalties. Things were comfortable, even if their locations were not performing. Many managers were older and did not have the same drive as earlier. If John was appointed and began to stir the waters in this “old boys’ network,” would the officers step in to protect their former charges? A few of the third generation already reported to John that they had excellent relationships. If all were under him, would things become more difficult? The third generation had been a weak force at best in the company’s development; would they now become an obstacle? Masters had warned that without the right protections,

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John would be caught in the stalemate that had kept the three officers locked up in recent years. He would merely be a puppet carrying out the same cycle that had kept the company moving in circles since 1988 when sales reached a plateau. He was right, and there were several forces that would hold John in the status quo that had taken 40 years to evolve. Still, it was tempting to just go with George’s wishes. He was the president, an owner, and obviously wanted the best for the company. What kind of signal would he give if he started negotiating defensive terms with these men that he admired so much? After 20 years with the Jacobs would he now incur their wrath, whether he became president or not? They were family in so many ways. The phone interrupted his thoughts. It was Russell calling from the West Coast. One of the third generation, Russell lived in Los Angeles and had been the international director. He had just returned from Europe and was calling Baxter to inform him that a European competitor in metal products was investing in a 10 million dollars plant in Mississippi, and judging from their approach in Europe they would be much more aggressive competitors than B&W. Now the competitive pressures were really building and John had to reach a decision.

Learning Notes Several issues are facing the firm. While an obvious one is succession, and in fact this may well be the result of a lot of decisions that occurred long before the thought of succession occurred. What are some of these other issues? In addition many career and personal questions were being faced by members of the third generation. For example: 1. Given competitor and industry pressures, what types of strategic issues are facing Barton Springs? 2. What should Baxter consider putting in his contract? 3. What type of issues does the family face? 4. The three owning families have distinctly different patterns in size and rate of growth, what types of downstream implications are there? A concern is prices had leveled for finished furniture for over a decade. This put enormous pressure on suppliers, the majority having been acquired or gone out of business. This was an extremely cost-sensitive industry. Now Barton faced a competitor several times its size, with enormous purchasing power and economies of scale. With the capital limitations typical for a ­privately owned business, this provides a formidable challenge for Mr. Baxter. One of Baxter’s personal goals is to take the essence of the three officers’ personalities and habits and from this forge formal policies and guidelines that can be passed on to other managers. The topic of transfer of title and actual transfer of power should be applicable in this case; George Shield was making it clear that he would personally stay involved with a few aspects of the business.

Chapter 7

Case Five: Ocean Safari – A Choice of Staying in Business

The research for this case was initially undertaken by Y. Lorenzo. The case was developed by Alan L. Carsrud and Malin Brännback. This case looks at the difficult decision of shutting down a family firm in the face of a changing economy.

Prologue Roberto sat in his office, cup of espresso in one hand, and the latest copy of Dive Training Magazine in the other. He had been up all night, considering the options available to him, his family, and his business. Roberto felt he had to make sure all options were explored and that any decision made would maximize returns for all parties involved. Would he be willing to give up an enterprise that he and his family helped create? Would the long nights away from his wife and children have been spent in vain? Making any one choice could change his future and the future of his two sisters. Would the family remain as close as it currently was if the wrong choice was made?

Family History Roberto Sr. and Avilia Rivera, a Cuban couple migrated to Miami, FL in 1967, as did many other Cubans after Fidel Castro assumed power in 1960. They left behind all their possessions and brought only what was necessary. Roberto took on a position as a cook at a local night club called Los Violines, or The Violins, known for its appeal to Miami’s wealthy crowd. Avilia worked as a seamstress in a local factory. Roberto and Avilia’s three children are Roberto Jr., the oldest, Maria Ellena, and Marta. Growing up as immigrants in a new country, the three understood the value of hard work and appreciated their parents’ efforts to provide them with a better life. A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_7, © Alan L. Carsrud and Malin Brännback, 2011

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Roberto Jr. was always good with his hands. He enjoyed building equipment, machines, anything, etc. He would build it, break it apart, and rebuild it again. As a teenager Roberto even took over the bedroom he and his sisters shared, to build an automobile engine from scratch. In 1976, he graduated from the American Marine Institute (AMI). He always held a deep passion for adventure, exploring the ocean in particular. He found it intriguing, and knew it was destined to be his lifelong work.

Entering the Diving Industry After graduating from AMI, Roberto, Jr. worked as a subcontractor for various diving equipment manufacturers. He provided service for parts, while also designing and assembling equipment. In 1980, the year his father died, he went on to work for Cressi Sub, a pioneer in diving equipment. Cressi Sub, an Italian company, is well known throughout Europe for its quality equipment in both free diving and scuba equipment.

Industry Overview Scuba diving involves any underwater activity, while using scuba equipment. SCUBA is an acronym for self-contained underwater breathing apparatus, a term coined during World War II. Scuba used to refer to United States combat frogmen’s oxygen rebreathers, developed by Dr. Christian Lambertsen for underwater warfare. Today, scuba typically refers to in-line open-circuit equipment, in which compressed gas is inhaled from a tank and then exhaled into the water. This allows the diver to stay underwater longer than he could by simply holding his breath. Different, but related to scuba diving, is the sport of free diving which includes any underwater activity where the diver holds his breath. To dive safely, scuba divers must be able to control their rate of descent and ascent in the water, usually determined by his or her buoyancy. Equipments such as weight systems, diving suits (wet, dry, and semi-dry suits are used depending on the water temperature), and buoyancy compensators can be used to adjust the overall buoyancy. When a diver wants to remain at constant depth, he or she tries to achieve neutral buoyancy. Scuba diving is still evolving, but general classifications have grown to describe various diving activities. These classifications include commercial diving, military diving, police diving, professional diving, recreational diving, rescue diving, and technical diving. To dive, a person must be certified. Recreational scuba diving does not have a centralized certifying or regulatory agency, and is mostly self-regulated. There are, however, several large diving organizations such as the Professional Association of Diving Instructors (PADI) and the National Association of Underwater Instruction (NAUI) that train and certify divers and dive instructors. Many diving-related sales and rental outlets require proof of diver certification from one of these organizations prior to selling or renting certain diving products or services.

Change in Ownership

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The Family’s Involvement While at Cressi Sub, Roberto worked as a Sales Representative. In 1986, he became the Vice President of Sales for the company. After much success and industry-wide recognition, Roberto was offered the position of National Sales Manager for Beuchat USA. Founded by George Beuchat in the 1930s, the French company has been in the forefront of all aspects of underwater activities. Roberto’s expertise and talent in sales led the company from $700,000 in sales in 1987 to $6.6 million in sales in 2003. In 1987, Maria Ellena worked as Credit Manager for a local community bank. At which time, Roberto approached her with the opportunity of joining Beuchat’s Credit Department. Although it required Maria Ellena to drive an additional 50 miles/day, she considered the offer to be a great opportunity. Not only was she able to work with her family member, but the compensation was also definitely worth her while. Maria Ellena had earned an Associate’s Degree, and would be taught what was necessary for her to succeed in the diving industry. The company even promised to send her back to university to get her BA degree in accounting. Five years later, in 1992, Beuchat was hiring support staff for its Accounting Department. Both Maria Ellena and Roberto thought it was a great opportunity to bring in their younger sister, Marta. She too was a banker. Marta worked as an International Department Officer for growing local community bank. For reasons similar to Maria Ellena’s, including a lucrative salary increase, Marta joined her siblings. Her initial duties involved assisting the Accounting Manager and managing Accounts Receivable functions. Having completed her Associate’s Degree years earlier, Marta’s new position motivated her to pursue a professional career in Accounting. In the years that followed, Marta went back to school and earned a Bachelor’s Degree in Accounting from a local university. This prompted Maria Ellena to also consider the firm’s willingness to send her back to school. She realized, like her sister, that not only did she benefit from the hands-on experience, but working at Beuchat also allowed her some flexibility to complete her studies.

Change in Ownership For years, the Riveras worked together at Beuchat USA, learning the ins and outs of the business. In 1998, however, as part of the parent company’s restructuring, and attempt to lower capital investments, Beuchat France chose to downsize and close its US subsidiary. Instead of closing down operations all together, Beuchat France made a promising offer. Roberto was offered distributor rights for North America. By this time, Roberto, Maria Ellena, and Marta had become passionate about their work. They jumped at the opportunity to work for themselves and to continue a business they helped develop. Roberto and Maria Ellena made the initial investment becoming owners of the new Beuchat.

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In order to take over the distribution of Beuchat equipment, Beuchat North America (BNA) was created. As a fallback plan, the Riveras also opened a Factory Showroom to focus on direct customer contact and community relations. They wanted to enhance product awareness within the local market. Throughout its operation, BNA was operated by Roberto, Maria Ellena, and Marta, along with one nonfamily employee, Vinicio. Vinicio was an employee of Beuchat USA and stayed with the family when they took over the North American distributorship. His role was to oversee general store operations in addition to inventory/warehouse maintenance. During busy seasons, Roberto, Maria Ellena, and Marta were pulled away from their office work to attend customers and make sure the store maximized its profits. Although Vinicio was in charge of the store, he was not the best salesman. Roberto could never bring himself to fire Vinicio because he was loyal, and helped the family ensure a smooth transition. Roberto and his sisters always had a better grasp of what it took to make the final sale. They always felt Vinicio did not have the passion for selling, in a way that was necessary for the success of the firm, but they also saw him as “part of the family.” The siblings, unlike Vinicio, were not only able to negotiate prices with customers, but they were also able to establish personal relationships along with providing customers with their diving expertise. In addition to selling a novice diver his first set of gear, it was very common for Roberto to give a 1–2-h lesson on the ins and outs of using the equipment, what works, what doesn’t, and so on. Selling diving equipment directly to the end consumer is labor-intensive and time-intensive. Although they had some experience with direct sales in the past, it was more challenging than they expected. Customers expected personalized service and the Riveras wanted nothing more than to provide it. During peak seasons, this meant tiresome days on the sales floor, late nights answering e-mails, and generating invoices and completing office work. A year into operations, it became increasingly difficult to import exclusive French diving equipment. At the time, the parent company, Beuchat France, had unrealistic growth expectations for the export business to North America that required a significant capital investment from Roberto and Maria Ellena. The two could not afford such an investment, nor could they foresee the ability to meet expectations given the local market conditions. After much thought and consideration of alternatives, the decision was made to sell distributorship rights of the Beuchat brand to a larger firm that was more capable of managing the rising costs of imports. The Rivera’s main focus then became the diving shop.

Ocean Safari’s Birth What began as only a showroom became Ocean Safari, a full service diving center, a one-stop-shop for a diver’s scuba and free-diving needs. The retailer now offered various brands of top of the line equipment, service and maintenance, rental gear, and dive instruction. The store’s location was very convenient, very near the beach

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with its own dock spaces and frontage on a major street. The two-story building offered a large retail space on the first floor, with plentiful office space on the ­second. Roberto had a kitchen and shower put in as well, perfect for late night dinners and quick showers after last minute dive trips. Although it was somewhat unconventional, it made late nights at the office easier for him and Maria Ellena, in particular, as she could pick up her kids from school and bring them back to office if need be. It was a home away from home for the ever expanding Rivera family. Roberto and Maria Ellena also bought the 7,000 sq. ft property adjacent to the store, in hopes of one day building the store’s own pool and dive facilities. Their vision included building small studios, where instructors from other states and their students could spend the weekend and dive Miami’s best spots. In the meantime, the property, consisting of six small studio units and one small house, was managed as rental properties as a side business for the family and the rentals brought in a steady, but small income. At the time, students had to use their personal pools for courses, or the firm would rent pools at county parks for their pool lessons. Around the time Roberto and Maria Ellena took complete ownership of Ocean, Vinicio, the non-family employee, resigned to move to Chicago. While sorry to see him go, the siblings were relieved, even if it increased some of their workload. Trying to rely on family to fill the gap in employees was not an option. Roberto and Maria Ellena’s children were too young to work at the store. After interviewing potential candidates, Roberto and his sisters decided to manage the store on their own without hiring a replacement for Vinicio. He had been with them for years, and it would be too challenging to hire, train, and trust a nonfamily employee. This led to an interesting twist to the Riveras owning their own business. Roberto, as President, felt it was difficult to get his sisters, particularly Marta, to do what they needed to do, as opposed to what they thought should be done for the company. Although they each had a job description detailing their duties and responsibilities, it was very easy for boundaries to be crossed and lines to become blurred. In one particular instance, Roberto left the office after a long day’s work. He returned the next day to find his sisters had changed the store’s entire layout to give customers a new and fresh feeling when they entered the store. Roberto did not mind the change. In fact, he thought it was a good change, but he would have preferred for his sisters to stay up all night working through the stacks of files piling on their desks, rather than putting their designer side to work. Maria Ellena’s original role as Credit Manager no longer required her to sit at a desk full-time. More often than not, she would go to sales floor and help customers, something she was quite good at. She had the ability to answer any and all customer questions or concerns. She had a special quality of making customers feel as if they were the only customer in the store; a quality that usually leads a new diver to purchase all his gear from Ocean Safari and ultimately creates an everlasting connection with Ocean Safari as the diving center was prepared to fill all his diving needs. Customers loved her, even if she was not a very good diver herself. Marta was more conservative in her approach with customers; she preferred office work rather than selling. She was a true Accountant at heart. During this time, she went on to earn a Master of Accounting Degree with a specialization in Taxation.

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While Marta’s newly acquired education made her overqualified to continue ­working at the store, she chose to stick with the family business rather than pursuing other opportunities. She grew up in a Cuban family where supporting each other was a virtue and quitting the firm would be considered being a traitor to the family. In public she said it was for many reasons. She felt it was too difficult to reenter the corporate workforce at her age. She felt most large accounting firms hired inexperienced interns to work long hours with little pay. Roberto always thought she was comfortable in her situation, and lacked the confidence to pursue other goals. Deep inside, she had a strong sense of loyalty to her siblings and that kept her at the firm. Roberto felt a deep satisfaction working with his sisters. He felt an enduring sense of responsibility for them. As his father had died, he was the male leader of this tightly knit Cuban family. Frequently, Roberto, Maria Ellena, and Marta felt that the other made choices that 1 day seemed inconceivable or just plain wrong yet the next day, made other choices that were phenomenal for the business. Roberto’s constant struggle was balancing the intertwining objectives of the business with the family’s traditional Cuban culture and the personal goals more strongly influenced by being in America. In an effort to expand the business, the Ocean Safari opened a second dive center at another local marina and purchased a 50-ft dive boat for dive excursions. The second center was only 100 sq. ft, much smaller than its main store, but served as a convenient locale, where divers could register for daily dive trips, and purchase last minute equipment. The second dive shop was opened with other investors who would provide the personnel, while Ocean Safari provided day-to-day management and overview. A growing list of new, adjacent hotels was expected to boost additional tourist business. In keeping the family atmosphere of the store and striving to provide excellent customer service, Maria Ellena provided all divers with refreshments and fresh fruit on every trip. Although Roberto, Maria Ellena, and Marta had worked for others and had professional work experience, managing the store was a completely different operation. They learned by doing, and made mistakes along the way. One of their more problematic decisions was allowing customers to establish credit accounts whereby letting them purchase equipment on any interest-free payment plan. Although somewhat unconventional, credit terms were provided to high spending customers to build relationships based on mutual trust. This strategy soon taught them a lesson, that not all wealthy customers would become loyal customers. When the economy had a dip, they were the first not to be paid by their customers.

Instruction Becomes a Value Added Service The store had a classroom equipped with the latest media for student instruction. Instructors were subcontracted to provide certifications. Most of the time, instructors were first customers of Ocean Safari and later approached by Roberto to join the certification staff. Three full-time instructors were always available to provide the

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wide range of certifications available. Aside from instruction, these dive professionals played a crucial role in the marketing function for Ocean Safari. They served as a link between the customer and the store, planning weekend dive trips, group outings, and offering advanced levels of instruction, which for the most part required divers to make Ocean Safari their one-stop shop for all their diving needs. Even as subcontractors, there was a great deal of interaction between the instructors and management due to the simple nature of the business. During busy periods of instruction, particularly during the summer, instructors almost always spent their days at the store. This usually meant they would join in as the family shared their almost daily homemade lunch cooked by their mother, Avilia, who also spent a majority of her time at the store. Since the death or her husband, the children and grandchildren were her obsession. It was customary for Roberto to use the instructors’ input to help make business decisions as they provided as outsider’s view of the operations. Maria Ellena was open to having other points of view considered; yet Marta was not so keen on the idea. Their mother, however, felt strongly that Roberto should be the only one to make decisions (perhaps with input from her only). Marta was not a fan of having instructors intrude on their lunch meetings. She felt this was the only valuable time she and her brother and sister spent without interruption, where they could talk about the business and update each other on personal matters, as well. Their mother, however, loved to cook and to have what she saw as extended family around. Having instructors join in gave them, the instructors, information she felt should not be shared with individuals outside the business. To Avilia, it was a conflict of interest and none of their business to know how and why Ocean Safari worked the way it did. Marta agreed with her mother on this issue. Because of Marta’s sometimes open disapproval, the store experienced cyclical periods of what some would call turnover among the instructors. They never broke their relationship with the store, especially not with Roberto who knew the value of a good instructor, but they did lessen the number of courses they normally would have taught. This same phase occurred several times, as an instructor became too friendly with the family, and at times crossed the line of what was acceptable advice and what was abuse of power. Clearly this was a very traditional Cuban family.

Family Business Developments The family ran the business and the business ran the family. Roberto felt it was always an opportune time to talk business. Family gatherings were always peppered with some talk about the store’s latest events and happenings, what was done right and what was done wrong. Avilia always found it her duty to quiet the chaos. As first time entrepreneurs, it seemed difficult for the family to maintain a profitable business. During difficult times especially, the topic of Marta’s education became an issue. Roberto and Maria Ellena continuously encouraged her to do ­better for herself and to make use of her Master’s Degree. On numerous occasions,

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store customers who were also accountants offered Marta the opportunity to join their firms, with pay far more than what she was earning at the store – particularly when taking her workload into consideration. However, Roberto believed that her control issues and personal work habits prevented her from leaving, because she felt no one else could do things the way she could. In reality, her behavior was one of the driving factors for his encouragement. Both he and Maria Ellena felt that the store would probably be better off hiring an outside sales employee, and hire Marta to work the books on a part-time basis. A  natural introvert, she became easily comfortable dealing with family only and found it trying to put up with others, as she referred to it. Ultimately, all Roberto did was encourage, but he never had the heart to fire his sister because of the hard work she had put into the founding of Ocean Safari. Besides, if he fired his sibling, he would get an “ear full” from his mother. Both Roberto and Maria Ellena were married, but their spouses were not involved in the business. Maria Ellena had two children, Jasmine and Elmes. Roberto also had two children, Roberto III and Gabbie. Although Maria Ellena’s children were usually brought to work at the store during their summer vacations, none of the cousins showed a true interest in working for the store. Only after starting college did the business mindset become part of the children. Jasmine, the oldest showed some interest in making the store profitable. She understood the hard work her aunt, uncle, and mother put in to provide a living for the family. She was even taking entrepreneurship classes in college. Jasmine worked in Human Resources outside the family business. She had earned a degree in Management and was looking to pursue an MBA. Through her professional contacts, she mainly helped the store’s marketing efforts. Her help was extremely valuable, but Roberto or Maria Ellena never asked her to join the store full-time. It may have been because they wanted her to explore and learn from the “business-world” and then come back and help the store flourish. They wanted to learn from the mistakes and successes of others. During the weekends, Jasmine put herself to work getting Ocean Safari’s name out in the community, creating partnerships with local social and professional organizations, in attempts to reach new markets. Until 2002, Miami’s dive season was year-round, with the exception of days when the ocean is choppy and for safety reasons, diving is not recommended. After 3 consecutive years of tropical storms and hurricanes, including Katrina, the season was effectively shortened to 3 viable months of business. This affected the store’s operations, because cash flows were limited.

Terror Affects the Industry The terrorist attacks of September 11, 2001 not only took a toll on the nation, but also their effects spread wildly, impacting even the diving industry. In this sport, divers use wrist computers to gauge their time and depth underwater in order to

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avoid decompression sickness. After 9/11, the government was fearful of potential underwater attacks and issued stringent guidelines on scuba retailers. Any time a retailer sold a computer, it was required to submit a detailed report of the buyer and the computer so that it may be tracked in case it was used in the execution of a subsequent attack. This created a burden on retailers and created panic in the industry. Stores looking to certify new divers became wary. Divers did not want to divulge personal information they felt was unnecessary, and therefore put off such purchases until the nation felt safe again. In time, the Roberto found that maintaining the second location was very difficult especially due to the seasonality of the business. Because the boat was so large, it needed to book at maximum capacity, 40 divers, in order to make a profit. Although weekend bookings were consistent, seldom was it booked at maximum capacity. Major overhead costs included fueling the boat and captain and crew salaries, in addition to the rent and salary of the employee working in the second shop. During the off-season, the main store’s revenues were not enough to support both facilities. Deciding what to do with the boat was similar to other significant decisions Roberto had to make. Maria Ellena knew the second venture was not profitable and futile to continue, but Roberto’s entrepreneurial spirit and optimism made it difficult to close the operations. The shop kept the boat running at a loss for months. Roberto felt it was an added service for its regular customers but knew it could not maintain both.

A Decision to Be Made As time passed, and business took its course, the family realized they could no longer afford to keep the business running without additional financial support. At the time, the real estate market was booming in Miami, even if it was a bubble related to condo and second home purchases. Political instability in South America brought a considerable influx of new capital to keep the bubble going. Because Ocean Safari was located minutes from Downtown Miami and the thriving Brickell Business District, the family was given numerous offers to sell its real estate and ultimately give up its business. This opportunity was confusing to deal with as Roberto and Maria Ellena had not developed a strategic plan for the firm. These offers caught them completely off guard. Developers were looking to tear down the Ocean Safari building and its adjacent property to build high rise condominiums. The Rivera’s next step was crucial. Should they sell the store, take their profits, and each reenter the workforce? Or could they too benefit from the booming South Florida economy by continuing their efforts to stay afloat? If they chose the latter, what changes would have to be made to ensure the profitability of the store? Would Marta be forced to take on a position outside the company? These were all questions to be considered, as their consequences could change the family forever.

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The Result While Roberto, Maria Ellena, and Marta saw the potential of the booming Downtown, they turned down numerous offers worth millions of dollars to purchase their real estate. Instead, each looked for outside employment keeping Ocean Safari intact. Roberto was hired by SCUBAPRO, a division of Johnson Marine Motors, as the Sales Manager for Latin America. This allowed him to work from the office and add Scuba Pro to the lines of equipment offered by the store. Maria Ellena found work with a childhood friend who owned a printing company. Marta became a part-time auditor for a friend’s accounting firm, yet continues to oversee the daily financial operation of the store. With the decline in Miami land values and the “great recession,” the family is looking back on the decision to stay in business with major regret at this point.

Learning Notes The reader may want to consider how they would answer the following questions concerning the management of the crises and uncertainties in this case: 1 . How should the family go about making their decision? 2. Should the family have been more active about getting the next generation (Jasmine, Elmes, Roberto, and Gabbie) involved in the firm? 3. What strategies could Roberto have used to better manage his sisters? Should he have been more stern with Marta? 4. What, if any, special planning techniques should be used by seasonal businesses? 5. How could strategic planning have helped the family run its business more effectively? 6. Due to the seasonality of the diving industry, would it be better for the Riveras to liquidate their assets or try to pass it on to the next generation? 7. How did family values affect business decisions?

Chapter 8

Case Six: Siam Chemical – A Father’s Dilemma

Introduction Helen Tung, Mark Wisneiwski, and Steven Liao did the initial research for this case which was prepared by Alan L. Carsrud. This case discusses the challenges facing a family firm dominated by women in a traditionally male-dominated industry and culture.

Prologue Catherine took a last look at her cubicle in the newly decorated offices of Siam Chemical and Machinery Company (SCMC) on the 39th floor of the tallest building in the rapidly developing city of Bangkok. A rush of emotions came over her as she checked with her secretary Lian for the last time. Lian was like a second mother as she had been with Siam Chemical Company since its start. Catherine felt she had to make sure that she had done everything necessary to make her departure from her family’s business as smooth and undisturbing as possible. In 3 h, she would be leaving on Thai Airlines for the other side of the world. She was going to California to pursue an MBA degree at one of the top business schools in the United States. She was going despite the obvious misgivings of one of her sisters. While acquiring more advanced problem-solving and analytical skills were her primary public reasons for going back to school, Catherine had another, more personal reason in mind. She knew she had to get away from SCMC and Bangkok. She needed to decide if this is where she wanted to be, in the family business.

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_8, © Alan L. Carsrud and Malin Brännback, 2011

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History of Founder and the Firm As the only son of a farming family in a rural Taiwanese town growing up after the arrival of the National Chinese Government in 1946, Leon Chen knew he wanted a different life. The town showered his parents with praise, but also considerable envy, when he became the first in town to amend a university. There was even more envy because he had graduated from the most prestigious university in Taiwan and began working as the head of an engineering team at the biggest textile in Taiwan. Returning to his parent’s small home in a rapidly changing Taiwan was the last thing Leon would have done. When he was offered an opportunity for training in Hong Kong and Japan to be followed by a position as factory manager, he took the new position without hesitation. However, old home ties were not completely forgotten. In the first summer of the training program, he married Shirley, who was also from his hometown. By 1970, when Leon was transferred back to the textile firm’s base operations in the north of Taiwan, they were the proud parents of three daughters, Dana and Nancy, born in Hong Kong and Catherine, born in Japan. In 1973, Leon was sent to Thailand to assist a management team of executives from Hong Kong and Japan in setting up a new textile chemical production facility. When the project was completed, he was offered the position of manager of the new facility. Having enjoyed his previous postings abroad, he accepted without asking his wife, Shirley. Although he did not realize the impact this would have on his life, or those of his family, accepting this offer became the first step of a long journey as an immigrant in Thailand. In 1981, bad news arrived from the holding company’s headquarters in Hong Kong. All of the textile-related operations were to be transferred to Japanese ownership over the next 10 months. This meant that almost all of the current management team were to be laid off. The only exceptions were for those who were fluent in Japanese. Leon thanked the gods that he had a way with languages for he was fluent in Japanese. Although Leon was asked to stay with the company, he pondered his future in the company once his Japanese counterparts mastered cross-cultural management. He thought about the future of his four daughters, of whom the youngest, Jennifer, was only 5. He knew he had to come up with a contingency plan quickly. He had been away from Taiwan too long and both his parents and his in-laws were deceased. Returning home unemployed was not an alternative. Convinced of the underlying potential for the emerging economy of Thailand, Leon begun actively searching for other investment opportunities in the Kingdom so that would mean not uprooting his family once more. Equipped with the skills he acquired at managing various textile operations and processes, Leon was convinced that he could succeed at supplying textile chemicals with the added value of technical support. Moreover, he was confident that the strong personal relationships he had built with other textile and chemical manufacturers in Thailand and Southeast Asia would give him an initial advantage over other suppliers. However, some legal and cultural barriers were barriers to overcome. Constrained by immigration law from full ownership of a company, Leon had to

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find a local Thai partner whom he could trust. It was at this time that, Kittiwat, a long time friend employed by another chemical company, approached Leon with an offer for partnership in a new chemical company. Leon felt sure that the gods and his parent’s spirits were watching after him. After a year of seemingly endless paper work, contract development, and negotiations with manufacturers, Siam Chemical Company began business in the fall of 1982. It was a small operation with only Leon, Kittiwat, and a secretary, Lian. With the network Leon brought from the customer and manufacturing end and the connections Kittiwat had with local suppliers, SCC grew from a company of three to seven employees over a 1-year period. Leon’s success in his new venture was short lived, however. With the growth of the company, Leon and Kittiwat developed differences in their vision of company management and expansion. In early spring of 1983, year-end accounting tracked a large amount of missing inventory and excess expenses to Kittiwat. In addition to pocketing revenues from unreported sales, he had been writing large expense checks to himself. Kittiwat firmly believed that the firm and its resources were his to do with as he pleased. Determined to keep SCC, Leon took out a bank loan to buy up the other half of the company despite the government restrictions on ownership. Even more damaging was the fact that when Kittiwat left SCC, he took with him three employees who were his relatives. Desperate to keep the company running with only one employee in addition to himself and Lian, Leon turned to his wife, Shirley, for help.

Shirley, the Woman Behind the Founder Although reluctant to leave their youngest daughter, at the age of 6, in the care of their older daughters, Shirley knew she really had no other choice. Although Kittiwat’s embezzlement did cripple the company in a minor way, buying up his half of the company put the family into a major financial burden. Knowing how much the success of the company meant to Leon and the family, Shirley devoted all of her time to mastering the operations of the company. With the assistance of Lian, an accountant and a lawyer, she began learning the art of cross-cultural management. With the rapid growth of the company, however, Shirley began wondering about the involvement of the family in the future of the company. Because Leon was an only son, there was considerable pressure for them to produce a male child from the family remaining in Taiwan. However, with her age (45) and four daughters, having another child was almost certainly out of the question. Clearly, a new cultural model for the Chen daughters would have to be employed. After Dana and Nancy returned from university in Hong Kong to join the family business, Shirley devoted herself to training them in the business. After working under Shirley for 2 years, Dana joined the sales force and became the head of the newly developed Engineering and Machinery Department. This development led to the change of the company name to Siam Chemical and Machinery Company (SCMC). Nancy, a computer science and math major at Chinese University of Hong Kong, became responsible for overseeing

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internal operations and their developments. By the time Catherine returned from ­college in Japan, Dana and Nancy were able to train her in most operations. Despite Shirley’s confidence in her daughters’ abilities to take over the company, she was concerned that they might choose marriage and family life over the business. In trying to be liberal and understanding, they offered the family business as an opportunity rather than an obligation, unlike many Chinese families they knew. Yet, all members of the family realized that for the business to fall into the hands of outsiders would be a blow to Leon, their esteemed father. It is the hope of Leon and Shirley that their daughters would work together as a team in growing and developing the company, perhaps with the help of their husbands, when they married.

Dana, the First Child As in most other cultures, Dana was raised with the responsibility of the oldest child. By the time she was a teen, she realized that she would have the added responsibility of an oldest son since there was no male child in the family. Family business, however, did not really present itself as an option because she was away at college turning the 4 years when SCC underwent structural changes and rapid growth. By the time she graduated from college with a bachelor’s degree in engineering management, SCC welcomed her with open arms. For 2 years, Dana worked under Shirley, learning the responsibilities of internal operations. With her outgoing personality, however, she realized quite early on that she did not want to take over Shirley’s job managing internal operations. By accompanying Leon on client visits, she quickly established a reputation in the maledominant textile chemical industry. Then, in response to customer requests for assistance in purchasing new textile machinery and equipment, Leon delegated the job of researching and contacting machinery manufacturers to Dana. Because Dana had virtually no technical background in textile engineering, it took her almost a year to familiarize herself with textile processes and machinery. Meanwhile, there was growing demand from clients to supply them with not only information about the latest technology, but with the machinery themselves. In 1992, as a response to client demand, Leon established a new Engineering and Machinery Department to handle these requests. With Dana as the head of the department, Leon recruited a textile engineer, Kelvin, to complement the marketing skills of Dana. Under the leadership of Dana and Kelvin, the machinery business grew to include three other employees by 1994. Moreover, impressive sales performances were experienced from having the exclusive agency rights with several machinery manufacturers from the United States, Great Britain, and Taiwan. Despite their vigorous efforts at recruiting more technical and sales talents, growth of the Engineering Department was severely handicapped by the shortage of qualified individuals in the industry in Thailand. Concerned that their products were not getting enough attention from Dana and Kelvin, some manufacturers began suggesting the possibility of retracting the original exclusive right to general

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representation rights when the contracts expired. So now, more than ever, Dana and Kelvin were desperate to recruit and train capable individuals in their attempt to save the accounts won often with great effort. They were unsure, however, whether the trained individuals would stay since turnover rate was quite high for technicians and sales representatives in the field. In addition to the Engineering and Machinery Department, Leon was able to obtain the exclusive agency rights to the textile products of a leading Japanese petrochemical company. Although he realized that textile chemical sales needed his undivided attention, he accepted the offer and, almost immediately, handed the responsibilities over to Dana. Torn between the Engineering Department and the new petrochemical sales, Dana began to wonder if perhaps Leon was a lime too confident in her. In addition, she was beginning to enjoy the night-life that Bangkok offers to its well-off citizens. When Catherine returned from Tokyo University to join the business, Dana welcomed the assistance. Although Catherine did not have extensive experience in the business, she had a way with words, which was particularly helpful in contract negotiations. Moreover, since Catherine did not belong to any particular ­department, she was able to analyze problems from a “big picture” rather than a departmental perspective. After 5 years at SCMC, Dana wanted someone to take over some of the responsibilities that fell on her shoulders by default over the years. Knowing that Nancy had her hands full with internal operations, Dana had big plans for Catherine. When Catherine announced her intention to return to school, Dana did not know what to think. Her plan to have a life outside the company seemed to be threatened. Yet, she wanted only the best for her sister. Nevertheless, she felt it was somewhat unfair that she did not have the same liberty to walk away from the family business like Catherine was about to do. Deep in her mind, she wished Catherine would stay to help her. But, she knew once Catherine made up her mind about anything, nothing could change her mind.

Nancy, the Pseudo-Son Unlike Dana, who was very feminine, Nancy was almost raised as the son Leon had always wanted, but did not have. Her memories of childhood consisted mostly of boyish haircuts, clothing, and sports. In fact, she remembered Leon introducing her as his son until she was almost 10. Although Nancy sometimes wondered why Leon seemed happier when she played “son,” she was more than happy not doing the “girlie stuff” anyway. With time, she began to realize that she was playing the role of the son Leon never had. The Chinese tradition, which obliged Leon to pass on the last name to a son, became a shadow hovering over all the members of the family, particularly Nancy. By the time Nancy was in her teens, however, she rapidly grew away from the tomboyish personality and became a full-fledged daughter of the Chen family. Her stunning beauty as a young woman in her 20s soon made her the one most young Thai men of Chinese background wanted to date and marry.

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With a particular strength in mathematics and sciences, Nancy decided to pursue a degree in computer science, rather than chemical engineering, which Leon had hoped she would choose. It was Leon’s belief that if any of his children could follow his footsteps in taking up engineering, it would be Nancy. When she failed to share his enthusiasm, he turned his hopes on the two youngest daughters, who had yet to decide on a major. Seeing how Dana had joined the business immediately after college, Nancy wanted to buy herself some time. She was not sure if she wanted to join the chemical business. She was not sure about joining the family business. It was not an inevitable choice. So upon graduation from college, Nancy insisted on pursuing a master degree in mass communications and traveled to Europe for several months before job searching. With a Masters degree in hand, Nancy began searching for a job in England that would hopefully lead to a career in communications. However, after searching fruitlessly for 6 months, she was given an ultimatum from Leon to return to SCMC if she could not find a better offer. Two months later, in September 1992, she returned to Bangkok to follow the same path once traveled by Dana. Although she was frustrated and somewhat bitter about the situation, Nancy knew there was nothing she could do to reverse the decision. It was part of her obligation to the family as one of the daughters to help guard the fortress Leon worked so hard to build. Knowing that she did not want to join the sales and marketing groups, she indulged herself in learning all functions of the internal operations. In time, she became not only Shirley’s right hand person but began taking over the daily routines of the company. Moreover, with her computer skills, she revamped several internal operations by computerizing and automating several processes. Despite the frustration she still felt from time to time for not having full control over her life, Nancy had become attached to the business. She had adopted it as a major part of her life much to the dismay of several young men from wealthy families who wanted to marry into Leon’s family and the firm. Recognizing the difficulty with which Catherine was adjusting to the family business initially, Nancy became her mentor at work and confidante at home. When Catherine decided to return to school, Nancy was her big supporter. In Catherine, Nancy saw her own struggle with destiny and a boundary that extended beyond the family business.

Catherine, the Black Sheep For 6 years after her birth, Catherine was the pampered baby of the family. She did not have the responsibility of the oldest child. Neither did she feel the pressure of having to play the role of a son. When Jennifer was born in 1976, the sudden shift of attention and affection took Catherine by surprise. Almost as an attempt to regain some of the lost attention, Catherine launched a silent protest in the form of extreme stubbornness coupled with a rather foolish determination to succeed. Grouping up under the mentality that she had to try extra hard to be noticed, Catherine developed

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a tough and perfectionist personality. By the time she was in her early teens. She had become the “brain child who never gave up” according to her father. And because of her self-confidence and strong personality, Catherine began taking the role of protectorate over her sisters in social surroundings. Although Leon and Shirley were happy to see one of their children exhibit such strong character, they sometimes wonder if Catherine would run herself into walls of tradition in Thailand because of her idealistic views about the role of women. By the time Catherine was leaving for college, she had worked at SCC for almost 4 years doing odd jobs after school. Although her opinions were rarely solicited because of her young age, Catherine learned to see things from the management’s point of view. While in college, as another attempt to prove herself to Leon, she chose to major in chemical engineering. With a weak background in the sciences, however, Catherine admitted defeat for the first time in her life and transferred out of the engineering major. Immediately after her graduation, Catherine resumed to SCMC, eager to join the other four members of the family in the business. In her newfound zeal to grow and expand the company, Catherine became a strong advocate of structural changes. Although Leon was usually open-minded about Catherine’s ideas, he rarely implemented them. Moreover, the ones he implemented he failed to take seriously. Feeling that her ideas were being brushed aside, Catherine began to wonder if she had a future at all in SCMC. She had always thought Leon and Shirley had particularly high hopes in her. Yet, with everything that happened after she resumed from college, she wasn’t sure about anything anymore. It was at this time that Catherine began considering returning to school far from the eyes of family in Bangkok. With an American MBA, she could hopefully get a job with more growth and development opportunities either in Thailand or somewhere else in Asia. When she finally announced her plans, however, she was surprised by the responses she received. Her only vote of support came from Nancy. But she knew she had to leave, at least for a while.

Jennifer, the Little One Jennifer never really gave much thought to the family business. Unless SCMC diversified into other, very different industries, there was no way she wanted to get involved with the chemical or textile business. She wanted to be an architect or an interior designer. Now what would SCMC do with an architect? Besides, the rest of the family was in the business and she felt they would not miss her. Although Jennifer was virtually raised and nurtured with the company, she saw SCMC more as a source of income and disputes rather than a family legacy to be cherished. As the youngest child, Jennifer was never asked to work at SCMC. She was, however, constantly bombarded with problems at SCMC because that was what the family talked about day in and day out. As a freshman in college in Bangkok, she was beginning to realize that someday, she might end up working at SCMC. She was glad she had a few more years to go, though, before she had to

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make a decision about joining SCMC. In the mean time, all she needed to worry about was school and Sam Yin, the son of one of Bangkok’s wealthiest Chinese families. And that alone was more than enough for her.

Leon’s Dilemma Leon clearly did not think Catherine was coming back and he told his wife so. He wondered if he was in some ways responsible for her leaving the company. He realized that he may not have been the easiest boss to work with, but he was only testing Catherine’s tenacity. Although Leon was glad that Catherine had so much confidence in herself, he was concerned that her readiness to challenge authority might get her into trouble especially as a Chinese woman in a culture such as Thailand. Even he felt the pressure of being challenged by this newest addition to SCMC. Despite knowing that many of Catherine’s ideas would help SCMC tremendously, Leon was not sure if, by following her suggestions, he could still appear as being impartial and “in-charge.” He really did not mean to push her away. He just wanted to challenge her, but then again, she did make him angry every now and then demanding he do things differently from the way he usually operated. His thoughts wandered as he pondered the future of SCMC. When he first started SCC, it was more a response to the structural changes in the textile industry than a desire to start his own business. He never thought of himself as an entrepreneur or even a family business owner. That he attributed to seeing his father and mother as poor self-employed farmers, he did not want to leave the fate of his family to uncertainty of being an entrepreneur. Yet that was what he had become and a very successful one at that. With the growth of the company, however, the lingering issue of not having a son surfaced again and again. The old traditions of China die hard, even in the mad rush of modern Bangkok. Although he had complete faith in Dana and Nancy to carry on the operations of SCMC, he worried that his retirement would take with it the relationships he established within the industry. Knowing how male-dominated the chemical and machinery businesses were especially in Asia, Leon tried to diversify into related businesses, which he hoped would be more receptive of women as business leaders. Now that Dana, Nancy, and Catherine were in their mid-20s, he wondered if they would stay with the company once they were married. Or could he recruit their husbands to join the business? What would he do about Jennifer, much less Sam Yin? Another issue which had been lingering on the minds of the employees and the family was “… who would succeed Leon and Shirley as the leader of the company?” Ideally, Leon and Shirley would like their four daughters to work together as a team. However, they also realize the difficulty employees would face with four different leaders, especially women in a business where women leaders were rare. Clearly, one person would need to take a more dominant role, but who? Despite Dana’s strength in sales and marketing, she had a tendency to be indecisive. Moreover, she was very easily swayed by other people’s opinions. Nancy, on the

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other hand, was the patient listener whom employees turned to in Shirley’s absence. In fact, Shirley had slowly transferred most of her responsibilities to Nancy, whose attention to detail had saved SCMC from committing some costly documentation errors on more than one occasion. Although Catherine had the decisiveness and the audacity not shared by her sisters, she still had much to learn about the industry and the company. In addition, her aggressive nature and perfectionist personality sometimes might dismay others, especially elders, in the Asian community. As for Jennifer, who most employees remembered from childhood, getting 500 people to respect her as an adult would be difficult, at least for a while. With these considerations, Leon wondered if he should let things unfold on their own. Or, if he were to plan the future of SCMC, how should he go about making the arrangements?

Learning Notes In this case it should be obvious that multiple uncertainties are occurring. These are set within the context of the cultural issues of the role of women in the family firm. In many ways you see a clash of generations in this case as well as a clash between some members of the same generation. Ask yourself, how would you answer Leon’s questions? What do you think Catherine will do? What will be the response to the Chen women after their father leaves the firm?

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Chapter 9

Case Seven: Marina Cove Ltd. and the Guthrie Family

Preface to Case Diane Cercle, Kim Chapman, Garrett Ellberger, Naomi Geiner, and Sheila Lee ­provided the initial research for this case. Robert B. Chapman and Steven Liao prepared the case for publication under the supervision of Alan L. Carsrud while at the University of California, Los Angeles. This case is of a real family and firm and with their permission. It is their hope that their lessons may be valuable to others.

Part I: When Family Members Do Not Make Good Employees Introduction Each day during the past 2 years, Les Guthrie thanked the powers that be for giving him a second chance. The doctor’s sentence of 6 more months had been wrong as Les’s Leukemia had gone into complete remission. Since that time, Les had hoped to see places he had never been and to leave his business, Marina Cove Ltd. (MCL), in the trusted hands of his wife, son, and daughters (see Exhibit 1 for biographies and Exhibit 2 for relationship between family, ownership and management). As part of his plan, Les had agreed to finance and sublease space for his son’s business, The BlueWaters Terrace. As he stared at the most recent financial statement of the BlueWaters Terrace, Les wondered if his plan of giving his children ownership and management control of MCL would work. After a full year of operation, the business was far from turning a profit and Les began to wonder if the concept would work. It was clear that the BlueWaters Terrace would need additional financial support in order to continue operations – a difficult burden given the strain created by the poor economy on Marina Cove’s other businesses. A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_9, © Alan L. Carsrud and Malin Brännback, 2011

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The Story Behind Marina Cove After graduating from college and a career in the United States Navy, Les began his long and successful career as a master real estate developer. With a few years experience and his college degree, Les undertook several ambitious projects including the development of two large subdivisions. Les quickly mastered the real estate development game and brought several new ideas to the rapidly growing market. As a result, both developments proceeded with few complications and provided Les with the capital to pursue his next project, MCL. In mid-1970s, Les formed a relationship with the city manager of Redondo Beach and learned about the opportunity to lease and develop 34 acres of prime land around and including the city’s highly prized, the Marina. With the help of outside investors, Les formed MCL and won the contract from the city. In exchange for a 1  million dollar a year rent and a percentage of any gross receipts from rentals (27%), Les had complete freedom to develop this sight. Shortly after signing the lease, MCL formed King Harbor Marina Inc. (KHM) to construct and oversee the rental and maintenance of slips within the marina and several apartments. Gerel Guthrie, Les’s oldest daughter, and her husband Tony Santiago, managed KHM, Inc. With the help of their leadership and the strength of the economy, King Harbor became the cash cow of the family’s portfolio of businesses. In 1985, for example, the Marina had a waiting list in excess of 100 boat owners. In addition to King Harbor, the Guthries formed JACAMO to administer the common areas and subleases for retail property. JACAMO rents space to operations including Charley Brown’s Restaurant, King Harbor Marine Center, King Harbor Marina, Sport Center Fitness, the BlueWaters Terrace, King Harbor Yacht Club, and the Redondo Beach Yacht Club. This operation is managed by Glenn Ishihara, who is not a member of the Guthrie family. In 1984, Maryann Guthrie quit her role as manager of the Sport Center, a health club owned by MCL, and began working for a Fortune 500 company. Shortly after quitting, Maryann began dating Les and soon thereafter, they were married. In 1986, Les bought out his partner’s interests and gave his wife and each of his children an ownership portion. At that time, Les estimated that the partnership was worth 40 million dollars. After getting married, Maryann returned to MCL to help Les run the various businesses. In addition, some of Les’s children, all from his previous marriage, became involved in the business in one way or another. Gerel Guthrie worked in her father’s business since graduating from college. She and her husband, Tony, managed King Harbor. Danelle Guthrie, age 39, graduated with a degree in architecture from the University of California at Berkeley and a Masters from UCLA, but unlike Gerel, has shied away from working with her father on a daily basis as she feels he is “a demanding person.” Instead, Danelle, who with her husband formed her own successful architectural design firm, sits on the board of JACAMO. Many feel that she is the logical successor to Les. She, however, still has no ambitions to become

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further involved and sits on the board as a means of directing policy and protecting the dividends she and her husband earn from their interest in MCL. Unlike Danelle and Gerel, Deslie and Tera Guthrie do not have college degrees. Deslie has never been involved in any business, including her father’s. Tera worked with her brother, Sean, in helping MCL open the Sport Center Bar and Grill, one of the first discos in the South Bay. After 3 years, Tera left her position at the bar and formed her own catering business called Adventurous Cooks. Her catering business has done quite well and managed to become a significant player in the market for weddings and other special events. Sean also disregarded his father’s pleas and never attended college. Instead, Sean worked for his father and helped build the successful Bar and Grill. In the late 1980s, the bar closed due to the end of the disco era and Sean moved back home with his father to have the freedom to figure out what to do next.

Sean’s Luck Runs Out During the year following the closure of the Sport Center Bar and Grill, Sean developed a plan for a business which would provide space and catering services for special events such as weddings, corporate parties, and other celebrations. He wanted to establish three different locations, but was unable to raise enough capital. Instead, he changed his plan to a one location concept, called the BlueWaters Terrace, and convinced his father and the MCL board to fund the business. Les, having seen the success of the Sport Center Bar and Grill, was confident that Sean could make the BlueWaters Terrace succeed. Shortly after giving Sean the green light, Les began to see the warning signs of failure. Sean quickly broke away from his detailed plans to hire a younger chef and his plan to coordinate/sell the events himself and instead hired an experienced chef and another experienced event coordinator. Because of their experience, Sean had to pay top dollar for these two new employees. Together, their salary represented more than 50% of the projected revenues of the new venture, yet Sean saw no need for concern. In addition, Sean spared no expense in the remodeling of the space and in the hiring of other individuals. Les began to wonder if Sean had analyzed if these overruns would lead to additional revenues and if Sean had a plan to cover the excess expense. Even with such concerns, Les was reluctant to get involved. Recent grumbling by other family members and trusted employees about Les’s authoritative and arbitrary management style had already prompted the board to hire a professional psychologist to interview employees and try to solve the problem. The interviews revealed that the nonfamily members were frustrated by Les’s seemingly one way and untimely communications, as well as the lack of procedures for handling grievances. Some of the family members also agreed that the management style was top down from Les and that the goals were not shared. As a result, the psychologist determined that a team spirit among management and employees did not exist. This prompted Maryann to recommend that JACAMO hire a consultant to conduct team

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building exercises and skill development seminars for the mangers of the business. In addition, Maryann requested that the family attend group therapy. Les felt that this training provided Sean and others with enough of an intrusion at this time. As a result of his lack of intervention and efforts by Sean to correct the problem, the BlueWaters Terrace lost a significant amount of money during its first year of operations. The business began to accumulate debt and could no longer make its lease payments to JACAMO. This happened at a time when JACAMO’s core business, the Marina, began to suffer due to the worsening recession. Thus, the corporation’s ability and willingness to bail-out the BlueWaters Terrace was significantly diminished. In addition, several members of the board, including Sean’s sister, began to doubt if the BlueWaters Terrace would ever make money.

Unfair Expectations The meeting with Sean had not gone as expected. When Les told Sean about JACAMO’s situation and the need to limit further cash outlays, Sean accused Les of being unfair. Sean reminded Les that few restaurants ever make money within their first 2 years of operations. Further suggestions regarding the need to cut payroll and perhaps terminate either the chef or event coordinator met with increased resistance. While Sean understood that few new businesses start with experienced, high paid management, it was clear that Sean did not want to fire the two people he had so diligently sought before his first year of operation. Les left the meeting wondering if his son could make the tough decisions needed to turn around the BlueWaters Terrace and decided to let the board decide on the fate of the business.

Biographies of Key People Les Guthrie, age 67 Famous for his real estate prowess and tough business negotiation skills, Les Guthrie is a true entrepreneur in every sense. He graduated from UCLA with a degree in engineering and is a former naval engineer. After leaving the Navy, he devoted his career to contracting and real estate development. Before becoming chairman of MCL and King Harbor, Les was responsible for the construction and sale of many residential homes. Currently, Les serves as the main decision maker for MCL and all its limited partnerships. He frequently takes a hand on management style but with his recent illness, is prepared to limit his future involvement in MCL. Maryann Guthrie, age 41 Maryann began working at MCL in 1977 after moving out to California from New Jersey. Prior to leaving MCL in 1984, Maryann helped MCL open the Sport Center.

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In 1984, Maryann began dating Les and married him in 1986, at which time she returned to MCL. She currently serves as the Marketing Director for the leasehold and often serves the role as intermediary between Les and his children. She has both a BA and MA degree. Gerel Guthrie Santiago, age 40 Gerel is the oldest daughter of Les Guthrie and has four children of her own. After majoring in Theater Arts at UCLA, she began working for her father. Currently she is the General Manager of the leasehold and helps run the Marina. Tony Santiago, age 42 Tony, the husband of Gerel Guthrie, has worked at MCL for more than 20 years. He started as a construction worker and quickly moved up the ranks into a management position. He currently shares responsibility for the Marina with his wife. Danelle Guthrie, age 39 Danelle is the second oldest daughter and holds a degree in architecture from the University of California at Berkeley and a Masters from UCLA. Danelle worked at her father’s company while in college but decided to pursue her own career in architecture. Together, with her husband, Danelle formed her own architecture firm. Her firm has worked on several projects for her father’s company including the Sport Center and the BlueWaters Terrace. She serves on the board as a policy maker. Deslie Guthrie, age 36 Deslie obtained an art degree from the San Francisco Art Institute. She worked as an office clerk for the company for 3 years, after which time she left to pursue her own career as an artist. Deslie likes her flexible lifestyle and is extremely uninterested in business affairs. Sean Guthrie, age 33 Sean Guthrie is Les’s only son. Despite the encouragement from his father, Sean never attended college and graduated from high school with average grades. He has always been involved in some portion of the operations of MCL and like his father, has skills in design, contracting, and construction. Sean helped MCL form and run the Sport Center Bar and Grill, and later help found the BlueWaters Terrace, which replaced the Sport Center Bar and Grill. Tera Guthrie, age 32 Tera is the youngest daughter of the Guthrie family and became involved with the business by helping her father and her brother form and operate the Sport Center Bar and Grill. She is a graduate from the San Francisco Culinary Academy. After 2  years, Tera left her father’s company to form her own catering business. She ­currently serves as a board member at MCL. Glenn Ishihara, age 32 Glenn has worked for MCL since 1978 and is currently the President and Financial Manager of JACAMO, Inc. Glenn originally started as a ball boy on the tennis courts at which time Les adopted him as his protégé. Glenn graduated from USC

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and has his MBA. Glenn is currently considering returning to law practice to further his skills. Michael Marinelli, age 33 Michael started working for the business in 1984 and left in 1985 when the company restructured. In 1989, he returned as the General Manager of the Sport Center. Michael has an MBA and is a dedicated and valued employee.

Learning Notes This case shows what happens when a family business hires an individual because he is a member of the family and not necessarily the best qualified individual for the job. The questions involving the events surrounding the BlueWaters Terrace are as follows: Should Les give Sean a second chance? What message and behavior expectations does this give to other family members and nonfamily managers? What could have Les done to put more pressure on Sean and enable his son to see the severity of the situation? What types of mechanisms/contracts should an owner put in place to handle the inevitable special status which is afforded by a family member within a firm?

Exhibit 1 Interlocking Relationship Circles, as of 1989

Ownership Glenn*

Danelle Deslie

Les Maryann Gerel Scan Tony

Tera

* = Not a Board Member

Family

Michael*

Management

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Part II: Terminating Family Employees Part II of the Marina Cove Case shows the Guthrie’s solution to the problem regarding Sean and the problems created by giving Sean a second chance. Part II highlights various actions which management may take to remedy the situation and ends by posing the question of how to solve the trouble created by hiring the wrong people, even family members.

The Board Asks Sean to Step Down Shortly after Les and Sean’s meeting, the board met to discuss the future operations of the BlueWaters Terrace. After much deliberation, the board agreed with Les and felt that Sean lacked the ability to make the critical decisions regarding overhead expenses. In addition, the board questioned Sean’s inability to handle conflicts between himself and other family members and employees of JACAMO. As a result, the board asked Sean to remove himself from the operations of the BlueWaters Terrace and attend therapy. In addition to the decision to remove Sean, the board agreed to let an interim management team, which had restaurant experience, try to turn around the operations. While Sean did not like the board’s decision, he agreed to remove himself from the BlueWaters Terrace and JACAMO’s board in exchange for the agreement by the remainder of the Guthrie family to attend group therapy.

The Calm Before the Storm With Sean’s cooperation, the board vote, and the slowly improving economy, Les and Maryann began to relax. They had faith that JACAMO’s operations would improve and began attending therapy with the remainder of the family. The therapy proved most interesting and revealed many problems behind the interfamily communications and cooperation, such as why each family member had agreed to work in the business. Shortly after therapy had begun, Gerel, the manager of the Marina, seriously questioned her own desire to work for King Harbor Marina. Gerel felt that she had entered the business to please her father and wondered if her family business career met her own personal needs. This problem, coupled with a personal health crisis involving one of her children, prompted Gerel to request and receive a leave of absence – thus leaving the Marina operations without an experienced senior manager. In addition to Gerel’s own personal issues, other concerns began to surface regarding her husband’s activities. While Tony had always been a hard working and loyal employee, much of his own management style and training did not meet the needs of a more complex business operation. Several concerns regarding his authoritarian management style and possible harassment of employees began to surface.

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Tony consistently missed meetings, made decisions without consulting those who were held responsible for the impact of such decisions, and even created tensions between himself and the female members of King Harbor Marina’s staff. Glenn felt that if Tony’s behavior continued, several trusted and good nonfamily employees would quit and Les may even be forced to face several discrimination and harassment lawsuits. Michael supported Glenn’s observations. Michael’s staff felt that a double standard for appropriate behavior existed: one for the Guthrie family and one for all other employees – the people who actually did the work. As a result of the personal therapy sessions, the family voted to create a Code of Conduct for the Guthrie Family members who worked at the various businesses. Maryann volunteered to write the Code and distribute it to the family.

Board Enforces the Code Les and Maryann knew that some of the family members would not be happy, but felt that the code had to be accepted in its entirety. While some family members were resistant, all family members signed the code. With the code in place, Les and Maryann went on their European vacation. After the first week, Les received an urgent call from Linda, the controller of the Marina. She was ready to resign after her decade of experience and even considered filing harassment charges as Tony continued to “assume privileges” which were granted to him due to his ownership and being a member of the Guthrie family. On hearing the news, Les and Maryann began to discuss their options. Instead of returning to handle the situation, Les and Maryann decided to have the board decide on the appropriate course of action using the family code of conduct as their guide. The board met and decided to place Tony on probation until the return of Les and Maryann.

The Ultimate Decision Upon their return, Les and Maryann began to formulate a plan which would let the diverse group reach a consensus. Such a plan was more difficult to construct than expected due to the numerous problems, interests, and options. Should Les and the family sell the business to a third party and let such an individual deal with the employment/management problems? How would this option impact the value and ability to give those who did not cause trouble their fair share? Could Les and Maryann fire Tony and hope that such an action would not jeopardize the ability for other members of the Guthrie family to earn a fair return from their partnership interests? Or should he and Maryann abandon the code and hope that Tony would behave in a more acceptable manner.

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Whatever the solution he knew he had to devise a way to be fair, maximize the family’s wealth, and provide himself with a means to eventually leave the business and enjoy his second chance. In addition, a decision had to be made about the BlueWaters Terrace, which after 6 more months, had yet to return a profit.

Code of Conduct for Guthrie Family Members I. The Philosophical Elements of Family Success (Whether in Business Together or Not) ( A) A family community – a roundtable to be seen and heard. (B) Understanding that maintaining a family is hard work, and commitment to all family members to do it. (C) Straightforward communication. (D) Consensus. (E) Understanding and respect for leadership; a willingness to be led; a problemsolving mentality. (F) A respect for individual differences and for freedom of choice. (G) An attitude of inclusively – a sense of the fun deriving from “the more the merrier.” (H) A willingness to seek help outside the family. (I) A sense of responsibility for family matters. (J) A respect for different generations without either needing the approval of the other. (K) A strong tradition of moral and ethical values. (L) A shared vision. II. Basic Principle of the Code (A) The family members (FM) who is associated with the family business (FB) as an owner, partner, stockholder, director, officer, manager, employee, contractor, consultant, vendor, tenant, member, or customer shall adhere to all requirements of this code. III. Inclusions (A) A FM in a FB has a recognized position of authority and power regardless of his/her title and rank, even regardless of the FM’s position. The FM has the inside tract. If the FM cannot command the top respect due a member of top management on the FM’s own merit and on the basis of his/her own performance, the FM should not be allowed to remain within the structure of the FB. Each FM is expected to the best of his/her ability to unequivocally support the philosophies and principles set forth in this document. (B) A FM is more specifically described as anyone related to L.C. Guthrie, Jr. by blood or marriage (including a spouse-like relationship) or a spouse (or a spouse-like person) of a blood relative.

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(C) The FB is more specifically described as to include all business activities involving the following legal entities: Marina Cove, Ltd. (MCL), JACAMO, Inc. (JACAMO), S.C. BlueWaters, Inc. (BWI), Sport Center Fitness, Inc. (SCF), King Harbor Marina, Inc. (KHM), King Harbor Island Corporation (KIC), Adventurous Cooks, Inc. (ACI), Cove Investment Properties, Ltd. (CIP), and Guthrie Properties, Ltd. (GPL). (D) Only those FMs who, on their own merit qualify for a position are allowed to stay in the business. (E) The FM who is not willing to work as a team member for the betterment of the business destroys morale and breeds both resentment and cynicism. (F) The FM will treat all tenants, members, guests, customers, and company personnel with respect. Abusive language and actions will not be tolerated not once, not ever. (G) The FM understands that he/she must set the example for other company personnel to follow. We will agree to continue to grow and improve our knowledge through education, seminars, therapy, and discussions. (H) The FM will agree and understand that working for the FB is not a birth/ marriage right. The FB will continue to hire and develop the best possible people to manage and/or work for the FM be it a FM or non-FM. IV. Specific Principles of Special Importance (A) The FM will treat all tenants, members, guests, customers, and company personnel in an equal and polite manner without regard for sex, race, religion, creed, or national origin. (B) The FM will communicate, cooperate, and work with all other company personnel when assigned duties or projects that affect any business on the MCL leasehold. (C) The FM is required to sign and acknowledge any and all statements which will affirm their receipt and understanding of each document relative to the FM’s specific responsibility when any non-FM in a similar position is also required to do the same. Such documents may include but are not limited to: the King Harbor Employee Handbook and Company Addendum’s, Position Description, Subcontracts, and Partnership and Stockholder Agreements. (D) The FM understands that FB owned tools and equipment will be shared by all companies in an established check in/out system. (E) The FM will attend all required staff meetings and team building seminars. The FM not attending any required meeting without the approval of the JACAMO Board of Directors will be fined $50.00. V. Consequences (A) For either poor performance of misconduct, the JACAMO Board of Directors will retain the right to discharge at will. Proven major violations of the FB policies or gross misconduct – fraudulent expense reports, stealing company property, or substantial conflicts of interest may lead to immediate suspension and discharge.

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VI. Steps Toward Performance Improvement (in Order of Seriousness) (A) Verbal counseling is documented for future reference. (B) Written counseling: Define the problem, states that probation, leave of absence, or termination – or all of the above – may result if improvement is not observed. The written counseling becomes part of the employee file. (C) Voluntary leave of absence/probation: If the problem has not been resolved through verbal counseling and written counseling, the individual should be placed on leave of absence/probation. Probation is a serious action in which the employee is advised that termination will occur if improvement in performance or conduct is not achieved within the probationary period. Probation length – Minimum 2 weeks and no longer than 60 days. A written probation letter should include a statement of the following: 1. The specific unsatisfactory situation. 2. A review of oral and written warnings. 3. The length of probation. 4. The specific behavior modification or acceptable level of performance. 5. Suggestions for improvement. 6. A scheduled counseling session or sessions during probationary period. 7. A statement that further action, including termination may result if defined improvement or behavior modification does not result during probation. “Further Action” may include, but is not limited to reassignment; reduction in pay grade; or demotion. VII. Disciplinary Actions (A) Suspension/involuntary leave of absence – suspension up to 1 week without pay may be justified when circumstances reasonably require an investigation of a serious incident in which the employee was allegedly involved. A suspension may also be warranted when any or all employees’ safety, welfare, or morale may be adversely affected if a suspension is not imposed. (Suspension is a disciplinary action and is not normally reserved for performance deficiencies.) (B) Involuntary termination – The Involuntary Termination Notice is prepared by the supervisor as noted in the employee’s Position Description. VIII. Appeal Process (A) Appeal process – any employee may appeal by written requires to the JACAMO Chairman of the Board of Directors.

What Happened The family closed the BlueWaters Terrace and fired Tony. This resulted in several years of hostile relations between Les and some of his children which improved. Les is still actively involved in the business.

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Learning Notes This case is an extension of Part I to show how the Guthrie family reacted to the problems of hiring family members for key position. Review the code and the method in which Les and Maryann implemented the code. How could have they reacted differently to have a better chance of altering Tony’s and Sean’s behavior? How is this code critical to understanding succession at MCL? Ask yourself how Les and Maryann might resolve the situation. Identifying the interests and logical positions which each family member may take in this dispute. Then, after identifying all the issues, consider alternatives on how a plan might be devised to appease the most parties and have the family reach a consensus. Do Les and Maryann really need the input of the rest of the family to act? Should they let the board resolve the issue? Can a code be expected to change behavior or for that matter, can a manager change the behavior of an employee such as Tony and Sean and if so, how? What about the issue of management succession? What should Les do? Can he sell the business or should he wait to do so? Is this the best option? How can Les and others convince the trusted and essential nonfamily managers to stay? Should they give these employees a portion of the ownership?

Exhibit 2 Marina Cove, Ltd.: Interlocking Relationship Circles, as of 1992

Ownership Glenn* Michael* Les

Gerel Danelle

Maryann

Deslie Sean* Tera Tony*

* = Not a Board Member

Family

Management

Chapter 10

Case Eight: Lennar Homes – Surviving Death and Recession

The research for this case was done by Octavio Barahona and Jeloika Cruz which was pulled from public data available on Lennar Corporation and its management. The case was developed by Alan L. Carsrud. The sections using the management consultant as the protagonist in the case is the only portion of this case that has been fabricated. This case is an example that often crises and uncertainty come in waves and it is critical to understand that decisions to address one issue can have profound impact on how other issues are addressed. We have provided the citations to the public sources from which information has been obtained.

Introduction Madison got up from bed this morning not knowing the new challenge that was awaiting him at work. When he found out the news, he was both excited and terrified at the same time. Since he started working for MJ Consulting & Associates, he had yet to be assigned a firm of this size. This was his opportunity to prove himself but at the same time felt overwhelmed at the daunting task ahead. He was assigned to Stuart Miller for Lennar Corporation. Having been born and raised in South Florida, Lennar was certainly a company Josh was familiar with. In fact, the house he currently lived in was developed and built by Lennar just a few years ago. Despite his initial excitement, Josh also feels anxious regarding this account. He kept thinking “how am I to devise a succession plan with proposed candidates, as well as spearhead a strategic plan for Lennar’s future given the current state of the housing market, and assist in estate planning for Mr. Miller?” Josh knew this task was not going to be easy and if he was going to be successful he would have to look specifically at the current challenges as this was the key to the future.

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6_10, © Alan L. Carsrud and Malin Brännback, 2011

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Overview: Corporate Strategy Lennar Corporation specializes in selling single-family attached and detached homes as well as multilevel residential buildings like apartment buildings. Attached homes would include condominiums, townhouse, and other multiunit structures. Its focus is to sell to “first time, move up and active adult homebuyers”1 using the Lennar brand name. Lennar has recently seen a drop in the average prices of their homes. Where a home used to average $315,000 in 2006, the 2007 average selling price has dropped to $297,000.2 Lennar is involved in every aspect of its product development process. Either they or “unconsolidated entities in which they have investments in” do all the planning and construction from “land acquisition, site planning, preparation and improvement of land” to the actual “design, construction and marketing of [the] homes.” They use unconsolidated entities as a safety measure to manage risks and also as a means to “expand market opportunities.”3 Unconsolidated entities mean separate firms that build these projects so that if the individual project should fail, it would not negatively impact the larger, public firm.

Management and Operating Structure Lennar’s structure is a combination of “a local operating structure with centralized corporate level management.” The corporate level management handles all of the “decisions related to their overall strategy, acquisitions of land and businesses, risk management, financing, cash management and information systems.” Their local operating structure is divided into regional divisions which are responsible for the “operating decisions regarding land identification, entitlement and development, the management of inventory levels for their current volume levels, community development, home design, and construction and marketing [of the] homes.” The divisions are managed by homebuilding industry experts that have extensive experience in the particular market they run (see Exhibits 1 and 2).4

Lennar Corporation, Form 10 K, December 31, 2007. Pg.3. Lennar Corporation, Form 10 K, December 31, 2007. Pg.3. 3 Lennar Corporation, Form 10 K, December 31, 2007. Pg.3. 4 Lennar Corporation, Form 10 K, December 31, 2007. Pg.3. 1 2

Competitive Advantages

85

Competitive Advantages 5 Few New Entrants At a national level, it is difficult, due to both capital requirements and sheer knowledge base, to penetrate different geographic regions to be competitive. But at a local level there is potential for an entrant to enter the market, but the new entrant will have to focus on customer demographics, i.e., family, senior living, multilevel residential buildings etc. Lennar has a wide spectrum of customers it serves based on its diversified product portfolio.

Shifting Power of Suppliers Lennar has established key partnerships with some key vendors in order to reduce cost it. Its key supplier partners are such GE, Moen, Kohler, etc. Having a limited number of suppliers gives Lennar a medium risk due to the fact that a small number of suppliers for this industry at a national level could restrict Lennar’s ability to purchase all of the materials needed for their homes. In addition, raw materials, such as wood and cement, have limited number of vendors that can supply on the scale that meets its needs.6

High Intensity from Existing Competition In this extremely competitive industry, its competitors consist not only of national, regional, and local homebuilders in the areas they do business in, but it also consists of the existing home resales and the rental housing market. Lennar competes for buyers (customers) on “a number of interrelated factors including location, price, reputation, amenities, design, quality and financing.”7 Aside from the competition for homebuyers, Lennar must also “compete with other homebuilders for desirable properties, raw materials and reliable, skilled labor.”8 Specifically, Lennar faces intense competition from three major national competitors: D.R. Horton, Centex, and Pulte Homes. In addition, they face slew of regional competitors each specializing in customer demographics and/or geographic markets, like WCI Communities.

Poza, Ernesto J. Family Business. 2nd Edition. Ohio: Thomson South-Western, 2007. Pg.175. http://mediaserver.prweb.com/pdfdownload/415155/6/pr.pdf. 7 Lennar Corporation, Form 10 K, December 31, 2007. Pg.8. 8 Lennar Corporation, Form 10 K, December 31, 2007. Pg.8. 5 6

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10  Case Eight: Lennar Homes – Surviving Death and Recession

Power of Customers Increasing In 2007, “the mortgage market experienced increased concern over rising default rates and tightening lending standards, which resulted in a significant decline in the availability of sub-prime loans (loans to persons with a FICO, personal credit, score under 620) and ‘Alt A loans’ (loans to persons with less conventional documentation of their incomes or net worth’s and FICO personal credit score of 620 or higher).” As a result, it is expected that the number of buyers in the market who qualify for mortgage loans for both new and existing home purchases will decrease. “During both the fourth quarter of 2007 and the year ended November 30, 2007, approximately 2% of the loans [made by their] Financial Services segment” were subprime loans. By subprime we mean less than standard quality loans with a higher level of risk. In regards to Alt A loans, “during the fourth quarter of 2007 and the year ended November 30, 2007, approximately 6 and 29%, respectively, of the loans [their] Financial Services segment made…were Alt A loans.”9 If the newly tightened lending standards remain in place, this could result in the “further deterioration [of] the overall homebuilding market due to stricter credit standards, higher down payment requirements and additional documentation requirements.” Thus, the number of homes Lennar is able to sell could be negatively affected.10 Another factor that needs to be taken into consideration is “the extent that homeowners have used sub-prime or Alt A mortgages to finance the purchase of their homes [under the old standards] and are later unable to refinance or maintain those loans, [may cause] additional foreclosures and an oversupply of inventory may result.” This could cause further “deterioration in the market and have an adverse impact on demand and the number of homes [Lennar] sell[s].”11

Substitute Housing Increasing Homes, in general do have a ready and able substitute in the market. New homes can be segregated by architectural style, location, lot size, living space square footage, and amenities. In addition, Lennar, as a new home builder, has to also compete with the resale of existing homes, including foreclosed homes, sales by housing speculators, and available rental housing. “As demand for homes has slowed, competition, including competition with homes purchased for speculation rather than as places to live, has created increased downward pressure on the prices at which we are able to sell homes, as well as upon the number of homes we can sell.”12

Lennar Corporation, Form 10 K, December 31, 2007. Pg.6. Lennar Corporation, Form 10 K, December 31, 2007. Pg.7. 11 Lennar Corporation, Form 10 K, December 31, 2007. Pg.7. 12 Lennar Corporation, Form 10 K, December 31, 2007. Pg.10.     9

10

Industry Outlook

87

Market Conditions In 2007, the state of the homebuilding industry continued to worsen as consumer confidence continued to drop and the mortgage industry saw increased volatility. As a result, Lennar saw high cancelation rates of 30% (up 1% from the previous year). Lennar also experienced a significant drop in net new orders which declined by 39% vs. 3% in the previous year.13 It proved to be another tough year for the entire real estate/homebuilding industry. Lennar has combated the ever increasing competitive pressures by reducing prices through the use of incentives, price reductions, and incentivized brokerage fees. As a result, the use of these sales incentives had a negative impact on gross margins.14

Industry Outlook There is a significant downturn in the homebuilding industry in general coupled with ever increasing credit markets whose players, namely Wall Street banks, have significantly shied away for providing financing with securitization. In addition, commercials banks have swung the pendulum to opposite direction of lax standards too stricter and lending requirements cumbersome for any home buyer. As a result, many homebuilders have experienced a significant decline in demand for newly built homes in almost all of their markets. Homebuilders’ inventories of unsold new homes have increased as a result of increased cancelation rates.15 For example, WCI Communities a homebuilder in Florida since 1946 and a major competitor to Lennar for decades has filed for bankruptcy protection this month.16 In addition, an oversupply of alternatives to new homes, such as rental properties and used homes, has depressed prices and reduced margins. This combination of lower demand and higher inventories affects both the number of homes Lennar can sell and respective prices.17 The passing of the 2008 Housing Bill will provide some stimuli for demand of new homes and stabilize the continuous downtrend in housing values as believed by many, including Stuart. Stuart believes that the $7,500 tax credit for first-time home buyers will help spur much needed demand for new homes. “[Lennar is] particularly optimistic about the bill’s $7,500 tax credit for first-time home buyers. This provision has the potential to create much needed demand among first-time buyers who have been undecided about buying a new home. And if first-time buyers enter the market, then existing homeowners may trade up, creating an upward spiral of demand.”

Lennar Corporation, Form 10 K, December 31, 2007. Pg.29. Lennar Corporation, Form 10 K, December 31, 2007. Pg.42. 15 Lennar Corporation, Form 10 K, December 31, 2007. Pg.12. 16 August 5, 2008. “WCI Communities files for Chapter 11 bankruptcy protection” Tweh, Bowdeya. Sun-Sentinel. 17 Lennar Corporation, Form 10 K, December 31, 2007. Pg.12. 13 14

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10  Case Eight: Lennar Homes – Surviving Death and Recession

Family Leonard Miller, father of Stuart and cofounder of Lennar was born in Bedford, Massachusetts. After receiving his degree from Harvard University, he moved his family to South Florida and invested $10,000 of his own pocket and cofounded Lennar.18 Leonard and wife Susan Miller had three children: Jeffrey, Stuart, and Leslie. The siblings, Jeffrey and Leslie, are not directly involved in Lennar. Jeffrey is the CEO of Weeks Gas and the Barbecue Superstore, and is actively involved in giving to the community. Leslie Saiontz, like her father and brother Stuart, is also a Harvard graduate. While she is not actively involved in the company, her husband, Steve Saiontz (also a Harvard alumni), does have a history with Lennar. Leslie and Steve married in 1982. They have five children, Melissa, Brent, Amanda, Rachel, and Matthew who all have attended Ivy League schools.19 Steve served on the board of directors of Lennar until 2006 and was the CEO of LNR Property Corporation; a Lennar spin-off specialized in real estate investment, finance, and management. In 2002, he resigned as CEO of LNR in order to take his late father in-law’s place as Chairman of Union Bank, headquartered in Sunrise, FL.20 Steve continued serving in Lennar’s board up until January 2006 when he resigned. His resignation was effective immediately. The reason for his departure was supposedly because he wished to “focus on other business interests and projects” that could result in “conflicts of interests” limiting “his ability to serve the Lennar board.”21

Planning for Succession Stuart Miller, 51,22 Son of Leonard Stuart Miller was born on August 8, 1957. He is the younger son of Leonard Miller and the only one of his children to take an interest in running the family business. Stuart is now divorced. He has four children with his ex wife Vickie Miller. Stuart has climbed his way up the ranks of Lennar. Between 1982 and 1992, he was an officer of the company. He later became vice president and in 1997 Stuart took his

“Medical School begins New Era with $100 Million dollar gift,” http://www6.miami.edu/veritas/ december2004/fp/fpstory1.html. 19 P Biography, http://www.goprincetontigers.com/ViewArticle.dbml?SPSID=46536&SPID=­ 4229&DB_OEM_ID=10600&ATCLID=603359&Q_SEASON=2008. 20 “LNR Prompt Moves at Sunrise Bank,” Miami Today, October 3, 2002, http://www.miamitodaynews.com/news/021003/story5.shtml. 21 “Two Directors to Leave Lennar,” South Florida Business Journal, January 13, 2006, http://www. bizjournals.com/southflorida/stories/2006/01/09/daily47.html?jst=t3_ln_hl. 22 http://www.referenceforbusiness.com/biography/M-R/Miller-Stuart-A-1957.html-23k-. 18

Planning for Succession

89

father position as President. Today, Stuart continues to as CEO in Lennar and has a total voting power of 49% of combined Class A and B shares.23

A Father’s Example Ever since he was a young boy, Lennar has always been a part of Stuart Miller’s life. Stuart grew up in Miami during the 1960s “watching his father’s business grow.” He first began working for the company when he was 11 years old. His job consisted of mowing the lawns of Lennar’s model houses. During his teenage years, Stuart began “working odd jobs around Lennar’s construction sites to save money for a car.” His father’s wealth did not seem to spoil Stuart. Although he was the son of Lennar’s cofounder. Stuart “did not take his position as the boss’s son lightly.” “He had inherited his father’s hard-working and entrepreneurial nature and desired to make his own way and earn his own money as soon as he was able.”24 “A strong work ethic is the most influential counterbalance to any experiences with the advantages of wealth.”25 Stuart attended Harvard University for his undergraduate degree. He later returned to Florida and received his law degree from the University of Miami in 1982. “Intent on demonstrating his leadership skills, helping grow the family business, and continuing his educational development in the realm of business,” Stuart returned to “the company he had grown up with.”26

Building a Homebuilder Career With Stuart’s help, Lennar grew “into one of the largest house builders in the United States.” The company’s ability to “branch out into all aspects of construction services” was fundamental to its growth and success. Stuart had a keen sense of what it was homebuyers needed and wanted in a home. He diversified Lennar’s operations to include “house construction and sales, land development, mortgage financing, title insurance, closing services, insurance agency services, high-speed Internet access, cable television, and alarm installation and monitoring services” thus providing homebuyers “with a complete service platform.”27 Stuart knew the company’s success highly depended on its ability to make “intelligent and well-researched land acquisitions.” His strategy was to follow the “market

http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 25 Poza, Ernesto J. Family Business. 2nd Edition. Ohio: Thomson South-Western, 2007. Pg.119. 26 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 27 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 23 24

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10  Case Eight: Lennar Homes – Surviving Death and Recession

across the country” and “acquire prime property in depressed markets poised for a comeback.” This was the case with the San Francisco Bay housing market which crashed in the late 1990s. Lennar saw this as an opportunity and “bought property in the area at a reduced price, believing that the market would eventually come back.” This decision proved to be a wise one because the market did bounce back and Lennar prospered as a result.28 Stuart knew that in order to successfully market its homes, “Lennar had to do its homework.” His guidance helped Lennar develop “a dual-faceted marketing program, which allowed buyers to choose between custom and standard options packages.” “Design Studio” was the name of Lennar’s custom packages. These packages “worked much as did other custom builder programs by allowing customers to choose finish options at one of Lennar’s design studios.” Its “Everything’s Included” program was its standard options package. This program allowed Lennar to “keep its costs and prices below those of competitors by building relatively simple houses and including all the options buyers wanted in the base price.” Lennar determined what should be included in the standard vs. the “design” package by conducting “extensive consumer research and customer surveys to identify the upgrades buyers wanted most.” Stuart’s theory on the program was that by “simplify[ing the] processes and keep[ing the] overhead low, [Lennar was] able to keep [their] costs lower” which helped in also providing “some of the desired upgrades in the base price.”29 An example of Stuart’s astuteness is the fact that he was able to “adapt to the changing face and needs of American house buyers” by “building multifamily dwellings in urban areas.” These included apartment buildings, townhomes, and similar properties. He specifically adapted to the needs of the “aging baby boomer generation” by shift[ing] away from subdivisions to build more condominiums, thus satisfying an important demographic group while responding to land shortages. In areas such as Miami where land supplies were diminishing. According to experts, Stuart’s “versatility” was what “allowed Lennar to ride the waves of volatility in the housing market.” It is no surprise that Stuart was able to take this shortage of land and turn it into an opportunity given “his extended knowledge about homebuilding and [his] very early exposure to the industry.”30

Management Style Stuart Miller management style can be described as both creative and effective and definitely not your typical leader. He is “focused on making every employee feel accountable and responsible for the growth and success of the corporation” while

http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 30 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 28 29

Management Style

91

also putting forth “extensive efforts to foster an atmosphere of creativity and fun in and around the office.” He is a firm believer “empowered and happy employees [are] vital to the success of the company.”31 Stuart’s unique management style was influenced by the Walt Disney Company. “Early in his career with Lennar, Miller attended a seminar at the Disney Institute, a management training program run by Walt Disney Company.” Their philosophy of encouraging employees “to be friendly regardless of their positions within the company” impressed Stuart to the point that he implemented a rule at Lennar that all employees would wear name tags which had only their first names and that contained no job titles. He believed that “in a company that was growing so rapidly that many employees did not know all of their coworkers by name, these name tags fostered an intimate and relaxed environment.”32 His management style fosters among his employees a sense that work is fun and exciting and that anything is possible. On Fridays before the commencement of meetings, Stuart “played music and danced with employees.” To further create a sense of equality among workers, there are also no assigned parking spaces in Lennar, not even for executives. Stuart “also instituted the production of lighthearted holiday videos that were distributed and shown to all Lennar employees to laud their accomplishments and encourage further success in the upcoming year.”33 Stuart’s approach to management is to combine creativity with discipline. He believes that “all employees play a part in Lennar’s commitment to maximizing return on net assets.” As a result, he requires that all of a Lennar’s division submit “a monthly, one-page report showing whether it [is] meeting its financial goals.”34 Stuart’s management style has also been influenced by “the writings of children’s author Dr. Seuss” which he finds are “especially relevant and applicable to his business philosophy.” He has often used “Seuss’s writings during business meetings and training sessions to boost the confidence of employees or illustrate an important lesson.” A notable example of such a time was when he once “sat on the conference room floor and gave a reading from Dr. Seuss’s classic book, Oh, the Places You’ll Go!” during a meeting with US Home Corporation. Stuart has even gone as far as having executives write nursery rhymes like Dr. Seuss’s “Where’s the Wow?” which “told of using research, practice, and simplicity to succeed.” The nursery rhymes were then illustrated and published for the company’s employees.35 Stuart’s creative side is also seen in his method for instilling company values among the employees through children’s fables. He created a tradition at Lennar where new employees “receive a card imprinted with ‘Scratchings from the Little Red Hen,’ a story adapted

http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller 33 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 34 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 35 http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. 31 32

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10  Case Eight: Lennar Homes – Surviving Death and Recession

from a popular children’s tale.” The company’s version of the story is meant to demonstrate how a good work ethic will lead to prosperity in that it “told of a little red hen digging for worms during a drought while an arrogant rooster waited in vain for worms to come to him. The hen was able to eat and prosper because of her work ethic, whereas the rooster’s lack of initiative left him weak and hungry.” The tradition is now considered “a rite of passage of sorts for Lennar employees” and can also be viewed as a metaphor for Stuart’s own work ethic.36

Next Generation Currently, Stuart’s children are in adolescent age, which leaves the only option of appointing a nonfamily member to be successor to Stuart. Unfortunately, there has been little indication by Stuart that a nonfamily member executive has been chosen. The executive team is comprised of industry veterans with decades in the homebuilding industry. In addition, some executives have been with the company for many years. Given current challenges and headwind, the company faces a chosen successor would be optimal. Unfortunately, survival and meeting financial obligations, i.e., bonds, are a greater priority for the company. It would be beneficial for Lennar to take note of some examples of companies whose successor is a nonfamily member as the next third-generation is growing to take command in the future. For example, Enterprise-Rent-A-Car has chosen an insider for the challenge of leading the company until the next generation is prepared for transition to lead of the company.37

Conclusion Overwhelmed by the results of the research he did on the Miller family, the company’s history, and its current woes, Josh pondered what this company’s future would be. Would it survive once it reaches the third generation of Millers? Would there be any Miller interested in taking on the reigns of the business once Stuart steps down? Would employees adjust well to having a successor with a more traditional management style? And even more perplexing, will this company make it at all to the next generation or will it be acquired or go bankrupt due to the ever deteriorating market conditions?

36 37

http://www.Answers.com, http://www.answers.com/topic/stuart-a-miller. August 4, 2008. “Enterprise Taps Nicholson as President.” Lublin, Joann. Wall Street Journal.

History

93

History38 1954 F&R Builders is formed in Miami, FL. 1956 Leonard Mr. Miller invests $10,000 and becomes coowner of F&R Builders. 1969 F&R’s equity base reaches $1 million. 1971 Leonard Mr. Miller and Arnold Rosen change the F&R name to Lennar, and the Company goes public with an initial offering of $8.7 million. 1972 Lennar is listed on the New York Stock Exchange. 1977 Lennar enters Arizona market with acquisition of Womack Development Corp. and MasterKraft Homes. Cofounder of Lennar Arnold Rosen retires and continues to serve as a Director. 1981 In response to S&L crisis, Lennar forms Universal American Mortgage Company. 1982 Lennar expands into Fort Myers, Florida, by acquiring Royal Homes. Lennar’s equity base reaches $100 million. Arizona Division introduces “The Little Red Hen” poem. 1984 Lennar expands in Palm Beach, Florida, by acquiring H. Mr. Miller & Sons. 1985 Lennar forms Universal Title Insurors. 1986 Lennar acquires DCA Homes throughout Florida. 1989 Lennar acquires Richmond American Homes in Orlando and Tampa. Lennar creates “Everything’s Included” concept in Palm Beach. 1991 Lennar enters the Texas market. Lennar expands mortgage services into California. 1992 Lennar acquires $1 billion Amerifirst real estate portfolio in joint venture with Morgan Stanley. Lennar introduces the Super Home. 38

Lennar Corporation, Form 10 K, December 31, 2007. Pg.1–2.

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10  Case Eight: Lennar Homes – Surviving Death and Recession

1993 Lennar acquires $2 billion Westinghouse loan portfolio in joint venture with Lehman Brothers. 1994 First recitation of “The Little Red Hen” poem from memory, at Sales Managers meetings in Ft. Lauderdale. Lennar’s equity base tops $500 million, and revenues exceed $800 million. 1995 Lennar acquires Village Builders and Friendswood Development Company in Houston, Texas from Exxon. Enters recovering California markets with acquisition of Bramalea. Opens Sarasota FL Division and an Active Adult Division in Orlando. Lennar Financial Services (LFS) grows to $3.4 billion servicing portfolio. 1996 Revenues break through $1 billion level to $1.2 billion. Equity base reaches $695 million. Lennar bolsters California presence with acquisition of Renaissance Homes, Coto de Caza, Stevenson Ranch and 2,800 homesites in Huntington Beach. Acquires $420 million real estate portfolio in partnership with Morgan Stanley. Acquires Regency Title in Houston. 1997 Lennar and Pacific Greystone merge. Lennar further strengthens California presence by acquiring Theyst Venture Homes, 2,700 homesites in North Natomas Community and 800 homesites in San Diego. Becomes master developer of billion dollar, 5,000-acre Mare Island Naval Base, a partnership with city of Vallejo. Revenues top $1.7 billion. 1998 Lennar acquires North American Title Company, Winncrest Homes, ColRich Communities and Polygon. 1999 Lennar acquires Souththeyst Land Title and Eagle Home Mortgage. 2000 U.S. Home joins Lennar, doubling the size of the Company. 2002 Lennar acquires Patriot Homes & Barry Andrews Homes in Baltimore, as well as Don Galloway Homes and Sunstar Communities in the Carolinas. Lennar acquires The Genesee Company and Cambridge Homes, strengthening their Arizona, CA & Colorado markets. Lennar acquires Summit Homes & Concord Homes, marking the Company’s entry into the Chicago market. 2003 Lennar acquires Coleman Homes in Bakersfield, CA. Lennar acquires Newhall Land and Farming Company in North Los Angeles County, through a Joint Venture with LNR Property Corporation.

Exhibit 1

95

2004 Lennar enters San Antonio, Texas market with the acquisition of Connell-Barron Homes. Lennar expands into Jacksonville, Florida, with the acquisition of Classic American Homes. 2005 Lennar expands its presence in Nevada with the acquisition of Barker Coleman Homes. Lennar enters the Northeast through an Urban Redevelopment Acquisition, consisting of a Joint Venture with Roseland Properties along the Hudson River waterfront facing midtown Manhattan and in the greater Boston area. Lennar’s stock is added to the S&P 500 Market Index. 2006 More than 20 of Lennar’s homebuilding brands change their name to Lennar. Lennar debuts the Logic Lab, a product research and development facility, at the El Toro Air Base in Orange County, CA. 2007 Lennar and LNR expand their strategic LandStheirce Partnership to include MacFarlane Partners’ Venture and CalPERS. Lennar introduces new brand identity – creating one unified image across the nation – and launches enhanced theybsite, inviting Customers to experience the Logic of Lennar.

Exhibit 1 Balance Sheets

Assets Cash and Short-term Inv Trade Accts Recvble, Gross Prov. for Doubtful Accts Total Receivables, Net Invent. – Work In Progress Inventories – Other Total Inventory Total Current Assets Goodwill, Net Long-term Investments Note Rcvble – Long-term Def. Inc. Tax – LT Asset Restricted Cash – LT

2003 11/30/03

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

1,201 – – 60 3,607 49 3,656 – – 390 – – –

1,311 – – 153 4,866 276 5,142 – 183 856 – – 12

910 103 (2) 101 7,493 371 7,864 – 195 1,283 198 – 23

662 123 (2) 122 7,459 372 7,831 – 197 1,447 37 300 25

642 166 (18) 1,029 3,681 820 4,500 – 0 934 60 742 35 (continued)

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10  Case Eight: Lennar Homes – Surviving Death and Recession

Balance Sheets  (continued) 2003 11/30/03

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

Other Assets Other Assets, Total Total Assets

1,467 1,467 6,775

1,508 1,508 9,165

1,968 1,968 12,541

1,787 1,787 12,408

1,159 1,159 9,103

Liabilities Accounts Payable Payable/Accrued Notes Payable/ST Debt Other Curr. Lblts, Total Total Current Liabilities Total Long-term Debt Total Debt Minority Interest Other Liabilities, Total Total Liabilities

– 1,041 0 – – 1,552 1,552 – 918 3,512

555 – 0 1,233 – 2,021 2,021 43 1,261 5,112

877 – 0 1,998 – 2,593 2,593 78 1,744 7,290

751 – 0 1,591 – 2,614 2,614 55 1,696 6,707

376 – 0 1,130 – 2,295 2,295 29 1,451 5,281

16 1,358 1,915 0 (25) 3,264 6,775

16 1,278 2,781 (4) (17) 4,053 9,165

16 1,487 4,047 (293) (5) 5,251 12,541

17 1,754 4,539 (606) (2) 5,701 12,408

17 1,920 2,497 (610) (2) 3,822 9,103

125 33 158 0 –

124 33 156 0 –

125 33 158 5 –

127 31 158 10 2

129 31 160 11 2

Revenue Total Revenue

2003 11/30/03 8,905

2004 11/30/04 10,501

2005 11/30/05 13,867

2006 11/30/06 16,267

2007 11/30/07 10,187

Operating Expenses: Cost of Revenue, Total Sell/Gen/AdminExpenses,Tot Inter/Expnse(In),Net Oper Impair-Assets Held for Use Other Unusual Expnse (In)

7,691 111 (82) – 0

9,019 142 (91) – 0

11,673 187 (134) 0 35

15,171 193 13 0 0

12,639 173 363 190 (176)

Shareholder’s Equity Common Stock Additional Paid-In Capital Ret. Earn.(Accum. Deficit) Treasury Stock – Common Other Equity, Total Total Equity Total Liabilities and Shareholders’ Equity Shr Outs.-Com. Primary Iss. Shr Outs.-Com. Stk. Iss. 2 Ttl Comm. Shares Outs. Trsy. Shrs-Comm. Primary Iss. Trsy. Shrs-Comm. Iss. 2 () = Negative value Values are displayed in millions

Income Statements

(continued)

Exhibit 1

97

Income Statements  (continued) Revenue

2003 11/30/03

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

Unusual Expense (Income) Other Operat Expse, Total Total Operating Expense Operating Income

0 (27) 7,694 1,211

0 (98) 8,973 1,528

35 (99) 11,662 2,205

0 (67) 15,311 956

14 76 13,266 (3,079)

1,528

2,205

956

(3,079)

573 955

815 1,389

349 607

(1,140) (1,939)

(11) 945

(45) 1,344

(13) 594

(2) (1,941)

2 (1) 1 946

17 (7) 11 1,355

0 0 0 594

0 0 0 (1,941)

751

945

1,344

594

(1,941)

751

946

1,355

594

(1,941)

147

167

155

158

158

5.10

5.65

8.65

3.76

(12.31)

5.10

5.65

8.72

3.76

(12.31)

4 163

– 167

– 166

– 161

0 158

4.62 4.63

5.65 5.65

8.12 8.19

3.68 3.68

(12.31) (12.31)

Common Stock Dividends Div/Share-ComStockPrimIssue Gross Divid – Common Stock

0.14 22

0.51 80

0.57 89

0.64 101

0.64 101

Pro Forma Income Stock-based Compensation Pro Forma Net Income Pro Forma Basic EPS Pro Forma Diluted EPS

7 744 5.05 4.61

11 934 6.01 5.63

13 1,342 8.64 8.16

– – – –

– – – –

Supplemental Items Interest Expense, Suppl Depreciat/Amort, Suppl

– 55

– 53

– 58

241 45

204 54

Nonoperating Income and Expenses Income Before Tax 1,211 Income Taxes Income Tax – Total 455 Income After Tax 756 Minority Interest and Equity in Affiliates Minority Interest (5) Net Inc Before Extra Items 751 Extraordinary Items Discontinued Operations 1 Tax on Extraordinary Items 0 Total Extraordinary Items 0 Net Income 751 Adjustments to Net Income Income Available to Common Excl. Extra. Items Income Available to Common Incl. Extra. Items EPS Reconciliation Basic/Primary Theyighted Average Shares Basic/Primary EPS Excl. Extra. Items Basic/Primary EPS Incl. Extra. Items Dilution Adjustment Diluted Theyighted Average Shares Diluted EPS Excl. Extra. Items Diluted EPS Incl. Extra. Items

(continued)

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10  Case Eight: Lennar Homes – Surviving Death and Recession

Income Statements  (continued) Revenue

2003 11/30/03

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

Normalized Income Total Special Items Normalzd Income Before Tax Efct/SpecItemsIncTxs (STEC) IncTxsExcl ImpctofSpec Itms Normalized Income After Tax Normalzd Inc Avail to Common Basic Normalized EPS Diluted Normalized EPS

0 1,211 0 455 756 751 5.10 4.62

0 1,528 0 573 955 945 5.65 5.65

35 2,240 13 828 1,411 1,366 8.79 8.26

0 956 0 349 607 594 3.76 3.68

14 (3,065) 5 (1,135) (1,930) (1,932) (12.25) (12.25)

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

945 53 82 1 1 (91) 61 (27) (385) (887) (1) 419 (631) 420

1,344 58 10 11 18 (134) 126 21 (221) (1,708) (41) 742 (1,122) 312

594 45 (198) 0 (18) 13 565 560 48 (371) 7 (386) (449) 553

(1,941) 54 (439) 0 (176) 363 2,808 2,995 339 666 (844) (684) (225) 445

(27) (106) – 365 (800) 34 (507) (534)

(22) (416) – 503 (957) (100) (971) (992)

(27) (33) – 404 (838) 89 (378) (404)

– 0 0 650 (716) 373 307 307

() = Negative value Values are displayed in millions

Cashflow Statements 2003 11/30/03 Cash From (used by) Operating Activities Net Income 751 Depreciation/Depletion 55 Deferred Taxes (51) Discontinued Operations 0 Unusual Items (2) Equity in Net Earnings/Loss (82) Other Noncash Items 37 Noncash Items (46) Accounts Receivable (51) Inventories (267) Other Assets (33) Payable/Accrued 54 Changes in Working Capital 7 Total Cash from Operations 715 Plus: Cash From (used by) Investing Activities Capital Expenditures (19) Acquisition of Business (159) Sale of Fixed Assets – Sale/Maturity of Investment 188 Purchase of Investments (265) Other Investing Cash Flow 11 OtherInvestCashFlowItms,Tot (225) Total Cash from Investing (244)

(continued)

Exhibit 2

99

Cashflow Statements  (continued) 2003 11/30/03

2004 11/30/04

2005 11/30/05

2006 11/30/06

2007 11/30/07

Plus: Cash From (used by) Financing Activities Financing Cash Flow Items 3 Total Cash Dividends Paid (23) Sale/Issuance of Common 18 Repurch/Retirement Common (1) Iss (Retirmnt) of Stock,Net 17 Short-term Debt, Net (119) Long-term Debt Issued 342 Long-term Debt Reduction (186) Long-term Debt, Net 156 Iss (Retirmnt) of Debt, Net 37 Total Cash From Financing 34

(18) (80) 15 (114) (99) 162 743 (404) 339 501 304

(33) (89) 38 (289) (251) 373 800 (528) 325 698 324

(64) (101) 31 (323) (292) – 498 (472) 28 28 (429)

413 (101) 22 (4) 18 – 0 (1,096) (1,064) (1,064) (735)

Equals: Increase (Decrease) in Cash Net Change in Cash 504 NetCash-BeginBal/RsvdforFutUse 721 NetCash-EndBal/RsrvforFutUse 1,226 Depreciation, Supplemental 55

190 1,226 1,416 53

(356) 1,416 1,059 58

(281) 1,059 778 45

17 778 795 54

() = Negative value Values are displayed in millions

Exhibit 2 Direct Competitor Comparison39 LEN CTX DHI Market Cap 1.90B 1.82B 3.55B Employees 6,934 6,530 4,400 Qtrly Rev Growth (yoy) (%) −60.80 −41.80 −37.70 Revenue (ttm) 6.71B 7.50B 9.17B Gross Margin (ttm) (%) −1.11 −7.43 5.38 EBITDA (ttm) −171.00M −820.60M −416.50M Oper Margins (ttm) (%) −3.26 −11.62 −5.21 Net Income (ttm) −1.97B −2.70B −2.31B EPS (ttm) −12.486 −21.738 −7.332 P/E (ttm) N/A N/A N/A PEG (5 year expected) N/A N/A N/A P/S (ttm) 0.29 0.24 0.38 CTX Centex Corporation; DHI DR Horton Inc.; PHM Pulte Homes Construction; LEN Lennar on the NYSE.

39

http://finance.yahoo.com/q/co?s=LEN.

PHM 3.04B 8,500 −19.90 8.43B −5.21 −161.33M −2.86 −2.54B −9.955 N/A N/A 0.37 Inc.; Industry

Industry 523.06M 2.03K −26.70 2.24B 13.05 −14.20M −10.05 −316.16M −9.96 40.09 0.22 0.31 Residential

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10  Case Eight: Lennar Homes – Surviving Death and Recession

Learning Notes This case is an example of the role that economic turmoil often plays in the life of a family business, in this case one that is traded on the public exchanges, but still managed and controlled by a family. This case also shows that firms do not usually face crises and uncertainty one-a-time but are often having to juggle a wide variety of events, both personal and economic. While this case is totally built on public records, you may want to ask yourself, if you were the consultant first mentioned in this case, what would you do to assist this firm? How would you approach helping the firm weather the economic storm in the US housing market? Did the death of the family CEO contribute to the crisis in the firm and if so how?

About the Authors

Malin Brännback, D.Sc. is Chair of International Business at Åbo Akademi University where she received her doctoral degree in management science in 1996. She also holds a B.Sc. in pharmacy. Prior to her return to Åbo Akademi University in 2003, she served as Associate Professor in Information Systems at University of Turku, and Professor of Marketing at Turku School of Economics. She is Docent at the Turku School of Economics where she taught prior to returning to Åbo, and she is Docent at the Swedish School of Economics and Business Administration in Stockholm. She has held a variety of teaching and research positions in such fields as Information Systems, International Marketing, Strategic Management, and Pharmacy. She has published widely on entrepreneurship, biotechnology business, and knowledge management. Her current research interests are in entrepreneurial intentionality, entrepreneurial cognition and entrepreneurial growth, and performance in technology entrepreneurship, especially within the field of life sciences. Alan L. Carsrud, Ph.D., Ec.D. (h.c.) is Professor of Entrepreneurship & Strategy and holds the Loretta Rogers Chair in Entrepreneurship in the Ted Rogers School of Management at Ryerson University in Toronto, Canada. His BA degree from Texas Christian University was in psychology, sociology, history, and anthropology. He received his doctoral degree in social psychology from the University of New Hampshire in 1974 and did postdoctoral work in applied psychology at the University of Texas at Austin. He holds an honorary doctorate in economics from Åbo Akademi University. He is Docent in Entrepreneurship at Åbo Akademi University in Finland. Prior to his appointment at Ryerson, he was Professor of Industrial and Systems Engineering, Clinical Professor of Management, and Executive Director of the Eugenio Pino & Family Global Entrepreneurship Center at Florida International University. He previously has served on the graduate entrepreneurship faculties of the Anderson Graduate School of Management of the

A.L. Carsrud and M. Brännback, Understanding Family Firms: Case Studies on the Management of Crises, Uncertainty and Change, SpringerBriefs in Business 2, DOI 10.1007/978-1-4614-0866-6, © Alan L. Carsrud and Malin Brännback, 2011

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About the Authors

University of California, Los Angeles; The Australian Graduate School of Management, Australia; Bond University, Australia; The University of Southern California; Pepperdine University; and the University of Texas at Austin. He has published over 160 articles, chapters, and books in entrepreneurship, family business, biotechnology, industrial and applied psychology, social psychology, and clinical psychology.