Management: There Are No Simple Businesses Anymore
Today even the smallest companies are quickly becoming very complicated. The consequences? The old rules of growing a business are no longer clear-cut, and the new rules -- more complex than anyone ever imagined -- have just begun to evolve
If you run a small business, you run your life. you control your destiny, and in the process you make a good living. That's the romance of running a small business. And it's also a myth.
People who own small businesses will tell you that the business -- if not the bank -- owns them. A small business invariably demands hard work and long hours that as often as not end in failure, not fortune.
Doing business in earlier times was always hard, but it was not necessarily complex. It typically demanded more brawn than brains. Energy and resolve often led to success.
Now that combination is not enough. If our times carry an economic subtext, it is this: There are no simple businesses anymore. Hard work will always have its place, but today managerial dexterity, mental acumen, and sharp instincts often spell the difference between success and failure for small businesses.
With the profusion of opportunities that accompany a globalizing economy, there arises not only an accompanying proliferation of hazards but an expanding universe of detail. The longer a small business lives, the greater the permutation of possibilities -- good, bad, and just plain confusing. And this phenomenon taxes small companies, which are typically resource constrained, more than large ones. In sum, for small businesses today there is much more to gain, much more to keep track of -- and much more to lose.* * *
Doing Business Requires Trench Warfare
Small businesses must struggle all the more today for a host of reasons, the most seminal one being that competition has intensified. It now comes from all quarters -- and at an accelerating pace. At the end of World War II, the United States generated 40% of the world's gross domestic product (GDP), with its powerful multinational companies able to thrust into distant, and defenseless, markets. Now come the parry and the reverse thrust. By the end of the century America's share of world GDP should decline to little more than 20%. Combine that with falling trade barriers, large disparities in labor rates, and highly mobile capital, and you've got a recipe for economic trench warfare.
Today the offshore multinational can crawl into the microniche of an American company on Main Street. It can produce high-quality customized goods at low cost. Small companies can fight back with the levers of sophisticated computer technology and intellectual capital, but those assets create newfound expectations. Customers now demand ever-improving quality, increasing innovation, better pricing, and just-in-time delivery -- demands that stress smaller businesses that are already running flat out.
Meanwhile, in a downsizing world, loyalty is disintegrating between organization and employee, between vendor and customer. Everyone is looking for a better deal. Rising distrust breeds litigation, and litigation derails justice. As lawsuits devour time and money, how often can the small businessperson, already pressed for both, really afford to seek redress in the courts?
Government, meanwhile, persistently rewrites rules to bring order to an increasingly chaotic world, but that effort often produces the opposite effect, resulting in rising taxes and burdensome regulations. Government's forays into the private sector not only disadvantage small-business owners; they dispirit them as well.
Kiva Container -- Deceptively Normal
To illustrate at the grass roots why there are no simple businesses anymore, this story focuses on a single small business -- and an ostensibly very simple one. Kiva Container of Phoenix is in the packaging business. It makes boxes from both corrugated paper and cardboard, chiefly for manufacturers of consumer goods. Family run for three generations, Kiva provides a livelihood for 67 people, many of whom have been with the company for 15 years or longer. At Kiva the notion of family takes on an extended meaning.
At the same time, Kiva has been buffeted by extrafamilial forces, ranging from rising local taxes to increasing global competition, and that dynamic forms the substance of this story. Kiva's experience tells us much about how operating a small business has changed in the past generation. Mel Stafford and his son, Ron, started Kiva Container in 1957. (Kiva is the Hopi name given to the meeting place where the Hopi conducted their commerce.) In both form and spirit Kiva Container is tribal, binding three generations of the Stafford clan to it. Mel Stafford died in 1977, but his widow, Anna Lou Stafford (whose father, Arthur Whiteley, began working for the company when it was founded in 1957), still tends to administrative tasks at a beat-up metal desk in a back-room office. In adjoining offices sit her son, Ron, his laconic and easygoing mien offset by a heavy dose of gold jewelry, and his wife, Ruth, the soul and moxie of the organization. In her former life Ruth became -- at 21 -- one of the youngest female stockbrokers in Phoenix. After 13 years of thriving at the brokerage game, she "retired" long enough for a round or two of golf before realizing that retirement was no way to spend her life.
Down the hall sits Ron and Ruth's son, Tom, Kiva's executive vice-president of sales and marketing. The Staffords also have a daughter, Jo'elle, who is not with the family business. Jo'elle has lived in France for eight years now, where she is an avid horsewoman. Perhaps she has escaped because she knows what her mother has had to endure. Ruth usually arrives at work by 6 a.m., and her work day as often as not lasts at least 10 hours -- at the office, that is. Her lawyer relates stories of receiving faxes from Ruth, worrying over some legal matter, at 3 in the morning. Ruth has also been active with the National Association of Manufacturers (NAM), chairing its forum for small manufacturers for the past three years.
She has traveled a number of times to Washington in an effort to make small business and its travails comprehensible to politicians. "You can't just talk about these issues," she says. "You've got to put your money where your mouth is. A lot of these characters have no idea what it means to meet a payroll."
Ruth Stafford worries for the business, fears it could die a slow death by 1,000 cuts from mercurial and uncomprehending forces. On the other hand, Kiva gets buyout offers all the time. The Staffords could sell tomorrow. But that would leave nothing to pass on to the next generation. "Who knows? Tom's son, Chad, might be interested some day," says Ruth hopefully. Chad is all of six years old.
Kiva sits in a dusty industrial neighborhood of west Phoenix. In the plant, men in baseball caps, T-shirts, and ponytails tend to throbbing machinery. The place looks like just another factory, where people show up in the morning, manufacture boxes, and make some money. But the scene is deceptive in its normality. Life at Kiva amounts to little more than a daily struggle for survival -- and thus speaks volumes about the state of small business in 1995.* * *
Competition: The Big Squeeze
For the American economy and for companies like Kiva, the late 1950s were the halcyon years. Back then, Phoenix was a world unto itself, a small city set in a blissful expanse of American emptiness. Then came the highways, the jet planes, the people, and all the modern communications that linked the city to Tucson, Scottsdale, Tempe, and from those cities to the world beyond.
In today's hyperconnected world Kiva Container remains a tortoise that none-theless must move at a hare's pace. It is largely a commodity business selling to local and regional customers. Kiva's sales last year came in at about $10 million. The net margin in a typical year is not much more than 5%. To boost that number -- and keep the top line from eroding -- Kiva has pursued a two-pronged strategy. First, it has tried "to get as horizontal as possible," says Tom Stafford, by offering a wide array of products and services to entice efficiency-minded customers with the promise of one-stop, one-invoice shopping.
Second, Kiva has tried to produce more value-added product, much of it proprietary and even patented. That has meant moving fast to get ahead of the market in materials, by producing corrugated plastic containers, which can last 40 times longer than corrugated cardboard containers. Eight years ago the company opened a plant in Anaheim, Calif., to convert corrugated plastic into boxes. This year it did the same in Taylor, S.C.
Corrugated plastic costs five times as much as corrugated paper and commands commensurately higher margins. But it's also costlier to convert. In a typical year Kiva now spends $500,000 on capital improvements just to keep pace with the technology.
The basic intent of such agreements as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) is to allow more companies to participate in more markets. The upside of that is the noble-sounding idea of free trade. The downside is the brutal reality of global competition.
There used to be a clearer delineation of markets. Big companies dealt with large national and international accounts. Smaller ones like Kiva concentrated on local or regional markets. Kiva retains its share of local customers, but now the big "integrateds" wade ever deeper into the Staffords' markets. Billion-dollar multinational companies, such as Stone Container, Gaylord Container, Packaging Corp. of America, and Container Corp. of America, by their sheer mass can flood and depress local markets. Or they can cherry pick.
"The integrateds used to concentrate on larger accounts because they would do only larger runs. Now they can economically do small runs," explains Tom Stafford. "They used to ship by the trailer load. Now they'll run 5,000 pieces and ship just 500 at a time."
But the big fish find even bigger ones eyeing them. Three years ago a Taiwan-based producer of corrugated plastic persuaded Texas officials to give it tax breaks to set up a huge facility in Port Arthur, Tex., near Houston. When the plant came on-line in mid-1993, it doubled U.S. capacity for producing corrugated plastic. The company promised to create upwards of 3,000 jobs -- and to be only a producer, not a converter, of raw material. The Staffords were skeptical, and their suspicions soon proved justified. During the first quarter of 1994, their industry sources informed them that the Taiwanese company was installing equipment to convert the plastic to finished value-added product. Its output instantly depressed prices 10% in the markets it was entering, chiefly the low-end agricultural markets. Tom Stafford says that Kiva focuses on higher-end consumer markets, but he is certain that the foreign competitor will migrate up into those markets as well. "We have accounts that I know they would love to sink their teeth into."
Ruth Stafford says that while the Taiwanese company came into the United States promising 3,000 jobs, "nobody talks about how many jobs they've destroyed in the process." She adds, "Once things get going in the right way in a market, there's always somebody who screws them up. And this was all financed at taxpayers' expense."
Meanwhile, regional players now invade Kiva's turf more often. "When the sales in Denver's paper-products market dipped because the economy was so hard hit, the box manufacturers up there would sell down here at no margin just to keep their plants running," says Tom Stafford. "That didn't used to happen." And in the past decade, the Staffords have seen the number of small packaging companies in the Phoenix area triple. "People in sales and production figure they can go out and make money by starting a little company," says Ruth. Other companies have been started by "retirees" who sold similar companies back in Cleveland, came to Arizona to lie back in the sun, and subsequently found the feeling, well, too laid-back. So they did what they knew and started up new packaging companies. Lately, some have migrated from California, worn out by the rising costs of doing business there.
Competitive pressure also comes from another group that has proliferated on the local level: brokers. Most are former salespeople for packaging companies, who left with their Rolodexes. "They work out of their houses, with no overhead," says Tom. "That hurts. A broker can survive on a 10% gross margin. We need 20%."
What's more, he continues, "many purchasing agents don't ask these brokers, 'Do you manufacture locally? Can I get a rush order if I need another 1,000 boxes?' Well, a lot of them source from as far away as Dallas, and they can't get that rush job done overnight." When brokers can break their promises, the industry's reputation suffers.* * *
Complexity: White-Collar Warfare
"The good thing about small companies is that they often die." That is an academic, not an entrepreneur, speaking. Bill Barnett, associate professor of strategic management at Stanford's Graduate School of Business, implies that small businesses lend themselves to study because they often have a beginning and an end. Their life cycles can be measured. Larger businesses, Barnett contends, are far more adept at mutating and perpetuating themselves -- even if they don't succeed in any grand way. Barnett, who studies American business from a Darwinian perspective, concludes that "the mediocre large company will usually kill the mediocre small company." Conversely, excellent small companies can run rings around good large ones. Barnett suggests that is because small companies typically do one thing, while larger companies have multiple lines of businesses. Their diversity insulates them against catastrophe, whereas a small business's narrower base offers much less protection.
But while small businesses cannot sustain the single big hit, they just as often die from a thousand cuts. That is so because today's marketplace is more fraught with dangers that are secondary to business risk, such as increased litigation, more regulation, and a decline in ethics.
Kiva Container has bled amply in recent years, and it has the bills for professional services to show for it. Kiva now shells out 5% of revenues on lawyers and accountants, about double the amount it paid five years ago. Put another way, that's about $600,000 a year in white-collar protection money.
When asked what makes her work difficult, Ruth Stafford immediately replies, "Lawyers. I hate them. They're ruining the country." She sees a diminution of her time and energy as she contends with rules and challenges crafted by lawyers. "I now spend 20% of my time on that junk," says Ruth, referring to related paperwork. Others, too, at Kiva must deal with compliance. Managing credit is now a 50-hour-a-week job. It used to require two hours a week. For Ruth, finely drawn contracts have supplanted simple handshakes.
In truth, Kiva's travails cannot be laid exclusively at the feet of meddlesome lawyers. The Staffords have also been plagued by a combination of unscrupulous customers and bad luck. Lawyers, aiding the rogues that have wronged Kiva, have doubtless exacerbated some painful problems.
If we were to sum up Kiva Container's experience, we might call this company the small-business equivalent of a drive-by shooting, with Kiva as the proverbial innocent bystander -- the only difference being that Kiva has happened to be standing on the wrong corner on numerous occasions. To wit . . .
Seven years ago a broker employed by Kiva diverted a $55,000 check that was supposed to be split by the broker and Kiva. Two weeks went by before the Staffords discovered the broker's sleight of hand. At that point the broker claimed he had no money. Kiva has since received a judgment against the broker, who, because of interest charges, now owes Kiva $70,000. To date, Kiva has spent $5,000 in legal fees and recovered nothing.
Four years ago Kiva's largest customer, representing 15% of its business, suddenly pulled out of the last year of a three-year contract. That customer had colluded with the raw-material supplier to bypass Kiva, even though the supplier had a written agreement with Kiva that it would not go direct. Management at the supplier changed and decided to ignore the agreement. "They would never have been exposed to our customer if it hadn't been for us," says Ruth Stafford. Kiva lost $2.5 million in business overnight and incurred an operating loss that year as a result. The Staffords considered a suit but concluded that litigation might cost as much as $100,000, with no guarantee of a favorable outcome against the much larger supplier and customer.
Three years ago Kiva took on a major customer and asked its bank to check him out. Kiva's bank consulted with the customer's bank, which gave the customer a clean bill of health. Soon after, the customer, who had, in fact, supplied his bank with false financial information, declared bankruptcy, leaving Kiva with $180,000 in unpaid bills -- and its second straight yearly operating loss.
Two years ago one of Kiva's trucks, stopped at a light, was rear-ended by a truck belonging to a small trucking company in California. As it turned out, the California company had been defrauded by its insurance broker, which had apparently gone so far as to issue insurance using letterhead stolen from a major insurance company. Thus, the California company was not insured. Kiva spent $22,000 replacing its damaged tractor and trailer -- and another $20,000 renting a rig to replace it (another cost it was told, incorrectly, would be covered by insurance). Kiva has already spent $28,000 on attorneys' fees in an effort to recover those expenses and expenses incurred from workers' compensation claims. (Kiva's workers' compensation premiums will rise for the next three years.) The California company has since declared bankruptcy, the "insurance broker" has likely fled the country, and the accident has cost Kiva close to $100,000.
Kiva's two operating losses have reverberated through the business. When the company sought financing for its new plant in South Carolina, the bank insisted on better numbers in the form of a more thorough -- and more expensive -- report by Kiva's certified public accountant, David Frome. Frome says that the bank wanted monthly financial reports, rather than the customary quarterly or semiannual report. It also sought a "review" by the CPA, rather than a less stringent "compilation." Adding insult to injury, the bank asked for financial projections four years into the future. "Those are impossible to predict with any accuracy," says Ruth Stafford. Kiva had been doing business with that same bank for eight years, yet arranging financing for the South Carolina plant took five months and reams of documentation.
Regulation: Bureaucracy at Its Best
You can barely make a move in Kiva's building without running into something touched by the government. The Occupational Safety and Health Administration inspects equipment, the Department of Commerce reviews shipping records, the Environmental Protection Agency regulates chemicals, and the Department of Transportation oversees the labels on packaging. Perhaps not coincidentally, Kiva's corporate taxes have risen sharply in recent years, health-care costs are up 150% in 5 years, and the state sales tax has doubled in the past 14 years. Property taxes are up 200% in 10 years. Nine years ago Kiva bought a 10,000 square foot building. The tax on that property then was $3,200. Today it's $10,000.
Asked why she thinks taxes have gone up, Ruth Stafford replies: "They reflect the inefficiencies of our government and our litigious society. The rising costs of insurance and health care reflect to some extent the cost of regulation, theft, and loss. Those are all hidden costs to the manufacturer and to the consumer." Stafford believes that a principal drive among lawyers is to "perpetuate themselves," and she says the evidence for that is in the rules they write and rewrite -- necessitating constant reinterpretation by those very same lawyers. In Kiva's case the most striking evidence of that condition existed in a small mountain of dirt, which until recently rose behind the company's building. That dirt, which came out of a nearby 30-foot-wide hole, had been there for nearly four years, awaiting disposal.
It was four years ago that the Staffords removed two underground fuel storage tanks. When they were removed, one tank was discovered to be leaking from the top -- not the bottom. In other words, the only time it leaked was when the tank was full. Kiva's attorney on the case, Christopher Wooten, labels the amount that leaked "very small." Tom Stafford says it was likely no more than 25 gallons. That didn't matter.
The site was declared hazardous by Arizona's Environmental Protection Agency. All the contaminated soil had to be removed. The hole was dug five feet deeper and five feet wider. "They excavated what they believed to be the entire quantity of contaminated soil and stockpiled it on Kiva's property," says Wooten. The Staffords were left with a big hole in the ground, which for three years was left unfilled, creating a worse potential liability for Kiva than the soil, all 250 cubic yards of it.
"It was a case of bureaucracy at its best," says Ron Stafford wryly. He notes that three sets of government lawyers got involved in the case, and each time Kiva found an attorney in the government astute enough to understand it, he left. Technicians tested the soil three separate times -- as time elapsed between each set of lawyers, with a subsequent presumption that the fuel had leaked that much deeper into the ground.
Finally in January 1995 the Staffords were allowed to fill the hole back in. But what remained was 250 cubic yards of soil "contaminated" with some 25 gallons of diesel fuel. Ron says, "We got an estimate of $80,000 to have it hauled away." He proposed an alternative: move the dirt to the Staffords' ranch, mix it with manure, and spread it out in the sun to dry. Stafford was told that would release various contaminants -- and require five separate permits. Stafford estimates that by the time the dirt was disposed of the total cost was "easily $100,000."
Kiva's backyard hole is simply the centerpiece in a web of regulation that has ensnared the company:
Tom Stafford says that Department of Transportation guidelines now can hold the packager liable if the packager makes a box for one product, the shipper repacks the box with a hazardous substance, and that box subsequently spills in transit. Accordingly, stringent disclaimers must be printed on the box, and if the box is to be used to transport chemicals or explosives, it must be tested at an independent laboratory and packed in precisely the way that the shipper intends to pack it. Wearied by the process and scared off by the potential liability, Kiva abandoned that market.
The Commerce Department periodically collects economic data, randomly tapping small companies. Currently, under penalty of law, the Staffords must collect data for the Commerce Department. Much of the information is hard to track down. Says Ruth Stafford, "You get selected by the Commerce Department for one full year. Every quarter you have to go back and pull roughly every tenth invoice. You have to list the mode of transport, where it went, its value, and the ultimate user, and then break all that information out by product code." Stafford says compiling the data requires one full weekend each quarter.
Kiva used to bid on government jobs. No longer. Bidding requirements have grown more elaborate, relating to various government-mandated set-asides for different types of contractors. Besides, notes Ruth Stafford, "there is no one clearing place for financial information on your company. Each time you bid you have to go back and provide information for the past three years." Stafford wonders why the government can't file the information centrally and certify contractors for a certain period of time.
Kiva's pension plan is under siege because of continuous revision of government rules, says Kiva's lawyer Jim O'Sullivan. "Retirement plans are important vehicles to keep employees around," he says, "but the retirement-planning industry has died because employers -- as trustees of the plans -- are afraid of potential liability." Ruth Stafford says it costs Kiva $5,000 in professional fees each year just to administer the plan, with the bulk of that money being spent on lawyers interpreting new guidelines. The Staffords are considering terminating their employee pension plan.
Witness the Demise of Loyalty
When large companies begin to downsize, the first casualty is loyalty. But that is just one facet of the endemic problem of fraying relationships in business. A small manufacturer like Kiva Container often finds itself stuck between vendors and customers much larger than itself. Between October 1993 and January 1995, Kiva saw five separate price increases for paper, totaling 68%. Corrugated plastic rose 42% in that time. Currently, U.S. paper companies can achieve a 25% premium by selling offshore. Hence, domestic supply is tight -- and prices soar.
Kiva resells stock corrugated paper boxes for a larger manufacturer. Twice this year it has had to throw away its catalogs after they were printed because prices rose again before the catalogs were shipped. In contrast, Kiva saw just four paper price increases in the previous 10 years -- and as many decreases.
When Kiva now tries to pass through price increases, customers ask for proof that three other customers have received similar increases. Longtime customers routinely shop around, and they demand just-in-time delivery, which forces Kiva to warehouse more product. The company used to send out one full truck a week. Now it sends one out daily, often carrying no more than one or two pallets. One customer even wanted to take product on consignment, paying Kiva weekly just for the amount of product sold. Kiva's customers now often demand payment schedules longer than the usual 30 days. "In fact, it's not unusual for the customer to say, 'If you want this job, you have to give us 60-day terms," says Tom Stafford. To gain more favor from customers, adds Stafford, "we source things for them that we don't even sell." In one instance Kiva located and purchased warehouse shelving for a customer.
At the same time, Kiva has been burned by bad debt, which totaled $40,000 last year. That stress gets off-loaded onto the work force. Kiva's sales force earns commissions based on collected sales, with higher commissions paid for earlier collections. Kiva now has an employee who spends about 75% of her time as credit manager. Ten years ago that job took no more than two hours a week.
"It's harder to build rapport with the customer," says Tom Stafford. "We used to feel comfortable with the smaller accounts, but now they jump around a lot." Stafford says the larger accounts, in contrast, want a stable supplier and a single source. "So the loyalty is now more with the medium-size and larger customers."
The decline in loyalty is internal as well. Ruth Stafford says that if a company like Kiva wants to fire an employee it must document everything. Kiva now has a labor lawyer on retainer. Two recent cases show why.
Two employees at Kiva's Anaheim plant quit voluntarily and subsequently filed for workers' compensation, claiming mental stress while on the job -- after they learned they could collect more from disability than from unemployment. Kiva's insurance company "reserved" $22,000 for each case, basing that figure on the average workers' compensation claim in California. "That $44,000 was charged to us as if it had been paid out," says Anaheim plant manager Norm England. "That affects your experience rating. Our premiums went up 15%." The insurance company subsequently recommended that Kiva settle each case for $2,000. "We said, 'No, we're going to fight this.' We even warned our insurance company that if it settled the claim we would sue them." Kiva ultimately prevailed after three years. That wiped out the $44,000 reserve. Says England, "We then asked, 'How about the higher premiums we paid during those three years? Are you going to reimburse us?' The insurance company said no."
Defending themselves against large insentient forces like insurance companies and the workers' compensation system creates a siege mentality in many small businesses. Those companies are often run by families struggling to preserve a legacy, which frequently means relying on what is tried and true. Moreover, small family-run businesses often grow risk averse as the margin for failure narrows.
Tom Stafford is 33. He began working at Kiva Container at age 9, watching his father try to experiment with new ideas, while his father, Mel, opted for a more conservative course. Now he understands that tension. "It's hard working with family at times," says Stafford. "There's always a power struggle between father and son. My father pushed against his father to take us places we had not been before, and now I see it happening again. It took me three years to switch our salespeople from salary to commission. It took me three years to get a consultant to come in and analyze the company."
Tom Stafford's background is in marketing. That is what he has excelled at, having been national sales manager for a cosmetics company, expanding distribution from 3 to 42 states. But then the family business drew him in. He recalls looking at statistics for family-run businesses and realizing the long odds: the chances of a family-run company being passed intact from the first generation to the next are fewer than one in three.* * *
In a Just-in-Time World You Niche and Innovate
Technology has greatly accelerated the pace of change, which, in turn, requires a stepped-up rate of adaptation. Small businesses, by definition, are specialists and theoretically can adapt quickly. But just when small companies grow secure in a niche, they must respecialize. They must become perpetual learning organizations.
Five years ago Kiva Container made just four basic products and variations thereof. Since then, Kiva's product offerings, says Tom, "have grown by 1,000%." A few years ago some customers drifted away when they could not get everything they wanted from Kiva. "We have done a lot of things to get that business back," says Stafford.
Key to making this "horizontal" strategy work is the need to constantly innovate. Kiva has invested $50,000 in a CAD/CAM system to generate new designs quickly. Larger customers come looking for patentable designs and an exclusive license on those designs. The potential payoff for Kiva is larger, but so, too, is the up-front cost and attendant risk. Currently, Kiva is talking to half a dozen large customers, each of which could give it $1 million in business, based on a single proprietary design. But product innovation requires a lot of preliminary design and development work with no guarantee that it will yield a contract. Tom Stafford estimates that in the past year alone Kiva has spent $50,000 on product proposals that have resulted in zero sales. In fact, the Staffords assert that some customers come in, look at Kiva's ideas, and go elsewhere to have them executed. Kiva wants big customers because there is good operating leverage in the work -- if they can get it. If they can't, considerable time, effort, and money have been spent for zero return.
At the same time Kiva must keep pushing on related fronts. Attending trade shows has become more important than it used to be. But a large regional show can cost Kiva $25,000 to $30,000, and meanwhile, the number of shows has increased exponentially. Kiva has brought more consultants in and sent more employees to seminars -- all to meet the market's expectations. Larger customers now insist that Kiva manufacture according to ISO 9000 standards -- which for a box maker is overkill. Ruth Stafford says that ISO 9000 creates a huge paper trail. The manual for the purchasing agent alone is two inches thick.* * *
The Business Becomes Your Life
In talking to people who run their own small businesses one hears a common refrain: you may leave the business each night, but the business never leaves you. The business preys on people. It wakes them up at 3 a.m., and if it can't rouse them, it infiltrates their dreams.
At Kiva one readily sees the stresses and strains. Earlier this year Ron Stafford spent a full month away from home, helping to set up the new plant in South Carolina. His wife continues to work her 70-hour weeks -- and then some. In addition to her work with NAM, Ruth Stafford is the first female president of the Arizona Association of Industries. She has gone to Washington on her own time and dollar to talk to legislators about health care and other matters affecting small business.
Asked if she takes her work home, Ruth Stafford replies, "I'd better take it home." Does she work harder today than in years past? "Definitely," she answers without hesitation.
Does she worry about Kiva's future? "Definitely."
She also worries that given the way things are going she might not have much of a company to pass on.
The Staffords could end their headache tomorrow. In an average week the phone rings twice at Kiva with someone inquiring whether the business is for sale. That gets the Staffords to wondering why they continue to hold on. But if they sold, they would be locked into an earnout -- and would lose control. "Would the people here be protected? No," says Ruth.
"When I look around this place, I see a lot of people who have worked here a long time. They are family to me. And besides," she adds gamely, "this can be a lot of fun."
WILL THE FAMILY BUSINESS SURVIVE?
Kiva Container is like any of the other 16.8 million small family-owned businesses scattered across the United States. As an economic universe, those companies chip in anywhere from 30% to 60% of U.S. gross domestic product, or $2 trillion to $4 trillion.
The graying of the American CEO will play an increasingly important role in those kin-driven companies over the next decade. The relative share of employees aged 45 to 64 will expand by more than 105%. That's great for productivity. But it ultimately means that more CEOs will be passing the torch -- and vast fortunes, too -- to their children. Bob Brockhaus, the Coleman Foundation chair in entrepreneurship at St. Louis University in St. Louis, estimates that over the next decade, $1 trillion worth of the small-family business economy will pass to the next generation.
Research suggests that family businesses have a short average life span -- 24 years, which happens to be the average tenure for the founder. Fewer than one-third of family-owned companies last into a second generation; fewer than 16% make it to a third.
If the Staffords trust the managerial capabilities of Tom, they have time to make provisions. Then again, they'll have to contend with hefty estate taxes, which could be anywhere between 55% to 85% of all income over $600,000 passed on. Succession planning has never been so critical yet so overlooked as the savior of family businesses. -- Karen E. Carney
If small companies are at a disadvantage in dealing with the banking and legal system, they suffer the same problem with the bureaucracy. In a 1994 survey by the National Association of Manufacturers of its members classified as "small manufacturers," 33.19% of respondents cited government regulations as their most serious problem. That was the most common response, followed by the cost of health insurance at 24.42% and increased taxes at 11.36%. (See chart below.)
Meanwhile, as regulation has steadily increased in recent years so has its cost. According to A Citizen's Guide to Regulation (Susan M. Eckerly, ed., Heritage Foundation, 1994), a 1978 report by the Center for the Study of American Business at Washington University in St. Louis estimated total regulatory costs in 1976 at $63 billion (in 1988 dollars). A 1993 study by Thomas Hopkins, professor at the Rochester Institute of Technology, put that figure at $615 billion (also in 1988 dollars) -- or about 10% of gross domestic product. Today government employs 18.7 million people versus 18.1 million employed in private-sector manufacturing. Small-business owners, meanwhile, spend at least one billion hours a year filling out government forms, according to the U.S. Small Business Administration. -- K.E.C.
Which of the Following Is Your Company's Most Serious Problem?
Government regulations 33.2%
Cost of health insurance for employees 24.4%
Decreased cash flow resulting from increased taxes 11.4%
Finding and keeping qualified employees 10.3%
Environmental regulations 8.1%
No response 6.0%
Difficulty obtaining financing 2.9%
Source: National Association of Manufacturers, survey of 2,100 small U.S. manufacturers, 76% of which have annual sales of less than $20 million. Washington, D.C., 1994.
Which of the Following Tax Incentives Would Have the Greatest Positive Impact on Your Company's Growth and on Job Creation?
Restore investment tax credit 41.4%
Repeal individual income-tax increase 27.6%
Eliminate double taxation of corporate dividends 10.8%
Restore capital gains differential 7.7%
Create incentives for individual savings and investment 7.4%
Did not respond 5.1%
Source: National Association of Manufacturers, survey of 2,100 small U.S. manufacturers, 76% of which have annual sales of less than $20 million. Washington, D.C., 1994.
Threats to Companies: Percentage of Respondents saying 'Severe or Serious' Threat
< $3 million > $3 million
Inadequate succession planning 58.5% 32.8%
Inadequate or inappropriate financing 47.5% 20.6%
Inadequate managerial skills in key posts 45.9% 23.2%
Unpreparedness for economic downturns 36.8% 25.5%
Inability to respond to market changes 29.9% 30.6%
Environmental regulations 29.4% 38.3%
Nonenvironmental regulations 17.6% 21.9%
Tort litigation 14.6% 21.1%
Employee theft or fraud 12.6% 11.4%
Foreign competition 10.7% 24.1%
Source: "1994 Survey on Trends and Future Developments in Management Consulting to Small Business," the Management Consulting Services Division of the American Institute of Certified Public Accountants, January 1995. n
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