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.
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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.
