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A second generation automotive parts family business that I represent has found itself in the midst of an automotive industry that is rapidly evolving and changing.  The forces of globalization, increasing safety requirements, environmental concerns, digital technology and pressure for innovation make the industry a very challenging one in which to operate.
 
Under such conditions, the biggest challenge for the client company is to avoid persisting in established patterns of behavior that have brought the company success in the past, but are not likely the keys to success in the future.  This requires taking a careful look at existing assumptions - - - about the industry and where it is headed, the company’s products, current competition, evolving customer base and methods of doing business.
 
Questioning old, “tried-and-true” assumptions is fundamental to a successful family business continuing on that path in the future.  One of the premier articles on the subject is a l999 Harvard Business Review piece by Donald Sull entitled, “Why Good Companies Go Bad.” One of the companies featured in the article is the Firestone Tire & Rubber Company.  Given the fact that both my client and Firestone Tire were automotive industry companies, the Sull article formed the basis for a very compelling session with the owners and senior management of the client. The discussion at the session revolved around the following:
 

  • Firestone Tire & Rubber Company was founded by Harvey Firestone, Sr. in l900.  Over the next seven generations of operation, it sat atop the thriving U.S. tire industry, along with Goodyear, its major competitor and crosstown rival in Akron, Ohio.
  • Firestone’s major customers were the Big Three Domestic Automakers of the time - - -  General Motors, Ford and Chrysler.
  • Firestone viewed its major challenge as simply keeping up with the steadily increasing demand for tires. That required continuous capital investment in new production capacity for bias-ply tires, the standard in the United States for years.
  • Firestone’s rigid adherence to the notion that bias-ply tires were the domestic tire industry’s best bet for the present and future flew in the face of information available to Firestone from its own forecasts, which clearly showed that radial tires would rapidly be accepted by the Big Three U.S. Automakers, as well as by U.S. consumers.  In addition, radial tire technology developed by French-owned Michelin had gained rapid acceptance in Europe during the l960’s, given its safer, longer-lasting and more fuel efficient characteristics.
  • Though by the early l970’s, Firestone had begun to slowly redesign its production processes to manufacture radial tires, it did so by making only minor adjustments to those processes.  The result was radial tires of lower quality.  In order to hedge its bets, Firestone also delayed closing factories that produced bias-ply tires.  It even started renting warehouses to store unsold bias tires.
  • The upshot of the above was that Firestone surrendered enormous market share to foreign competitors like Michelin during the l970’s.  By l988, Firestone was acquired by Bridgestone, a Japanese company, and ceased its independent existence.


The Firestone “story” is unfortunately a common phenomenon.  When successful companies face big changes in their operating environment, they often fail to respond in timely and effective manner to changing conditions.
 
And yet, most leading businesses owe their prosperity to a fresh, competitive formula that sets them apart from the crowd.  As the formula succeeds, the customer base multiplies, the labor force increases and more financing becomes available to support a “winning formula.”
 
Over a period of time, however, the “fresh thinking” that once spawned success is replaced by rigid devotion to the status quo.  The system that once brought enormous market place success begins to develop hardening of the arteries.  As a result, when changes in the business environment occur, the system that originally spawned success now brings failure.
 
How then does a family business that has realized great success avoid vanquishing failure? At a very productive meeting of owners and senior management of the client company, those in attendance took a hard look at the advice offered by Donald Sull in  “Why Good Companies Go Bad,” and concluded the following:
 

  • Success can breed organizational inertia.  Rigid adherence to formerly fresh thinking embodied by so-called “tried-and-true” processes and products is a guaranteed formula for losing sight of changing business conditions.  To survive, a company has to stay actively focused on the evolution of its industry category.
  • A changing marketplace in that industry category should not lead to ill-conceived and rushed decision making.  Rather, it requires clear and careful analysis of the changing business landscape.  Appropriate questions at this stage include: (i) what business are we now in and how has it changed over the years; (ii) how do we create real value in the new environment; (iii) who has become our competitors; and (iv) what does our evolving customer base look like.
  • More than anything, success in a changing environment requires changes in the organization’s “internal thought processes.” Innovation is at the heart of success.  Innovation requires flexible thinking and a clear vision of the future. Adherence to dogma (i.e., to what allowed the Allies to win World War I when they are about to start fighting World War II) is a guaranteed route to obsolescence.

 
Periodic analysis of the above sort does not require simultaneous change of every aspect of the company’s way of doing business (see again “Why Good Companies Go Bad”, by Donald Sull).  That approach would be a gross overreaction and one likely to destroy crucial, core competencies, disorient customers and employees alike and result in unnecessary damage to the fabric of a company trying to update its repertoire.

Joel Fishman has worked almost four decades as a business lawyer and mediator of business disputes. Representing large, middle market, and entrepreneurial businesses in a broad range of industries including entertainment, communications, new media, and technology, Fishman represents clients in the formation, financing, operation, and expansion of businesses, as well as with the leasing, purchase, development, financing, and sale of all types of real estate. Fishman is active in the Southern California community, and he frequently writes for the Los Angeles Daily Journal on mediation as well as corporate and real estate legal topics.