Making it to the next generation and beyond

September 1, 2008   by Eddie Pal

The buzz of the lathes penetrates the office walls. Within those walls, the company’s president and founder argue over their company’s future. It’s a heated discussion, and it’s between father and son.

“If we outsource to China, the quality will suffer,” says the founder. “For 55 years I built our reputation and you would cheapen it overnight.”

“Dad, if we don’t go to China, we’ll be priced out of the market,” says the son. “It’s already happening. Our reputation is for high prices and consumers won’t continue to pay.”

Though it may not be obvious, this family-owned and operated furniture company is actually facing two dilemmas, and both threaten its viability: going offshore and who’s in charge.

A squabble in the corner office can be a bigger threat than any external risk. If it persists, key business decisions may be put off, the company will lose focus, worker morale will suffer and everyday problems will grow into gigantic headaches.

Although the founder-father has given his son the title of “president,” he is clearly still hanging onto the reins. This can be dangerous. A succession that is poorly planned or only partly executed leaves a company without definite leadership. Less than one third of Canadian family businesses survive into the second generation.

Succession should be a gradual process that begins many years before the true takeover date; however, when takeover occurs, it should be final. Through a long period of training and oversight, the outgoing leader should feel comfortable with the management of the company and allow a new leader to take charge.

“Dad, we’ve got to face the China issue and come to some sort of compromise,” says the son. “What if we mass-produce most of our parts offshore and make the speciality pieces right here in the shop?”

Managing risks
This is a good compromise and a clever business strategy. Trying to compete with low Chinese labour costs is next to impossible in a labour-intensive industry such as furniture manufacturing. On the other hand, maintaining a shop in Canada provides a hedge against future uncertainty. What if shipping prices go up? Or Chinese labour costs rise? Or trade relations sour?

Frankly, maintaining a base of skilled tradespeople in Canada should be a national priority. If an entire domestic industry is wiped out, within a generation or two there will be few people in Canada with the know-how to rebuild it.

However, offshoring does have several benefits for individual companies. Because it’s difficult to mass-produce specialized, or one-off products, offshoring forces you to focus on your key profit drivers. It’s the 80/20 rule—20% of your products drive 80% of your profit. Shifting your production to emphasize that 20% will make you more profitable.

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