Biggest isn’t always best

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Kramer Foods is a supermarket that’s been a fixture in the Chicago suburb of Hinsdale, Ill., since 1953. Joel Nelson went to work there right out of military service and became a close protégé of the founder, Frank Kramer. When Kramer died in 1977, Nelson purchased the store from Kramer’s widow and has run it ever since. Although Joel is now semi-retired, his son-in-law, Ron, runs much of the day-to-day operations. Joel’s brother, Arnold, continues as the produce manager, a position he has held for 40 years. Joel’s daughter, Kim, works for the store several days a week, and two of Joel’s grandchildren work there part-time. At one time Joel’s wife, Joyce, also worked with him in what continues to be a thriving business, occupying about 15,000 square feet in a small strip mall.

The store appeals equally to long-time community residents and newer upscale professional couples who live in the surrounding area. Joel and other store managers know many customers by name. The office, located right next to the checkout counters, features a huge open counter over which many “How’s-the-family?” conversations take place every day. Clerks and stockers are eager to work for Kramer Foods because of its close-knit, family-friendly culture.

Joel’s major competitors are two national supermarket chains with multiple stores in the Chicago area, each store three to five times the size of Kramer Foods. Because Kramer Foods is landlocked by other tenants in the strip mall, Joel has been unable to expand the store much beyond its present size. Over the years he’s had numerous opportunities to add more stores in surrounding communities, but Joel turned them down: Even if they could transfer their successful formula to a different community, he and his family concluded, the added management complexity would drive up their costs, depress profit margins and jeopardize the hands-on management style that had been critical to their success.

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So instead of opening a second store, the Nelsons decided to add prepared meals to their deli offerings, focus on high-quality fresh red meats, feature unique bakery items and provide extraordinary customer service. The total sales impact of these innovations was neutral, because other products and offerings had to be eliminated to accommodate them. Thus for many years total revenues at Kramer Foods have remained essentially stagnant, the size of the store has stayed the same, margins are basically the same … and everyone is happy!

“Grow or die” is a phrase familiar to every business owner, a mantra of most business consultants and the impetus for uncounted numbers of books and articles. But what about business families like the Nelsons, who say, in effect, “We don’t want to grow”? Are they just being shortsighted, foolhardy, paralyzed by caution?

Not necessarily. On the contrary, they may be staking out the wisest course for the long-term survival of their business.

The growth of a business is typically understood to mean a steadily upward trend in things you can see and measure: sales, facilities, employees, equipment and number of locations. We don’t have to look any further than the dot-com bubble of the late 1990s, during which the term “burn rate” was coined, to remember how quickly public companies used up investor capital in pursuit of growth in sales and size without profitability.

To be sure, some businesses really have no choice but to grow or die. Multi-store and multiple-brand automobile dealerships, for example, enjoy critical advantages over smaller operations: They can cut better terms with manufacturers, command better financing of their floor plans, appeal more effectively to a highly diverse market, and shield themselves from fickle customer preferences. Strawbridge & Clothier, the Strawbridge family’s venerable Philadelphia-based department store chain, expired in 1996 after 128 years because it lacked the purchasing clout of larger regional competitors like Macy’s, Bloomingdale’s and Saks Fifth Avenue.

So why would the owners of a family business eschew the popular wisdom and decide on a no-growth or slow-growth strategy? I have observed at least three primary reasons:

•  The company has successfully established itself in a niche market where it is well positioned against its competitors based on factors other than sales and size. Consider, for example, Runnion Equipment Company in Lyons, Ill., an $8 million family company in the heavy equipment sales business. Runnion primarily represents National Crane, a highly respected international manufacturer of truck-mounted cranes. Because of the quality of the product, the exclusivity of the franchise arrangement and the outstanding capability of the company’s service department, the company enjoys an 80% market share in its territory. The company answers every phone call with “Runnion Equipment Company, where quality counts!” It’s an efficient operation that throws off a good income for its two partners—one of whom is Pat Runnion, son of the company’s founder, Earle—and allows them to compensate employees well.

To be sure, Runnion might be in trouble if a major competitor with deeper pockets entered the market and waged a price war. Nevertheless, the Runnions decided against trying to increase their market share a few points. Becoming bigger just didn’t make sense to them. It was simply not worth the disruption and the capital expense.

•  The company is experiencing a prolonged downturn in business due to marketplace conditions, and it needs to right-size for today’s realities. A machine-tool sales company had been at $12 million in sales during the peak years of its 30-year history, but consolidation among customers and overall negative economic conditions caused sales to drop into the $7 million to $8 million range. The company, however, was still operating at the full capacity of a $12 million business. Needless to say, profit margins were non-existent and efficiency had tanked. Believing that the solution was to grow company sales back to their former levels, the president had for two years pushed his sales force to regain the $12 million top-line revenue numbers. When this effort didn’t succeed, he decided instead to create the best $7 million business he could by reorganizing the staff and structure of the company. With this strategic shift, he greatly improved efficiencies and restored an acceptable level of profitability.

Was this a negative solution? Some proponents of the grow-or-die philosophy would say so. But it worked well for the owners of this company.

•  The ownership and management of the family business have concluded that a growth strategy is outside their level of risk-reward tolerance. Some might argue that in such a situation the best solution is to sell the company. But suppose family members and company employees are earning good livings, the business is serving its customers well and there’s no significant danger of its being overwhelmed by the competition?

A $15 million family company that distributes consumable products found itself in this position. It was losing business because its larger customers were going directly to the manufacturers for better prices. The company had no control over this shift, and its complaints to the manufacturers fell on deaf ears. But the owners understood their company’s strengths; they knew their product lines thoroughly and understood their market, which consisted mainly of individually operated retail stores. Instead of focusing on growth in sales to large customers, the company decided to emphasize a sophisticated educational program aimed at its smaller and more loyal retail customers. This was something the manufacturers couldn’t do—and the large customers didn’t want. Through seminars and written materials, this distribution company armed its customers with knowledge they could use in serving their customers, the end-users. With this shift in strategy, the company engendered deep loyalty with its primary customer base; as a result, it has been much easier for the company to introduce new products successfully.

Lateral and vertical growth

What is interesting in all three of the above situations is that the decision not to focus on growth in sales and size didn’t mean becoming stagnant or failing to change. Grow-or-die strategies often overlook other opportunities for meaningful and positive change.

Aside from growth in sales, what are your other “growth” options?

Growth in competence. It’s important to understand what differentiates you in your marketplace and serves as your strongest foundation for continued success. Interestingly, it is probably that which is easiest for you to do, and is thus most likely to be taken for granted and overlooked. Most companies, like most people, are so focused on trying to get better at doing those things they will never be really good at that they shortchange maximizing the impact of what comes easily.

Growth in strength. Sooner or later, we all accept that we are born with certain talents and physical characteristics and have only limited ability to enhance them. But we can still grow in very significant ways. We can, for example, become healthier, wiser and more focused, thereby increasing our resiliency, stamina and output. In business, we can take better care of customers, be more selective in replacing lost customers, get better at discerning the best customers and suppliers to work with, and become more determined and disciplined about employee and company performance evaluations.

Growth in integrity. High-profile business tragedies like the crashing and burning of Enron Corp. have brought home how important it is to constantly grow in integrity. Growth in sales and size without growth in integrity can, and does, eventually destroy a business just as easily as continued failure to meet sales targets. Growth in integrity means constantly getting better at doing what you say you’ll do, consistently over time, based on a set of values and an overriding purpose that defines who you are. Growth in integrity is not likely to show up either in top-line sales figures or in the size of the physical operation. It is evident in such intangibles as the amount of respect, recognition and allegiance received from stakeholders.

Growth in performance. Be the best you can be, not necessarily the biggest. Small community banks known for their friendly, first-name customer service and responsiveness are bought by mega-banks and quickly become impersonal and unresponsive. So today, small community banks are being formed and quickly succeeding across the country because they provide service levels that the big institutions can’t match. If you’re a $5 million company, be the best darned $5 million company you can be, and don’t even think about becoming a $6 million company until you’re ready.

Family business owners sometimes feel second-rate compared with their publicly traded cousins. They remind me of the Aesop’s fable about the dog who saw his reflection in the pool. The size of the bone he held in his jaws was magnified by the bone’s reflection in the pool. Eager for the bigger bone, he dropped the one he had into the water and, as it sank to the bottom, realized too late that he had traded the real thing for an illusion.

Edwin A. Hoover, Ph.D., CMC, is a management psychologist and relationship consultant exclusively for business-owning and affluent families. He is co-author of Getting Along in Family Business: The Relationship Intelligence Handbook (Routledge, 1999). His private practice is based in Willowbrook, Ill.

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