The Stress of Succession
Later generations of family entrepreneurial businesses were not always interested in or capable of succeeding the founding generation in managing and controlling business. In some cases, they were interested but did not necessarily have the natural gift or passion for the business or the intensity that it takes to succeed. The extreme demands of those unique businesses and the infectious nature of their challenges became a passion. The challenges drove the successful entrepreneur beyond the normal requirements for earning reasonable livelihood. It could be a really tough act to follow.
There are many examples of companies reaching that critical point in their history. That is, the first or maybe the second generation entrepreneur reached retirement age or incapacitation, and no capable heir was available to assume control. There are also examples where it was assumed that an heir would be ready and therefore, little serious grooming of non-family persons was undertaken. In addition, the heirs needed to find the way to cover impending tax obligations or get their inheritance capital out following or anticipating the incapacitation or passing of the entrepreneurial generation. Outright sale or going public were obvious alternatives.
The entrepreneur himself could be dominating and unwilling to relinquish much control or to share ownership. Aspiring young management prospects can become disillusioned and look elsewhere for opportunities, diluting efforts to build an enduring, visionary, world-class company. Those business environments were not necessarily the type that would encourage the pursuit of the W3 rewards.
In the case of special machine tool companies, many were left with control in the hands of professional managers from outside the industry. There are numerous examples of failures in these situations. The former manager understood the customer, the manufacturing engineering principles, and the competition. He was the passionate entrepreneur participating in the daily competitive battles, “The Machine Tool Guy,” and the energy behind the company’s success.
He also knew the competition and would try to anticipate competitors on each exercise, knowing their backlog (how hungry they were) and their technical strengths and weaknesses. Often, he could be autocratic to the point that most serious decisions were his and as a result, his people did not presume to interfere. The company may have been well-organized and contained supportive talent, but it had not been trained to make the top decisions or to envision and set the future course for the company. With the departure of the entrepreneur went much of the wisdom, spirit, and passion that were the competitive soul of the company and much of the industry.
A new manager from the outside was not capable of making industry- specific decisions on his own, and the organization did not have the depth or breadth to help, a formula for potentially serious problems.
Many of the closely-held companies could not manage the transition to the higher levels of business or the succession stresses. They found difficulty managing the capital requirements and going public due to the rust belt perception of prospective investors. Most companies were sold and the family heirs got their inheritance capital.
There are examples of other industries experiencing this same problem with more favorable outcomes. Their aspiring young workers could make their presence felt and gravitated to high levels of responsibility. They were able to overcome the obstacles faced in the special machine tool industry. In some cases, stock was made available to them over time and they became significant stakeholders perpetuating the entrepreneurial nature of the company.
In other cases, they saw that it could not happen where they were and opened their own businesses down the street, helping to perpetuate the industry. In fact, the natural market forces were enhanced by the added competition benefiting the buyers. There are examples where certain industries are centered in particular geographical locations resulting from these kinds of spin-offs. Furniture centers are an example.
In the Detroit area, there are a number of successful engineering companies, each having a nucleus of multiple owners/managers who left special machine tool companies in this way. There are a number of manufacturing support companies and machine shops, as well. The entry barriers in an engineering business consist largely of the personal reputations of the principal owners and managers and their contacts in their business communities.
The very high capital requirements of the special machine tool business are an entry barrier that is nearly impossible to scale for an individual. One such spin-off did happen in the late 1960s, and while the individual struggled initially, he was ultimately successful and his company grew substantially.
Not being directly consumer related, it is a very low profile industry. In effect, it is hidden from many imaginative and passionate young people, the Bill Gates or Mike Dells of the world, who could help to perpetuate it. In most cases, the financial barriers are simply too high without planning and assistance from the organization itself, as others have done, and so the talent and spirit have not gravitated to the ownership level.
The special machine tool experience typically involves working closely with engine builders and aircraft manufacturers, among others, from around the world. This is an exciting, challenging, and adventurous life’s work environment. Can the disciplines involved in conceiving, engineering, and manufacturing special machine tools for diverse worldwide customers be less glamorous or challenging than writing computer code day after day? If the industry profile and its “glamour” had been at higher levels, would the Gates or Dell types been attracted and be managing world-dominating U.S. special machine tool companies today?