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Prosper Across Generations®

Prospering Against the Cycle

We like to offer examples of businesses that exploit their family-owned status to create a valuable strategic competitive advantage. The following case offers a new twist on a fundamental family business approach--one that might be especially appropriate as the economy slows. The family business has been in construction for more than 70 years. They build manufacturing plants for a very cyclical industry. The cycles are very steep, ranging from substantial over-capacity to substantial under-capacity. As a private business with a good memory of how the cycles work, the business'leaders have the confidence to prosper in good times and endure the bad. We find this to be a common strategy among successful, long-lasting firms. But here's the twist. The business always has been very careful about their quoting of contracts, stipulating very specific security clauses for themselves. In good times they can still get plenty of business despite tougher standards than their competition. But in the bad times they suffer even more as their competitors desperately relax their standards to get any business they can. Consequently, the family business must be hyper-vigilant about cutting costs and hyper-patient through down cycles. What 70 years of experience has taught this family business is that their public company competitors usually are devastated by loose standards, all but going out of business. The companies then fire the managers they perceive as responsible for such bad judgment, deepening the problem by destroying customer relationships and critical institutional memory. Recovery then takes even longer when good times return. The family business prospers as it prepares for it to happen over again. They benefit, in the long run, by maintaining consistently high contract standards in a cyclical industry.

 

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