Ford and the fatal flaw of family businesses

By Jon Markman

Not all major corporate executives are vain, greedy and dull-witted, even if it seems that way sometimes. Every now and then one comes up with a brilliant idea. An idea so smart it leaves us cynics dumbfounded with disbelief.

And so imagine my surprise when Bill Ford -- chairman, CEO and spiritual quest-master of century-old Ford Motor (F, news, msgs) -- announced the other day that he had fired himself as CEO so he could concentrate on his other roles. Nine months after being dubbed the "savior" of the auto industry by Time Magazine, the great-grandson of Henry Ford decided that he wasn't cut out for running a $17 billion company after all, and would hand over the keys to an outsider, a corporate re-engineering pro from Boeing (BA, news, msgs).

Although undoubtedly painful, this is exactly the path that many of today's large family-run public companies are going to have to follow. This time, Ford really does have a better idea. To move their 20^th century enterprises into a new era of globalization, cost-cutting and relentless marketing, purebred plutocrats must give way to the tightwad technocrats.

Who should pull a Ford next? Here's my nominee: The founding family at Wm. Wrigley Jr. (WWY, news, msgs). Wrigley's founders were brilliant enough to build a company that became the unquestioned master of its market. But the problem with mastery in the modern, high-speed business world is that it is too easily imitated, undermined and ultimately destroyed. Wrigley is being crushed by competitors like never before who are using the Chicago-based icon's own playbook to ruin it.

Innovator's dilemma

Ford and Wrigley both are victims of the "innovator's dilemma," a phenomenon documented by Harvard professor Clayton Christensen. It essentially suggests that great companies succeed by listening intently to their customers and investing aggressively in technology, products, marketing and manufacturing that address those customers' needs. Yet the companies go on to fail because they then continue to upgrade their products to suit longtime customers while ignoring vigorous competitors that offer inferior products that are just "good enough" to slowly, steadily steal away market share.

Ford found it impossible to break away from his family legacy of dowdy, high-priced cars and challenge Japanese automakers' dogged push to build and energetically market attractive, low-priced cars and trucks.

There are other examples. Dell (DELL, news, msgs) has found it impossible to break away from Chairman Michael Dell's legacy of offering bland, modest-quality computer boxes with minimal customer service when challenged at the high end by high-touch, high-quality Apple (AAPL, news, msgs) under the charismatic new management of Steve Jobs and at the low end by reinvigorated Hewlett Packard (HPQ, news, msgs) under the new management of restructuring pro Mark Hurd.

Microsoft (MSFT, news, msgs) Chairman Bill Gates, before turning CEO responsibilities over to Steve Ballmer in early 2000, failed to develop a third act to his incredible successes with Windows and Office, running into a menace at the low end with free operating system Linux and in the middle with the runaway Web advertising genius of Google (GOOG, news, msgs). (Microsoft is publisher of this Web site.)

Evolving gum

You probably don't think of gum as innovative, but it has come a long way from humble roots. The Greeks, Mayans and North American Indians chewed the resin of three trees: the mastic, sapodilla and spruce. The 1850s and '60s saw the first patented gum and the first machine-made gum. In 1888, Thomas Adams' chewing gum Tutti-Frutti was the first sold in vending machines. In 1899, a druggist invented Dentyne and sold it as a teeth cleaner. In 1914, William Wrigley Jr. figured out how to add mint and fruit extracts to chewing gum, and popularity soared. Chewing gum is now the most popular candy in the world, with annual growth rates as high as 4% even in developed countries.

Let me note that the new generation of the founding family -- led by chairman and CEO William Wrigley Jr. -- does have the innovation chops of their forefathers. Their packaging prowess is unparalleled, and they are very inventive when it comes to new sweets, tweaking familiar treats and repackaging them in new delivery vehicles. Over the past summer, for instance, Wrigley introduced Life Savers Gummies Fruit Splosions and Winterfresh Winterbursts candies, as well as a new Big-E-Pak for the dispensing of Eclipse gum at your desk or from your car cup holder. Splosions are liquid-filled gummies with real fruit juice in the center. Kids love 'em.

Wrigley is the largest maker of gum in the United States and many countries overseas, but the company's shares are down nearly 20% in the past year due to blunders by the ruling Wrigley family managers. One mistake was the acquisition of the Altoids and Life Savers brands from Kraft. The $1.2 billion transaction, which is just over a year old, has steadily pulled down the company's margins in every quarter. It turns out that Kraft plants were inefficient, carrying margins that were 20 percentage points below Wrigley's 50% margins. Kraft's candies were also registering faster growth in lower margin areas, such as Eastern Europe.

Not-so-sweet sugar

More bad news: Consumers are shifting to sugarless gum from regular gum, long a Wrigley stronghold. Sugarless gum has a lot more competition, and thus lower prices and margins. As a result, Wrigley's share of the U.S. gum market has deteriorated badly in the past year, to 60.1% from 64%. A couple of the big losses: British rival Cadbury Schweppes (CSG, news, msgs) has done extremely well with Trident Splash and its new Stride branded gum, backed up with a $50 million campaign to market its longer-lasting taste -- a key purchase driver for gum buyers.

Cadbury, indeed, has been the Hewlett-Packard of this drama -- pushing hard to grab low- and high-end share from Wrigley in all of its key domestic and foreign markets. At the start of this year, Wrigley said it was on track for double-digit earnings growth worldwide, but going into the second half it's beginning to look like the American business icon will struggle to deliver more like 7.5% growth. With margins disappearing into the maw of intense competition, most of that will come from volume growth and a little from share repurchases.

The Wrigley family owns more than a 15% of the family company. Very little can budge them from the chair at the head of the board room if they don't want to go. But if the new Ford management succeeds brilliantly in Detroit after the proud auto-making family cedes control to outsiders, you're undoubtedly going to hear increasingly insistent calls for Wrigley to do the same.

Fine print

Speaking of Hewlett-Packard, one of the ironies in the board of directors fiasco there has gone largely unexplored. HP said Tuesday that Chairwoman Patricia Dunn will resign in January, apparently because of the privacy-invading techniques used by her henchmen to obtain phone records of board members suspected of leaking corporate deliberations to the press.

Yet who does Thomas Perkins -- the former board member who originally called for Dunn's resignation -- himself employ as his lead counsel? An attorney named Viet Dinh, who as a U.S. Department of Justice attorney under John Ashcroft was the architect and mastermind of the most privacy-invasive U.S. legislation ever passed, the U.S.A. Patriot Act. Read about Dinh in his Wikipedia entry. ... You can buy the "Innovator's Dilemma" at Amazon.com. Highly recommended.

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Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman owned shares of Dell and Microsoft.