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When the Third Generation Runs the Family Biz

In 2008, when R. Michael Johnson—Mikee to everyone who knows him—took over the pressure-treated lumber company his grandfather founded in 1952, he had a great idea: laptops for all managers and sales staff.

"You would have thought the world was coming apart," says Johnson, CEO and president of Cox Industries in Orangeburg, S.C. One salesman—convinced that the computer would be used to track his movements outside the office—up and quit. A buyer who'd been with the company for 35 years said he'd like a fax machine, but couldn't see why he needed a computer when he'd managed just fine without one for so long.

And that was just the beginning. In an industry where some businesses still write delivery tickets by hand and tote them up on calculators, Johnson recently led the company through an ERP (enterprise resource planning) software conversion and distributed iPhones to the sales team so they can use the company's new customer relationship management system.

"Let's just say I have spent quite a few Sunday lunches after church explaining technology acronyms to Granddad and Grandmom," Johnson says.

The resistance to new technology quieted, however, after Johnson was able to point to market share growth of 35% at the $200 million business in the past year. "The numbers are starting to resonate," he says. "Five years ago, I couldn't even say what our market share was because we didn't have the technology to figure it."

Technology Changes

Johnson's experience is not unusual for family-owned businesses that survive into a third generation. About 40% of U.S. family-owned businesses turn into second-generation businesses, but far fewer—approximately 13%—are passed down successfully to a third generation, family business experts say.

One reason is technological change that moves so swiftly it bypasses the older generation. Unless the next generation is poised to update, and can get buy-in from longtime employees wedded to "the way we always did it," a business can quickly become obsolete.

"Every once in a while, a business finds itself in a protected niche and they can continue to do business the same way for quite a while," says Craig E. Aronoff, principal of The Family Business Consulting Group in Marietta, Ga., and author of From Siblings to Cousins: Prospering in the Third Generation and Beyond.

But even companies that survive on longtime relationships must be nimble enough to build a consensus around change, Aronoff says, and support younger-generation family members when they take over. If they don't, "it's a dangerous thing, because the transition will be made and the business collapses. All the old-timers will say, 'The kid didn't have it like the old man did,' but the reality is that the old man left the business in a mess and the poor kid never had a chance."

The good news is that third-generation family business owners are likely to have gotten formal business education before they return to head the company. And if they are able to leverage that training effectively, it can propel the company forward dramatically.

Going Digital

That's what happened 30 years ago, when Jim Warjone became chairman of the Port Blakely Cos., a fifth-generation forestry business based in Seattle. Warjone is the grandson of John W. Eddy, who bought out the company from its founder in 1903.

Warjone was a systems engineer at IBM (IBM) when he was tapped as CEO in 1978. At that time, Port Blakely's tree farm division mapped inventory using old-fashioned surveying methods. Warjone worked with a team to create the company's first digital inventory system, one of the first of its kind in the forest products industry.

"At the time, there was a belief that it was not practical to digitize," Warjone says. "Like all change, it's very difficult when you start with a vision but no real boundaries." But his background at IBM gave him the courage to try—and he was able to persuade company managers to let him.

The end result was that Warjone's team wrote its own software and achieved results at a fraction of the cost that Port Blakely's competitors paid later. "Today, we have a large database that is very valuable in operating and managing the company," Warjone says. "We heard that some of the photo recognition technology we developed ended up being used by Boeing (BA) for their cruise missiles."

Warjone would not disclose annual revenues, but said the company, one of the oldest in the Pacific Northwest, is considered midsize for the lumber industry and currently employs 200 full-time workers.

Succession Planning

Not all third-generation transitions involve upheaval. Nancy Goedecke, chairman of Mayer Electric Supply Co. in Birmingham, Ala., credits her father, Charles Collat, with keeping the company on the cutting edge. "He wanted to have the best information technology around," she says. "We've been ahead of the curve in pretty much everything we've done."

Her father, who took over from his father-in-law, Ben Weil—who had founded the wholesale electrical products and services distribution company in 1930—also made sure that the third-generation transition went smoothly. For nearly two decades, he and his family met regularly to discuss the company and plan for succession.

That kind of cooperation and planning is invaluable, but unfortunately not the norm.

At The Cellular Connection, a family-owned cell-phone retailer based in Indiana, third-generation CEO Scott Moorehead, 32, headed up a five-year technology overhaul designed to enhance customer service. His grandfather and father had shepherded the company over the decades from an electrical contractor to a telephone equipment provider and finally into the cellular-phone industry in the 1990s.

While his father had the vision to pursue cell-phone sales early on, he was infamous in the company for not using a cell phone himself. "It was kind of comical," Moorehead says. "He's an entrepreneur, but not the most techie guy."

Modernization Drive

Moorehead was fortunate that he was given free rein to modernize the company, which now does $200 million in revenue through retail locations in 16 states. Cell-phone carriers are focusing increasingly on customer service and are eliminating many mom-and-pop retail chains that do not have up-to-date systems, he says. "There's no doubt in my mind that if we hadn't made some of these extreme changes—which were costly at the time—we would have been irrelevant a long time ago," he says.

John A. Davis, a partner of OMBI, a family business consulting firm in Cambridge, Mass., and faculty chair of the Families in Business Program at Harvard Business School, says he is seeing the traditional reluctance to change disappearing, mostly out of necessity. "Ten years ago I saw a lot of business leaders who were reluctant or negative about technology," Davis says. "But you don't hear that as much anymore. The older folks are either retired or dead and the younger crop has been disabused of the notion that they can escape, avoid, or delay getting on board with new technology."

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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