2. How could CFL have better managed this process?

Carl Friedrich Lakkard (CFL) founded the Lakkard Leather Company (Lakkard) in 1966, in Wuppertal, West Germany. The company quickly gained a reputation for fine leather design and the manufacture of high-quality manicure etuis and leather office accessories. The business grew steadily until 2003, at which point the company employed 131 people. In 2003, a near-fatal car accident temporarily removed CFL from active involvement in the business, and his son, Peter, who had very little experience, took the reins until CFL recovered and resumed leadership of the company. By May 2008, Lakkard employed 192 workers and had revenues of about 16 million (see Exhibit 1).

Despite incorporating the latest designs and broadening its product range, CFLs growth in the last two years had slowed to a standstill. Cash flow turned negative and suppliers were demanding earlier payments. To make matters worse, this downward spiral occurred at the same time as Lakkards leadership was beginning to falter. Despite stepping back after his fathers return, Peter still harbored ambitions to lead Lakkard, and he disagreed with the direction in which his father was taking the company. As a result, business succession had become a pressing issue. Father and son were engaged in an ongoing tussle over the control and future direction of Lakkard.

Unexpectedly, on May 14, 2008, CFL received a phone call from representatives of the Italian leather manufacturer Carabazzo, offering a 2.4 million buyout of Lakkard. CFL did not immediately share this news with anyone. He wondered whether he should sell and whether this was his decision to make or whether he should involve the rest of his family, including Peter. But if he did so, would Peter agree to sell, or would he want to preserve Lakkards independence? Clearly, involving Peter in the decision-making process was closely bound up with the succession issue. CFL sat down at his desk and pondered what he should do.

COMPANY BACKGROUND

Carl Friedrich Lakkard (CFL) was 24 when, in 1966, he resigned from his job as a sales representative in a car accessory company. He hated wearing a company uniform and dealing with red tape, so after yet another argument with his boss, he quit and went into direct competition with his former company, selling car accessories, such as leather steering wheel covers and seat cushions. In the early 1970s, CFL branched out into new products, and the business attracted a growing customer base that was built on a strong regional sales network. Before long, the small manufacturing space in the basement of the Lakkards private home was too small to meet the growing demand.

When CFLs only son, Peter, turned 14 years old in 1994, the Eggers Company, a regional competitor, advertised itself for sale. CFL seized the opportunity to expand and added all 29 Eggers employees to his own 38-person workshop. Only four years later the Kaiser Company, a traditional, family-owned leather-trading house, approached CFL for financing, and CFL secured his investment in Kaiser with equity rights. But Kaiser did not survive various fractious family struggles and was eventually merged with Eggers to form the Lakkard Leather Company before the end of 1998.

Lakkard continued to grow, with CFL running the company essentially alone. CFLs wife, Sandra, helped in a design capacity but took none of the major operational or strategic decisions. By early 2003, 23-year-old Peter was preparing for exams, working towards his degree in electrical engineering. Peter was not involved in the company, nor did he express any interest in it.

Every morning, CFL a strong character who had become accustomed to his own success told his employees to perform certain tasks during the day, a routine he famously called the morning order. He was in sole charge of procurement, manufacturing schedules, distribution and billing. Quite obviously, he enjoyed his power and would not have it any other way.

AN ACCIDENTAL SUCCESSION

On March 17, 2003, there was no morning order. CFL and Sandra had suffered severe injuries in a major car accident on their way to work. With both parents incapacitated, young Peter was forced to step in as Lakkards interim manager. He gathered the employees together for an informal meeting and told them about the accident, stating that he intended to lead the company for the three to four weeks that it would take before his parents returned. Peter made it clear that he would need everyones firm support with this endeavor.

Peter lacked even basic knowledge about the company and about the leather manufacturing business in general. He quickly realized that he could not run Lakkard the same way as his father had done. Feeling a sense of responsibility towards his family and to the employees, Peter left his degree program in June 2003 to devote his full attention to running the business. He was a fast learner and quickly adapted to his new environment. To his surprise, Peter found that he enjoyed seeing the fruits of his work by the end of the day. Indeed, his own efforts, as well as the goodwill and dedication of the employees, kept the business surviving and even thriving. Yet, under Peters leadership, the business started to change quietly but dramatically. Peter implemented efficiency improvements to the manufacturing process to reduce the amount of waste material. At the same time, his gentler personal touch was popular with the workers. Within weeks, Lakkard recorded the lowest employee absentee rate in years. The results of these changes quickly began to feed through into the companys bottom line.

THE RETURN OF CFL: CONFLICTS WITH PETER BEGIN

When CFL returned to the office after his surgery, he was expecting to operate his business just as he always had. He thanked the staff for their efforts, but he made it clear that he would be in charge again just as soon as he had fully recovered. CFL believed that, within a couple of weeks, he would be back on board.

Weeks turned into months and it became obvious, perhaps to everybody except CFL, that CFL was no longer able to run the business as he used to. Nevertheless, CFL spent most of his few active hours each day in the company. Notwithstanding his limitations, or his 61 years of age, he seemed as far away as ever from letting go of his business. A lack of other ways to spend his time and a skewed sense of responsibility led him to believe that he was still in the drivers seat and that he should remain there, for the benefit of all concerned.

Peter and CFL frequently clashed over business decisions. Three particular examples stood out:

1. CFL wanted to continue to do business with old friends and long-standing industry contacts, despite declining profitability and deteriorating cash flow from these clients. When Peter suggested taking a more hard-headed approach to these clients, dropping the loss-making orders altogether, he was firmly overruled by his father.

2. Peter wanted to hire a human resource manager to manage Lakkards 192 employees. CFL disliked the suggestion and refused to support any non-family member taking a leadership position at Lakkard. CFL firmly believed that one person was sufficient to run the business, as he had done for nearly four decades. Peter disagreed but felt he had to drop the issue.

3. Peter wanted to expand production by moving to a new, larger manufacturing facility in the area. From Peters perspective this move would both improve efficiency and mark a tangible break from the past and the antiquated, paternalistic leadership style that went with it. Peter proposed the idea to CFL just before the annual summer shutdown in 2008. CFL objected to it on the grounds of cost, suggesting instead that the company could rent extra warehouse capacity.

Peter and CFL were also internally conflicted. While CFL appreciated Peters engagement at one level, he also found that he disliked and resented it at the same time. As for Peter, on one hand he knew that the company was legally his parents property, and he also knew how much it meant to his father, who had devoted most of his life to the business. On the other hand, Peter was tired of always listening to his father and obeying his commands. Peter wanted to have a greater say in the business decisions, especially in view of the fact that he stood to inherit the business. Peter had also observed the pronounced improvement in the company since he had taken charge. For example, throughput time had been reduced by nine per cent, and the rate of material wastage hit an all-time low of just seven per cent of raw material input. No less importantly, employees now seemed to come to work with smiles on their faces. Peter felt he had proven that he could lead the company. He also felt responsible for the employees who had worked for the family for years, and in some cases, decades. Peter felt that he was betraying the employees loyalty by failing to act in their/the companys best interests.

Underlying the disagreements between CFL and Peter was a larger, unspoken question: When should CFL make way for his son to take over the business? CFL had never before explicitly considered handing over the reins to Peter or to some other outside interest. Even after his forced absence from the firm in 2003, CFL was reluctant to agree to any change of leadership.

As the months went by, the conflicts between CFL and Peter began to spill over into their family lives. Peter and his mother tended to take the same side of any argument, leaving CFL feeling isolated and under-appreciated. CFL began to express himself in a bitter, even hostile, way. As a result, the atmosphere in the workplace began to suffer. Peter worried that the situation would soon start to affect workplace morale, upon which Lakkards success partly depended.

NEGATIVE CASH FLOW AND A NEW PRODUCT LINE: THE BASIS OF FURTHER CONFLICT

By 2008, free cash flow was becoming stretched. CFL still granted the same generous payment terms for his long-term customers, while almost all the suppliers had shortened theirs. Not surprisingly, this situation stretched Lakkards payment schedule, but CFL was convinced that his business partners would stand by him. The fact that more than half of them were already retired and had transferred or sold their companies was of little concern to him. He still treated the company of an old friend as if she or he was still leading it. He was proud to honor tradition and his family name.

Additional financial strain came from the new designer leather handbags that Peter had introduced seven months ago against the wishes of CFL for the 2007 Christmas season. These handbags, which came to be seen as Peters project, were highly labor-intensive, owing to their special design and costly raw material. Even though the bags carried a 70 per cent margin, i.e., double that of most of the companys other products, CFL blamed this product line for the cash shortfall. Peter did not have access to the companys books, so he lacked the hard data to refute CFLs criticisms, but he was convinced that the ever-widening gap between the credit terms of Lakkards suppliers and the payment terms offered to its clients were chiefly responsible for the cash shortfall, not the introduction of the handbags.

THE CARABAZZO OFFER

What Peter Lakkard did not know at this point was that CFL had received an offer for the business from Carabazzo, an Italian leather designer. Ironically, it was Peters handbag project that had initially caught Carabazzos attention, but CFL planned on keeping that information to himself. Details were not yet worked out, but in the initial phone call, Carabazzos managers had estimated their interest to be worth up to 2.4 million, in return for all the companys assets, including its patent rights. With that kind of money, all the Lakkards could enjoy a stress-free retirement. Yet, what would happen to the employees that had become part of the Lakkard family? And how would this sale tie in with CFL and Peters aspirations for and futures at the company? CFL did not know what to do. He looked over the companys books to estimate an asking price for the company in the event that they decided to commence negotiations with Carabazzo, but he was no closer to resolving his indecision about the offer in general.

OTHER CHALLENGES AND OBSTACLES

Peter was pondering a number of different challenges. He could already foresee a shortage of qualified labour for what he was increasingly coming to regard as his company. The bulk of the textile manufacturing industry had long since moved to the Far East, leaving Germany with few people still willing and able to operate sewing machines and stances. Most young people did not want a manufacturing job and instead dreamed of something higher. It also did not help that the company was located in a residential suburb of a small city that had seen better days. Peter worried that Lakkards unappealing location might make it harder to attract young, qualified employees in the future.

In addition, the old steel and metal industry, which provided much of the client base for Lakkard, was in structural decline. How could Lakkard become independent from its historically profitable customer base? Would the company eventually shrink to become a design house, with production taking place elsewhere? Peter had lots of issues to worry about, let alone the difficult situation with his father, but he believed the situation would be easier once the leadership and succession issues had been resolved