The Demise of The A. C. Gilbert Company

How is it that a company with an inventive leader, whose first year of business produced less than ten thousand dollars and by 1953 was doing $20 million, went out of business?

The Demise of The A. C. Gilbert Company
by Steven D. Goldberg, University of New Haven

Alfred Carlton Gilbert, a. k. a., A. C., president and founder of the A. C. Gilbert Company, of New Haven, Connecticut, was trained to be a physician, but his love was business. He started his first business in 1909, the same year he graduated from The Yale Medical School, the Mysto Manufacturing Company, which manufactured and sold magic sets. Intrigued by girders that were being erected to support the electric power lines for the New York, New Haven & Hartford Railroad's conversion from steam to electricity in 1912, he got the idea of the Erector set which propelled the company to national notoriety. The Mysto Company name was changed in 1916 to The A. C. Gilbert Company, which ultimately sold erector sets, magic sets, and toy chemistry sets. Twenty years later the company purchased the American Flyer Train Company, a Chicago manufacturer of model trains. Successful though the company was, and noble as its mission appears, it barely outlived its founder.

Why did the A. C. Gilbert Company cease to exist? How is it that a company with an inventive leader, whose first year of business produced less than ten thousand dollars and by 1953 was doing $20 million, went out of business? In order to answer these questions, this author researched the subject by speaking to Gilbert relatives, former employees, and family business experts. This paper presents a rationale for the demise of The A. C. Gilbert Company. Because of specific requests and for the sake of confidentiality, names of interviewees are not presented. Conclusions, however, are based on their narratives.

A. C. Gilbert was born in 1884 in Oregon and died in 1961 in Connecticut. His father, Frank, and his uncle, Andy, Frank's brother, were partners in a brokerage and insurance business. A. C. had two brothers: Harold, the oldest, a good companion but interested in different things, and Frank Wellington, eight years younger. "I never played with him nor knew him particularly well until we were both grown up," Gilbert wrote. As a young boy, A. C. enjoyed hunting, gymnastics and pole vaulting. Despite being slight and only about five and a half feet tall, he became a world class and Olympic pole vault champion. He attended Pacific University but later transferred to Yale University in order to pursue a medical degree, while at the same time continuing his love of field and track.

Like most entrepreneurs, he displayed a high need to achieve, for which he used sports and, later, business as his means of expressing this need. For him, competition was a vehicle to winning--and winning was most important. A. Co's father told him, liDo what you like, but do it better than the other fellow." The need to be the best haunted him all his life. Golf was a good example of his need to win. After several years of playing golf, he announced one day that he was giving away his clubs because, IIl've decided I can't master the game" (Bainbridge, 1952).

A. C. and Mary Thompson were married in 1908. Their first child, Charlotte, was born in 1911. Lucretia was born in 1917. Alfred, Jr., or AI as he was called, was born in 1919. Al was close to his mother, but not as close as the daughters. Charlotte was closest to Mary. Lucretia was A. Co's favorite, probably because, of the three children, she was the most athletic. Al was left out; he was introverted and believed his father regarded him with little respect: for Al, growing up was lonely. The sisters were not involved in the business, simply because male primogeniture was practiced; only Al had any chance of being included in the firm.

Al went to work for his father's company in 1946 and six years later became vice president of finance. A graduate of the Yale School of Engineering, where he earned high honors, Al's college athletic career was limited to swimming and failed to match the brilliance of his father's. lilt was pretty frustrating," Al said, "l'd be particularly proud of some grades I'd got, and I'd show them to Dad, and he'd say, 'Uh-huh. How was swimming today?' "I got my major letter in swimming by sheer work and strife, to please my father" (Bainbridge, 1952). Likewise, Al joined the family firm only to please his father.

Al reluctantly took over the company after A. Co's death because he felt compelled to protect the family's assets. As noble a deed as it was, AI really did not want to run the business because he believed he did not have the ability to manage it and felt he would run it into the ground. A. C. was a pragmatist who fit and mingled quite easily with his shop people. Al was an intellectual, unable to relate to the common working man.

Family firms have always led a tenuous existence, and few are able to survive beyond the first generation. The reasons for the demise of these firms include poor economic conditions, lack of capital and resources, and incompetent management. Less than 30 percent of family businesses make it through the second generation, and barely ten percent get to the third generation. The A. C. Gilbert Company was typical; it never got through the second generation man; after a couple years as C.E.O., and his self-prophecy ringing true, he sold his family's stock.

The stock was purchased by Jack Wrather, whose riches came from his mother's investments in the oil business. Al and Jack knew each other from The Young Presidents Club and that is how Jack became familiar with the Gilbert family and the company. Jack hired a man by the name of Quinlan to be c.E.O., while AI took the ceremonial position of Chairman of the Board, but died shortly thereafter, in 1964, of a brain tumor. Wrather, a wealthy bon vivant, was comfortable among the Hollywood set and was married to Bonita Granville, a movie star. A regular at the Four Seasons Restaurant, he once loaned Richard Nixon a bus for campaigning. He owned the Stephens Yacht Company, the Disneyland hotel, and saw leisure time as the newest craze. He perceived The A. C. Gilbert Company as a leisure company instead of an educational one. Though his vision may have been partially correct, he was unable to make the company successful. Too much was handed to him because he was his mother's son, and along the way he never developed the traits of an astute businessman. And, in the case of the Gilbert Company, his timing could not have been worse.

Jack developed a business relationship with Marvin Glass, an adept toy inventor, and negotiated an agreement whereby the Gilbert Company would buy his items and promote them on T.V. Unfortunately, it was late in 1963 and a wildly enthusiastic T. V. campaign was suddenly out of the question because of President Kennedy's assassination. The country was thrown into mourning; toy sales plummeted because of national sentiment, and network television disfavored toy ads. At the same time, Quaker Oats Company agreed to sell A. C. Gilbert's toys on consignment, but failed miserably, returning a disastrous backlog of stock to the company. Simultaneously, Wrather counted on an alliance with Pepsi Cola to promote their products together on T. V. Time and money were put into this endeavor, but it never came to fruition.

The failures usually involve a father who is unable or unwilling to give up power and a son who is unable to take power. The son's continuing dependency damages his own sense of self-esteem. But his frustrated struggles to become his own man may also threaten the father. Such struggles often end in the son's abandoning the family business after the dominant father dies. One poignant comment came from a company president who said, "Fortunately, my father died one year after I joined the firm" (Barnes & Hershon, 1976).

In the case of the A. C. Gilbert Company, a combination of six succession factors caused its demise: Egocentrism, paternalism, a lack of succession planning, differentiation, life stage incompatibility, and plateauing. An explanation follows.

As with many entrepreneurs, A. C. was egocentric, believing that everything centered around himself. Entrepreneurs who tend to be successful are open to new ideas even if they come from other people, and they are willing to listen to different viewpoints. Dyer (1992) called this the cosmopolitan entrepreneur. On the other hand, entrepreneurs with homespun attitudes believe that what has worked in the past will work today, so why rock the boat. Consistent with this orientation, these entrepreneurs surround themselves with "yes-men." This provincial orientation may be the result of an overactive ego.

Most egocentric people have a hard time giving credit where credit is due. In no place was this more obvious than in A. C. Gilbert's autobiography (McClintock, 1954) where he is quoted as saying, "In the course of this book, I haven't said much about my family, a personal side of my life that I consider private and not particularly interesting to anyone outside of the family." Furthermore, it should be noted that in the end of his book, pages 372-4 are devoted to Notable Events in the Life of A. C. GILBERT, and there is absolutely no mention of his wife or children.

Paternalism

One of the most common patterns in family business is the paternalistic characteristic of The A. C. Gilbert Company. Relationships are hierarchical. The leaders, who are family members, retain all power and authority and make all the key decisions. The family distrusts outsiders and closely supervises the employees. It was common for A. C. to visit the shop floor unannounced at night in order to see for himself what was going on.

One company with similar characteristics to the Gilbert company that illustrates the paternalistic pattern was National Cash Register under the direction of John Patterson. He viewed himself as a pioneer and a conqueror--he rode a white horse because Napoleon did. He claimed to be an expert in topics ranging from health to religion. He created one of the first "welfare" industrial organizations in the U. S., building parks, theaters, and other amenities to bring the employee's entire family into the N. C. R. fold. He was so intent on helping that often. he insisted on minutely regulating the lives of those with whom he came in contact.

The paternalistic pattern works when the leader of the family business has the necessary expertise and information to manage all aspects of the business. Paternalistic firms tend to be very present oriented. Although they maintain some traditions, they focus on current problems and quickly change to meet new threats. In this kind of culture, there is no question who makes the decisions. Thus, decisions can be made quickly, and resources can be mobilized to meet competitive threats. Since the leader in a paternalistic culture is often highly charismatic, and A. C. certainly was, there tends to be high commitment on the part of the followers to embrace the leader's vision.

A number of inherent problems are associated with the paternalistic culture. First, the business often relies too much on the leader for direction, and the firm is at risk if the leader is incapacitated. Second, training and development for the next generation are often neglected. Time-worn traditions are at the center of the culture. Third, the leader may not be able to manage ambiguity or complexity as the business grows or as the environment becomes turbulent. Fourth, since the leader makes all the major decisions, many members of the family business may have feelings of incompetence or powerlessness. Given these potential problems, the paternalistic culture generally is best able to succeed when the business is small and the environment is fairly stable. As the firm grows, the leader's family matures, and as the environment becomes more volatile, the family business culture often must evolve into a new cultural pattern, which the A. C. Gilbert Company was unable to do.

The lack of succession planning has been identified as one of the most important reasons why many first-generation family firms do not survive their founders. Available estimates indicate that approximately 70

percent of all family firms are either sold or liquidated after the death or retirement of their founders (Dun & Bradstreet, 1988). Research (Astrachan, 1988) suggests that many of the positive characteristics associated with family ownership and management, such as concern for quality, longterm investment viewpoint, and strong community relations, are easily lost as a result of acquisition by larger firms. This was clearly the case when the company was taken over by Jack Wrather.

Succession planning means making the preparations necessary to ensure the harmony of the family and the continuity of the enterprise through the next generation. A. C. had no intention of letting go, thus succession planning was never really initiated: "What I'll probably do is compromise and become chairman of the board. I'm afraid I'd feel lost if I dropped out of this race. I'm willing to let AI worry about new costaccounting systems, time studies, and finances, and run the business, but I'm going to have plenty to do and say about engineering, new inventions and products, promotion and advertising, packaging, and coworker relations for many years to come. I'm not going to be an inactive chairman of the board after AI becomes president of the company" (Bainbridge, 1952). During a time of extreme exasperation, AI was quoted as saying, "Dad gets frustrated because he still can't run the whole show, but he never stops trying" (Bainbridge, 1952).

First-generation family businesses are heavily dependent on the founder not only for his leadership and drive but also for his connections and technical know-how. Failure to plan for succession deprives the business of these crucial managerial assets. Lack of succession planning also threatens the family's financial health by leaving many estate issues unanswered; a distressed sale of the firm is often the result, as in Al's sale of the family stock to Jack Wrather.

Al, the successor without portfolio, was the one most affected by A. Co's dereliction of succession planning. Had A. C. been amenable to relinquishing power, maybe AI would have had a chance. If A. C. had paved the road for AI, the issue of resistive employees also would have been diminished. Employees resist succession because of their desire to maintain their personal relationship with the founder; most know they have been and will continue to be denied perks reserved for family; they are resentful of nepotism because they know they are totally excluded as potential successors. How could A. Co's five key managers willingly accept Al as their new boss when they could remember the days they bounced Al on their knees? H,?w could they forget the times AI traveled and was chaperoned by his cousin because A. C. did not want him to travel alone?

Differentiation (Bowen, 1976), the struggle to achieve individuality, is one of life's most basic and difficult tasks. Individuals and families can be characterized by their degree of differentiation along a range from fused and enmeshed to well differentiated, autonomous, or individuated. In a family business, differentiation from one's family of origin can profoundly affect the career development of the entrepreneur and the development of the family business. Sometimes rigid emotional ties to parents can paralyze a successor generation, preventing' it from taking action even though family business assets have been transferred to them and they are formally in control.

According to Bowen (1978), differentiation concerns a person's awareness of two basic forces, emotionality and rationality, and of how they influence family relationships. It entails an optimal balance between these two forces and an ability to use one's intellect to make decisions and choose a life course based on rational, analytical determinations. When emotions have the upper hand, facts are often pushed aside by fears of rejection or desires to succeed.

The differentiation process is tangled when one is the successor to a family business, and it is difficult to achieve when one is the son of the founder of a family firm--especially the first-born son. A founder who lacks adequate differentiation usually counterbalances this flaw by forming relationships in which he is the master over his wife and siblings. His need to be master in certain domains can be immoderate to his subordinates' sense of self. Some fathers need to overwhelm their sons; they cannot tolerate their growing potency, perhaps seeing their own decline in the burgeoning potential of youth (Osherson, 1992). Bowen's concept of differentiation is evident in the Gilbert family, and its negative consequences pervaded the management of the company and especially affected Al.

According to life stage theory for men (Davis & Tagiuri, 1989), the age periods between 17-22, 34-50, and 61-70 are relatively difficult times for interpersonal relationships and work relationships. On the basis of what is known about these male life stages, fathers who are 51-60 or 71-85 and who work with sons who are 23-33 or 41-60 are relatively harmonious. Conversely, the mixture of in-between ages shows relatively problematic relationships.

Tom Watson, Jr., of IBM, was in awe of his father and had severe feelings of inadequacy. As he said in his book (Watson & Peetre, p.213), "no man can totally please his father"; one can only speculate that Tom Junior felt totally incapable of pleasing his father and thus at an early age pursued things that were totally foreign to his father. A classic problem experienced by the Watsons was the decision of Watson Senior to bring in an "interim" or "bridge" manager to run the business until Tom Junior was ready to take over. In this case, the man was Charley Kirk, appointed executive vice-president--number two man in the organization and heir apparent to Watson Senior--at the young age of forty-one. The problem was exacerbated for Tom Junior by the fact that Kirk was only nine years older than he. This meant that Tom Junior would have a very long wait before he could put his mar~ on IBM. From Watson Senior's perspective, he wanted a young, hard charging, competent executive to carry out his plans for the firm. Watson Junior was obsessed with pleasing his father, a characteristic seemingly found in many successful second-generation successors. Many parallels can be drawn between the Watsons and the Gilberts. If one is to give credence to "life stage" theory, it must be remembered that when AI joined the company his father was 62-years old.

Levinson (1978) and Kets de Vries & Miller (1984) suggest the theory of plateauing in connection with life stage development. The term connotes four conditions: First, the entrepreneur has reduced either the amount of time devoted to the business or the intensity of it. Second, the entrepreneur has increased either the amount of time or the vigor of efforts to non-business pursuits. Third, the entrepreneur shows little desire to improve business or managerial skills. Fourth, the entrepreneur accepts business performance that is significantly below the firm's potential.

Three business conditions are typical indications that the entrepreneur has plateaued: same products/same customers; same key employees; and too much cash. It was apparent that all these conditions prevailed at the A. C. Gilbert Company.

The same products/same customers condition suggests an atrophied marketing philosophy. The real danger lies in providing only the same product or service to the same customers, since few industries are so stable that requirements do not emerge over a decade. The same product and customer mix. may indicate that the firm is not recognizing the changes that are occurring in the marketplace. By the time the country was receptive to inexpensive, plastic toys, The A. C. Gilbert Company was firmly entrenched in expensive, elaborate, last-for-ever, metal toys.

When entrepreneurs first start out, they hire people who are approximately the same age and who grow with the company. Because of a sense of loyalty, the entrepreneur chooses not to cull or improve this cadre. The "same key employees" condition is not conducive to corporate rejuvenation. New products and business practices are not proposed; the company may have difficulty recruiting younger managers; more resourceful employees seek opportunities elsewhere. Inbreeding limits the firm's current performance, and inhibits the management succession that will determine the future of the business. Evidence of this is readily seen in the "Gilbert Spotlight" section of The Gilbert News, the bimonthly company newsletter which, among other things, cherished and touted employee longevity. A typical example appeared in the May-June, 1950 newsletter honoring Edward Anketell, 76-years old, who retired from the company after 35-years of service.

Entrepreneurs whose businesses generate too much cash often focus on creating ways to pay as little in taxes or interest as possible. A. C. was quoted in his book as saying, "But a business should grow and develop from its own resources. I hate like the devil to borrow money, even when I can pay it back soon. If there is a sensible way of avoiding it, I want to. It costs money, too, and reduces profits." In 1938, when American Flyer became part of the A. C. Gilbert Company, no cash or stock changed hands, even though its owner, W. O. Coleman, was asking $600,000 for the assets; Coleman had to settle for royalties on future sales. This was a wonderful business decision for A. c.; however, his stubbornness could have resulted in not getting American Flyer, which at one later point proved to be the salvation of The A. C. Gilbert Company. A. c.'s frugality was also evident in remuneration. Everyone was underpaid except the shop floor people. When left in charge of the company, while A. C. was recuperating from an illness, his brother paid out a stock dividend and was fired for his decision. In effect, these firms slowly transform themselves from operating businesses into passive investment companies.

Founder-level plateauing usually occurs with little evidence of any disaffection with the business. What is especially distressing about founder-level plateauing is that the founder is often unsuspecting of the cause of the problem. The founder works just as hard as he did in the old days, but he seems to have less to show for it in terms both of financial rewards and of personal satisfaction. The inability to show results for the hours expended breeds a sense of impotence and disappointment. Eventually, the founder chooses merely to extend the life of the business rather than make fundamental changes. What is often indisputable, however, is that the business has not changed much from its early years.

Successor-level plateauing is usually marked by comments that "Junior is nowhere near the kind of businessman that his father was." Many heirs are coerced toward the family firm as the result of years of being told how lucky they are to have the opportunity. Thus, the heir may begin a career in a business in which she or he has little intrinsic interest. The inclination for successor owner-managers to plateau and the form that the plateauing can take are affected by their degree of psychological ownership of the firm. To the extent that the successor has not made important and successful changes in the business, the successor is managing what is effectively still his father's business. Not only will the successor be reluctant to undertake necessary changes, but even if the business is operating successfully, the successor subconsciously knows that the success is due to his predecessor's deeds. Unless the family firm can meet the successor's need for personal and skilled growth, plateauing behavior is likely to result (Malone & Jenster, 1992).

The descriptions of the plateaued founder, A. c., and the plateaued successor, Al, are clear, and were corroborated through people who were personally intimate with the family and the business.

Hindsight, as the cliche goes, is 20-20. To dwell on what could have been is endless. Suffice it to say that, given the players and circumstances, The A. C. Gilbert Company was a textbook example of the majority of family-owned/controlled companies--Iess than 30 percent make it to the second generation, and fewer than 10 percent become third generation owned companies. Al never had a chance to succeed; together with A. Co's psyche, The A. C. Gilbert Company was destined to fail, but maybe that was his plan all along.

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