Small and medium sized enterprises (SMEs) with their useful socio-economic funtions and ‘shock-absorbing capacity’ form the backbone of most Asian economies. To survive the current economic downturn and to stay in business in the age of globalization, the upgrading of management, systems, and operations are deemed to be necessary. While governments have provided various incentive schemes for such measures, it seems that many SMEs are reluctant to adopt such programs and to implement planned organizational change, i.e. transformations with regard to structure, technology, human resources and/or culture to increase their competitiveness. The example of Good Tools, a locally-owned manufacturing firm in Malaysia with a high level of resistance among supervisory staff, serves to illustrate some of the issues and challenges associated with organizational change in family-owned small firms. It is argued that the quality of corporate governance in terms of management structure, leadership style, compensation policy etc. in combination with certain family institutional characteristics of small businesses such as nepotism are central in understanding successful or unsuccessful organizational change processes. Another proposition put forward is that planned corporate transformations such as the implementation of modern management concepts (e.g. total quality management) are difficult to sustain if management adopts a paternalistic and authoritarian management style.