the world of family business - indian school of business

Indian School of BusinessIndian School of BusinessMBA StudentsMBA Students

October 2009October 2009

The World ofThe World ofFamily BusinessFamily Business

1

Family BusinessesFamily Businesses

? Who Are They ?? Who Are They ?

? How Do They Perform?? How Do They Perform?

? How Do They Think ?? How Do They Think ?

? What Difference Do They Make?? What Difference Do They Make?

210-2009 ISB MBA

Family Business QuizFamily Business Quiz

1.1. Family businesses represent what Family businesses represent what percentage of western economies?percentage of western economies?

a)a) 95%95%

b)b) 65%65%

c)c) 55%55%

d)d) 25%25%

310-2009 ISB MBA


1.1. Family businesses represent what Family businesses represent what percentage of western economies?percentage of western economies?

a)a) 95%95% FirmsFirms

b)b) 65%65% EmploymentEmployment

c)c) 55%55% GDPGDP

d)d) 25%25% Public Markets CapPublic Markets Cap

410-2009 ISB MBA

““Shirt Sleeves to Shirt SleevesShirt Sleeves to Shirt Sleeves””

““The children of the children are The children of the children are indifferent.indifferent.””

-- ShakespeareShakespeare

““Generations pass while some trees stand, Generations pass while some trees stand, and old families last not three oaks.and old families last not three oaks.””

-- Sir Thomas Browne,Sir Thomas Browne,HydriatophiaHydriatophia, 1658, 1658

Padre BodegueroPadre BodegueroHijo MillonarioHijo Millonario

Nieto PordioNieto Pordioççeroero

FFöörvrväärvarvaÄÄrva rva

FFöördrdäärvarva

ErwerbenErwerbenVererbenVererben

VerderbenVerderben

Pai RicoPai RicoFilho NobreFilho NobreNeto PobreNeto Pobre

La premiLa premièère gre géénnéération la crration la crééeeLa deuxiLa deuxièème la developpeme la developpeLa troisiLa troisièème la tueme la tue

510-2009 ISB MBA

Shirt Sleeves to Shirt SleevesShirt Sleeves to Shirt Sleeves

I must study politics and war that my sons may have liberty to sI must study politics and war that my sons may have liberty to study tudy mathematics and philosophy, geography, natural history, naval mathematics and philosophy, geography, natural history, naval

architecture, navigation, commerce and agriculture in order to garchitecture, navigation, commerce and agriculture in order to give ive their children a right to study painting, poetry, music, architetheir children a right to study painting, poetry, music, architecture, cture,

statuary, tapestry and porcelain.statuary, tapestry and porcelain.John AdamsJohn AdamsParis, 1778Paris, 1778

Let us now return and explain the genesis of the democratical maLet us now return and explain the genesis of the democratical man. An n. An oligarchical father has a son whom he brings up on narrow and oligarchical father has a son whom he brings up on narrow and

parsimonious principles. The young man tastes the honey of dronparsimonious principles. The young man tastes the honey of drones, and es, and sedition is engendered within his soul. A struggle ensues, the sedition is engendered within his soul. A struggle ensues, the unnecessary unnecessary

desires prevail and the young man becomes an impartial devotee odesires prevail and the young man becomes an impartial devotee of f pleasure in all its forms and consequently a follower of democrapleasure in all its forms and consequently a follower of democracy.cy.

PlatoPlato

610-2009 ISB MBA

2.2. Which is the Greatest Family Business Challenge?Which is the Greatest Family Business Challenge?

a.a. Next Generation CompetenceNext Generation Competence

b.b. Letting GoLetting Go

c.c. Sibling RivalrySibling Rivalry

d.d. Scattering Interests Among CousinsScattering Interests Among Cousins

e.e. Death TaxesDeath Taxes

f.f. Changing Business ConditionsChanging Business Conditions


710-2009 ISB MBA









810-2009 ISB MBA

Inheriting the business from you makes me a born businessman, riInheriting the business from you makes me a born businessman, right, Dad?ght, Dad?

910-2009 ISB MBA

1010-2009 ISB MBA

1110-2009 ISB MBA

1210-2009 ISB MBA









1310-2009 ISB MBA

1410-2009 ISB MBA









1510-2009 ISB MBA

1610-2009 ISB MBA

1710-2009 ISB MBA

Who says your brotherWho says your brother’’s the most logical choice as the next president?s the most logical choice as the next president?

1810-2009 ISB MBA









1910-2009 ISB MBA

2010-2009 ISB MBA









2110-2009 ISB MBA

The trick is to stop thinking The trick is to stop thinking of it asof it as your your money.money.

2210-2009 ISB MBA









2310-2009 ISB MBA

The Fundamental DilemmaThe Fundamental Dilemma

Family Business

2410-2009 ISB MBA

Five Principles of SuccessFive Principles of Success

1.1. Respect for the ChallengeRespect for the Challenge2.2. Understanding of the DifferencesUnderstanding of the Differences3.3. CommunicatingCommunicating4.4. PlanningPlanning5.5. CommitmentCommitment

2510-2009 ISB MBA

Family Management

Ownership

2610-2009 ISB MBA

Five Principles of SuccessFive Principles of Success

1.1. Respect for the ChallengeRespect for the Challenge2.2. Understanding of the DifferencesUnderstanding of the Differences3.3. CommunicatingCommunicating4.4. PlanningPlanning5.5. CommitmentCommitment

2710-2009 ISB MBA

3.3. Research has shown that all but which one of the following Research has shown that all but which one of the following helps family businesses continue and prosper?helps family businesses continue and prosper?

a.a. Independent Board of DirectorsIndependent Board of Directors

b.b. Regular Family MeetingsRegular Family Meetings

c.c. Family ConstitutionFamily Constitution

d.d. Work Experience Outside the Family BusinessWork Experience Outside the Family Business

e.e. Use of a Family Business ConsultantUse of a Family Business Consultant


2810-2009 ISB MBA

4.4. Family business profitability relative to nonFamily business profitability relative to non‐‐family family business profitability is on average business profitability is on average

a.a. More profitable?More profitable?

b.b. About the same?About the same?

c.c. Less profitable?Less profitable?


2910-2009 ISB MBA

Family Firms are More ProfitableFamily Firms are More Profitable

Ward:Ward: 26% vs 21% ROIC26% vs 21% ROIC ( 5 years)( 5 years)

AndersonAnderson--Reeb:Reeb: 5 5 –– 10% S&P 50010% S&P 500 (10 years)(10 years)

Morgan Stanley:Morgan Stanley: +16%/yr vs. MSCI +16%/yr vs. MSCI (5 years)(5 years)& 18.5% ROE vs. 14.1% ROE& 18.5% ROE vs. 14.1% ROE

Pitcairn US:Pitcairn US: 30% Premium MV/BV30% Premium MV/BV (20 years)(20 years)

DenisonDenison--Ward:Ward: Culture of 200 companiesCulture of 200 companies

FB 1000:FB 1000: +35% ROIC+35% ROIC (2006)(2006)

3010-2009 ISB MBA

3110-2009 ISB MBA

……and Continueand Continue

FBs:FBs: 20% 20% 50 years50 years

S&P 500:S&P 500: 15% > 40 years15% > 40 years

McKinsey 1000:McKinsey 1000: 14% > 37 years14% > 37 years

FB 1000:FB 1000: 30% > 100 years30% > 100 years

3210-2009 ISB MBA


5.5. Which is the Which is the oldestoldest family business?family business?

a)a) Hoshi HotelHoshi Hotel (Japan)(Japan)

b)b) Clinton Devon EstateClinton Devon Estate (England)(England)

c)c) Antinori WineAntinori Wine (Italy)(Italy)

d)d) Cordoniu WineCordoniu Wine (Spain)(Spain)

e)e) Hugel & Fils WineHugel & Fils Wine (France)(France)

f)f) Ulefos Saw MillsUlefos Saw Mills (Norway)(Norway)

3310-2009 ISB MBA

The Reasons?The Reasons? •• PurposePurpose•• Strategy (2/3)Strategy (2/3)

–– LongLong--TermTerm–– UnconventionalUnconventional–– QualityQuality

•• Culture (1/3)Culture (1/3)–– Personal ValuesPersonal Values–– Time OrientationTime Orientation–– Prudence & FrugalityPrudence & Frugality

•• AdaptabilityAdaptability

3410-2009 ISB MBA

How Do We Think About?How Do We Think About?

NetNetReturnReturn

TimeTime

BB

AA

•• Investing in PeopleInvesting in People•• Inverting in R&DInverting in R&D•• Investing in New ProductsInvesting in New Products•• Investing in New MarketsInvesting in New Markets•• Investing in AlliancesInvesting in Alliances

3510-2009 ISB MBA

Some Survey ResultsSome Survey Results•• ““Only 1% of corporate directors reported that they had never Only 1% of corporate directors reported that they had never encountered the dilemma between maximizing the stock price and aencountered the dilemma between maximizing the stock price and acting cting in the longin the long‐‐term interest of the firm.term interest of the firm.””

Lorsch & MacIver, HBSLorsch & MacIver, HBS

•• ““Stock marketStock market’’s attention to quarterly earnings has contributed to a s attention to quarterly earnings has contributed to a decline in longdecline in long‐‐term investmentterm investment…… and competitive edge.and competitive edge.””

82% of 100 USA CEOs82% of 100 USA CEOs

•• ““78% of CFOs would give up economic value in exchange for smooth 78% of CFOs would give up economic value in exchange for smooth earnings.earnings.””–– 80% would reduce R&D to meet targets80% would reduce R&D to meet targets

–– 41% would reduce +NPV investments41% would reduce +NPV investments

3610-2009 ISB MBA

Our Survey ResultsOur Survey ResultsNFBNFB FBFB

•• I believe my company under invests in the future I believe my company under invests in the future (CEOs)(CEOs)

43%43% 8%8%

•• Our planning horizons are getting shorterOur planning horizons are getting shorter 84%84% 59%59%

•• There is no doubt in my mind who will control this There is no doubt in my mind who will control this company in five yearscompany in five years

40%40% 82%82%

•• If I see a nearIf I see a near--term problem I shift my focus to it to term problem I shift my focus to it to the detriment of longthe detriment of long--term initiativesterm initiatives

74%74% 47%47%

•• The future will be better than the pastThe future will be better than the past 68%68% 90%90%

•• In our company we actively promote the pastIn our company we actively promote the past 21%21% 75%75%

3710-2009 ISB MBA

Why? Values?Why? Values?

Culture is a system of informal, unwritten, yet Culture is a system of informal, unwritten, yet

powerful norms, derived from shared values that powerful norms, derived from shared values that

influence behavior.influence behavior.

3810-2009 ISB MBA

Corporate Culture & ProfitabilityCorporate Culture & Profitability

AdaptabilityAdaptability MissionMission

InvolvementInvolvement ConsistencyConsistency

Dan Denison, IMD

3910-2009 ISB MBA

Distinct Family Business CultureDistinct Family Business Culture

FlexibleFlexible

ExternalExternal

StableStable

InternalInternal

AdaptabilityAdaptability

InvolvementInvolvement

MissionMission

ConsistencyConsistency

Non FBNon FB FBFB

Source: DenisonSource: Denison40

10-2009 ISB MBA

Stronger CultureStronger Culture

•• Tenure and StabilityTenure and Stability

•• HistoryHistory

•• Different ValuesDifferent Values

4110-2009 ISB MBA

InnovationInnovationEmpowermentEmpowermentPerformancePerformance

TeamworkTeamworkChangeChange

LeadershipLeadershipEfficiencyEfficiency

ProfitabilityProfitabilityQualityQuality

CommunicationCommunicationCreativityCreativityLearningLearning

Continuous ImprovementContinuous ImprovementEntrepreneurshipEntrepreneurship

ExcellenceExcellenceCustomer ServiceCustomer Service

CourageCourageDignityDignity

ReputationReputationFairnessFairness

OpenOpen--mindednessmindednessAuthenticityAuthenticityHard WorkHard Work

StewardshipStewardshipDependabilityDependability

EmpathyEmpathyCuriosityCuriosityHumilityHumility

DisciplineDisciplinePrudencePrudenceSinceritySincerity

Do The Right ThingDo The Right Thing

ValuesValues

4210-2009 ISB MBA

Most Common Core ValuesMost Common Core ValuesMutual respect:Mutual respect: Empathy, tolerance, golden rule, Empathy, tolerance, golden rule,

compassion, trust, generosity, cherish compassion, trust, generosity, cherish individualityindividuality

Stewardship:Stewardship: Perseverance, longPerseverance, long--term, determination, term, determination, tenacity, persistence, hard work, legacytenacity, persistence, hard work, legacy

Integrity:Integrity: DoDo--thethe--rightright--thing, honorable, thing, honorable, trustworthy, reputationtrustworthy, reputation

Personal responsibility:Personal responsibility: Independent thinking, reliability, Independent thinking, reliability, freedomfreedom

Fun:Fun: Enthusiasm, passion, celebrationEnthusiasm, passion, celebration

4310-2009 ISB MBA

Different ValuesDifferent Valuesandand

Different BeliefsDifferent Beliefs

Past / Present / FuturePast / Present / Future

Nature of Humankind: Good / Neutral / BadNature of Humankind: Good / Neutral / Bad

Individuality v. CollectivityIndividuality v. Collectivity

4410-2009 ISB MBA

Company Time OrientationCompany Time Orientation

Family FirmsFamily Firms ++ ── ++

PastPast ── PresentPresent ── FutureFuture

NonNon--Family Family FirmsFirms ── ++ ──

4510-2009 ISB MBA

Best Places to WorkBest Places to Work

•• Founder BusinessesFounder Businesses 34%34%•• Family BusinessesFamily Businesses 26%26%•• PartnershipsPartnerships 16%16%•• NonNon--ProfitsProfits 12%12%•• Associations/CoAssociations/Co--Ops/ESOPsOps/ESOPs 4%4%•• WidelyWidely--HeldHeld 8%8%

4610-2009 ISB MBA

Century of SuccessCentury of Success““Control is the ability to absorb and adapt.Control is the ability to absorb and adapt.””

ConfuciousConfucious

•• ResilienceResilience–– Slack ResourcesSlack Resources–– Ownership CommitmentOwnership Commitment

•• ProActive AdaptAbilityProActive AdaptAbility–– Sensing FrontsSensing Fronts–– Testing FrontsTesting Fronts

•• ContinuityContinuity–– SensibilitySensibility–– TenacityTenacity

4710-2009 ISB MBA

The Family Business ParadigmThe Family Business ParadigmFor the Family FirmFor the Family Firm For the NonFor the Non‐‐Family FirmFamily Firm

The purpose is continuity The purpose is maximizing near‐term share price

The goal is to preserve the assets and reputation of the owning family

The goal is to meet institutional investor expectations

The fundamental belief is that the first priority is to protect downside risk

The fundamental belief is that more risk promises more return

The strategic orientation is adaptation The strategic orientation is constant growth

The management focus is continuous incremental improvement

The management focus istransformation

The most important stakeholders are customers and employees

The most important stakeholders are shareholders and management

The business is seen as a social institution The business is seen as a disposable asset

Leadership is stewardship Leadership is personal charisma

4810-2009 ISB MBA

““Continuity is the fundamental value of Continuity is the fundamental value of a family business.a family business.””

G. Agnelli, 2001G. Agnelli, 2001

““All decisions are made in the context of All decisions are made in the context of the longthe long--term preservation of the family term preservation of the family name, honor and traditions.name, honor and traditions.””

WallenbergWallenberg

4910-2009 ISB MBA

““I am not in favor of megaI am not in favor of mega--mergers which are counterproductive to create mergers which are counterproductive to create what this industry is about, which is innovation.what this industry is about, which is innovation.””

Franz Humer, CEOFranz Humer, CEORocheRoche

““Being a family business is an asset. The employees know there isBeing a family business is an asset. The employees know there is a Marriott a Marriott family and that provides stability and continuity in its managemfamily and that provides stability and continuity in its management.ent.

WeWe’’re not constantly shifting chief executive officers around like re not constantly shifting chief executive officers around like other other companies.companies.

When a CEO is shifted the company gets a new set of values and iWhen a CEO is shifted the company gets a new set of values and ideas and deas and that creates confusion and instability.that creates confusion and instability.””

Bill MarriottBill Marriott

5010-2009 ISB MBA

““We are fearful when others are greedy, and We are fearful when others are greedy, and greedy when others are fearful.greedy when others are fearful.””

Warren BuffettWarren Buffett

““We answer to a higher authority than the We answer to a higher authority than the stock market stock market –– that higher authority being that higher authority being family values.family values.””

Levi StraussLevi Strauss

5110-2009 ISB MBA

Special Topics forSpecial Topics forFamily Businesses in IndiaFamily Businesses in India

•• How fast to grow?How fast to grow?

•• Corporate financial structureCorporate financial structure

•• Beware of generic strategyBeware of generic strategy

•• Separating ownership and managementSeparating ownership and management

•• One family and one businessOne family and one business

•• Building good boardsBuilding good boards

•• Evolving to strategic philanthropyEvolving to strategic philanthropy52

10-2009 ISB MBA

the world of family business - indian school of business

Documents