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Chapter 2 Great Family Businesses: Lessons from Centennial Family Companies Family Business, Second Edition, by Ernesto J. Poza Copyright © 2007 Thomson.

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Presentation on theme: "Chapter 2 Great Family Businesses: Lessons from Centennial Family Companies Family Business, Second Edition, by Ernesto J. Poza Copyright © 2007 Thomson."— Presentation transcript:

1 Chapter 2 Great Family Businesses: Lessons from Centennial Family Companies Family Business, Second Edition, by Ernesto J. Poza Copyright © 2007 Thomson South-Western

2 2-2 History Inquiry begun in 2001 Question: WHAT accounts for the success of centennial family companies in continuing across generations? Interviews with CEOs, presidents and chairpersons of family-owned and family-controlled companies in the U.S., Latin America, and Spain Companies range from $18 million to $5 billion A variety of industries: newspapers, textbook distribution, tiles, food and beverage, wine, baked goods, steel and bearings, insurance, farming equipment distribution, auto retailing, funeral homes, leather accessories... What do these leaders do to make their firms enduring enterprises?

3 2-3 Organizational Culture A set of values, beliefs, and assumptions that influence the practices and behaviors of organizational members Reflects what has proven successful, over time, to an organization Proven way of thinking becomes, over time, the organization’s culture It becomes so matter of fact that the culture, and its values and beliefs, drop out of awareness —that is, until the culture is found wanting or there are new challenges to the established culture

4 2-4 Cultural Blur Little differentiation of the assumptions that go into decision making on the basis of it being a family, an ownership, or a management issue Family values and rules are used in the business Business values and rules are used in the family Cultural blur may enable families in business to avoid conflict and the anxiety it provokes By minimizing differences that sometimes lead to conflict, problem-solving ability is diminished

5 2-5 Cultural Blur (cont.) Cultural blur may endow the business with “invisible crossovers” that provide it with what the strategy literature refers to as “intangible assets” that can be turned into competitive advantages, e.g.:  Love – quality and caring customer service  Commitment – patient capital and transfer of knowledge  Independence – low debt/equity ratio  Work ethic – productivity  Creativity – entrepreneurship and innovation

6 2-6 The Timken Company Founded in 1899 Publicly traded, S&P 500 company Operates in 29 countries $5 billion in annual revenues 26,000 employees The family retains a 13% controlling share and has had a family member active in top management in every generation

7 2-7 Tim Timken on the Drivers of Continuity Product: world's largest manufacturer of tapered roller bearings. engineered bearings, alloy and specialty steel and related components. Values  Ethics and integrity  Quality  Innovation  Independence

8 2-8 Tim Timken His developmental track included:  Operations and sales assignments in field locations in Europe and Latin America  Corporate assignment as director of strategic planning  Currently the president of the steel division  Member of operating committee  Member of the board of directors His father and uncle (4 th generation) remain active in the business

9 2-9 Ironrock Capital Began as making paving bricks and through hard work and perseverance became the largest paving- brick manufacturer in the world Over the years, the company shifted its focus to the tile business—quarry and decorative Today, under Guy Renkert’s (fifth generation) leadership, the company is now producing a “thin brick,” along with quarry and decorative tiles The business has grown 500 percent under Guy’s leadership over the past 10 years

10 2-10 The J.M. Smucker Company Established in 1897 Employs 3,000 Operates in 45 countries Had revenues over 2 billion dollars in fiscal 2006 Led by Richard Smucker and his brother, Tim (fourth generation)

11 2-11 Richard Smucker on the Drivers of Continuity A family with the same religious values A board of directors with independent outsiders A deep appreciation that the consumer is king

12 2-12 Profile of Organizational Cultures Linked to Success and Longevity Strong culture Culture that fits the strategy of the business Culture that is flexible and agile

13 2-13 Culture and Adaptation Strong cultures that fit the company’s strategy (e.g., to provide the best customer service, like L.L. Bean does) are strong contributors to competitiveness and profitability  These cultures represent the memory of what has led to the company’s success in the past Strong cultures, like steel, resist reshaping without a lot of heat being put back into the process When competitive conditions change and the strategy and organization need to adapt, cultures too resist change  Hypercompetition and the speed of change in the social and economic environment demand agility and adaptability

14 2-14 Beyond Conflict: Two Generations Add Value with their Differences Two generations with a different vision of the future bring to the table the necessary ingredients for continued competitive fitness:  Appreciating and preserving the core values and practices that have led to the current success  Stimulating the change that adapts the business to its ever-changing competitive environment

15 2-15 The Notion of Required Cultural Revolutions Strong cultures that fit a successful business strategy are often hard to change Are revolutions and revolutionaries needed to provide the firm and family with the requisite variety they both need to be future-ready?

16 2-16 Ignacio Osborne, 6 th Generation CEO, Osborne, Cádiz, Spain Osborne was founded in 1772 Ignacio joined the company in 1993 and helped the managing director for 2.5 years Ignacio’s father and uncle were active in the 5 th generation His cousin, Tomás, is Chairman of Osborne

17 2-17 Ignacio Osborne: “Does it really take a revolution” “It was not a revolution, there was no conflict… There were many meetings with shareholders and the board.” “Resistance to change came from having the family name on the product and the reputation Osborne had, plus having been successful, so why change?” “I worked through the board, business only, and then communicated a lot with family members [preserving family unity]…

18 2-18 The Erosion of the Entrepreneurial Culture There is the possibility that the family itself will become an important source of inward-focused time-wasters, in which case, the family begins to represent an important cost to the firm rather than the resource that the combined owner- manager role of a family member represented during the entrepreneurial stage In later generations, the family-business interaction, which in earlier periods represented an intangible asset that could be converted into the strategic advantage called speed and agility can become a cost; the lost of agility in the face of change A family that is paralyzed because of conflicting views across generations or across branches of the extended family can become inward-looking and become fertile ground for turf wars and feelings of entitlement, which in turn causes them to forget the most basic competitive advantage in relation to often larger, more bureaucratic corporations—its nimbleness By focusing inside, it can lose the ability to keep an eye on new competitive dynamics and the ever-changing marketplace

19 2-19 Source of Value and Competitive Advantage: Family Unity and a Positive Family-Business Interaction High scores on family unity combined with high scores in career opportunities in the business produced a high score indicating a positive family- business interaction This positive family-business interaction was a great predictor of the number of best management/governance practices implemented and the source of a hypothesized virtuous cycle Source: Poza, E., Hanlon, S., and Kishida, R. “Does the family-business interaction factor represent a resource or a cost?” Family Business Review, June 2004, pp. 99–118.

20 2-20 Family Business Interaction Factor: Resource or Cost? COMMUNICATION, INFORMATION, KNOWLEDGE Family Culture/ Family Unity? Organization Culture/Business Opportunity? Use of Management & Governance Practices Family Business Continuity?

21 2-21 Journalistic Family Values at The Washington Post: The Family- Business Crossover Effect “Most American newspapers have switched from family to corporate ownership, the latest example being Times Mirror. But I don’t think it’s an accident that the newspapers best known for quality in this country—The New York Times, The Wall Street Journal, the Los Angeles Times, the Boston Globe, the Washington Post…are family controlled.” - Katharine Graham, WSJ, March 20, 2000.

22 2-22 Ignacio Osborne, CEO, Osborne Wines “The biggest change I brought about was convincing the family that even though we may continue to have the best palate in Spain, we now have to base our new product launch and marketing plan on the consumer’s palate and not our own.”

23 2-23 Culture Change: The Leader Builds the “case for change”, acts as the conscience for founding family values and establishes a sense of urgency Communicates the customer-based vision and strategies to the entire organization and repeats the message Recognizes that cultural change takes time yet acts with speed Takes actions and behaves consistently with the message: “walks the talk”

24 2-24 Guy Renkert, CEO, Ironrock Capital “I unwound the Advisory Board that my sister had created, both my parents retired from the board and I added three independents to it.” “I also make presentations to shareholders, communicate my enthusiasm about the new strategy and maintain their trust.” “More so than my sister I spend plenty of time talking to the employees because ultimately we are a manufacturing company and breaking down barriers in manufacturing is essential.”

25 2-25 Next-Generation Partnership The next generation:  Provides the customer-driven vision that promotes innovation and regenerates the company  Creates a partnership with: Other family members through the family council, family meetings, shareholder meetings and hundreds of informal conversations that inform and educate Key nonfamily management through top management team, operating committees, etc. Boards of directors New members of the ever-changing supply chain  Engage in a lifelong journey of preparation for leadership rather than “rushing to the Presidency,” and then act as stewards of the family and its wealth

26 2-26 Incumbent Generation Leadership Keeps the business healthy and successful Builds the institutions that will effectively govern the family- business interaction: strong board, family meetings, key nonfamily employees in top management, equity structure that facilitates control, and buy–sell agreements In effect “cleans house for the next generation” before… Transferring power (with customers, suppliers, employees) while in full command of the corporation This then allows the next generation to focus on the future, not on the past

27 2-27 In Conclusion The first part of the centennial family company story is about competitiveness and adaptation  “The only disagreement worth having in the family business is one over the strategy of the firm and its adaptive capacity: product, service, customer, innovation, values. Fights over dividends, salaries, perks, even the presidency, represent zero-sum dynamics that end with everyone losing. Keeping the business growing and providing career opportunities for family and nonfamily employees, is at the heart of the positive-sum dynamic required for continuity.” The second part of the story is about commitment by shareholders to govern themselves on behalf of continued ownership and control  “Communications, information and engagement that promote family unity and a positive family-business interaction are central to shareholder commitment, and the patient capital resource that allows family companies to deploy unique long-term strategies based on unique competitive advantages.” Finally, centennial family companies have learned to manage change in order to continue to realize the value of their unique competitive advantages and to govern the family-business interaction through:  Hiring and retaining nonfamily employees in top management  Business and strategic planning processes  Extensive communication using family councils and family meetings  An equity structure appropriate to continued control by family members  Influential and independent boards

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