Like it or not, our world is changing. And nowadays, it is not just incremental change. According to Professor Albrecht Enders, the world is in an era of disruptive change – significant shocks that disrupt the status quo – and it is not just the magnitude of change that is notable but also the speed at which it is happening. New competitors, typically from outside traditional industries, and new dimensions of value creation are challenging established players who cling to old habits. When change is viewed as an opportunity, companies are more flexible. But the moment change is viewed as a threat, their vision narrows.
A poll of event participants indicated that family businesses have some pluses and minuses when it comes to taking on the significant risks associated with discontinuous change. According to Lisa Whitsell, president and owner of Whitsell Consulting,1 “Fear can hold family businesses back – fear of losing everything and not leaving anything behind for the next generation.” Others mentioned lack of resources, loss of identity, deep-rooted cultures and family values as standing in the way of change. On the flip side, however, many pointed to the pluses family businesses have – a long-term commitment, less hierarchy and the speed of implementation. As Jean Monney, founder, CEO and chairman of Laurastar,2 put it, “We don’t have the deep pockets of bigger corporations but we do have agility on our side.”
While some research has shown that, overall, family businesses outperform their non-family rivals, they operate in a much more complex environment. Stories abound of the struggles that family businesses face over their life cycle – succession, governance and strategy have all taken center stage. More recently, the role of corporate culture, philanthropy and the family office have had their turn in the spotlight. But as Professor Joachim Schwass explained, it is internal transitions from generation to generation that present the biggest challenge. Understandably, generational changes are extraordinarily difficult to plan for, but if you do not plan, the results can be disastrous.
In order to succeed in the face of the phenomenal change the world is experiencing, family businesses need total clarity on three dimensions – family, ownership and business. There are many options and no easy answers. But it is essential that there is clarity on: who is family and how far the family tree will extend; ownership and whether it will be concentrated among a few or diluted among many; and the business and whether it will be focused or diversified, private or public. And each generation must be given the space to define their future in their own time. Above all, a mindset that accepts dichotomies, such as finding the balance between tradition and innovation, values and profit, short-term and long-term views, and the like will help family businesses obtain harmonious solutions in the face of difficult choices.
In the following examples, we will explore from different angles (family, ownership, business) how firms in Europe and India have driven a strong agenda for change against a backdrop of tradition.
Torres: Propelling the business through sustainability
Sustainability has long been a hot topic on the corporate agendas of many businesses, but few companies have taken it as far as family-owned Torres, the leading Spanish wine producer. Devoted to vine-growing and wine culture for generations, the Torres family has always held respect for nature as one of its main priorities. After all, good land and climatic conditions are essential for good quality wine. However, a turning point came when Miguel Torres, the company’s president and CEO, saw Al Gore’s 2006 documentary film on climate change – An Inconvenient Truth. Rather than saying, “It’s not my problem,” Miguel felt that it was his problem and he could do something about it. While sustainability had been a classic value of the company, he went a step further in combining extreme external change with extreme internal action. He convinced his board to turbo-charge the company’s efforts in sustainability with a commitment to invest some €10 million.
Miguel believes that customers buy Torres wines because of what the company stands for. He also believes that the more it cares for the earth, the better its wines will be. As a result, the company lives and breathes sustainability: It practices balanced viticulture – all wastewater is purified, and it actively participates in the conservation and replanting of regional forests as well as preservation activities in Spain and Chile. To lessen the effects of climate change, the company is investing in renewable energies (solar panels and wind parks) and hybrid cars, and it is also studying the exploitation of vineyard and forest biomass.
Nowadays, Miguel’s main concern is keeping the family together. As Professor Benoît Leleux explained, this is a cause of concern for many family businesses, since family splits are often the root cause of many family business failures. The opposite is also true – if the business goes wrong, the family goes wrong. But Miguel is convinced that the family’s long-term devotion to sustainability will be the legacy that will hold the family together for generations to come.
Sula wines: Family backing to create a new world
Imagine creating a world-class wine organization in a country with no tradition of wine making and the highest level of non-drinkers in the world. Rajeev Samant, the son of an Indian shipbuilding family, did just that. He claims he did not have a choice because his father said that there was room for only one child in the business – Rajeev’s brother. But his father did agree to partially financially back him in whatever he wanted to do.
Though no formal market research was done, Rajeev saw a trend toward wine consumption in every country in Southeast Asia. So, knowing absolutely nothing about it, he chose to go into the business of making wine. As he set about pursuing his goal, he had to overcome a number of obstacles along the way – attracting additional financing, influencing policy, persuading farmers to grow his vines, attracting top talent, creating a distribution chain from scratch, changing people’s perceptions about wine and creating a market for good wine. While the first four or five years were a struggle, things got easier after that. By 2005, Sula wines were well known in India, particularly among young urban women who had been convinced that moderate wine consumption is good for the health and consequently the old taboos surrounding alcohol were being put aside.
Today, Rajeev believes that the company has only seen the tip of the iceberg. India still has the lowest per capita consumption of wine in the non-Islamic world, so Rajeev plans to climb the quality ladder in terms of his wine over the next five years and grow the company at a rate of 47% per year in a market that is growing at 20% per year. Through an often-difficult process of trial and error, he has developed a vision that will surely leave a deep cultural imprint as the winery continues to grow. But as Professor Anand Narasimhan pointed out, perhaps starting up Sula Vineyards was the easiest step for Rajeev in the evolution of a family business, which goes from entrepreneurship to family business to family office to the entrepreneurship of the next generation. While Rajeev is still busy building his business, eventually he will have to face the issues that many entrepreneurs grapple with as they evolve – ownership, control, diversification and succession.
We have explored the stories behind family businesses at various stages of their evolution – the tightly held family business, the family-controlled con-glomerate, the generational challenges of Chinese family businesses, the venture philanthropist and the next generation coming full circle and starting his own entrepreneurial venture. Each one tells the story of family businesses that are adapting to the changes taking place in the world and seizing the opportunities those changes present. Though the context is different in each case, the fundamental issue – the value exchange between family and business – remains the same. What comes naturally for the entrepreneur needs to be understood and planned for in the following generations. IMD family business research highlights the importance of each generation explicitly addressing three questions:
- Who are we? (What is our DNA, what are our strengths and weaknesses?)
- What do we want? (What is our ownership vision for our generation?)
- How will we decide? (Do we have transparent and respected governance structures for the family, for the ownership and for the business?
Family businesses are ideally placed to create strong and sustainable value for their stakeholders and for society, but as Professor Schwass stresses, clarity on family, ownership and business and a mindset that accepts dichotomies are key if they are to remain at the forefront of global change.