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Managing

Family Businesses

Edited by
Rajendar Singh Rathore
Icfai Business School Case Development Centre
Icfai Books
# 71, Nagarjuna Hills,
Punjagutta, Hyderabad – 500082
Andhra Pradesh, INDIA
Phone: 91 - 40 - 23435387/91, Fax: 91 - 40 - 23435386
e-mail: icfaibooks@icfai.org, ibscdc@icfai.org
Website: www.books.iupindia.org, www.ibscdc.org

© 2008 The Institute of Chartered Financial Analysts of India. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, used in a


spreadsheet, or transmitted in any form or by any means – electronic, mechanical,
photocopying or otherwise – without prior permission in writing from The Institute of
Chartered Financial Analysts of India.

While every care has been taken to avoid errors and omissions, this book is being
sold on the condition and understanding that the information given in the book is
merely for reference and must not be taken as having authority of or being binding in
any way on the authors, editors, publisher or sellers.

Product or corporate names may be registered trademarks. These are used in the
book only for the purpose of identification and explanation, without intent to infringe.

Case studies are intended to be used as a basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation.

Copies of individual case studies are available for purchase from www.ibscdc.org

ISBN: 978-81-314-1482-8

Editorial Team: Devi Rajnikanth and Lalitha Jayaprakash


Cover Page Artist: Romi
Designer: P. Damodara Siva Prasad
Contents

Leadership and the Family Business


Areas of Consideration for the Effective Executive
1–10

Interview with John A. Davis

11–16

Understanding Family Business Dynamics


The Strategic Issues
17–24

Family Business
Growth Intelligence?
25–32

Interview with Prof. Kelin E. Gersick

33–38

Family Business Solutions


Transitions in Management Succession Planning
39–56
Case Study
Nordstrom
The Fourth Generation Expansion Strategies
57–64

Estée Lauder Case Study

The Family-Owned Cosmetic Manufacturer’s


Growth Strategies 65–82

Case Study
The Reliance Group Split-up
What Went Wrong with the Indian Conglomerate?
83–93
P R E L U D E
When “Family Business” (starring Sean Connery, Dustin Hoffman and
Matthew Broderick) was released on December 15th 1989, it carried a
tagline, “There’s nothing like a good robbery... to bring a family together.”
Hollywood’s another blockbuster, “Godfather” (released in 1972) also
reflects what happens in a ‘family’ business. The games continue with
different players. Coaches? The parents. Umpires? No. They wish rather
to build empires without umpires. The rules of the game? Self-made. The
issues involved in managing a family are
“Succession, wealth
multi-fold. Succession, wealth management and
management and governance are three governance are three
very important issues concerning family very important issues
concerning family
businesses. Fewer than one in three businesses.”
survives to the second generation.
Family businesses are primarily of two different types. The first type is a business
having only the family members as principals as well as agents. Outsiders are
suspected and sullied. Generally, these types of companies do not see exceptional
growth. Not that they cannot. Rather, they do not wish to. Why do they wish
not to grow? It’s a trade-off. The conscious choice made seems to be in favour
of remaining small for fear of dilution of control. No one buys Henri Fayol’s
‘subordination of individual interest to general interest’ principle. Avedis Zildjian
Co. (1623), Laird & Co. (1780), George Ruhl & Sons (1789), Loane Bros.
(1815), Bevin Brothers Manufacturing Co. (1832), Antoine’s Restaurant
(1840), Verdin Co. (1842), Baumann Safe Co.(1843), AE Schmidt (1850)
and Hicks Nurseries (1853). What are these 10 companies known for? These
are the 10 oldest surviving family businesses in the US. The parenthesis indicates
the year in which each of these companies was founded. Today, on an average,
fifth-generation descendants run each of these businesses. Aren’t they obscure?
That’s the choice made.
The second type of business is where a family has a majority stake and
therefore controlling power over the company. Wal-Mart, Fiat, Cargill,
Ford, News Corp., Hyundai, Nike, Viacom, Virgin, Reliance Industries,
WIPRO, etc., are companies with a predominance of family ownership.
Managing these companies is a daunting task. The principal-agent
relationship makes the job of a CEO really challenging. The Economist
(March 15th 2007) observed, “The “The late Alex Trotman, who
late Alex Trotman, who held the top held the top job at Ford in
job at Ford in 1993–1998, used to 1993–1998, used to say that
to be successful, the boss of
say that to be successful, the boss of Ford needs to manage the
Ford needs to manage the family as family as well as the
well as the company.” company.”

Of late, quite a few positive changes are noticed in many family businesses.
Having a ‘constitution’ or a family governance system is by far the most
important step in this direction. In their book, Practical Strategy for Family
Business, authors Michael K. Allio and Robert J. Allio highlight five virtues
and five vices of family businesses. The five virtues identified are loyalty,
deep pockets for growth, focus, speed and follow through. Blind loyalty,
tunnel vision, good $ after bad, impulsiveness and tactics are the five vices of
family businesses according to the authors. However, the importance of
family businesses cannot be discounted. The findings of the University of
Southern Maine’s Institute for Family-Owned Business are quite revealing:
some 35% of Fortune 500 companies are family-controlled. Family
businesses account for 50% of US’ GDP. They generate 60% of the country’s
employment and 78% of all new job creation.

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