Ernesto J Poza is Professor of Family Business and Director of the Partnership with Family Business at Case Western Reserve University (USA). He consults and serves on the boards of sseveral family companies in the US, Latin America and Europe.
With a comprehensive business plan, the backing of their shareholders and a will to travel, there is no reason that family businesses should not be embracing business expansion outside their domestic market
Intergenerational entrepreneurial activity, interpreneurship, keeps the family-controlled company young and provides opportunities for next generation members to be entrepreneurs too. Intergenerational growth through entrepreneurial activity also improves the odds that the family enterprise will continue across generations. Interpreneurship is often driven by new products, product line extensions, and new markets for existing products, often found in new global opportunities.
Global growth opportunities
There is no question that the future holds many growth opportunities in markets other than a family company's domestic market. Family companies have often been reluctant to grow by going overseas out of yet another expression of conservative fiscal management and a propensity for risk-avoidance.
True, other than in select open economies, there has not been a compelling rationale for going global. In many countries in Latin America, Europe, the Middle East, and Asia, business risk was more easily managed by growing diversification of the enterprise domestically than by going overseas. The fact that the business-owning families had an established reputation in the local market, access to skilled non-family managers well versed in other industries, and good relationships with the government, meant that diversification in the somewhat protected market was a lower-risk growth option.
As local economies have been opening up to global trade, some of those diversification opportunities no longer seem as compelling. In Chile, for instance, a fast-tracked opening of the local economy to global trade in the 1980s produced significant restructuring of the economy. Many family companies closed down, unable to compete with global competitors. Others that either already enjoyed relative advantages in the world stage, or began then to pursue comparative competitive advantages, thrived. A similar process took place in Mexico in the 1990s, with widely diversified 'Grupos' selling entire companies or divisions to foreign global competitors at the same time that they redeployed assets to businesses where they continued to enjoy comparative advantages following the North American Free Trade Agreement.
In the US, the large size and opportunity of the domestic market and a tendency towards risk-avoidance has also put the brakes on much growth overseas except by the very large and professionally managed family companies such as Bechtel, SC Johnson, Mars, Marriott, Cargill and Ford.
Other companies have grown comfortable with the global expansion opportunity by seeking other family companies as partners in foreign countries. These partners for new ventures are families they may have known for years in a more social, personal context. For example, being friends with and collaborating on some pilot tree farm projects over the years with a business family in Chile, Simpson Investments of Seattle, Washington decided to partner and invest in a US$100 million pulp mill operation in southern Chile.
While expansion overseas will very likely be a more compelling growth opportunity for family companies in the future, the management of risk will continue to be an important agenda. After all, family companies are constantly facing the capital for growth versus liquidity needs of shareholders dilemma.
Guidelines for global success
Develop a business plan
Develop a thorough business plan for the new global opportunity and eloquently build a case for it. Unless you can convince other family members on the merits for expansion and give them some parameters for measuring progress against the plan, growing globally is understandably seen as risky by shareholders.
Abandon the myth that the company can exercise managerial control remotely through sophisticated financial information and control systems. When it comes to foreign operations, there really is no substitute for being there. Different reporting practices, cultures, competitive dynamics, compensation and incentives, even general business practices, render management by detecting financial variances, useless. It often amounts to too little, too late. Direct involvement by expatriate managers in the early years has been shown to improve the financial performance of foreign subsidiaries.
Invest in the brand
Whatever reputation the brand has in the home country is often irrelevant in the new marketplace. Discard the assumptions embedded in the marketing strategies of a power brand when planning your marketing strategy for the new country. Often brand equity has to be created from scratch, with a healthy dosage of listening to the local customer, quality, product differentiation, exceptional service and advertising. Sony, although not a family company, is a great example of the importance of the brand equity imperative to family companies going global. Akio Morita, during one of his first trips to the US representing Sony, turned down an order from Bulova Watch's purchasing agent because the agent insisted that the transistor radios be branded Bulova. To his board members' consternation, who advised him to take the order, Mr Morita turned down the huge Bulova order and instead committed to several smaller purchase orders by retailers where the radios would be branded Sony. Sony was an unknown brand in the US then. But the Sony name would not remain unknown for long. Years later, Akio Morita celebrated this decision as the best one taken during his long and successful career at Sony.
Most intangible corporate assets or sources of value, such as brand equity, caring and skilled employees, committed ownership, are harder to replicate than other competitive strategies. They often serve family businesses well in shaping competitive strategies for the foreign subsidiaries.
Manage by travel
It is a sound practice when growing globally. Meeting government leaders, as well as foreign subsidiary employees and the leaders of the competition provides much intelligence on the appropriate adaptation of strategies for the local market. Marriott family members and other Marriott non-family top management travel to overseas operations often and manage the risk of distance by adding some personal proximity to their global management portfolio.
Establish local advisory boards
This facilitates the entry into new markets and helps the global company adapt to the local culture, to peculiar regulations, and unique competitive dynamics. It also helps it develop local high-influence networks. Local boards establish a committed and trustworthy relationship which differentiates your company from the often larger, management-controlled firms and the more contractual relationships they use when expanding overseas. SC Johnson, a family company has boards of directors with independent outsiders in most of the countries in which it operates. SC Johnson recruits smart, well-networked, prominent business, academic and society leaders to help them review, customise and infuse strategies and practices with local content.
Selling the product overseas, with the assistance of a foreign sales representative, for instance, is far less risky than establishing distribution and production facilities. Sales also help gauge the market opportunity. If greater involvement is warranted because of market demand and cost or skill-based opportunities in the new country, your company can still outsource distribution and manufacturing to a joint venture partner first, before making the larger commitment to a sales force, and company-owned distribution and manufacturing facilities. When seeking these partners, search for other family businesses. Family businesses, even from different cultures, share much common ground and are more likely to understand and respect one another as allies.
Positive sum dynamics
Family companies moving across generations are particularly vulnerable to what economists call zero-sum dynamics and behavioural scientists often refer to as 'tit for tat'. Generally, this means that in the absence of growth or the perception of business opportunity in the future, there is a great propensity to see winning only as the result of defeating someone else. In family companies, of course, that someone else is often a relative – the next generation successor who patiently waits, the other branch of the family that has none of its nuclear family members in the management of the enterprise, the cousin who is an impractical and incurable romantic.
But there is no reason why one person or generation or branch's gain has to come at the expense of another's. That is, if the enterprise is growing. Because there is plenty of evidence that in the absence of growth both the perception of opportunity and the sense of family harmony suffer, often leading to turf battles, blaming and a general sense of inequity.
Research is showing that family unity and business opportunity (for employment, career, and other forms of participation) are good predictors of the increased use of managerial and governance practices that are highly correlated with family business continuity.
These practices include:
- strategic planning that promotes growth opportunities,
- boards with independent outsiders,
- family councils,
- key non-family management in the top management team and
- estate planning that promotes business agility in the succeeding generation.
Critical role of the next generation
Next generation members in a family company represent an important asset in the global growth and adaptation of the business to new competitive conditions. Hypercompetitive markets and the accelerating speed of change demand these capabilities. And in pursuing global opportunities, next generation members can also be contributors to the creation of loyalty and goodwill rooted in new opportunities for shareholders and family members to participate in the enterprise, whether as employees, board members or philanthropic leaders.
Patricia Botin, of the Banco Santander Central Hispano in Spain, thrust the financial group into accelerated growth via acquisitions throughout Latin America. Many analysts and reporters criticised the speed, magnitude and cost of the strategy. But there is no question that the acquisitions made BSCH a global powerhouse. Looking at her efforts on behalf of global growth with a long term perspective, the patient capital perspective that many family-controlled companies enjoy, one has to admire her ability to lead the charge, maintain shareholder relations and eventually deliver the profits.
When it comes to succeeding in the globally competitive environment, next generation members have to be leaders of change, they have to promote dissatisfaction with the status quo (that is, build the case for going global) and communicate a vision of a better future ahead (that includes the global expansion). A business plan for the new overseas opportunity is a great vehicle for doing this. When it comes to shareholders and family, next generation leaders have to promote patience while accommodating the growing diversity of preferences among members of a wealthy family. Only then can they inspire common ground and build shareholder loyalty.
Next generation leaders need to understand, first hand, the value to the extended family of helping the business family also achieve its non-economic goals as the company goes global. Next generation leaders have to craft their own approach to meeting both economic and non-economic family goals. (This is much like at the firm level managers have learned to both improve productivity and employee satisfaction in the workplace or at the country level governments are learning to promote economic growth and simultaneously improve the quality of the environment.) It is a huge assignment but one that many next generation members experience as their calling, their very personal and unique way to create value and make a difference in their lifetime.