Family business , the global growth driver

Family business - the global growth driver

Table of Contents

1. Prologue

2. Complexities and issues of family business        The Three Cycle Model        Life Cycle Diagram

3. Why are family enterprises successful?

4. Top five of world’s largest family owned companies           #Walmart           #Volkswagen           #Berkshire Hathway           #Exor           #Ford

Prologue

Family businesses are biggest mover of global economy. Rapid industrialization and liberalization has given growth opportunities to all types of businesses.  From Mom-Pop shops to big firms, family owned business has taken the most of the space, contributing 70-90 % of GDP and providing 50-80% of employment in most countries ¹. Globally, two-third of all business is from family owned firms and if indirect control is taken into consideration 90 % of all establishments would end up within the definition of family enterprise. 

Cargill is said to be the largest privately owned enterprise with $ 135 billion in revenues. Though Walmart is a publicly traded company, the controlling stake is with the Walton family who possess about 50 % of the shares ². According to Guinness Book of World Record, Houshi Ryokan, a Japanese inn is the oldest family owned business, with history since AD 717 ³.

In India, 90% of gross industry output is from family businesses and accounts for 2/3^rd of the country’s GDP ¹.

A family business is a commercial organization in which not only ownership is held by family members related by blood or marriage but decision-making and leadership is also influenced by the family.

A family enterprise takes the definition ahead to include assets as financial, real estate,heirloom and philanthropic.

Broadly there are three types of family business:

Owned by	Led by	Managed by	Generally covers
Family	Family members	Family members	Small stores, cottage and small scale production, trading business,
Family	Family members	Professionals	Medium and large scale
Family	Professionals	Professionals	Large scale, MNCs,

Complexities and issues of family business

THREE CIRCLE MODEL

While discussing family business, the Three-Circle Model needs a mention. The model was first published in the Family Business Review in 1982 in Taguiri and Davis’ classic article “Bivalent Attributes of the Family Firm.” Prior to this model the focus was on the business and family. The third aspect of ownership was not given importance. This model removed the ambiguity and interdependent relationship between family, business and ownership was established , illustrating the advantages and issues.

Each zone represents the rights and roles of a person related to the business, the family or non-family member.

FAMILY CIRCLE         Adopted or born as a member of the family,

Married to a member of the business owning family

BUSINESS CIRCLE    Consultant to the family business

Paid employee

OWNERSHIP             Owns shares in the company correct

Own preferred shares in the company

Serves as trustee of a trust which owns shares in the company

Beneficiary of a trust which own shares in the company

Ownership Circle Issues

1. Common ownership vision and goals

2. Policies of sharing of returns of ownership of business

3. Issues of trust and control between members of family

4. Dynamics of shareholders and shareholding

5. Education level of owners

6. Difference in management goals between generations of family

7. Position of members in the firm and those moving in or out of active participation in the operation of the firm

8. Entry and exit of family members from operations

9. Growth plans and liquidity

Family Circle Issues

1. Common values

2. Effective cohesion

3. Rivalry between members of family

4. Favoritism towards members of family

5. Negative and positive communication. How to hear everybody in the family ?

6. Entitlement of members and their participation in business

7. Breakage in relationship in family by the way of divorce and marriage

8. Family leadership

9. Managing conflict between members

Business Circle Issues

1. Clarity of role in the business

2. Compensation to members the family

3. Performance issues of members who are in operations

4. Functioning and composition of board of directors

5. Balancing personal and business

6. Evolution of Leadership

7. Difference in management goals between generations of family

8. Risk appetite and goals of members and balancing of the decisions

9. Tolerance of risk

10 Collective goals and vision

Please read further on the subject at http://johndavis.com/three-circle-model-family-business-system/

LIFE CYCLE DIAGRAM

Another important model for understanding family business and its attributes is the Life Cycle Diagram. This diagram represents the life cycle experience that business families go through. Manfred F. R. Kets de Vries and Randel S. Carlock with Elizabeth Florent-Treacy explains it in their book ‘FAMILY BUSINESS ON THE COUCH - A Psychological Perspective’ :

Why are family enterprises successful?

Around the world family enterprises compete with non-family owned business and large corporations. Various studies and research have revealed that family enterprises return more to shareholders over a period of time in comparison to non-family businesses.

Danny Miller & Isabelle Le Breton in their book ‘Managing for the Long Run’, identified four C’s ⁴:

1. Continuity – Family business invest for the long run. They do not adopt short term tactic, instead opt for firm’s long term survivability and continuity.

2. Connections - A family has open minded and collaborative relationship with suppliers and customers much beyond the contractual transaction based relationship of non-family business. Business world has been witness to many instances of extension of co-operation by means of funds and resources between family businesses and suppliers.

3. Community - A family is more cohesive and collaborative to workforce. Family businesses have a better connection and relationship with their employees, who share the strong values of the employers.

4. Command - They have command and control and can take action swiftly. Leaders of family enterprises are much more independent and are able to take business decisions without worrying about aligning with shareholders.

These are the four competitive advantages of family owned businesses.

Top five of world’s most successful family business

Founder, Sam Walton started his first Walmart store in 1962 at the age of 44 in Rogers, Arkansas with a strategy of offering lower prices and great service. Within 5 years Walton family had 24 stores and annual revenue of $ 12.70 million. The family incorporated itself in 1969 as Wal-Mart Stores, Inc. and the next year became a publicly traded company. By early 80's, Walmart has reached $1 billion in annual sales from 276 stores.

It may be surprising to know, that Walmart in 1987 installed the largest private satellite communication system in the U.S., linking the company's operations through voice, data and video communication.

Its first venture outside US was in Mexico in 1991 in collaboration with Cifra, a Mexican retail company. Sam Walton passed away in 1992, leaving behind 1928 stores with 371,000 employees. From 1994 Walmart started expanding to other countries, Canada, followed by China in 1996 and UK in 1998 ⁵.

Currently it operates in 27 countries and its last reported revenue is $ 486 billion and is ranked # 1 in Fortune Global 500 - 2017 list.

Volkswagen Group is a German automobile giant, the largest automobile makers in the world, with operations in 153 countries.

Volkswagen was founded in 1937, to manufacture the car which would become known as the Beetle. During WWII the company was into manufacturing military vehicles and weapons. Production grew rapidly in the 1950s and 1960s, and in 1965 launched the first post-war Audi models and in the 70s, models including the Passat, Polo and Golf were introduced. Volkswagen acquired SEAT in 1986 and Škoda in 1994. It launched lines as Bentley, Lamborghini and Bugatti in 1998, Scania in 2008 and Ducati, MAN and Porsche in 2012. China has become its largest market.

Porsche Automobil Holding SE holds around 53 % of the shares in Volkswagen. Porsche SE is a German holding company belonging to Porsche and Piëch families ⁶.

It is ranked # 6 in Fortune Global 500 - 2017 list with revenue of $ 240 billion.

Berkshire Hathway is led by famed investor, Warren E. Buffett and is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. It wholly owns GEICO, Dairy Queen, BNSF Railway, Lubrizol, among others and owns 38.6% of Pilot Flying J and 26.7% of the Kraft Heinz Company. It also has minority but substantial shares of American Express (17.15%), Coca Cola (9.4%), Wells Fargo  (9.9%), IBM (6.9%), and Apple (2.5%). The company has acquired in the last two years large holdings in the major US airline carriers, and is currently the largest shareholder in United Airlines and Delta Air Lines, and a top three shareholder in Southwest Airlines and American Airlines. 

Its portfolio of approximately $ 620 million now spans across confectionery, retail, railroads, home furnishings, encyclopedias, manufacturers of vacuum cleaners, jewelry sales, newspaper publishing, manufacture and distribution of uniforms, and several regional electric and gas utilities.

It is ranked # 8 in Fortune Global 500 - 2017 list with revenue of $ 224 billion.

Exor N.V. is a leading investment company, incorporated in The Netherlands and controlled by Italy's Agnelli/Elkann family with a history of investments running over a century and currently having a net asset value of around $ 17 billion.

It has substantial holding in finest of companies in different sectors, prominently among them are:

Partner Re Ltd                          Insurance company         100.00 %,  

Fiat Chrysler Automobiles          Automobiles                     29.23 %,

CNH Industrial,                        Capital goods                    26.90 %,

Ferrari                                     Automobiles                      22.91 %,

The Economist group                Media                               43.40 %,

Juventus F.C.                           Soccer club                       63.77 %

Its illustrious history starts in 1899, when Giovanni Agnelli with some other entrepreneurs founded the Fabbrica Italiana Automobili Torino (FIAT) ⁷.

It is ranked 20^th in Fortune Global 500 list of 2017 with revenue of $ 155 billion.

The Ford Motor Company is an American multinational automaker headquartered in Michigan. The company’s major shareholder is the Ford family. Its’ founder was Henry Ford and the company was incorporated in 1903. Under Henry Ford, the company adopted and refined Assembly line concept of mass production. Initially he procured automobile parts from different vendors under contracts but vertically integrated into in-house parts production later. His contributed towards mass production through moving assembly line is well documented and acknowledged, a system adopted by rest of the world through-out 40s, to 60s. Its' most successful model was Model T, millions of which were sold in two decades till 1927, when it was replaced by another model. In 1922, the firm took over Lincoln Motor Company to enter the luxury segment. By the end of 20^th century, Ford has launched various models, some of them turned out to be iconic brands, as Ford Mustang. Luxury car makers Jaguar and Aston Martin came under the belt in first half of last decade.

Between, 2001 to 2005, the company came under pressure from declining sales, inflated cost, high incentives and low margin, to a point where they nearly went bankrupt. However, able leadership of William Clay Ford Jr with financial restructuring, cost reduction, layoffs and asset dilutions, saw them through. Jaguar and Land Rover were sold to Tata Motors in 2008 and Ford’s subsidiary company Hertz Rent-a-Car to private players.  Various non-core operations were also shaved off.

Ford currently has operations and manufacturing facilities in the United States, Canada, Mexico, China, UK, Germany, Turkey, Brazil, Argentina, Australia, and South Africa.

Ford ranks # 21 in Fortune Global 500 list of 2017, with revenue of $ 152 billion and profit of $ 4.60 billion.

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Bibliography :

1.http://www.ffi.org/page/globaldatapoints

2.Profile of Walton family - https://www.forbes.com/profile/walton-1/

3.http://www.guinnessworldrecords.com/search/applicationrecordsearch?term=oldest+family&contentType=record

4.https://hbswk.hbs.edu/archive/leveraging-the-mission-in-family-business

5. https://corporate.walmart.com/our-story/our-history

6. https://en.wikipedia.org/wiki/Volkswagen_Group

7. http://www.exor.com

Vinay Pandey, 08/12/2017

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