Family Business -an Important, Developing Field of Research

Appendix A: Family Business -an Important, Developing Field of Research

The academic world of family business is fascinating in a number of respects. Firstly, it is one of the youngest academic disciplines. It was launched in the 1980s in the United States and eventually migrated to Europe as a serious research topic by the end of the 1980s. What is fascinating about this late emergence as an academic field is the fact that family businesses, without doubt, are the oldest form of business organization. Family businesses can be traced back over 2,000 years: Jesus Christ was mentioned as having worked in his father's family business.

The oldest surviving family businesses are found in Japan: a cabinet-making family firm founded in the sixth century, Kongo Gumi, and the Hoshi Hotel, founded in 718 and still owned and managed by the 46th generation of direct descendants of the founding family. The latter is part of "The Henokians", a Paris, France, based association of about 30 family businesses over 200 years old. To belong to this exclusive club, the family business must be majority owned and managed by descendants of the founding family and the business must be financially sound. It is noteworthy that a large proportion of the members are active in wine and spirit making. The attachment of families to property is a common trait of many of the oldest surviving family businesses.

On the one hand the family business is the oldest form of corporate organization; on the other, it is a very young academic discipline. Why has comprehensive research into family businesses only recently begun?

One answer may be that the academic world's traditional deep specialization is not adapted to the needs of interdisciplinary fields. And this is precisely what family business research needs, an interdisciplinary approach which encompasses a number of disciplines: general management, ownership, leadership, sociology, psychology, anthropology - the list is exhaustive. Another way of stating the problem is that family businesses need the understanding of the "softer" dimension of the "family" system on the one hand, and the "harder" dimension of the "business" system, on the other. Linking those two contrary structures is by no means an automatic or easy process. In fact, it took- and still does- market driven initiatives to create the base for comprehensive research on an interdisciplinary approach. There are many examples of both US- and European-based academic research centres and chairs which were launched as the result of family business financial endowments and gifts. The family business research and educational activities at IMD were made possible in 1988 by the endowment of Stephan Schmidheiny, a well-known Swiss family business entrepreneur. Subsequently, Thierry Lombard, of the 200-year-old private bank Lombard Odier Darier Hentsch in Geneva, initiated the creation of the dedicated Family Business Research Center at IMD. In the US, most of the over 100 family business centres carry the names of the family businesses that provided the initial financial sponsorship.

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A second reason why there is only recent research may be found in family businesses themselves. Family businesses are typically very discreet - if not secretive. Few family businesses have allowed outsiders to study them, especially in regard to the interaction between the separate realms of the family and the business. This aversion to openness and transparency has discouraged many research efforts and made it more difficult to create a systematic analysis of success strategies, in particular.

The third fascinating characteristic of family businesses is their enormous macroeconomic importance. Their importance is undisputed whichever definition of family business is adopted. So far, there is no commonly accepted and agreed upon definition of who qualifies as a family business. Most definitions focus on a quantitative ownership approach, linking a given family to a controlling ownership stake. A more realistic approach reduces the weight of the quantifiable ownership in favour of the qualitative element of the family influence over the business, especially for its future orientation. This more qualitative approach means that the family plays a key role - directly or indirectly- in appointing the CEO. Family businesses do not require absolute ownership control in order to be able to select the CEO.

When this broader definition of family business is adopted, surveys conducted in a number of countries indicate that typically family businesses represent the largest percentage of all registered companies, from just over half in the Netherlands to almost all in Italy. While these numbers are impressive, one real indicator of the strength of family businesses is measured by their contribution to the gross national product (GNP) which is estimated at 45-70 per cent. Another is their contribution to the rate of employment of the overall workforce. A major turning point for the recognition of family business importance came in May 2000, when the European Community officially, and for the first time, published their findings, whereby European family businesses employed 45 million workers.

The fourth fascinating characteristic of family businesses is that not only are they significant contributors to national economies, but they also tend to outperform other forms of corporate organizations. In 2003, the Journal of Finance published a research study that indicated that family businesses are clearly more profitable than publicly traded corporations. Several earlier studies have also pointed in this direction.

Combining the element of significant macroeconomic importance with the superior competitive performance of family businesses leads to an increasing level of interest in the strengths of this particular form of business organization. One barometer for this is the strong annual increase in the number of research papers presented at the Annual World Conference of the Family Business Network (FBN), the world's premier association of family businesses.

Appendix B: Distinguished Family Business Award

IMD, in partnership with Lombard Odier Darier Hentsch, awards the Distinguished Family Business Award.

The award was created in 1996 in order to meet the following objectives:

To highlight the important global economic contribution of family businesses To recognize, annually, an outstanding company which has successfully blended family and business interests To identify best practices which may be useful to other family businesses.

A distinguished award committee was formed in order to first nominate and then select the annual award-winner. This committee is comprised of over 20 leading family business owners and academics from all over the world.

At the beginning of each year, the committee members nominate candidates which follow these criteria:

1. To have reached at least the third generation of family ownership and management

2. To have achieved a solid long-term record of financial performance and stability

3. To produce products which are market leaders and respected in their industry segment

4. To have established and maintained an effective governance system 5. To be an international business 6. To have effectively linked tradition and innovation 7. To have demonstrated good corporate citizenship by making a social

contribution to the communities within which it operates.

The nominated firms are submitted to a rigorous in-depth analysis with respect to their qualification for each of the seven criteria. This research is conducted by the IMD family business research team. The research team also draws on qualified outside evaluations and opinions. The award committee has the final word on the selection of the annual award-winner. The process is conducted independent of the IMD President and the Lombard Odier Darier Hentsch Managing Partners.

The award winners are announced each year at the gala dinner of the Annual Family Business Network World Conference. This is the most respected annual educational and networking event for leading family businesses from all over the world. The award winner receives a trophy which is crafted by Chopard of Geneva, a family-owned and managed luxury watch and jewellery firm. A presentation of the winning family business precedes a plenary interview with delegates from

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the family business. An in-depth article explaining the historic evolution of the award winner is usually broadly published.

Distinguished Family Business Award Winners -1996-2004

1996 Lego Group, Denmark 1997 Hermes SA, France 1998 Corporacion Puig, Spain 1999 Henkel Group, Germany 2000 Zegna Group, Italy 2001 Murugappa Group, India 2002 Samuel C. Johnson Family Enterprises, US 2003 Bonnier Group, Sweden 2004 Barilla Group, Italy

Appendix C: The Articles on the Nine Award-Winning Family Businesses

The following articles were published in the year of the respective award.

~ IM) The LEGO Group

IMD Distinguished Family Business Award Winner 1996 By Jonathan Pellegrin, Executive-in-Residence, Family Business Area at IMD

Founded in 1932, the LEGO Group, with close to 9,000 employees all over the world, has consistently blended business and family interests successfully. There are many lessons family businesses can learn through reviewing the following best practices identified by IMD's Distinguished Family Business Award selection panel during their research of the LEGO Group:

Prudent risk taking and conservative financial management

During the Great Depression of the 1930s, financial catastrophes faced by the fledgling carpentry company's customers nearly forced the founder and his business into bankruptcy. Recognizing that people could not afford to build houses, Ole Kirk Christiansen reinvented his business and began producing stepladders, ironing boards and wooden toys. Demand for the well-made toys (called LEGO -a combination of two Danish words "leg godt" meaning "play well") was strong, and new products were developed. Ironically, the diversification that was created to save the company, in fact, became the company. Christiansen believed that producing very high quality, less expensive products with more stable consumption levels would protect his company against future economic downturns.

The financial problems caused by the depression, along with some early management difficulties, persuaded the family to embrace a conservative attitude toward their balance sheet. The family felt a deep sense of responsibility to both their employees and vendors and early on developed a reputation for honouring their financial obligations.

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Concentration and focus on full exploitation of core product Line

In 1949, the company introduced a primitive forerunner of what was to become the revolutionary plastic building bricks. These toy construction components were popular and represented an opportunity for significant growth.

In 1955, the founder's son, Godtfred Kirk Christiansen, recognized that the children's toy market was primarily comprised of "one-off" products. He filled what was perceived as a market gap by launching the "LEGO System of Play" based on the building bricks. The concept involved development and packaging of a starter kit followed by the systematic addition of new elements and play themes. This product development cascade was designed to stimulate greater retail commitment of shelf space and more time spent with the product and additional purchases by consumers.

Considering that just six of the original eight studded bricks of the same colour can be put together in 102,981,500 different ways, the opportunities for creative play are virtually limitless. Every year, more than 100 new LEGO sets are added to the range, and around the same number are withdrawn. New elements, play themes and sets result from the hundreds of ideas that come out of six product development departments in Denmark, the US and Japan.

Engender interest of next generation in the family business at

an early age

Godtfred Kirk Christiansen, the founder's son, began working in the company when he was only 12 years old and literally grew up in the company. By the age of 18, he was designing new toy models. At age 24, he had become his father's righthand man, responsible for product development, sales and finance. He gradually assumed more and more responsibility for managing the business as his father's health declined.

From an early age, GKC's son, Kjeld Kirk Kristiansen1 developed a reputation as a skilled and imaginative LEGO builder. GKC looked to young Kjeld as a great source of product development ideas. Upon completion of his upper-secondary education, Kjeld joined the staff of the Group's German subsidiary as a trainee. He then took a commercial degree in Denmark, followed by an MBA in 1972. During his studies, he gradually realized what role he wanted to play in the family business.

The first two generations, Ole and then Godtfred Christiansen, did five important things in developing their sons for the business:

1. They exposed their sons to the business at a very early age 2. They provided their sons with opportunities to work on meaningful projects

as soon as they began working in the company 3. After giving their sons actual working experience in the company, the sons

went away to school for further education and training 4. They gave their sons significant responsibilities and allowed them to succeed

or fail in a visible way 5. They gave their sons the opportunity to increase their responsibilities at a rapid

rate and grow professionally while still very young and full of enthusiasm for the business.

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Hire a non-family executive to assist with generational management transitions Vagn Holck Andersen, a seasoned Danish executive, was consulting with Godtfred about the possible sale of the LEGO Group following the tragic death of his daughter in an automobile accident. Holck advised GKC not to sell the company, and was consequently hired as senior vice-president, reporting toG KC, responsible for maintaining control over the rapidly growing organization.

Andersen's role over his entire career became one of being the "buffer" between father and son. Throughout his involvement with the LEGO Group, Andersen was a key contributor to the decision-making processes and facilitated the dialogue between father and son so decisions were made objectively, not emotionally. He retired in 1996 as chairman of the parent company.

Global expansion should begin close to home with familiar products The globalization of the LEGO Group was nearly as systematic as the development and expansion of the product line. Beginning in neighbouring Norway, distribution was expanded throughout Europe. Subsequently, captive sales companies were established around the world. By the early 1970s, the LEGO Group had truly become a well-known global brand.

An outside, professional board stretches and challenges the CEO When Kjeld Kirk Kristiansen received the IMD Distinguished Family Business Award, he said: "To have a strong and active board was not even considered in my grandfather's time, and as to my father, he wanted to have a board, although at the same time, he didn't really want to use it. For me, however, it has been very important to work closely together with an active and professional board. Especially when it comes to involving the board members as sparring partners for discussing new concepts and strategies."

Today, the board of directors of LEGO Group A/S includes two executives from large, multinational public companies, one of which is family controlled, the nonfamily CEO of a very large multinational family-owned company, the Kristiansen family lawyer and Kjeld's brother-in-law representing the family ownership outside of Kjeld's family.

Good corporate citizenship creates a better business environment All of the LEGO Group's business activities have followed the guiding principle that it must be a good corporate citizen. The company has been recognized throughout the world for the positive contributions it has made to the development of young people through LEGO products as well as the contributions it has made to the communities in which it operates.

Billund, Denmark, has a modern, efficient international airport served by commercial airlines thanks to the LEGO Group, which donated it to the community. It is the second largest airport in Denmark. In 1985, the LEGO Group founded an annual international prize which now awards DKr. 1 million to individuals and/or groups which have: developed a wider knowledge of the conditions under which children live and grow up; promoted children's welfare and development; made

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an outstanding educational effort for the benefit of children or helped generate a broader understanding of children, their situation and conditions.

The company carries out regular educational initiatives dedicated to preserving the environment, and it has been recognized and honoured for developing and adopting environmentally sensitive manufacturing and production processes.

Take time for a sabbatical; it can renew and refresh the company An effective way for a family CEO to get refreshed and renewed is to periodically get away from the business and take a sabbatical. In Kjeld Kristiansen's case, after 15 years as president of the LEGO Group, a prolonged illness resulted in an unplanned sabbatical.

It proved, however, to be fortunate. Having sustained growth for more than four decades and continuous improvement in its systems approach, the company had nearly "written the book on success". There were, however, many things going on in the LEGO markets to which it was not reacting because of its tradition of success and bureaucratic management.

While Kjeld was convalescing, he realized that as LEGO markets were undergoing major changes due to globalization, information technology, the media revolution and related new lifestyles; therefore the approach of LEGO management would also have to change. The historic drive for consensus had led to a very systemand plan-oriented organization which had lost the necessary dynamism and entrepreneurship to effectively compete in the new world order.

Initial thinking during Kjeld's forced sabbatical led him to implement "Compass Management (CM)", a new management direction at the LEGO Group, upon his return. Under CM the company has embarked on a process of changing attitudes and behaviour of employees (see Table Al).

Table Al Compass Management: a process of changing attitudes and behaviours

From looking at details and doing things right From internal focus From consensus and long debates

From slow reaction From individual and functional mindset

The current generation's perspective

'l> to looking at perspective and doing the right things

'l> to consumer focus 'l> to commitment, empowerment and

action 'l> to fast action 'l> to a shared global mindset, shared

values, shared objectives and a shared direction for the future development of the company

During recent conversations with IMD faculty, Kjeld Kristiansen said: "The long term reinvention of our company through 'Compass Management' has implications for just about everything we do. It is not an easy or short-term project in a company, which has always been accustomed to success. It is the introduction of a whole new way of thinking, which we believe will carry us successfully into

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the next millennium. Through three generations of family ownership and family management, the LEGO Group has grown from a small workshop into a global company aiming at being the world's most respected and esteemed brand among families with children."

Note

1. Kjeld Kirk Kristiansen's name was officially misspelled during registry and he took no steps to change the mistake.

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~ IM) Hermes

IMD Distinguished Family Business Award Winner 1997 By Professor Joachim Schwass, IMD Industry Professor, and Dr Monica Wagen, IMD Research Associate

Known as one of the world's most elegant businesses, Hermes SA is a French manufacturer and marketer of upmarket luggage, apparel and accessories. From a nineteenth-century foundation in leather goods, the company has since diversified into silk goods (about 25 per cent of revenues in 1996), ready-to-wear clothing (13 per cent), watches (10 per cent) and perfumes (7.5 per cent). Its ongoing dedication to family ownership and management, impeccable craftsmanship, and careful protection of the brand's mystique set Hermes apart from most other companies.

Family businesses can learn many valuable lessons by reviewing the following best practices identified by IMD's Distinguished Family Business Award selection panel during the research of the Hermes group.

Expanding internationally

From the late 1980s until today, Hermes has been led by Jean-Louis Dumas, a fifthgeneration descendant of the founder. He has been credited with building Hermes' worldwide retailing empire by directing an intense programme of geographic expansion. Although more than 50 per cent of annual sales were still generated in Europe in the 1990s, the Asia/Pacific region contributed nearly one third of annual revenues, and the US pitched in 11 per cent of yearly turnover. From 1986 to 1996, Hermes enjoyed average annual sales increases of 24 per cent.

Developing a product Line

During the 1970s, some observers feared that Hermes' profitability was being sacrificed on the altar of quality. The concern was that, with the arrival of nonman-made materials like plastic and polyester and the growing vogue for easy-going styles, the Hermes dedication to classic, natural materials (silk and leather) and modest styles could lose impact. And effectively, the usual Hermes 5 per cent annual sales growth started to drop.

To overcome the crisis, the company hired new clothing designers to revive the apparel line and develop new items, like motorcycle jackets and fantasy jeans. In 1979, a French advertising campaign that featured a young woman wearing a Hermes scarf introduced the branded goods to a new generation of consumers. This move changed the Hermes label from the object of an older generation's

Appendix C 1 09

nostalgia to the subject of young people's dreams. By 1990, Hermes had expanded its line of merchandise to include 30,000 different items.

Creating an image of quality

The company's explosive growth- annual sales grew from US$ 50 million in 1978 to US$700 million by 1996, and its net profit grew even faster- had as much to do with changing consumer values as the revitalization of Hermes strategy. The company took advantage of the resurgence in Hermes popularity by boosting store locations and licensed boutiques in America, Japan, Asia and the Pacific. The number of Hermes-owned stores quadrupled from 15 in 1978 to 80 in 1996, as the total number of outlets worldwide grew to more than 225. In recent years, the demand for the products has increased beyond all expectations- the company is planning to develop new markets, in three to five years, to have 30 fully owned Hermes stores in Asia and ten in the US.

Developing "market Leader" products

Some observers consider Hermes scarves collectible works of art. Overall scarf volume increased by 250,000 in 1978 to 1.2 million in 1989. Hermes' combination of quality materials and time-consuming hand craftsmanship was reflected in its high retail prices. By the mid-1990s, one Hermes scarf commanded US$245, a tie cost US$115, and a "Kelly" purse set cost about US$3,500.

Transmitting the company successfully through five generations

Hermes' trademark- a horse-drawn carriage- harkens back to its original saddlery business.

Founded in 183 7 by Thierry Hermes, the firm gained a reputation as a producer of one-of-a-kind saddlery for European noblemen. The functional and decorative "saddle stitch" used by Hermes craftsmen to join pieces of leather would come to represent the branded goods' quality and simple elegance. Throughout the 19th and 20th centuries, the company continued to custom-make saddles, investing 20 to 40 hours in each. In the 1870s, the founder transmitted the business to his son Emile-Charles Hermes, who moved the business to the rue du Faubourg St Honore, a site that would become one of Paris' most prized pieces of real estate. After a few years at the helm, Emile-Charles sold his stake in the business to his son Emile-Maurice in 1922. Faced with the ascent of the automobile and corresponding obsolescence of the carriage, Emile-Maurice Hermes began to diversify into travel- and sportsrelated leather goods, but he never abandoned Hermes' "horsy heritage". Saddlebags gave way to luggage, wallets and handbags. For instance, the famous Hermes "Kelly" bag, named in the 1950s after Princess Grace of Monaco, who was often photographed with the accessory, helped burnish the brand image as an accoutrement for royalty and celebrities. In the early 1920s, Emile-Maurice bought a patent from the Canadian inventor of the zipper, and brought it back to France. The zipper became so closely associated with Hermes products like handbags, jockey silks and leather goods that Frenchmen came to call the invention "La fermeture Hermes".

110 Wise Growth Strategies in Leading Family Businesses

In the 1920s, the company launched ready-to-wear clothing, leather-banded watches and leather gloves. In the 1930s, Emile-Maurice passed the family business on to his son-inlaw, Robert Dumas. (This transmission meant that in the fourth generation, the Hermes name was no longer carried on by the CEO, but by the female line.) Robert directed the design and production of the first Hermes scarf in 1937. Over the years, the scarves became ingrained in the European culture as a traditional heirloom. Although scarf production slackened in the midtwentieth century, by the mid-1980s, Hermes was unveiling a dozen new designs each year. In 1978, Jean-Louis Dumas, the fourth of six children, took over the company's top position after the death of his father. He had first worked as a buyer for competitors before returning to the family firm in 1964. This "outside" experience was certainly the catalyst for the sweeping turnaround he engineered in the 1980s.

Creating a strong financial structure (going public) Based on family consensus, Hermes made its first stock offering in June 1993. But the family retained over 80 per cent of the equity in the hands of 56 family members, six of whom kept a S-10 per cent stake. The 425,000 shares floated at US$55 and were oversubscribed by a factor of 34. Ultimately, there were approximately 4,000 outside shareholders. Actually, the equity sale helped lessen family tensions by allowing some members to liquidate their holdings without squabbling among themselves over share valuations. With the share flotation, family members could have shares with a fluctuating value, an established price, liquidity, and, if they wanted to buy houses or cars, they could do so without affecting the market. In the eyes of the owning family, going public increased stability while still keeping a strong family influence. They consider themselves a public company with a "Fort Knox-type" family culture.

Developing strong family/business relationships The family firm is, according to the owners, based on the principle of a democratic monarchy. This means that the owners have:

Strong leadership, in the person of the CEO, closely related to the family body (more than 40 family members in the sixth generation) Several members of the three branches (Dumas, Puech and Guerrand) of the family work in the company at different levels A structure to keep family influence thanks to a strategy committee of several family representatives, with shared responsibility A board of directors composed mainly of family members Written company regulations and a family constitution with rules for selling and buying shares, with limited family voting rights, and so on, was established after Hermes went public To avoid the dilution of the voting rights, non-family buyers and the divorced family members can have shares, but no voting rights A 75 per cent majority is needed to change the company statutes as well as the CEO, so as to keep family influence

Appendix C 111

The next generation is directly immersed in the tradition of the company at an early age- regular, organized tours to subsidiaries and company suppliers give them a stronger feeling for the product and its creation.

Cultivating strong values The owning family wants Hermes to remain a family firm. They believe it is desirable, but not imperative, that the CEO be a family member. What is imperative to them is that the family shareholders choose this person. They believe the family should have majority control in the ordinary and extraordinary meetings. In their opinion, if the family does not have that control, even if the CEO has been appointed by the family, the company would lose part of its family character. They believe that the family has few rights and many obligations. These obligations are part of the family culture and ethic. Among other values, Hermes stipulates:

Respect for people and nature. Towards nature they feel not so much admiration but gratitude. What would Hermes be without the silkworms to spin their cocoons, or the cattle to provide leather? Respect for new ideas. At every level, Hermes has always stimulated new ideas and the desire for perfection.

Stimulating company culture All the human elements that together make up Hermes have a remarkably strong identification with and pride in the firm. To give an example of this pride, a doctor who has many patients in the company commented that when he asked other patients what jobs they had, they replied that they were secretaries, engineers, and so on. The employees of Hermes, however, say, "I am with Hermes." All these people seem to be united in their love for quality, and their creative vitality contributes greatly to the company's family spirit.

Developing financial autonomy Hermes was able, despite being risk takers, to stick to the principle of self-financing. To avoid financial dependence on the banks, but still have the capital needed for new projects, Hermes traditionally reinvests approximately 15 per cent of the profits in the company.

Stimulating family pride According to Jean-Louis Dumas,

The secret of our company lies in a job well done. Everyone should be proud of doing his or her best. This type of pride is not arrogance, but tempered by humility and shared enthusiasm. You are more proud thinking that your grandchildren will harvest the fruit of your labours. The only valid criterion of their satisfaction is whether if, thanks to some miracle, their grandfather returned to life, he would pat them on the back and tell them that they have done a good job. The main idea is that yesterday's ship is ancestral and it is our duty to conserve it even though we did not build it. Today, every family member is responsible for one of the oars.

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~ IM) Corporacion Puig

IMD Distinguished Family Business Award Winner 1998 By Dr Monica Wagen, IMD

Long viewed as a prestigious company, the Barcelona-based Corporacion Puig is one of the few remaining family-owned perfume and fashion houses. Its various activities range from mass-market products with brand names such as Agua Lavanda Puig, Aqua Brava and Quorum, to world-renowned brands such as Carolina Herrera, Paco Rabanne and Nina Ricci. Puig's product lines include fashion goods, haute couture, perfumes, as well as L' Air du temps from Nina Ricci, which is one of the world's top ten fragrances. Herrera for Men and Paco Rabanne Pour Homme are already considered classic perfumes. With growth rates of 15 per cent in the last five years, Corporacion Puig has been regularly increasing its market position, thanks to the development of prestigious branded products.

This year, Corpora cion Puig is the winner of the prestigious Distinguished Family Business Award given by IMD. The Award, given each year to a family business (LEGO, Denmark, in 1996 and Hermes, Paris, in 1997) recognizes the Spanish company for its remarkable geographic expansion. The award also recognizes the family's ongoing dedication to family management and ownership, which sets Corpora cion Puig apart from most other companies. Family businesses can learn many valuable lessons from the following Corporacion Puig practices identified by IMD's research.

The Puig Company's development

At the turn of the twentieth century, Antonio Puig established a small perfumery company, with distribution throughout Spain.

Later, he began manufacturing his own products, and when he became the first Spanish lipstick manufacturer, he caused something of a social outcry. According to Puig family legend, in making lipstick, Antonio Puig encountered problems with the packaging and went to see his supplier. The supplier's response was, "If you help me financially, I'll be able to find a solution."

To gain better control of the production chain, Puig acquired the supplier's entire plant and started diversification. This purchase was the first breakpoint in Corporacion Puig's history. It launched a series of mergers and acquisitions that ultimately brought the company, which had been limited to a niche market, to a position of leadership in the fashion industry.

Appendix C 113

Founder's legacy

Antonio Puig, Corporacion Puig's founder, had four children. He gave them an adequate education and encouraged them to be active in the business. The first, Antonio Puig Jr, and the second, Mariano, entered the flagship company, the perfumery business. The third developed the company's diversification activity. And the fourth had the position of institutional relations and communications director. The second generation thus grew up and came to occupy their individual positions. But they still felt very strong family bonds. In 1979, Antonio fell ill, and on his deathbed, he left his four children a legacy and testament that still guides the family, "Stay together. Your unity will be your strength." This "unity" has been one of the identifying characteristics of the second generation. Formal and informal meetings take place among the members of the second generation, communication is excellent, and respect for one another abounds.

New direction

Even as far back as the mid-twentieth century, following the principles of primogeniture and consensus, the flagship company gradually came under the direction of a twosome: the founder's first and second children, Antonio Jr and Mariano. In the early 1950s, the duo established five major objectives: team work, product creation, internationalization, critical mass, and effective internal organization.

To meet these objectives- in fact, to survive as a company- Puig had to create a fashionable, attractive product. To give their product the market presence and image it needed, the Puigs approached the most talented designers. With this move, the company was the first in the perfume industry to work with industrial designers and famous artists. They then created a packaging development office and an R&D laboratory to define the content, in order to be able to obtain the best raw materials and to create the best product. Since that time, one of the company's trademarks has been its extraordinary concern for quality and excellence.

Early internationalization

Once the two managers had the right product, they saw that Puig's all-important research and development expenditures could not be recouped from a market the size of Spain. So they went international. (This happened 35 years ago, when international expansion was still uncommon in Spain.) The company set up a venture in the US to sell Puig's Spanish product. But it quickly became apparent that the Spanish product was not attractive enough for the US market.

Puig needed a product with a Parisian label. So they created a company in Paris, with its own product development, its own marketing, and its own funds, with French personnel, and fully dependent on its own industry. In succession, they then built distribution companies in Britain, Germany, Holland, Central America, South America, the Middle East and other regions.

Keep in mind that not even ten years ago, Corpora cion Puig's competition was basically small- to medium-sized family-owned businesses bearing the name of the founder: for example, Christian Dior, Helena Rubinstein, and Yves Saint-Laurent. Today, however, Corpora cion Puig has seven large competitors who, little by little, have bought out these other companies and now control a very high market percentage and command seemingly infinite financial resources.

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A strict dividend policy

In the 1970s, the two managers from the second generation realized that internal growth was insufficient to reach the critical mass needed to compete against the leading international groups. They had no choice but to create a financial infrastructure to collect resources. So in order to have the necessary liquidity but stay independent, they established strict rules to limit the distribution of dividends. These rules may have asked the family to make sacrifices, but they enabled the company to grow by purchasing famous brand names that showed distinct potential for expansion.

Making management professional

Creating the structure for international expansion meant completely reorganizing the management. To this point, the general management had directed each of the group's companies. Basically, the family was directing the family's flagship. Nevertheless, it was decided that the family needed to move up to a higher level. A general director was needed - even though it would cost them. So the family promoted Javier Carro, an industrial engineer with 25 years' experience in various company positions, to be the new CEO of the flagship. This sent a strong message of career opportunities for non-family managers. And since Carro's age put him between the two generations, his appointment also set up a valuable link between them.

The third generation: strong family/business relationship

As the family grew to four brothers in the second generation and to 14 cousins in the third generation, things grew more complicated. The second generation already had top positions in the holding company, but was not involved in day-to-day affairs. Although some of the firstborn of the third generation had moved on to executive positions, they realized that, with 18 shareholders, it was impossible to work as they had with four. Clearly, the system needed to be changed.

So to maintain family involvement, they restructured by creating a governing system made up of the assembly of shareholders, the holding (which embraces the various companies), the family council and the advisory board, as follows:

1. The family council consists of one representative from each branch of the second generation and one representative from the third generation, all older than 30. It meets at least twice a year and otherwise, as necessary. Two standing orders- a family handbook (code of behaviour) and a family protocol- were created by the family council.

2. The assembly of shareholders meets a couple of times a year (convening both those who work in the company and those who do not). Operational matters are explained; comments from attendees are received, so communication between shareholders and management stays open; and an attempt is made to ensure that shareholders remain proud, satisfied members of the group.

3. The holding, the primary mission of which is to be the steward of the group's patrimony, is its financial, strategic, control and management centre. It is composed of four shareholders, one from each family branch, the same four people who are involved in the advisory board, each having one vote.

AppendixC 115

4. Another organ is the advisory board. There has always been a group of people to whom the family goes for informal advice. At a certain moment, however, it became clear that a more formal vehicle for this informal guidance would be beneficial. The advisory board was established, a total of four people from the family, one member from each branch, and an additional four from outside the family.

Cultivating strong values The family handbook expresses the Puig family's feelings, as business people and as family members, so the employees can better carry out the intentions of the family. In other words, the book summarizes the moral position, ethics, and professional principles in such a way that any person in the group will know how the owning family thinks and wants things done. For example, a proposal was made regarding a French product bearing the name "amaigrissant" (weight reducer). The managers, knowing this was dishonest, did not carry it out- family ethics do not sanction the sale of a product that makes false claims. The family handbook ends by stating that the Puig family wants the company to remain independent and that, therefore, profits must be produced to finance growth.

Family protocol The family always tries to operate with love (love of parents for their children and love among siblings) and always has the interests of the business in mind. Conscious that these two values may be at odds, family members created a family protocol of unity between the company and the family. The protocol is essentially a series of rules, like the following:

Family members who come to serve as executives must have university degrees and must have worked for a minimum of five years outside the family company. For instance, Mariano's son is an industrial engineer who works for Nestle; his nephew works as an economist at Pepsi; one of his nieces is a lawyer and works in a museum of art, and so on. Qualified people like these are on a waiting list, with the expectation that, one day, if the right situation should arise, and if they have proven their professional abilities, the company may call them. This way, these individuals will bring a new cultural outlook into the company. In-laws will not form part of the company's executive board. No shareholders are allowed to use their shares as collateral for other personal objectives. If, at any moment, a member of the family bearing the Puig surname separates from the company, that member shall not produce goods that could compete with the company. On the other hand, the group builds a financial reserve to purchase - at a pre-determined price the shares of a member who wishes to leave.

The list is quite long and changes according to the times and the needs - the family protocol is a "living" document.

116 Wise Growth Strategies in Leading Family Businesses

Composition of the advisory board

When it came to bringing in external advisors, Corporacion Puig established a desired profile, guided by the following principles:

Among the people on the advisory board, there should not be any friends, or consultants It is important that these people be well remunerated, and that they feel obligated to fulfil their assigned task, not defend their own interests.

Founded on these ideas, the profile of possible advisory board members looks like this: individuals accustomed to being creators or developers of important businesses, with a business and international outlook, an industrial and brand image background, and family business experience with which the family members feel comfortable.

Role of the advisory board

The advisory board meets three or four times a year. To date, it has been remarkably efficient, playing a key role, for example, in the following three situations:

1. During the autarky period, the company diversified in packaging and did quite well nationally. But when Spain became a member of the EEC, these activities were unable to compete. In a meeting with the advisory board, the family was advised to get rid of these companies. This was hard for the family at first because these activities were closely identified with the history of the group, but in the end, the family successfully followed the board's advice.

2. The family was trying to buy a competing company. The executive management team was excited because this would mean that their market share would grow and positioning would be strengthened. The seller, however, kept adding conditions; the management team went along - in retrospect, accepting perhaps a little too lightly. Fortunately, the advisory board stepped in, admonishing them not to meet further conditions. Negotiations broke down. A year went by. The seller came back, and accepted all the conditions that they would otherwise not have been able to impose.

3. The upward growth rate of the Paris-based company (established there in the sixties) slowed dramatically. The second generation was concerned because France was seen as a highly competitive country. They did not know how to reverse the slide. The advisory board said "Send a member from the third generation there." At first the family was against, but in the end, the board prevailed. And the experience has been excellent; so good, in fact, that this scenario was repeated by sending another member of the third generation to the New York subsidiary.

Corpora cion Puig has sought to create structures through which problems can be channelled and resolved. It has four institutional bodies that make decisions by consensus or by majority. On top, one of the leitmotivs of the group is that, in order to subsist, it is important to have a very close-knit base of shareholders, a sufficient critical mass of business and a highly efficient executive team.

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Current transition of control

As in many family organizations, the Puigs consider that their greatest challenge is to ensure the continuity of the business. Therefore, for the last six years, they have been drawing up an organizational and strategic plan that defines their future objective, which will guide the transition to the next generation.

As of July 1998, the second generation- Antonio Puig and Mariano Puigofficially retired from the operational business. The baton of executive power was handed over to a newly created executive committee called Excom. The Excom has four members, with equal power and equal authority, each in charge of separate units. On the committee are three family members, Manuel, Mariano Jr and Marc Puig (one son of Antonio and two sons of Mariano) and one non-family manager, Javier Cano. Their tasks are set according to a brand division, which coincides with a country division of the group: the business activities in the USA and Canada, Spain, France and the rest of the world have four different bosses.

The Excom is the highest executive organ of the entire group. It works as a team, in the same way that the brothers of the second generation have traditionally worked. Each senior member of the organization reports, according to their position, to an Excom member. The Excom, in turn, is accountable to the board of directors, which will keep Mariano, of the second generation, as its president. His brother, Antonio, is president of the shareholders' assembly.

Two other brothers remain involved in the business, through the board of directors, and as ambassadors of the group in several organizations, such as the association of perfumery manufacturers.

According to the family mission, the Ex com will have a clear mandate: take a leap forward, turn Corpora cion Puig into a major multinational player, and bring it into an enviable position in the next millennium.

This paper was based on interviews with the president of the Puig Group, Mariano Puig, and several family members, by Dr Monica Wagen, Research Associate, and Professor Joachim Schwass at IMD, as well as company documents. June 1998.

118 Wise Growth Strategies in Leading Family Businesses

~ IM) The Henkel Group

IMD Distinguished Family Business Award Winner 1999 By Professor Joachim Schwass

The Henkel Group, with headquarters in Dusseldorf, Germany, is a large familycontrolled business active in detergents, chemical products, adhesives, hygiene, and surface technologies. Today, the fourth generation plays an active ownership role. The Henkel Group has been selected as the recipient of the 1999 IMD Distinguished Family Business Award in recognition of its successful blending of family and business interests.

The beginning The founder of the business was Fritz Henkel, whose father was a schoolteacher in Germany. In 1876, after observing that detergents had arrived on the market and that they could vastly facilitate cleaning and washing in individual households, Fritz Henkel started his modest business activities. He used bleaching soda and started to sell it himself. He became very successful, and soon employed workers and started to expand. By 1899, having managed to develop the business substantially -employing 79 workers- Henkel required a new location and thus moved outside Dusseldorf. His entrepreneurial ambition was clearly demonstrated by the size of the land he purchased for the future development: 54,846 square metres!

In 1907, Henkel launched the first branded detergent product under the name Persil. He understood that the users wanted a product of consistent quality, and by branding it, Henkel wanted to provide a quality guarantee. He also observed that supplying detergents in bulk was impractical for individual households. He therefore launched the first prepackaged detergent in a smaller household size. Both the branding and the packaging laid the groundwork for the future growth of the company.

In 1908, Henkel started the first conveyor belt packaging line for Persil products: four female workers produced 28 cartons of Persil products per minute. In 1911, employment surged to 925, and the company built the first homes for the workers.

In 1918, Fritz Henkel celebrated his 70th birthday and created a pension fund for the workers. In the same year, the company reduced the daily working hours to eight, with a total working week of 48 hours. After World War I, the detergent manufacturer faced a shortage of raw materials: it became difficult to purchase

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cardboard and adhesives for the packaging of the detergents. So Fritz Henkel started making these products.

The next generations

Fritz Henkel had three children: Hugo, Fritz Jr, and one daughter, Emmy. The sons were brought into the business while the daughter stayed with her family, as was the tradition then. As unconventional as Fritz Henkel was in his role as a full-blooded entrepreneur, he was just as unconventional -for that time, at least - in his approach to company ownership: he divided the ownership of his business among his three children. Since Emmy was not active in the business, she received 20 per cent ownership; the sons got 40 per cent each. Thereby the three family branches were created, and even today, reference is still made to the "Hugo branch", the "FritzJr branch" and the "Emmybranch". The legacy of the founder to his children was that they must stay united as a family in the business.

So far as company operations went, despite the three-way ownership, and with Emmy staying at home, the two brothers assumed the leadership of the company in the classic separation of functions. Hugo became the technical director in 1904; Fritz joined a year later as the commercial director (at that time, the company employed 110 workers).

By 1930, 25 years later, employment had surged to 5,000 workers, with an annual production rate of over 110,000 tons, the vast majority being Persil washing powder. That year, Fritz Henkel Jr unexpectedly passed away, and two months later his father, the founder of the business, Fritz Henkel Sr, died at the age of 81. Hugo assumed sole leadership of the company.

Fritz Jr had had no sons, but Hugo had had three sons and two daughters. Hugo's oldest son, ]ost (now the third Henkel generation), was appointed CEO in 1938, with Hugo becoming chairman of the supervisory board. Although two cousins were also active in management positions, they passed away during World War II. So it fell to J ost to rebuild the business after Allied bombing caused widescale destruction. ]ost successfully lead the business until1961, when he, too, died unexpectedly. Until then, the Henkel corporation had focused primarily on building on the foundations Fritz Sr had laid, making and distributing branded and packaged detergents in Germany, with some export activities.

A new era

With the appointment of Konrad Henkel as the head of the company in 1962, the company entered into a major phase of strategic reorientation. Born in 1915, Konrad was ]ost's younger brother. A chemist by training, he had devoted his efforts in the business to research and development, so he already had a profound knowledge of Henkel's products when he was asked to lead the company at the age of 46. Konrad felt a strong sense of duty to continue the entrepreneurial activities of his grandfather and father.

An unassuming, almost shy personality, Konrad Henkel exuded inner strength and calm. Often seen as uncomfortable in public events, he disliked speeches. He was an" active" listener and surrounded himself with competent and trustworthy managers. He closely coordinated the family's business interests with his cousin, Willy Manchot, and later with his son Ji.irgen, a scion of the Fritz Jr branch of the Henkel family. The unpretentious Henkel understood the need to keep

120 Wise Growth Strategies in Leading Family Businesses

the family members informed about the development of the business; in his branch of the family, which controlled 40 per cent of the ownership, he instituted fortnightly information meetings with his two sisters, who were the only surviving siblings.

When Konrad assumed the business leadership, the Henkel company employed 8,525 workers and produced 500,000 tons of chemical products annually, mainly detergents under the original brand name Persil, as well as newly launched products including Dixan, Pril and Dor. He understood that the company, which had grown from a medium-sized, conservatively managed and very profitable business, would eventually face new challenges. So he started to travel extensively inside Europe, to Japan and especially to the United States. He was intrigued by the growth of Henkel's direct competitor, Procter & Gamble, and studied P&G's business very closely.

Konrad Henkel's background as a chemist kept him focused on the chemical industry. In a markedly application-driven approach, he undertook new diversification efforts, expanding the product range in a gradual, but nevertheless substantial manner. In order to reduce the dependence on the German home market, he also launched a dynamic internationalization process. Throughout this expansion, the predominantly German company also tested other markets. At one stage, it entered the dog food market, but soon gave up that foray, refocusing its main efforts on the core chemical business. From the beginning of his tenure, and long before ecological standards had become popular, Konrad Henkel understood the need to adopt an environmentally friendly philosophy. His practical background as a chemist had taught him that resources were limited.

In the early 1980s, with a stronger appearance of foreign competitors, conditions in the European market started to deteriorate. A worldwide overproduction of detergents led to a price war, and most producers - including Henkel - started losing money for the first time. The only possible strategy for Konrad Henkel was to move forward: growth through acquisitions and continuing diversification. During this period, two major challenges strongly influenced Konrad Henkel's thinking and determined the future impact the Henkel family would have on the company.

Firstly, the continuing growth of the business required financing. During this period of high competition and lower profitability, however, finding money became more and more difficult. Further exacerbating the financial problems, a family member passed away, which resulted in substantial inheritance taxes, and drained both the company and the family.

The Henkel Group had grown substantially and was approaching DM 10 billion in revenues. Konrad Henkel realized that if the family did not want to become an inhibiting element, the role of the family as managers and owners needed to be redefined. After a lengthy reflection process, shared with his cousins and sisters, Konrad Henkel took two sequential decisions that would dramatically alter the role of the family.

The family withdraws from operational management

In 1980, at the age of 65, Konrad Henkel stepped down as the last CEO originating from the Henkel family and handed over the executive control to Professor Sihler, a senior non-family manager. Since Henkel was in good health and could have continued as active leader for a long time, this step surprised most people inside and

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outside the business. His only motivation appeared to be his desire to redesign the governance structure around the owning family in order to perpetuate the growth of this now very substantial family business, unhindered by issues solely related to the family itself. At the same time, his cousinjurgen Manchot also stepped down as executive manager. (Members of the "Emmy branch" had previously renounced their right to a management position in the third generation.)

A new nine-member body called the shareholders committee was formed. Five members were directly appointed by the three family branches in accordance with the still-intact distribution of shares as decided by the founder: 40 per cent, 40 per cent and 20 per cent (giving 2, 2 and 1 seats respectively). Four of the nine members were to be highly qualified external non-family business personalities, elected by the family meeting, which included all family shareholders.

With these changes, the right to delegate family members to the shareholders committee replaced the long-standing right of each branch to nominate one family member for a senior management position. According to the new statutes, the shareholders committee had the right to manage the company, and this right had to be delegated to the management board, which included only non-family managers. The committee and the board were scheduled to meet six times a year. Parallel to this new structure, the family agreed unanimously not to sell their shares for about 20 years, or until the year 2000.

The company goes public

To address the needs of the growing business and the family, the company was prepared for an initial public offering (IPO) that took place in 1985. The capital was increased in non-voting shares in favour of the family. In order to ensure sufficient liquidity for inheritance taxes, one part was transferred to a heritage pool; a smaller part provided a selling option for family members in need of liquidity.

The public was offered only non-voting shares, and the business obtained fresh money to finance the rapid growth. At the time of the IPO, the Henkel Group had revenues of DM 9.2 billion. By 1996, revenues had ballooned to DM 16.3 billion, both through organic growth and acquisitions, such as Schwarzkopf, another German family business active in cosmetics, and Loctite, a US company active in adhesives.

The next generation

Konrad Henkel continued to influence the development of the Group through his presence in the shareholders committee. He also saw the fourth and the fifth generation of the Henkel family grow to over 60 members. In 1994, knowing that the family shareholder pool agreement would run out in the year 2000, he invited the fourth generation of cousins to start thinking about the future role of the family as shareholders. Over a period of about two years, the fourth- and fifth-generation family members, with no influence from the third generation, held meetings and discussions, partly moderated by outside advisors, with the aim of establishing a long-term plan for the business interests of the family. All options were openly discussed, without taboos:

Sale of the company, or parts of it Minority holdings Governance issues.

122 Wise Growth Strategies in Leading Family Businesses

It quickly became clear that, with the important changes in the eighties having affected the role of the family, the next generations would be more oriented towards creating shareholder value.

In 1996, four years before the first 20-year shareholder agreement was to expire, the fourth- and fifth-generation family members, with the approval of the third generation, produced a new 20-year shareholder agreement. This new agreement, which guaranteed the family ongoing control of the business, had several stipulations:

Voting shares had to be introduced on the stock exchange Every family member has the right to sell some of his or her shares The family meeting, including all family shareholders, was given more influence in the acquisitions, company mission, principles and strategy.

Continuing as a family business

The younger generations are committed to remaining responsible majority owners and allowing the business to grow. A capital increase in voting shares or a merger is thus excluded. Future growth, therefore, has to be funded through:

Performance-oriented management Holding minority shares in other companies Spinning off strategic business units Raising additional capital through preferred stocks IPOs of subsidiaries.

By the late 1990s, the Henkel family was still growing. Some of its 80 members were living on other continents; very few were living in and around the business headquarters in Dusseldorf. To stay united as a family whose parts share important business interests, the members became part of both formal and informal structures. Until his death in early 1999, Konrad Henkel had been seen as the patriarch of the family who had managed over decades to bring the family together. A large pre-Christmas party in his home was one of the well-established rituals. Further, he had brought the young generation together in an "Information Circle", which still meets three to four times a year. Study groups brought family members to companies and factories of the Henkel Group around the globe. Christoph Henkel, son of Konrad, says, "This is one of the ways the family adds value to the business: showing an interest and demonstrating a long-term commitment to the business is not only important to our employees, but also to our clients, suppliers and stakeholders at large."

In 1999, the Henkel family continues to exercise an important strategic influence on the business. Controlling well over SO per cent of the voting shares, five family members from the three branches, under the chairmanship of Albrecht Woeste, and aided by four highly respected outside business leaders, regularly meet in the shareholders committee. The family-controlled business generates DM 21 billion in sales, of which only 23 per cent are made up of the original business line (detergents). Other sectors are chemical products (23 per cent), adhesives (22 per cent), cosmetics/toiletries (15 per cent), and hygiene (8 per cent). The Group operates in 70 countries, with Germany generating 23 per cent of total revenue.

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Over 57,000 employees are active with 10,000 products. The fourth- and fifthgeneration members of the family are firmly committed to the long-term growth of the company. They agree that Henkel can keep growing only if the interests of the business come before those of the family.

Professor Joachim Schwass wrote this article. It is based on interviews with members of the Henkel family, Mr Winkhaus, the non-family CEO of the Group, as well as the presentation of Christoph Henkel on occasion of the lOth Annual World Conference of the Family Business Network in Stockholm, September 1999.

124 Wise Growth Strategies in Leading Family Businesses

~ IM) The Zegna Group

IMD Distinguished Family Business Award Winner 2000 By Professor Joachim Schwass

The beginnings of the Ermenegildo Zegna Group as a family business can be traced back to the birth of Angelo Zegna in 1859 in the northwestern part of Italy known as Piedmont. Born the fourth child of a farmer, Angelo worked as a watchmaker when he later became a weaver, which was the then most common industry in this isolated and impoverished mountainous area. Records traced back to the thirteenth century already indicate a flourishing activity of wool making initiated by shepherds around the town of Biella. A Guild of Wool Makers had established norms for weaving and dyeing wool. In the beginning of the nineteenth century, water-powered mechanical looms and spinning machines were introduced into the area which provided both plentiful hydraulic and human resources. This was the start of the industrial revolution for Northern Italy.

At the age of 40, Angelo Zegna operated a textile manufacturing plant, with about 15 looms, which was destroyed by a fire. In 1907 he rebuilt it in the small town of Trivero. Amongst his ten children, it was his last-born son in 1892, Ermenegildo, who would have the strongest impact on what would eventually become one of the largest and most dynamic Italian family businesses.

Angelo, being busy building the small spinning plant, confided the education of his son Ermenegildo at the age of six to the local parish priest. Accompanying the priest on his rounds exposed the young child to both sad and joyous rites: witnessing births and deaths in this isolated mountain village opened his eyes to the hardship of its inhabitants. This was a time of poverty, hard work also for children as shepherds or in the small textile factories. Many inhabitants emigrated trying to find a better life elsewhere. Ermenegildo, described as a bright, curious and intelligent child also joined his brothers in his father's factory. After having served in World War I he returned to nearby Biella and completed technical studies at the professional textile institute. In 1923, Angelo Zegna, the founder and entrepreneur, passed away. Ermenegildo soon emerged as the next leader of the family business. Having worked closely with his father he understood the business very well. But Ermenegildo had a very different concept of an entrepreneur: he felt the need for a more humane approach to leadership and he was convinced that technological advances would be the vehicles allowing him to implement a more modern and social vision.

AppendixC 125

Having observed the higher quality of English textiles, he travelled and studied what he felt were vastly better manufacturing processes. He became driven by the deep-seated desire to become better than his English competitors. In 1930, the family firm started producing high-quality textiles using the latest imported English spinning machines. Most unusual for this industry, the name Ermenegildo Zegna became a trademark applied to the fine fabrics that were supplied to designers and private customers. Rich and creative designs were produced - some of which are still used today.

By the end of the 1930s, the company employed 1,000 workers. In 1942, the company was split into Ermenegildo Zegna and Sons, continuing the same process of wool production, and a new establishment under the control of Mario, one of his brothers. Ermenegildo now had control over the business, which had flourished under his leadership. A hard worker, described as a calm and secure person, he had already then created an exceptional legacy. Beginning in 1932, he had started building hospitals, hotels, sports facilities and a professional training school. The factories were light and airy, creating a pleasant working environment. He built a beautiful scenic road - the Panoramica Zegna - linking one village to the next. His project comprised the reforesting of mountain slopes with 500,000 conifers, rhododendrons and hydrangeas. The 65-kilometre-long road was to bring new life to the mountains above Trivero. Ermenegildo's children and grandchildren will expand this extraordinary environmental project.

The business continued to flourish as workers were highly motivated to work for this socially advanced company and as Ermenegildo continued to excel as an outstanding leader and entrepreneur. Always impeccably dressed, he could be seen observing the dress codes of his countrymen on all sorts of occasions. He undertook his own market research, always wanting to be at the forefront of innovation and best quality supplies. He invited many tailors to visit the factory. While the English fabric manufacturers imposed a SO-metre-length minimum order size per fabric, which many tailors disliked as it led to systematic overstocking, Ermenegildo offered a more flexible order and delivery condition based on the actual fabric requirement per suit. An enthusiastic traveller, already in 1938 the first Ermenegildo Zegna fabrics were imported into the United States and initially sold to immigrant Italian tailors who remembered the brand. Zegna was the first branded product to be advertised on Italian trains. During World War II, a time of scarcity, the already legendary high-quality market perception of Zegna fabrics was reinforced by the fact that many tailors used previously worn fabrics by just reversing them. The fabrics were already exported to over 40 countries, which provided the necessary foreign currencies needed to finance the purchase of the finest Australian wool as raw material.

The enormous achievements of Ermenegildo Zegna, as an early social entrepreneur, are described by his younger son Angelo Zegna in the following words:

I see four important forces, which influenced my father's life:

• Firstly, he was born into the right environment which could foster his entrepreneurial behaviour: a cluster of many competitors in a physically constrained, small area

126 Wise Growth Strategies in Leading Family Businesses

Secondly, he was intensely driven by the vision to beat the English competitors by offering fabrics with Italian design creativity at unsurpassed quality levels Thirdly, an extraordinary open mind, especially in regards to the social welfare and giving back to the workers Lastly, his closeness to nature understanding that resources are limited and must be protected. He was an ecologist well before the word existed!

Angelo, born 1924, and his brother Aldo, born in 1920, both joined their father's business very early on in their lives. As children, they spent each day after school and at least half of each school holiday working in the factory. The boys were supervised by a nanny who spoke German with them. Learning English and French and travelling at an early age were high on the list of educational priorities. But first and foremost Ermenegildo wanted his sons to share his love for wool and fabrics, for the highest quality combined with beautiful designs.

The father was reported to be strict but not severe, allowing his sons time for sports and diversions.

Aldo, the elder son, studied engineering, while Angelo undertook studies in economics and commerce. This would be the functional separation, which the brothers would observe during their working careers.

After the difficulties of World War II, the father, in close cooperation with his sons, concentrated on modernizing the manufacturing plants. By 1955, Ermenegildo Zegna and Sons employed 1,400 workers. The focus of attention gradually shifted to the creation of new designs and styles. But essentially until the death of Ermenegildo in 1966, at the age of 74, the firm was a manufacturer of fabrics for men's clothing, building on its spinning roots. The sons Aldo and Angelo, who were firmly in control of all operations, had observed that their traditional clients, the tailors of men's suits, gradually disappeared. This market shift now seemed to open up new opportunities for them, and in an opportunistic yet strategic move they decided to expand their business activities to include the manufacture of ready-made suits on an industrial base. They also believed that high-quality suits made industrially would make suits more accessible to the broader population. While traditionally suits were worn on Sundays, after the war, suits became increasingly commonplace also in workplaces and offices. Angelo, with his commercial background, took on this exciting new challenge and "Zegna Confection" was launched in 1968 with a new plant in Novara, northern Italy. Being able to capitalize on an already well-known brand for their fabrics and now for their ready-made suits gave this new business enormous credibility and almost instant success. While Aldo looked after the traditional fabric-making activities, Angelo focused his energy on this new division. Convinced of their successful business model in Italy, they started to look for markets outside Italy as an expansion and risk diversification strategy. They focused on Spain as a country with many cultural and structural similarities with Italy and launched their first foreign plant for ready-made suits in 1973. Their assessments were proven right: the first year this new operation broke even, and it turned a profit in the second year. The expansion pattern seemed to be clear for the brothers, and in 1975 they opened the second foreign plant in Greece. But, as Angelo says, this proved to be a mistake:

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We believed that Greece with its very low labour cost would provide similar structures and advantages as Spain. But we hit many problems, the main one being that during harvest times the women working in the factory just walked out and we literally had no workers for weeks! We realized that this just would not work and that we had to be realistic and cut our losses. After two years we closed the operations.

Meanwhile, the growing demand on the Italian production had created bottlenecks, which were further exacerbated by an increasingly unreliable working environment riddled by strikes. It became ever more difficult to work and plan in this unpredictable economic scenery. The Zegnas looked then at the Italian part of Switzerland as a point of production. The Canton of Ticino, less than an hour's drive from Milan, promised a stable working environment with considerably lower taxes and surprisingly, lower manufacturing costs thanks to flexible crossborder workers resources. In 1977, the Zegnas opened a plant for men's suits in the southern part of the Canton of Ticino.

This now provided them with a stable, reliable and highest quality manufacturing facility for men's suits. It was on this platform that the next strategic expansion step took place: building on their expertise in ready-to-wear men's suits, they now also offered made-to-measure men's suits. Aldo and Angelo Zegna had observed the gradual disappearance of individual tailors during and after the war and madeto-measure suits became in most countries an expensive luxury.

But the brothers had a deep understanding of the meaning of perfectly adapted clothes to the differing shapes of the human body; even the best-manufactured ready-to-wear suit could never reach that perfection.

Now, through their plant in Switzerland and an ingenious setting up of measuring devices and systems, they could offer the perfection of a made-tomeasure suit through selected key distributors around the world at a price not much different to a good ready-to-wear suit. Over the years, new computer aided design and manufacturing techniques were introduced. Today, the Zegna family business employs over 800 workers in the Italian area of Switzerland alone, demonstrating the success of this new market offering.

While the 1960s and 1970s proved to be decades of growth for many European countries, the success and dynamic entrepreneurial expansion of the Zegna business has to be sought in the family's leadership. Aldo and Angelo Zegna learned all about business by working closely with their father until their early forties. Ermenegildo Zegna was the modem social entrepreneur, a hard worker striving for perfection, uncompromised quality and closeness to the customer. Yet he was also close to nature, understanding the need for balance in all his undertakings. Often self-effacing, he frequently delegated social and formal responsibilities to his sons. After he had passed away, the sons assumed his legacy and adapted it to the modern world. They became entrepreneurs in their own right and took the family business to new strategic levels, but by always building on the achieved, on the tradition. They shared ownership equally. The two brothers drew enormous energy from the close team that they formed. Aldo, with his engineering background, was the more cautious thinker, while his younger brother Angelo, with his commercial background was more intuitive and innovation driven. Marco Vitale, a professor and consultant, who is today a member of the board of the Zegna Group, was

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initially brought in as a business process consultant in the 19 70s. Having observed the interaction between the two brothers over decades, he commented:

To an outsider, it seemed like there was always conflict between Aldo and Angelo. There were loud discussions and disagreements. But they were always on a professional base - they had the deepest personal respect for each other and of course they were very close. But these frequent discussions really allowed them to analyze a given problem from all angles, be creative, intuitive, rational and finally come up with a well thought out, down-to-earth solution. That close, familiar yet professional relationship was the backbone of their successful, third generation leadership.

Meanwhile, the fourth generation of Zegnas was growing up. Aldo had four children born between 1950 and 1961; Angelo also had four children born between 1955 and 1965. As their father Ermenegildo had done with them, so Aldo and Angelo brought up their children with an outlook on the modern world, travelling, learning languages and studying abroad, but always recognizing the roots of the family firm that had started in Trivero. Aldo had maintained his residence in his hometown, close to the fabric-making plant. Angelo had moved closer to the suitmaking plant in Ticino. The fourth generation understood the importance of the roots in Trivero and the outstanding social achievements of their grandfather.

Gildo Zegna, son of Angelo, says:

For my cousin Paolo and myself it was always natural to join the family business. The business carries the name of the family, so somehow it was all part of us. But we also understood that there were rules of behavior if indeed we did enter the business: Education, languages, university degrees and outside work experience.

Paolo, born 1956 as son of Aldo, and Gildo, born 1955 as son of Angelo, emerged as the natural next-generation leaders. Paolo graduated in business studies at the University of Geneva and worked in Spain and Australia for several years. Gildo graduated at the University of London and gained a BA from the Harvard Business School before working for Bloomingdale's as a buyer. He then joined Zegna in the US.

As their fathers had done, they worked their way up in different functions and it was in 1998, when they were both in their forties that they became joint CEOs with Angelo and Aldo giving up their executive responsibilities and moving to the board. This was not always an easy time for the two generations to work together. Both Gildo and Paolo aspired to more managerial control and freedom earlier on. Marco Vitale, the outsider who had joined the board, played a crucial role in facilitating the succession process. He says:

I was the facilitator between the generations. When discussions became difficult, I urged the younger ones to take courage and speak up. Indeed it was sometimes intimidating to follow and wanting to add something to the intensive and heated discussions between Angelo and Aldo. But I defended Gil do and Paolo when I felt they were right and over time the situation became more balanced. As an outsider, I could take some of the emotions out of the discussion and bring them to a rational base.

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Meanwhile, the business had gone from strength to strength with the opening up of new markets and manufacturing plants. In 1999, the Zegna Group had eight manufacturing plants in Italy, two in Spain, three in Switzerland, one in Mexico and one in Turkey. The range of manufactured products covered fabrics, suits, ties, knitwear, shirts, accessories and sportswear. But the family showed yet another sign of entrepreneurial growth by moving into retailing. Over decades, the business had been built on the strength of the brand name, manufacturing and supplying highest-quality products to European, Asian and American markets through Zegna-owned import companies, carefully selecting the best distributors and investing in brand building. But the family felt that Ermenegildo Zegna's legacy was to be as close as possible to the consumer. And by doing that they would better understand consumer needs and they could better transmit their vision of quality. Gildo explains the cornerstones of the Zegna vision: "We call it the Zegna Box with its four corners: quality, modernity, masculinity, naturalness. Whatever we do under the Zegna brand, it has to fit into the box."

In 1980, Zegna opened the first fully owned retail store in Paris. It took five years before they opened the next store in Milan. After several years of trial and error, the family successfully learned yet again how another business functions. Other fourth-generation family members were involved in launching Zegna into retailing: Paolo's younger brother Andrea works as an architect. Gilda's younger sisters Anna and Benedetta work in communication and training. The entire family is drawn into this energizing new strategic direction for the group. Dozens of new retail stores are opened around the world. If break-even is not achieved within three years, they are unconditionally closed. Anna Zegna says: "We are realistic and not concerned about possibly losing face: if a new store does not work, we close it!" In the year 2000, there were over 300 Zegna stores around the world, one third fully owned and the rest under franchise.

The year 2000 was a successful milestone: group sales were around US$600 million with pretax profits of 12 per cent of sales in 1999. Total assets have more than doubled in the 1996-99 period. The group is debt-free. Zegna is widely considered the world leader in fine men's clothing, with a market share of 30 per cent and a yearly output of over 2 million metres of fabric, 350,000 suits, 1 million sportswear items and 1.5 million ties. The group employs 4,500 workers worldwide, of which 1,500 are in Italy. Sales by area are: the Americas: 40 per cent, Europe: 40 per cent and Asia: 20 per cent.

But the year 2000 also brought the passing away of Aldo Zegna. His brother Angelo, as president, continues to keep an alert eye on the fortunes of the business which is now firmly in the hands of the fourth generation. Ownership continues to be equally divided between the two branches. It is possible for a family member to sell shares to another family member, but at a predetermined formula with a heavy discount. But the family ties appear to be as strong in this generation as in the previous one. The fourth generation has introduced an astonishing degree of financial transparency- but as Marco Vitale says, only after very long discussions with their fathers. Today, this not only enables the two co-CEOs to motivate their employees around the world, but it also provides responsible and transparent reporting back to the board and the owners. The board is made up of Angelo, three members of the fourth generation and the trusted outsider Marco Vitale.

The co-CEOs state that they are running the business as if it were a public corporation. Asked if they would consider selling, the reply was instinctively

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negative: "At least not in this generation!" They are aggressively pursuing a dynamic expansion strategy on several fronts:

The launch of a new, softer sports range initially in the United States, under the name of Zegna Sport Exploring opportunities in the market for women's clothing through the acquisition of the Agnona business in Italy A new joint venture with Armani to manufacture men's clothing in newly bought factories of the joint venture under the Armani collection brand.

The Zegna Group is a totally integrated business, controlling the entire value chain from raw materials right through to the final sale of a finished product to the customer. It is a successful business which has built on traditions and values as defined by earlier generations but which each generation has successfully redefined and adapted to the changed world. Anna Zegna talks about the role of a family business:

For the Zegnas it all started with a social commitment to the small community and the people of Trivero. We pass these values on to our children from generation to generation and it is the duty of the family to bring these values to the company. Thus the family business is a point of reference of values. Governments are faceless today; they can no longer provide guidance on values.

The young leaders of the family business, Gil do and Paolo, define the important values for them and the family as:

Self-respect Discipline Hard work Honesty Trust.

The respect for the roots of the Zegna family is being kept alive also by the fourth generation: building on Ermenegildo's Panoramica road in Trivero, in 1993 the Oasi Zegna was launched as a 100-square-kilometre reserve of meadows and forest. Fourth-generation Laura Zegna oversees this first Italian example of environmental patronage. Its mission is to promote environmental education and to encourage direct contact with nature through sport and soft tourism.

The guiding principles of the family were explained in the following words by Aldo Zegna addressing the key employees at a company convention in Venice in june 1999:

The virtues of our father Ermenegildo did not only include intelligence and great vision but also perseverance, dedication and coherence, and this is the legacy that Angelo and I received which has fueled and guided our activity. Being able to predict the future, having intuition, working courageously with persistence as well as having sensitivity for social causes are the messages, which I give you now when our working life is about to close. This message has been received

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by our children in their capable and confident hands to work as intended. The future is in God's hands, but the premises for success are there. Continue working as you have been doing with enthusiasm, clear ideas, dedication and you cannot fail to be successful.

Professor Joachim Schwass wrote this article, based on interviews with Zegna family members and employees and publications by Fiero Chiara and the Zegna Group

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~ IM) The Murugappa Group

IMD Distinguished Family Business Award Winner 2001 By Professor John L. Ward, Wild Group Professor of Family Business, IMD, and CoDirector of the Center for Family Enterprises

2001 IMD Award Winners, The Murugappa Group, have drawn upon their business acumen, heritage and faith in the family system to help them successfully adapt to change.

The Murugappa Group, headquartered in Chennai (Madras), India, has grown from humble beginnings to become a very important conglomerate. The company started as the dream of a driven entrepreneur in Burma in the early 1900s. Today it boasts revenues of US$850 million and employs 22,500 people in its 27 business units. The company is presently undergoing a major change, as it restructures its family governance system. It realizes that change is necessary if they want to continue to compete in the world marketplace. Though adaptation is not always easy, the Murugappas find strength through their heritage and values.

An entrepreneurial spirit

The family traces its business history to 1760 when the great-great-greatgrandfather of the founder was active in trading and money lending. He had five sons who each, separately, built successful businesses that, in later generations, led to leadership in several industries in India. The family came from a long line of members of the Chettiar sub-clan of the Vaisyas caste-merchants and professionals with business interests primarily in Burma, Malaysia, Sri Lanka and Vietnam, known for their scrupulous honesty, trustworthiness, cleverness in trade and proficiency in money matters.

The Group's founder was Dewan Bahadur Arunachalam Murugappa Murugappa Chettiar (known as Dewan Bahadur), the youngest of three sons, born in 1884. Following Indian tradition, the majority control of his deceased father's entire estate went to the eldest son, with Dewan Bahadur receiving virtually nothing for all his work. The unfairness of this policy spurred him to divide his estate equally among his three sons - Murugappa, Vellayan and AMM. He did this while they were young men and while he was still alive to give them the freedom and the opportunity to be a family energetically pursuing business together. He also encouraged free speech among his sons until a decision was taken; then the

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courtesies due to an elder had to be honoured. This, too, varied from the norm in society at the time where respect for the elder was paramount.

All three of Dewan Bahadur's sons shared their father's venturesome business spirit and complemented each other in their managerial styles. Murugappa was marketing and external relations-oriented; Vellayan was finance-oriented; and AMM was operations-oriented, with a focus on details.

In the early 1930s, Dewan Bahadur and his sons made several decisions that were critical to their later success. At a time when 70 per cent of Chettiar wealth was in Burma, they repatriated much of their monies to India so that the Great Depression, World War II and Burmese national movements didn't bankrupt the family; they had an insight that India was on the verge of industrialization; and they decided to take the family's first steps into major industry.

With the repatriated funds, they established a sandpaper plant (the beginning of today's US$65 million abrasives business called CUMI); they purchased a steel safe manufacturing company; they started an insurance company; and they bought a rubber plantation. The Murugappa Group was born.

In 1931, Dewan Bahadur's eldest son, Murugappa, visited the US for the International Chambers of Commerce Convention. This trip broadened the family's view of possibilities for making money and expanding the company.

When Murugappa returned from the US, he kept an eye out for a business opportunity he could set up and lead in India. When he heard from an acquaintance that there was market demand in India for a quality manufacturer of steel security furniture such as safes, cashboxes and filing cabinets, he moved forward with family support, commencing production in 1940.

A much larger foray, conceived during the same time period, was to enter the business of making abrasives, a product used by manufacturers to sand, sharpen and smooth equipment, materials, components and end products. The family's rationale was that if world war broke out, the volume and variety of goods imported on British ships would decrease; thus local manufacturing would expand with the new opportunity. The family cleverly negotiated to buy, dismantle, ship and install an abrasives plant from the American Midwest to its location in India. The plant was operational in 1942.

About a decade later, AMM made contact with the three largest abrasives companies in the world- to seek a joint venture for access to new technologies. When all three were disinterested or very slow to respond, he contacted and struck a deal with Carborundum USA and Universal of UK. Before anything official was signed, the largest company in the field made overtures and showed interest. Since the family had given its word to the British company, they would not go back on it to negotiate with one of their larger, first-choice firms. This was the first of many successful joint venture arrangements (since 1952 named Carborundum Universal of Madras, India, or CUMI).

After India gained independence in 1947, the Murugappa family was among the first in India to form a joint venture. With introductions by Sir A. Rarnaswami Mudaliar, some experience in steel manufacturing of safes and with a vision for bicycles in India, Tube Investments of India (Til) was formed in 1949. Til began as a bicycle assembly firm representing the English Hercules brand in India. The English partner began with a 43 per cent interest. Over time, Til grew, integrated into most all components, and diversified into steel tubes for furniture, industry and other applications. Hercules became the number one bicycle company in India.

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The British partner eventually departed the industry, turned the Hercules, BSA and Philips brand over to the Murugappas and divested its ownership position.

One of the patterns in the Group's development is that their foreign partners lose interest in the Indian venture due to acquisition, management or strategy changes and sell back their shares to the family at a better than fair price because of the trusting relationship they had built. This happened, for example, with CUMI in 1982 when its UK parent sold back its shares. CUMI, now publicly traded, is 43 per cent controlled by the family.

Adaptation and growth In India's government-regulated economy, the Murugappa Group found it necessary to adapt in order to prosper. In the 1980s, Indian law prohibited formation of a business group, so the family followed the system of cross-holding controlling shares among separate public companies. Recently, that law has changed, and the family is restructuring again to become a holding company.

Because of government regulation in the past, it was difficult to obtain licences for new businesses. Between 1964 and 1980, the Group applied for 17 licences. Out of the 17 licence applications, one was granted and the other 16 were not. The Group decided not to pursue these because of their values. Consequently, to grow, they sought acquisition of ailing units to tum around. In the last 20 years, 17 additional companies have been acquired.

The most well-publicized acquisition occurred in 1981 with the purchase of Madras-based EID Parry- a huge, decrepit yet symbolic business that the Group had been interested in since 1958. Parry, the second oldest commercial name in India, included fertilizers, pesticides, confectionery and also sugar mills. For years, EID Parry's creditors were asking the Group to take over its management, given the Group's management reputation and acumen. The family repeatedly turned down the overtures, responding that without control EID Parry wasn't in the family interests. Eventually, the creditors relented and the family gained control of the publicly traded company. The agreement made headlines because it showed the Group's commitment to invest in what many in India felt was a risky venture, but what they saw as an opportunity to grow. EID Parry is now a business with US$265 million in sales and is 41 percent family-owned.

With EID Parry came a 7 per cent holding in a joint venture fertilizer company, CoRomendel Fertilizers Ltd Chevron and IMC Global, partnered in the fertilizer growth area then later sold out. EID Parry developed a unique organic pesticide from indigenous neem seeds that is often acclaimed to be the best in the world. EID Parry is also in the sanitary ware business. However, not all businesses have been a success. For example, the Group has divested a cement company, sold its electronics business and faced difficulties with its long-held construction company.

Business and philanthropy Today the Group includes seven substantial business units comprising 27 companies in a variety of industries: CUMI, Til, CoRomendel, Parry Agro, EID Parry, CIFCO and the only private company, Ambadi Estates, holder of some of the plantations. Til now has four significant lines: bicycles, chains, industrial tubes and roll forming. CUMI is a full line, vertically integrated abrasives company

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and CoRomendel is a very profitable fertilizer business. With Ambadi and Parry Agro, the Group remains active in rubber, tea and coffee plantations. EID Parry includes an assortment of businesses including fertilizers, sugar mills, pesticides and sanitary ware. The Group is in the food industry with Parrys Confectionery Ltd. CIFCO is in the financial services of brokerage, vehicle finance, insurance and mutual funds.

The Murugappa Group and family also continue to build on the example of philanthropy initiated by Dewan Bahadur. His decision to set aside a major portion of his wealth for charitable causes, starting in 1924 when he built a hospital in his home village, commenced a tradition of helping, guiding and supporting others in communities in which the companies do business. The family's trust, the AMM Foundation, is sustained by a fixed percentage of annual business profits and family contributions. To date it has built and nurtured four high schools of 8,000 students, a polytechnic institute of 1,000 students, four no-fee hospitals and a rural research centre. The rural research centre focuses its activities on developing such things as protein-efficient algae, natural dyes, organic farming and technologies for the rural and urban poor. Although by custom, the sisters and wives of the Murugappa men do not work in the businesses, they are the major sources of leadership and guidance in the family's foundation and the institutions it supports.

Family ties While success seems to overflow for the Murugappas, the family and business have also been shaped by trauma and loss. Tragedy first struck in late 1945 at the end of World War II. Middle son Vellayan, age 40, was assassinated while in Burma as part of a formal delegation gauging the safety of Indian civilians returning to the newly communist country. From then on, his two brothers functioned in the business roles as "Mr Outside" (Murugappa) and "Mr Inside" (AMM), under the overall leadership of the elder- their father until his death in 1949, Murugappa until his death in 1965 and AMM until his death in 1999.

Beginning in the late 1950s, the third-generation sons entered the business. They successfully avoided a common family business trap of an enterprise slumping after the founder's generation. This was due to their elders' concerted focus on developing the talents of the younger members as professionals through academic training, international experience, at least two years' work outside of the family business and finally employment at a mid-level in the Group's companies, rising one step at a time. Up through the mid-1990s, each of the six male family members in the third generation rose to become managing director of one or more of the business units.

MV, first son of Vellayan and the oldest of his generation, set the pace with higher education at a college. While working at businesses within the Group, MV was encouraged by his uncle AMM, the chairman, to play roles in the business world beyond the family, including positions on boards, associations and delegations. He held managing director or joint managing director positions at Carborundum, later CUMI, Til and CoRomendel until his death in 1996.

Muthiah, second son of Vellayan, was adopted as a teen by his uncle Murugappa who had no male heirs. He held several positions with the family firms, including Ambadi Estates where he became a leading authority on planting in southern India. He worked at CoRomendel Engineering and was the managing director of CUMI when he died suddenly in 1979 at age 49.

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Murugappan, the third son of Vellayan trained as a civil engineer in England and used his expertise to successfully scout unique new lines of industrial products to manufacture and sell in India. He took over the managing director position of CUMI when Muthiah died and continues as chairman of CUMI to this day. Since 1999, he has been the family elder, but decided against the leadership of the business, deferring to his younger brother, Subbiah.

Subbiah, the youngest son of Vellayan, has his college degree from the University of Aston in England. He is credited with a major role in turning ailing EID Parry into a successful business in the 1980s, serving as vice-chairman and managing director. He also had leadership positions at TI Cycles, as the chairman of the Murugappa Group and the Executive chairman of EID Parry. In 1996 he was appointed Group CEO.

Muru, the oldest son of AMM, studied mechanical engineering in England, followed by on-the-job training at Tube Investments Group UK. He worked at, then headed up CoRomendel Engineering, the family's construction business. He died in 1995 at age 55.

Algy is the second son of AMM. After schooling in Lawrence at Ooty and gaining his degree in commerce in India, he went to Britain as a management trainee with TI. He started his work experience at TI Cycles and subsequently moved up to number two to Muthiah in the plantation business. He was instrumental in starting up the Cholamandalam financial services business. Currently he is vice-chairman of the Murugappa Group and chairman of Cholamandalam.

Since the late 1970s, six of seven sons in the fourth generation have also joined the Group, making contributions in the business units at all levels including managing director. All men of the same generation and age who work in the family business receive equal compensation and perks, regardless of title, position, contribution or level of responsibility within the organization. To enhance individual and Group success, informal mentoring among the family members takes place with older, more experienced and/or accomplished members guiding, assisting and supporting younger, less experienced members. As for inheritance, equal thirds of the family's business shares - following the three branches of the family emanating from the three sons of Dewan Bahadur - are divided and entrusted to the males in each generation, whether they work in the business or not.

Transitions

An important transition in organization occurred in 1985 when the Group hired for the first time a management consultant, AD Little, to look at issues of structure and succession. This effort resulted in a leadership succession plan in which senior members of the family of the third generation filled the positions of business unit managing directors, COO and CEO until each retired at 65, with the selection process based on merit as well as seniority.

After India signed the World Trade Organization agreement around 1995, the family saw opportunities, including new export-oriented activities. Because of this, they realized the necessity of making speedier business portfolio decisions than was presently possible due to individual family members being emotionally involved in separate business units. In this environment, even when everyone wanted to make a positive business decision for the Group as a whole, it could

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not be made with the speed and nimbleness necessary in the faster pace of the new global economy.

Despite this realization, nothing changed until1996 when Muru and MV both died at early ages. These tragic events acted as a wake-up call. The family elder, AMM, urged a restructuring to improve the future of the business by relying less on family members for the day-to-day management of the business units as managing directors. Leadership of this task fell to AMM until his death in 1999, then to his nephew Murugappan who continues as family elder today, and to Subbiah, appointed Group CEO in 1996.

The goal of the restructuring was to introduce change without disrupting performance in an atmosphere of openness and support. The family leaders sought the help of an esteemed Indian colleague to help facilitate discussions of change among family members. Several insights about the Murugappa Group's reorganization surfaced, which included the need:

1. To be more of a Group rather than a collection of separate entities 2. To be more flexible in the makeup of the portfolio of businesses 3. To have less emotional attachment by individuals to their businesses 4. To shift away from family-led units to non-family-led units 5. To mentor the non-family managing directors for the long-term view.

Facilitating change To facilitate the change process, the family members on the board committed one to two days a month for almost two years. This resulted in establishing a holding company-like board with the intention of becoming an actual holding company in the future. In 1999, the Murugappa Group created the new governance structure. They changed the leadership of the individual business units from family members to professional managers and the family members moved to board positions on the newly formed nine-member Murugappa Corporate Board (MCB). This holding company-like board includes as directors five family members (two from the third generation and three from the fourth generation), three independent members and the Group CFO. The independent board members recognized the importance of their participation in the transition of the company and wanted to work with the Murugappa family members because of their exceptional experience, humility and a willingness to listen. They also wanted to demonstrate the success of the holding company model for family business and to ensure the family business as an important force in the economy of India.

The new structure was innovative for the business and for India. At once, it allowed family members on the board to focus on strategic areas across businesses for the benefit of the entire organization. Each family member on the MCB serves as a full-time director with three assigned responsibilities. One is for a function across all business units, another is to serve as mentor/overseer for one or more businesses he has typically never led before, and the third is to guide younger family members for future governance roles.

One of the benefits of this arrangement has been the creation of knowledge transfer and technology synergies among the Group's businesses. The move harnessed the substantial business experience and resourcefulness of the family

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members for the good of the overall company, not just a business unit, and also brought a new perspective from the independent board members.

The family members on the board have noticed great value in the restructuring, although it is not without personal challenges because they are being stretched to perform in areas new to them with different people, operations and situations.

The changes made in the management and leadership of the business were also noticed by workers, family and community. The family board members are aware that they are serving as role models of the structural change, especially in bringing along other constituent groups that need to make adjustments to the new arrangement. The new governing structures caused a shift in decision making to one that is more collaborative- a counter to Indian norms and values of the traditional leadership role of elders in the family.

Future focus

As the business moves from family-operated to family-governed, formalizing the family's business approach is being discussed within the family and among the MCB members. The family has taken steps towards articulating what they stand for by developing their corporate values and beliefs. These are listed prominently on their corporate materials, website, and bill of rights and responsibilities for family member owners, all of which can be amended by family consensus but not by vote. The development of a family constitution is seen as the next important step, but the form the family constitution takes - whether it should be a formal written document or an understanding by custom and practice - is under discussion. Independent directors are trying to get the family to formalize procedures because the businesses' complexity demands it.

Family and independent directors of the board realize that the future role of family members in the business is evolving. They are aware that family members in future generations will have more choices in terms of profession than in the past and may opt out of the business. Those who enter the business need education, development and training to be future leaders in the family business at the governing level, although they will not be managing directors of units.

Up until April 2001, the MCB was headed by a family member, Subbiah. At that time, he stepped aside and independent board member NS Raghavan took over as the MCB's first independent non-family executive chairman on an interim basis. The reasons for this change were to create an environment that encourages creativity and fuels growth and to make decision making even more rational and less personal. The board is proceeding slowly to find a permanent non-family MCB chairman, preferring to wait for a person who is just right for the position.

In the last decade, the Group has looked at its portfolio of businesses with an eye towards future growth. Although many of the Group's long-term companies are in low-margin, old economy manufacturing, there has been a continued focus on investing in and maximizing research for the good of the business. Several of the business units have launched products developed as a direct result of its proprietary research investments that could have global markets. The value of supporting research for product innovation is a priority.

The company also seeks to balance and reduce its portfolio of companies to the six business areas it knows well and in which it holds leadership positions. The Group plans to shift reliance away from low but steady growth manufacturing to opportunities in the high growth financial services sector through its business unit,

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CIFCO, where it has managerial and financial capability. The Group is increasing exports and is exploring entirely new opportunities in industries that are global employing the highly talented yet cost-effective Indian workforce. One such endeavour under development is information technology enabled products.

For the Murugappa Group family business leaders, the last three years have been times of great structural changes, shifts in thinking and adaptation, all the while managing a major spectrum of successful businesses and opportunities in a marketplace that is increasingly fast-paced and global. Sustaining them through these substantial efforts in meeting success in the future have been the valuable lessons of their family's heritage. Throughout the generations, family members in the business have used situations presented to them as springboards from which to creatively adjust, flex and move forward for the good of family and community. They have anticipated change, shown a willingness to adapt and to take risks. As fourth-generation Murugu reflected when he accepted, on behalf of his family, the IMD Distinguished Family Business Award in October 2001 in Rome:

We consider ourselves custodians to a heritage and trustees to a tradition, both built on togetherness, trust, mutual respect, ethical values and above all dignity, independence and discipline. As the scope and magnitude of the family and business leadership changes, we are preparing ourselves for the great challenges ahead. This award reinforces our faith in family and also in our ability to build business and public institutions.

140 Wise Growth Strategies in Leading Family Businesses

~ IM) Samuel C. johnson Family Enterprises

IMD Distinguished Family Business Award Winner 2002 By Professor Joachim Schwass, Professor of Family Business, IMD, and Director, The IMD-Lombard Odier Darier Hentsch Family Business Center

"We should worry not about whether we have lived up to the expectations of our fathers ... but whether we, as fathers, live up to the expectations of our children."

Sam Johnson

The founder of what is today the Samuel C. Johnson Family Enterprises was Samuel Curtis Johnson (1833-1919). In his early working years, Johnson was employed at the Racine Hardware Company, where he sold parquet floors. In 1886, he acquired the parquet flooring business, which in its first year generated a profit of US$268.27.

Recognizing people's need to treat wooden floors, Johnson developed a wax product from beeswax and other components that he mixed in a bathtub. In 1888 he introduced Johnson Prepared Wax and bought his first national advertising in the Saturday Evening Post. By the turn of the century, wax sales were larger than the revenues from selling parquet floors, so Johnson discontinued the sales of parquet. As the company's wax products gained wide acceptance, Johnson exported them to Britain and even as far as Australia, and the number of employees ballooned to over 100. By 1900, Johnson Wax was at the forefront in human resources policies, offering paid vacations to the employees. In 1917, it introduced a profit-sharing plan that gave employees 25 per cent of the company's earnings.

In 1919, Samuel C. Johnson died, and his son, Herbert Fisk Johnson (1868-1928) took over. Herbert's sister, Jessie, neither worked in the business nor inherited ownership. Herbert, who had joined the business at 20, working closely with his father, became an equal partner in 1906, at which time the company became SC Johnson & Son. On Samuel's death in 1919, Herbert, then 51, became president. More technical than his father, Herbert's research-orientation led to a number of new cleaning and treating products, which earned him a reputation as the "real business builder" through diversification. In 1926, Herbert, who shared his father's strong sense of social responsibility, established a 40-hour workweek, calling his approach "enlightened selfishness". In 1927, on occasion of the Christmas Profit Sharing, Herbert gave a widely respected speech that still serves as a philosophical

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guide for current generations: "The goodwill of the people is the only enduring thing in any business. It is the sole substance ... the rest is shadow!"

In 1928, Herbert unexpectedly died at age 59 and left the family business devoid of any will or succession plan. His son, Herbert Fisk (HF) JohnsonJr (1899-1978), assumed management control- he was 28. It took a decade to clarify ownership with Henrietta, HF's younger sister, who eventually received one third of the shares. This protracted legal battle caused HF to state that he was "never going to let that happen to [his] son", and in his will he subsequently designated his son, Sam, as his successor.

HF led the 500-strong company through the Great Depression with no layoffs. He is widely seen as the creator of international growth and the progenitor of new manufacturing technologies. HF was, in fact, the company's first chemist. On the personal side, besides the relatively early loss of his father, he also suffered the death of his four-year-old daughter and a subsequent divorce from his first wife, who suffered from alcoholism. The other two children, Karen and Sam, moved between their father in the Midwest and their mother in New York.

After the Depression years, HF started to worry about the supply of the key ingredient in the company's wax products, which comes from the carnauba palm in the Brazilian rain forest. His background as a chemist had raised his awareness of the importance not only of the manufacturing technology, but also about the nature of the raw materials used in production. Believing strongly in product quality he launched the "Product Plus" concept: every new Johnson product had to have a distinct advantage over everything else on the market, or it had to be new and unique enough to outstrip the competition.

In 1935, HF bought an amphibious plane and led a 22,000-mile expedition from Milwaukee to the Brazilian rain forest to study the carnauba palm tree. The trip, which received broad press coverage, was described by Time magazine as "Johnson's search for the 'tree of life"'. The expedition had a strong, favourable impact on the 36-year-old HF. He returned invigorated and full of new visions for the business. In 1936, he invited Frank Lloyd Wright to design the new company headquarters in Racine, Wisconsin. He also wrote a book about his Brazilian sojourn. On the inside of his son's copy he wrote: "Sammy, I hope you take this trip someday. It changed my life. Love, Dad."

Sam later described his father as "a scientist, and indisputably proud of it, the 'father' of technology at Johnson Wax", an "internationalist" who created an "organization he could trust" so he could travel, enjoy himself and "still take care of the business details on an overseas journey". According to Sam, HF was "a creative leader" who "insisted on the best", drew superior performance from his people, and "believed in the benefits of retaining wise consultants and counsel", a man with a vision who thought in terms of entire generations, a "humanist" who believed in the good of individual creativity and in the "dignity of man and woman". Sam quotes his father as frequently saying: "Every community where we operate should become a better place because we are there." Sam remembered his father as "a family man who ... took his son hunting and fishing".

In 1953, HF wrote Sam a letter that was to be opened upon his death. Twentyfive years later Sam opened it:

Some people may try to challenge you by saying you are not doing as well as your grandfather or father did. This is something you should not give any worry

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to because what your great grandfather, grandfather and I did was to build on a foundation of honesty and integrity in business. Just go ahead in the way you think best. I'm confident in your future.

Sam (1928-) joined the business as his father's assistant in 1954, with a master's degree in business from Harvard Business School in his pocket and two years of US Air Force service. On the advice of a consulting firm (Booz, Allen and Hamilton), HF developed a career plan for Sam. Later, Sam recalled that he had been upset about having to follow a carefully laid-out development plan - after all, wasn't he the son of the owner and entitled to go straight to the top? But in time, he came to appreciate the wisdom of the incremental approach thought out by Jim Allen of Booz, Allen and Hamilton that initially had him directing a newly created department responsible for developing new products. The Johnson Wax Company had grown internationally, but it was still primarily limited to wax products for various applications. "I had just become the company's new products director, and our section had decided that the insecticide field was a good and growing business, one in which we wanted to play a part."

Sam recalls his first product idea:

I had a mock label created, stuck it on a can, brought the sample of "Johnson's Aerosol Insecticide" to my father, and announced that this was a business we surely ought to enter. He looked at me and then at the can. "Don't you realize we don't make any products without wax in them?" he said. Although he was the boss, he was also my father, so I was able to risk a little impertinence and I answered, "Well, we could put a little wax in it, but I don't think it would do the product any good." My shot at humour didn't throw him off track. He told me we didn't know anything about bugs. I replied that we were learning. He said: "OK, then let's get down to fundamentals. Tell me what is better about that product than what is already on the market." I offered: "It will have a nice label and be an aerosol." He said, "Does it work better than the other ones?" I admitted finally: "No. It's just a darn good aerosol insecticide." My father replied, "Then take it back to the lab and when you have something that is better, come back and we'll talk about the insecticide business." His instincts were right and we did come back with a better insect killer: Raid. When we came out with an aqueous formula, we indeed had a Product Plus. It smelled better and killed insects without harming plants.

The following years saw a number of new products move the company away from the wax-related products: the Garden Bug Killer, Off (a mosquito repellent), Pledge (a furniture duster and polisher), and Glade air freshener. Within a year of market introduction, they represented 35 per cent of total domestic sales. The new product development process created by Sam was so innovative that it became the subject of a Harvard Business School case study, and stands today as a model for new product development organizations.

In 1959, Sam moved into international operations and travelled to Europe. In 1960, he was named European regional director, and in 1962, he was promoted to International vice president. Sam's first important setback occurred in 1965 when he oversaw the consolidation of European regional manufacturing in a large new plant in the Netherlands, an effort that was designed to reduce cost and

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improve efficiency. Faced with overcapacity, start-up problems and major losses, Sam was called back to the US. His father was furious about the bad results. Several weeks later, at the age of 65, Sam's father suffered a stroke that left him severely handicapped. He could neither read nor write well and became very irritable. Sam recalls, "I always wondered whether I had given him the stroke because of the mess-up I'd made in Europe."

In 1966, at 38, Sam became president of the company, which now boasted annual sales of US$171 million. His father, now honorary chairman, wintered in Florida, so Sam had to fly down every two weeks to report. These visits often turned very unpleasant. His increasingly irritable father often railed, "I don't like these numbers. And I don't like you either. And you're fired." Later, Sam recalled that this was a most difficult and depressing time. When his father died in 1978, Sam received the letter his father had written in 1953 for posthumous delivery. The 25-year-old letter "released [him] to be [himself] and not just a clone of [his] father".

By then, Sam had put his imprint as a strong leader on a company with revenues reaching US$1 billion in 1978. This was based on a strong, international expansion through diversification and acquisitions. He had decided on this approach during a one-year sabbatical he took in 1968 after his father's stroke. He also planned for the ownership transition from himself to his four children by setting up trusts for them and the grandchildren.

In 1976, in a statement of corporate philosophy entitled "This We Believe", Sam codified the basic principles that he believed drove the family business. It built on his grandfather's famous 1927 Christmas Profit Sharing speech:

Employees: We believe that the fundamental vitality and strength of our worldwide company lies in our people.

Consumers and users: We believe in earning the enduring goodwill of consumers and users of our products and services.

General public: We believe in being a responsible leader within the free market economy.

Neighbors and hosts: We believe in contributing to the well being of the countries and communities where we conduct business.

World community: We believe in improving international understanding.

Further to these principles, Sam added: "The way of safeguarding these beliefs is to remain a privately held company. Our way of reinforcing them is to make profits through growth and development, profits which allow us to do more for all the people on whom we depend." Dick Hansen, current CEO of Johnson Financial Group, talks about how these beliefs make a difference for employees in a family owned business: "I see Sam's integrity through his respect for the community. Sam challenges us to make our communities better because we are there. He doesn't talk values, he lives them."

One strong example for this values-based management approach occurred in 1975, when Sam Johnson voluntarily and unilaterally banned the worldwide

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use of chlorofluorocarbons (CFCs) from all Johnson aerosol products. At the time, unproven research suggested that CFCs might harm the ozone layer. Both internally and externally, Sam's decision was widely criticized until, three years later, it was validated when the US and Canada officially banned the use of CFCs in aerosols. It also turned out to be a smart business decision as company scientists discovered that propane was a cheaper substitute for CFCs, a strong advantage over competitors.

The business continued to grow in the consumer products field. In 1970, Johnson Diversified, now known as Johnson Outdoors Inc., was created, making leisure products like boats and camping equipment. The Johnson Bank was started in Wisconsin. These steps were made both out of fear and logic: fear of being cornered by larger, publicly held consumer products companies, like Procter & Gamble; logic by providing entrepreneurial opportunities in new businesses to the next generation of family business leaders.

Sam had married Imogene Powers, whom he had met in college, in 1954. Together they have four children: Curt (b. 1955), Helen (b. 1956), Fisk (b. 1958) and Winnie (b. 1959). All four were educated at Cornell, where the business school is called the Johnson School. Each of the children decided to join the family business without pressure from their father. Although they recognized the expectations and pressures put on next-generation members of the owning family, they felt the company was a special place. Like their father a generation before, they believed family leadership was necessary to ensure the core values - which led to its success - continued to guide the operations.

In 1985, Helen was the first member of the fifth generation to join the company as an associate product manager. In 1986, Winnie joined as a public affairs manager. One year later, Fisk joined the company as a marketing associate. And in 1990, Curt joined the company when Windpoint Ventures, a venture capital fund he started, was folded into the family business.

Late in his career, Sam began to suffer from the same addiction to alcohol his mother had once had. With strong support from his wife and children, he decided to confront this dependence. After a one-month treatment in 1993 in the Mayo Clinic, of which he was the chairman, he returned home cured, and readying himself for retirement from day-to-day responsibilities. He started to think about his father's journey to Brazil and what it had meant in his life. Recalling the note his father had left in his book expressing the hope that Sam would make the same journey one day, Sam decided to follow in his father's footsteps.

The original aircraft had been sold and crashed in Asia and could not be salvaged. Sam decided to have an exact replicate built, a project that took over three years. On 22 October 1998, Sam and his two sons, Curt and Fisk, took off from Racine, Wisconsin, for a month-long trip to the Brazilian rain forest, following the route of Sam's father well over 60 years earlier. There the rest of the family joined them. The trip proved to be an invigorating experience - much as it had been for his father. But Sam also wanted it filmed as a legacy for his family and companies. The film, Camauba: A Son's Memoir, turned out much more personal than intended. In it, Sam speaks very openly about his father, himself and the difficult periods in their lives. Even his children had not understood the extent of Sam's difficulties with his father. Fisk said, "My brother and sisters and I have been huge beneficiaries of the relationship that my father had with his father. I think my father said to himself, 'I'm never going to put my children through this'." His brother Curt

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stated in an internet posting to the company employees: "The trip has provided us with an opportunity to talk about some of the issues and opportunities facing the family businesses. I feel connected to the visioning process my grandfather experienced when he made this trip."

By this time, the family had created a council with regular meetings of all family members to deal with both family and business matters. Sam had a strong interest in the history of family businesses; he knew well their fragile structures, and he devoted much attention to preparing next-generation family members and creating a large degree of transparency. The council became the forum for succession planning. It became increasingly apparent that the children had different interests and leadership aspirations. Sam, who had seen many family businesses suffer from sibling rivalry, wanted to avoid siblings reporting to each other. Without conflicts, the family arrived at a suitable arrangement in 1999.

Fisk, who has a PhD in applied physics, became chairman of SC Johnson, the core consumer products business. Helen became chairman of Johnson Outdoors Inc., the recreational products business. Curt became chairman of JohnsonDiversey, now the second largest institutional and industrial products and services business in the world. And Winnie, who had expressed a lesser interest in the business, became president of the Johnson Family Foundation. Helen described the functional separation as follows: "We each found our spot. Curt was the wheeler-dealer entrepreneur, Fisk was the technician, and I was the one interested in marketing."

In a joint statement, the four children talk about the relationship between the two generations:

Under Dad's leadership, within just a few brief decades, the Johnson business went from a small wax company (US$171 million in sales) to four major global enterprises (combined US$8 billion in sales) that include household goods, innovative commercial products and services, environmentally-responsible polymers, diverse financial services and some of the most recognized brands in the recreational industry. And he didn't just champion the business. He took seriously the challenge of making our world a better place to live. Whether funding the restoration of Martin Luther King Junior's birthplace, contributing time and money to the World Business Council for Sustainable Development, or helping protect a unique ecosystem in Brazil, Dad has dedicated himself personally and positioned the family businesses to shape our communities and protect our planet. But even more important to us, his children, is the support Dad provides right here at home. From the family dining room to the corporate boardroom, he has been a coach, protector and friend to each of us. He has guided us with wise counsel, but also encouraged us to follow our hearts.

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~ IM) The Bonnier Group

2003 "IMD-Lombard Odier Darier Rentsch Distinguished Family Business Award" Winner By Professor Joachim Schwass

The early generations The Bonnier Group is a leading Scandinavian diversified-media conglomerate of over 200 privately owned companies. The ownership is in the hands of 73 family members from the fifth to the eighth generations who are direct descendants of the founding family. The family appears strongly committed to building and expanding a business that grew from modest beginnings when Gerhard Bonnier, the founder, opened a library in Copenhagen in 1804.

Gerhard Bonnier (1778-1862) was born in Germany as Gutkind Hirschel, son of a banker in Dresden. When he was 22, Bonnier migrated to Denmark. There, making a fresh start, he grew his modest library into a book publishing business. He married a Danish girl in 1803. They had eleven children. Adolf, the firstborn, opened bookstores first in Gothenburg, Sweden (1827), in Uppsala and then in Stockholm. Another brother, David Felix, took over in Gothenburg; he later started the daily newspaper Gotehorgsposten. Meanwhile, the youngest son, Albert, took multiyear training in various publishing firms in Scandinavia and abroad. In 1837, he opened his own Stockholm publishing firm, called Albert Bonniers Forlag, which became the platform for today's media group. The publishing business expanded, most notably at mid-century, with a backward integration of composition and printing. In the second generation 100 per cent ownership was maintained. From his operating profits, Albert invested in a printing house. This led to an initial investment in Dagens Nyheter, a leading Swedish daily newspaper. The next generation bought more shares in Dagens Nyheter, and in the 1920s, the family became the dominant owners.

Albert and Betty had three children: two daughters and a middle son, Karl Otto (1856-1941). Following the pattern of selecting the first-born male descendant, the parents viewed Karl Otto as the natural leader of the family company. At the death of his father in 1900, Karl Otto became the sole owner (his sisters received no shares in the business). The first three generations thus upheld a strict ownership strategy: total ownership control by one descendant, either prepared for this role, or by separation from other family members. While Gerhard had had the idea that the family should get involved in distributing books, the second generation,

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represented by Albert, pursued publishing. This laid the foundation for the culture that drives the family today: a strong interest in culture, and trusting, respectful relationships with authors. In the third generation, Karl Otto took the company in two directions:

The business model was broadened to prepare for diversification into daily papers and magazines. The initial investment in Dagens Nyheter became a controlling interest in what, by that time, had become the largest daily paper in Sweden after World War I. The family as a driver for the business and a guarantor of the values greatly increased with a move to a stately family home in an elegant part of Stockholm. The home, which was called Nedre Manilla ("lower Manilla"), quickly became a focal point in the lives of all future Bonnier generations. Karl Otto expanded the building for his ever-growing art collection. He and his wife, Lisen, raised their six children in Manilla and used it for social gatherings and business, often entertaining Bonnier Group authors. The Bonnier children attended many of these dinners and grew up with intellectual curiosity and cultural education, and gradually the boundaries between family life and business life faded.

In the fourth generation, Karl Otto's first son, Tor (1883-1976), assumed both business and family leadership. Daughters were again excluded from the family business. Once married, they left Manilla, and lost their informal contact with the business and Bonnier authors. At Karl Otto's death, the two daughters inherited some real estate, but business ownership went to Tor, Ake and Kaj (a fourth son, Gert, was pursuing an academic career). The distribution of ownership was slightly decreasing following birth order. After three generations of ownership concentrated in one hand, for the first time, a new rule came into play: male descendants who were working in the family business received ownership. This working partnership model, however, was in no way egalitarian- Tor dominated. Ake moved to the United States. Kaj assumed leadership of the Bonnier's traditional book publishing. The applied ownership principle represented a mix of primo genitur and "operative partners" rules.

The fourth generation rigorously pursued the new, enlarged business model: under Tor's leadership the magazine publishing firm Ahlen & Akerlund was acquired in 1929. This was a milestone for the family business. Until then, it had, for the most part, grown organically, or through gradual investments in the newspaper business with inherited capital. Acquiring Ahlen & Akerlund was a big risk: the price of well over €1.0 million equalled the approximate value of the family business. The acquisition soon became a benchmark: future Bonnier generations revisited it whenever they were considering large investments.

The Bonnier family business was now in book publishing, newspaper editing and weekly magazines editing. The public image of the family business was, nevertheless, still associated with book publishing; when, in the 1940s, this branch of the business had been producing significant losses for more than two decades, the family never questioned its long-term publishing commitment and subsidized its publishing interests with profits from the well-run newspaper and magazine divisions. But internally, the family was growing more critical of Kaj's leadership. In 1952, Kaj asked to be bought out by Tor and Ake, and his shares were distributed

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pro rata parte. Taking account of the initial unequal shareholding, this brought Tor to about 54 per cent ownership, and Ake, who was still living in the United States, now had 46 per cent. And so, at this time, the family business returned to a dominant owner stage, the model on which it had been founded.

The impact of a growing family on ownership

Tor had married three times. He had three boys with his first wife Greta: Albert Jr (Abbe), Johan and Lukas. The next two marriages produced three more male descendants: Simon, Karl-Adam and Mikael. Ake, Tor's brother, had one son only, Gerard, which simplified the ownership inheritance. But Tor's situation was more complicated. During his first divorce, his first wife, Greta, strongly defended the ownership rights of her sons. Each received a third each of Tor's shares, with Abbe, the eldest, getting an additional 1 per cent so his siblings would see him as the dominant leader. When the younger half-brothers were born, each of the eldest brothers gave 1 per cent of their shares to them. From two owners in the fourth generation, the family business now had seven owners in the fifth generation with very unequal shareholdings, both inter- and intrabranch. To gain clarity and commitment, a SO-year ownership contract was drawn up along the following lines:

The family wanted to stay together and build the business Family members who wanted to sell were not allowed to go outside the family.

While other cousins pursued outside careers, in the fifth generation, management responsibilities were divided among Abbe, Lukas and Gerard as follows:

Abbe looked after the newspaper business and emerged as the leader, with a strong entrepreneurial drive Lukas looked after the magazine business Gerard became head of book publishing.

Lukas said of this arrangement between the cousins: "In a way, we did not need a paper contract. The bond was strong. We wanted to stay together and had more than enough trust in each other."

Building on his father's diversification strategy, Abbe added a daily evening paper to Dagens Nyheter, which continued to be very successful. In 1944, Expressen was launched. By now, the Bonnier family business had such a strong position in publishing and editing in Sweden that public concern was growing: the family, it was said, was too powerful. Abbe was troubled by the danger this perception might entail. Being growth oriented, he adopted the view that the family's future was in unrelated diversification, away from Swedish media. So, starting in the early 1950s, Abbe launched a more than three-decade expansion. The Group made initial investments in vertically related industries like paper. Increasingly though, the Bonnier family invested in and acquired companies in unrelated industries like furniture production, disposable tableware, packaging, engineering and ferry services. When younger members of the family talk about Abbe's enormous entrepreneurial drive, they tell of the time Abbe travelled to the southern tip of Latin America where he discovered shrimp farming and immediately wanted to

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enter that business. Lukas said: "Abbe was unstoppable. But he did consult with his cousin Gerard, the single largest owner, before making any investment. And there was good corporate back-up by a solid finance director."

While fourth-generation Tor was approaching his seventies and reducing his workload, in the early 1950s, Abbe shifted the responsibility of the traditional businesses to Lukas and Gerard. They enjoyed freedom to run the newspaper, magazine and book publishing businesses as they saw fit. Abbe got involved only when the two of them faced difficulties or needed money. By 1957, Abbe saw his main responsibility as managing the concern and diversification projects. But his entrepreneurial energy and enthusiasm spilled over to the non-family managers he had put at the top of newly acquired companies.

CEO selection and appointment was the most important vehicle for the owning family to influence the growing business. Although the family's ownership interests were combined in a holding company over which Abbe presided, there was no formal governance structure. Abbe was the leader; he made all key decisions. He was constantly travelling and visiting the various companies, often with his wife, Birgit, who played an important role in many of his business decisions. She provided input and advice and often evaluated potential candidates for management positions after private dinners with them and their wives.

Abbe's summerhouse in Dalaro, on the coast south of Stockholm, was the venue for many dinner parties with business associates, employees and family members. In good family tradition, the children participated in these parties and celebrations, meeting business people and following the elders' business discussions. Decision making was, therefore, highly centralized, but always carefully checked with the other family shareholders, particularly Gerard, who was now the largest owner. Gerard had carved himself a strong leadership position in the publishing business from which he aptly represented the family's interests. He kept up steady contact with leading writers and artists and maintained and grew the family's art collection.

By the mid-1970s, with new legislation requiring employee representation on corporate boards, the Bonnier family's decision process needed to change. Soon, decisions were taken more formally, but the family came to board meetings with one voice and a consensus reached in previous informal consultations, often during family meals.

Abbe continued the industrial diversification, financing it entirely from cash the family's businesses generated. This meant that the traditional publishing business had a hard time, since it could have benefited from the financial resources that were flowing to the industrial companies. In 1976, a new financial paper was launched: Dagens Industri. Initially it was seen as a weekly technical information sheet, but in 1980, after accumulated losses, the Group positioned it as a business paper published three days a week, then five, and finally six. Hasse Olsson, who today heads the Bonnier Business Press division, recalls:

When I joined the Dagens Industri paper in 1980 there were 35 people. Today there are 9 business papers in different European countries employing 1200 people. Until the advertising slump in 2000, we were consistently the most profitable business paper with gross profit margins of 40 percent.

In 1978, Abbe stepped up from working president to working chairman of the Group. He was 71, but still very much in control. Since no family member was

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ready for the presidency, a non-family outsider was chosen. Until Abbe's death in 1989, there were two non-family presidents, no doubt because it was difficult to work under an active, powerful chairman. This governance structure, born of necessity, later became the new model for the family: either a family member or a non-family member would hold the chairmanship and the presidency respectively; thus, power between ownership and management was balanced. Abbe held the chairmanship until 1988, at which time his younger brother Lucas succeeded him (he remained for four years).

The sixth generation arrives

The sixth generation was growing up, and there were more family members now. The Tor and Ake branches, which had grown to seven male descendants and owners in the fifth generation, had now evolved to 28 male and female descendants in the sixth generation. For the first time, female descendants were entitled not only to ownership but also to employment in the business. In fact, Abbe, Lucas and Gerard agreed that it was good to have many next-generation family members work in the business in order to see who emerged as the key candidate for leadership in the sixth generation. Abbe did not seem to be overly concerned with succession planning. He also had two daughters, which according to family tradition meant that a male nephew would succeed him. And so it was Carl-Johan, the third son of Abbe's brother J ohan, who became the next -generation leader. Born in 1951, Carl-Johan entered the family business right after taking a business degree at Stockholm School of Economics. He said:

There were no real succession discussions in the family. It just happened that several of the sixth generation members entered the business in various functions. For me, it was just natural and easy to enter the family business because it seemed so much more interesting than any other business.

Succession from the fifth to the sixth generation represented an enormous paradigm shift ("breakpoint") for the family and for the business. Up through the fifth generation, the concept of the dominant owner had prevailed. Ownership and management control was limited -by choice - to as few persons as possible. Even though the number of owners had grown, the consensus was that there had to be one dominant leader. Reflecting on reasons why the family business had survived for so many generations, the sixth-generation family members agreed on the following explanations:

Ownership was never an issue. Each inheritor understood that he would hold ownership for the next generation. A strong consensus approach combined with a "communication culture". Family members raised business issues in their informal meetings, and when a member seriously objected to a project, it was dropped. Interest in the business was nurtured in most family members from a young age.

Lukas reflected on this breakpoint for the family business:

When I was chairman, after the strong and entrepreneurial leadership of Abbe, I believed that the only way forward for our enormously diversified business and

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for the very large number of sixth generation family members would be to go public. I sincerely believed that we had reached the limits as a family business. But I had not counted on the energy and enthusiasm of the next generation. They persuaded me that they were ready, willing and able to take our privately held family business to a new level, by building on the tradition, but in an innovative, different way. I changed my mind and encouraged them to do it.

Managing a complicated generational transition In the early 1990s, the sixth generation members- together with Lukas- went through an educational programme about family business structures and strategies, which created a platform for learning, discussion and development. The programme provided a common language for the large sixth-generation family group and allowed them to create a vision of how the family would keep adding value. Carl-Johan emerged as the natural leader and was appointed CEO in 1991. Lukas Bonnier soon thereafter stepped down as chairman of the board and was replaced by a trusted non-family former executive.

The business model Abbe had created now came under pressure. The diversification strategy had stretched financial resources and human resources to the limits. The once tightly controlled media market in Sweden had opened up, and the internet offered enormous opportunities. The sixth generation rapidly concluded that it should focus on the traditional industry- media- and capitalize on new opportunities there, instead of spreading resources thinly across the unrelated diversified industries. In Carl-Johan's words, "The family had a name in media- the family always liked the publishing of books, papers and magazines; therefore, it was an easy decision to pull out of the wide diversification and instead focus nationally and internationally on the business that is in the blood of the family." Until 1998, there were a number of divestitures, and the proceeds went to expanding the media businesses and acquiring related companies.

Another turning point came in 1998 when the family considered increasing its investment in Marie berg, a publicly traded publishing business in which it held just under 50 per cent ownership. The Bonnier Group already had substantial business dealings with Marieberg, and merging the activities made strategic sense. Marieberg's revenues were similar to the Bonnier Group's, so the investment would be a very sizeable financial commitment. The Bonnier family essentially had two choices:

Merge the Bonnier Group into the publicly traded Marieberg company, thus providing access to further growth capital on a public stock market and providing family members with exit opportunities, or Take Marieberg private and merge it into the Bonnier Group (still 100 per cent privately owned by the Bonnier family).

The Bonnier cousins preferred the second option. They feared that going to the stock market could increase the risk of the family business breaking up over time. The emotional attachment to the media industry, and more specifically to the traditional book publishing business, was so strong that the family was willing to pay the price of this acquisition. In fact, the overall purchasing package was close to €500 million, which represented about half of the Bonnier Group's assets. In order to finance the project, bank loans were negotiated and several assets were

152 Wise Growth Strategies in Leading Family Businesses

sold. Within 12 months, half of the borrowings were repaid. This project reflects the continuing entrepreneurial drive in the owning family. Several times in earlier generations the family had proven to be willing to accept large risks by acquiring large companies, which helped them, each time, take the family business to a new platform.

The Bonnier Group: modern business structures

Through this acquisition, the head of Marieberg, Bengt Braun, joined the Bonnier Group. He became group president and CEO, and Carl-Johan Bonnier became executive chairman of the board. Braun had had a successful career with Procter & Gamble before taking over at Marie berg in 1989. He brought experience of a structured organization and management competence to the Bonnier Group, the media activities of which are now divided into six distinct business divisions:

Books Magazine Group Business Press Newspapers Business Information Entertainment

A president who reports directly to Bengt Braun heads each division. In order to maximize freedom and initiative in the six divisions, the size and functions of the Group head office have been drastically reduced. The head office functions include Group Finance and Group Human Resources. At the top of the hierarchy, CarlJohan Bonnier, representing the family owners, and Bengt Braun, the non-family CEO, share the power. To facilitate frequent, close contact, Bonnier and Braun have adjoining offices on the same floor of the Bonnier building in Stockholm.

The important generational transition in the 1990s brought two family issues to the fore:

The family was rapidly growing - 28 descendants in the sixth generation, and the seventh generation likely to be a multiple of this. The family would be more and more widely dispersed around the globe, with only a fraction of the younger family members living in the Stockholm area. The old shareholder agreement from 1952, binding family owners together, would expire in the year 2000.

The sixth-generation family members realized that the three-year transition from the fifth to the sixth generation had produced an effective outcome for the family and the business because they had jointly built a transparent decision-making process that involved all family members. Contrary to the prevailing centralized decision making by one leader in all previous generations, the family now required an institutional - but effective - approach to exercising responsible ownership and management power over a growing business empire.

A new approach to governance

The family constructed a new approach to governance that rests on two pillars:

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On the business side: Albert Bonnier AB combines the family ownership interests in a holding company, which has 12 family members (seven ordinary and five deputy members) plus three honorary family members on the board. The operating company, Bonnier AB, fully owned by the holding company, has a board with five family members who are nominated by the holding company board, five non-family members and three employee representatives, as required by law. This board decides on any investment larger than €2 million. Today, the chairman of both the holding and operating companies is Carl-Johan Bonnier. On the family side: the Bonnier Family Foundation takes care of all family issues. The foundation has a board of eight family members, six from the general assembly and two from the holding company board, plus the company chairman. The chairman of the family foundation is sixthgeneration Hans-Jacob Bonnier, who holds a six-year mandate.

In the hierarchy, a general assembly is above the business holding company and the family foundation. The general assembly today includes all 73 family owners who meet once a year for a full day meeting preceded by a dinner the night before. This "owners day" is attended by the owners (with or without spouses), non-family board members and the company management officers. The general assembly elects the holding company board and chairman, and the family foundation board. Family members exercise their voting rights in two ways:

On the ownership side: their votes are weighed according to the percentage of shares each family member owns On the family foundation side: each family member has one vote.

The Bonnier Family Foundation has become a meaningful, well-structured institution whose mission is to keep the family together and actively involved in a range of activities that go beyond ownership. The board, which meets five times a year, is elected every two years in order to allow a broad involvement of many family members. A number of activities and committees exist:

Family mansion committee: looks after the family home Manilla with its portrait gallery, renovations and rules for the utilization by family members Financial Committee: sets up budgets for the family foundation Education committee: formalizes and transmits the family's owner philosophy, to arrange trainee and summer jobs and scholarships Family social events: golf tournaments, Christmas party, cinema previews, and so on Family archives: keep track of the large number of family documents and publications Gutkind & Company: a next-generation activity.

Gutkind & Company came into being in the late 1990s as a formal initiative to prepare and educate the young next-generation family members for ownership. The agenda is based on education and fun. In 2003, there are 28 members who are 16-32 years old. They have their own board with seven members elected every

154 Wise Growth Strategies in Leading Family Businesses

year, which allows regular rotation and training of board functions and formalities. The chairman is automatically a deputy in the Bonnier Family Foundation. The activities include two yearly educational seminars, one of which lasts three days. The members have their own Website for easy contact in between meetings. The family foundation chairman, Hans-Jacob Bonnier, who initiated this activity, recalls how the first meeting was launched:

We wanted to create a strong bonding between these young family members who did not all know each other. So we put them on a boat going to a barbecue on one of the islands outside Stockholm. We staged a technical engine problem so all had to organize themselves in an emergency situation. That really got them going, and the whole event became more dynamic and fun!

The family ownership philosophy On the general assembly level, in 1998, the family unanimously signed a new shareholder agreement, well before the 50-year agreement expired in 2001. The new agreement is valid for 30 years (until 2030). The underlying philosophy of this agreement introduced new elements:

The family does not want to think in terms of branches, which might endanger unity The contractual period of 30 years is sufficiently long for the current sixth and seventh generations to protect their unity, but short enough so that the following generation can freely decide on their own ownership structure An internal market for shares, first between family members and only secondly with the family foundation, based on a clear formula.

The family also defined their ownership philosophy:

"We want to be responsible owners with high integrity, moral and ethical standards" The family is guided by the traditional family values: "Servants of free speech, responsibility and quality" The family wants to stay together and be loyal to the majority A moderate dividend policy Hire the best professionals to run the business Provide job opportunities for family members.

Hans-Jacob Bonnier comments on the ownership philosophy: "For me, my grandfather's statement that we are in the business to be servants of free speech has really meant a lot."

In 2003, 12 family members were working on different levels in the Group. No one family member reports to another family member. Marcus Forsell, a seventhgeneration family member who heads the activities in radio, said that, "As family members we have to prove more and work harder than non-family employees."

The non-family president, Bengt Braun, notes that,

It is in the company's interest- and mine as a president- to have more family members work in the business. The family knows that they must be competent

AppendixC 155

for the job, of course. And, as family members, they bring a deep-seated commitment and understanding which is good for all.

Conclusion

In 2003, just one year before the Bonnier Group celebrates its 200th anniversary, the sixth and seventh generations appear to be firmly committed to the future as a family business. The Group has governance structures in place - both for the business and for the family- that they use actively and to ensure transparency, commitment and emotional attachment to the business. This represents a logical evolution since the first generation. Chairman Carl-Johan Bonnier states:

Clearly, we have survived so many generations because the business has always been successful. In addition, our industry is exciting, glamorous and fun, and makes it attractive for family members to work. Of course they must be competent and follow the rules. I am convinced the business will continue to perform for another generation. If it is still a family owned business -that is up to each coming generation to decide.

This article was written by Professor Joachim Schwass, IMD, based on interviews with fifth, sixth and seventh generation family members and senior non-family management of the Bonnier Group.

156 Wise Growth Strategies in Leading Family Businesses

~ IM) The Barilla Group

2004 IMD-Lombard Odier Darier Rentsch Distinguished Family Business Award By Professor Joachim Schwass

Barilla is a household name all over the globe, and the family behind the name has recently been awarded the 2004 IMD-Lombard Odier Darier Hentsch Distinguished Family Business Award. The Barilla Group is not only the largest Italian food processing business but also the world market leader for pasta products. The business is controlled by the fourth generation of direct descendants of the founder Pietro Barilla.

The beginnings

In 1877, Pietro Barilla, then in his twenties, opened a bakery shop in the centre of Parma, Italy, where he sold bread and pasta. He produced the pasta in a traditional way using a small wooden press; the maximum daily capacity was 50 kilogrammes. With the support of his wife, and by working 18-hour days, Pietro grew the business slowly but steadily. Expansion into a second shop did not succeed, so he focused on developing the pasta production. He specialized in egg pasta, which differentiated his business from the mainstream offerings that used just flour and water. By 1900, he was using five wooden presses and five ovens. Ten years later, the first factory was built, employing 80 workers. This factory was run by Pietro's two sons, Riccardo and Gualtiero, the second generation, who were then in their thirties.

The second generation

Riccardo and Gualtiero had worked alongside their father since they were 14 years old. In 1914, the two brothers took the unusual step of launching a marketing campaign with posters showing Barilla pasta with a mother and child. The objective was to reach the consumer directly and create demand for Barilla products.

While Riccardo was in charge of production, Gualtiero looked after sales. He emerged as the entrepreneur and risk taker. He wanted to be a missionary and never married, but his father pushed him to join the business, where he had a reputation for taking good care of the employees. But in 1919, Gualtiero died suddenly and unexpectedly from food poisoning. Ownership reverted to Riccardo, thus returning the family business in the second generation to the owner -manager

AppendixC 157

structure that had prevailed with the founder, with 100 per cent control in the hands of one family member.

The business continued to grow. In Parma, Barilla pasta was sold through company stores; in the rest of Italy, it was sold through grocers with exclusivity contracts. Following participation in international trade fairs, there were a few minor exports. World War I had led to a shortage of meat, and pasta was increasingly seen as an inexpensive but nutritious alternative.

The third generation

Riccardo, with the help of his wife, Virginia, and his two sons, Pietro and Gianni, continued to invest in both updating the production equipment and building the brand. By 1936, 700 workers were producing 80 tons of pasta and 15 tons of bread per day using six continuous presses. As in the previous generation, the functional responsibilities were split into technical (Gianni) and commercial (Pietro). The problems started when Pietro, the more entrepreneurially oriented of the two brothers, was drafted into military service in 1939 when World War II broke out. During this time, the government directed food production primarily to the army, and the consumer-based distribution system that Barilla had ably built up over decades was starved of supplies. Air raids also damaged part of the plant. Meanwhile, Pietro Barilla was driving trucks for the Italian army at the Russian Front. His son Paolo later said that the time during the war had greatly shaped his father's character: "He saw poverty, death and human misery. That certainly put everything else in perspective."

When he returned from the war, Pietro and his brother Gianni started to rebuild the business. For them, 1947 was an important year. Sadly, their father Riccardo died. They cancelled the supply contract with the Italian army and developed a new distribution system throughout the Italian peninsula by acquiring a fleet of small trucks. In 1950, Pietro visited the United States to study American marketing practices. As a result, they stopped bread production in 1952 in order to focus exclusively on pasta. The Italian graphic artist Erberto Carboni created a new trademark for Barilla, inspired by the white and yolk of an egg lying on its side. This was adopted as the firm's logo and is, after several evolutionary changes, still in use today. In 1955, Barilla was the first manufacturer to pack pasta in portionsized cardboard boxes. The consumer market was growing again. In 1960, Barilla became a joint-stock company. By this time, there were 1,300 workers and a sales team of 200. In 1965, Barilla opened a new plant for non-perishable baked goods, such as breadsticks and rusks. Four years later, the company built the world's largest pasta manufacturing plant in Pedrignano, with a surface area of 1.25 million square metres. The production capacity was 1,000 tons a day.

The breakpoint

The completion of the plant coincided with one of Italy's darkest periods. Having overheated in the 1950s, the economy now paid the price through enormous inflation. Political and social unrest grew. A spate of terrorism with almost daily victims and kidnappings created uncertainty and unrest. Many companies went bankrupt or were sold. Gianni Barilla felt that they should sell the business and leave the country, but Pietro wanted none of that. Gianni, who held 50 percent of the business, offered his share to Pietro, who said he could not buy his brother

158 Wise Growth Strategies in Leading Family Businesses

out. In 1971, the 94-year-old family business was sold to the US multinational, Grace, which wanted to enter the food market in Italy. While Gianni moved to Switzerland, Pietro - who had reluctantly agreed to accept the offer from Grace - stayed in Parma. His sons later commented about this period: "The sale broke our father's heart. He loved the business. And he had only one thing in mind -how to regain control of the business."

Grace undertook several strategic moves with the Barilla Company, which were important for the future:

1972: entered the milling sector with the acquisition of a first mill in Italy 1973: purchased the Voiello pasta factory, taking Barilla's market share in Italy to 15 per cent 1975: created the Mulino Bianco line of baked products that taught Italians a whole new way of thinking about breakfast 1977: extended the Mulino Bianco line to include fresh products: snacks, mini-cakes and soft sliced bread.

By 1979, the company had sales of €130 million and employed 1,600 people. But Grace was not satisfied with its entry into the Italian food market and put the company up for sale. Pietro Barilla, who had never given up hope of regaining ownership, worked feverishly to raise the necessary capital. For many months he commuted between Italy and New York. Once, his son Guido recalled, he felt so close to achieving his dream of recapturing the family's business but did not make it and broke down in tears. Finally, Pietro succeeded in buying back the company from the US multinational. His children recalled this period:

We were very young then, in our teens. But we understood how much our father was emotionally attached to the business and that he must have suffered when it was sold to Grace. But at home, he was always a warm, caring and positive father.

Pietro was 66 years old in 1979, but appeared to have boundless energy. Both he and the workers were enthusiastic, and a strong period of growth started. This time, the economic environment was considerably better than it had been a decade earlier. The government lifted the ceiling on the price of pasta, which had been one of the key irritation factors for Grace. Once again, the pasta market became attractive for manufacturers. In 1985, Barilla launched a creative marketing campaign with the Italian filmmaker Federico Fellini, which involved many Italian and international stars over the years. In 1989, a new line of pasta sauces was launched. Two years later, Barilla made a strategic move outside of Italy by purchasing Misko, the leading pasta manufacturer in Greece. The following year, Barilla bought Pavesi, the famous and historic bakery company in Novara, Italy. And then, in 1993, at the age of 80, Pietro Barilla died, leaving the company of 8,500 employees and 25 factories to his four children. Barilla Group revenues amounted to about €2 billion. After three generations of dominant owners, the siblings shared equal ownership of the 85 per cent their father had held. A new era began.

The fourth generation

The fourth generation consisted of Guido (1958), Luca (1960), Paolo (1961) and Emanuela (1968). The two eldest children joined Barilla in their early twenties,

AppendixC 159

shortly after their father had bought back the company. They both moved through various training phases in Italy and abroad and joined the board in 1987 as vice chairmen. Guido studied economy and philosophy and lived in New York for over two years. There he developed a strong interest in the US market and marketing practices. He joined the company's Barilla France subsidiary in 1982. Luca completed his education and management training in the US. In 1984, he joined the management team as a product manager, and the following year he gained direct sales experiences with Barilla France in Paris. In 1987, he became a member of the board of directors, assuming the role of executive vice chairman in 1988, together with Guido. He has been managing director of GranMilan since 1998.

Paolo was fascinated by professional motor racing and became a successful driver, winning the Le Mans 24-hour race in 1985 in the prototype category. He spent two years in Japan working for Toyota. There he gained strong insights into the principles of industrial quality. His father had agreed to support Paolo's ambition on two conditions: firstly, that his siblings were supportive of Paolo and, secondly, that he took this move seriously and professionally and gave it his best. When Paolo turned 30 he decided to return to Barilla, joining the French affiliate before moving to Italy. He joined the board in 1993. Emanuela pursued a career as a journalist but maintained a close interest in the business.

Guido and Paolo mentioned several key principles that their father had taught them all:

The business can only be truly successful if it improves the life of people The richness of man is the work - not the money, which is only a tool to go through life Have clarity on what you do and make it readable to the outside.

When their father died, the siblings made it clear that they would jointly continue to develop the family business according to the entrepreneurial spirit of the previous three generations. But they also wanted to introduce new ways of managing the growing business. Their father had run the business in a very paternalistic way. His soul can still be felt in the business headquarters in Parma, where photos show him in the plant and where his impressive art collection adorns the gardens, offices, hallways and boardroom. To support the professionalization process, the brothers brought in a senior, highly experienced outsider. In 1995, former Procter & Gamble CEO Edwin Artzt joined Barilla as CEO for three years. He brought structures, clarity, cost management and marketing expertise. In 1996, the siblings decided to aggressively enter the US market and built a state-of-the-art pasta factory, costing more than €100 million, in Iowa. They decided to import Italian pasta taste standards rather than adapt to existing US pasta tastes. just three years after market entry, Barilla was market leader for pasta in the US. Thanks to its high quality and a very effective marketing campaign, Barilla continued to grow in this important market. Marketing took up 4 per cent of the revenue. Other benchmarks during the first decade under the fourth generation included:

1994: acquisition of the number two pasta factory in Turkey 1997: construction of a new pasta factory in Italy, and launch of ready-touse sauce products

160 Wise Growth Strategies in Leading Family Businesses

1998: construction of a new pasta factory in Greece 1999: acquisition of Wasa, Europe's leading manufacturer of crisp breads.

Many other innovations, acquisitions and upgradings took place. A particularly remarkable move was the acquisition of the German Kamps Group in 2002. The Barilla siblings showed their commitment to entrepreneurial growth and a willingness to take certain risks - like previous generations before them - by staging a hostile €1.8 billion takeover of this publicly traded group of bread manufacturing and distribution companies in Germany and France. The Kamps Group had been built up by an entrepreneur who had bought many smaller companies, and it was experiencing structural and financial problems. Barilla, which had attained worldwide leadership in the pasta industry, saw this as an opportunity to strengthen geographic distribution weaknesses in the important German and French markets, and to substantially broaden its presence in the bread market. In many ways, this represented a return to the roots of the company, which had started 125 years earlier in both pasta and bread. The acquisition was financed with the support of several financial institutions, which held 49 per cent in Kamps, against the Barilla majority of 51 per cent. The brothers openly state that more work needs to be done in order to bring Kamps up to where it should be in terms of performance. Meanwhile, growth activities continue in other parts of the group. In 2004, the group employed 25,000 people, with group revenues of €4.4 billion and EBITDA (earnings before interest tax depreciation amortization) of €503 million (11.4 per cent of sales). The organizational structure shows a 100 per cent family-owned holding with four subsidiaries:

Barilla G + R Fratelli S. p.A (84.7 5 per cent) GranMilan S.p.A (100 per cent) Harry's (100 per cent) Kamps (51 per cent).

The family-controlled holding has a board with all four siblings as directors- with Guido as chairman - and four non-family directors. The siblings are also active on the boards of each subsidiary with a number of independent directors. Each subsidiary has its own CEO and management team.

Table A.2 Barilla Group revenues and EBITDA per subsidiary in 2003

Revenues (€ million) EBITDA (€ million)

Barilla 2507 322 Kamps 1495 131 Harry's 239 29 GranMilan 194 25

Adding value in the fourth generation

The brothers' governance philosophy is "Influence but don't interfere". In addition to their ownership role on the different boards, they are present in three key committees:

AppendixC 161

The brand equity committee: here, together with management, they discuss and jointly define the direction with regard to the brand ("everything you see") The product development committee: this committee decides on the launch of new products and the upgrade of existing ones The category review committee: this committee regularly reviews the business and financial performance of each business and product category.

The non-family CEO of Barilla, Gianluca Bolla, says that it is good for the business to have knowledgeable and visible owners. In fact, in 2003, the family published a booklet entitled "Changing to last", which formally states the views and the vision of the owning family. They expressed their intention to grow the business by "considering its original, founding values, meaning curiosity and passion stimulating the mind and expressing a concept capable of combining imagination and pragmatic thinking". According to Guido Barilla, the organization needs to be pushed and driven by new products, otherwise it runs the risk of becoming too self-centred. The family is both the driving force of this innovation and the guarantor of traditional values, including the safety of their products. They have stated their opposition to genetically modified organisms (GMOs). "There are too many questions and not enough answers. We cannot guarantee our food products to the consumer when we do not understand all risks."

The four siblings in the fourth generation seem at ease with the future. They draw on each other to build individual strength. They still live together in the group of houses their father built for the family in Parma, which facilitates frequent informal contact. They have made it clear that they will never sell the company or go public. In the words of Guido Barilla: "We are not a family business one can write a novel about, we are committed to simple, basic values and a daily discipline and process of constant improvement."

Professor Joachim Schwass, IMD, wrote this article based on publications of the Barilla Group; Les Echos 27 August 2001; "Barilla", by Monica Wagen in F.B.N. Newsletter, No. 23, May 1999, and interviews with the family and Gianluca Bolla.

References

Grant, Jeremy and Roberts, Adrienne (2001) "Swiss grain trader counts the cost of family ties: The restructuring of Andre has failed", Financial Times, 4 April.

Grow, Gerald (1988) "New Perspectives on Andragogy" in Malcolm S. Knowles, Elwood F. Holton III and Richard A. Swanson, The Adult Learner (51h edn.). Houston: Gulf Publishing Company.

Hill, Lillian H. (2001) "The Brain and Consciousness: Sources of Information for Understanding Adult Learning" in Sharan B. Merriam (ed.) The New Update on Adult Learning Theory. San Francisco: Jossey-Bass.

IMD-Lombard Odier Family Business Center (2001) Keeping the Business in the Family: A Study of Swiss Family Businesses. Lausanne, Switzerland.

Kellerman, Barbara (2004) Bad Leadership. Boston: Harvard Business School Press.

Kolb, D.A. (1984) Experiential Learning: Experience on the Source of Learning and Development. Englewood Cliffs: Prentice Hall.

Schwass, Joachim (2005) "Understanding the Successor's Challenges and an Effective Successor Development Strategy", in John L. Ward (ed.) Unconventional Wisdom- Counterintuitive Insights for Family Business Success Chichester: John Wiley.

Useem, Jerry (2004) "Another Boss- Another Revolution", Fortune, 5 April. Vermot, P. (2001) "Andre & Cie Pousse Son Chant de Cygne et Met Fin a ses

Activites Commerciales", Agefi, 12 March.

162

Index Compiled by Sue Carlton

AD Little 16, 117 Ahlen & Akerlund 20, 128 Albert Bonniers Forlag 19, 127 Ambadi Estates 115-16 AMM Foundation 16, 116 Andersen, Vagn Holck 86 Andre, Georges 30-1 Andre Group 30-1 Andre, Henri 31 Artzt, Edwin 140 award winning family businesses

best practices 7, 8-9, 10-11, 13, 15, 17,19,21,22

lessons from 2-4 success factors 1-2, 48

Barilla family Emanuela 139, 140 Gianni 21-2, 138-9 Gualtiero 21, 137 Guido 57, 139-40, 142 Luca 139-40 Paolo 57, 138, 139, 140 Pietro (founder) 21, 137 Pietro (son of Riccardo) 21-2, 50,

70, 138-9 Riccardo 21, 137, 138 Virginia 21, 138

Barilla France 140 Barilla Group 21-2, 137-42

acquisitions 22, 139, 140-1 financial difficulties 22, 138-9 governance structure 22, 140-2 leadership transition 70 and non-family CEO 22, 140, 142 philanthropic activities 55 sold to Grace 22, 139

Billund Airport 55, 86 Bloomingdale's 57, 109 Bolla, Gianluca 142 Bonnier AB 134

163

Bonnier family Abbe 20, 129-31 Ake 20, 128-9 Albert 19, 127-8 Birgit 130 Carl-Johan 20, 131, 132, 133, 134,

136 David Felix 127 Gerard 129, 130 Gerhard (founder) 19, 127 Hans-Jacob 134, 135 Kaj20, 128 Karl Otto 19-20, 127-8 Lukas 129, 130, 131-2 Tor 20, 128-9, 130

Bonnier Family Foundation 134, 135 Bonnier Group 19-21, 127-36

acquisitions 20, 76, 129, 132-3 diversification 74, 129-30, 132 female descendants 127, 128, 131 governance structures 20, 56, 130,

133-5 leadership transition 131-3 and non-family managers 130, 131,

133, 134 ownership 20, 27, 129, 130-1,

135-6 philanthropic activities 55

Booz, Allen and Hamilton 18, 62 Braun, Bengt 133, 135-6 BSA 115 Burmese national movements 15, 114 business growth strategies 2, 72-7

diversification 72, 73, 74 evolutionary growth 24, 49 internationalization 72, 73, 74 vertical integration 72, 73, 74-5 see also 'wise growth' strategy

Cano, Javier 10, 95, 98 Carboni, Erberto 138

164 Wise Growth Strategies in Leading Family Businesses

Carborundum Universal of Madras, India (CUMI) 114, 115-16, 117

Carborundum USA 114 Carnauba: A Son's Memoir 125 camauba palm tree 122 Chevron 115 chlorofluorcarbons (CFCs) 125 Cholamandalam 117 Chopard 82 Christiansen, Godtfred Kirk 6, 85, 86 Christiansen, Ole Kirk 5, 84 CIFCO 115-16, 120 Compass Management (CM) 87 CoRomendel Fertilizers Ltd 115-16 Corporacion Puig 9-11, 93-8

acquisition 9, 10, 93 advisory board 97 diversification 93, 94 dividend policy 95 family protocol 96-7 governance structure 10, 95-6, 98 internationalization 9-10, 94 and leadership development 62, 66 leadership transition 61, 67-8, 69,

98 and non-family CEO 10, 95, 98 product development 94 values 96 see also Puig family

corporate citizenship/philanthropy 6, 14, 16, 55, 86-7, 121-2, 124-5, 142

Dagens Industri 20, 130 Dagens Nyheter 19-20, 127, 129 Distinguished Family Business Award

82-3 criteria 1, 82

'do' phase 3, 39-42, 46, 51, 61, 67 Dumas, Jean-Louis 7, 8, SO, 5 7-8, 89,

91, 92 Dumas, Robert 8, 91

EID Parry 16, 115-16, 117 environment, respect for 14, 18, 106,

111, 124-5, 142 Expressen 129

family see four interest levels

Family Business Network (F.B.N.) 58 Annual World Conference 81, 82

family businesses academic research 80-1 entrepreneurial type 25-6 ephemeral type 24 importance of 81 oldest surviving 80 preserving type 24-5 pruning 2, 25-6, 27, 65 role of family 26-8 and secrecy 81 threats to multigenerational

survival 23-33 family vision 3, 64-7, 79 Fellini, Federico 139 Forsell, Marcus 135 four interest levels 3, 28, 32-3, 34, 78

and generational transition process 34, 38, 40-8

General Electric 32 generational transition process 28-33

advice for incoming generation 36 advice for outgoing generation

36-7 challenges 31-3, 34-48 communication between

generations 35, 37, 40-1, 54-5 as evolutionary process 38-45 facilitating 36-7, 118-19 and four interest levels 34, 38, 40-8 and independent outside advice

61-4 and intergenerational conflict

29-30,31,34,35,40-1,62 leadership cycle 3, 39, 67, 78

see also 'do' phase; 'lead to do' phase; 'let do' phase

leadership phases matrix 46-8 and parent-child relationship 37-8,

40-1,42,45, 61,66 planning for 10, 18, 30, 34, 36, 46,

63, 124 recognition of successors 23, 32,

71-2 and risk of failure 30-1, 40, 46-7 visioning process 64-7 see also leadership development

genetically modified organisms (GMOs) 142

Gotehorgsposten 127 Grace 22, 139 Great Depression 5, 6, 15, 114, 122 Gutkind & Company 134-5

Hansen, Dick 124 Henkel family

Christoph 103 Emmy 100 Fritz (founder) 11, 99-100 Fritz,Jr 100 Hugo 11, 100 Jost 11, 100 Jiirgen Manchot 100, 102 Konrad 11-12, 69, 100-2, 103 Willy Manchot 100

Henkel Group 11-13, 99-104 acquisition 12, 101 diversification 12, 72-4, 101 family control12-13, 69, 103-4 financial problems 101 governance structure 12, 101-2 Information Circle 103 internationalization 12, 72-4 and leadership development 54, 62,

65 leadership transition 61, 69, 100-1 and non-family CEO 12, 69, 101-2 pension fund 99 role of family 102-3 stock offering 12, 102

Hercules 114-15 Hermes 7-9, 89-92

company culture 92 diversfication 7-8, 75-6, 89-90 financial autonomy 92 geographic expansion 7, 89 leadership development 57-8 leadership transition 90-1 product development 8, 89, 90-1 and quality products 7, 8, 90 role of family 91-2 stock offering 8, 91

Hermes family Emile-Charles 90 Emile-Maurice 8, 90-1

Index 165

Jean-Louis Dumas 7, 8, SO, 57-8, 89,91,92

Robert Dumas 8, 91 Thierry 8, 90

Hoshi Hotel 80

IMC Global 115 IMD 1, 5, 80, 82 Immelt, Jeffery 32 India

independence 114 industrialization 15 joining WTO 68, 117

individual growth of 50-60, 78 see also four interest levels

Initial Public Offering (IPO) 12, 102 innovation, linked to tradition 7, 9,

49, 55, 75

Johnson Bank 125 Johnson family

Curt 19, 125-6 Fisk 19, 125, 126 Helen 19, 125, 126 Henrietta 122 Herbert Fisk 17, 121-2 Herbert Fisk, Jr (HF) 18, 62, 122-3,

124 Sam (son of HF) 17, 18-19, 62, 75,

121, 122-5, 126 Samuel Curtis (founder) 17, 121,

124 Winnie 19, 125, 126 see also Samuel C. Johnson Family

Enterprises Johnson Family Foundation 19, 126 Johnson Outdoors Inc. 19, 125, 126 Johnson Wax Company 18, 121, 122,

123 JohnsonDiversey 19, 126 Jones, Reginald 32

Kamps Group 22, 141 Kolb's learning model 53-9

abstract conceptualization 53, 56 active experimentation 53, 57, 58 concrete experience 53 reflective observation 53

166 Wise Growth Strategies in Leading Family Businesses

Kongo Gumi 80 Kristiansen family

Godtfred Kirk Christiansen 6, 85, 86 Kjeld Kirk 6-7, 85, 86, 87 Ole Kirk Christiansen 5, 84 see also LEGO Group

'lead to do' phase 3, 39, 40, 42-4, 46, 51,61, 67,69

leadership institutional 45 and long-term tenure 29-30 organizational 44 personal42 qualities needed for 52 specialization 56, 107, 114

leadership development 2, 3 growing the role in the business

60-71, 78 and growth of individual 50-60, 78 and learning process 52-9 phased 39-48, 49, 78 and visioning process 64-7

learning process 52-9 education 36, 56, 58, 65, 107 family business seminars 55-6, 103 interaction with senior family 54-5,

56, 108 and outside experience 56-8, 91,

96, 109, 116-17 role of senior generation 59-60 sabbaticals 58, 87, 124 stages of evolution 59 see also Kolb's learning model

LEGO Group 5-7, 84-8 board of directors 86 Compass Management (CM) 87 conservative financial management

6, 84 diversification 5-6, 84 and globalization 6, 7, 86, 87 as good corporate citizen 6, 55, 86-7 and leadership development 58, 85,

87 non-family CEO 86 product development 6, 85 see also Kristiansen family

LEGO System of Play 6, 85 'let do' phase 3, 39, 40, 44-5, 46, 61,

67, 69, 75

Lombard Odier Darier Hentsch 5, 80,82

management 25, 28 see also four interest levels

management consultants see outside advisors

Manchot, ]Urgen 100, 102 Manchot, Willy 100 Marieberg 20, 76, 132-3 Misko 139 Mudaliar, Sir A. Rarnaswami 114 Murugappa Corporate Board (MCB)

118-19 Murugappa family

Algy 117 AMM 15, 16, 113-14, 116, 118 Dewan Bahadur (founder) 15,

113-14 Muru 16, 117, 118 Murugappa 15, 113-14, 116 Murugappan 117, 118 Murugu 120 Muthiah 116, 117 MV 16, 116, 118 Subbiah 117, 118 Vellayan 15, 113, 116

Murugappa Group 15-17, 113-20 acquisitions 16, 115 diversification 15-16, 114 governance structure 16-17, 56,

116, 118-19 leadership development 58 leadership transition 68, 113-14,

117-19 and non-family CEO 119 philanthropy 16, 115-16 role offamily 116-17, 119

Oasi Zegna 111 Olsson, Hasse 130 outside advisors 16, 61-4, 65, 67, 71,

76, 86, 117 ownership 13, 20, 21, 22, 25, 28, 38

shareholder identity 26-8, 29 shareholder proximity 26, 27-8, 29 see also four interest levels

Panoramica Zegna 14, 106, 111 Parmalat 24

Parry Agro 115-16 Parrys Confectionary Ltd 116 Pavesi 139 Pellegrin, Jonathan 84 Persil 11-12, 99 Philips 115 Proctor & Gamble 12, 125, 133, 140 Puig family

Antonio (founder) 9, 10, 93, 94 Antonio, Jr 9-10, 94, 98 Manuel98 Marc 98 Mariano 9-10, 69, 94, 98 Mariano, Jr 98 see also Corporacion Puig

Raghavan, NS 119 Raid insecticide 18, 123

Samuel C. Johnson Family Enterprises 17-19, 121-6

acquisitions 18, 124 diversification 18, 75, 123-4, 125 governance structure 19 human resources policies 18 leadership development 18, 58, 62,

67, 123 philanthropy 55, 121-2, 124-5, 126 product development 123 Product Plus 18, 55, 122, 123 see also Johnson family

SCJohnson 19, 126 Schmidheiny, Stephan 80 Second World War 15, 21, 114 Sihler, Professor 101 Spain, membership of CEE 97

TI Cycles 117 Toyota 57 Tube Investments of India (Til) 114,

115

Universal, UK 114

vision statements 65-6 visioning process 64-7 Vitale, Marco 108-9, 110

Wagen, Monica 98 Ward, John L. 113 Welch, Jack 32

Index 167

'wise growth' strategy 3, 49-77, 78-9 and four interest levels 50, 71 growing as an individual 50-60, 78 growing the business 71-7, 78 growing the role in the business

60-71, 78 Woeste, Albrecht 103 World Trade Organization 68, 117

Young Presidents' Organization 58

Zegna Confection 14, 107 Zegna family

Aldo 14, 107, 108-9, 110, 111-12 Andrea 110 Angelo (founder) 13, 105 Angelo (son of Ermengildo) 14,

106-9, 108-9, 110 Anna 110, 111 Benedetta 110 Ermengildo 13-14, 51-2, 56, 105-7,

108 Gildo 14, 57, 62, 109, 110, 111 Laura 111 Mario 106 Paolo 14, 62, 109, 111

Zegna Group 13-15, 105-12 geographic expansion 14, 110 leadership development 51-2, 62,

105-6, 107, 108, 109 move into retailing 73, 77, 110 and non-family CEO 110 and quality products 110 social entrepreneurship 14, 106,

111 vertical integration 7 4-5

Family Business -an Important, Developing Field of Research - [PDF Document] (2024)

FAQs

What is family business pdf? ›

“Family businesses are those where policy and decision are subject to significant influence by. one or more family units. This influence is exercised through ownership and sometime. through the participation of family members in management. It is the interaction between two.

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Why are family businesses important? ›

Family businesses account for 64 percent of U.S. gross domestic product, generate 62 percent of the country's employment, and account for 78 percent of all new job creation. Family-owned businesses are the backbone of the American economy.

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What are the three types of family business? ›

Family businesses are often classified as (1) first generation or founder firms, (2) sibling ownership or partnership, or (3) family dynasty or cousin consortium.

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How to build a family enterprise? ›

Here are six key priorities:

Establish a shared mission. ...
Implement family governance. ...
Evaluate the next generation. ...
Prioritize education and communication. ...
Think about how to diversify the business. ...
Make a succession plan.

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What is the basic concept of family business? ›

A family business is a commercial organization in which decision-making is influenced by multiple generations of a family, related by blood or marriage or adoption, who has both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals.

What is the biggest challenge in family business? ›

7 most common family business challenges

Succession planning. For many family-owned businesses, one of the biggest – and perhaps the most contentious – hurdles is obvious: succession planning. ...
Roles and boundaries. ...
Conflict resolution. ...
Financial management. ...
Growth and innovation. ...
Work-life balance. ...
External perception.

Mar 20, 2024

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What is the core purpose of a family business? ›

Corporate and social responsibility is often a cornerstone of family business and is reflected in their commitment to employees and community, as well as shaping the family's values, culture and legacy.

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Why is the role of a family business important? ›

Family businesses know their trade and business model well and are prepared to incorporate new technologies and adapt their business models to transform and enhance their value chain. They understand that ensuring their continuity relies on building competitive advantages over time.

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What is the impact of family business? ›

It's estimated that family-owned businesses contribute more than half of the world's GDP and account for over 65% of its employment. Moreover, the 500 largest family enterprises generate over $8.02 trillion in annual revenue alone, collectively enough to be the third largest national economy after the US and China.

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What is the most successful family business? ›

Top 50

Rank	Company	Family (shareholding)
1	Walmart	Walton family (48.9%)
2	Berkshire Hathaway	Buffett family (37.2%)
3	Exor	Agnelli family (53.0%)
4	Schwarz Group	Schwarz family (100%)

46 more rows

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What is the best structure for a family business? ›

Distributed: This is the most common ownership model. Distributed family-owned businesses pass ownership down to most or all descendants, whether or not they work in the company. Nested: This structure consists of parts of the family agreeing to own some assets jointly and some assets separately.

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What are the rules of a family business? ›

Minding Your Business: 10 Rules for Family Businesses

Do not create a job for a family member. ...
Have the family member work somewhere else first. ...
Treat family members the same as any other employees. ...
If possible, have family members report to non-family employees. ...
Build a firewall between family and business issues.

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Sep 18, 2017

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Why is it hard to run a family business? ›

Because family members often have the same background and upbringing, the danger for groupthink and resistance to change is very high, especially if an older family member is running the company.

What is the strategy of a family business? ›

Family business strategy requires the creation and definition of a distinct clarity at the core, the definition and agreement on a shared future vision among family members (often across multiple generations with diverse perspectives and motivations), and the relentless leadership and execution of the overall future ...

Family Business -an Important, Developing Field of Research - [PDF Document] (2024)

FAQs

What is family business pdf? ›

What is the best structure for a family business? ›