By Enrique Soriano
OVER a long period of time, the literature on corporate diversification has focused almost exclusively on large, publicly held firms. However, within the last few years, there have been some works published , dealing with diversification issues in small and medium sized firms but also in family businesses (Iacobucci & Rosa, 2005). Whereas some authors hold the view that family businesses engage in significantly less diversification than non-family firms, others describe diversification as a prevalent long-term strategy among family businesses.
Following Guillen (2005) and Granovetter (1995), we define a business group as a collection of legally independent firms that are connected by economic links (such as ownership, financial, and commercial) and social ties (such as family, kinship, and friendship) that lead to operational links. This definition distinguishes conglomerates or strategic alliances from buyer groups, in that the latter operate under somewhat unified entrepreneurial guidance, going beyond simple alliances among otherwise independent firms (Yiu, Bruton and Lu. 2005). In our case, the main social tie that links different firms into a business group will be that all those firms are under the control of the same family. The family business group (FBG), is the group of firms under control or managed by a group of people with family ties.
The usual criteria defining family firms, from the management side point of view, is that the institutional values of the firm should be identified with the family. Empirically this implies the involvement of multiple generations in a business group, the ownership of the group and voting control by family members, the effective management of the firm by family members and a large number of family members having board seats.
Examples of big family business groups in the Philippines are the Ayala Group, the Lopez Group, and the Gokongwei Group. Some of the most enduring family businesses started in one industry before growing into diversified companies with many lines of businesses.
Diversification is entering new markets with new products. Sometimes you just need to bust out and try something new like if you’re a tobacco firm, buying a packaged-food company; a cola firm entering the water business; or a chemical company going into the spa supply business.
Many companies appreciate the need to diversify but few use it as a way of relating to their markets. Fundamentally, this strategy is about creating new products with new product life cycles and making the existing ones obsolete. By doing so, firms launch new products that are developed not just for current customers but for new ones, too. To execute this strategy, you usually manage a merger, an acquisition, or a completely new business venture.
Well-known, highly innovative companies which include Intel, Google, DuPont, and all the pharmaceutical companies are into diversification. A company’s diversification strategy can be either related or unrelated to its original business. Related diversification makes more sense than unrelated because the company shares assets, skills, or capabilities. But many successful companies, such as Tyco and GE, continue to buy unrelated businesses.
We may distinguish among related and unrelated diversification, which in turn can be seen as a continuum in between single business units and fully diversified firms. Related diversification means entering in multiple industries that are able to share a common pool of corporate resources and capabilities. These are businesses where sales force, advertising, and distribution activities can be shared, exploiting closely related technologies.
We may safely assume that the family is directly involved in decisions regarding corporate diversification (in contrast with publicly held firms, where managers make these choices). Hence, to concentrate on FBG can be a useful way to analyse if diversification may be a valuable strategy for creating value.
To a family business, diversification is a way to extend their capabilities into new lines of business. The diversification will turn out profitable if the capabilities than were useful into one line of business are indeed also a capability in the new segment.
Diversification, on the other hand, may have two main costs for family business groups:
(i) The need of adding capabilities outside those of the family, be it through the hiring of professional managers, or through partnerships with other shareholders that incorporate the needed new abilities. (ii) An increase in complexity in the family group that may affect negatively its organization. In any case, the incorporation of outsiders to the FBG reduces the firm’s control by the family and may require an increase in monitoring effort.
Why Diversification Matters
Anyone who has invested money has heard about the importance of diversification in a portfolio to hedge against losing too much money when markets retreat. Diversification can be equally important to businesses that may face serious threats during turbulent economic times or when disruptive technologies enter the marketplace and big competitors move in. Although family businesses are known for their nimbleness and ability to react quickly to changing times, diversifying lines of business and expanding products and services can offer additional security when times get tough.
by Prof. Enrique Soriano
THE cousin consortium is the third stage of a family business. After having the ownership placed under sibling partnership from the founding stage, the next generation, comprised of the cousins, would then acquire the family business’ stakes as owners and managers. At this point, there would be several families involved (unlike the previous stages when there was only one family) which could be a challenge in arriving at a common vision and in immediately deciding about business and even familial matters. Fortunately, family businesses that are able to stand for many long years — from one generation to another — experience difficulties in many areas. However these family businesses have found that institutionalized governance is the key to success despite conflicting interests.
One positive factor that puts the cousin consortium at an advantage is that the cousins would have better outlook on familial and business disputes. In the past, they have witnessed how their parents and/or grandparents fought over differing ideas and have felt the unsettling negative impact of unwise decisions. There could be a growing hope among the cousins to learn from the mistakes made during the founding and sibling partnership stages of the family business and make better choices.
On the other hand, even if cousins already possess a better understanding of situations, it would still be hard to always share the same vision. Since, there would be a number of families concerned, attaining unity could not be secured at all times. There is a tendency for the cousins to treat situations from the point of view of their own immediate families. One would argue, “Our family started the importation of our products, so we sure have to be the ones to decide on whether or not our company should expand on it”. Regardless of the business context, when the concept of the family would be inserted into the argument, divisiveness would start to emerge. This is why the support from non-family business experts and even family business psychologists would be highly recommended in this stage of the family business. The neutral advice of these people that come from a scientific approach could provide the cousins with the needed guidance to set aside their biases and become proactive.
In a cousin consortium, the depth of involvement of each of the cousins vary. There are those who would be active in the business and there are those who would be passive. The scope of ownership could also be different. Some of the cousins could be majority stockholders and some could be minority stockholders. In this case, the control over the business would not actually be equally balanced. There would be procedures that need to be considered. The non-family members who would serve as board of directors would have to ensure that the objectives of the enterprise would be prioritized.
It is of course very healthy to develop an open communication among the cousins; after all they are one huge family. Any type of organization would benefit from it. However, since they would not be coming from one and the same nuclear family, it would not necessarily follow that they would have the same ideas, background, culture, practices, beliefs, education, skills, levels of understanding and experience. Moreover, they could be living from any part in the world that could add on the difficulty of gathering all at once for a meeting (something which could easily be managed in a smaller group of family like that of the founding stage to sibling partnership). Nevertheless, all these hindrances in achieving an open communication among the cousins could be managed if they would specifically begin the consortium out of willingness to participate, commitment and respect to each other.
What could save the family business that is under a cousin consortium would be to strongly implement an institutionalized governance. The cousins would need to agree to stick with what really matters for the upkeep of the family business and for the maintenance of peace across the several nuclear families concerned. They would need to take the initiative to participate and be informed. The cousins would need to establish a strong leadership powered by their teamwork and their shared vision and mission for the family business to flourish in their time and in the coming generations.
- Do You Have a Family Business Succession Plan? (blogs.findlaw.com)
- How Can A Family Business Prepare for the Hard Times? (opinyon2010.wordpress.com)
- Use External Surveillance to Secure Your Home, Family and Business (epicahome.com)
- Overcoming the Challenges of Starting a Family Business (barefootwinefounders.com)
- NAPL Releases Livelihood & Legacy, Management Guide for the Family-Owned Business (whattheythink.com)
- Lessons In Leadership – Episode 2 – Family Businesses (lugenfamilyoffice.com)
- UB CEL to take on family biz (bizjournals.com)
- What we can learn from family business (business.financialpost.com)
- Family Business Seminar (tylerbusinesslawyer.com)
- On the rocky shoals of business-family relationships (thehartford.com)
by: Prof Enrique Soriano
MANY would say (and they have a point) that initially, family members are only active in family businesses, because of the obvious reasons like being able to receive extraordinary financial gains (which they could never receive from other companies), better treatment by the administration, and the opportunity to select their preferred line of duty and their freedom to maintain a particular lifestyle. These are all undeniably true in most cases, but nonetheless, family businesses remain standing, because the family members eventually learn the value of teamwork amongst themselves.
In order to prepare the family members to develop solutions in salvaging the family business, it is always helpful to be honest with everybody’s needs and opinions. A dialogue wherein every single family member will have the chance to voice out his/her needs and thoughts about the company’s situation and other specific issues that need to be addressed could be a healthy practice. Stressing the guidelines beforehand and doing consistent reminders are ways to preventing these from happening. #OpinYon #business
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