Clearing the third generation hurdle

Making the strategic shift is the big challenge for any family business. It’s a paradox too: on one hand, it’s a lot more difficult because family firms need to incorporate family issues into their thinking and family concerns and preferences can influence the choice of strategy.

At the same time, family businesses might be better at it than other companies. They tend to focus more on the long-term, they rarely have outside shareholders to justify quarterly performance in sales and earnings and no stock market will punish them for increasing expenses for worthwhile long-term strategies, as we have seen with many listed companies. They’re also more flexible, have fewer bureaucratic layers, they’re more adaptable to smaller markets and in a better position to offer quicker service and have everyone pulling in the same direction with their family’s name on the door.

Strategic change will also determine whether a family business will survive past the third generation. Most don’t. Research by John Ward, who teaches about family business at Kellogg School of Management in the United States, found that only 13 per cent of family businesses lasted through the third generation. But the ones that lasted, not only survived but prospered. All of them had renewed or regenerated their business strategies several times over, adding new strategies to the past ways of doing business.

There have been some fascinating case studies.

One is Lum Kum Kee, the company that invented oyster sauce. Its founder Lee Kam Sheung started making the sauce in his tea house, located in the small village of Nanshui in the Guongdong province of China back in 1888. After a fire wiped out the business, he relocated to Macau and then to Hong Kong. Starting with only two products, shrimp paste and oyster sauce, Lum Kum Kee now sells sauces and condiments to over 100 countries across five continents.

In 1990, one of the sons, Sammy, had finished working for Citibank in Hong Kong – Lee family members wishing to work at the company have to get three to five years’ experience working at other corporations before joining. This gave him the opportunity to explore other industries. He convinced the board to diversify without moving that far away from the family recipe. In 1990, LKK opened a chain of restaurants in Hong Kong and the following the year, the Lee Kum Kee Property Company opened. Then in 1992, LKK and the First Military Medical University of the People’s Republic of China formed a joint venture to manufacture and market traditional Chinese medicines and health products made in mainland China. The restaurants were eventually sold and LKK assumed sole ownership of the health products group encompassing Chinese medicines as well as health and skin care products. The health products group also launched a chain of retail outlets across China called Infinitus. The condiments business also diversified, moving into soy sauce, a staple of the Chinese diet and developing branded products in non-traditional niches like ketchups and marinades.

The significance here is that the roots of the company which had held the family together for generations were not forgotten.

Another example is Beretta, the world’s most famous arms maker and the oldest industrial company. Its origins go back to 1526 when its founder Bartolomeo Beretta delivered 185 gun barrels to the Republic of Venice. The laws of the time nurtured the family business as only the son of a master gunmaker could become a master himself. The big change came in the fourteenth generation when Ugo Gussalli Beretta assumed the helm as managing director in 1981. Facing rapidly changing markets, products and technology, he developed footholds in new high potential markets.   

Now Beretta is creating US military weapons, including the M-9 semiautomatic pistol, field glasses, miniature gun replicas, competition rifles and sporting clothes. All this diversified the revenue stream. At the same time, the company as with Lee Kum Kee did not move that far from its roots. From its experience, it knew that the military market was a robust but unreliable customer base. Wars and governments come and go. But its heart and soul was with outdoorsmen. Sporting firearms constitute 75 per cent of sales, 70 per cent of which are generated in foreign markets.

The company’s motto, Prudencia e Audaci (Prudence and Audacity) which was right there from the start underpinned the way it managed these changes. Local managers were empowered to act promptly and appropriately, its sales force was expected to take in customer feedback expressing concerns or wish lists for product enhancements, and a focus on technology allowed it to apply ideas in seemingly contradictory ways, using wood and steel and plastic as raw materials, establishing a Beretta School of Arms Engraving while investing in cutting edge production equipment that combined the ancient art of craftsmanship with robotic technology. It also introduced a matrix sales and marketing organisation with sales teams specialising in different segments of the market. The company now increasingly relies on the American market after centuries of seeing itself as an Italian enterprise. But in a sense, Beretta has not moved that far from its origins.

So how did they do it? The companies combined business and family plans, recognising they were interdependent and that family issues strongly influenced the choice of strategy. This is why they remained true to their roots. They also went through a rigorous market analysis of the business, showing whether the company was gaining or losing market share, using cash efficiently, uncovering potential soft spots and calculating the required rate for reinvestment. Then they looked at possible business alternatives, including new markets and geographical areas and how those could play into the company’s competitive strengths.

Other family businesses could do the same if they want to survive beyond the third generation.