Family Firms and Social Entrepreneurship: Succession Planning and Innovation

1. Session 11 FAMILY AND SOCIAL ENTREPRENEURSHIP

2. Entrepreneurial family firms are a critical source of innovation. • Contradictory evidence about family firms being more successful than non-family firms. • Succession planning is a critical issue in family firms. • Poor succession management in family firms can severely damage business. • Family firms founded by entrepreneurs usually sustain this orientation into subsequent generations. • Some entrepreneurs utilise their skills to assist disadvantaged members of society. • Social entrepreneurship is more effective than grant aid in many developing nation economies. • Critical role of social entrepreneurs is their involvement in the creation of microfinance. Session 11

3. Family Firms • There is some dispute about the most appropriate definition for a family firm. • Simplest definition is a firm where one family owns more than half of the business. • As most start-ups are established by a single individual, most small firms are family firms. • As a start-up grows, the usual outcome is for family involvement to decline over time. Session 11

4. In most nations, approximately 70% of firms are family businesses. • In some sectors, such as agriculture, the percentage is much higher. • This dominance has resulted in significant research on family firm management. • One stream of research has focused on differences between family and non-family firms. • Some studies conclude that family firms are inward looking, less capital intensive and grow more slowly. Session 11

5. These findings are not totally supported by other research. • In some cases, family firms do grow faster and outperform non-family firms. • Also evidence in some studies that family firms are more efficient and produce higher ROI than non-family firms. • A UK study concluded that generalisations over differences probably cannot be made. • Possibly the only certain difference is that family firms place more emphasis on job creation for family members than job creation orientation in non-family firms. Session 11

6. Family Firm Examples • Many of the large firms that are iconic brand names of the 20th century started life as family businesses. • Brooke Bond PG Tips, the leading tea brand in the UK, was started in 1845 by Mr. Brooke opening a tea shop in Manchester. • There never was a Mr. Bond - Brooke just liked the sound of the name. • The international confectionery brand, Cadbury’s, was founded in 1820 by John Cadbury, selling tea, coffee and drinking chocolate. • He later moved into the manufacture of chocolate products and, over time, evolved into a global brand. Session 11

7. Succession • The area which has received greatest attention in family firm research is the management of succession. • Very typically, the founder hands the business over to one of their children. • Where no appropriate family successor is apparent, a professional manager from inside or outside the firm is appointed. • Unless the process is carefully managed, the succession decision can create major conflict inside the family. • The worse case scenario is conflict, eventually leading to collapse or dissolution of business. Session 11

8. Commonest causes of founder’s succession decision is retirement, ill-health or death. • Conflict can arise for reasons such as: • Nominated child has never worked in the business • There are a number of children, but only one is the named successor • Family shareholders object to the appointment of an outside professional manager • Family shareholders interfere with day-to-day business decisions • Also problem that some founders, having appointed their successor, still want to remain involved in running the business. Session 11

9. Scale of acrimony is usually highest when founder appoints their own child as successor. • Founder behaves as a parent, not a business person, in the ongoing relation with their successor. • Famous scenario is Henry Ford who, as he got older, would not permit needed strategic change to combat General Motors. • He would not allow his son Edsel to implement organisational change. • Only after Henry Ford’s death was his grandson Henry Ford II able to introduce strategies to revitalise the business. Session 11

10. Succession Planning • A significant proportion of succession management research is based on very limited samples and/or anecdotal evidence. • A large-scale UK study revealed: • Most heirs have appropriate education/business background • Succession plans that exist have been discussed within the family • Open flexible attitude about need to revise plan in face of changing business circumstances • Most effective succession occurs where there is strong mutual trust among family members Session 11

11. Conclusion would appear to be that, if carefully planned and implemented, problems over succession are avoidable. • Another complication in succession is where the founder has a significant shareholding which creates tax problems upon death. • In order to meet the tax bill, it may be necessary to sell the business or give up control to non-family investors. • In extreme situations, the death of a founder can lead to the firm being forced into bankruptcy. • To avoid such problems, careful personal estate planning should occur some years before the founder is expected to die. Session 11

12. Usual solution is to create some form of trust into which the founder’s shares are placed. • Even in these cases, later generations of the family, especially if not involved in the business, can create problems. • Commonest problem is that these family members sell their shares enabling unfriendly external investors to gain a foothold in the business. • Alternative is where professional managers have negotiated a sale, merger or acquisition and family members vote against such actions. Session 11

13. Succession Management • Standard advice in the literature is for succession planning to commence well before the next successor needs to be appointed. • Where a family member is the successor, this individual must have (or acquire) the necessary values, motivation and skills to be the next leader. • It is often beneficial if the current incumbent and successor can reach an agreement over future strategy and business plans. • Achieving such an agreement can only occur if the individuals develop mutual respect and understanding of each other’s views. Session 11

14. King undertook an in-depth study of 31 firms over time using interviews with predecessor and successor. • Average age of predecessor was 64 and average age of successor was 36. • He measured managerial competence using a standard complex problem solving tool. • His general conclusion was that successors exhibited a higher level of managerial competence. • In scenarios where the predecessor was more competent, the usual outcome was that business performance declined following succession. • King noted, however, that this finding must be accompanied by accepting that other factors can influence the success of the succession. Session 11

15. Another study utilised the Myers-Briggs Personality Classification tool. • Effective transition was more likely where founder is an ‘extrovert – sensing – thinking – perceptive’ individual. • Succession was also enhanced where a collaborative, participative culture prevails in both the family and the business. • Succession will be severely impacted where the predecessor insists on remaining involved in ongoing decision making. • Selection of the best successor is clearly an important factor influencing successful hand-over. Session 11

16. Hand-over also needs to be carefully orchestrated and managed within the firm • The aim is for the successor to gain acceptance and credibility within the business. • This aim is usually best achieved by the successor working in the business for a period prior to the succession. • Two usual scenarios are (a) the successor works in the business immediately after completing education, or (b) rejoins the business after working elsewhere for some years. • Gaining acceptance and credibility is easier if the successor has gained experience working elsewhere for some years. Session 11

17. Level of entrepreneurial orientation in family firm is heavily influenced by founder and their successor. • Two key competences influencing entrepreneurial drive are: • Ability to recognise new opportunities • Ability to acquire resources to exploit new opportunities • Entrepreneurial leader must also be able to avoid conflicts with any family interests. • Most probable leadership style to achieve this goal is a collaborative, participative, relationship-based orientation. • This style permits achievement of family being supportive of proposed entrepreneurial plans. Session 11

18. A Confectionery Saga • John Mackintosh opened a shop in 1890 and then started making toffees. • The company used techniques such as national press advertising and couponing to build market share. • His son, Harold, assisted by 2 other sons Douglas and Eric, ran the business from 1920 onwards. • Due to intense competition, profits fell in the 1920s and did not recover until the 1930s. • Eric was assigned responsibility for managing a chocolate company bought from Unilever. • This led to the launch of the Quality Street chocolate selection and a chocolate covered toffee bar – Rolo. Session 11

19. After the Second World War, the company was vulnerable to competition from the 3 larger firms, Mars, Cadbury’s and Rowntree. • The death of Harold revealed both strategic weakness in the business and friction within the Mackintosh family. • The succession problems eventually led to the decision to accept a merger proposal from Rowntree to create Rowntree Mackintosh. • Henry Isaac Rowntree had started this business in 1869 and, after his death, his brother Joseph took the company into manufacturing chocolates. Session 11

20. Business became number 2 brand in UK second only to Cadbury’s. • Rowntree was managed by three family trusts owning 60% of the business. • After the Mackintosh merger, the trusts retained 36% of new company shares. • Rowntree was a more dominant player with successful brands such as Kit Kat, Aero and Smarties. • The Rowntree chairman ran the new business and the involvement of the Mackintosh family in operations rapidly declined. • In 1987, the firm was forced to go public to raise more capital and family trusts could no longer block take over bids. • Eventually Nestle bought the business for $4.6 billion and although certain brands were retained (e.g. Kit Kat, Polo, Aero), many of the other products, especially Mackintosh items, were allowed to disappear. Session 11

21. The Wrigley Story • William Wrigley Jr. started life as a soap, then a baking powder salesman. • In 1892, he started offering chewing gum as a sales promotion device to stimulate baking powder sales. • He decided chewing gum offered more opportunities and started manufacturing gum. • William Wrigley was an exceptional sales person, but he also pioneered the use of print advertising to build brand awareness. • The company was also an early entrant into the world of radio advertising. Session 11

22. Company expanded not just within the USA but also opened factories overseas after the First World War. • The next CEO, Philip Wrigley, handled Second World War rationing by selling all output to the US Armed Forces while running a ‘Remember this Wrapper’ campaign in the US consumer market. • Philip was succeeded by his son William Wrigley in 1961. • During William’s 38 year tenure, he moved the company into more overseas markets supported by adding manufacturing operations in 19 different countries. • By the time of his retirement, William Wrigley had created markets in more than 180 countries around the world. Session 11

23. William Wrigley also pioneered the development and launch of sugar free gums. • His son William Wrigley Jr. took over in the late 1990s. • The new CEO decided chewing gum offered few new opportunities so he embarked on a major acquisition programme of other confectionery brands. • This acquisition programme doubled total sales making the company an attractive take-over target. • The Wrigley Family Trusts successfully resisted these attempts for many years. • Then in 2008 the Wrigley family accepted a bid price from Mars which William Wrigley Jr. felt would permit the company to survive in an increasingly competitive global market. Session 11

24. Social Entrepreneurship • Individuals involved in using their entrepreneurial skills to assist social causes and projects for the less advantaged are rarely motivated by personal financial achievement. • The concept of entrepreneurs engaging in philanthropic community enterprise has a long history. • In the UK most of the ‘free hospitals’ in Victorian times were founded by wealthy business people. • Other business people (e.g. Cadbury’s) created model villages for their workers, providing housing, healthcare and schools. • The prevailing philosophy was that wealthy people had an obligation to contribute to the general good of society. Session 11

25. The term ‘social entrepreneurship’ has emerged to describe how private firms, communities, voluntary and public sector bodies have become involved in social welfare activities. • The growth of this sector reflects: • Government bodies slow to respond to changing structural and social need • Welfare state is no longer able to fund all activities, because increasing demand cannot be matched by Government tax revenues • Growing concerns about social exclusion, where groups in a nation have become marginalised in relation to receiving needed support Session 11

26. The emergence of social enterprise has taken different paths in the USA and Europe. • In the USA, the concept has broader application with primary focus on revenue generation. • In the USA, it is seen as a continuum of activity from corporate sponsorship of good causes through to large not-for-profit trading companies. • Development path has occurred because, in the 1960s, the US government launched great societies programme across poverty, education, healthcare and housing. • Funds were directed at existing non-profit organisations to deliver these schemes. • When federal funds were reduced in the 1970s, these not-for-profit organisations had to find new funding sources, in many cases by becoming trading organisations. Session 11

27. European academics tend to focus on community enterprises that have social impact as their primary goal. • Consequently writings tend to examine the role of corporate social responsibility and the use of charities to deliver programmes on behalf of government. • Social enterprise in Europe is characterised as: • Not-for-profit motivation • Capacity to build trust with client groups • Expertise in assisting disadvantaged communities • Bias towards fulfilling role that governments are unable or unwilling to fund adequately. Session 11

28. Programme Examples A: Genesis • Created as Christian group seeking to make a difference in UK • First project was a chicken farm, an occupational training centre for 15-25 year olds • Received grant to move into an old church and create a community centre • Then moved into an old bus depot providing sports hall, café, conference centre and business incubators • Evolution achievable by demonstrating positive impact on helping local communities Session 11

29. B: Suma • Independent health and whole foods wholesaler based in UK • Products sold meet Suma’s ethical values in relation to Fair Trade • Business run as a co-operative • Employees rotate job roles and focus on equality plus new job creation C: Ka Boom! • Created by Darrell Hammond in the USA to create inner-city play areas • Organisation works with local communities assisting them raise funds and advise on site location/operation • By 2002, Ka Boom! had helped create over 300 new playgroups Session 11

30. D: Trade plus Aid • Created by Charlotte di Vita in UK, having seen impact of drought in Ghana • Her offer to buy seeds was rejected, but instead villagers made pendants in return for funds • She opened a stall in London to sell the pendants • She created a seed bank where farmers could borrow money to buy seeds • She created a mail order business marketing products from developing nations • Now diversified into other projects, in 15 years she was able to contribute over £5 million to communities in developing nations Session 11

31. Developing Nation Support • Emerging view that direct support such as donating food does not assist in creating economic independence in developing nations. • Growing support for initiatives aimed at creating new small businesses as route to self reliance. A: Honey Care Africa • Launched by Kenyan entrepreneur to help African honey producers • Guaranteed fixed price for honey which is then marketed in Europe • Provides support and hives to local farmers • Has created over 200 community-based self help operations Session 11

32. B: Sekem • Based in Egypt to train farmers in use of biodynamic farming to increase productivity of marginal land • Provides training and micro-financing to help farmers produce cotton and organic food products C: Balrampur Chini Mills • One of India’s largest sugar producers • Has mills located in poor areas and is committed to buying from small farmers • Farmers are paid in 7 days and the company operates cane collection centres to minimise farmers’ transportation costs • Company also has specialist staff who provide advice and training to small farmers Session 11

33. Definition Debate • Community enterprises are by definition based within local communities. • The individual who acts as catalyst and leader of community projects is identified as a social entrepreneur. • Academics have sought to identify common characteristics of social entrepreneurs. • Terms such as ‘good people’ who are ‘different’ are frequently used to describe the social entrepreneur. • As with small business research, efforts to identify common characteristics of social entrepreneurs have met with minimal success. Session 11

34. Leadbeater has proposed these individuals: • Excel at spotting unmet needs and mobilising under-utilised resources • Determined, ambitious and charismatic • Driven by mission to help others rather than seeking to achieve personal success • In small business can create new firm without need for founder to be entrepreneurial. • Less probable with community projects because initiator needs to be creative and innovative to gain access to needed resources. • Research suggests business and social entrepreneurs do share certain common characteristics. Session 11

35. Shared traits include drive, ambition, leadership skills, ability to vision and to inspire others. • Social entrepreneurs usually confront certain specific obstacles: • Government agencies do not encourage creative, innovative solutions • Outcome cannot be measured in terms of financial success • Many social entrepreneurs as perceived as too radical and also willing to challenge government agency rules • Initially viewed with suspicion by local communities who believe the individual must have a ‘hidden agenda’. Session 11

36. Ecopreneurs • Primary focus of social entrepreneurs in developing nations is on specific highly-disadvantaged groups in society. • Such countries have a high number of people living in poverty in rural areas. • Focus in such situations is towards assisting small farmers achieve at least a subsistence income. • Hermangee and Abhay Jambhekar wanted to find alternatives to expensive Western technology in agriculture. • Focus on vermicomposting which uses earth worms to create low-cost bio-fertiliser. Session 11

37. P.D. Uplenchwar obtained a postgraduate qualification in Agricultural Economics. • He created a community advisory centre and then became concerned about cost of conventional chemical pesticides. • He developed an alternative herbal pesticide, ignored legislation over pesticide manufacturing and either sold recipe to farmers or supplied the product from his operation. • Dr W.B. Rahudkar developed low-cost pest control alternatives using herbal ingredients. • He then created a low-cost broad-spectrum fungicide, and gave all the formulae to farmers for free to permit self production of pest and fungal control products. Session 11

38. Micro-finance • Concept of making small loans to people who have no collateral or credit history. • Such individuals are perceived as excessively high risk by conventional banking sources. • View that subsidies or grants create artificial expectations among those who receive support. • Problem for micro-lenders are the high costs of making contact with highly dispersed populations and then managing repayments. • Micro-lenders often only exist because they receive funding from public or private sources to cover high operating costs. Session 11

39. Success of micro-finance has led to concept gaining widespread acceptance as an economic support mechanism. • For those in extreme poverty, model has been developed to make concept more feasible. • Trickle Up program is a US-based organisation that works with local NGOs that have local knowledge in developing nations. • Local agency makes initial assessment, provides immediate $50 grant and then provides training and support to develop borrower’s business skills. • Second grant made available, predominantly in agriculture following delivery of guidance and support. Session 11

40. Micro-finance Leader • Muhammad Yunus founded one of the world’s first micro-finance banks in Bangladesh. • He taught economics and sought to understand the causes of poverty in Bangladesh. • He recognised the situation where an individual making bamboo stools was limited by ability to buy bamboo. • He tried to convince local banks to make micro-loans available, but his request wasrefused. • He started to lend his own money to prove the viability of his idea. • After 7 years he was given permission to create his own bank. Session 11

41. By the mid-1990s, the Grameen Bank was working with almost half of all villages in Bangladesh, lending to over 2 million borrowers. • Total lending of over $2 billion and average loan of $175. • Bank focuses on reaching the poorest members of society. • Borrower must own less than half an acre and not have wealth exceeding a value equal to one acre. • Most probable borrowers are women which has created cultural problems in a male dominated society. Session 11

42. Yunus feels women have greater commitment to rescuing their family from poverty. • Operation has subsequently evolved into other forms of community support. • Grameen Cybernet rents fibre optic cable from the railroad to permit individuals to create on-line trading operations. • Yunus’ success led to him being awarded Nobel Prize. • He is very vocal that social entrepreneurship should be community-based because outside providers lack understanding of need. Session 11