Faculty of Business Management & Globalisation

Faculty of Business Management & Globalisation BBE3133 Family and Business Entrepreneurship Lecture 2: (1) The 4Ps (2) The 50 Business Lessons

1. Introduction • The Four P’s address the fundamental dilemma of family business: • what the family needs in order to be strong and healthy often conflicts with what the business needs to grow and thrive. • The family needs funds to be secure; the business may need some or all of the same funds to expand. • Family members must have emotional and other personal needs satisfied - meeting those needs within the business may be harmful to its success.

1. Introduction • Families and businesses are themselves a study in contrasts: Family Business Emotional Rational and objective Basically socialistic Basically capitalistic Membership is permanent Membership is voluntary and discretionary • The rules and norms of a family are different from and sometimes even the opposite of the rules and norms of a business. • The business-owning family finds that the two systems collide time and time again over such issues as who gets hired and promoted, compensation of family members, valuation of the business, reinvestment in the business, and who makes the decisions.

2. The four Ps • Successful business families recognize the contradictions between family and business as a given and employ the Four P’s to reduce or avert the friction that these contradictions can create. • Policies Before the Need • Sense of Purpose • Process • Parenting

3. The first P: Policies Before the Need • Wise business-owning families recognize that predictable issues are going to come up that will create some conflict or friction. • They ask, “When this issue or that one arises, how are we going to deal with it?” • They answer that question by establishing policies before the policies are actually needed.

3. The first P: Policies Before the Need • Examples: • Long before the second generation is ready to come into the business, the first generation develops and writes down on paper an employment policy that sets forth the requirements for family members who want to join and move up in the business. • Long before there’s a girlfriend or boyfriend in the younger generation’s sight, the senior generation develops a policy requiring prenuptial agreements to keep the business’ assets within the family. • Long before the second generation enters the business, the first generation puts on paper a policy that guides decision making on compensation and performance appraisal issues.

3. The first P: Policies Before the Need • The beauty of establishing policies before they are needed is that issues are given attention before they become personal and emotional. They can therefore be addressed more comfortably and more rationally. • A second major benefit of having policies in place before they are needed is that the business family is actually managing expectations, preparing family members for how things will work. • When policies are developed and communicated effectively throughout the family, there are no surprises. • When a business-owning family develops policies before the need, it can be much more objective than it would be if it had to make decisions in the heat of crisis. • Many of the conflicts the family dreaded might not arise at all because it has managed family members’ expectations.

3. The first P: Policies Before the Need • Case: CodorníuGroup • An international wine producer based in Spain • The requirements for family members for becoming an executive in the company is known “almost from the day you’re born” • a good command of English • a university degree and • must have worked for five years successfully at a company outside Cordoníu. • Ultimately, a family council decides which family members can work in the company, and the needs of the business take precedence over the desire of the family applicant. • Now in its eighteenth generation, Codorníu traces its origins back to 1551.

4. The second P: Sense of Purpose • Enduring family businesses work very hard at defining a Sense of Purpose, the second P. • They ask and discuss such questions as: • Why are we doing this? • Why are we working so hard? • Why are we spending the time to develop policies? • Why are we exerting so much energy to prepare for the future? • As we learned from Insight #5, they thoroughly explore their purpose for being in business together. • They need, in other words, to feel an over-arching purpose that makes continuing the family business worth the strife.

4. The second P: Sense of Purpose • The Sense of Purpose will be different for each family. • For one, it might be the opportunity to pass on values to future generations, to employees, and to the community. • For another, it might be the opportunity to serve humanity through the products it creates. • Case: Ochs-Sulzberger family of The New York Times Company For four generations, family members have come together to renew their commitment to the belief that, with their ownership of one of the world’s greatest newspapers, they have been charged with a trust and an opportunity to serve humanity. The loss of sense of purpose can result in the end of family ownership or in a major shift in the way a business-owning family perceives its role.

5. The third P: Process • The third P is Process. • A business family can never anticipate every policy it will need. • The day will come when it will be surprised by an issue that is unexpected. The capacity of a family to deal with that issue effectively will be a function of its skills as a group to communicate, solve problems, reach consensus, develop win–win solutions, and collaborate. • By process, I mean all the thinking and meeting and discussing that family members do together to resolve issues.

5. The third P: Process • Case: the Salvatore FerragamoGroup (Florence, Italy) • Another family business dedicated to consensus and the process that goes with it. • For more than 30 years following the 1960 death of her husband, shoe designer and company founder Salvatore Ferragamo, Wanda Ferragamo headed the company and, with the help of her 6 children, built it into the international luxury goods company that it is today. • All the Ferragamo children are company executives, and members of the 3rd generation are beginning to take their place alongside their parents and grandmother.

5. The third P: Process • Case: The Salvatore Ferragamo Group • According to a Harvard Business School case, the Ferragamos are known for their ability to work together and for the way they respect one another’s opinions. • “Wanda insisted that the family ‘work as a team,’ encouraging the children to iron out any differences among themselves,” the authors write. • “She believed the family should form a cohesive decision-making body, ‘like seven arteries to the heart.’

5. The third P: Process • It’s not so much what policy a family has but that it has a policy, which means the family members have experienced the process of developing the policy and share expectations. • Ward: What I have found, for example, is that some families have liberal employment policies (any family member can join the business!) while others have restrictive rules (you can join only if you are a direct descendant of the founder, have an MBA, and have five years of outside experience). • But the fact that they have a policy, they have worked on it together as a family, they have come to a consensus on it, and they have articulated it is more important than the content of the policy itself.

6. The fourth P: Parenting • One of the things that we can never underestimate is how much good parenting affects the future of a family business. • After all, what is a family business about if it is not about the next generation? • Sometimes, adults in family businesses work so hard at the business that they badly neglect parenting. • This is particularly true of second-generation, sibling-owned businesses, where brothers and sisters have such big shoes to fill and work so hard to fulfill their own and their parents’ expectations that they compromise time at home and time as parents.

6. The fourth P: Parenting • Parents in the most successful family firms keep their attention on Parenting. • Many families learn about parenting in family meeting educational sessions. • They know that all the skills that are developed by engaging in Process – • the capacity to communicate, • the capacity to think outside of your own interests, • the capacity to make decisions, the capacity to seek consensus, and • the capacity to want fairness and justice for others – are the skills that you learn best growing up in your own family.

7. Review of the 5 insights and 4 Ps • Think of The Five Insights and The Four P’s as the framework and foundation for family business continuity. The 5 Insights Insight #1: We Respect the Challenge Insight #2: Family Business Issues are Common and Predictable, yet Perspectives on the Same Issues will be Different Insight #3: Communication is Indispensable Insight #4: Planning is Essential to Continuity Insight #5: Commitment is Required of Us The 4 Ps First P: Policies Before the Need Second P: Sense of Purpose Third P: Process Fourth P: Parenting

8. The 50 Business Lessons • The 5 Insights and 4 Ps provide the underlying shape and strength upon which the 50 Lessons – or bricks and mortar and windows and roof – depend. • Refer the Annexure from Ward.

Faculty of Business Management & Globalisation