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Managing for the Long Run

LIFE CYCLE AND CORPORATE
DEVELOPMENT (w/ Pascal Wild)
Entrepreneur:
1
...

supplies financial capital
3
...

decision maker
5
...

organizer and coordinator of economic resources
Manager vs
...
Potential Entrepreneurà
CONCEPTION
(Total Early-State Entrepreneurial Activity)
2
...
Owner-Manager of a New Business
PERSISTANCE
4
...
Necessityàthe different economies
Factor-driven: Algeria, India, Iran, Vietnam—highest TEA
Efficiency-driven: Croatia, Poland, Mexico—mid TEA
Innovation-driven: Italy, Japan, USA, Korea—lowest TEA
e
...
Swiss 5% TEA—more driven by opportunity

Nicolas & Shane (2006) Entrepreneurs born
But enterprising individuals (people willing to
accept) risk that recognize new business
opportunitiesàcan become entrepreneurs
Analyzing a Business Opportunity
Existence of opportunitiesà
Identification of opportunityà
Essential impact factorsà
Shaping utilization
Opportunity Recognition
• External factors
• Industry relevance: life cycle, structure
• Porter’s 5 forces
An opportunity should…N
...
D
...
E
...
line/mgmt
...

product based vs
...
matrix
Innovation Rule of Thumb
Need to combine resource based and market
based innovation strategies
Inside-outà developing resources to meet
market
Outside-inàlooking in market to develop
resources
Kurt’s Force Field Analysis:

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Managing for the Long Run
S-curve in Technology

Red Ocean vs
...
) •
Investments in existing technologies • Products based on the new
technology cannibalizes established firm’s sales (extra cost and no
extra revenue) • Do incremental changed once threat comes •
Organizational obstacles when changing the core technology

The Life Trajectory of Technological Revolution

(2) Cost overlapping Buyer Value= Value Innovation
(3) Four Actions Framework: ERRC

3 Stages of Innovation: Utterback-Abernathy Dynamic
Model

Fluid phase (b4 establishment of DD): start-ups have lower
entry barriers; can operate on small scale; can operate w/o
adopting the same design as established firms
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Managing for the Long Run
(4) Reach the Non Customers: Beyond Existing Demand

CASE STUDY NEARSPACE: OPPORTUNITY
RECOGNITION
•
Entrepreneurship not always a matter of precipitous
(rush) discovery
...

CULTURE & STRATEGY
• having a simple set of values and committing
to them, is actually a way of getting things done
faster
• really focusing on every person at the
company, not just their work but them
personally, requires a huge information network
• a warrior spirit, a servant’s heart, a funluving attitude (the way Southwest spells “love”)

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Managing for the Long Run

FAMILY BUSINESS SUCCESSION (w/ Alfred
Munger)

Family can influence the firm via various channels: ownership,
management, board positions, culture, etc
...
43% so about
507K companies out of which 87
...

NEGATIVE FAMILINESS:
• Decision-makingàdynamic employees leave
• Company cultureàauthority of founderàmissed
chances
• Management teamà family firstàlack of
qualification/biased
RESOURCES OF FAMILY FIRMS:
1
...
Physical
3
...
Organizational
5
...
owneràmoney to family instead of
firm
Owner vs
...
Increasing competition (globalization)
2
...
Environmental change that require
firms to change also
4
...
Family gets bigger, so the firm needs to
“feed” more people
GENERAL GROWTH OPTIONS
Ø Product Innovation: differentiation
from competitors
Ø Process Innovation: reduce cost
Ø Business Model Innovation: satisfy new
customer need
Ø Extend portfolio: either organic or
merger & acquisition
Ø Expand locations: regional, national or
international
STRATEGIES FROM GERMAN RETAILING
FIRMS:
• Fewer rules, fewer calculation, less
formalization
• More power of CEOs
• Often high commitment of top level
• Depending on firm culture, the family
firm can be very hierarchical or very
“inclusive”
STRENGTHS VS
...


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Managing for the Long Run

Ø
Ø
Ø

Ø
Ø
Ø

o Quick decision paths
o Trustful relations among manager groups
Little conflicts of interest:
o Smaller conflicts of interest since ownership
coincide with management
Higher ability to risk:
o Lower rate of dependency on banks
Continuity:
o Continuity of leadership and low labor turnover
o Steady returns—reliableàpositive stock market
performance
Employee Commitment:
o Long-term employees with high loyalty to the
firm
Business Culture:
o Strong business culture, increases with age of the
firm
Human Resource Management:
o Efficient use of labor, lower wages

Weaknesses:
Ø Succession planning
o Heirs (conflicts, abilities)
o Every change of owner, about 30% of
companies either alternate their owner or
go out of business
Ø Dependence on owner and family situation
o Owner as figurehead but also as a potential
risk
Ø Family internal conflicts
o Abuse of the firm’s assets
Ø Recruiting of highly qualified managers
o Given the fact that they will never be able to
get top positions in many family firms

NOTE: It is important to be able to adapt to
discontinuous and to know your S&W
Depending on their primary non-financial goals
(reputation and ties, transgenerational
intentions) family differ in their adaptation to
discontinuous technologies
INCUMBENT VS
...
Trusted brand name e
...
Rolex, Porsche, Pictet
2
...
g
...
Efficiency perfectionist e
...
Wal-Mart, Carrefour,
IKEA
Discontinuous Technologies
Ø Different product features, process or business
models
Ø Often first commercialized by new industryoutsiders
Ø Cyclically occur in almost any industry
Ø Also called radical or disruptive innovations
Ø E
...
CD—MP3, physical retailing to online shopping,
gas driven to electric cars
f

NOTE: family businesses have to be
limited/rate, non-imitable/substitutable;
valuableà industry specific
e
...
ROLEXà vertical supply chain, everything
is done within the company + valude added
chain

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Managing for the Long Run
SUCCESSION
12
...
History
2
...
Search of successor/succession phase
4
...
&
paperwork)
5
...
Aftermath of succession/life after
succession
NOTE: Important to communicate the
handover and the right time and choose a day
GOAL OF STRATEGIC LEVEL:
o Make the firm an interesting target for an
acquisition
o To be considered: products, markets, roles
& functions after succession, different
financing possibilities
GOAL OF OPERATIVE LEVEL:
o Take care of the final financing structure,
the legal and tax aspects related to the deal
TRANSACTION VALUE: company valuation+
emotional valuation + financing latitude (max
...
Customers’ satisfaction/demand
2
...
Old contracts
4
...
Key performance indications (past figures)
6 TRANSFER OPTIONS
Ø FBO (Family Buy Out)
+Transfer of the values
+Your personal work over years in good hands
+Satisfaction as you do something good for family
--Family conflicts
--Not necessarily best-qualified people
--Jealousy
--Money issues (buying out other family members)
Ø MBO (Management Buy Out—Inside Employee)
+Experience & knowledge
+Smooth change/handover
--Jealousy—from colleagues
--Relationship b/w and towards family members will
be tense
Ø MBI (Management Buy-In—Outside manager or
mgmt
...
g
...
Leverage—having more debt than equity
2
...
Leveraging would decreased the
independence and business survival goal
4
...
Lower number of shareholders—less
leverage
6
...
Presence of founder CEO in firm
management has a negate effect on the
leverage ratio
8
...
& Disadv
...
Control risk—to lose control; for family
firms it is low
2
...
Operational risk—risky decisions; for FF it
depends on the owner

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Managing for the Long Run
HOW TO CLOSE THE GAP? (when debt from bank &
equity from buyer doesn’t cover whole value)
Ø Loan from seller
Ø Super-dividend to the seller in the following years
Ø Price reduction
Ø Sale of part of the shares only
Ø Additional source of money (e
...
venture capital
THE HARBOR STRATEGY
• Take extra risks if you can be sure that your initial
position is safe
• Only opt for the risker strategy if you can afford it
• Easier to go out from safe positions because you can
go back
SIDE NOTES:
• Family dynamics can be understood using a genogram
• Three circle modeà interaction of ownership, family
& business
• More shareholderàmore liquidityàto pay more
dividends
• 3rd generation underperforming? Too many people
involved; they don’t take care to the money
consumption
• Social identity: Nestle bought Cailler, but kept the
name
• Cash ration should be > 1 (liquidity)
• Quick ration >1 (liquidity)
• Current ration >0
...

actual figures
• On average sale to family members is 20% lower than
sale to 3rd parties
• Acquisition holding=tax advantage; dividends are not
taxed; remaining profit in the firm is taxed at lower
levels
• Real estate evaluation: checking neighborhood prices,
check willingness to pay by renting out; equipment

ADVANTAGES vs
...
The expected exit date for the
founder/leader
2
...
Ensure completion of those elements
needed to get the business ready for
succession
4
...
Managerial and organizational
2
...
Social well-being (“to be” rather than “to have”)
2
...
Ecology (“produce to live” rather than “live to
produce”)
4
...
Solidarity
6
...
Consistency (say what we do and do what you say)
MEMBERS OF SSE “FAMILY”
Ø Housing cooperative
Ø Crafts, agricultural, industrial
Ø Environmental services
Ø Social services (work integration, childcare, health
service, etc
...
; involves a
vigorous hiring process; guaranteed on
ongoing professional development of
employees
Ø Provides coaching and follow up before,
during and after
Ø Started a micro-franchise w/ADIE—a cocreation
Ø ADIE: microfinance; people who are
rejected from the banking system can get
a loan in order to create their small
business
Ø Franchisee (this case study involved
gardening entrepreneurs) hence is able to
take micro-credit

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