Building Family Business Champions
Eric G. Flamholtz and Yvonne Randle

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Preface

We wrote this book to help businesses understand what to do to become a “family business champion”—that is, a family business that has undergone at least two successful leadership transitions from one generation to the next, while simultaneously growing and remaining profitable. Research has shown that only one-third of family businesses are passed successfully to a second generation of family leadership.1 In addition, “only 13 percent of successful family businesses last through the third generation.”2 Maintaining family business success for more than one generation is clearly a difficult task. Nevertheless, many companies have achieved this, including Simon Property Group (a NYSE-listed shopping mall developer and operator), Westfield (an Australian and U.S. shopping mall developer and operator), GOJO™ (developer and manufacturer of Purell™), and Heineken (the Dutch beer brewer).

The number of family businesses that have been highly successful for more than one generation and can therefore be called family business champions is quite small, and there are even fewer family businesses that have been successful for four or more generations. Any family business that has been successful for four generations can be called a “family business dynasty.” Companies that have achieved this special status include Bechtel, SC Johnson & Son, and Bank Santander in Spain.3 Throughout this book, we describe the evolution of another company that has achieved this elite status—Bell-Carter Foods. We use Bell-Carter (which has had four generations of successful family leaders over a 100-year period) as a unifying case to illustrate the concepts, frameworks, and methods we advocate for building family business champions.

A Look at One Family Business Champion: Heineken

Heineken, a true family business champion, has prospered over four generations of family leadership and more than 150 years.4 Heineken was founded when Gerard Adriaan Heineken, then 22 years of age, bought a brewery in the heart of Amsterdam in 1864.5 The young Heineken had no experience in brewing, but brewing was to become his passion and his life’s work.

He had vision, treated customers and employees well, and strived for consistently high quality in his product. His vision was to expand the brewery to become the largest and best in Europe.6 He was also committed to experimentation and continuous improvement, not only in product quality but also in methods of brewing alternative types of beers. On January 11, 1873, he officially incorporated “Heineken Bierbrouwerji Maatschappij NV” also known as “HBM.” It should be noted that this resulted in the transition of Heineken from a pure family business to a quasi-family business.

Four Generations

Gerard died unexpectedly in 1893, at the age of 51. Although Gerard’s widow was the majority shareholder, she was not prepared to run the company herself, so she appointed a family friend, J. D. A. Peterson, as a director of HBM. One year later she married Peterson, who became stepfather to Henry Pierre Heineken, Gerard’s son.7 In effect, Peterson became caretaker of the business until Gerard’s son, Henry Pierre, could assume leadership.

On October 1, 1914, Henry Pierre Heineken became a director of HBM, and three years later he was appointed chairman. Henry Pierre Heineken, who held a doctorate in chemistry, managed the company from 1917 to 1940 and continued his involvement with the company until 1951. Under his leadership, HBM developed techniques to maintain consistent beer quality in large-scale production. During their tenure at HBM, Peterson worked alongside two other directors, and Heineken worked with three others in what has been described as a “very close-knit team.”8

Henry Pierre’s son, Alfred Henry Heineken, who was born in 1923, began working at the company in 1941 at the age of 18. Freddy, as he preferred to be called, was not originally interested in the business except as an owner and left the running of the business to the company’s directors.9 Freddy preferred artistic pursuits and at first seemed to be a classic third-generation scion under whose “leadership” the business would likely decline. After World War II, when the company began to focus more on exports and becoming a global brand, the brewery management “asked Leo Van Munching, Heineken’s U.S. importer, to teach ‘little Freddy’ the finer points of the business.”10

To the surprise of management, Freddy emerged as a successful salesman and with a new-found interest in the family business. During the prior generation’s leadership, the family’s share of stock ownership had been diluted. Freddy’s mission was to return majority ownership to the family. When he succeeded in doing so by 1954, Freddy described it as “the masterpiece of my working life.”11

One of Freddy’s strengths was his ability to think strategically, and this was a key ingredient in Heineken’s continued global expansion. As he stated: “I am a generational thinker and I think in terms of 25 to 50 years ahead. It is an entirely different way of thinking than, for example, the way a director thinks in maximum periods of 5 years.” He used a chess metaphor to describe his business dealings, stating: “It is fun to checkmate people.”12 Freddy retired from the executive board in 1989 but maintained involvement with the company until his death in 2002.

Freddy’s daughter, Charlene de Carvalho-Heineken, born on June 30, 1954, is the fourth generation of the Heineken family to be involved in the business. At this writing, she owns a controlling interest in the world’s third-largest brewer, Heineken International, and sits on the company’s board of management. Her mark on the company is a work in progress. Her husband is also a member of the board.

Today, Heineken is a family business dynasty and one of the leading brewing groups in the world. Although we are not privy to the internal Heineken family dynamics, the firm’s success suggests a healthy functional family, generation after generation.

Becoming a Family Business Champion

Since its founding in 1978, our firm has worked with hundreds of companies, approximately 45 percent of them family businesses—including some of the family business champions mentioned here (Simon Property Group, GOJO™, Westfield, Techmer PM, and Bell-Carter Foods). Drawing on this experience and on our research, this book provides a framework for understanding what must be done to become a family business champion. We provide a set of concepts and managerial tools to help achieve this challenging objective including planning, performance management, and culture management. We also provide a unique set of questionnaires to facilitate the self-assessment of the extent to which a specific family business is positioned for long-term success.

Throughout the book, we examine both successful and unsuccessful family businesses and analyze the lessons that can be derived from each one. All of the unsuccessful companies are disguised unless they are in the public domain.

The book is organized in four parts. Part I consists of two framework chapters. Chapter 1 defines family business and family business champions and presents a “formula” for family business success that is based on managing what we call “family functionality” and the development of the company’s “infrastructure.” Chapter 2 provides a framework for understanding and identifying the stages of family business development.

Part II describes the managerial tools needed to manage and develop a family business successfully—strategic planning (chapter 3), organizational structure (chapter 4), performance management (chapter 5), and culture management (chapter 6). We examine each topic from a dual perspective: the technical aspects of the tools and the family business issues involved in their application.

Part III deals with the unique issues facing family businesses. Chapter 7 focuses on the “dark side” or dysfunctional aspects of family businesses. Chapter 8 deals with effective leadership. Chapter 9 presents a process for managing leadership succession.

In chapter 10 we step back from our discussion of individual companies and tools and offer insights and conclusions about what is required to become a family business champion.

The appendix contains a self-scored questionnaire that a family business can use to evaluate the extent to which it has developed the four essential managerial tools—strategic planning, structure, performance management, and culture management.

This book makes several significant contributions to the family business literature. First, our overall approach is unique because we focus on what must be done holistically to create a successful family business. Specifically, we deal with the issues of family business from the perspective of the family and the business. We provide a framework or template for building family businesses capable of lasting multiple generations. The framework also is helpful in understanding and analyzing family business issues in relation to business issues more broadly.

Second, we make several important conceptual contributions to thinking about family business with constructs such as “family business functionality and dysfunctionality,” the “family business foundation,” “family business equilibrium,” and the “family business success formula.” We offer some new analytical frameworks, including six factors that must be managed to achieve a high degree of family functionality and a set of dysfunctional family business syndromes (see chapter 7).

Third, we provide assessment tools that can be used to improve family businesses. In chapter 1, we present two self-scored questionnaires for assessing the two key aspects of the family business success formula: (1) organizational development and (2) family functionality. Using the results of these questionnaires, the family business can identify which “type” it is (chapter 2). Chapter 2 also describes the “conditional stages” of family business development (which are based, in part, on the family business type) that will help leaders understand how to increase their company’s effectiveness at the current stage and prepare for the next. The appendix provides methods for assessing the effectiveness of key family business management tools.

Our Unique Perspective

We believe that we offer a virtually unique perspective on family business for several reasons. First, as noted earlier, a large percentage of the companies that our firm, Management Systems (based in Los Angeles, but with global affiliates), has worked with since its founding in 1978 have been family businesses. Second, we are ourselves a family business, albeit first generation. As a husband-and-wife team (with the occasional involvement of other family members), we understand the unique challenges of making a family business work. Third, we have had the rare opportunity to be consultants to one family business, Bell-Carter Foods, for more than twenty years, since 1993.13 The confidence of the Carter family in bringing us back several times during that period presented an opportunity to conduct longitudinal research in our role as both participant and observer. We are not aware of any other published in-depth study of a family business’ development and transfer of leadership from one generation to the next over such an extended period. Our involvement was similar to research by anthropologists who visit tribes or communities over time.

Notes

1. See Edward D. Hess, The Successful Family Business: A Proactive Plan for Managing the Family and the Business (Westport, CT: Praeger, 2006), ix.

2. See John L. Ward, Keeping the Family Business Healthy (Marietta, GA: Family Enterprise, 1997), 1.

3. An article in the Wall Street Journal referred to Bank Santander, successful for four generations, as a “family business ‘dynasty.’” For simplicity’s sake, we use the term “family business champion” throughout this book, even for companies that have been successful for four or more generations.

4. This case example was developed from published sources, including M. G. P. A. Jacobs and W. H. G. Maas, The Magic of Heineken (Amsterdam: Heineken NV, 2001). The authors gratefully acknowledge the assistance of Mr. Brett Hundley who, as an undergraduate student at UCLA, prepared an earlier version of this case while serving as an intern at the authors’ firm, Management Systems Consulting Corporation, in 2012.

5. Jacobs and Maas, The Magic of Heineken, I.3.

6. Ibid., 2.3.

7. Heineken refers to Henry Pierre Heineken as the second-generation leader, though one could also view Peterson and Gerard’s wife as the second generation. Jacobs and Maas, The Magic of Heineken, 4.5.

8. Ibid., 4.7.

9. Ibid., 9–4.

10. Ibid., 9–7.

11. The story of how Freddy reacquired control of HBM is interesting, complicated, and beyond the scope of this book. For a discussion, see ibid., 9.10–9.18.

12. Ibid., 9.27, 9.14.

13. Yvonne Randle was the lead consultant for almost all of that period. Eric Flamholtz was involved for the first few years and remained involved by proxy, along with other consultants from our firm.