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Family fortunes

Published:  23 July, 2008

Gallo. Torres. Symington. Rothschild. It's no secret that the wine world is dominated by family businesses. With family ownership comes the advantage of the long-term view: you are looking after your brand for your children and grandchildren, so - in theory at least - you are less likely to throw away brand equity in pursuit of short-run gain. But it can also bring disadvantages, most notably intra-family disagreements and rivalries, in some cases lasting generations (and getting worse as the family tree spreads wider).

Perhaps the most obvious example of how this hobbles a family firm is when the firm (and the family) tries to have a sensible conversation about the future of the business - its strategy going forward, its market position, and how this sits with the needs and capabilities of its family owners.

Recently there have been several examples of where this process has worked - and where it has gone spectacularly wrong.

A good example of the former is the recent decision by Enotria founder Remo Nardone to sell the majority of his stake to private equity firm ISIS in a multi-million pound deal. For the latter, look no further than Unwins, which finally sold itself for little more than its fixed-asset value after much internal wrangling within the 100-strong ranks of the controlling Weiss family, only to crash into receivership within 12 months under its new private equity owners.

There is one trait that most successful companies share: a relentless focus on a growth strategy that aligns family and business interests in the pursuit of a shared goal. So, with uncertain times facing the global wine industry in 2006, and with the London Wine Fair still a few months distant, what should the family business owner(s) be doing to maintain and enhance the value of their investment? Do they need to do anything? What should they be thinking about?

One of the challenges of managing a business, particularly a family or private business, is for the leaders to detach themselves periodically from day-to-day management, step back and look objectively at the business. The prerequisites for an effective strategic review are disarmingly simple to state, but often difficult to achieve: access to accurate and relevant data about the business, its products and the market; a commitment to honesty and frankness around the table; and a willingness to act on the conclusions of the review.

At its simplest and most effective level, a strategy review occurs in three stages.

1 Where are we now? What is the business good at? Where is there room for improvement? What capabilities and resources do we have, and where are the gaps? How has the business performed in quantitative terms and relative to competitors? Which of our products are stars (or are they all average)? Who are our customers and/or consumers and what do they think of us? Is the business generating sufficient returns to pay dividends and fund investment?

2 What is happening in the market? What are the business trends in terms of new products, channels or changing consumer habits? What is driving these trends? What impact might they have on our business? What is happening elsewhere in the supply chain? Where is consolidation or expansion occurring, and how might it affect us? What will the market look like in five years' time?

3 Where do we go from here? This stage builds on the platform and market situation of the existing business and will consist of some combination of: doing more of the same; doing it more profitably; or doing something new, thereby creating a new competitive platform. One of the first thoughts should therefore be, what capabilities or unique features do you have that could be leveraged, such as relationships, products, knowledge, franchise, brands, technology, etc.? You will need to think about what you can do that is distinctive and can provide a sustainable advantage.

This process may result in a neat plan - encapsulated in a phrase or a sentence such as Be number one for Italy in the on-trade' - which drives all activities of the business over the next year and beyond. However, reality is often a lot messier. Businesses typically have several product lines and channels, each with their own issues and needs. To ensure that everyone is pointing in the same direction, the plan must therefore reconcile the ambitions of individual business units with the overall vision for the business.

Many successful business owners treat their business like a portfolio - consciously developing a series of new business options alongside their core business. One approach therefore might be to have an overarching strategy for the core business (get to 500,000 cases') and more specific ones for the new ventures (establish credibility with white-tablecloth restaurants'). There may be different time horizons for new initiatives - the 500,000-case target might be two years hence, and the white-tablecloth initiative might be even longer term. Like a portfolio, regular review ensures underperformers get culled, while the stars get investment.

Strategic planning can encounter other problems. All too often, business owners will go through the process, come up with

a plan, but then not bother to institute some type of measurement or review process. Strategy is a learning process: you try stuff, learn lessons and use that understanding to do better next time. If you don't have a way of auditing your strategy after six or 12 months, how do you know which parts worked and which parts flopped? Also, strategies don't exist in a vacuum. Competitors will steal a good idea and perhaps improve on it - so anticipating their moves should be part of your plan too.

For family businesses, strategic planning sessions can open a can of worms which some owners might prefer to keep shut. Does the business have the scale or resources to create long-term value? Does the family want the business to do radical things (which in the short run might mean lower - or non-existent - dividends and/or lots of hard work)? Should the family business continue in its current form, or would it be best for the owners to seek a merger, alliance or trade sale? Which matters more: the company (and its heritage/prospects) or the family (and its needs today)?

While there are clearly emotional issues surrounding mergers, alliances or exits, they are important tools in the strategic toolbox and need to be factored into any planning process to ensure focus on longer-term value creation. Exit remains an area where many business owners unwittingly destroy significant value, and will be dealt with in the second article.

The bottom line is that in these uncertain times, you need a plan. The best plans are simple: they can be summarised in a few words and have resonance throughout an organisation. They are not the fluffy nonsense that so many organisations use for their mission statements. Their purpose is to face the organisation in the same direction, from the leaders to the shop floor. They don't need to be grand either: small steps, well executed, are better than ambitious leaps that fail to reach the first milestone.

For family-owned enterprises there is a further imperative. Strategy processes allow a rare moment of clarity and reflection in what is often a high-pressure, nose-to-the-grindstone existence. If the family leadership cannot agree among themselves what the strategy should be, the rest of the organisation has less chance of going about its business in a focused and coherent way. And it is hardly rocket science to understand that directionless businesses are far more likely to destroy shareholder value - which, in the case of the family business, means eroding your pension and your children's inheritance.

Next month's article will look at succession difficulties and exit strategy.