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Family business throughout generation: Innovation

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Discuss the extent to which innovation has enabled some family businesses to survive through many generations Before starting, it would be helpful to provide some definitions in order to clarify the arguments and examples used in this essay. Chambers-Harrap gives us two definitions of the word ‘innovation’; “1 something new which is introduced, eg a new idea or method” and “2 an act of innovating.”[1] This helps us, as it shows that innovation need not necessarily apply as we might initially think only to new ideas in a material sense, like inventions (also innovations in their own right) but also to methods; to the application of new or fresh ideas or techniques. Secondly, and importantly, we should define exactly and thoroughly what is meant by ‘family business’ before proceeding any further. The GEEF, the European Group of Owner Managed and Family Enterprises, gives four criteria that may define a family business; “A firm, of any size, is a family enterprise, if: 1. The majority of votes is in possession of the natural person(s) who established the firm, or in possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs. 2. The majority of votes may be indirect or direct. 3. At least one representative of the family or kin is involved in the management or administration of the firm. 4. Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the right to vote mandated by their share capital.” [2] This definition, technical as it sounds, is a very useful one, for it will help us to appreciate the true range of businesses, both in past and present, which may correctly be defined as family firms. It would be easy to think, at face value, that a ‘family business’ only means one which is run by a whole string of high-profile family members, handed down from generation to generation. Or, we may even visualise only the huge, powerful family-run empires which have existed throughout the ages, such as the ‘dynasties’ David Landes visualises in the introduction to Dynasties; Fortune and Misfortune in the World’s Great Family Businesses; “…many images come to mind, exotic and dramatic, from the silken lineages of Chinese Emperors to the soap-opera magnates of the 1980s television of the same name.” (p.ix)[3] In fact, as Landes himself points out, family businesses are all around us, and their existence is far more common than we may realise, especially if we are only thinking of ‘family business’ in the kind of context shown above; “…statistics show us that the great majority of the world’s enterprises today are family firms. In the European Union, family firms make up 60-90 per cent of businesses, depending on the country, and they account for two thirds of GNP and jobs. In the United States in the mid-1990s, more than 90 per cent of firms were family units, accounting for more than half the country’s goods and services; further, one third of the Fortune 500 (the country’s five hundred largest firms) were said to be family controlled or to have founding families involved in management”. (p.xi)[4] Now we have laid down some definitions, we can look at one of the most innovative and successful businesses of modern times; Virgin, founded by Richard Branson. John Arlidge of the Sunday Times, in an article about Branson’s plans for multi-billion dollar world expansion of the Virgin business, describes an organisation that is “still very much a family business in ownership structure and public image”.[5] Branson’s Virgin brand has come a long way since 1970, when it was founded as a record shop. The vast, global empire Virgin now comprises is too great to list here in full – but it includes mobile phone network provision, cable and broadband services (all now branded Virgin Media), a chain of health clubs, an annual music festival, a brand of cola, a cruise holiday agent, a UK railway operator, and an international airline. Adaptability is key to ensuring the survival and development of any business, and Branson has, over the decades, shown exceptional acumen in moving with the times. Virgin Media, by embracing mobile and internet technology, has managed to corner large segments of this still-growing market, being one of the first providers to offer a high-speed broadband package, as well as an integrated service bundling internet provision, a mobile phone contract, and cable television all in one. Virgin Trains are a prime example of the embracing of innovative technology ahead of the competition. Tilting trains are not a new idea; in fact, British Rail developed and tested several prototypes of a tilting train in the late seventies and early eighties; it was named the APT, and there were several prototypes.[6] The tilting trains, able to handle corners at greater speeds, broke journey time records, and showed significant promise in the improvement and modernisation of Britain’s rail networks. However, an unfortunate combination of mishaps during testing, bad press, and disorganisation and lack of will on the part of senior management caused the project to be shelved. Only in 2002 was this revolutionary technology finally brought into live service on Britain’s railways, when Virgin introduced its fleet of Italian-built Class 390 Pendolino tilting trains to the network. The high-speed lines now run from London to Manchester, Liverpool, Birmingham and Glasgow, and journey times have been slashed. Branson’s vision, it seems, even goes beyond the skies, and reaches to the stars; in addition to what is now considered a first-class Atlantic airline, Branson is already selling advance tickets for journeys into space on his new ‘spaceline’, Virgin Galactic.[7] Formula One champion Lewis Hamilton, according to the Evening Standard, was one of Virgin Galactic’s first customers, reportedly paying £625,000 for five seats on one of Virgin’s space cruises. Virgin today, almost four decades since its creation, is thriving more than ever, and continues to grow in size, scope and ambition. The ability to recognise, and make the most of change and innovation can ensure the failure or success of a business. Were it not for the unnatural business ability and ruthless tactics employed by the first true entrepreneur of the Rockefeller family, John D Rockefeller, the failure to embrace innovation could at once point have done the business significant harm, and the fortune he passed onto his children in his later years may not have been nearly so great. Generally speaking, John D Rockefeller adapted very well to circumstances, managing to stay ahead of the competition by any means he could (often undercutting them, and eventually neutralising them entirely by buying them out). When building his rock oil business, he was quick to realise the usefulness of railways, and he quickly went from transporting his product on wooden pallets by rail to using fully enclosed tanks. He embraced and used science to his advantage when it suited him. Shortly after the potential use of rock oil (hitherto thought useless) as an illuminant was identified by George Bissell, John D had some good fortune. An industrial chemist named Samuel Andrews, who had worked out how to purify oil using sulphuric acid, happened to attend the same Cleveland Baptist church as John D. Rockefeller and Maurice Clark, his business partner. The two entrepreneurs had a meeting with Andrews, and a vision for a new partnership in oil refining was conceived. The refining of oil heralded the next major development in the Rockefeller business. However, Rockefeller failed to appreciate the significance and potential of pipelines for transportation of oil over a distance; “In a lifetime of successes, his one significant error was a failure to appreciate the potential contribution of pipeline oil transport.” (p.223)[8] Instead, he continued to transport his oil by rail, in spite of the pipelines now being rapidly developed by other corporations. To stay ahead of the game, he resorted to using his wealth and connections to thwart these new developments by his rivals wherever possible, at one point even buying a stretch of land solely in order to block the progress of a pipeline being laid by a company named Tidewater (p.224)[9]. Landes points to Rockefeller’s stubbornness in refusing to embrace this particular innovation, which could have been so beneficial to his business; “This was once instance in which John D’s normally impeccable instinct deserted him. When his associates urged him to begin his own network of pipelines, he dismissed them.” (p.224)[10] A lesser businessman may have been finished by such an error of judgement – but Rockefeller soon realised his oversight, and after initially failing to buy out Tidewater, began to construct his own pipelines. Eventually he bought a controlling stake in Tidewater, thus giving him control of all major pipelines. One enduring family business, indeed a name which has earned itself the title of dynasty, is that of the Rothschilds, made famous and extremely wealthy by ventures in banking and finance. Between 1813 and 1815, Nathan Mayer Rothschild played a key role in financing the Duke of Wellington’s army, via shipments of bullion to Spain and Portugal. Nathan Mayer and his brothers soon built up an entire intercontinental network of gold transportation. Nathan Mayer established a financing company in London, issuing bonds for government loans. The empire spread, until the Rothschild name became synonymous with international banking and vast wealth. There is no doubt whatsoever that such success would not have been possible had men such as Nathan Mayer Rothschild been extraordinarily astute and quick to create and make the most of bold new opportunities, and employ innovative and audacious, hitherto unheard-of approaches to place their competitors firmly in the shade. If anything, what these examples show us, even in an essay of this limited size, is that innovation, and adapting to change, are key factors in the success of business – and surely not just in family businesses, but in all types of business. Certainly, many businesses become family enterprises purely as a result of their survival through the generations, so it is correct to say that these qualities are important to family businesses in particular. Yet there are those who would argue that family businesses are ill-equipped to deal with fast-paced change. As Landes points out; “…today’s prevalent economic thinking has chosen to ignore the family firm as a subject of serious study and has all but written it off as obsolete and inconsequential… The world changes with the increase of knowledge. New discoveries prompt new ways of doing business that call for new personnel.” (pp.xi-xii)[11] As technological advance has changed the nature of business throughout history, it is true that some family businesses throughout history have dissolved entirely; “The new chemical firms thrived…Mostly the firms began as family enterprises, but the complexity and cost of the work called for heavy investment and early on led to mergers that took the form of joint-stock, limited-liability managerial corporations… an industry that was once well-suited to family enterprise became the perfect candidate for managerial capitalism.” (p.xiii)[12] However, the case studies selected for this essay demonstrate that innovation, at least for several of the world’s biggest players in business, has been instrumental – and also that failure to properly embrace innovation and change can spell trouble for an organisation. Finally, if we refer back to the statistics quoted from Landes at the beginning of this essay, we can see that the sheer proportion of enterprises around the world today which are family businesses proves that they endure – and to last as long as many of them have would not have been possible had they not moved with the times, which many would argue are changing more quickly than ever before. Bibliography Branson, Richard; Losing My Virginity: The Autobiography. Virgin Books; New edition 2005 Landes, David; Dynasties; Fortune and Misfortune in the World’s Great Family Businesses. Penguin 2006 Ward, John L; Perpetuating The Family Business: 50 Lessons Learned from Long Lasting, Successful Families in Business. Palgrave Macmillan 2004 Online sources http://www.chambersharrap.co.uk https://www.virgingalactic.com https://www.thetimes.co.uk http://www.geef.org
[1] http://www.chambersharrap.co.uk/chambers/features/chref/chref.py/main?query=innovation&title=21st [2] http://www.geef.org/definition.php [3] Dynasties; Fortune and Misfortune in the World’s Great Family Businesses [4] Ibid [5] http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article3998893.ece [6] http://en.wikipedia.org/wiki/Advanced_Passenger_Train [7] http://www.virgingalactic.com/htmlsite/index.php?language=english [8] Dynasties; Fortune and Misfortune in the World’s Great Family Businesses [9] Ibid [10] Ibid [11] Ibid [12] Ibid
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