When Jan Carlzon was appointed CEO of Scandinavian Airlines System (S.A.S.) in the early eighties, the company was a stagnant bureaucratic organization that was barely surviving on what remained of its monopoly powers. Carlzon's challenge was to restore the airline to profitability, and he acted boldly. He decentralized company operations, giving local managers extraordinary discretion to allocate resources. He focused the company on a single market-the business traveler. He replaced 13 of 14 top managers with self-starters who could lead the charge in transforming the corporate culture. He took enormous risks while flying through the storm of deregulation, and he emerged with significant rewards.
At meetings with leaders of family businesses around the world, I frequently ask: "Does Jan Carlzon provide us with a role model for leadership in your business today? Don't you all have to become more heroic, take on bigger risks, transform your companies?"
The answer I usually get is interesting.''There is a big difference between Jan Carlzon and us," my listeners say. "Carlzon didn't own the company."
It is true that when you own a company that represents perhaps 90 percent of your family's net worth, and is your only real source of income, you are going to handle risk a little differently than did Jan Carlzon. Carlzon, after all, was a hired professional who could walk away from the company.
Because the consequences of failure are more severe for family businesses than for other firms, they tend to minimize risk. As the business matures, as the owners grow older, they adopt a "steady-as-you-go" attitude and avoid bold steps.
During the merger-and-acquisition fever of the eighties, this conservative,steady-as-you- go approach paid off for family businesses. Many of them are in good shape in the nineties, while the fast-track companies are heavily in debt and the leveraged buyout deals are coming apart.
The challenge of the nineties is not how to win by avoiding risk; it is how to prosper by better managing risk. What families in some industries don't fully appreciate is that not taking risks in today's business environment can be just as harmful.
Changes in the business world are forcing bold moves. Consolidation in some industries will make it difficult for the smaller firm with limited resources to survive in the middle. As the big players get even bigger, the smaller companies have to grow quickly to reach a critical mass, or shrink to a niche.
Many family businesses are being forced to change by conditions in their industry and by their own customers. One of this year's winners of the Malcolm Baldrige quality award, for example, was a family-owned pipe and valve supplier in Houston, the Wallace Co., which in the eighties was suffering from doldrums in both the construction and oil businesses. In 1984, one ofits biggest customers, Celanese Chemical, came to the Wallace Co. and announced that it planned to cut back radically the number of suppliers of pipes and flttings for its plants. Only those companies that could assure the highest standards of quality and speedy, reliable delivery would get Celanese's business.
To meet those standards, the Wallace Co. had to transform their operations and make huge investments of time and money. That they managed in a few short years to introduce rigorous quality controls and shift their business to supplying large chemical plants is a tribute to a family company's capacity to change. Since the quality program began in 1985, Wallace's sales have grown some 69 percent to $79 million in 1989.
Wallace was forced to risk big change. Management had to step into new territory, take risks with people, and trust that a whole new way of operating would work. However, becoming too dependent on the business of one big partner (or, in Waliace's case, a few) is like learning to dance with an 800-pound gorilla. If your partner decides to walk right over you, it won't do much good to complain.
Global expansion of markets also calls for bold moves. Europe will be one market by 1993, and families that want to take advantage of opportunities there must make their move soon. Likewise, the planned free-trade pact with Mexico will necessitate more venturing south of the border.
How can family businesses deal with these challenges? Clearly, they must be more willing to take risks. But they also have to think before they leap, and develop better planning. They have to invest wisely, and make certain that every dollar increases competitive advantage.
One family firm in the paper products industry was about to invest $50 million in a new paper-making machine, in a last-ditch effort to keep up with its Fortune 500 competitors. Fortunately, the CEO of the family company decided to take a good look at the alternatives. What he discovered was that the capital investment in papermaking would bring the company to a "me-too" parity with the big guys. He con- cluded that the money would be better spent on another significant part of the production process--equipment for binding, packaging, and shipping that was needed to guarantee rapid delivery.
Most discussions of risk-taking in family companies turn on where the money will come from. Because they do not want to share ownership and control, most family businesses finance such capital investments out of internally generated cash flow or through debt. For most family businesses, raising new equity is today unacceptable or impractical. With the banks in trouble, borrowing is also difficult. And the problem with debt is that it adds another fixed charge to the company's operations, thereby increasing the risks in a downturn. In most cases, more efficient management of cash flow is thus the only way to generate the financial flexibility that family businesses need to make the moves that are necessary.
But there's one other aspect of the financial picture that must be considered. As never before, families today must protect themselves financially. To have 90 percent or more of their personal assets tied up in a single business no longer makes sense. The risks are simply too great. Families need to look at the portfolio of assets they control, of which the family business is one big part. They have to make sure there is adequate diversity in these holdings. Only by building a secure core of financiai well-being will they be able to take the risks inherent in running a businesstoday.
If business owners cannot meet the capital needs of their company and diversify their own personal holdings, they must look toward partnerships. For most family businesses, this goes against the grain. But, of necessity, we are beginning to see tremendous growth in the number of equity partnerships between family businesses and individuals or institutions that handle private placements. These invest- ments provide capital for growth (frequently into foreign markets) and for the sharing of technology and know-how.
More and more, family businesses that are expand- ing into Japan, or Mexico,or Europe want to do so by means of equity partnerships with local companies that provide a regional presence and expertise. These partnerships also reduce indebtedness and risk.
One family firm that has employed this strategy is Barney's, the New York clothing retailer. To finance an ambi- tious expansion ofits stores in this country and Japan, Barney's joined with Isetan, a fourth-gener- ation family business in Japan. Isetan will supply about half of the initial $250 mil- lion for the expansion, according to the New York Times.
The motivation for the deal was simple. "In 1986 we hired Goldman Sachs as an advisor and sat down as a family to try to figure out how to grow and still sleep at night," said Robert Pressman, vice-president and grandson of Barney's founder.
Risk is a major concern for family businesses today. They need to aggressively manage risk, not avoid it or flirt with it. They have to discuss it openly, assess it frequently, and maintain a consensus about how large a dose they are willing to take. They'll sleep better at night if they do.
Peter Davis is chairman of Family Business's advisory board, and the director of the Division of Family Business Studies at the Wharton School.