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Victory Supermarkets: ExpansionStrategy?

"I,oe have a crisis,,, said.Arthur [Jay.]DiGeroniuro, Jr., president of Viciory Supermarkets, Inc--one day in November 1998."The-o-wngof the compethg s.ipe.marketin town'has hled a legal challmge to our nevr' store in Derry, New }lampshire. irs " aalyiog tactic. unforh.'rater y, it niay work. On the other haad, it mears they are finaly taking us seriousiy.; Superrurkets, a privately-owned clain in Massachusetts, was a compliment to it "^ ,-,_^_t_ol-U,,O?Z a De taxen senously by major competitor. In 7923,two iurmigrant Italian brothers, Jam""'ut d Looit DiGeronimo, had founded an 80O-square-foot corner store nimed victory n reorninstei. Th";; r.apidly gained a reputation for perional service and excellent meats. s'tories grew of cross-town r-4e ca-ke yeacr to a customer who needed to bal<e of bread. f .,o,"tr.tty, tf,e Uiotf,"rr, l*l-aT:l becameinvolved I tour sons in the operatiory opening a 10,000-square-foot serf-serviceiupermarket in 1955.1 1998,Victory tnd grown to g250million in revenuesand 16 stores in By 15 towns throuehout easternand central Massachusettsand southem New Ha:npshire [seeExhibits i ".J zi artt rf ir", and Jim, of-the second gmeratiory wg9 sti_llactively involved in the compuny, U,_rt sha.ea mu+, of the resporsibility with their sons [seeExhibit 3]. A lawyer by trajnin& Jay DiGeronimo, of the third gereratior; used a seat_of-the_parts ap?roadr to financing the chain,s exparsion. ,,As long as we ca.risell this fl, -or" tf,r,. ; ;;;;i" said, "we're in good shape.The basic problem with ieasures iike internal rate of return is trrai thev yg" have a competingopportunity for the money. But who,s going to loan ^" _"*, -"*: i; invest in the stock market? No one r rnow. Fleet financesL on a fiue y!a'iot" ur,a "" lr; -A;y keep loaning us rroney, I guesswe're doing OK.,, was definitely-o1the company'smind. It had recentlyopenedtwo Victory stores .,_"" _ radrcat "T:ol.*,, wrtn.a _lTTyi a ,Market Square,,that heated food as'theiter, with a capiuccino pizza station, s'i.hi area,and a stir-fry_to_ordersection, along *ii, u f"I ::11[T,j1!j !l l:d.s,bat, Darery, meat counter, cheeseisland, deri. The flagship store it the Twin city MaIl ii brue-couar _and Leominster, Massadrusetts,offered five differort typEs o? impo*ed olive o , certified Angru beef. and wheels of Pecorino-Romalo cheese,along with pork chops at 99g eacharrd progresso bla"c*be; at 79c.fot a 19-ouncecan. ,-'-^-^_'PO L4lJerOruIrrOwe have a vetr-icle *itfr -nl.f, we can go toe-to-toe with the big guys,,, said

1 This buildirg

no* houses the corporate headquaiters.

ResesrchA'ssocitte.Ann K.,I^emnok?rcPared this caseundcr the superiisiotl of ProlessorDaoid E. Bell as the basisfor class *rsc'tsston rathcf than ta ttLustfate either fiectioe ol inqectioe haad.Iing of an administratioe sifr.t.tion.

CopyrrghtO 1999by the Presidentand Fellows of Harvard College. To order copies or requestDermission to reploduce Eraterials,call 1-800-5,6-7685, wribe Harvard Buslnessihoot pubUshini;;;-"*'MA;ii;;.;;; ;; httpi,/,/ww-w.hbsp-harva-rded No part of this publication"-y b" *;r;;;:;r"*#;;;;;;;il;" u used in a spreadsheet,or baJEmitted in any form or by any i-r.*"j*f ".t.-., ''-".h"Ji, ;;;ir;;. recoldin& or otherwise-withoui the permission of Harvard BusinessSchool

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Victory Sqpermarkets:ExpanslonStategy?

Before, we'd always gone to the small towrs and established ourselves thse before the big guys bothered- We've rurr out of sma.ll towrs now. As I see it, my brothers, cousirs and I could eadr tal<e a store and n:n it and male a deeent living. Or we could use the Market Square concept to renew ourselves and keep the drain viable. We could expand slowlp adding five or tsr new stores in the next five years. Maybe we could evm open 10 or 15 stores in five years. That would drange the dynaqrics - we'd be big enough to do our own distribution and gei really good pricing discor.rnts. But is the Market Sqr.rare concept sr:stainable? Are the econorrics feasible? Is it robr:st enough io go to many sites, or is it only a fluke that it worked in the t$zo sites we have so far? And io gei really big that fast, we might have to dilute the ownership - eithc taking a partner or going to the capiial markets. Is ii u.orttr it?

The U.S-Supermarket lndustryz

In the late-1990s, the U.S. supermarket industry, historically dominated by snrall operators ard smaller margiru, [see Exhibit 4] was undergoing a period of phenomenal drange. In 1998, three srassive mergers changed the superrnarket landscape, New competitors lurked outside the isrmediate confines of grocery: Wal-Mart, whose supercenters had made it a major player, warehouse dubs like Costco ald BJ,'s, and convenience stores. Despite this competitiory supennarkets accourtd fot 77lo of 7997's total grocery sales of $436.4 billion Table 1 shows estimated sales for the top five dlains3 in 1998.

Table 1: Salesfor the Top Grocery Chains

In order to compete, superrrarkets (defined as grocery stores with more than L2 Kroger/Fred Meyer $+S | units arrd more than $2 million in alnual sales) Albertson'YAmerican Stores | $36 had begun offering "one stop" convenience, Wal-MartSupercenters $30 | adding pharrnacies, baleries, delis, and Safeway $ZS | barking services. Time.corstrained consumers Ahold/Giant | $21 forced them to compete on other fronts, as Total $tgO | -Tradscan', Supsrnakd Business, well. Through the '90s, spending on food Sourc: Anon., 'l 998, pg. 13, Ahoh., onsumer acceptance of corsumed away from home rose dranatically. September In 1996, food and snacks eaten away from one-stopshoppingf, Drtg|st rB N6|.ns, July 13, 1998, p9. 79, Anon,, "lcogr to acqui@Ftd Mefef , Weeldy home consurned 46Y. oI the U.S. food dollar, Coryqate Cmwth Repott,Octobr25, 1998, pg. 985'l . up from 4j"h ten years before.a Although ovelall, 701" of meals were stiil prepared and eaten at home, almost halJ of the everling meals were not,s Many dual-income farrrilies preferred the convenierrce of home sreal replacemmts (ready-to-serve entrees) from Kentucky Fried Cri&err or other drains over making a mea.l from ssatch Dinner was less a familial bonding experierrce than an annoying task to be accomplished between after-school and early-evaning activities- Supermarkets erpanded into their owrt home meal replacerrent lines and added frandrjsed restaurants such as Taco Bell, P?za Hut, and even a WoUgarrg Puck-affiliate. Still, in 1997, a consr.mer made an average o{ 2-2 trips to the supermarket each week.5 Home meal replacements and other prepared foods not only rnet customers' needs, but carried margins

Company

Est. 1998 Sales

z This section is adapted fiom Wegmars Food Markets: DiabetesCounseling tIBSil599{57. 3 Official accormtsdo not considet Wal-Mart a grocrJrstole becausethe ftaiority of its storesare non-food. 4 United StatesDeparhnert of Agriculture. 5 Ridtard Papiesr& "lVhafs for dirmer?" Nation's RestauraitNeras, February 3, 1992 pg, 41, Maureer C. Carini, Standod 8 P@/'s Srpennalkets Drugstores I Ind.ustryS raey,New lo!k, NY, April Z 1998,pg.2. " 6 Food Marketing Insti tt1tE, SrpennarketFacts: Inhtstry Cloql)iztD 1gg8".

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Viclory Superrnerkets: Expanslon Strategy?

599-054

Table 2 Depanment

and Tums % of Store Sales 40% 29% 11yo NA 490h '14%

Grosa Margin % zya NA NA 27y. 25%

2go/o

Turns 13.8 NA NA 5.1 8.5 22.5 42.6 31.9 58.4 NA 38.8

I tt.c

Grocery DryGrocery (Food) DryGrocery (Nonfood) General Merchandisey'Health & Beauty(incl,Prescdptions) Prescriptions Perishablea MeavFish/Poultry Service Deti Produce Bakd Goods In-store Bakery Dairy Frozen Foods Total

easily twice those of less processed foods. Margins on different d?arElrents for an average supermarket are strown in Table 2. Consumers also demaaded more of their retailers as a whole. Not iust content with quality and reasonable prices, they also wanted to be entertained, or at least educated through their shopping experimce.

4% 3% 7% 5% 100%

23% 38% 30/o NA 41% 21% 25% 26%

The New England Grocery Industry

Intense competition and no domirant retailer marked the New England

17.1

Sourc6:adEptedtrcm FMI Ksy Industry Facts, www.lmi.org, OctoUer ZO,teg8. Anonymous,"DiscoudtstoEs adjust to nsw rulss ol phanacf , Disxl:,uot Slord Ng!l. ArrguslI0,1998, p. 65.

D Slrar.''s, J,'sWarehouse and r.l.i CtoppL. fr"rroio; ;;;fu; B. Club,

Leominster,/Fitchburs area, ut.1ffi qh..^,,.

qolay-

industy

llr the

billion in sa.les from 150 stores *as another-signifi."ot pt^yo i. the region. with its acquisition of Boston-basedstar Markets h November 1998,"shaw'sila stores, with 91 birlion in sares iJJso (seeTable 3).
Table 3 Worcester #ot Stores 10 7 4
ch ol Market

S*i]l,;ff;ilb:;

Storcs Pric Chopper Mctory Stop& Shop

43

Totsl # Stores 126' ot

18 190 DeMoulasMarket Basket 3 16 40 $1.9 Bil. Own BigY 3 t4 g914Mit. Supervatu 41 .1 Goretti's 1 na t s'Perutlu pubtications, SourD: Fairchild StV'$ D,bt', ,'6 Sf"ay aEr"""ry Sfor"Srlo, bufon 0Wny 1996)p. .t76. Markt .lr'Vhere you shar6bas6d rBsponses the question on to have shopped thlastssvendays?", in multiple responses
allow6d.

1997 Principal Revenues $2.8Bit.' Own $1.6Bit. Own $2s0 Mir. Supervalu oc.5 E . Own

Victory
Viciory had succeededthrls far^by being the fust supermarket in secondary or tertiary markets, v/hich it would then dominate. stirtitrg ;'ith i., ;gdoluoo^ i'' 1955,it graduarly added stores in the Leominster/Fitchburg area. Irr the'early 19gos, si of its then twelve stles weie ;n the area, giving it 50-60%of the market. when a Heartlind grocery arrived, victory had to r""r., t o* to suxeive with a 30% strare. It began building larger stJres, b'ot, "" o'coorr.i o noted, ,f'e were al-wayssmaller ihan the big g!ys. When tnly *L" Urria-g a0,0OO square foot stores, ours were 30,000.Whqr they were Zt- 1O,OOO, -ou at aOpOO.,,"Victory *" a.lso moved away from its

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599{ttl

Victory Superma.k6ts: Expansion Stratsgy?

concenhation on the lominster area, placing stores in soutlern and westrn Massachusettsand ,,Ir'y'e t!-pshire. nlnrun; out of places to go,,, said DiGeronimo. ,,rde had f_$,-_)"y . to l,er: ngure out a new way to go to market and competeagainst the big-chains and win.,, Not onry did its small s101e size hamper victory, but the smarl sales vorusre meant -that it *99 "l support its own distribution ."t tt. It" *ilruJ* was superval', a Mdwest-based "'ltolocrlq and reta'er, who ofter competed .""t o,o" ir i;;J;.y -against it" i"a[""aort."t"' were not growing fast mouglL By using a whJesaler, Vicory lost the producer i.,.*ti"". p.ia to to stock certain prod.,.t . Lr""dditio.r, p*i,'r&.,f if,rrrgt S,iperu"f., n"a .om;-U:;;*. *gftyt"o If P& offered a specia.l deat on a .o"t"ir*._t,oJJ-oiJ"O'.ufil ;i;;;";;;;;., independmt ctr.ainria,]ers in Massach*.ft. ;;;;h"";ioT|'* ,o *" "o,'re. If one of the four was not interested, there was no deal. Victory,s stores fell into tl'ee distinct groups: the older 35,000 to 40,000 square foot operations,the larger conventional stores,and the ,iew li4arket Sqr.,ares.

LancasterStreet
Built in 1961' the Lancaster street store was the oldest victory location still in operation. Originally 18,000square feer, it !r'as !eb,,ili_in 1935wii1140^OOO ,i"-" f!", fi""*.1*".;;1,*;ft, neighborhood on the south-eastemedge of Leomrnster. rv1u.r,or-il di*ta. -the "r.irred on foot. ,,we,re a store," said Joe Fusco, "**trJJ-tr.o"d )fleluorlooa from the store in uxbridge. "Marry of our customers are in here two orranaryr, tluee-times a day, at*ro,rgl. tl,i" ar"* r,* tr," ""-" ""#" footage and traffic count as Uxbrid.ge [the most profit ii";Jr,fi"":,e.;;;;;; ,h" .d]l;" don't have tIrc sameaveragesales.; The store was sEikingly dean. .Ttris. company is built on grving service, va.lue,clea'Lness, and quarity," said Fusco' '"we-sive people a deceni pri'ce and gooi seroice.ff they wanted something else' they'd go sourewhere "1"". AJt* ar, Twin itl;t;;; Market square storel is i,st tsr minutes away. This dientele goesfor meat and potatoJs.,; Lancaster Sheet did not have a food court. ,,I wouldn,t want one,., said Fusco. ,,It,s not t'e space issue so much as the fact that we don,t ha.,e the demografhics here. Maybe half, ;;;;; quarters of our stores cou.rduse a food court, if they're in lo.r"tiois -ith rot" or i.o-ir,.o-u r"^ i"s. But'aving a food co'rt and lots of wariefy i*'t ut--uy" u g..,u'-;;" of "rr."e"". srr"*,, f"i" ,i*[,*t down the road from tl." store in uxbridge was big-gerand had more .rariety - and my store it picked up 3% in sales.We just tale care oipeople.,, Fusco focussed on service. ,,people are always saying that our help is so friendly, they don,t seehow we do ii " one customernoted that a r4yJar-ori "i.tpr.y*, -ni ;kJ;i;'.i;'"il; ,h" nanager, personally escorted her to Fusco's office, rather *,ut ri,',pty poi"tirrg to"r*J it. 4 Jo; rush my hiring," said Fusco' "I have a three-stepprocess. rir"t, ["y fiu out an apprication. I read it that nigh! maybe call them the next,a3f.1t if,iy f,r"" --iirovi"-. I c_heck their referencesnext, 9" and if everythingworks out, they,re hir'ed.W" do ; pr"fiy;;ve onentahon,and probablysoend 12to t5 hours traini',s. havethem,""a ti," "to'r" in I tobaccoprodurts to urinorsr ana sigrLthat they've done f6tl"Jtf;;hr,;;;il;;{';;ir;ffi; !o. mf nu.,r"" i,.ut abook, and tale a quiz on =* "' the material. Our wag"s -" .omp"Etive and *e offer a sofia *1g" paiL *ith ."gul*;;;.-,,The tight labor market dd pgr_"challarges. ,.Irl Uxbridge,,, Fusco noted, ,,I could find hieh school kids. Here, I'm hiring 14- and 1s'year-orai. r.t -.r" ."-!ri."t"d; ih;;; ;;;" .%"r;d.rlill but some work out and stay with us.,,

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Victory Supermarket6:Expansion Stlstegy?

599{t54

Marlborough
The 51,000-square-foot store in Marlborough, Massachusetts ilft:strated the second step in Victory's development. IMhrr it was built, in 1995, it was the chain's biggesi store. A conventional store without a food court or a large meal prq>aration section, its wide aisles, bright lighting, dear[iness, and wide product selection made it welcoming and easy to shop. The store became profitable in its second year and has best the chain's second-most profitable location since. The Mariborough Victory practically had the entire market to itself. Shortly after it opened, the small Star Market nearby dosed, and Siop & Shop bought the Edward's Market in Shrewsbury. Victory beca:ne the only altemative to Stop & Shop. In 1998, however, Price Chopper opened a new 70,000+quare.foot store down the road. A year later, lim Guercio, Victory's Marlborough store ma&rger, cosrmented on the continued success of his store: "As soon as you come tluough the doors, you notice how dean it is. People come in all the time and say 'I cal't believe how dean your store is'. We really iake pdde in how the store looks. We're very sarritation corscious. Victory does sanitation as well or better than anyone else and it shows. Ifs a comrrdtuient - we contract with one company for sevm-day-a-week floor service on a.ll of the stores. You can see the difference, tlds store is tluee years old next month and it still looks new. One of the big employers nearby is a medical facility, so we have lots oI cr.Etomers with that sort of background. Even they say they can't believe how dea.n it is. Price Chopper is big, sure, but that building is onJy a year old and it already looks grungy. People care about deanliness and they care about price. Wlat I've foud is that they'll ta.ke deadiness over price. If the building is kept io high standards, they can feel confident that the food is, too. It rea.lly comes from the top and permeates the whole organization. Jay [DiGeronimo] is passionate about deanliness. He's said, 'I rray drop in anytime. Don't disappoint me."' Nor did DiGeronimo have to visit personally. Every department had customer comment cards, whidr werrt directly to the presidm/s desk. Nonetheless, Guercio fett he had plenty of autonomy. Jay will lisierr to a guy like me. He gives us free rein in oul stores. He has an open door pol.iry and will [sten to ideas and suggestions." Victory also prided itsel-f on sendce. "We're always getting comrrrants like, 'I can't believe how good your help is!"' said Guercio. "I/s really simple errough. We're very pi&y about whom we hire. It's hard to find good employees in Marlborough with labor so tight, but I pick and choose. More than experience, I'm looking for an employee who'lllook you in the eye who's really friendly. I interview every hire personally. " A.long with cateful selection, training played a key role. "Price Cropper doesn t train like Victory. They send their people out and do it centraliy. We do our baining within the store. I've been in the industry for 29 years and I have my own ideas about how I like things done, so basically, while there are handbooks and such, they learn to do things my way. People feed off each other; whan the majority are friendly and hard-working and enthusiastic, it carries tlrough the whole place." Even when potential employees had cornpeting offers from Price Ctropper, they often chose Victory. '?rice Chopper wiJl offer 50 cents or a dollar an hour more to start. And people still come here. People are looking for more than a rate of pay. They say that Victory seems better rLrn and it's deaner, So the two are related, the deanlness shows the pride that we feel and people want to feel tlEt pride. they want to be part of it." Marlborough had been slated to add a food court to its offerings. The location, dose to several high-tech and medical employers and boasting a high percentage of two-income farnilies, would male it successfuI. The recent addition of sushi had proved very popu.lar with the lunch qowd. But, as Cuercio ad-nitted, "A food cor-rrtis a double-edied sword.'The overhead and pawol.l

599{54

Victory Supermarkslat E eassloo Strategy?

costs really dse. Part of our great profit performance has to be because we don't have that kind of overhead. I'd still love to have one, thougtr- I think the inoeased traffic and volume worild more tl12n compensate for the increased expenses." The Marlborough store represented the farthest advance of Victorj/s thin-king at the time, bui the compaay felt it needed to evolve in a differsrt direction in order to succeed agaiist the ctrails. A conjunction of evnts worked to victorj/s advantaBe. To complete its 1996 merger with puriry supreme, stop & shop sold off some units, induding one in Kingstory Massachusais, south-east of Boston, tl't victory purchased. "ThG was a rca1 g)!1," said DiGeronimo. "we trad a chance to tr" something new. No one rcrew us down there, so iiwe fell on our faces, we could pick o*""1rr"" ,rf and go on and dralk it up to experierrce.,,

The Market Square _ Victory purdused the 60,000-square-foot Kingstonstorein April 1995. Run by Stop& Shop

fot a year, its weekly sales had fallen to 9185,000. market studl showed that the store had a A potential of $30O@0weekly in a conventional grocery formai. Competition in the area was fierce; a la-rgeStop & Shop stood 200 yards away.

lfe'!lv9 been happy, actually, to achieve 9300 [thousand in weekly sales],,, said DiGeronimo. "we planned to put about g1-5million into remodeling the place, after spending $1.g million to buy it. That would've beer a nice little operation. Bui to celebrate rry p-"nts', +0" armiversary,_the whole farrrily took a bus trip to Niagara Falls and stopped at a wegmars in syracuse. It was incredible - sushi, food preparation right out in the "p..r, tt J cure, dra6itic lighting on t6e "was produce, just so mudr excitement about food. we had a couective epiphany. Tlrrs iow we wanted to do food retailing. This made shopping firn. we wanted to rnake ;hopping at Victory fun-Viciory ca[d in a consr.rltingfirm run by ex-Weg:nans,employeesand asked, ,TIow do you take a convqrtiorul operator ar'd ma-kethe quantum leap to wegro'''s'uuying staffing, operaLrg - tuming shopping for food into a theahe experience?"The firur, Design Associates, .dp"tra"a uy designing the Market Squareconcept [seeExhibit 5]. The third_gerrerationsupported the Market square idea. 'The second generation thought we were nuts," said DiGeronimo, "but iJ we wanted to work that lrard they weri happy to let ri. In a way, we were turning grocery theory on its head. For years, my rutdes and father had sweated to ta-kecostsout of the busiless. Now we were going to put them bick in. ,, Design Associaies'Jim Risenburger beliwed that Victory had srade a basic traruition in its _ fiinking. "They sell food at viciory," he said. "They're couunitted to it. It's not bottom-line thinking there, it's top-line thinking- If you pay attention to the top rine, the bottour line takes care of itselJ.,,7 In Fall 1995,the Kingston store opured. Almost tfuee years later, it generatedweekly salesof M78,000.almost $8/square foot. Customers commended the store for its variety, deanlinesi ald the friendliness of its persornel. [SeeExhibit 6 for courments.]Although the aaining associatedwith the food court inqeased operring costs signficaatly, victory decided to continue witi Market squares.

Twin City MarketSquare

Victory's flagship store in Leominstq's Twin City mall o,penedin May 199g,replacing ar, __ older Victory store in the same srall. At 65,000square feet, this was the largest store y* ror vict"ory,
/ RosearneHarper, "Square Success",Srpennarlet Neros,May4,1998,pg. g5.

Io+

Victory Supetmarksts: ExPansion Strategy?

59+054

dunged. and arnounced to ihe people who had l,nown the chain all their lives that victory had a stong summer Popr:lation - Leominster was a blue"collar town with Kingston, *lti.h d.; Unlike tastes in foceries, Jthough it also had a significant ethnic population 'rpposedty".,-sophisticated TheMaJketSqlaresectionoftheneu/victorytook24,000squarefeetwhidrwereaddedto was the existing 41p00-sqirare-foot structure' While DGeronimo lq:rer / it was a risk, the design "Iy'y'e can change the lighting grid - iJ necessary, convert the whole fletble mirgtr to atlow c6anges. "But we probably $'ort't have to'" thing to a conventional store," he said. The Twin city store, like Kingston before it, exceeded budget both in costs and revenues. The market Etudy had eslmated $420,000 in weekfy sales. On average, d'ring the tert months since.its exceeded opening, thJstore tlad brought in S455,000a week. As with Kingston, start-uP expases had because the specialty areas rLquired more intnsive training' Ir. dos. ti, conventional stoies a iaaiAorr, gr*d opanings invariably ate inio profits; give.aways and loss-leader prices armihilated already razor-thin rnargirs. grocery's Twin City's impressive sales had come at the expense only of competitors; sales at t]rc Lancaster SEeet Victory on the other side of town had risen 3%. The L,eoqrirstel maiket was the most exit competitive of any in whlctr victory operated, with shaw's and DeMoulas,/Maiket Basket one away on Route 2. f?' Rob Wihtelin, manager of the Twin City store, felt that the Market Square concept.y*"q "Large corporations are looking to rnake.a profit for their Victory because it was farJly owned. 'alere, it's a family op&ation and there's a differmt set of priorities " stockliolders," he said. '"!Ve managers don t have the autonomy of larger Fa:rrily ownership was a mixed blessing. what chairs. You never lqrow whqr an owner will shiw up. But ai the same time, it mears they see doing and they 8et customer conments fust-tEnd. And everyone loves the store' they love the we're service and the quality and our specials." The Market square had besr very popular with shoppers and wihtelin believed it trad "I4het ie get to 20 or 30 sioies," he noted, "prcople will say 'what got thm there?' staying power. and a,ri tiJ un"*o is just wlit Victory has always done, frierdty service, incredible deadiness, quality. We've got a lot of pride in our stores. When we-fust opened up, people said we were great

realizedthey'regettingwhat mY qi{ !?: F:? ia."y,'Uot iu. aott't tear that somuchnow. People and the price leader down the road, Market Basket,isn't as good as it once was; it doesn't have
everything people need and its produce is terrible." ,Triendly service is a huge part of what we offer," said wihtelin, as he reflected on the spirit ,nVe hire friendly people a,.'d we show tlem we care. I'm responsiblefor meeting of the company. to tf,," puy.off","i.,Uos, but iI lt takei &tri people to gire excellentsewice, I'11take the hit. You have top of the gvJ people the tools and support to ieliver.,, Th" cotr."m for service went to the 'Every October, sitsdown with wery fuIl-time employeeto conductr'r'age reviews' [tg-Lutio.t. Jay it,to"\ ttiT 't"S and Jay Last,year' director,the storemarags, the I(i jr:st the employee, persorurel 'Tomado Man' and whsr he weeks. Jay's splrii reauy charges the whole chain. They called hirn became'plesidkt, it rejly sho-okthe place up. I was oniy 16 ai the time, a bagger,-andI reme.ber 'Oh boy, 'iomado \'tan's at tire helm!' But he really cares about the place and he people Jaying inspires the rest of us." "It's very labor-intensive.Th rest The food court pressrted wihtelin with several drallenges"And there's a 1ot of of the store can get citnched in order to carry those labor costs," he said. of haining involved:My chefs just fi-njshedworking with the Kingston chefsto develop a handbook product.. And yet, I thilk it really fills a needaconsister:rt preserLt mett ods so that we can recipes"arrd We do dinner-hour demonstrations during the week - today ils Spanish Beef Ste$/ and we have

165

5g$Olf

Victory Supermarksns: Expansron Stratggy?

samples and all the ingedients and the reci-pesright there. They ca^ ty it, buy i., and ma,keit at home in lessthan thirtv-nlinutes- customers lir"" rt-Tir"y J""'i'have to think about wlnt,s for dirurer, we solve tlat problemior thenu,,

Merchandislng MarketSquares
The most strilins aspect.of Square was its produce d?artnent. The shopper lfuk+ walked directly onto a itase, with * the cotors'of p.rd";;;;;; al J;*T; iriol*"t*o emphasized with hand-wriEen crulkboard rig".. *+;;-th" area were rhe coffee strop, caf, pr?araon statiorL and the colorful ju-urbl" ,ji fr" tr-.r .trdT"h a"p-tor"r,t. rr," ""J'.i'rri*baked bread wafted over from the ba_kery. Toney Tar"lli, produce buyer for the chain, said tlnt.yarket s-quares added dispray complexity gut did not c-ompricate act'at uuying.lr his m;*t-"r,".tir,g ,tot off on a lisl ThereG so much available from the distdbutors now. Ifs ut" iirpr"y'tr.t," differlnt. t" t"ii"" "p-r.r"i-""" every week, the entire department is rearranged twice a'month, you have to "-*" There'salotoftaboronthlstoreend,k*pir.,g"th";.o;;;;"i;i;;ki";*ii.j,,*ilri"f"-stay on top of thino. fr:, *: of. the depart.ent a,owed creative merc'andising, which increased sares at the .. sa'ne time that it educated customers. "Think of herbs. Everyone hai them, but *" ; ;"uu;;* attention to theuu We dont stick ir.. [nle comer i^ if*U" U"gj*; ;;;;";r;a ;;* tg I them off.-And every so often, we,ll put th" "p ft;i, fh; opporrunify to do demonstrations -Ja allowed the store to inhoduce customers to new products. ,.nd* *" i"r,"A i""g-*";, Taralli, "salesthat wee_k wenf ft..om to 400, u_.rd'*. only .rt up 50 mangoes 30 to give away. The tus p1s_isted; peoplestill buy applesa^d oranges;d potaroes, now thev,ll but 1oe1;e buv a mano^ too. demonstrationsdearlv had c.'stomershading up; d'ring holdays, ;;;'p".pr" iiiJa ?"*".., thlmsetve+ salesat the Kingst"" vt*t"t q'J" f;;;i;&., while rhose at rl* next best store onlv rose 14%. B:.T".ft9 qrodlce preparation area was out in the open, customers could always find someone ask for help. ,,Customers always ask a q,."stion,,, to can iai T"r"lfi. ,,W";;"iJ;"f;J_ in our hiring, staff has to be outgoing. We,ve worked rviiL th"; ;"--;;;"y"';;?ii#;", inviting them to ask questions.,, The difference befvyeen Victo5/s Market Square and the competition was commitmenr, committed to this concept " he sard. tt's not'just product on a table in a depalbnsrt. The merdundising theme rrns tluough the store. who.'s'a;bJ". *" rn seasorLwe feature fresh stawberries,. the bakery does sdawberr)' tarts, arrd tf," ""i?-L, strawberies and qea,'r. With aspara*us' it's asparazus oizza and ceam of asparagussoup. Everyone has to be cosrnitted to this. There's this senseof dcitement about tlr" tJi."T ""a irr;*t inJecrious.,, ;";J'ilil;3; "lvlarket square is realv here to_stay,-he said. "Ifs a Iittre hard to get used to moving things around a'rd all. Employees *" 1a1"a about it now, ,fr""gf,,',f-r"y .ff& Jg;;J;;S ilfs. Managers becorne more ma'agerial; there's more to do. enJ-ttomers love the variety, freslaess, quality, and service.I watch cooking shows, alr the chefs r"y ?"*, . e"opr" -" l;kidi;f ii;i,-'""' "wete The focus on quaritr and service,he berieved, was victory's prisnry competitive advantage. wal-Mart [a wa]-Mart supercentol oto""a i"-.aosr ,n" ""J*li *""rdn't kin us. B.l.,s is alreJy dow'. the street' People whoire focussedon price win shop -after u-ott-, ut a ** price leaders,but thev do ,r" that al'eady. We're ihe qrrel;ty "o*ri.,*. .-Sli"*f"iirl;; "r.ppJ d,r"Lg A;;';ir;; & Ca-urbridge, iiace we opened. people'will' pay a lif0e more for something 3:"d u'ith $r:r" : if thq/re rtappy it when thev get home. rt doesn't matter how gruJt th" p.,au *- iJ the strawberries are moldy when you opot tiJo*.,, "If

Theywo'rd-n't before because aia.t r.i thiy

wnatio i, *,r,'ri.;'rr.."'#;;lili:

166

Mctory Supermaikets:Expsmion Stratsgy?

599-054

Financials
The Marlborough store had cost 94 million in 1995. The landlord conEibuted $2 srillion for the land, building arld major systems. Victory paid an additional $2 million for fixtures and interior design, with inventory as an extra cost. Three.quarters of victor5/s sirare ca:ne tlEough a fi1e-y911 loan-at 8%; the balance was from cash flow. The 6tore generated $432,000 weekly during the 199E fiscal year, while rstt cost the comParry $l0/square foot.

At Kingston in 1996, Victory bought an already-existing Purity SuPleme oPsation, purctusing its Jquipment, goodwill and leasefor 91.8 mjllion- It s?ent alr additional $3.3 miJlion on ierroaain!. Atliough thesi costs outsEipped both projectiors and those tlat a conventional store would tnv-e incurrd. *tu Uurt* q"ure iection (deli coffeebar, produce section and so forth) made money from the first year. Rent was $7/square foot. At Twin city, the landlord contributed $lmilion to the remodel, an exchange tlEt meant victory's rent was $8.00/square foot. As with
costs exceeded Kingstorf estimates, but the Market Square area again made money (seeTable 3).

Two more Market Squares were planned. One was under construction in Derry, New Hampshire, and wou-ld be the largest yet, at square feet. The 70,0N million in leasehold improvements, and victory would borrow $4 landlord was contributilg $2 million and use $870,000 from cash flow to come uP with the $5'87 million for construction' The store was erpected to generate $500,000 in weekly sales. size was not the sole factor in its performance; there was only orie competitor in the area. The other store was planned for Hingham, Massadrustts, "AIl the competitors are there," said Dceronimo, "Shaw's, Stop & ShoP' Without close to Kingiton this conceptl wed never get near the place. Market square has proved that we carr go up agatBt the big guys and win." Paymnts fo! intetest and depreciation were direcdy applied Table 4 Operating Lea-sesfor Rea.lEstate to the profit ajrd loss statement of them. the store tl|at incurred Equipmmt depreciation schedules was but Victory had varied currantly using a fiveyear shaight line sdredule. The companY also Rent Expense(1998) chareed each store its actual rent Payments for real estate taj( and (seelable 4). Other costs, such as commonarea malntenance SG&A, were allocated based on sa.les.Stores with higher volume, a carried sudr as Kingstorr Sourc:Victory SupemaJkets,Annual Report,yat andlng 1ry2/98. substantial share of less-producti ve stores, SG&A expense. Likewise, except for the distall Kingston store, advertising was allocated on volume, because the stores' trading areas overlapped [See Exhibits 7 and 8.] Wldle concerned about sales and profits, Diceronimo felt t}Iat a store v/as a success i{ it broke everLbefore depreciation. Tlpically, the itores broke evqr in their second year and made P:oft" itt their third. Market Squares ieemed to add a year to tlEt schedule, breaking even in their third year and becoming profitable ir the fourth.

167

s99-03t

Victory Suparmarket5: Expansion Strategy?

Threats
"Irly'e face tlree different threats," said DiGeronimo. -The fust is cornpetition. That will_gadually erode sares.we'[ lose about 10% of our saleswhen u tr* .o-i.ut-orr* i'' Economic downturns are the-second. They hit us more slowly, b"-.*" ia. i;tthn g people do in a sundr is give up little heats. They won,t go out to have a stea! they,ll buy one here and cook it at home.. But_once people have taded-down in tlreir..ddL;i;:;y, -rong from steat- to harnburg.er.-. it takes a time for theqr to bade back up"agarn. so an economic downturn win bring us down 5% event'ally. And the rast rs g.J tairc asra ot --people being time.poor. The l\,farket Square bades on that- If it clanges, we;;" "A; victory's dq>endance on its dis*ibutor and on short-term financing also ^ posed tl'eats. on a cost-plus basi.cand.required anf% margir In rerurn tL ",rppfy .or,t ".tn it 3fl1:f_:"13 woluq guarantee tJreleasefor a new store, allowing the deveroper to get permits to buiii. To suoport its own distributiors thou6h, Victory wouJd have to geneiate $iS t ion jrr ;;J J;::l* qE)enonce on short-term firartcing meant that a downturn could quickly cut off its qedjt flow. The Future "Going forward," said DGeronimo, "we waJrt to be abre to choosefrom a porfforio _ of options. We want to develop a smaller Market Square.That way, *i." " l*" i*"^* available, we can rnatch the store to the deurographics, the compei-tion" il il." ;;;i; volume. We aten't the price leader'and we don-,t ty to be- We,ve got the q"rXty;t the service and we nake shopping frrn.', 'It's a conund'rm,,,. he contirued. ,.Icngston and Twin City are not our most profitable stores.we should have nothing but Mairboroughs and uxbidges rri tr-r"-u"i"Iine. But we're convinced that the future is with Marka square. we,re nJt maximizing our food court sales;u/e can do more. It's pre*y recession_proof;*" .* A*uy" ,*i "n ?oi $4'99 panini to 92.99 hao' and swiss. we can ta-kethis concept and run with it. But w l everyone in my fanrily go for it? Ald will u/e be able to get the money?,, Supervalu was willing to put up $50rnillion initially and $50 million in lease gua_rantees iJ it was made a 100%partsre i.. a major exparsion effort. -This,- said DGeronimo, "^"i* tfr" f",'.ily very nervous." Another option was to go to the small cap rrarkets with FleetExparsion would also dunge the corporate cr:lture. ,"We,re an oral companv,,, explained DiGeronirno' "1ly'ealmost never write anything aown. w" *rr"g" uy h.ull*ay-.""i"#nrii;f,* " nit of thu1+, every rwo new stores requirtd two clerical wJrkel "rrd ;; ";p;;;;; " ;; addition of $150,000in sG&A. currcrtly, several of the brothers and cousins shared buving responsibilities, "ttrey're getting spreadprety ihin,,as the numbers,f but tt;-;;;Jlr;;;: larser stores. 'The chains won,t do this,,, said DiGeronimo, ,,it,s too new ard risky. We can do d"9, -"--* _"1d. As long as we can sell it for more than we o!ve, we,ve had a nice time. But to be reall..IbiF; we've got take a partrrer. And that changeseverything. Are we better to -to stay small and just gradually drange? What do we need to io to grl_ {LZ;i" a ;;;. like to thbk that we,re ahead of the gaine, thirking outside the boi. B"t *" ",ighite to;; nuts."

168

Vlctory Suprrnarkets: Expansion StrateEf?

Exhibit I

Victory StoreOPenings Year

tooo

ReplacemenVRemodel
(2Twin City Replacement Ma*et Square) UxbridgeRemodel

GardnerReDlacement Hudson Replacement North BrooKieldBeplacement ClintonRemodel Twin City remodel Athol remodel LancasterSt. Leominstelremodel *Maynardremodel 'Acton. Norfi Leominster movedto N. Main St, Leominster Headquarters 'Lowell Market Warehouse/Farmerc Leominster

'199S '1996 Kingston (1'Markel Square),PelhamNH 1995 Marlborough 1994 Middleboro 1992 Amherst 1991 '1990 1989 1988 1987 1985 1983 1982 1978 1977 1976 '1975 1974 1971 1970 1966 '1963 1961 1960 Lancasier St., Leominster 'Maynard Uxbridge Townsend Athol,NorthBrooHield boughtout. Tony,ol the 2- generation, Gardner

Store Opening NH Derry (3" Ma*et Square)

'ldmball St. & *Lunenberg Fitchburg St., 'Hiqh St.,Clinton 'John Fitch, Fitchburg 'Parkhill, Fitchburg

Clinton Twin City Ayer Hudson

'N. Main, Leominster,10,000 ft, firstVictorysupermarkel I O E E sq. *MctoryMarketfounded,800 sq. ft. home-delivery 1S23 siore
': Has siice clossd. Sourcei The Vatory Voic,(vol.9, numbd 3), Octobr 1998.

169

599-O5ll

Victory SupsrmarkEt6: Expanslon Sttategy?

Exhibit 2

Approximate Locatiors of Victory Stores Newllarpshire

Sourc6: company irf o.mation. Exhibit 3 DiGeronimo Family Tree

James Founding B rothr Jarn gs ,J , r

Louls F o u n d i n gB r o t h e r

boughl out in 1982

ArrhurJr. (Jay) P r s i d n t

Jam es M ark B uyer

2 da ug hlors not in lh buslness

Buyer

A n t h o n y M i gl i a r o G n e r a lM a n a g t ( s o n- i n- l a w )

S tve n Buyer 2 d a u gh t r s not in lhe business

Source: company iadormation.

170

gtratsgy? Victory SuPermarkets: Expanslon

59q)54

Exhibit 4:

Supermarket Facts:Iadustry Ovewiew 1998

3.5 million 126,000 $4:)6.3billion 30,300 $334.5billion 1.OA% 39,260sq. ft. 30,000 $2U,7OO $9.45 $110.32 a.8"/" 10.3% 17.6"/.

Numberof Employees Numberof GroceryStores Total Grocery Sales Numbetof Supermarkets Sales Total Supermarket Net profit after taxes, 4t96-3197 Size TypicalSupermarket Numberol items in a suPermarKet expenses Laboras a percentot operating WeeklysalesPer suPermarket Weeklysalesper squareloot ot sellingarea SalesPercustomertransaction Salesper laborhour incomespenton food Per cent ot v,/eeldy United States Canada Japan Definitionsr

along dry grocery' canned Soods' or non-food itens Grocery store any retail store selling a line of with some perishables. Superrnrket sales of $2 million or more' arry fu1l-line se[-sewice grocery store wit]r arurual

a liurited line of high-convenience itens' Over Convenience stole: A comPact, drive-to store offering half sell gasoline ald some sort of fast {ood' lndeperrdent an operator of uP to ten retail stores' Chain: an oPerator of 11 or more retail stores' dataunless rellect1997 ancl ol on Dara based a cross-scrion FMImembls www.{mi.oro. aJe Insriture, FoodMarke,ting sources: noted.

171

599)tl

Victory Supermarkets: Expansion Strategy?

Exhibit 5

Market SquareStoreLayout

Source: company infornation.

14

t t L

Victory Superma.kd:

Expanslon Strategy?

599-054

Exhibit 6 : Customer comsrsrts and Profiles at the Kingston Market Square Cu5tomer researchB at the Kingston store ajter it had been open for a year shoygd ttu! i-ts eustomers seemed somewhat bipolar. While the average age exceeded the local norm (45.5 vs. 43 9), Victory a_lsohad more shopperi ulder age 36. Customers tended to trave Iarger hcuseholds (3.6 people vs. 3.5), and rrore tr,rn t.r of them had more than tluee people in the household. They 38% of their food dollars and 33% of their shopping trips there, shopping Victory an .o**tr"t"d of once a week.9 They gave Victory overwhelndngly positive scores for quality and service in average meats] det, produce, home-meil-replacements, arrd ba-kery, along with store d6cor, deanliness, and drawback was the perception of highest overall prices friqraliness of checkout. The most ;gnficant Victory may trave beerr attracting the convenimce-minded younger person a-long with the older shopper who appreciated its service ard qualityCrlstomer Comxnents on Kingston Store: . I "What do you like about this store?"

The meat selection and the checkout are faster for meI?re store has a butcher shop that cuts meat the way you want it and they filet yor.rr fuh. I use this service all the arne. The layout of the store is easy to read and it somewhat folows my shoPPing Pattern. The decor is beautiful. I like the produce and the meat selection They also have good variety. lt's very attractive. Ii bas specialty soups and pizza to tale out alrd tables to sit at. They have a1 different kinds of loffee to gdna ad espresso. They are coudeous and helpf'J. They srrile. Quality meat and deli. I can shop with my oedit or debit card and I don't have to write checks. They have senior day on Tuesday I like the deli and I really urioy their bakery. I love their meat section' The layout of the store is beautifu.l and the customer service is friendly
-,:rl:-wurS r ^ a , q -J . L^Il !v

. .

and always

. o

It's conver:rient to my home artd pretty much carries every item I need. I like the c_leanstore and it G set up how I like it, mearring the coffee is right thele when I get in. I ]ike the service, meaning that the people are ava-ilable to help me when I need it' I like that they have a wide variety of everything and they play nice music in the store' They have a nice coffee stand when you walk in tlrc store. The prices of food and selection. It's convenient to my home. The quality of the baked goods are excellent. I li]row all the employees at Victory and tley are wonderful. The quality of ihe foods in the deLi. The vegetable ard balery departments are dean and verv Dteasan!.

o .

8 SuperValu Marketing Research, "Victory Market Kingston Massachusetts", SePted$er 10,1997' 9 Wl,il" this is lo-o than the national avetage ol2-2 n'ips per weel the area has a lower nunrber of shoPPing trips per month than the national norm al well (10.5 vs 12.2 nationally). __

173

599{91

Victory Supefmarkets:ExpansionStraiFgy? It's dose. I l&e the store- If I wanted to complain about somethin& marager easily. i(s attractive and it has everything I need. The produce is frestr- Good variety, Butcher shop offers black algus beef. It's a.very welcoming store and I think it,s one of the best stores ever. It,s spacious and easy to find everything and the people are ""ry "i"" *a "oJ"oL. Customer serrTice.The size of it.-They Fay.not carry as much but they have everything I need. It's an intimate atmosphere because i/s a smailer storenice and, spacious store. It has a bagel shop which serves good baeels l^llll-"^: -l"y ano conee shop as we'. The meat is e;cellent. I,ve nluer hid " p."bl""r;iii;;.,;: produce is always fresh. Tl: the produce,is laid out among orher thrngs T:$ft"t. 1ay in the store. The decorations and the beautiful colors they l,ave. The stote"isvery J""r, "nd n"*. They.ave a hu-ge serection of foods made ava'able to peorple. It,s rike if I,m rookins for something and Victory Market doesn,, f,""" i ,h* irpril"ily , ir.rt ^ua". 5:.L*" of a counEy store. The layout is beautiful and I like the fruits, veggies and

I cor:ld find a

Not too many people in the store. It,s not as crowded as some of the big stores, I haven,t gotten used to going there yet. Ir,s_not as snall as A&p ;; tt; ;; * big as Stop & Shop. You're not sure if they're goirg to have what you,re lookhg for. I can usually find special items tiat I can,t find in other stores. It offers things tlEt tlle other stores don,t, such as a coffee shop, a bagel shop, and music that relaxes you. The d6cor has an open air about it, like the stores in Europe. I tke the deanliness, friendliness, bakery, deli and the good fast food. The store is beautifur' It looks as if it- cost a rot of money to build that store. The ranes are open- Every cashier is friendly.,'d ""t";;;;;6 _always meat is ueautiftrl. end ;";:de the prices are reasonableThe produce is fresh and thev have a large variety. you can sit and drin_k coffee wherr your feet are hurting or vou need " U.!"f fn"'y J" Ll)"'"*t"ga shop. I will be shopping there more often.

174

Victory Supe.maJkt5:Expanslon StrateEy?

59H)54

Extribit 7a
------Salea

Victory Income Sfatement

Oct. 3, 1997 OsL 2, 1998 "/ool Sales Amount $ % ot Sales Amount$ 100.0% 100.0% 223,679,794 231,697,034 6,444,114 164,465,008 2,007,006 2,233,O70 (1,589,479) 173,459,719 7 ,207,754 166,251,961 26.1 57,427,837 74.3 25.7

Year ending

Cost ot Sale
lnwenlnrics--Beoinnino

Purchases-Netof discounts Cartageand warehousecharges Suppliesand wraps income Promotional Total Less-lnventoriesending Total Cosl ot SaleE

7,207,758 '170,028,505 2,056,834 2,308,194

(2,s61,191)
179,M0,100 7,751,895 't71,288,205 60,408,829

ga=le!tStore Erpenses and Payroll tringes

Other expenses Total Siore ExPenses Adminisirative Expenses Payrolland lrinqes Total Adminlstrative ExPenaes Total Store and Administrative ExpenEes Operallng lncome

29,534,609 22,516,202 52,050,811

12.7 9.7

26,959,592 21,922,266 48,881,858

12.1 9.8 21.9

3,934,161 2,545,979 6,480,140 58,530,951 1,877,A7A

1.7
1.1

3,806,459 2,2A2,407 6,088,866 54,970,724 2,457,113

1.7 1.0 2.7 24.6

1.1

2.8

Annual Beport, year ending I cV?J98' Solirce: Vidory Supermarkets,

| / J

599-031

Victo.y Supermarksts: Expan6ion Strategy?

Edribit 7b

Victory BalanceSheet 1998 1997

ASSETS C"r*"t A"""t" Cash

Loans ano ac@untsreceivable MercnanoFe Inventories Prepaid e)aenses Marktable securities Total Current Assets Properly 8nd Equlpment Less-Accumulated deDreciation Nel Property and Equipment Other A8sets uasn surenoer vatue ot lite insurance, of loansof net $1,225,551 and $4,398,893, Espectivety Goodwill,net of amortization g157,796and of $111,89O, respectively Miscellaneous otherassets Total Other Assets Total Assels LIABILMES AND STOCKHOLDERS' EOU]TY Current Liabilhies Accounts payable Currentportionol long-termdebt Accruedexpensesand other cunent liabilities Tolal Curenl Liabitities Long-term Liablllties Long-term debt,net of cunent portjon Delened tax liabitity Detenedcompensation Total Long-termLiabilities Total Liebilfti.s Stockholders' Equity Total Lisbllities and Stockholders' Equity
Source: ViotorySupnnarkdts,Annual Report, y6ar ending l CyZg

$644,0s8
2,19A,4U 7,751,A95 1,746,095 834,881 13,175,393 35,890,011 '12,133,052 23,756,959 1,843,4A2

$556,259 1,600,531 7,207,758 1,633,798 798,933 1'l ,797 ,379 32,280,207 13,618,869 18,661,338 2,191,849 576,702 24,4W 2,797,U1 $33,255,758

s30,796
228,068 2,602,346 $39,534,698

$13,400,103 2,012,436 2,100,a26 17,5t3,365

$10,706,356 2,312,016 1,942,A62 14,961,2U

7,7M,607 1,72A,600 246,4'16 9,719,523 27,232,98A 12,301,710

4,453,916 '1,501,600

5,055,279 21,016,513 12,239,245

$39,534,6981

$33,25s,758

'1 76

Victory Supermarkels: Expan6ionStrategy?

599.054

Exhibit 8a: Store-level Financials, Percent of Sales Six Morfihs Ehding 32g|/99
Lancaetor SiMrrlboro King6ton Trvln Clty TOTAL

Gtucaty Depaftnant Sales Gross Margin{% Dp't Sales) of Frozen Dparinent Sales Gmss Margin(% Dep't Sales) of

47.4% 21.9"/" 6.74. 29.3./" 10.4.b 20.4/" s.66/" 11,3y" 13.1% 29.O"/.

45.4"/o 21.Oo/"

39.5% 20.4"/o

40-3% 19.7y" 6.8% 30.2Vo 9.9L 20.9.h

45.4/" 19.74. 6.8% 30.8% 10.7% 23.6"/o

6.4% 30.5%
'10.60,6 22.30/"

35.5% 9.8% 25.9% 4.57" 34.7v. 15.3% 26.4"/6 11,4.h 33.90/o

1.9e|/." 27.7% 2.40/" 51.4h

DairyDepatunent Sal6s Gross Margin(% D6p't ol Sales)

Haalth & Bea'ty Depaftment Sal6s Gross Margin (% ol Depl Sales) Meat Depaftmgnt Sal6s Gross Margin(% D6p't Sales) of Produce Ddpatinont Sales Gross Maryin(o/. Dp'tSal6s) of Floral Depdftnent Sales Gross Margin(% Dep't Sales) of Food Courl Depaltment Sales Gross Margin(% Dp't Sales) of

4.Oy. 25.4.4
13.20/" 31.4/"

22.8./"
fl.6e/6

3.34 26,7"4
14.0% 24,2"k
9.40/. 33.7./" 1.00/" 33.7"h

26.1% 10.5y. 31.4% 1.9% 30.3./" 2.5% 46.e"/. 5.2./" 39.5% 4.44" 47.6% o.0% o.0%

a.ay" 33.2v"
't.6% 27.8/"

9.8% 34.6"h

39.00,6

o.o"/" o.ovo
4,9% 44.34.

o.zvo 61.4%
5.2./" 47.40/"

0.5% 49.7'/" 5.1"/" 45.0,4 2.9% 49.0"k

Deli Dspatunent Sales Gross Margin(% Dep't of Sales) BakeryDepatundnt Sales Gross Margin(% D6p't ol Sales)
Beer & Wine Depatund Sales Gross Margin{% Dep'tSales) ol AcnJal StoBlE Costs (% of Store Sales)
LADOT

5.8% 41.6L 3.9% 50.1% 0.0% 0.0%

3.Oao 43.5v"

3.0.,6 55.5% o.o% 0.0%

o.o% 0.o%

o.9"/. ?2.5"/"

StoaeExp6ns, Insurance, Maintenance Utilities & Bnt & Ral Estate Tax CommonAta Promotion Other Cosls Alocated Stoft CosE (",4ol Sfore Sa/es SG&A Advedising OtherAllocated Costs

12.OV. 3.O7" 2.5"h o.170 o.4y" 2.3y. 2.4% 1.1% 0.5v"

11.7"h 2.27. 2.9% 0.6v. 0.4% 2.1./"

14.6"/o 3,14. 2.170

14.8.h 3.4/" 2.6v" o.2./" 0.5./" 3.7h 2.87" 1.1v. 0.5%

12.5h 2.4% 2.3e/. 0.3./" 0.60/. 2.5"/"

o.3% 0.5% 3.0./"

2.8k 1.4./" 0.5%

2.8/"
1.10/. 0.5%

2.8./" 1.1"h o.570

gt9/99. Source: Victory periodending Supermaftets, ProfitandLossStalernent.

177

599-0tl

Victory Supo]markets: Expan6ion StratsEy?

Exhibit 8b:

Store.level Financials, Dollars

g2gl99 SixMonths Ending

Sales GlossMargin
Frozql D6paftn6nt

$ $

3,013,396 6s9,403 426,232

$ 4]39J12 $ 993,979
711,425

$ 4,s29,982 $ 92A,991 $ 632,250 s 224,4U

81,122,526

$ 4,239,700 $ s1,4o2.4u $ 835,368 $ 10,196,s49

$ 717,335 $ 2 1 $ t,037,280 $ 216.26 $ $ 7,724,678 2,382,96t $ 12,14i1,202 $ 2,864,126 3,25,37.1 1,OO8,S51

Sales Gross Dahy Dpaftne Sales Gross Health & Beauty Oepaftment Sales GrossMargin Meat Daoartnent Sales GrossMargin Prod)ce Dparbnent Sales Gross Horal Depat n6nt Sales GrossMargin Food Cout Depaftment Salos Gross Deli Ddpeftmenl Sales Gross Bekery Wafthent Sales Gross Beet & Wine Depaftnent Sales Gross Margin AcllJal Store Costs Labor StorExpense,lnsuranco, Mair onance & Lltilities Rni & Ral Estate Tax CommonArea Promotion OtherCosts Al@ated Swe Cos's sG&A A(tuerlising OtherAllocded Cosls

686,347 142,927 $ g $ $ 231,223 26,1j? 833,068 241,583 561,! 75 186,3a1 99,087

$ 't,10a,n4
$ $ $ 247 419,871 106,831

$ $

509,468 176,695

42O,Z1o $ 95,BgB $

$ 1,974,471 $ 432,061 $ 1,026,822

$ 1,749,378 $ 468,52l $ 1,306,099 $ 442,680 $ $ $ $ $ $ 218,818 60,698 271,888 139,871 665,179 276,463 456 221.

$.1,539,178 $ i5,863,4so $ 40.1,604 $ 4,480,81S $ ' 1 , 1 0 3 , 7 2 1 $ 10,s96,699 $ 3,s74,358 195,275 59,098 $ 265,623 1,107,295 373,354 562,087 279,598 5,715,673 2,573,413

27ss

174,'t0o 67,U2
24,576 1

310,559 13?,487 193,559

$ 5s0,825 $ 217,342
$ $ $ 461,040 219,393

317,022.

3,242,9't9

,]

1,010,064 226,960

$ $ $ $ $ g $ $ $

761,2A 192,822 160,758 9,000 26,860 149,021 175,209 69,901 31,504

$ 1,224,633 $ 224,547 $ $ $ I $ $ $ 301,000 66,861 38,711 223,466 292,416 114,878 47,688

$ 1,666,517 $ 350,32 $ $ $ $ $ $ $ 237,000 32,400 58,739 34B,s3O 322,544 125,862 5./,210

$ 1,s59,2s6 $ 14,160,710 $ 362,718 $ 3.168.367 $ $ $ $ 272,620 17,640 56.538 987,193 $ $ $ $ 2.606,494 297.s89 637.721 Z]A3,fis 3,181,695 1,244,605

$ 294,84s $ 11s,832 $ 52.651

Source:Victory Supemarkets, Profit and Loss Statemnt,perjod ending 319/99.

I05

178

Transferring
power ln

For the company to grow to it is essential temove the rcins from the old man'shands

the family business

and LouisB. Barnes SimonA. Hershon
Should a faoily business $taf iD dre family? The question is really academic, since faoilics appear to be in busiDess to stay- But, wheD the hrnageDeDt moveS flom oDe geBelatioD to the ncxt, thc traDsitioE is oftea far from orderly. In addition, as the company develops, there is a need Jor a rnaDageEent style *rat goes beyond aod survival thialing, ertrepreDeurs terd not to be reorgelizers. In Iact, whilc ; sometimes bitter power stmggle ig pealiog, the fortunes of the compaoy may be sliding downhill. In other cases,power struggles are Dart of a healthy caDsitioD. Accordilg to these authots, fanrily and company tlersitio[s will be more productive when they are simultaneous. The eternal probleo involves the older generation's making use of the flexi" bility and new ideas oI the succeeding generatioo. Third party irlvolveDent may heip to prevent iJreparable Iamily rifu aod company stagnation. Dialogues between all *re parties-family

roanagers,relatrves,employees, and outsidersca-aalso help. Louis B. Barnes will be familier to readersof HBR as coauthor of "Putting Jud8Eent Back inm Decisioos," MarchApril r9zo, a-nd "Power Networks in the Appraisal Plocess," May-Juner97r. He is prolessorof business admiDistratioDet Harvard Business School, aod is at plesent on leave as president and professor,IraD Centet for Maoagement Srudies, Tehran. SiEoonA. HershoD is curreotly on active duty with the United StatesNara. His fieldwork at Han'ard BusinessSchool prowided much of the material for this article.

One of the most agonizing exPeriences that any business faces is the movilg from one generation of top management to the next. The problem is often most acute iI fa:nily busilesses, where the original entrepreneur hangs on as he watches others try to help manage or take over his business,while at the same time, his heirs feel overshadowed and frustrated. Paralieliug the stageso{ family pov/er are stagesof company growth or of stagnation, and the smoothless with which one kind of transition is made often has a direct efiect on the successof the ot-her. Sons or subordinates of first generation enterPreneurs tell of patient and impatient waiting in the wings for their time to take over the running of the coErpany- When the tirne comes, it usually comes because the "old man" has died or is too ill to actively take part in managemeEt, even though stiil holding tightly to the reils of the family business. Often this means years of teasion and conflict as older and younger generations pretetrd to coexist in
lvP udro6vuru!-

As one second generation mxnager put it, speaking o{ these problems: "Iom-rnate1y, my father clied one year after I ioiled the firm." Conceming a-nother "The old man company, a prospective buyer said: is rulnilg the cornpany downhill so fast that we'll pick it up for nothing before the kids car build it back up." The transition problem aflects both family ald nonfa.mily members. Brokers aad banlers, professioual
tc!6ovi.d8B th. !.1! od rpoGoGhiP Th .othos rtr.dul)y -4urho6'!oi.: Progr:@ t( rbc hoE thc So.ll.t Coop.ot MurS@.Dt th.y r...'Ed Hrw.rd rq.iD6r School

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t06
Hareard BusinessReview

,uly-August 1975

managersremployees,competitors, outside directors, wives, friends, and potential stock investors a-1.1. have more ttran passing jnterest as a company moves from one generatiou to the next. Some of these transitions seem orderly. Most, however, do not. Managenent becomes racked with strife and indecision. Sons, heirs, key enployees, ald directors resign in protest. FaDilies ere tom with con_flict. Ttre president-father is deposed. Buyers who wdlt to merge with or acquire the business change tLeir mi-nds. A-nd often the company dies or becomes stagnant. The frequency of such accounts and the pain reflected in describing the transfer of power F.o. orr" generation to the next led us to begin a more {ormal tesearch iaquiry into what happens as a fa-nily business, or more accurately, a family and its business grow and develop over generations- Specifically, what happens in the Iamily and cnmpany befweeu those periods when one generation or anotler is clearly in control but both are ,,around,,? In addition, how do some D.atagements go tlrough or hurdle the family transition without impeding company growth? A-ad csn or must fami_ly and company transitionsbe kept separate? Tte research proiect on these questions began in lune ry74 and is still continuing. It has included interviews with over 2@ men and women and multiple interiews irr over 35 compalies, not all of which went beyond the ffrst crucial transitios test. This article contains some of tle initial findings a-ndconclusions.

vocates. It has even been suggestedthat the fernily members should {orm e trust, t:king ail the relatives out of busiaess operations, thus enablilg them to act irr concert as a family-l Lile any altument for objectivity, the plea for pro{essionalism has logic on its side. It makes good business sense,and in a way, good family sense as well. It guides a business away from mixing personal lives with business pracrices, and it belps to avoid the evils of nepotism end wea_k family successors who appear so often to cause transition crisesHistoriclly, the rnein problem with this rational artument is that most compalies lean more heavily on family and personal psychology than they do on such busjaess logic- The evidence is overwhelmiag. There are more ttran one million busiaesses in the United States. Of these, about 98o,ooo are family dominated, including many of the largest. yet most of us have the opposite impression. We tend to believe ttrat, afte.r a generatirin or so, family businesses fade i''to widely held public companies managed by outside m.[agers professional with backgrounds. The myth comes partly from a landmark srudy of big business by Adotph perle a_ad Gardner Meals, who rnaintained that ownership of maior U.S. companies was becoming widely difiused and that opetating control was passing i_ato the hands of professional m:ruagers who owned only a small Iraction of their co4)oration,s stock. This widely publicized "[^c(' was further used by ]ohn Kennetb Galbraith to build a concept which he called the "tecbnostructurd, of iDdustrv. based in large part on the alleged separation oi .o.por"t. ownership from management conuol-2 There is eyidence to the contrary, though. A snrdy reported in Fortune by Robert Sheehan examined the 5oo largest corporations on this question. Sheehan reported that fa:nily ownership and control in the largest companies was still signGcant and that in about r5o compa-aiescontrolling ownership rested in the hancls o{ arl individual or of the members o{ a single Iamily. Signi6caatly, these owners were not just the remnants of the rriDeteentl ceTrtury dynasdes that once ruled Americarr business. Many of them were relativeb fresh faces.3 The myth is even more severely challenged in a study of 45o large compa:ries done by Philip Burch and published irr 1972.By his calculations, ovet 4z/o of the largest publicly held corporations are controlled by one person or a family, and a:rother r7/o

Professional family management? or

Some obsewers and com_mentatorson familv busi: ness believe th.at the sooner the family -".r"g.ro.rrt is replaced by professional management in growing compalies, the befter. The problems just described can lead to disruption or destruction of either the family or tle business,somedr:aesboth, in the long run. Fwthermore, the argument goes, an obiective, professional managementwill focus on what is good for the business and its growth without gettintlost i.n the emotions aud confusiorrs of fernily politics. This rati.onal ergruoent for professional management irr growing companies bas many stroug ad-

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Tran lerring powet

,J80

are placed in the "possible family control" category. Then there is one oti.er major category of large " pi..v ate|y" omed companies-companies with f ewer than 5oo shareholders, which are not required to disclosetheir snrncial ffgures. Some well-know:: corporate names ,Je included in this cateSory: Cargill, Bechtel Corporation, Hearst Corporation, Hallnark Cards, arrd Hughes Aircraft, arnong others. Burch notes that eontrary to what one might expect, the rather pervesive farnily control exercised is, for the most Part/ very direct and enduring. It is exercised through si8!.ficant stock ownership arld outside representation on the board of directorsi and also, in many cases, tlrougb a considerable emount of actual fa-mily management.4 When one thinks more closely about families i-n big as well as small businesses, some well-knowrr succession examples also come to mind, suggesting ft11 {arn;ly trarsitioD &D.dco4)orate growth occur together even tlough there may be strain in tle process. lor example: D H. J. Heinz was founded by Henry |. Heinz to botde and sell horseradish,a.ndtoday H.f. Heinz II, a grandson, he:ds ttre billion dollar concem. 'lelegraph, Triangle Publications owrrs tle Morning TY Guide, and Seventeen.It was founded by Moses Amenberg. He was succeededby his son, Walter, arrd a daughter, Enid, is now editor-in-chief of SeventaeL The Bechtel Corporation was begul by Warren ABechtel, for building railroacls. His son, Steye Sr., directed the ffrm into construction of pipelines aud nuclear power plants. Today, Steve ir- heads the $z billion coupany, which is now further diversi6.ed. Kaiser Industries, built by Henry J. Kaiser, includes KaiserSteel,Kaiser Aluminum and Chemical, Kaiser Cement alrd Gypsr:-m,Kaiser Broadcasting, Kaiser Engheering, and Kaiser Resources.The present industrial giant is headed by Henry's son, Edgar, now over 65 years old. An obvious successoris Edgar Jr., presidentof Kaiser Resources Ltd.
"Con[i.a l. Itanr L.vilson, MtEl-April rt7(, p- 9o. Th.t PI.Fc thc ldily Bsinei," HDR

Should a farnily business stay iD the familyi The question no$' seems almost academic.It is appareut that famllies do stay in their businesses, and the businessesstay il the fernily. ftu5 there is somethir\g more deeply tooted irr trenslers of power than impersonal business interests. The human tradition a-ndname from of passilg on heritage, Possessions, generation to tbe next leads both parents and one children to seek continuity in the famiiy business. In this ligbt, tle question whettrer a business should stay in the family seems less imPortant, we suspect, than learning more about how tlese businessesand their lamily owners make the trg:rsition {rom one generation to ttre next.

Inside and outside perspectiYes

WLet are the implications when the transition from one generation to the next includes both business and fanily chaage, and whet are the consequences also iI busiaess ald fa-mily, ttrough separate, remain tied together in plans, argumentJ, and emotions? In consideriag the-"equestions, it might heIP to examine two perspectives in addition to age diI' ference. One is the {a-mily, the other is the business, point of view. Both of these can be viewed from either the inside or tle outsidc. Exhibit 1 shows these four diferent yantage points from which to observe family ald business mem"family malbers. One viewpoint is that of the agers" (inside the farnily and iaside the business) as seen by both old and you-lg generaEons.When they forget or ignore the other three perspectives, they ca-neasily get boxed into ttreir own coDcems. Thjs kind of compulsion i-acludes hanging onto power lor the older generalion and getting hold of it for the younger. To bottr generations, it implies the selection, inclusion, and perpetuation of family rnanagers, A second perspective comes from "the employees," again older ald younger, who work inside the business but who are outiide tle farnily- Understandably, they face diflerent pressures and eoncerns {rom those of tle family manatelsf eveD though many are treated as part of the larger corporate family. The older employees warlt rewards for loyalty, sharing of equiry, aDd security, and they wa-at to please the boss- Younger employees

1. Adolpl !- Bcrlc od C..il.d Thc Mod.a C- ll{..jir, AoryoaLion dnd Pd'd.. Ptop'rry {Nq lo'L: J:lttoun, Bne & World, 1968} atl lob! (@cih G.D'ntL, fir Na IldsE cl S&@ lBoioD: Housht@ MifliD, J. Robcrt ShEb@, {. ?hilip H. tuch, Ma.: D-C, Hc.t!, '?ropri.@c '1r., in thc Wodd Rzvoludo. of Bis tusiDAs," lde.d Fo.rEr,

Th. !97r.1

M@ds.ridj

ll-didston,

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181
108 Haward BusinessReview

1976 July-August

Erh|bn t
Pressures and Intgresltln E lanlly business
lnrld. ll|c budn.rt

problem. Yet the concems ia the lelt columl boxes are typicaily iust as importrnt as, and more tim-e cons_uming than, the outside-the-family problems on the right. These inside-tle-family problems tend to be ignored in managerneat books, consultalt's reportsr and business school courses. Ignoring these realities caa. be disastrous for both the famiiy and the company. Our studies show tbat the uensfer of power from first to second generation rarely ukes place while the founder is alive a.ud on the scene. Wh"t o""u.. instead duriag this time is e ransition period. of Sreat di-fficulry for botl older and yo.rrg.-, g.r,.r"FoI the founder, gryrl up the company is :i9ns.. trke signing b-is own death warrant. For the son or successor,the straire may be comparable. As one of these said: "I dr-ewup the acquisition papers to buy my fatler out, becausefor a long time he has been saying he did not care about the business anymore. HowJver, when it was all ta-kencare of, and we presented hins wrtb the papers, he started to renege. Everythiag was done the way he would like it. yet he woull not sign. He finally told me he did not thinl he could do it. He felt it awfr:lly hard to acrually lose the company. He said he felt he still had somethirre to giye.'/

Oublde lhr bualnesr

generally went professionalism, opporrunities for growth, equiry, and reesons fot staying. Botrh age groups worry about bridging the family transirion. A third perspective comes from ,,the relatives.,, those family members who are not i.n the active management of the business. The older relatives wony about income, family conflicts, dividend policies, and a place in the busi_ness their own for children. The younger, often disillusioned brothets and co 'sins feel varyi_ngdegreesof pressure to ioin the business.Both generations.may be interested, il,::f.fu.e, involved, end sometimes helpful, as we snalt seelater oI1Finally, ttre founh perspective cornes from ,,the outsiders."These are persons who are competito$, R &. D interests,creditors, customers,govemment regulators/ vendors,consultants,ard others wbo are connected to the busi:ressend its practices from t}e outside. They have various private interests in the compaly which range from constructive to de_ structi.ve in intention and efiecr. A curious irony is that ttre more ,.outside,, the farnijy_1[g pecpective is, as shown in Exhibir i, the more legitimate it seenr as a ,,real,, managemeDt

Ald another commented: "I can't change tbings as fast as I would lil<e to. It is absolutely clear to me that thiags need to be changed. However, it is not easy. Firit of all there is Junction of age and experience as well as .the Derngthe boss'sson. Every other oflicer in the com_ pany is in his fffties. Wtrat I am talking about now are deep sourcesof dissatisfaction.I would like more o\.r/nership.Now I haye only l%, my {ather has 8o/o arrd,my {ernily another r3/o. In my position, I iust cannot move the company fast enough. We argue_ lot, but nothing seemsto change. I have set a a goal for myself. If I cannot run the companv within two years, I am ieaving. I,Il do sometli.rr! else.,,
,,Adolcsc@cc G::l: s:"gr ir orsrDl,rcion croerh: p,obrcD,. pus, I fqrbilid6,,, Or\@tzarrcnol Dlr@ic5, Sprtnt rg74, p. ,; Rob.n B. !r.rci.. ,urrerr Policy )D ctowia8 prr@r lse rrr.bcisco: ch.Ddtc! Publirhils Co, 196rl. Tbcodorc Coho ud Roy A. LD.tbcrt, Sw,vdJ dld Gtowih: Manesctu.nt s\at.']e-s lot th. Sn6l1 pjtrut lN.w yort: AMACoM, ,,Cnr,al ttzaj. kE.nc. L. sr.Dm<E, srrlc6 ot S!'u Bu3LDq crowrh,,, n:nzoP F.bru.ry te6c. p re: Bruct L. sc.r(, ,,strrc of 1uJEAr Lorpor:rc ucvctopmcnr plrr r,,, H.rrrd Butioo. Schoot No.. 6 L{rr E. ci.incr, ,,lvolutior.!d HBR tuly.Aulxrr r97t, !. j7. Raolutio! t. Orsdj2ltjo.s c.ow,-

Copyright 02000. Att RightsReserved.

powr Transferring

r$82

EfttbI tl charactristics comoanvqrowth ot

The company transition

While iemily Eranagersfeel the multiple strains as the generations overlap during periods of transition, alother related processis occurrilg as the company grows ald develops- Various authors have tried to describe this process.6But, where one describes a smooth procedurel development, another sees a seriesof difiicult crises.For some, a seriesof growth st.ages important. For others, it is the mergiDg of is functions with processeethat count. Most writers do not tie business growth or decline to family transitions-However, the following points stand out for us in relation to company transitionsI Organizational growth tends to be non-linear. Organizations grow ill discrete stages, with varying Srowth rates i.u each stage. 2 Periods of profound orgalizational development ofteu occur batwaan periods of growth. TheJe slower periods often are viewed with alarm, but they force managercto examine what the company has grown toward or into. Th$e periods of development are the transition periods which appear less &amatis {i.e., there is less grovth} but may be most crucial to a company's preparations for its own future.! The apparent floundering can provoke useful lea.rning once management begins to adopt and encourage new practices and procedures. 3 A t ?ical maDagement response to transitional strains is a total or partial reorganization of the company. This sometimes helps shake up old habits but rarely resolves a transition crisis. What is needed is time for the social arrd political systems of the company to re3lip themselves into new norms and relationships,

g.!Tl3!l-..tir
chrrcr.ri.tlc Core problm

or l P.to,rn. rhe I l:19:.-..1r. I nrtr

iM.nagemenl ol i Menag.ial control a n a :growth : c o n t r o l and allocallon ol

i:+s-i*i*"i,
Fhalon ot grF orel authority inlo specjelized tunclionE

tCenlraltuncllon d i v e r s et a l e n t s inlo e unified

Fusion ot independant unals into an inieF dpndenl

control systemE (ins;de)i (outside)

Co9t cent6rs and abstract ( l n s l d e ) ig r o w t h pol.nliel (out3ld6) Selsry. opportunltles and probl6ms ol growlh Integrating ,paciallsls: collaboratlv6 manag6m6nt Functionel speciali3tl
Oi16cl

critria (insid6); capilel xpanslon potential (out3ide) Salary, p6rtormstock options, per prstg6 hte9rating generalists;

Ownershlp, m e m b 6 r s h i pi n lh famiJY lndividualistic;

6G;n;;-Slructur primary CEO's taBk

Dlvision organ12eligns Managing Oon'6ralist Managin0 spoclallzod

menrgert I I At leastthre

I mane9er6 I A1l6astfoLrr
I

ized peers. The third stage typically involves a looser, imperson-al, collective sfyle, with the chieJ executive managing generalists ss well as functional specialists. Under the psttems of the first stage, the core problem for a small company is survival. The pattems of the rougb.ly deffned second stage show a size and scope requidng such specialized lunctions as finance, production, marketing,
anrl enoineerino

Exhibit shows how a later growth stage difiers from and builds on the earter ones. The ffrst stage is characteristic of an entrepreneurial company with direct management. The second is typified by a rapidly growing product Line ared market situation with second-levelmalagemept set up in specialized functions. The third stage has divisional operations with a diverse line of products and markets. Whereas the managemeDt sryle of the ffrst stage is highly person:I and direct, the secoud tends to become the more collaborative style of a boss aad special-

As the company's size contiaues to increase, it is likely to evolve toward third-stage pattems of growth: At this poilt, difierent product liaes become separate companies or divisions, while, in multinational firms, the separatioa may also be on an area basis [e.g., Europe, North America, Latin America, Middle East, Iar East) as well. In between the box-like stages of growth shor.m in Exhibit U appear the transition phases which help to prepare an organization for its oext stage. To cross the broken lines separaling one growth stage lrom anottrer in Exhibit 11requires time, new interaction pattems, and an awkward period of overlap.

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e
Hervard BusinessReview

1976 tuly-August

In efiect, the broken vertical lines oI Exhibit II represent widened time zones of varying and ir_ regular width. As we have seen, family transitions and comoany transitions can occur separately and at difiireni times. However, we lound that they usually occur together.As a company moves from rhe proilem of survival to one of managing rapid growih, it must d.evelop new control, motivation, and reward systems. It also requires a management style that can rntegrate specialists and their functions. This deyelopment cannot occur without a top management that wants to take the extra step bevond survival thinking. That is where an ""g.. yo,l.lg., generatron comes irr- He, she, or tley are more likely to rdant to go beyond traditional practicesr hrs pent-up energy seemed to be a major factor in getting beyond company transitions in z7 out of we 32 businesses studied where the company had gone beyond t-hefirst growrb stage. Alother kind of transition occurs between the s,econd and the third growth suges. Company and dlvlslon units in stage three had general managers in both the head office and rhe decentralizedunits who had learned to work with both other seneral managers aud fuactional specialists. This meant thal they had to have or develop a senseof the com_ plex interdependence that characterizes most maior companiestoday. These dual transitions seemed best catalyzed when the old'"pnlggnrent forcs so-.how heljed to pave the way for the new. The following "r.. i. . iooi example;t D When Max Krisch ceme to America in rg5r, he brought an expertise in baking "na .r, ota iaoritf recipe for bread. Soon efter settling, he establishei a small bakery. The business grew, and Max got help {rom his three sons as soon "s they.rrere Jld enough to operate the ovens after school and on weekends. When Martin, the oldest,graduatedfrom college in r89o, he joiaed the business and soon staned suggestingchanges which he was convinced for the company,sgrowth. His father re. ;verl Sood ruseo,aDd the two men wouJd often end uo in dis_ agreement. Sometimesthe argumentswere l,ongand brtter Eventually, Max,s wife abandoned her role of neutraliry and intervened on Martin,s behalf. She beggedMax to give MartiD a chance to implemeni

his ideas. Reluctantly, Max agreed and let Martin take the first step. Martin's idea was to sell bread to milk peddlerswho would ofier it for sale to their milk customers.It was a ne\{ concept at the time, and it worked. Ttre demand for Krisch,sBread increasedsharply. At this time, too, the secondbrother, peter, was ready to join the company. Martia realized that the company's production capability,would soon be unable to keep up with the increasing sales.He hoped thar Peter could take over, modemize, and expand production, but again Max reacted strongly. He argued that the baking of Krisch,s Bread could'not be jone in volume without ruining the quality. Martin and Peter eventually promised their Jather that if the new methods harmed the bread,squality they would discontinue them. Over time, M;x again agreed to g9 peter workeJ closely {o:g with the change, and with his father to increase production while still maintaining qualiry. Again, too, the mother was behind the scenes trying to keep peacein the family. When the third brother, Kurt, .ioined the Arm, Martin gave,him the responsibility {or bookkeeping and financial aflairs. Fortunately,Kurt had " goodi."d lor hgures and did the iob well. As Max became less active in the business,Martin was in charge,with peter headingproduction, while Kurt handled the ffnancial end oJ ihe business.The business flourished. Occasionally, the three sons felt hampered by Max,s continuing strong opinions on some aspectsof ti.e business.At these timeJ. the boys'mother would often refereethe disasreements. Partly because she was a sensitivepersonind a good listener, she was usually able to hilp the fatherind sons arnve at some mutually satisfactory solution to their problems. Our studies show that when the fami[al and organizational transitions occurred together, as irt the Krisch ca-se, they rypically took place in an atmo, spbere ol strain and uncerbinty. euite often, a mother was a behind-the-scenei influence. More often, though, the transitions .v/ere not manased well either inside the family or inside t_he businiss. In the Krisch case,Martin guided the company into rts secondgrowth stage.But it was his mother,ssensitive management of the family relationships that eased that process and eventually permitted the brorhersto achievean outstand-ing growth recordfor the firm- Although Max,s time-tested ways arnd _ methods fell by the wayside as his sons tool over,

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he became a useful adviser once both he and his sonsacceptedManil as head of the businessthough not head of the fa-mily. The tralsfer of power inside *re business took place when Max moved into a new working relatioash.ip with his sons and a new family relationship with his wife. With Martin managingthe businesstransition and his mother helping to hold the family together, Krisch's Bakeries made both transitions. The second transition period for Krisch Bakeries is also instructive. After an impressive groryth record over a 3o-yearperiod, Martin Krisch ald his brothers set the wheels in motion for the transition to the third generation- Martin's son, Max Krisch II, was the most obvious successor. By r9e5, the company had established an executiv committee of both family and nonfamily managers who made decisions by consensus.The brothers believed that such an arrangement helped keep the family together and provided valuabie inputs from nonfamily members oa the executive committee. In preparation for the transition, Martin, who was thea 55, hired an outsider v/ho suggestedthat a new role of coordinator be set up for the commitiee which he took on initially and then passedon to Max II, who had just been brought onto the committee as a member. Soon after, Martil was advised by the outsider that he sbould get ofi tJ:e committee and out of the company as much as possible. Thus Martin began to spend more and more of his time away from the company in civic, volunteer/ outside boards, and other business activities. At times, he was lrustrated and unhappy over not being in the mainstream of the business,but he gained some satisfaction in watching Max II develop into a manager who set new wheels in motion for the coxopany's expansion and &versiffcation into new areasof business.New product lines were developed, the company was broken into divisions and a chain of other businesseswas started. A-11 seemed to be going well until the corupaDy was hit by an antitrust suit which restricted and delaved some of its most ambitious plans. Though the Krisch Bakeries' plans for wider ownership, di.versiffcation, and expansion were stalledfor a number of ye:rs, it seemedto again make the dual transition on both the family arrd the business levels.
t Thi! &d zll iollowils csd Jictirious da66 and indurtric, r. b..ed on ..1 cncu6n:nccs. ar. u..d blt

The single transition

Even though most of the companies we studied changed top management and growth stages together, other comparies showed one traDsitional change at a time. A stag:lant company car get that way when the older generation gives way to the younger without any company transition. The Quinn Company was one of these.

o
In the Quinn family bushess harmouy had been difiicult to achieve. The founder, Josiah Quinn, es tablished his industrial supply company ia r9rr. He began the busiless with a partner, and it grew steadily. As business improved, the partner took a less active role, and Quinn soon betan to resent the partne/s equal salary and taking of the profits. When his wife suddenly died, Quian impulsiveiy sold the business to his partner and took his 6ve children West. After severalyears there, he returned home and begal a new business,remarried, and had two children by his second wife. Eventually, Quinl's oldest children joined the firm. They worked well together, and the company prospered. When his second set of children also ioined. the company, however, iealousy and resentment increased.Con{Lict began to disrupt operations daily. The problems flowed over ioto family Me, where his wife took the side of "he/' children against "his." Fiaally, Quinn decided to set up a separatecompany for his wi(e's children. He founded it ulder anothcr name, brought customers from the other company, and enioyed helping it get started. When World War II broke out, Quinn's most capable son in the frrst company was drafted. He was sent out Westi married, and eventually set up his own company in San Francisco. This left the first company without a really capablesuccessor, though the departed son's brothers and brothers-in-law worked to keep the company going. Again" dissension increased. While the company continued to operate after Quinn died, its per{ormance levels never rose over the next 30 yearc, The Quinn Company's transition from first to second generation was influenced by a maior split within the family, by the loss of its key youag successor,

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and the divisive role taken by Quinn's second wife. The femily con0icts seemed to keep Quinn and his heirs Irom dealhg with conpany transition problems, since all their eDergieswere spent oD insidethe-family problems. The result was a family transition withoud a simultaneous company transition. Such single transitions were even harder for those inside tle family and the company than when the two transitions occurred together. Today the Quinn Company is hearling painfully into another transi' tion, its seeond geDeration having apparendy suffered much, but having leamed little from the first one. The older family menagers ffnd it hard to let go as the 66-year-oldpresidlnt steps asideuneasily, only to be replaced by a 68-year-old in-Iaw whose sons wait impatiendy and sometimes irresponsibly for their turn. Meanwhile, the company sufiers. Another type of single trartsition occurs when a company moves from one growth stage to the next within one menagement generation. Such growth occurs rarely, it seems,in tbe fust generation, partly because entrepreneurs tend not to be reorganizers, and growth requires teorganization along with a shift in management styles. We found these company transitions without a family transition to occur more often durilg tle second generatioD.Whereas 6.rst generation entrepreneurs had trouble shlfting to bdgh growth stretegiesand more collaborative styles; the sons were more flexible, possibly because the shift from a second to a third stage growth pattem involves letting go of less personal ties or possibly because t-hey had more help in making the shift. Here is an exa-o.pleof such a transition:

and therefore in the long run the interests of all family members. Nevertheiess,he had created a split in the family that never healed. Meanwbjle, the ne\r' company president admitted t}'at Paul had become like a father to him, and it vr'asapparent that the father-son parallel was very strong for both of them. There was still one nephew in the company, and although he had an irnportant position, it was clear that he had no inside track on successionplans.

Thomas EDterprises moved laster than most companies do in its gor,^/th cycle, possibly because Paul Thomas was wi-iling to sacri-flce fa:nily harmony for what seemed to be business e.fticiency. Ironically, though, the frred family members each went on to successJul careers in outside iobs, most of them pleased in retrospect to get out from under Paul's reign. Whether any one of ttrem could have taken over fle sprawling company is hard to iudge at this stage.What is clear is that Paul found aaother "son" who beca.sreheir apparent. In an artGcial way. tle "succession" transition actuelly ca:ne along only slightly behind the company transition. The tbree patterns show! iu the Krisch, Quinn, and Thomas cases suggest some overall advantates of family and business transitions occurring at the same time. The Quin:e and Thom:s casesalso show what happens when family managers,relatives, employees, and outsiders car:not form a power coalition to protect either the family or the business transition, whichever is ieopardized by family conllicts. In the Quinn case, the fanily managers withclrew irr the face of destructiye family pressures typified by Quinn's second wife. Shenot only divided the family but had a strong hand in dividing the company into two separate enterprises, each also competiag with the other. In efiect, the microcosm of family conflict became replicated in the macrocosm of the two companies. Without capablesecondgeneration managers,the original Quinn businessnevet got beyond the first growth stage. In the Thomas case,the opposite occurred. The relatives retreated "for the good of the family business" as Paul Thomas put it. They helped to destroy the family by abdicating in favor of the dominant oldel family managers, PauI and Bilg Thomas. In the process,some competent family managers were lost. However, the poi::t is not whether Paul and Birrg were right or wrong, it is only that they made sure that t}rey were never really tested or questioned by the intinidated reladves. Neitber employees nor outsiders found a wav to heb either.

tr
When Wells Thomas died, his hardware supply business passedon to his tr//o sons, Paul and Bing. Paul handled production, and Bing worted in sales.The two brothers bui.it the family rm into a maior hardware supply house. Paul became chief executive ofiicer, and he and Bing er,'entually diversified the businessinto retail hardware stores, medium equipment coEpanies, an electrical manu{acturi.ng company, ald several unrlated businesses.Aloag the way, they brou8bt in six third-generation members of their own arld their sister's fami-lies. But these younger family members never quite made the grade. Paul, with Bing's approval, fired five of the six and handed the presidency oI the corporation over to a man who had been president of one of the acquired companres. His iustifi.cation lor discharging his sons, nephews, and sons-il-law was the good of the family business,

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Under the distorted doroinance of either {amily managersor relatives, not only crippled transitions but regressioncar set il, Consider one more case:

tr
in the Brindle Company, a father had handed the business ovr to a son-in-law, did not like the results, and reclaimed the company, even though the sonin-law had done an impressive job of managing the company il terms of growth and expansion. Several vean later. with the son-in-Iaw out of the business, but still with a small ownership stake, Mr. Brindle sold the company at a Iraction of the price that the same buyer had ofiered while the son-in-law was running tle busiaess. The business' Fowth had stalled and declined. The company had gone from second generation back to ffrst generation, and the fanily was shattered to the extent that the t1Yo youngest grandchildren bom to the son-in-law and his wife had never been permitted to meet their
orndna tcn t<

compeny by the younger lamily managers,but becauseof the intersention of relalives, noncompetrng employees,or trusted outsiders,who may find a way of helping to pull the old frrn;Iy manager into a new set of activities. At some point, a critical necwork of family managers,employees,relatives, and outsiders must begin to focus upon the duality of both family and business transitions. Such talks should, in our opinion, begin at least 7 to 8 years before the president is supposed to retire. Even though the speciffc plans may change, the important assumptions behind those plans will not.

Mediation vs. confrontetion

Time after tirne we sa$' casesin which an entre' wiJe played an importalt role in bridging Dreneur's gro*ing gap between father and sons, as hapih. p.t "d io the Krisch case. It also happened that.an entrepreneur'swidow would step in as a peacemaker for the younger Seneration But when it came to helpiug make both transitions occur, the wife was ^oi. iopottrrrt tlan the widow. As in the Krisch case, she would help or persuade her husband to look toward the {children's} future instead o{ his o$'n past. In efiect, she provided a relative's outsidethe-business perspective. Such outside perspectives turned out to be crucial in tra[sition maDAgement, becausethey helped to heal and avoid the wounds of family conflict. In some management circles over recent years/ a cult of confrontation has been built. Coofroqtation is regarded as calling a spade a spade,not in anger, but i" a way to move beyond conflict toward Problem solving. The approach is reasonableand works in many businesssituations. As we pointed out earlier, though, families and their businessesare not necelsadly reesonable The primary emotions tend to be closeto the surface,so that con{licts erupt almost without reason. Attempts at confrontation by one party often fail, because they are seen as open or continuing attacks by the other' When such nerve ends are raw, partly because of family iealousies and partly because of historical sensitivities, a third party or outside perspectlve can provide mediation and help to soften hardened posi' tions. Relatives, outside directors, friends, and key euployees all take this role in family companies' But they do something elsethat is equally inportant'

Managing the two transitions

If, as in the Brindle case, a single dominant power force tends to cause lopsided transitions or regres' sion, how can a gonstructive pettern be built for creating and managing both transitions? The answer seems lie in a powe! balancing setup that prevents to polarized conflict. Only in the Krisch case,of those described earlier, tYas this power balancing dooe efiectively. Yet it also bappened in at least some of the other companies we studied. It may help to look at some of the assumptions and mechanisms that were used to encourage and manage the two transitions. The company will live, but I won t The key assumptioa {or growth was an almost ex"the company plicit decision by senior managersthat will Live, but I won't." This assumption, so often avoided by older famiiy managers/ is almost built i:ito the forced redrement prograrns of established or But an eDtTePreneur even his sons,as companies. thelget older, must somehow consciously face and make the decision that, even though they will die, *re company will live. Often, that decision occurs not because they are pushed into it, or out of the

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They can help to begia a practice of open dialogue that cuts not only across age levels, but across the difierent perspectives of family managers, relatiyes, employees, and outsiders. The dialogues can aid in manpower planning and in managing the transitions. The question is how to develop such dialogues so as to include all the televartt persDectives.

management skills. Relatives leat]l how to take third party roles to provide an outside perspective.

Beginningnearthe end
We have been describing one of the most difiicult and deep-rootedproblems {aced by human orgzrizarions. Family owned and ma:raged concems in. clude some of ttre largest as well as most oI the smallest companies in the United Statesand possibly the world. It seems poindess to talk about separating families from tleir businesses, least in out sociery. at Families are in businessto stay. llowever, as one management generation comes neal its end, the li{e of the business is also jeopardized. Meanwhile. critics, scholars, and managers like to pretend that tfte "real', business problems lie outside of the famiiy's involvement. This may be true in some cases,but it can also lead to and perpetuate four sets of tunnel vision. Faroily managers, relatives, employees, and outsiders adopt separate perspectives and separatepaths. Our studies, however, suggest that the healthiest transitions are those old-versus-young struggles in which both the family managers and the business change pattems. For this to happen, ,,the old man,, must face the decision of helping the company live er.en though he must die. If he can do this, the management of transitions can begin. In efiect, a successfulfamily transition can mean a new beginning Ior the company. Writers like to think that tbeir work a-nd words will have a lastingimpact upon the teader.However, the history of the topic we are discussing provides Iitde cause for such optimism- In fact, a truly lasting solution may come only from experience such as that described by an enuepreneur, who said: "I left my own fatheis company and swore I,d never subiect my own children to what I had to face. Now my son is getting good experienc in another company in our industry before comi::g in to take over chis one. Within five years of tLe day he walks in that door, I walk out. Anci everyoneknows it-even me."

Mechanisms for dialogue

None of the dialogue mechanisms we observed or heard of is a cure-all. But each brought diflerent i.mportant combinations o{ people together. One company management hsd periodic family meetings for family managers and relatives. Another combined family managers and employees into proiect teams and task forces. Outside boards of directors, executive committees, and aonlamiiy stock ownership {to be sold back to t}re company at the owner,s death or departure) brought together family managers,employees, and outsider consultan$ on maior policy problems in a number of companies. One family company had in-company managementdcvelopment programs, but inwited outside participants and also gave periodic progressreportsto the dnancial and civic communiry for comment and review, At one extreme, family managersand key employees did set up a series of confrontation sessions,but only after detailed planning. The ground rules were carefully worked out and over the years both familv and company transitions made good progress. the At other extreme, companies would hold various lunches or social events where the open dialogue opportunities were limited but sometimes possible in an informel settine.

Future role building

Unwilli-ngness to face the future stalls both family and business transitions, since in one sensethe future can only mean death for an older {amily manager.But in a more limited senseit implies new but separate lives for the manager and his conpany. If some of the above assumptions and mechanisms begin to take hold, they will lead to the building of new roles. The older managers learn how to advise and teach rather than to control and dominate. The younger managers learn how to use their new power potential as bosses. Family managerstake stips to leam new roles outside the business as directorc, ofiice holders, and advisers. Employees learn new functional management skills as well as new general

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The Murugappa Group

Genturies-OldBusiness Heritageand Tradition
AII embraced the ltfuntgappa family cttlture, an amalgam oJ respectfor the elders, traditionql yalue1 and modemprofessionalism.l -AMM (1918-1999),second generatiou, family elclerandkartbaAom 1965_1999, family business leaderfrom 1965-1983 The important thing is to beflexible, just like a tree. There are heavy winds; there ore storms blowing. The trees that are flexible survive. The trees that ate rigid do not.2 -Murugap'pan ft: 1935), third generation, frmily elder aad kartba since 1999 My goal tqs to introduce chonge without disrltptihg perform.rnce and to create @ropen culture. I starled to bring in thb idea ofprofessionalization. I thought, ,,Let's try to change businessthought around here so that there is no more emotional attachment to trdiyidual businesses and there is more logic and strategt attachment,', 3 -Subbiah (b: 1939), third generation, family busbess leader sincc 1996 With the econotil opoing up, we neededthe hind of input thar indqendent board menbers ofered. A lot of lrs thefamily didn't have wide e4toxtre becausewe wete jn jLtst nmni4g our businesses.' -Veoky &: 1958), fourth generation, active in the family busi!ss since lggo

For aX least five generations, members of the extended Murugappa family were successfi:l in deveioping and leading important businesses i:r India. One ofthese enGrprises, staned in the 1910s bv Dewan Bahadur,) continued as ofmid-2000 as the family-governed Murugappa Group.6 It was India's sixteentl largest busiless group, with $850 million in sales and 23,500 r-pioyees. Headquartered in

1 s. Muttiab' Lootins Back Fron "Moulaein": '4 Biogrephr ol .LMM Arunachatan (Ma&ds: Eastwest Bootj, 2000), 138 |.o.ercaftlfA^aM. ' Mrmrgalpa Group, in discussion with thc suthor, 2001. ' Ibid ' Ibid. 5 His fill Dame wEs Derva! Bahadlr A-li{. Murugappa Chettiar (l 884-1 949). 'De\r4o Bahadul' was the o6cial titlc bcsrowed Wotr th foudcr la&r in life by the Viceroy ofBdtish India It Ee3nx "a Ireat nan or distilguishcd pcrsoBAgcwho is a stew"rd i! char8; of a housc ofbusilcss." o Tte coEpmy't logo is a peacock syEboliziq tle chadot of tlc hsily's god and idol Irrd Mllr'uga, second son ofl^ord Shiva The festhers slso rEprcscnt the croq's mgIry coryanies. (See Erhibit lj S)llbolisn of tle Mrngappa clo|.p Coqatry Logo.) O20tt4 by thc K-cllogg School of MaDagcmco! Northwest m Udvcrsity. This cse was prEparEdby R.search Associat Carot Adler zsobay ald Professo. Joln L. wsra cases slr developed solely as thc basis for clsss discussiotr. cases arc nor jlteDded to serve as ctrdors.fieDts, sorllces of priBzry dstA or ilrlsEatiols of cffcctive or ileffective malageEeDL To ord6 copi6 or requesr pgndissioE to reproaluce sattrials, call 800-545-7685 (or 617-783-?600 outsiite tbe urird srat6 or canada) or c-oail custsew@hbQ-harvard-edL No part of this pubticatior Eay be reproduce4 stored ir a rtric'vat sysre1!, used in a s?rcadsht, or Fallai,ttcd h any JorID or by aoy EcaDs---+lectrodc, nech"dcal, photocopying, .ecording, or otbd-wise*withour the permission of the Keuogg School ofMaDagemcd

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Chemai (Madras), Iadia's fourth largest urban ce'ter, tle M'rugappa Group was a loose con-federatiou sevencompanies. of units in 3g manufacturinglocations,spreadover l1 Indian states . It was composedof25 busine-ss in the fields of abrasives, bioproducts, confectioaery,bicyclJs, steel tubes, cbains,roU_for_eOJooi frames,sugar,fertilizers, pesticides,mutual firnds, ""ii"r" m""io!, stock brokerage,nutraceuticars, sanitaryware, and rubber,tea, andcoffee plantations.Family ovnerihip of th" "o*p;; ,;;;;;;; 34 to 100percent(See Erhibit 2: Busineises ofthe Murugappa Groupas of2000.) Up uutil 1990 eachofthe sevencompanieswas headed a fam y member by as cEo. There was no formal,interactionamongthe compaaiis- a group, and oiy informal as c"*"ltdi";;;;;i.;i; Il Te+er.: I 19q with the openiag.p of the Indian economyandtre start of a liberalizationlrociJ, the family felt it advantageous to-becomea group in a -ore-fo.mui*ay, and officiany constituteda Murugappacrrporate Board (MCB), composed fa-ily m"mbers.MV, oi oneof D"*"o nuua* , ,i* g the enterprise,tryami Croup CEO. Uis brotf SuUUlaU, f."u_" C.oop CtrO. H-{oil":t]" (see E*-hibit 3: MruugappaFa'ily Tree clarrj ranity members contrnuedas cEos of the seven - companies uonfam y membersservedaspresidentsoithe companies and andasth" c,,*p cro. With Iadia's signing of the World Trade Orgatizali6a agreement 1995, il the family recognized the Group, suchas increasedexporr-ori-ented activiti"r, _d "l"o tbr,';tr, ,;J-; li:,ry1ry*.*r 'oemr rmpons lbese srt'aho's required speedier and more flexible Group business portforio decisionsthan could be madewhen.inaividuaifamily members were emotioDalry i"rov"J i"'sf u-t" business units and focusedon their individual company" d"y+oJy -,""gement. It was hard for the Group to makea business decisionto resauctue, downsize,o, ."u u oivi.i& o. unit, irft"i;tiry w"" a frvorite of a brother or cousin running it. Even when all family me-bers *"ot"d to .d;;lid;; business^decisions the Gror-pas a whole, they could not mat'e decisions for as nimbly ". ,.qj;;; the new faster-paced global economy. In september1999 ownershioani-operational ma'agementof the compames were separated for eadershin th6 swen i"airia"ir-*-p-iJ of switchedfrom famity members .-*":U"-,*^r::ll":,9*,f DontaErty m'nrgers, all promoted from withir The five family members who had 3^^p,yT.t-* *l* *:. drfiereEt coErpaEies moved into a sbaredofEce suite at headiuartersaoa U"""me ::,1":l mu-ume o'ectors ot the trewly reorganizednine_member MCB. They werejoined on the MCB by outside boardmembersand the Group\ nonr,-ity gpg. r""n ru-tinl 9:: uqpoi"t"a independent MQB femily board menbsr was assiged tbree broad stategic';ks for the Grorp: " fu";o;i responsibility across all business (for exa"lfle marketiig, huoan resources,technology, or *units sFategy),a mentoringrole to the cEO ard board of one or mor" Io*pat"s n" n a "rt r"a u"irrZ -a a role as-adviser/guide younger family membersworking for the fuwugappu to cro.,p. 1s"" rriitii 4: The MurugappaGroupGovemauceStucture as of 2000.) The cbairmanof the restructuredMC-B w-assubbiab" By mid-2000 the Group aad family were fgrward with, and adjusting.to,.the changesil tl" ]!|nSlo.,remiog structure.However, Subbiah believedthere was still more orofessiooalizingto do to sec*e"th" cooin."a ,""""., lr ta" i"1"rplrl for faneily, employees,and commrnity. subbiah had oo ti-" t waste fe to complete a smooth transition He was 6l years old, and, if he followed tbe precedent startedby his rmcle AMM and continuedby his brother MV, he was scheduled retire at age65. to As Subbia.h more decisionsaboutbusinessand fam y leadership felt needed be addressed to soon, hc decidedto head 300h further south in the stateof ramii Nadu ioi " -e"teno trip to his family,s a:rcestral_home the villege of pallath'r, populalion 10,000.(See in Exhibit 5: Map oithe Muu;;;p; Family Homeland.)He hopedto spendtimi it his family hone, u. *"tr ". at the tenth-centurytsmDle

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supportedby his family's clau and the bospital finded by his family over the past sevefy-five years. As Le traveled southward,he reflectedon the lessonsleamed from the family and the businessin the for past in order to plan with otberfamily members the frrture.

FamilyHistory
Dewan Bahadur and his Murugappa aucestors were members of the Chettiar clan within India's Vaisya caste. Members of this clan were businessmen, historically active itr trading, money lending, anA tantiag. (See Erhibit 6: Brief Description of Chettiar Cultue.) Nitre generatioDs earlier, in the mid-l700s, ancestor vellaya.n chettiar successfirlly pursued business in these fields. He bad five sons who went on separately to build flourishing businesses tbat became industry leaders in Iadia for generations. Hii second son, Anmachalam, was Dewan Bahadur's great-geat-grandfattrer. Arunachalam had one son who, in hrln, had two sons. One ofthese som bad tbree sons, all of whom worked in the family e,rterprise.TThe youngest of these sons, bom in 1884, was the energetic and entrepreneurial Dewau Bahadur. The current fa:nily enterprise had its begindng in 1898 wheu Dewal Bahadur, at age 14, was sent to neighboring Burma (now Myannar), where he worked a few years 25 a lanking clerk for another cheuiar family business. Two decades later, tbrough hard work, honesty, and sawy business sense, Dewan Bahadur bad built a fir:ancial institution tbat was the lalgest private bank in lower Burma. Durbg the same time period" he married alld had a family that included five daughters and three were reared back in India by his wife, sons-Murugapp4 Vellayan, and Arunachalam (AMM)-who Valii. Wlen Dewan Babadur's father die4 his will followed the Indiatr trad.ition ofpartitioning the joint farnily bushess property and sharing the wealth equally. In 1929, whcn his own ttrree sons were old enough to work in the family enterprise, Dewan Babadur started a new traditiotr and divided up his family business estate equally, while he was still alive and active in the enterprise, in order to give them-al the opportunity to be a family energetically pursuing business togetler'3 Doing so, Dewan -,;gave each the confidence tbat he had a place as an individual in the whole."'This Bahadur said, action multiplied the family's entrepreneurial Eanpowel to maximize opportunities for the enterPnse' wealth creation, and family Unity. Dewan Bahadur died in 1949, but the grormdwort he laid for his ftmily enterprise coqtinued. Prior to his deat!, Dewan Bahadur also served as his family's elder and kartba. The kartha system is a uoique and flexible Hindu leadership tradition. Ia it, the kartha is the male family leader in charge of guidhg and choreographing the course of the family. Amoog other rhings, he is responsible fordirecting the education aud work paths of individual family members. Major family business decisions must also be blessed by him' 611 5"6u11of the family, he encourages and ut izls members' individual strengths and supports weakDesses, eveE subordinating himself wben others are better suited for the leadership of particular tasks and roles. Howevel, when the family is under stress, the kartha sewes as a geueral, arour:d whom family members rally and submit. Until the

t Thc busiaess was araaged ia a t-aditioBal Indian way, with only male hmily EelDbers involved Tlis i5 a Practice tbat contulues today. ! This policy contirucs today into rhe fourth geneiatioo. Membe:r of each of thc otiginal tbrec bralches pu W capital equaly i! ncw 7: Shares ofthe Murugap?a vatr:res so thar each of the braDchesstill maintains 33 percent of the &mily conttol stocL (See Etibit Gmup Busilesss by Ge.lcl'atio4 by Malc.)

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early 1800s, a family's kartba would name his successor basedtpon whom he felt was the most acceptablefaroily leader, regardlessof birth order. Ilowever, under British rule il tbe mid-1800s,a colonial tax collection law called the 'Tlindu Undivided Family'' required that the kartbabe the oldest 62ls femily member.A-lthough tlese laws are no longer in place, the tradition still exists in most Indian hmiiies that the eldestmale family memberservesasboth fi.mity elder andkartbauntil deatbAs Dewaa Babadur's sons in the second generationgrew in the business,they sbaredtheir father's ertepreneurial spirit, but were different from one anotherand complemented eachother in their managerialstyles.Murugappa(1902-1965) was an exceusntcommrmicatorwho was diplomatic aad good at external relations. He was one of the fust Chettiars io visit the United Statesand he pioneeredthe femily's launch into iadustrial manufacturingin ttre 1930s.He was alsotle fust Chettiar to ocupy several esteemedcommercial and social leadershippositions in India. He establisheda coDsultative decision-makingsystemamongstmale membersofthe hmily that helpedkeepthe fanily togsthervery well. Murugappabecameleaderofthe family busiaess, family elder,andkartbaafter the the deathofhis fatherin 1949. Vellalan (1905-1945) was business-oriented, ambitious, and interested in deal makiag. While retuming to Buma to continue i! busiaessafter World War tr, be was tragically assassinated by Burmese communistswho resentedIndia:r commercial interestsin theA county. Prior to his deat\ Vellayan hadbeenvery closeto the leadersofthe newly independent Burma. He bad also boughtnew propertiesfor the family enterprise,incluling a parachute-manufacturing business. AMM (1918-1999)was operations-oriente4 with a focus on details.He startedtle famiiy's stockbrokeragebusiness and increased professionalism ir the firm. He and his eldest brother, Murugapp4 establishedindepsadent boards of directors for ildividual companies and attracted exceUent oonfaEily Duuragers. AMM becamefamiiy elder, kartba, and head ofthe busiless after the death of Mumgappa in 1965. AMM was aeitler a natural communicatornor exterEally focused;he called on these skills in other family members,like his nephewMV who benefitedthe family aud enterprisewith his leadershipand commuications skills- ln 1983AMM setthe trend of retiring a8tle family's businessleaderat age 65 and bandedover tbat role to his nephew,MV (1929-1997). AMM remainedas family elder and kartha until his deathin 1999,whenhis nephew,Murugappan,filled that role. The sonsof Dewal Babadw developedexpectations their six sonsin the third generation, for born between 1929and 1943,to be active ir the enterprise.When Murugappaheld the positionsof family eldel kartba, ald businessleader from 1949 to 1965,he was hstumental irr preparingmales of the next generation for their furure in the entsrprise by guiding their educatioa, training, and work assignments. arrangedfor the young men to speDd He time in Englandstudying and./or workiag with joint-venture parhers. He did this so tbat third-generationmales acquiredbusinessexperience away &om the family aadwere preventedfrom being parcperedor taken^ advaltage of early in their careers. The third-generationsons included Muthiah (son of Murugappa'"); MV, Murugappaq and Subbiah (sons of Vellayan); and Muru and Algy (soDsof AMM). (SeeErhibit 8: Photos of the Muugappa Family Group Members.) There were sevsn sons in the fourth generation,bom betweeu 1953 and 19?6. They iocluded Mtrugu and Venky (sonsof Muthiah), A. Vellayan and A. Venky (som of MV), S. Vellayan (son of

tD Sitrct il'le'italrc! id IDdia passcsftoE fathcr to so!, it is custoEary for a family with no sols to adopt a to e rclativc or an Erclat d !0alc fiorn the saEc clt!" Muthiah s,as bor! to Vellaya4 but was adoptcd by Murugappa when be was 15 ycars old bccausc Mllltrgappa had two daugltsrs, bu no sclns.

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Subbiah),Arun M. (sou of Mr:ru), andArun A. (son of Algy). AMM held the position of family elder' kartba and businessleader during their formative yea.rsand guided their training. Most achieved or graduatedegreesin business,science, tecblology from uaiversitiesin Indi4 Britai4 or the United States.Witl the exceptionof S. Vellayaq who joined a U.S. consultancyfirm after his MBA, and in Arun A., who worked for two yearsq/ith GE Capital in India the othersgainedwork experience the Male family family businessaod held positions of increasedresponsibility in the family enterprise. dependent their seniority andexPsrience. on were compensated members not As of mid-2000, S. Vellayan was tle only son ir the fourth gener-ation working in the family he schoolin the UniteCStates, marriedoutsidethe arranged enierprise.A-ftergraduatingfrom busir:ess it marriige norms otfie t"-ity and did not rctum to the family businessbecause would be socially uncomfortablefor his wife. Instead,he continuedto work as a malagementconsultad in the United States.By custom,the wives and daughtersof the family did not work in the business.They were, the however,very active supporting family's fouudationandcharitiesthat includedhospitals,schools, developmentof the rural areasnear their centertbat focusedon zustaiqable and a technical research home aadbusinesscommurities.(SeeExhibit 9: Family Norms a:rdCustoms.)

BusinessHistory
Over the decades, the family enterprise grew tbrough a variety of forms: start-ups, acquisitions, joint ventures, diversification, vertical integratioo, public offerings, and divestitures. These different groEth strategies evolved as the political and economic situation of lndia and tie surrormding area ehanggd The family took advaDtageof opportunities tbat presented themselves, sought out others, and regror4ed after disappointment, all the while working deftly and ethically within the realities of India's governmental, economic, and political parameters. For example, in the 1920s tbrough 1930s when 70 Percent of Cheuiar wealth was in Burma, Dewaa Bahadur and his sons made a decision that diverged from others ia their clan and rePatriated much of their monies &om Buma to India. Concurrently, they had the insight that lodia was oD the verge of i.ndustrialization, and decided to use the funds to filance the family's fust steps into Eajor in India. In making ttrese two strdtegic decisions, they escaped the financial ruin -aouactrlrlog suffered by most otler Chettiars due to tle Grat Depression, World War II, and the Br:rmese nationalization movement. Instead, the family was poised to prosper. l9zus and eaxly m opportuoities contlnued Tbe family's view of busiaess oooortuoities continued to broaden h the late 1920sand early Dewan Bahadur developeda close friendship with a most distinguishedIndian statesman 1930s.First, named Sir A. Ramaswami Mudaliarrr who iafluenced him to look for opportuuities to bring to India

from outsideits borders.In 1931DewanBabadursenthis middle soa,Vellayan, on a trip to explore businessopportunities ia China and Japan.He sent his eldest son, Murugapp4 on an eighl-montb businesstrip that included attendingthe Intemational Chambersof Comnerce Convetrtion il the tbat UD.itedStates.Il the years after their renrrn, the sonskept au eye out for busiaessoPPortunities In set up aud lead ia l_udia. the late 1930sMurugappadeterminedthat ttrere was the family could

11A nativc of thc Murugappas' home region of Talail Nafu Sir A R xoaswami Mudaliar lived Aoln i887 to 1976 He was very achve io lodiat Justicc ?arty L-tbe l92oFl930s, was s ncmber ofthc war Council in S! Jades iD l,otrdo!, was lndia's 6rst aEbassador io gealtl Organizatioa and sereed as plsident of thc the United Nations affer indpendcnce,was artive in the United Natlons' World FiIs1Ceneml Assedbly ofthe ItN's EcoDomic sld Social Coulcil (ECOSOC) in 1946.

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market dsmand in India for the manufactureof quality security firtriturer2 and was i'strumental ia setbngup a plant . A_much larger foray inio industrial ma.mrfacturingconceivedby M'rugappa during the sametine ^nanufac-tu;;;-sa;e period was to entsr tre businessof maki''g abrasilves, prodri u used bi and-gmoothequipmenl mat?nals,"o-po"*t., "od *Jp-d""t". fn" aUtyt ..ignTi ]hargg+ that if a world war broke ou! the-vol'me. and "r.l"ty & ;-po.tei goods would d""r-;";;i;;; manufacturing(with the need for abrasives) wo'ld "*pu"a #tu tt" o"* opportmity. To this end, the fanily rled its recently establishedconracts_ abroadto ioentiry, negotate to buy, dismantle,and ship usedequipmentfrom an abrasivesplaut in the udted states ttut 6u" uiog opa"t"d J;;i t,; thinl-ing was, "Let's take a risk, buy A" ofa .q"ipm*t andlacitities,'and b""t,b"; f*1,1n" The 1!aur was operational in 1942. As of 2000, the abrasivesbusiness,now caned clrvtr, generated$67 million in sales and was headedby thinl-generation M'rugappan before the MtE reorganizationtook place. Aaer India's independence aom Britain in 194g, the govemmenta'rounced a five-year plan to expatrdindustry and raise rivire standardl, in part tbroufr foreip support. Murugappa guided the to take advantageof thii opportunity and be anong the fust to eater a joint venture with a !kgy? British concern_ The Grorp developeda plan! to mute UiJV"GsJo'owed by JJ",b;.. ft;';d venture parher held a 43 percent inlerest in tbe company.ilver'time, the -busi""tr gr"*, iot"gi"tJ mto..most bicyle components,and diversfied into steel tubes for nmrture and other hduscial Tbe.British partaer eventuallydepartedO" ina*ry "na aivested its ovnership;;#. ,"pp^li^":lop In 2000 this business,called fube.Invesfoents of India GD,'was 29.4 percentf"-ily;;;';;; generated$251 milliou in sales.prior to reorganization,ii was headeduy'ftira-g*;;"" Mv-;,i his retirementin 1996,after which it was head;d by fo;h_g*"r"tio" a. Vellayan. requireddifficult_to_get . .In the 1960sand 1970s,the.Indian governmeDt liceuses start new to businesses, assuring for -near-monopolies ihose awaded iic;;es. wh* tnJ U"_[gp" G;rqp ;; awardedonly one of several liceusesit applied fo1 it chosethree other methods'fii gr*d o; integrarebackwardsin its cunent industries.As an example, CITMI became l,:*l.:::_e ab.slves company :*ically ue o j in the w_orld be totally integrated from power generationfor plants. to rF its vrq' to producing raw Eaterials, to manuftcturing, marteting, ia s"ilgiTfi"t;il;;;;;;vr Aaother method for g:owth was to purchaseexisting businesses. one acquisitionin 1gg0was the poorly run English aud sconish rea cgmpany, -ooperative wholesaie s*i"ty _el?]: icwsj r"oi" (renamcd Parry Ago Industries in, 1992). es or iboo, its sares were $22 miuion. The boldest acquisitionoccurredin l98l wi& the purcbase Madras_basJ-ElD-parry, of a h"g", 193_y;_oil business which the Gror.qp bad been intsrested siace 195g. ro-earry was the second-oldest .in commercialname ia India and included fetilizers, pesticides,sanitary ware, confe"tioo",y, *a ,u!* rrills. According to Algy, ,.At the time the deal was made,fm_fun1iw"s one_and-a-half times larger tban or:r entiregrorp !" For yea$, fiaancial institutions asked the _Murogappa Group to take over ElD_parry,s grl/en the Group,s trustworthinessaud decision-making acumen the fanity repeJAy 1a*gT""t, tumed down tle overtures,respondingthat without coot ol, -rroie_"nt was not rn the family,s
': Sccuriry firaitue iDcludcs stecl almiiabs, safes, cashboxes, rld filing crbine6. !r Itrs grandsog foutb-gezreEriod Murug\ paraphrasing Murugappa-

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interest. Eventually, the financial instittrtions relentedand tle f,-ily gained control of the publicly traded compaan largely due to the relarionship-building skill of MV, who was imtumintal in ngqotiating the deal. The ag:eeEent made headlinesbecauseit showedthe Group's entepreneurial side and its commitmentto invest in wbat many in India felt was ar uncertainventure.AMM wrote of the takeoverin his memoir: "our valuesrmaitrtraditional and conservative, when an oppornmity but to grow [Iike EID-Parrli] comesalong, we don't ignore it evenif it means plowing a lot of moueyinio whatmight be a risky business."ra Although Subbiahhad arguedthat the huge, ailing compary was too sick to becomeprofitable, orce the salewas completedMV and AMM tappedsubbiatrto lead its tuxn-around. of2000, EIDAs Parry ras generating $263 million in reveque. Prior to the Group's reorganization,tle business continuedto be rua by Subbiah. A third method of growth for the MurugappaGrorp was to eDterbusinesses did not require that liceoses.In 1978 they starteda financial servicesbusinesscalled cIFCo tbat grew to $3? Eil[o; in 2000 andwas headed Algy until reorganization. by since the 2000 reorganization"the thinking was to shift reliance away from its slow-but-steady grorth nnufacturing sectorto opporhmitiesin its high-gowth frnaucialservicessector,where it also badcapability. According to Murugu: Now we ye beenlookihgat ot,r portfolia of businesses diferentperspectives. in We'ye been sayingthat we have too muchmanufacturing arefar too integrated or within far manufacuring. Ninetypercentof our rerenues come lrom manufacturing-related
businesses. Perhaps we need to go more into services, so there's an oyerall balance in the oort{olio."

The Group wantedto increaseexportsfrom its chahs, tubes,grinding wheeis,and sanitary-ware divisions.Additionally, the Gror.p startedexploring entirelynew opportunitiesin global indusries that employedthe highly talented,more cost-effectivelndian worlforci, such as idormatiou tecbnologyenabledservices. Because MurugappaGroupwas not yet a legally constitutedholdiag companlf it the could only start a businesswithi:r an existhg business-and most of its exising busiroessis were publicly tradedaadheadedby nonfamily cEos. So questionsaroseasto how to maintaiu a goveming structureon top of a govomitg structue.

lnfluential Outsiders
Dewan Bahadur initiated a tradition of using trusted advisors, starting with sir A. R-amaswami Muclaliar in the 1930s. ln the late 1950s Dewan Bahadur's descendefis showed a willinmess to include nonfamily members in business management and made Sir Mudaliar the first noneiecutive, nonfamily chairman of their fwo most important businesses, Ttr and CUMI. In 1994 the Mulgappa Group engaged its fust management consult"nE A. D. Little, to look at issues of governance and leadership succession. This resulted in a succession plar" based ou msrit as well as seniority, ia which seqior family membsrs were to fill the positions ofmanaging director, chief

* AMM, r83. 15 Murugappa crcup, interviews the au6or, 2001. by

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operatiagofficer' and chief executiveofficer of tbe Group's compauesrmt eachretired at 65. This plan was put into practice and worked werl for a *hii". i D. rttl" also taught the Group .jprocess Trn"gemntl'to help shift rhinr.ing from a Fansactior orientation to an iniovation -d'";ti;;; focus. A draft of a Family Business-onstitution was also *_p"r"a " ,Ai. ,L", b;;;;r;;;;"J., During 1996-1997the Murugapp-a Gro'p hired McKbsey & company t! do a pordolio ar:arysis of the companies. resurtof rbareffort wasa rero'meDa"uln The r--tn" rr,rorugappa Gror* o deveroo a more concentrated portforio of bus-iness units. ActinS 0u that recommendatio" tn" cJw "-ri"a i few of the noncore businesses. McKinsey & c".p;t;id ;* "ior"r. issues of family business governance successiou. or A-fter lcing over businessleadershipfrj- Mv in l9%, Subbiab, in consultationwith AMM. engaged prominentbusinesscolleagueand.respeted a t"- y hr*a, or. a. a. ilf,];jJ;;f3f,ffir; communicationon fam'y business anong te ranity i""-o"., ""t,.r" iu the ente4rrise.The leade,rshin grolq) met one or two daysa month for arnost two yean to ch* the courseofchange. Th"y'dir;;;;; topics such as: How best could famiry membo" .-uk" th" tt"*itr--t". "n"*m! ,"'i"i";-;" businesses? wrat roles should familrmemiers pray as gou;tricoro "urent nonfam'y coos of the businessuoits stepup inro the m,neg,ng aitttivcfo ,oi"*" rdut ,aoua be the compositionof tbe Group board and tbe familv role ia thJsubsidiary uo*J.r-o*iog the meetings,the Murugappa Group s'rfaced fiue re-organizationg-oals:first, to be more or a-gro,-p rather thatr a colrectior of s?arate entities; second'to be more flexible in the make-up or tne-porirouo or u*io"r""i-tnira io bavelcss emotional anacbmeDt iadividualsto tl.l, Uusio'esr.c bv io'rrtl. o .nin "*"y;;;F;;: uonfamity-ted r:nits; fiftb, to mentor nosf;rr';;, d.irectors/CEOs the long_ for l*T:L,:

Murugu:

Suppofting a CEO rather tban being a CEO was a shjft for the family members. Accordine to We neededto incredsingly believe that we direatcompanies, butwe owrnothing. This is hard becausein India people say, ,,How comeyou haveyou, "ii"1o"*tno *, Ar" compqiy? Whd.tif they make misrakesand ntn the companies aground? . Oul ability to ttanscend all this is very, very iml?rtan!. Weneed to sta)l co iftt"d to th" "o " oj. growing the businessprolessionally and within our valui.tT

Tte role of the nonfan'y cEo in each of ttre seven businesses was vital to the success of the -p*n" . changes that the Group wanted to make. The nonfam y cro, vrr. s. Datta (pafiho), hired in 1998, erylained it this way: The (businessunit) cEo is the mosr clitical lunction and *e need to do whatever it tak"s lo sttenglhen him r/nd put him on a very-htSh ft " CtO ^i,-;en I able to get the right sort oJtpeople my business?An i4edestat. able to get the righi "." .i n"n"At for resources? Cqn Lnake sure that mv oeo-pleare not diadvanuled by nlinUrs ofthe board?" This wilt be hisminimal apendalE

ffi-T':-J$*""|#if.'i,ffi*:*'*:""" r?
"

16Dr' Gaaguty, agcd 67' w"r board cha; of ICl-IDdia, orc of lndis s largest compades. He was thc former cbairEa! aod llatrasils Murugaf'pa crol4, ilrlTvicws by the author, 2001. Ibid

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_ .concurrent with reaching outward for a&ice, the Group also looked inward for input. After the family members in busiaess leadership revisited the set of varues and beriefs developed *a"i tu" leadership-of MV in 1987 (see Exhibit 10: Values and Beliefs of the Murugappa Croupy, they pickJ a g'or4) of about 80 people across tre organization for a meeting. eccoraing io ventry, tnis is wrat occured: First we etamined f there wa a setse of personal congntencewith the vqlues. Then we looked at which of the values we thought we were aetuilly violqlinE in tems ofbusiness process and how we do business. Wetalked about the crstomer, thi employei, the stockholders, and businessethics. Thesewere dffiait questionsto qsk and dfficrh ones to answer. Then, we lookzd at how we could alter bwiness processes meel or exceed to the value slstem and to ensure that yalues aren ,t yiolated.r9 Prior 1s imFlementing tbe reorganized MCB in 1999 with the guidance of Dr. Ganguly, the -, Murugappa. G1q actively recruited tbree outside board members who represented. broadiusiaess experience in Indi4 the West, academi4 consumer malufacturing, aad information tecl"otogy. Oi" outside MCB member was N. S. Ragbavaa (Ragbavan), co_iounder and recently *ti.ft :oiot manaeing dircclor of Infosys, one of India's three largesi IT software companies. His reasoni for accepting the MCB board position inchrlsd ths femily's opeq entrepreneurial approach: I appreciated that theJamily was entrepreneurial. Theysaw the independentboard memberrole as helping them look/or sofutions outside their zones if comfort. I also admired the huuiliry' ofthe Muttgappafamity and their wi ingnessto listen to us.I don't k tow too many corrrpaniq or too matrypeople with theilevel ofexperience who dle as open b consfi-Lctivecriticism andfeedback as they are- One o/ the things I keep pushing is the velocity ofthe decision making. Ihe marl:et b not going to wait, so I,i trlng to push. The Group needs to get into more grolrth qreas,gro*,th industries. It is saddled with old economycomponiesand that meansmarl@,capitqlization is yery low. Let's takesomerisk and go ahead.tu A second outside MCB member was Dr. Marti Subrdhmatyam (Marti), an Indian native and professor of intemational business fiaance at Nyu's stem Schooi of Business. He chose to be on the MCB to sho* lndian family businesses that a fam y busiaess model such as the oae envisioned by the Murugappa Group could be done: The cefiral issueco\fronting the Group i,sreally that we do things tery slowly and ctssue we can corrtinue doing that,If)tou ask the man in the stleet what he thinks ofthe lvfrtrugappa Group, he will say they are impeccable in terms o/ their values, but vej cowervatite, very slow. I thinh what we're strivingJor on the board is on external perspective.A lot of the Murugappa Group businesses have beengoing in one direction hr thirry ol fony years. The world arotmd them haschanged.Most of the expeience of the intemal pie,ces, family or nonfamily, is confined to oni little seto1[rules,but the mles
nave chonged.-'

A third outside MCB member was I\,Ir. Natalino Duo (Natalino), an Itariaa who worked as India's regional managing director for Benneto', a successfi.rl family-owned globar clothing manufacturer.
'' Murugappa G,"oup,i*ervie*r '" Ibid 4 lbid"

by th autLor, 2001 .

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When he was asked to serve on the board, he flt the enterprise was sending a message to the ialcrDatioDalbusiaess community. saying, ..It is clear the Murugappa Group has a comrnment to globalization Aom their decision to choose a foreign independent board member with mv background-22

FamilyManagement
From th: 1920sup to 1987,eachbusinessrmit was run by a hands-onfarnily owner/manager, aad most decisionswere made at the ildividual companyrevel. If one of the businesses b"J;"."y;; desire io expand' it did so. The Group level hai the potential to lead capital *a n r.- ."**"" allocation' but lweraging of resourcesand transfer of Gowledge across buiinesses*u, rot"qu*t oi abseqt.Earlier i! the enterprise'sdevelopment,fam y interacion bappened frequentry -a i.*r-uy -anoth".. becausethe famites had lived in the sime compound or near oni i Cror.p C"r?;6 committee -was started in 1987, and in 1990 becamethe MCB. Thi. -", created to increasethe exch2ngeof ideas, advice, and howledge that had decreased over the years "s tl" tusio"sr", g"o; larger andmore diverseand the families lived farther from one aaotherthan in the past. 1993,MV, th.oage &, badpresented a-proposal for.familybusiness leade^hipsuccession _- ! to A-lt,]vl' who had veto power in his role as farniiy ianha- Trreproposal had been dev;l;eJtbrcu; evaluation of options, discussion, and consenlus by the eighi m;les in leadership p""iri;;;i;;; family enterpriseat the time. Theseincluded MV, M'rugapp;, Subbiah, Muru, ""a iky;;" i#; generationand A. Vellaya4 Murugr1-and Venlf, in th; fourti g*"1atioo1'n, propo?f "uU"a-f_ yo the leadersiip when MV t"ii."i io ree+ ui "g" {v's lgest brother, Subbiab,to tak^eover business 65 AMM agreedto the selection of Subbiah as businessleader,6ut directed Mv to renain in tfie position tlrough 1995dudng India's transition to membership tie in WTO. this tine of changeand soonlhereafter,the unexpected deatbsof Muru (in 1995)andMV .. (ia -!1iag occurred rhis situation stetcbed the suwiving f,miry 1996) membersin businessl""d;;; ;;, the shortcoming thr successiou of pta-o in ilace in 1994.Even family "ld*;; 3d.rev91l{ frl karthq AMM, who was 77 years old pd -retired,help"A'ly.utiog ll;-"eif more availableto n"fp nU the Group's leadershipvoid temporarily. His w l to ieep the famiiy and busro"ss-nnrog se.u;'"s a morale-b-oost royrcer family members.at they regainedtheir bearings. f-o1 It was during this time "The that AMM- said, Group needed profession^i teia".rUp of its companies; The Family, as rnembers ofa governingboard, should.ody offer policy guidelinesandmonitor results. Tteir numbers in the busiaess wouldthennot matter.'J3 AMM continuedin his role of fauily_elder and kartba,but preparedthe family for the time when his nephew,Murugappao,would take over thoserolesafter he died. At the -oldest sam" ti-", sub; , as the recently naEed cEo of tbe MurugappaGroup, felt d.isadvantaged iu the eansition because hi] predecessor, MV, wh9 bad strong fam yl""detrhip tki s "nd businesi experience, had d.iedandcould Dotbe the supportto Subbiahashe had hopedBy mid-2000 things bad stabilized.y*gupp"o, age65, was the family _ elder aad kartba,but had chosennot to play a role on the MCB. Ust""4 n" wi very acti"e io thj faDxily,sfoundationsthat srpported schools,hospitals,tecbnologyresearcb,andthe tenple. Family memberson &e MCB wL
a Muruap?a cmup, intrreiews by tbc autlor, 2001. " IMM2M.

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embracing their oew role, creating a path for family members in tbe future. According to A. Vellayan, 'To make the tansition and succession work, trust across the generations is paramount. Meritocracy is the way to the top. Upcoming family members rmdelstaad that a place on the board is not automatic. We have a clea.r-cut set of criteria for upconing family members to work towards to become board members." Both the family and nonfamily members of the MCB, and Murugappa.n in his role as kartha, ageed tbat a Family Constitution was needed that would articulate the family's roles, responsibilities, and relationships.'" However, tiere was disagreement as to the form it should take' Murugappan favored a corstitution acknowledged by custom and practice, but qot written down- Subbiall as business leader, favored a more formal written doqrment tbat had few precedents in lndia. Subbiah's point ofview was: Developing a formal constitution i.t qbsolutely essential ifwe wqnt to sr/stainand grov) our business.We need to bring thefamill together, derelop a constitution, dnd rcvisit it regularl! storting with the aspirations of et ery individual. There are a lot of Westem examplesavailable for this, but the only lndian family that has sot tething similar is the Chandariafamily of Africa, who have now spread all over the world.' The independent board member, Marti, explained his view as an outsider: The reality is, we haee sevenetecutive directors and ten CEO/MDs in the Murugappa the Group and we needfonnal processes.And thoseformal Processes----even standard thirteen accounting boards-have to be much moreformaL which meanswritten things, has been formal things. Weneed to meshall the rest of it, The tradition of thefamily"That's very great conservdtivein terns of everybodyknowing everything. I ve beensaying, practice, we c@t't continue to do thA." This businessB v)qYtoo as a concept, but in complicatedfor that. It takes too much time,'"

Leadershipfor the Future

For generations, both family and business decisions were made by the oldest male family member ua. death. Then AMM set a Dew tradition of separatilg ttre family and business leadership roles til when he retained his position as elder and kartha, but retied from business at 65, tuming over business leadership to his nephew, MV. When Murugappan was next in line for all tbree roles, he became family kartha and elder, but declined a leadership role in the Group level business, deferriag that respoosibility to his younger brother Subbiah- As of mid-2000, Subbiat, as MCB chairman, had steered the family enterprise tbrough a reorganization that separated owaership from operations. Now he questioned ifthe position he held on the MCB was best served with hin in it. He saw at least three options. One was for Subbiah to follow family custorD, stay as chairman uatil age 65, and then offer tbe post to his next-in-lire cousin. Subbiah woqdered if this was the most flexible and sustahable framework for successi.nthe future. A second option was for Subbiah to retire

a Topics would ioclude: qualifcations for fimily merdbers' eoployment; how to llale dcision,s; salary, pcrqubit, betreft, ald dividend alocatioEs; q,hat t! do for family membe$ i-Eneeq the procss to pick a fadily leadr and matc famity decisiotrs; schedule of fasily mcetings; how to prepare for the corpomle boar4 aDdhow to qua!ry to be or the boald. E Manasenent Raiq Jor.rdi (Julre 2001): 38 (parapbEsed). x Murugappa Croup, iltefiiws by the authsr, 2001.

KIItLoc'G

Sc'HooL oF lvlANAGE4tNT

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't 99

TET MI,RUGATPA GRoL?

KEL121

u"--. *TJ,Gr9g"rut."^ro position Hjlil"":#n*Tft.T.'*9. o**"o *lxra could i-p."-a;;d;;;; optioDsiohire exist ;ilil#ilmtf"T"Hffl;g5i-d ;;
On the family side, Subbiahpondered-whether he was lp to the task of being ram;ly eventua'vbe became ordestsurvivbg.r^r,'iit kzrtba if the .".b;.;;rfr";t abourthe hisroryof the kartha role, andrecalledthat before British rule,-,h" k ,ib";-J;;; ;;ffi tn" old".t _.le famiry member,

early aom tbe MCB and oDt out of the business artogether. tbis might meanthe MCB But wourd lose the benefitof Subbiah'szuidanceand **""1, ju"t';;; l"i t* "" guidance his predecessor, of MV' A third oprion *". fo. subbiuh to .t"p do;;;-i;; ililr. o. tuned 65, bu ro remain on tbe MCB as a firt-time direcror' This"i"ua .p"o ,1"-iliii'iry "i settbg a oew precedent in prolessionalizationbv appointing a no"f"-irv -;;;;; "i]-i## ;o cEo, if a personright for the

,ruir-".a? il,"L",".o_"oo" ramly iothe who l::*"?ilffi?t1f .3-. ,JJ*;,,"F;r""s

Traditionand Transition
subbiah was stirred from his thoughtsashe arrived at the fimily,s ancestralhooe in pallathur. considered He how tbe tasrvears bad b;"" " G;i;:;i;;ffij ln^og"r, "Hn. in thinr.ips.aDd for thefamity aud tbe Group.at .he sa-e ime, tle en*riljse nadherdits own,manasins 3^tf:y:spectrum ma;or a of successfirlbusinesses-in i"_"*idt * f;_pi*a gf.U"f marketrlace. S;bbLh

and trusteesto a Fadition- both built.on togeth"-*r, t*i, -ri*i'*"pect, ethical values,and above all,, dignity..rudepende.ce, disciplin aDd e."As,b;,6;; ;;; family and business teaaershiiibaneJs,;;;;;;;;g "urselvesfor the great*"u;*".fi"ll.-mri

;;;'^ffi ";tii:ffi:!:1!ir,i?tff ::T:qi.chf ,ffi il;;il'"i1'J;:tr-ll:tH

trifrH#H*:,"}:TT::,'T:T:rth"r"-i-rv\;t1."si*t-*;1""9",incrudingadapt

F-rilies

in B:ainers 2 (2002): 3t.

F.l=Ei) \7 NORTHV/ESTERN
LNTIIGRSITY

IHR\

t2
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200

KEL12I

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Logo of GroupCompany Exhibit 1: Symbolism the Murugappa

The company's logo is a peacock symlsli.ing tle clariot of the family's god and idol, Lord Muruga, second son of Iord Shiva. The feathers also represent the Group's many companies. The family regularly worships a glass picture of Lord Muruga at the family's private offices on Monday aud Friday evenings and before a family member takes leave for a long travel. The head of the family r.rsually arranges the time of worship and has male family members called. Female family members may also attend. The specific glass paiating that they worship has a significant history. It was in Br.rma with the family for security and comfod when the family's busiress was tlgre. When the Commudsts took over Burma after World War tr and the family was back in India, ar agent rescued the pailting and walked three days without food to assure its safe return to the family.

201

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GROUP

KELIII

Exhibit 2: Businessesof the MurugappaGroup asof 2OOO (US$ in millions)

CUMI T

"ffi.fl?g" .JH;.,jH" "S:HX:" EG;ili$"f

33.10 t2 29.42 543 37.25 143 78.31 ,24

i:j.;:^

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46.65 315

MU:HSF.A
GROUP

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3: Murugappa Family TreeCharts MIJRUGAPPA FAMILY GROUP TREE SONS OF OI'ER GENf,RANONS 2OOO 5 AS OF Generution:

(I.dt aldl{ \rhre

0m!relt

0929.1996)

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ExhibltS (cantinued) Fa.Eily TrccofDesceodaqts ofDe*?n Babadu., Founder ofthe Murugappa Group, of2OOO as

^/.as (t!r.,

riind.rp..E

fr,HHT ffifl

bd.bo rl,.i,",d;i*";i ; i,l*.x"n,v*,.r,.c"pp*.

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Structureas of 2000 Exhibit 4: The MurugappaGroup Governance

ChairmaD ofthe Murugappr Corporate Board (lvICB) Subbiah p/as Five Wholetime Directors @our Frmily Members, One CFO) AEr
Yic. ChrirErn Fu^.lionol *et: Strateg,

Ve!ry
Dircctor

Mu4ss
Dirccto.

A. vclaE! Director

E4!s Director

HR

Tec.hrologs'

Mrrkelirg

Bdircst

Mc,tor:'11;lJ1:lDc MarkctiDg Seryices

Psrryt CIJMI CoDftictioncry Plrnrstions ItL CbolaE&dal@ AtuM. Vdky Jr.

EID-Parry Comlraldel Fcrtilizcn Ltd,

LEs l Sccy. A,D

Fonity M.^to. of:

Arua A

p,irs Tbree Exterlal Non-Wboletime Directors

K-ELoGa ScBooL oF MAN^o!-r,a'r

205

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KEL121

Exhibit 5: Map ot the Murugappa FamilyHomeland

Village ofPallathur, Chettinad Region, Srateof Tamil Nadu India

Sourcdr S Muthiah, Looldrg Ba* Fmn .r,loutnein,: A Bio/F'phyd A.M.M. Arunachlm (Madras: Eastwest Books, 2000).

18

K.EIIoGG ScHooL oF MANAGB'EIII

206

KEL121

Tm MLRUGAPPA GRoUP

Exhibit 6: BriefDescription Chettiar of Culture

India's system of hereditary social classes is called the caste system. Although the system bas weakeaed ovsr the last fifty years and people often mingle freely between castes, it is still a strong influence on India:r life. The systen originated about 1500 B.C. when Aryans from cenhal Asia invadd controlled most of Indi4 and developed the system to limit coftact between themselves aud the local populations. Later, the system became integrated into the teachirgs of Hinduism, the polytheistic religion most inlluential in Iadian culture since prehistoric times. The four Hindu castes {s pTahntans-ths priests and scholars; Kshatriyas*the rulers and warriors; I/airyas-the merchaats and professionals; and the Sac?ar*the laborers and serva.Jxts. WithiD the castes, there are thousaJrdsof subcastes, each with its owa rules ofbebavior. The Murugappa family is a member of the Vaisya caste, in the subcaste of Nattukottai Chettiar, also known as Negarathar. The family is related to the original seven families that settled ia the Chettinad are4 abod 300lm south of Madras, now Chennai. This occurred i! the tenth cenhlry when they were offered land by a king as an inducement to settle in his kingdom aad provide the moneylending aud hading fuactions. Today, the Chettiud area comprises about 75 villages and a population of about 150,000. Historically, several business practices marked the Chettiar. These included tnrstworthiness, orientation to creating wealth, willingness to travel, sophisticated accouting methods, and a strong sense of social responsfuility. Starting in the late eighteenth centuqr, Chettiars were asked to lead British commercial e4ransion in Ceylon (1796), Burma (1824), and Malaya. The French and Dutch also used the Chettiar when they expanded throrghout Southeast Asia. The Chettiars' only commercial competitors tbroughout this.region were the Chinese. During this time: - . . the Nogarathar (Chettiars) enjoyed not only a privileged position, bxt also a highly trusted one in those lands across the seas.Money was lent to local fatmers and cultiyalors qnd petty businessmen a rate the Chettiors, in conclave, decided on etery at month . . . Chettiar unity and integrity in this age were legendary . . . Less visible than the businessofmoneyletding, howel'er, was the signal contribution made to the countries in which the Chettiars establbhed themselves,The expansion ofpaddy atltivation in Burma, making it the rice bowl ofAsia, the developmentof coconut snd rubbet acreage in Ceylon - . , prwiding support to tin mining and ntbber growing in Malaya . . . letc.l all ^^ contributed lo the economic develoqnent ofwhatever countria the Naparathar wmt to.'o

'3

T!. Chettiar Heritage, viii

KEllrcc

SGrooL of MANAGE.TFTT

201

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Exhibit7: sharesof lhe Murugappa croup Businesses Generation, Mare, of by by as 2ooo

x'd G-anr

4ti(:d#nr

Jrhild*dip

r
| \eyEr!.,' l

- l=_ _t]-_[;;;]_ t :
'--vd" eribnri. aE.-dbn tr..d-qa Grn' ' + I l I I I tel{ltsru., I t _-_l i

F;;;l
F;;j t'*-;']j

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s')dtul,

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208

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FamilyGroupMembers Exhibit 8: Photosof the Murugappa

wife Valli; Left:Seated,DewanBahadur, frDmlefr,AMM, Murugappa, Standing. Vellayan(Phototaken in 1944) familyin 1978at AMM s MiddlerMurugappa sixtiethbirthday. familyin 1989at lvMs Bottom:Murugappa sixtiethbidhday.

Kgj,oc

ScrooL oF lvlaNAGEGI'rr

21

20s

Tm MT,RUGAPPA GROUP

tcELt2l

Exhibit 9: FamilyNormsand Customs

To understand how the Murugappa family practices business, it is instructive to look at several areas within the context of their family culture and tle native I.ndian culture. C L A NA N D C A S T E Many of the Murugappa family cultural norms and raditions derive from Indian society aEd the family's place in it as members of the Chettiar claa of businessmen and tradsrs in the Vaisya caste. Through the ages, the Chettiar claa system bas held firm- Each Chettiar clan was established around a Hindu temple and supported the temple and surrounding village with contrraudons from its members' eamings. There are nine Chettiar claos; two of the large ones have seven sub-clans each and one has tlree sub-clans. The Murugappa farnily, from tbe Chettiar village of Pallathur, belongs to the sub-clan Pattinaswami ofthe Ilayathankudi Temple, a skucture tbat dates from 707 A.D. MARRIAGE Marriage is arranged withiu the larger Chettiax conmunity with a cr:rrent population of about 150,000. Tradition forbids marriage within clans or sub-claos and marriage between differeEt castes is strictly forbidden because it is considered a threat to family unity. Upon mariagg a yormg man is accepted as a member ofhis clan temple. AAer marriage, a girl becomes a member ofher husband's clan- In this cla.n system, a united femily is the ideal aad the goal. For the most part, the Murugappa family bas fit this ideal exceptioually well. DOWRY A dowry ia Indian traditiou is an amount of moDey or propefiy given to a groom's family fiom a bride's family at the time of marriage. The way the dowry is administered in tbe Murugappa fa.mily differs &om the norm of the country. Starthg in the generation of Dewan Bahadur's children, the family bas asked for no dowry from the families of the brides of their sons. matever money or property tbe bide bdngs with her is the bride's to maaage alxd keep as she determines. When the Murugappa dauglters marry, the family pays a dowry to the mother of tbe groon:, as specitred by Fadition The family differs Aom the norm in that it has never negotiated what will be given to one of its daughters. This is because the family opeDs inveshent accounts for the girls at birth and adds to them regularly. The iEvestment accouqts, which include substantial shares in the "stee danam" (daughter family's publicly traded subsidiaries, are tumed over to tle daughters as a gift) when they marry. Because tbe family knows that the daughters will be financially secure rpon marriage, they arrange marriages for tleir daughters that focus on the personal characteristics of the potential husband rather than on the wealth ofhis family. ADOPTION InheritaDce in India passes from father to son. Tberefore, it is an ancient Chettiar custom that a family without a son adopts a boy from the same temple clan or subrclan to ensute succession. However, adopting a son from within one's own family is preferred over adopting from the clan because it is considered easisr to instill the family's rmique culture aod values that way.

22

Kxurc,c

Sctool oF MAIAGE,{E}ir

210

KEL12I

Ttr

MURUGATPA GROUP

Exhibit 9 (continued)
daughtersand no sons' ln order to Murugapp4 the eldest son of Dewan Babadur' hatt two tlut Mtt*gupp" adoPta sonAom the maintain family unity *a "oot-*tyl O"'"- nunta* i*i"t"a son' Muthiab' then 15 years old Later' familv. He clid this by adoptinghs ilther V"Utyun" second two

#i"#r"ilr'""*";*L*aii;;,"
OJ"gUt-t,li"y

for by him' "U "ame to live wi& Murugappa'sfamily andwere cared

sons, remaining and tbree S,,r-" L tf+i, t"""i"g a widow,

ALL SONS IN THE BUSINESS

to emplolment oppornmitiesare passed Following Chettiar and llindu eustom,family business place itr the io th" fo* generationshave for:nd a the males. To date, sixteer ti a""""t"-*- t*
,. 4!. 2000 ttrere were urne meo rrom ule rn:ru ?ruu ruulu tsEuvrouvD

il;*;;";"'p_by:.L.y;u"JIHrmt;::*:'Jttl*Trs?T:"ff ;'i*,*il:
tle opportunity to 1om' ,o i- tler" -" " total of seven sons who will have EGALITARIACOMPENSATION N manner dependent on the raoge of Male family membef,s are compensated I T quitable and Group success' informal msntoring between the seniority ancl experience. To enlance individual guidi.ng, members

accomplisbed "k", prr"" *ltiloia"., -oi" .*p"ri""""a and./or ;;t';;; less and/or ablemembers' less younger, experienced ""rirtiog, uoat"pporting

thirds of the farnily's collective -busi-uess As for bheritance, it is i-amily custom that equal emanating from the tbree sons of Dewan tle tlree braoctes of the famiiy shares-following 6:l each generation" Yh"t|* -:.?1.--3i. Bahadur-are dividetl ancl entu'sted to the males i:r at trle hme ol shares are divided equally aud passed to the sons ot *l Typically, a father's i',ffirt tbe father's death. R O L E O F W O M E NI N T H E F A M I L YA N D B U S I N E S S good educations' most at the universlty The Murugappa daughters and wives have all received and ana euiaange ,il tUe.fanilf.'-s A |.I'|, foundation If i""attnip level. They are the ma.;or **"o follows a custom rn especially the schools and hospitals Yet' -thrcfamily still i"- "lrtio6f " i*ti*ions, operation of the family busiDess' nor are' they wb.ich the wome! of tle famrly are not a part of the

This ir-b"caus of the cultural Eadition that when a i",1, i"-ffy,, .U-"iliAo."furgs. pfi"-lp_" family Recently' the role of the familv's women ir p* "il";i;;;;;s sirl marries.shbecomes in iy tn" clllreDtboard leadershipand will be addressed in?Uiilln"rj U. i"* n gg"J f", Ji**ri"" the future. O P O ST I O N F E L D E R S I

"gurusishya,"which meansone must leam from one's elders This In India tbele is a tradition of on famity-aud,ia tbe busin:ss over the ssnsmtions'A twist bas been upheldbotn in tle Vruruglappa of famiJymembers all policyrbai whenhepromoted.tbe saned uoderAMM,s leadership thisu-adirion tbe pros and cons' makes TheDthe eldsr, wbo should strive for neutralityto weigh ;g;t;;;;;p;. a who sees sbift occumrg: ti" na.t J""isioo. tle curent family elderis Murugappaa

Kr],Loc'c

ScHooL oF MANAGB,Gf iT

23

211

TM MURUGAPPA GRoUP

KELI2I

Exhibit 9 (continued)
Respectlor elders is still there. But it i,, biad ofgexing to a dfferent level- There is 'rtona respect, but at the some time, there is now an opp"inity to up ad e4tress one,s view. A ganeration earlier, yormger people might expreis their views, but o,ce the elder came to a decision, it na., accepted without attempi to persuadefurther. Now there is a shifi to decisionsjor the good of thefamily ora i" t^iro, i^"a on nore of a "Galden consenaus, what I call the Mean, Ihe elder,s role is shifiing to thi of consensusbdlder, Wat we are leaming is how to build consensus among difelent points ofview, which are exp-ress-e! more elpticitl! than in the past. This-moiel requires more patience_-notjust by the elder, but by the whole lamtty group:THRIFT The t'adition of selectins mauiage partners for one's children bas been used to maintain the M'rugappa uorm of tbrift. accordin,gio AI\avI;r ur"g.pit rTi;ecting wives for their sons, the parents looked for girls who were educatea, no"ext""ig"oi teamwort_orieite4 _d thrfiy. V;;, ;; 'riJ'rT.

n'ife of DewanBabadur' exemplified thrift bv.raisingtil; G ;b.nv * a{u r?rnlcea a! age80,"Shewas rolemodelto ri on "t"rr& --""rg"-"ot" ignl u"u]il. of moderate -a reso'rces andinculcated an ofus thevirtueof thrift. rt is a rabrt thaibal in s[t not tet us,evenin business. . . ** Y:, 9trghl rp to betbrifty andto o'o"itot uu "*p"oait*"r cJenuy-ana tmse habitswe took
o the worblace."'u CREATIVE DAPTATION ND FLEXIBILITY A A A teaching in Hinduism is to- ..live in barmoay with the cosmic orcler.,, Startiug from Dewan M'rugappa f:rnily members_are "L-G,o-f;;;rsftrr 9oy4 adaptability and flexibilitv for barmony in their strviropmsnt fbroughout tn. g;o","tioor, -stiytng d;i; ;;;;;: business have used situatioDs Dresetrted. rhem as riri"guo-aJto* to *n ch to creatively adapt, flex, aadmove forward for good B*t'*

the of,family -d "";;;T. v/illingnessto adaptandto take risks.

il;#il_o"rp"r"a

"nunge and shown a

Dewan Bahaduradaptedthe nor."' of intreritancethat he experienced one morc conduciveto to family unity aad creationof wealth fo..hi. *^. Th;d;ri arl""'o"pt"a u"ir businesses political to situations, such as divestine their rendirg, o"ahe, -G;"lL"iirai"g, ; Brr#;f# #;;rd' n an! Ae au. of thatlountry to cJmmuoisln. rl"i, "Jpt"d,;;a continue to adapt, to India.o !1 government restrictionson businesses. S T E W A R D SP ,W E L F A R E ,N DT R U S T ES HI P IH A E stewardshipis an attitudeof leadership that is rooted in Iadian religloq. It is the responsible useof resourcessuch as money, time, aod talent for the commongooa, Th"-lra..,ugapp"Cr;r;;;f;i; have_ a long nadirionof hetpirg. had q.gTq, -d ."ppr6;;;;; uus maoner srncerhe fou.oder developed supponed and i-ostitutions L_hitio-e "ir^g. ii;;;;e bas conriaued the form of ir creatingoppornmitiesandinstitutions.of healtha"d leariingi" ,[" ""--*it* wherethe Murugappa Groqr doesbusiness. According to third-g*"*tioo."-bJ t"ttid.

**. ffi*r"

ln*tews byrhc au.hor. l . 200

K-ELrccG

212

KEL121

TEI, MT'RUGAPPA GROT]P

Exhibit 9 (continued)
(fntsteeship) is actualty Pctrt ofainduism and afimdamental oflndilt' Gandhi tall6 of 'tn6teeship'. T'ha{s the way oflife' Whenyo! arrive i4 this wo d, you don't come with Whenyou go backfrom this world, you go back with nothing So' while you're anything. hire, yiu're holding something in trustfor somebodythat was held and handed over to ll you- iou enjoyed iland yo, h-ond"dft ive, safe and better' That is my role Murugu Good stewarclship extends to the family's view towards shareholders. Fourth-gener-ation explained: I don't like to let any shareholder doww-prtblic or fanily ' ' Ihe smallest is as imporlant, ol more irnporT'nt, to me than thefamily shareholder becouse'in a cotmtry liiz ours, he hasentn tted hi.seqmings or sqvings with the MurugapPafamily' I have to ensure that he is taken cdre of Members of theJqmily qre truslees' not shareholders' The shareholder has it|ested in us.He has imPosedhis cotfidence in us al a time when we perhaps neededthe money.I may not need the monqt now, but I cannotforget that he did "' irrvestin me so thal today I an in thisPosition N I N T E G R I T YT R U S T ,A N D T R A N S P A R EC Y , htegrity is one of the most prized values by people of chettiar clans. Accordilg to fourth,,t tbink business, at least part of brsiness, is all abor.rt reLationships-good, g"o"*,iio i,a,r*gr1 fioiest, long-lastiig relationships . . . The spoken word is far more inportant thao the written' really'" TheGrouphasprrtresourcesbehinditsdesiretomakebusinessdealingstnnspareDtio.o4oP weight -1d build trust. in Oe iggOs, farmers who supplied sugar cane mistusted the company's the company i.nvestedi! a computerized weigh-bridge p"y.*t '*"igl p.o""a*.s. I'st;ad of confrontation" t o"t" before and after being loaded with the cane aud gavc farmers a priltout so they wgre io to computerze satisfifr that the company was being fair in their pal,ments. when the family decided payment system ro transf; money direitly into the fqmers_' accormts, they discoyered ttrat the whole thefarmers-ittt*t"Abaoks.Tocouaterthis,tlecompanyeducatedthefarmersonthebenefitsof trusting baDk accormts. The result was farmers that were totaly iupportive of the new procedures and of the company's dealings with themCHARITY Mahemai. whereby every family sets aside-a There is an ancient Nagarathar (Chettiar) .o:adtno1 fo. tle upkeep of its village and clan temples Philanthrcpy in the its profits -o,:illy portion of 'U,]-g"ppu home fu.ity began at least as early as i924 when Dewaa Bahadur built a hospital il his gifts to support the hospital and to help riU"gZ ii p"ff"tn*. fo this day the family makes annual assurefree accessfor the Poor. Thefamilyalsofllledneedsinthecommu.Ditiesinwhichtheyopemtebystartinghospitalsor by the Murugappa schools with ianily seed capital. The financial srpport is from contibutions with businesses and the early endowment capital from Dlwau Babadur. All this became formalized the AMM Formdationia i953.

rr Mungappa Gml4, iltelviews by the author' 2001" Ibid

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Exhibit 9 (continued)
J[e family continues to support these establisbmsnts financially, in parhqship s.ith the governmeflt, and also provides oversight for &e institution- In the third generation, ttre family began to encdrrage the wives in the famiiy to become active in the oversight fimction So far, the wives of the thAd gemration are more actively involved tbaa those in the fourth generationThe second generation greatly expanded the family's cbaritable activities. Murugappa polltecbaic was startod to assue college-educated engineers in the region near the TrI business. At firsl the family provided 25 percenl ofthe operating budget, tle govemment 75 perceut. Now it is lO percent family, 90 percent government. currently the Polltecbaic has l,ooo students aad a faculty of 125. The family enmurages close ties with the institutions for mutual benefit. As Muugu eqrlahed: Marry times we iivolle these instihttions with the business.The Polytecllnic has students who are being trained in in&1stry. If thele are industry-wide prograns on qualiry, we ir|ite them. We conduct progratns /or the teachers and the schools. Meubers oJ the compani$ are on the academic boards and awqr^ committeesof the institutions. Iherc is a lot o/ cross-fertilization of thoughts and ideas.33 The family has also established aad continues to support four high schoots with a total annual enrolloetrt of 8,000 students, and three reduced-fee hospitals. One hospital is near the femily,5 |,fg\.,. Ambadi Estates plantations and the otler two are near manufacturing facilities. A nursing school was started in honor of omayal Achi, a second-generation sister, who died with her whole farnily ia an airplaae crasb- one of the hospitals is named in honor of the English gentleman who made several of the family's early business htroductioDs. At on time they sponsored cooperative housing for employes, but tbat idea was evenhrally abandoned. while schools and hospitals are the main focus of family support, the family has other charitable vsntures as well. They fou:rded the scientific Sri AMM Murugappa chettiar Research center (McRc) ttrat conducts research on protein-efficistrt algae, mtural dyes, orgaaic farmiry, and biodegradable plastics. The applications ofthese to the businesses have the potential to create significant income for farme$ iu the Chettinad region. As of 2000, the Murugappa companies were couributing about $325,000 an:rually to these institutiors and the family foundation added more, for a total support of about $2 million per year.

33Murugryps GroW, iltefficws

by thc author, 2001.

26

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TM MLRUGAPPA GRoUP

Exhibit 10: Valuesand Beliefs the Murugappa of Group

Aaer detailed discussion with family members and mnsultants on the b"'t way to opsrate highperformance businesses and gow more rapidly rhan in the pas! these doclmsnts were fiaahzed tlrough consensus of family members who are members of the McB. They can be amended by family coDsensus,but not by vote. V A L U E SA N D B EL I E F S . o . . . . . o Adhere to ethical norms in all dealiags with shareholden, employees,customers,finaacial institutions. and governmenr.. Provide value for money to customersthlo,roh quality prcducts aud services, Treat our poople with respectand concem; provide opportunities to learn, contribute, aDdadvaEce: recognize and reward initiative, innovativeness,and creativity. Maintai! ar organizatiooal climate cooducive to tust, open commuication, and lea,a spirit. Maintain a stylo ofoperations befitting our size, but reflectirg moderation atrd hutaility. Maaage environmeat efectively for hamessingopportunities. Discbarge respoDsibilitiesto various sectionsofsociety and preserveeoviroDmedt. Grow in au acceleratedmaDner,consistentwith values aDdbeliefs, by continuous organization tenewal.

B I L L O F R I G H T S : A C HM A L E F A M I L YM E M B E R E ' ' . Has the right to be given an opportuaity to work in any ofthe Group companiesprovided he has aa aptitude for the job. H'q fhe dght to get a salary commensuratewith the level ofrespousibility held and performance ia thc business. Has the right to question (or seek clarification) with regard to any decision tbat, in his opinion, -clecision wilVmay affect the GrouP-with clear undentanding tbat he will abide by the majority of the hmily merobls. Has the rigfit io have information on any oajor happening (evetrt) that takesplace in the Group, e.g.,acquisitio4 closue, colLaboration, etc. Has the right to a certain reasonablestandardof living and to be provided with the necessitiesto maintain suah statrdardHas the dgtrt to pursue a careerofhis choice and Dot be bound to work in the Murugappa Group. In such evenl he has the right to maiotain his share ofbusiness aad other assetswitloot b"ion iavolved il the mzaagement.

. ' .

B I L LO F R E S P O N S I B I L I T I EN D t V t D U A L S T H E F A M t L y t S: TO . . . . . ' To uphold the traditioDs,reputation, and values the family sta:rdsfor. To Ensureproper uusteeship ofthe businessesaad otier fao.ily assets. To proEote fiIst the interestsofthe fandly and Dot individual self-hrerest. To share ally rclevaat information afecting the bwiaess with the family. To provide guidanceand direction to other family members,particularly tbose of succeeding geDeratioDs, upbold values as well as to handle senior manageme't positioDs at a future date. to To eosurethal in the event ofdisposal ofthe hdividual shareofthe businesses and partoe6hips, such disposal is carried oul in a maDllerthat will notjeopardize the interest ofthe famiiy in ary

mrnnel.

r ' o

To make a n"ill. To create a Trust or any other mechanismwhich is acceptableto the Family Board, iftbere is no male successorTo ensurefaoily membersare gua.aDteed reasonableliving standard a

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Bibliography
MurugappaGror"p.Application by the Mr:nrgappaGroup for the IMD-FBN Award 2001. -. Personalinterview transcriptsfrom conversations with 5i1 femily members(dgy, A. Velayan, Murugappan,Mr:rugr1 Subbialqaod Venky), two irdependeatboard nembers (Marti andMr. Raglavan), aadthe group CFO @artho).Interviews conducted JobaWard. by Summer 2001:478pages. Video of a panel discussionof six Mr.uugappa Groupboard memberson the occasionof winningthe IMD-FBN Family Business Award2001.Rome,Italy, October 2001. 6, The Ctettiar Heritage

-.

Muthiall S., M. Meyappan,and R Visalakshi. The ChettiarHeritage. &al,ai: Press,2000. -.

Looking Back From "Moulmein": A Biography of A.M.M Arunaclalanr. Madras:EastWest Books,2000.

Ramacbandraq "lnterview M. V. Subbiah:Retum to Roots." Management J. ReviewJournal (hme ZO0l\: 27-39.