To grow or not to grow? A case study of Kenyan family businesses and way forward

The year was 1992. The Kenyan shilling devalued dramatically – almost overnight – against major currencies. Mr Miano had just made a significant investment in an automated plant from an overseas supplier to meet the growing demand for his packaged beverages.

Suddenly, the company was faced with the prospect of repaying its new vendor in US dollars at more than double the amount projected in shillings.

The organisation faced an existential question.

The year is now 2018. The company has survived, through the sheer determination and fiscal discipline of its founders. Revenues have grown to several billion shillings. The number of owners have multiplied, too, with the birth of successive generations.

However, growth last year was nil – the company posted its second consecutive annual loss.

Management’s argument: “2017 was an election year, the economy was down, and wananchi had no money to spend.” The board’s counter: “But then why did we also lose money in 2016?”

THIRD GENERATION

Management now consists of the erstwhile second and third generations. And why shouldn’t it? The point of a family business is to generate income for its kin. And yet now the family’s fortunes are at risk. The company has reached its Point of Stagnation.

Like in this hypothetical scenario, every family business is at some point confronted with the reality that it must outsource its management to keep reaping sustainable rewards.

So why not tap into the wider non-family talent pool commonly referred to as the job market? The solution seems simple. However, there are certain inalienable fears.

Firstly, the fear of over-spending — putting resources into the black-hole of cost-centres that are these new high-priced (often ex-multinational) talent.

As far as the enshrined family logic goes, we have been doing it perfectly well by ourselves for all these years, so why pay someone to do it now?

Secondly, the fear of losing status. For some family members holding key management positions, the intrusion of outsiders may be aggressively resisted. The very notion of losing control is perceived as a direct judgement on their capabilities – the antithesis of employment by birthright.

FOUNDER SYNDROME

Lastly, there is the ever-present yet hard to articulate “Founder’s Syndrome”. This is a fear of change by the pioneers of an organisation that manifests itself indirectly in actions that self-sabotage even when the changes are likely to be positive and necessary.

But fears can be overcome and here is why they should be. As the classic adage goes, you need to spend money to make money.

However, there is such a thing as spending too little. Under-investment describes a situation where no returns can reasonably be expected because the critical mass required to move the needle was not achieved.

Basic business school maths will tell you though with any expenditure you can calculate a Return on Investment. Put simply, what does business hope to gain as an increase in revenues and profitability to offset the required extra outlays, including on human capital.

Then, I have seen ventures where the family’s fear is so great that they scrutinise the disbursement of Sh300 with as much due diligence as they would for Sh3 million.

FEWER TRANSACTIONS

Of course, when the business was smaller and with fewer transactions, this hands-on approach was viable. Inevitably though, with growth must come delegation – and to those with no common DNA. This frees the leadership to spend more time on longer-term visionary thoughts. 

I put it to the shareholders that this will not be an outsourced, out-of-control executive with wild plans to spend what little that has not already been apportioned to their seven-figure salaries.

This will be a highly experienced management team whom one can hold accountable by dint of agreed top and bottom line goals.

One of the hidden strengths of a family-owned business is where the management team sits across the board-room table, looks the owners in the eye and tells them that this year they will not be able to send their children to that high-cost school or make the planned down-payment for their dream home, and that they must find some other line of credit to survive.

PERSONAL ACCOUNTABILITY

This type of personal accountability can rarely be achieved with a publicly listed company consisting of an anonymous group of potentially thousands of shareholders.

My final thought for the heirs of Mr Miano is inspired by that ultimate family business, the LEGO company of Denmark. This far-sighted enterprise brought in ex-McKinsey strategist Jorgen Vig Knudstorp as CEO and reversed its declining fortunes. The company grew 17 per cent per year between 2012 and 2016. Mr Knudstorp was the first non-family member to occupy the top post since its origins in 1934, and is credited with winning back the hearts and minds of children everywhere.

To bring in outside blood is akin to asking the question of whether to grow (or not) and indeed to survive. Is it a risk you are prepared to take?

The author is the Managing Partner of C.Suite Africa