We have a supplier who owns and runs a small business. The business is located on a nice lot on a block of what used to be a by-way that ran from one sleepy beach town to another. Fifty years and two airport improvements later, that unmortgaged piece of property is in the middle of a block on the main road through the fastest growing part of a wealthy cosmopolitan county. The business does well enough: it covers its expenses and supports the family. Selling the land the business sits on, however, would ensure that no one in the family ever again have to get up and go to work in the morning.
Why do they keep operating their little low-margin, high-effort business? “This gives Dad something to do with his time” is the answer the current CEO gives when asked. Should we hold this up as an example of bad strategic planning? We don’t think so. In fact, we think it is an unusually good example of planning for a family business.
Standard business theory tells us that every asset should be used to produce its highest economic value. In this case, that would generally mean the family would sell the land and close the business. Or they would at least borrow against the land and invest the resulting funds in assets that produce a higher economic return. In this case, however, the value of giving the founding patriarch a purpose for his days has a higher value to the family than the land has.
Over time the family has done a little investing. Using the land as collateral, they have bought nice homes in the neighborhood and a family vacation home in the mountains. They have also purchased “some stocks and bonds.” They clearly have not, however, made any significant effort to diversify their assets. Why not?
The economically approved answer might be that the continuing development of the neighborhood around the land suggests that the return on the land will improve over time and/or that there is a tax advantage to holding the land until after the father has died. But, in this case – and, often, in the context of a family business – the family’s non-economic needs constitute a type of return the family has determined to be important.
That doesn’t mean that the family has ignored economic returns in favor of their non-economic needs. They have specifically catalogued and considered both the costs – direct cash costs and opportunity costs – and the risks of keeping the business running. Based on that information, they have consciously balanced family needs against alternative economic possibilities.
Weighing family needs against potential economic returns has to be done carefully. It can often be complex and require both objectivity and expertise that the family has to hire outsiders to bring to the discussion. Nevertheless, we believe that the family’s non-economic needs and goals should be recognized as legitimate needs and goals of the owning family and should be made explicit in the discussion of the strategy for a family-owned business.
Friday, September 22, 2006
Tuesday, September 05, 2006
An organization’s economics – not just for bean counters anymore
Over the long holiday weekend I spent some delightful time with a very creative eight-year-old friend of mine. Although his main interests have shifted from Thomas the Tank Engine to the Power Rangers to the Bionicles, he has never lost his love of story telling. Given half a chance, he has always been willing to tell any story to anyone who will listen. He has now reached a new stage: Presented with a handful of story elements – a couple of characters and a setting – he will make up and tell his own story about them. This weekend he fell in love with and built a small universe around the characters in the back-to-school ad currently being aired by Target.
His rapture with those characters gave me some real insight into why the task of identifying any organization’s inputs and outputs is a job that must be tackled by some multi-faceted team of people whose various perspectives will represent all of the perspective of an organization’s various stakeholders.
For those of you who haven’t seen it, the Target ad is a very clever presentation of various characters going back to school, with the characters made up of back-to-school supplies (like protractors, rulers, erasers and such). The characters bounce and dance and generally behave just like children who are excited to be going on a new adventure. And to my eight-year-old friend they are children who are excited to be going on a new adventure. He was so engaged in the narrative of what these characters were doing he didn’t even notice that they weren’t “human” at all.
We all do it . . . . .We take so many cues from the context that we don’t see the thing in itself. And we lose perspective on what the thing could do if it is different from what it does do.
This loss of perspective is why we think it is a mistake to allow any one department organization tackle the definition of the organization’s inputs and returns alone. The financial types will think mostly about the hard dollar costs and returns of any project. They may also assess opportunity costs, and costs of capital and other costs that may not be visible to non-financial types . . . . But will they think about issues like generating interest among a new market segment, or the costs of reducing services in such a way that a traditionally loyal market segment walks away? These are the day-to-day province of the marketing department whose job is to understand the organization’s customers and it is their job to bring that perspective to the organization’s understanding of its inputs and returns.
Organizations and their activities are generally complex, interrelated systems that most of us see most clearly from a single perspective. If we are to think well about the economics of our organizations, we have to do it creatively. We have to throw away the every-day definitions and assumptions we attach to the things we work with every day, and view our organizations with new eyes. This is an important reason to work in interdisciplinary teams: We will each start from our own assumptions and, if we work well, we will invite our colleagues to use their everyday perspectives to challenge those assumptions.
The second time my eight-year-old friend and I saw the Target ad, I told him what a protractor was and asked him what he thought the protractor boy would do at school. He thought awhile and said, “I don’t know; maybe he will use that [protractor] thing on his body to make a whole big circle so he and his friends can throw it around like a handball.” Indeed . . . . a new dimension to the children’s new adventure!
His rapture with those characters gave me some real insight into why the task of identifying any organization’s inputs and outputs is a job that must be tackled by some multi-faceted team of people whose various perspectives will represent all of the perspective of an organization’s various stakeholders.
For those of you who haven’t seen it, the Target ad is a very clever presentation of various characters going back to school, with the characters made up of back-to-school supplies (like protractors, rulers, erasers and such). The characters bounce and dance and generally behave just like children who are excited to be going on a new adventure. And to my eight-year-old friend they are children who are excited to be going on a new adventure. He was so engaged in the narrative of what these characters were doing he didn’t even notice that they weren’t “human” at all.
We all do it . . . . .We take so many cues from the context that we don’t see the thing in itself. And we lose perspective on what the thing could do if it is different from what it does do.
This loss of perspective is why we think it is a mistake to allow any one department organization tackle the definition of the organization’s inputs and returns alone. The financial types will think mostly about the hard dollar costs and returns of any project. They may also assess opportunity costs, and costs of capital and other costs that may not be visible to non-financial types . . . . But will they think about issues like generating interest among a new market segment, or the costs of reducing services in such a way that a traditionally loyal market segment walks away? These are the day-to-day province of the marketing department whose job is to understand the organization’s customers and it is their job to bring that perspective to the organization’s understanding of its inputs and returns.
Organizations and their activities are generally complex, interrelated systems that most of us see most clearly from a single perspective. If we are to think well about the economics of our organizations, we have to do it creatively. We have to throw away the every-day definitions and assumptions we attach to the things we work with every day, and view our organizations with new eyes. This is an important reason to work in interdisciplinary teams: We will each start from our own assumptions and, if we work well, we will invite our colleagues to use their everyday perspectives to challenge those assumptions.
The second time my eight-year-old friend and I saw the Target ad, I told him what a protractor was and asked him what he thought the protractor boy would do at school. He thought awhile and said, “I don’t know; maybe he will use that [protractor] thing on his body to make a whole big circle so he and his friends can throw it around like a handball.” Indeed . . . . a new dimension to the children’s new adventure!
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