Plan Your Succession In Advance

September 20, 2014

For those of you whose businesses are owned by you and your family, have you ever asked yourself the question: “Would continuity of the business as a family business be wise?” Truth is, that’s only part of the question that must be asked. When considering succession in a family business, the question must be expanded to define which area(s) of succession you are referring to – e.g., succession in management, succession in governance, or succession in ownership.

If you cannot see passing the CEO baton to a family member because there is no candidate who is both capable and interested or because selecting one of several candidates could result in jealousy or worse, it may still be possible to arrange for successful succession of family governance, by having family member representation on (or control of) the Board of Directors. Even if directorships are unsuitable or unwelcomed by family members, continuity can be geared to family ownership.

All those positions require training and education. Being a director of any company requires new knowledge and skills – business operations, finance, competition, personnel, etc. – in order to accomplish appropriate oversight. Education and training is especially critical in a highly regulated industry such as banking. It may seem that ownership succession is a no-brainer in that you’ve covered it by using trusts and trustees. That may solve legal issues, but isn’t totally dispositive. Even ownership, direct or indirect (as through trusts) should be preceded by an understanding of certain business and governance matters. Generally, for successful succession, this requires planning and preparation starting years before transitions take place.

In my forthcoming book, tentatively titled INVENT, REINVENT AND THRIVE, The Key to Entrepreneurs Success and Family Business Continuity (to be published by McGraw-Hill next year), I will deal with the need for continual reinvention of self and business for entrepreneurial and multi-generational businesses to succeed. In it I share stories about famous and fabulously successful family businesses.

 

Retail is Entertainment

When consumers step into any retail store these days, they’re looking for more than the products on the shelf or even the quality of the service they receive. Increasingly, they expect an engaging, entertaining experience, and will reward the same with their spending dollars. Multiple stories in my book INVENT REINVENT THRIVE (McGraw-Hill, 2014) illustrate how retail entrepreneurs have succeeded by building businesses that deliver an entertaining experience to their target customers.

Here, we consider three massive retail successes (Build-a-Bear Workshop, Costco, and Starbucks) and the entrepreneurs behind them (Maxine Clark, Jim Sinegal, and Howard Schultz), as profiled in my book, along with Abt Electronics, a Chicago-based retailer, which, though not detailed in my book, is the subject of a Kellogg School case study I authored. All are great examples of the retail-is-entertainment concept across sectors.

 

Build-a-Bear Workshop: When Maxine Clark came up with the idea of a retail store where customers could create their own teddy bears, she knew she was selling much more than teddy bears, even more than a stuff-your-own-animals experience. She aimed to provide an entertainment venue where all family members—children, parents, grandparents, and others—could be part of a process that tied them to the product, the process, the experience, and the company. That meant creating a bright, whimsical, colorful space with different stations, the ability to customize and personalize the products in multiple ways (such as a recorded message built into the stuffed animal), and windows through which customers could view the entire process. By the time people received their personalized products fresh off the “assembly line,” they had bonded closely with the brand through the engaging, entertaining experience.

Costco: Jim Sinegal’s approach to keeping his company Costco engaging evolved over time. Beyond offering a smaller number of SKUs (stock-keeping units, or different product types) and larger unit sizes than traditional discount retailers, he changed the product lineup and added multiple departments over the decades to keep customers interested. That meant the addition of bakery items, seafood, gasoline, pharmacy, and many other products. The company also introduced customizable products such as liquor bottles onto which customers could engrave gift messages. Costco’s famous cornucopia of free samples in almost every aisle and outsized café items (a hot dog and a soda is still $1.50, the same price as when Costco first opened in 1983!) only add to the festive atmosphere. Again, the business’s ability to engage customers has contributed greatly to its success.

Starbucks: Howard Schultz’s vision for Starbucks included providing a warm, inviting atmosphere for people to enjoy on their way to or from work. The combination of premium coffee products, comfortable furniture, and relaxing music—including jazz and other compilations made specifically for the company—has made it a place where many people come to work and socialize, a “third place” between work and home. So much so that many communities provide sufficient demand for multiple Starbucks stores in close proximity. While Starbucks may not offer entertainment per se, the business provides a master class in how to engage customers and keep them coming back again and again, daily in many cases.

Abt Electronics: Another business that embodies the retail-as-entertainment concept is Abt Electronics, a family-owned retailer in the Chicago area. Bob Abt, who passed away recently, built the company over several decades from a small store his mother started into an extraordinarily successful retail phenomenon. The warehouse-sized store sells appliances, TVs, sound systems, vacuum cleaners, fitness equipment, watches, phones, furniture and much more, all out of a large, single location. There are interactive displays for family members of every age, and even free chocolate chip cookies available daily. Bob Abt was inspired to offer such a large-scale, engaging, entertaining experience by Las Vegas casino mogul Steve Wynn, of whom Abt was a big fan. Not surprisingly, many customers report feeling like they are in an upscale Vegas casino while shopping at the store.

 

INVENT REINVENT THRIVE offers many more details of the first three retail superstars above, along with examples of other entrepreneurs who understand that retail is entertainment. The message is clear: to thrive as a retailer, you need to engage your customers by creating an environment and experience that engages them fully, connecting them on multiple levels with your products and company. That translates into long-term customer value, and market-beating profits.

 

 

Entrepreneurship, Introspection, and Application

Entrepreneurs tend to be so busy doing things that are visible in the external world—conceiving and developing products, lining up suppliers, acquiring customers—that they may overlook some of the more invisible, interior work that is part of success. I’m talking specifically about introspection, or the observation and examination of one’s own mental and emotional state and its implications. “I don’t have time for that kind of thing,” many an entrepreneur or family business leader has told me when I raise this issue. I always counter that it’s important to make time for meaningful introspection—and then to apply what you learn—as it can have a huge impact on your business, family, and well-being.

Bronfman Jr. Image
Bronfman Jr. Image

The story of the Bronfman business family is a clear example of the power of introspection and its application—or lack thereof. As detailed at length in my book Invent Reinvent Thrive (McGraw-Hill, 2014), the three Bronfman generations faced multiple challenges that would have been mitigated by careful introspection and consequent action.

Sam Bronfman built Seagram into a highly successful business including spirits and other consumer products; based in Canada, it was once the world’s largest distillery. But the father cast a long and dominant shadow on his son Edgar, who had also joined the business. Had Sam been able to introspect and understand the danger of his approach to Edgar, he may have helped his son develop a more sound and effective internal state himself.

This became especially important when Edgar had to assess the judgment of his son (Sam’s grandson), Edgar Jr., who succeeded his father as CEO. Though Edgar Sr. probably recognized that his son was making questionable business decisions, especially with regard to considering sale of Seagram’s core business, he was overly careful about dominating the next generation. He wished to avoid doing to Edgar Jr. what his father had done to him. Had Edgar Sr. used introspection to understand more fully the source of his reluctance to act, he may have been able to separate the personal from the professional and stepped in to intervene on the deal Edgar Jr. ultimately made with Vivendi—a transaction that ultimately cost the family billions, halving their wealth.

Introspection and its application also figured into the role of Edgar Sr.’s younger brother Charles in this situation. Charles clearly observed what was going wrong with the Vivendi deal and had serious doubts about ending the Bronfman Family’s control of Seagram. However, his “younger brother syndrome” prevented him from saying what needed to be said to Edgar Sr. He understood the business problem but, like his brother, failed to understand fully the role of his internal state in preventing his intervention. Deeper introspection would have helped. Thus Sam, Edgar Sr., and Charles all would have benefited from more thoughtful introspection, which would in turn have helped the business and the family assets that depended on it.

In fact, Charles proved he was fully capable of engaging in the necessary introspection and then applying it effectively when he did so with Michael Steinhart with respect to the charitable foundation they formed, Operation Birthright. The organization aimed to enable any young Jewish person to visit Israel at no cost. Though Charles and Michael agreed on the big picture, they clashed over details (e.g., whether it had to be the person’s first trip to Israel). Charles’s wife gave him simple but profound advice about having a frank discussion with Michael: “You have everything to gain and nothing to lose” was the essence of what she said. Charles followed her advice, and the better understanding he achieved with Michael helped make Operation Birthright immensely successful.

Had Charles followed the same advice in dealing with Edgar Sr., his brother, the family’s wealth might still be fully intact. Here, however, deep emotional issues made it seem there was indeed much to lose. With introspection, that could have been gauged more realistically. Eventually, after serious and difficult introspection, Charles did have a conversation with Edgar. Though it was too late to save the fortune, it was a well-timed interaction, happening shortly before Edgar Sr.’s death.

Introspection and application are obviously easier in a non-family situation such as the one related to Operation Birthright—although even that one was facilitated by Charles’s wife’s advice. Overall, anyone in business—entrepreneurship, family business, or otherwise—can benefit deeply from introspection. Open your mind for exploration, assess your motives and their potential sources, then develop a thoughtful plan to put what you’ve learned into action. You won’t regret it.

Real Homework Is Not For Students (part 1 of 3)

Most students complain about homework. Pic Homework GirliiWhen my MBA students at the Kellogg School of Management grumble about assignments, I tell them that what they’ve called “homework” from elementary school through graduate school isn’t actually homework. It was merely practice to develop tools for them to learn to do real homework. Real homework is the work you do when no one gives you the assignment, tells you how much work is enough, or establishes a deadline. Ultimately real homework is what you have to do yourself to succeed. Real homework really counts.

Successful businesspeople—entrepreneurs, family business founders and managers, and corporate managers—all do high-quality, appropriate amounts of homework. When they stop short on the homework, they almost always come up short on results. If you’re not sure how to do real homework, take a look at my recent book, Invent Reinvent Thrive (McGraw-Hill 2014), which has many excellent examples of the kind of homework that breeds success. In this three-part blog, I present multiple stories of real homework from the book, grouped by the principle they exemplify best. Continue reading

You May Not Be the Smartest Person in the Room (and That’s Okay)

Success is often interpreted as an indication of intelligence. It brings to mind the lyrics of “If I were a Rich Man” from Fiddler on the Roof: “When you’re rich, they think you really know.” Highly successful entrepreneurs tend to be quite smart. Some have a good sense of self-approval; others less so. It turns out that the quality of self-approval is likely an important factor for success.

Being able to gauge your capabilities, including raw intellectual horsepower, and understanding that while you may not be the smartest person in the room, there are things you can do about that, namely, get smarter and/or change rooms. Rather than bemoaning deficits, the most successful entrepreneurs learn to focus on areas in which they do show more aptitude and interest, and to take steps to shore up their capabilities in other areas, whether by building new skills or the right team.

Below I present several lessons related to understanding your intelligence and how to use it. I illustrate the lessons with stories of entrepreneurs from my recent book Invent Reinvent Thrive (McGraw-Hill, 2014).

Find the right “classroom”—and the right brains to pick. Mike Krasny did both. “I wasn’t one of the smartest kids on the block,” he told me during our interview for the book. “I was not a good student, I was a C student, probably in the lower quartile.” Had Mike continued to use academic grades as the only measure of his talent, he may not have discovered and indulged his deep interest in computers, at a time when most of his peers knew nothing about the field. He took his first computer class in 1971 at the University of Illinois and—though it took him some time to get over the lack of confidence bred largely by his early academic experience—eventually launched computer distributor CDW. As an entrepreneur he learned as much as he could from businesses he admired and the people behind them—including HP, IBM, Microsoft, Intel, Fel-Pro, and Walmart. As head of CDW, he found the right people for his management team, further building the firm’s capabilities. By stepping into the right “classroom” in which to excel and identifying the right brains to pick, the former C-student earned an A+ in creating shareholder value.

Don’t put them on a pedestal. Everyone establishes their own standards for “smart,” generally pointing to someone else whom they consider very smart. It’s fine to have business mentors or others you admire for their intelligence. But some entrepreneurs make the mistake of putting their sources of inspiration on sky-high pedestals, which may diminish their sense of their own capabilities. This was the case with Jim Sinegal, founder of Costco. Prior to starting Costco, Jim worked for Price Club for over two decades, He always revered that company’s founder, Sol Price. “He taught me everything I know,” Sinegal said of Sol. Jim truly believed that Sol was the smartest man he’d ever met, and as a result Jim never presumed to be able to do what Sol had done, even as Costco grew steadily. Of course, at the time Jim launched Costco, Sol’s experience was infinitely greater than Jim’s, who started at Price Club “schlepping mattresses out to the customers’ cars’ rooftops.” Twenty five years later, as Price Club’s second in command, Jim felt Sol remained far smarter and more capable than Jim. It wasn’t until years later, after Costco had been operating for a while, when Jim found that Price Club was having problems, that he began to believe in his own capabilities more deeply, and made strategic moves including expanding Costco’s product lines significantly. Ultimately, Jim motivated Costco’s purchase of Price Club. Sol and Jim remained friends until Sol’s death. And while Jim still reveres Sol, the former mentee’s story illustrates that sometimes actual results displace pedestals. Removing his longtime mentor from the pedestal helped Jim make Costco into the $100 billion business it is today.

Recognize your blind-spots, Although he is not an entrepreneur but a leader of a prominent family business, Tom Pritzker’s situation is worth noting. Unlike CDW’s Mike Krasny, Tom was an excellent student, and he rose to become a third-generation leader of the highly successful Pritzker family, which held assets including the Hyatt hotel chain. Tom learned a great deal both within the classroom and outside it, especially from his father, Jay, whom I consider one of the smartest people I’ve known, and Jay’s father, A.N. Observing them helped Tom understand how to find, select, motivate and defer to strong professional managers for the family’s many businesses. But Tom also inherited a large blind-spot: While the previous generations had excellent business acumen and skills, they had failed to prepare for the “cousins stage” of the business; the many protective measures they had implemented—including granting decision-making rights and knowledge about the family business to very few family members—backfired when the business passed into the third generation’s hands. Tom was a smart businessman, but he tried to play the hand he was dealt instead of replacing a few cards. He continued with all that his ancestors had invented, instead of reinventing it to fit the family/business situation. The ensuing legal battles made the highly private Pritzkers front-page news for years. Being the smartest businesspeople in the room had made the family blind to the governance/ownership measures they needed to take. Eventually, Tom recognized the shortcoming and took steps to remedy the problems, but only after significant, undesirable public exposure of family discord.

Be honest with yourself. Honesty and self-awareness don’t always accompany intelligence, as the Pritzker story illustrates. Tom Stemberg, founder of office-supply giant Staples, provides a nice counter-example. Upon arriving at Harvard, Stemberg found himself somewhat unprepared, in part because he had completed high school in Austria after his mother moved him there following his father’s death. Speaking of Harvard, Stemberg told me, “You had to accept the fact that you’re not only not the smartest person in the room, you may not be in the top ten. You have to get comfortable with that and move forward.”That attitude helped him move forward in a big way, as he sharpened his idea of a large-scale office-supply chain, learning by observing local stationery stores and companies such as United Stationers and Quill, always admitting when he lacked knowledge, but also feeling comfortable when he thought he was right. Stemberg’s healthy self-awareness helped him build Staples into a multibillion-dollar retail chain with over 2000 stores in 26 countries.

***

Intelligence is only one factor in success, and certainly not the most important one in many cases. The “smartest” entrepreneurs may not be the smartest people in the room, but they have found the right space in which to compete (like Krasny), worked hard to be honest with themselves about what they don’t know (like Stemberg), avoided being intimidated by successful peers and mentors (like Sinegal did eventually), and assessed their blind-spots carefully (like the Pritzkers eventually did). I hope you can do the same.

 

 

Watch, Listen, Learn: How Entrepreneurs Gain Skills through Observation

“A tolerance for ambiguity” or even the ability to thrive amidst ambiguity is on everyone’s list of key traits for entrepreneurs. So how do successful entrepreneurs develop that trait? One might develop a tolerance for pain by continually enduring pain; but there must be a better way. Successful entrepreneurs don’t just strengthen their tolerance—they reduce the ambiguity. In many instances, founders gain insights and learn best practices by observing people and practices carefully across sectors, applying what they learn to great effect. The entrepreneurs below, all profiled extensively in my book Invent Reinvent Thrive (McGraw-Hill, 2014), are excellent examples of the power of watching and listening.

Maxine Clark expanded her vision of a store where people could customize teddy bears into the 400 Build-a-Bear Workshops in existence today. Part of Maxine’s early success was her ability to negotiate leases in malls on behalf of her start-up in an unproven business. To succeed, she used what she’d learned previously as president of mall staple Payless Shoes. “Even though I’d never negotiated a lease before . . . I had listened to our legal department talking about them,” she told me in our interview for the book. “I didn’t have to know everything about them, but I did need to know enough not to be dangerous.” The insights Maxine gained from observing lease negotiations helped Build-a-Bear thrive. Continue reading

Money is Fungible; Capital Sources Are Not

Entrepreneurs, especially those in early stages of building a business, focus sharply on finding investors. They do so with good reason: without initial and ongoing capital, many businesses would die on the vine. But I’ve observed that some investors fail to take into account prospective investors’ compatibility with and suitability for their businesses and their own styles, practices, and preferences. In other words, they consider funding from any source—self-funding, angel, VC, other institutional investors—as having the same value. Money is fungible, right? Continue reading

Adding new skills to your quiver enables painless reinvention.

That’s what Alyson points out so well in the article, The Case For Embracing Lateral Career Moves, published by FastCompany.

If you assume, as so many do, that exponential or total change of your skill set is required, then the prospect of reinvention is daunting. During the worst of the recent great recession, many who lost their jobs appeared to be like a deer in headlights, because they didn’t understand those possibilities. If, however, you understand that reinvention can be incremental, by changing perhaps a few skills, with the result that a new skill set is created, then the prospect seems more readily achievable. There are numerous people who have done just that.

In my book Invent Reinvent Thrive (McGraw Hill, 2014), I relate some of their stories and explain why such reinvention is critical and how incremental reinvention is readily achievable. The stories include (i) a soldier, who became a businessman, then a venture capitalist and a philanthropist and ultimately the Mayor of Jerusalem; (ii) a grocer who understood retail but not the office products industry but who sharpened a few skills to fit that industry and founded Staples; (iii) a solo practicing physician who ultimately became the president of the largest group of physicians in Illinois; (iv) a man who considers himself a failure in school, who first toyed with using computers in his father’s car dealership, who then tried his hand at selling computers and related products that he obtained at reasonable cost from others who didn’t know what to do with such inventory, finally founding CDW which he sold for billions.

As Alyson points out in her article, it doesn’t matter whether you adjust your skills through multiple jobs at different employers or by lateral shifts within the same company. Either way, refining your skill set by refining or changing just a few skills generally is sufficient to achieve a meaningful reinvention.

Reinventing Tinker Tailor Soldier Spy

Someone recently said to me, “the concept of reinvention of you or your business is fine in certain occupations, industries and businesses, but it could not be applied across the board.” I strongly disagreed and for a somewhat ironic example, took the title of John le Carre’s famous book, Tinker, Tailor, Soldier, Spy, and applied reinvention to each of those businesses.

Tinker
In my recent book, In my book Invent Reinvent Thrive (McGraw Hill, 2014), I tell the story of Sam Popiel and his famous invention, the Pocket Fisherman. Sam was on one of his excursions to a practice fishing farm, where he would tinker with his invention until he solved the pending problem. That day he also tinkered with the price that he would charge for the Pocket Fisherman. As a result, he brought millions of additional dollars to the bottom line. The methodology for reinventing his business through this tinkering process is a fascinating, fun-filled story.

Tailor
Tom Stemberg, the founder of staples and subsequently a venture capitalist who has invested in companies such as Lululemon and a chain of cleaning stores. While those businesses were more like tailors, the best stories of Tom’s career relate to Staples and especially his use of good homework to overcome naysayers.

Soldier
One of the people I interviewed for my book was Nir Barkat, currently the mayor of Jerusalem but previously an entrepreneur and venture capitalist. Prior to all of that Nir was a soldier in the Israel Defense Forces. The story — how he was wounded as his commanding officer, standing next to Nir, was killed during military activities — is an exciting read. More important is how Nir took the lessons from the military training and activities and applied them to every phase of his continually reinvented life. He is proof that a soldiers reinvention of himself and later in his businesses can be a remarkably successful and profitable journey.

I was fascinated to read, earlier this year, of a soldier reinventing himself as an entrepreneur as a result of reading my earlier book, Entrepreneurs Are Made Not Born. Civilian Warriors, is a book written by Erik Prince, the founder of Blackwater, a private company that conducted military operations in Iraq. In it, Erik said that Entrepreneurs Are Made Not Born inspired his own entrepreneurship.

Spy
Recent news events show that the spy agencies, from the CIA to the NSA, are constantly being reinvented. I do not have any personal knowledge about the spy business. Besides, even if I did and told you, I would have to kill you. 🙂

 

A Place In-between, Commentary by Lloyd Shefsky

Brigid Sweeney, in her insightful article, “Please Don’t Call Them Stores: Modern Retailers Aim to be Hangouts,” appearing in Crain’s Chicago Business, provides local examples of how retailers are focusing on providing “a place in-between” and customer entertainment, such as including experiential happenings.

Nowhere is the importance of a place in-between laid out more clearly than in the story of Starbucks, both at its inception and later, during its reinvention in 2008. Even when I first met Howard Schultz and interviewed him for my first book, Entrepreneurs Are Made Not Born, I referred to Starbucks as a club, much like the bar on “Cheers,” where the opening song proclaimed “a place where everybody knows your name,” reminiscent of the way Starbucks taught baristas to know frequent customers’ names and even their favorite beverages. In my latest book Invent Reinvent Thrive (McGraw Hill, 2014) I explain how Howard’s clear understanding of that essence of the business (what he refers to as “the company’s soul”) enabled him to avoid the near catastrophe in 2008.

Similarly, in Invent Reinvent Thrive, I tell the stories of Jim Sinegal, founder Costco, and Maxine Clark, founder of Build-a-Bear, both of whom believed in customer entertainment and experiential events in their retail businesses, much as those mentioned in Brigid Sweeney ‘s article.

As I said in Invent Reinvent Thrive, “Jim Sinegal decided he’d better reinvent Costco, at least partially from time to time, lest his stores…become uninteresting. He decided to add new items periodically. He constantly reminded himself and his colleagues, ‘There’s no annuity [here]. You’ve got to continually add stuff that’s new and exciting. Otherwise you become boring.’” Likewise, I quote Maxine Clark in Invent Reinvent Thrive: “At the May Company, she was fortunate enough to make a presentation to Stanley Goodman, May’s chairman. He told her that ‘retailing is entertainment and the store is a stage. When the customers have fun, they spend more money.’ His words made an indelible impression on Maxine.”

Brigid is right on!