High growth rates: an mixed blessing for family businesses

IE Focus Newsletter November 2008November 2008 | By Cristina Cruz, Professor at IE Business School

Peru is seeing an increase in wealth that brings many opportunities for family businesses, provided that they put their house in order. The Peruvian economyâ??s sustained growth at rates of over 6% in recent years constitutes a scenario of huge opportunities for the country´s family businesses, which make up more than 85% of the countryâ??s business fabric; however, it also involves numerous challenges.

In such a dynamic environment, competitive advantages evolve rapidly, the economic cycles of enterprises are reduced, and corporate success requires a management model based on two fundamental pillars: willingness to change, in order to capture new ways in which value can be created; and continuous training in order to adapt the company to changing market requirements. Why is this particularly difficult for a family business?

The problem facing many family businesses is that the traditions and resources that were once a source of competitive edge occasionally create inertia and prevent the development of new strategies required to play on markets that are becoming more and more competitive. By the same token, the obsession for maintaining control in the family means that shares used to finance growth, such as mergers, the sale of part of the capital or being floated on the stock exchange, may be considered as a sign of failure instead of a step towards the creation of wealth.

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Congratulations to IE’s Law School 祝贺IE法学院被《金融时报》评为世界顶级法学院之一

Financial Times has just published its first LLM course listing which places IE Law School’s LLM 5th in Europe in terms of numbers of students enrolled. So, from our Chinese Community, we would likt to address our sincerest congratulations to all the LLM staff! And also congratulations to IE’s LLM students, you’ve choosen one of…

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China – Enabling a New Era of Changes《中国开创变革新纪元》

正如中国企业峰会(亚洲经济论坛)上对中国经济现状的总结时所说的:“中国正经历着有史以来最令人瞩目的发展”。以此为契机,中国的本土人民和文化,外来商业和政府职能,交织在一起组成了一个史无前例,独一无二又繁华眩目的独特群体。《中国开创变革新纪元》一书对此进行了深刻的阐述(出版社:John Wiley, 纽约、新加坡 2003版(New York and Singapore 2003);合编:Pamela C.M. Mar(世界经济论坛))。 这本书是对当代中国经济演化的发人深省的深刻注解,也是一本帮助你把握中国发展脉动的万能手册。这本书还预测了中国经济在今后十年的发展趋势,同时也指出了中国如何才能利用和增强发展所带来的积极因素从而抵制负面效应的影响。 作者从一个别具一格的,却颇具深意的视角给出了中国经济的最优,最劣前景展望。 A uniquely diverse group of Chinese and foreign business and government leaders was brought together on the occasion of the China Business Summit (World Economic Forum) to address and comment on China’s most significant growth challenges. • Hank M. Paulson, Chairman and CEO,…

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Trends in educating future business leaders

1596.jpgOctober 2008 | By Joaquin Garralda, Professor of Strategy at IE Business School

 

The training of future business leaders comprises more than equipping them with knowledge. It is essential to instill them with values in order to combat bad business practices.

The directives included in the Bologna Accord seek to converge the various higher education systems in Europe and lay down design principles which most leading Spanish business schools already apply in their master degree contents and activities.

One of the key issues is the search for a balance between the academic point of view and the interests of the companies that hire the students. Accordingly, Bologna recommends asking employers about the skills and knowhow they consider relevant in the recent university graduates they hire. Leading schools have applied this principle since they first began. The ability to do so is based on two facts: One, they are fully integrated in a highly entrepreneurial environment owing to the academic and education activities they carry out with managers and companies; and two, as leading schools they help manage their students´ careers given that they are very aware of the needs of enterprise and integrate them into their programmes.

A second issue highlighted in the Bologna Accord is that the pedagogical focus should shift to achieving expected results. These results include the personal skills associated with behaviour and capacity for action as key factors. There may not be a specific programme for certain cross-skills, which may be developed across several academic subjects.

Hence the significance of skills workshops in the sessions of a master programme has increased; however, these skills should not only be developed thought dedicated sessions, but rather they must be integrated into other subjects in such a way that certain forms of behaviour are reinforced.

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Leading an entrepreneurial family

1595.jpgOctober 2008 | By Cristina Cruz, Professor of Entrepreneurship at IE Business School.

The world has changed and family businesses must change with it if they are to avoid high mortality rates. But this transformation has to come from the top, from the company leader.

Millionaire grandfather, spendthrift son, beggar grandson, or so the Spanish saying goes. In other words, grandfather founds company, comfortable son rests on his laurels, and by the time the third generation comes along thereâ??s nothing left. This particular saying describes the problem facing family businesses on a daily basis.

Only 30% of family businesses reach the second generation and only 15% carry on to the third. The statistics are universal and the phenomenon is repeated everywhere in the world despite cultural differences. Why do family businesses disappear? Problems related to the lack of understanding between members of the family who own the business, the company´s incapacity to adapt to environmental changes, the lack of professionalization and/or the lack of commitment of subsequent generations are some of the most frequent reasons mentioned by family entrepreneurs and researchers. Behind all these reasons lies one common denominator: an inappropriate substitution of leadership which means there is no effective leader to help the company successfully overcome the transitions it is faces. Hence, if leadership is a critical factor for any company´s success, the evidence points to its being even more important for family businesses.

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The way Darwin would see it

1594.jpgOctober 2008 | By Antonio Rivela, Professor at IE Business School

One of the collateral effects of the crisis is a purge of the entire system as Darwinâ??s famous survival of the fittest kicks in. But should all species be left to fend for themselves?

What should the central banks do to combat the recession? That is the question asked constantly by investment banks, politicians, legislators and people on the street. Many players on the market will see a digital answer to the question.

Should they inject funds indiscriminately into the system from the public treasury to correct the upset caused by the investment banks? Or should they be allowed to fall in pure Darwinian survival-of-the-fittest style? On this particular occasion I happen to think that it depends on each case.

There are banks which, owing to their status, help the financial system on a structural scale. They can be compared with the age-old trees that form a basis for an ecosystem. Without them, no animal would be able to exist. The latest examples are the agencies that support the mortgage system in the United States, affectionately known as Freddie Mac and Fannie Mae, since their initials are unpronounceable, believe me. I think it is blatantly obvious that these institutions should be helped in order to avoid a potential collapse of the United States property market, which could have been comparable with the 1929 recession. In these two cases, the Fed was correct to inject $100 billion into each institution.

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Investment Trends

1569.jpgSeptember 2008 | By Ignacio de la Torre, Professor of Finance and Academic Director of IE’s Master in Finance.

Except for the odd diehard, nobody is denying that we are facing a credit crisis that is affecting the mainstream economy. The question is: Where do we go from here?

In the city of Boston in the 1920s, an Italian immigrant, Roberto Ponzi, convinced hundreds of people that investing in Spanish and Italian stamps with guaranteed profitability levels was a better option than buying traditional products, such as bonds and shares, whose high prices had rendered them less profitable. Of course, the promised levels of profitability came from the revenue generated by those who were the last to buy the stamps, which is why the English term for this type of con trick is “Ponzi scheme”, which made Roberto eternally famous.

Does this sound familiar?

A scenario of economic expansion with controlled inflation, as took place in the 1920s or, more recently, since 2004, eventually leads to a heavy increase in the money supply. This leads to increases in the real prices of assets (fixed assets, stock exchanges, bonds), dampening their implicit profitability. Investors look for alternative products that can give them greater profitability, causing successive “bubbles” in said assets as they attract investments (in 2006, the JP Morgan index for emerging bonds offered profit levels that were only 1.3% higher than the North American bond). Paradoxically, as pointed out by the economist Hyman Minski in the 1970s, trust in the central bank´s success can involve a disproportionate expansion of credit, which, in turn, brings about greater falls in default (since the refinancing of the debt is easy in this kind of environment), giving rise to a vicious circle. The circle is blown to pieces when a significant event (such as the non-payment of the subprime mortgages) leads the market to reconsider its appetite for risk and this reconsideration brings about a fall in credit, which is quickly transferred to the real economy with the threat of a possible recession (which is where we are today).

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10,000 Women: Goldman Sachs

IE Business School has signed a collaboration agreement with Goldman Sachs to act as academic partner in the â??10,000 Womenâ?? project, an initiative whereby universities and business schools from around the world will provide management education programs for 10,000 women in developing countries. IE Business School will be running a program for women entrepreneurs in…

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Rehabilitating Snow White

1572.jpgIE Focus, September 2008 | By Celia de Anca, Professor of Diversity Management at IE Business School.

Our idea of a heroine has changed since the days when princesses waited in their towers to be rescued. Todayâ??s heroine is all action, a feminine version of a masculine hero. Therein lies the mistake.

The psychologist Carl Jung argued that by eliminating any element that wasnâ??t strictly rational, the western world transferred a series of stereotypes that were deep-rooted in our primitive collective conscious to our subconscious. Thus man´s relationship with nature, the supernatural or tribal functions became part of our subconscious world, resurfacing in the form of dreams, symbols or myths (1).

Enter the classic hero with a thousand and one faces, as described by Joseph Campbell. However, all heroes share certain features that changed very little since the existence of the subconscious was first acknowledged. Indiana Jones is perhaps one of our most widely known modern-day heroes and, like his forerunners, he demonstrates courage and determination in pursuing his ideals, even if those ideals are somewhat more tangible as a result of changing times.

The heroine, meanwhile, has undergone radical change. She is no longer the princess that waits impatiently to be rescued from her tower. She is an intrepid and independent adventurer who competes with the hero in terms of courage and strength. Although it must be said that it is still the hero who usually saves her from the cliff edge or from perishing in the fire. It seems that the 21st century heroine has become something of an imitation of the male hero, but perhaps a weaker version?

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j0438951.jpgBy Miguel Hernández, Director of the Advanced Programme in Real Estate Business Management at IE Business School. Member of the Royal Institution of Chartered Surveyors

At times of uncertainty, such as the present, it is of fundamental importance to consider the basic principles and concepts on which real estate is based. We have had such frenetic years that daily routine has taken away our mid-term vision and perspective. I also remember where we have come from. Accordingly, I consider five questions and offer one thought on the current situation.

What is understood by the â??real estate sectorâ??
In recent years, the sector has become so sophisticated that the activity related to real estate has very different focuses when seen from the viewpoints of product, location, operators, capitals and demand.

What may be a crisis for developers is an opportunity for demand and, what is seen as the contraction of finance opens up the door to higher profitability for own resources. There are areas in the world where cycles come to an end and there are others where they begin. There are product segments that run out and others that offer better investment possibilities.

In short, we can speak of a residential crisis in Spain for developers and banks, but there are also high levels of profitability to be gained from investments in Russia or Turkey in the development of low-geared shopping centres.

Can we speak of only one â??real estate sectorâ??
Does an apartment developer, a REIT (Real Estate Investment Trust) trader or a listed company analyst speak about real estate? Of course they do, but the part of the sector in which each one is interested is completely different. Everything is related, but there is a â??level of technologyâ? that is so specific for all the operators in the sector that it is almost impossible for the information on each area to be consistent. Indeed, work is carried out independently.

This graph shows investment outlooks by asset type and reveals the numerous alternatives by product, geographical location and investment format.

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Innoversity: Innovation and diversity in enterprise

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June 2008 | By Yanire Braña, Director of the MET Program at IE Business School

Forget established patterns of behaviors. Innovation plays a key role in growing a business and making it profitable. But companies also have to remember to include diversity in the equation.

In an age where attracting talent and brand power are fundamental, many companies have been forced to cultivate their uniqueness, looking for new ways of developing the values and factors that enable them to do just that. Accordingly, they turn to innovation as the only way to maintain or create a new competitive edge that can be sustained over time.

The most innovative enterprises are aware that innovating is not simply creating or modifying products and services, but rather it is sometimes important to create an infrastructure of people and processes that allows them to respond to all their current and future needs.

The need to grow their business and making it profitable makes companies occasionally focus exclusively on their competitors, customers and employees, but what happens with other factors? Business reality tells us that customer retention and loyalty strategies are often designed but that they do not always include employees and often overlook an important potential market: non-customers and non-employees. Then there are the difficulties involved in learning about this particular segment, which is the result of massive demographic, economic and sociocultural change and often fails to present the kind of segmentation criteria that makes for in-depth knowledge. New technologies make it easy for enterprises to see beyond their traditional sources of advantage, but sometimes this is not enough to actually innovate or the renew competitive advantage. In order to maximize all the options, companies also need to invest in discovering the differences among their customers and employees that can take them beyond existing demand and open up the door to a new mass of customers and employees that did not exist until now.

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India: Third Ranked World Economy

rev102_economia.jpgBy Rafael Pampillón published in IDEAS, IE Business School alumni magazine

After Vietnam, India is the world economy that will enjoy the highest growth, with a forecasted yearly average growth rate of 8.5%.

Almost everyone agrees that the country in the starring role during the first half of the 21st century is China. But no one has any doubt that the second half of the 21st century will also feature India as a protagonist. The largest populations in the world â?? for some years now both countries have been implementing reforms enabling change of their economic model, from high-intervention to market economies. These reforms have consisted of ambitious economic policy strategies that have meant greater internal deregulation, and opening to the exterior, that have produced high economic growth rates. This growth process has been accompanied by reductions in poverty levels in both China and India, although, unfortunately, social and regional inequality has increased. All this means that the governments of both countries continue to prioritize the adoption of measures for maintaining or even increasing economic growth, to raise the populationâ??s level of per capita income, and to generate a higher level of wellbeing to allow sustainable development.Economic structure
As a consequence of the economic reforms, Indiaâ??s productive structure has undergone notable changes over the last 15 years. Transformations in the production system led the services sector in 2006 to generate 55% of the GDP, industry 27%, and agriculture 18% (see table 1). Services use 27% of the working population, and also represent the sector with the highest growth rate. In the Services sector as a whole, special mention must be made of the information and communications technologies (ICT) sector which is expanding in a sustained manner and growing at a yearly rate of 25%. The success of the ICT sector in India has had a significant impact on the countryâ??s economic productivity. The arrival of the digital age, and the new workforce with a high level of education and the ability to speak English, has gradually transformed the country into an important destination for international companies looking for technological support.

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