Small Market, Big Plans

Now that I have been in Santiago for about two days, I feel I have absorbed enough to make some observations about the culture and business climate.  Our meetings with executives from banks, forestry companies, airlines and even chocolate stores have been extremely helpful in generating a better understanding of what doing business in Chile is like.  If you don’t have time to read the rest of this blog post, let me sum it up for you in one word:

Efficiency.

It feels almost as if all the executives we meet with have coordinated their messaging to ensure that we are repeatedly reminded of this defining trait of the Chilean economy.  Coming from a very large market – the US- where there are various population centers, geographies and climates it’s hard to understand the constraints under which Chile has managed to do a stellar job of growing its economy.

As I mentioned in my previous post, Chile’s population is right around 17 million people.  And according Juan Pablo Castro, Head of Research at Banco Santander Chile (the second largest commercial bank in Chile), the average income per capita has grown over the past 40 years from roughly $9,000 in the 1970’s to upwards of $17,000 today.  While this growth is remarkable, it still only amounts to about $248 billion in total income.  This is a very small market compared to a country like Brazil or Colombia.  What this all boils down to is Chile’s need to be an exporter of both goods and services.  Because the domestic market reaches saturation very quickly, the country is one of the most open economies in the world today and has free trade agreements with over 90 countries.   Though not directly related to the Chilean economy, a particularly interesting point brought up during our discussion was the challenge this local subsidiary of the large Spanish firm Groupo Santander, SA, has faced from ratings agencies eager to reduce its rating because of ties to its parent.  The case of Banco Santander highlights the critical role of corporate governance and creating appropriate separation between parent and subsidiary, especially when one is disproportionately affected by a market downturn while the other is reporting strong growth.

Chile’s laser focus on only producing goods in which it has a competitive advantage is very impressive.  For example, the country used to assemble cars and trucks domestically.  However, it was eventually decided that this was not a best use of Chile’s labor force and resources, and today the country imports virtually all of its vehicles.   On the other hand, the Chilean climate gives this country a unique advantage in the lumber and paper pulp market.  As we learned during our visit to Arauco, where we met with CFO Gianfranco Truffello, certain types of trees grow significantly faster in Chile than in North America.  This gives the company a tremendous advantage and allows it to get higher yield out of its land holdings in order to produce the paper pulp.  The mining industry, which I look forward to learning more about later in the week, is another good example of how this small country is a net exporter of raw materials to the world but imports almost all of its finished goods.

In the services area, Chile faces similar growth ceilings.  One of Chile’s best known companies, LAN, is a perfect example of the need to expand outside of the country’s borders.  The airline recently merged with Brazilian giant TAM to become LATAM Airlines.  The challenges of integrating with a Brazilian firm- with substantial language and cultural barriers- is one of the most interesting parts of the new company and learning about how LAN prepared for and continues to manage the integration process was a highlight of our discussion.  LATAM Airlines now servers a substantial part of the South and Central American market, allowing what was a small Chilean airline founded in 1929 to become the leading airline in Latin America.  Today the combined company serves over 60 million passengers a year and recorded a combined revenue of nearly 3 times that of its closest regional competitor.

Though we have yet to dive in to the large-scale retail experience here in Chile, we literally got a taste of what the entrepreneurial climate is like for aspiring retails today when the founder and CEO of La Fete Chocolate, Jorge Mckay, came and spoke to us about his business as well as the challenges of starting and growing a small venture in Chile.  What was most impressive about our discussion, aside from the delicious chocolate we all received (yum!), was Mckay’s passion for optimizing the customer experience.

A La Fete store in Parque Arauco, one of Santiago’s large, upscale malls.

The expertly decorated and laid out stores looked like they could have been on a chic corner in Soho and the focus on providing an optimal selection of products for customers, even at the risk of complicating the production process, was what really impressed our group.   He concluded his presentation with a few words that really stuck with me: “First build a dream, then you can build a business.

Though we have not had much free time, our guide managed to squeeze in a trip to the Mercado Central as well as the Plaza de Armas, the main square downtown.

We also attended an outdoor movie last night, which was a lot of fun and made for a great opportunity to experience Santiago as a consumer.  The event allowed us to see how companies market themselves in Chile since the outdoor space was surrounded by promotional booths for wines, food and other goods.

Thus far Chile has been everything I expected and more. This country has a surprisingly sophisticated and developed feel.  Everyone has been very welcoming and seems to really want to show us how much this country has to offer.  Tonight we are off to a reception with CBS alumni (being abroad is no excuse to stop networking after all) so there will be more updates to come.

Abrazos,

Hannah

Proxima Parada: Santiago [Next Stop: Santiago]

Peru, Colombia, Argentina, Uruguay, Brazil, Ecuador.  All places I have visited and or worked in at one point or another over the past several years. Speaking Spanish and having a long term interest in doing further work in this region, I was a little surprised when I thought about the gap in my regional knowledge as I have yet to visit Chile.  But that is going to change tomorrow.

When I heard about the Chazen Global Immersion Program in Chile focusing on family businesses and the unique challenges they face in Latin American markets, I wasn’t sure that this was the class for me.  Unlike some of my peers in the class, I don’t have any stake in a family business and don’t plan to start one in the near future.  However, upon further contemplation I realized that this was a valuable experience for me regardless of my (lack of) involvement in a family business. I attribute this in large part to two factors:

1)      According to a report by the Family Firm Institute, it is estimated that roughly 75% of all firms in Chile are family owned and controlled. While one might initially think that this is just a very large number of very small businesses, in fact, about 65% of the medium-to-large enterprises in Chile are family owned.

2)      Chile’s GDP growth- though somewhat volatile over the past ten years- has held steady at 5% to  6% throughout the past three years and even as the fortunes of its neighbors rise and fall, Chile has retained a sound economy and government about 20 years.

Just these two pieces of information were enough to convince me that this will be a very valuable program!  But that was five months ago, so lets fast forward to now.

Though I didn’t know much about Chile prior to this course, my peers and I have all been making an effort to understand more about the country and its progress over the past several years.   One of the most surprising things I discovered during our pre-trip lectures was that Chile is one of only about 20 countries in the world that, according to the World Economic Forum’s Global Competitiveness report, is successfully moving from an efficiency-driven to an innovation-driven economy.  Such a move will put this small country of about 17 million people alongside Western Europe and North America in terms of development. The report also ranks Chile as number 33 in terms of global competitiveness (out of 141 countries), placing it ahead of all its South American peers.  An economy with a majority of family owned businesses that is on a steady growth path and outpacing its cohorts is a country every businessperson should know more about.

Sanhattan
CBSers will feel right at home in the business district of Santiago, affectionately known as ‘Sanhattan’

In a recent interview with CNN, the country’s president Sebastián Piñera highlighted the “Four pillars of success for Chile: Education, science and technology, innovation and entrepreneurship, and more employment.” He went on to state, “Our vision is to transform Chile into a developed country and to eliminate poverty by the end of this decade.  We hope that we will be the first in our region to achieve that… by being an economically open and integrated country.”  My classmates and I can’t wait to see firsthand how Chile’s efforts are progressing and how family businesses are having an impact.

Hasta pronto!

Hannah Stern ‘13

(Follow my travels on twitter.com/Iamblond007)  [blogging from sunny Rio de Janiero…for now]

Final Thoughts on the Austria Family Business Trip

I apologize for taking a bit to get the final entry out, but I would like to relive some of the moments on the trip. We saw a lot of family businesses over our time in Austria, from a waste management/recycling company to a multi-national distribution and logistics company. The trip really makes you think about how different the perspectives can be in a business. Especially in a family business, the culture, attitude, and process can usually be attributed to a single person. Personalities can range from an “overbearing father” type of CEO, who keeps tight control over the firm and drives decisions, to a more team-based leader, who will defer to the general consensus of the board. These personality ranges in the manager/family owners really do make each company unique in its structure. I will admit, my preconception of a family business leader was that of an independent decision maker, who led with a firm conviction. But this trip has taught me that, in preparing for the success of future generations, it is important to include the family in a large portion of the decisions of family ownership.

I’ve met a lot of people on this trip who have developed into new friends. A smaller trip made interacting with everyone possible, which was very refreshing. All of my travels to date have been with what feels like a billion people. We had some good times and laughs, which can probably best be summarized below:

Thank you to Jennifer, Roberta, and Michael Preston for making this such a memorable trip. I hope they do a similar trip for the family business people of CBS in the upcoming years.

Auf wiedersehen!

By: Michael Murnane

Vienna Days Two thru Four: Take it to the BauMax!

These last few days have gone by in a whirlwind for our group. We have toured and experienced (8) different companies. This has led to a lot of lessons learned on both the family and business side of things. I will attempt to provide a solid overview of a couple of our visits and the lessons learned. I will also attempt to not be boring.

1. BauMax

We toured the U.S. equivalent of the Home Depot/Lowe’s chains in Austria. BauMax is a family owned construction/home improvement supply and garden center. The founder of BauMax, Mr. Essl, opened 10 store chains in Austria by himself in 1976.

This company has thrived through two main ideas: economies of scale and historical macroeconomic events. BauMax achieved economies of scale by being a first-mover in the home supply market. They rapidly expanded to 67 stores in Austria, and have also expanded internationally. They use a strong mix of local suppliers and international suppliers to gain a cost advantage over their competitors. BauMax has also benefited greatly from the fall of the Iron Curtain. In the 1990s, they expanded into the Czech Republic, Hungary, Slovakia, and Slovenia.  The fall of communism in these areas allowed foreign entities to move in: essentially the new “Wild West” market.

Our BauMax host, Alexander, reiterated how a being a family business was a big advantage for BauMax. First of all, they were able to move quickly into new markets because Mr. Essl made the major decisions. They didn’t waste time with shareholder votes and a complicated due diligence process. Another advantage was that Mr. Essl made decisions that were right for the long-term survival of BauMax. He placed emphasis on timing the right expansion, rather than growing yearly earnings. The final advantage of being a family business seemed to be in “walking the talk”. While the company expanded into new countries, the local foreign newspapers were trying to dig up dirt on Mr. Essl. However, because he carried his family values to his business and lived modestly, Mr. Essl was able to gain the respect of the local people and avoid bad press in the new countries.

Okay, maybe that was a bit analytical (boring). Hey, here’s a cool thing: the BauMax mascot is a construction worker without a chin.

BauMax mascot. I think he may be related to Beaker from the Muppets.

2. Gebrüder Weiss

This was a really cool firm. Gebrüder Weiss is a logistics, transport, and freighting company that has been around for 538 years. Yes, that is a long time. They were around before America was a known thing. The other crazy part about this company: they have been a family business for all of that time.

With a tradition this old, I can only imagine the enormous pressure that the children in the company must have felt over the years. I can picture in my head one of the fathers passively aggressively talking to his son/daughter about the future, “You know, our 1 billion Euro company has been around for 17 generations…but sure, you go ahead and audition for American Idol. I’m sure that will be the most rewarding move you will make in your life.” Of course this would have been relayed in German.

Paul Senger-Weiss talking to CBS students about how his family business operates.

The Weiss family has accomplished an amazing feat by lasting this long. They had this advice to offer in maintaining a family business for 500+ years:

1. Organize and plan succession early and openly.

2. Be balanced in the paradoxes that exist in the family business (i.e. do what is best for the family vs. best for the company)

3. Live humility

4. Always seek challenges and innovation

5. Balance risk and security

6. Stay sensitive to and always focus on employees and customers

Perhaps another bit of very useful advice that came out of our meeting: Never form 51% to 49% partnerships. Either structure a partnership to be 50/50 or a proportion that is much larger. A proportion that is so close breeds resentment, and often ends in loss for both sides.

I wonder if the show American Idol will last for 500+ years. Probably not, thank goodness.

By: Michael Murnane ’12

Vienna Day One: A Visit to the Candy Factory!

Our first family business visit here in Vienna was a very exciting one. We went to a candy manufacturer, the Manner Corporation. Manner is a majority family-owned company that has a very distinct Viennese brand. Upon entering the factory, one can’t help but draw comparisons to Willy Wonka and the Chocolate Factory. I think we all secretly wanted the Manner factory to be similar. However, after further review, I have found some inefficiencies in the Wonka factory that a reputably efficient Austrian manufacturing firm would easily uncover:

In the real world, the Manner factory is much more productive and clean.

CBS students in hairnets getting a tour of the Manner factory wafer production line.

I should also mention that the Manner Corporation is much more than just a candy manufacturer. In fact, their most popular product is a hazelnut filled wafer cookie. These Manner Wafers are quite tasty, and received product placement ads in movies such as Terminator 3 and TV shows such as Friends. 

Our group was led by Mr. Hans Andres and was taken around the production line of the wafers. The best part of our tour actually came near the waste bin. Wafers that are damaged in the cutting process are disposed, but are actually still quite delicious. This led to the first dumpster diving that I have ever done in my life.

Wafer cross-section of a broken batch. The interior is a hazelnut chocolate filling.
Delicious dumpster edibles!

What is most interesting about the Manner Corporation is its successful merger with Casali-Napoli in the late 1970s. This merger combined both the companies and two different families: the Manner and the Andres families. Mr. Andres spoke to us about how difficult it was to unite the two companies. Even after 17 years, there were still remnants of the rivalry that once existed between the two families. He mentioned that the problem was solved by open communication with all employees. He felt that being open about the company goals united the firm and helped to dissolve the past tension. Mr. Andres also stressed the importance of having non-family member board members present, to keep an objective eye on how the business is progressing. The non-family board members were able to effectively recognize the tension and communicated to both families how important it would be to change the attitude. Ultimately, this led to a more integrated company which deals with conflict in a more productive way.

We really enjoyed our time at the Manner company, and can’t wait to see what else the week has in store.

By: Michael Murnane ’12

All in the Family: Our Journey to Austria

We have arrived in Austria. It is a country that is rich in culture and tradition. Of course we are excited about all of the stereotypical Austrian delights: skiing, the opera, the birthplace of Mozart and Arnold Schwarzenegger, and of course, the food! Yes, our professor has not stopped talking about the legendary Sacher Torte, a pastry created at the renown Sacher Hotel. The treat is a rich blend of chocolate frosting, three layers of spongy chocolate cake, and a thin layer of apricot jam along with a side of whipped cream.

Sachertorte3.jpg

While the pastry is a sufficient reason to visit the hotel, we are going for a different reason: the hotel is family owned and operated. We are taking this trip as part of a Global Immersion in Family Business course at CBS. Our group is visiting Vienna and Graz to get a closer look at Austrian family businesses and how they operate. In Europe, over 60% of enterprises are family owned. In Austria specifically, there are many companies that are in the 4th and 5th generation of family ownership. This length of ownership is quite a feat- approximately 65% of family businesses fail during the 2nd generation and 87% fail during the 3rd generation.

During our time here, we are hoping to gain insight on best practices to maintain a lasting family business. We are also looking to learn about the cultural differences between European and American family enterprises. We have a packed schedule, but we will try to squeeze in a few local activities as well. And we will certainly be having a Sacher Torte.

By: Michael Murnane