Expanding and diversifying a family business

Family businesses around the world come in many different forms and sizes. Global giants such as WalMart and Ford are prominent examples.

A large proportion of family firms however come under the category of small and medium sized enterprises (SMEs). In this sector firms tend to be characterised by the dominance of the founder or leader and a shortage of specialist managers with decision-making often highly centralised and driven by the intuition of the founder or the leader.

One consequence of this is that the decisions are not questioned or vetted through a rigorous process, hence we often see family businesses taking on growth strategies that are risky in their own right or are unrelated to their core competence, possibly leading to even greater risk.

In May last year for example a relatively small Singaporean travel agency had to abruptly shut down because of a $2 million loss on properties, a sector completely unrelated to its core business. It was a cautionary case for many small businesses.

So how can small, growth-oriented family firms successfully venture into new fields?

Recently, I met SMCFood21, a Singapore-based family business that has enjoyed considerable success in its growth and diversification strategies. Liang Chye Cheng, the firm’sfounder and managing director, came from a family business producing and distributing sugar products.

The company had been a manufacturer of sugar cubes but found itself presented with an expansion opportunity in the 1990s when it took over the production plant of a bankrupt supplier that had owed SMC a significant amount of money.

The plant was used to make blends of sugar, milk and cocoa and SMC quickly realised that the bankrupt company had built good relationships with its customers, something it in turn was able to capitalise on.

From this accidental entry into the production of blends, SMC has made the process the core of its business. But while SMC deserves credit for identifying the initial opportunity, its subsequent moves are even more interesting.

SMC has sought to actively deepen its customer relationships – for example, making some exclusive blends for some of the large Japanese trading houses. It also supplies directly to some smaller retail customers, thus eliminating the mark ups charged by middlemen. Over time, it has also shifted the bulk of business to supplying Japanese customers.

On the supply side also, SMC has tried to enhance its competitive advantage. It has established plants in Thailand and Malaysia because it recognised that it could save transportation costs and possibly procurement costs by being close to sources of supply.

It has continuously increased overall capacity as well as the capacity of each plant. While the former allows it to serve customers and participate in their growth, the latter allows it to benefit from economies of scale.

A common problem facing small, growth-oriented family businesses is the absence of specialised executives. The flipside of this however is that it is easier to maintain an informal and familial culture.

Mr Cheng, the MD of SMC fully recognises this, making it a point to know every employee by name and actively nurturing the familial and close-knit culture.

For example, the company has a flat corporate structure consisting of just three levels and takes every employee for an annual holiday. It also invests actively in training and development by sending production workers on training programs and backs selected employees to attend MBA programs.

At some point in the future Mr Cheng also hopes to list the company, allowing him to give all employees an ownership stake in the company.

SMC is not resting on its laurels, with ambitious plans to enter new areas such as milk powder manufacturing, aiming to develop and market its own brand milk powder—a first for the company which has been in the business to business space so far.

The example of SMC’s evolution offers several worthwhile pointers for family businesses.

  • The company has mostly stayed within the domain of making blends, supporting the viewpoint that many family businesses do best by ‘sticking to the knitting’ – in other words, doing what they know and do well.
  • Family businesses have to continuously think of enhancing their competitive advantage, as SMC did by deepening customer relationships, increasing volumes and implementing rigorous quality control at its plants.
  • Family businesses can strive for a balance between different types of diversification—e.g., based on product, geography or customer. SMC has balanced narrow product focus (i.e., low degree of product diversification) with a broader geographic focus, especially in terms of establishment of plants in Malaysia and Thailand, taking it closer to sources of supply. If family businesses achieve this balance, they may be able to reduce risk.
  • Finally, SMC also demonstrates how a firm can leverage on its strengths. Family businesses are well served by building strong commitment from their employees, helping compensate for lack of quantity of staff or even specialised staff. Their familial culture which is facilitated by their small size can be a very important asset.

Growth-oriented family businesses, especially small family businesses, would do well to consider emulating these.

Sign up to our newsletter