Private companies are less in the spotlight than public companies. Thus, they have less stress with quarterly reports and analyst calls. But, are there any real strategic benefits from being a private company than these more practical advantages?
This post is once again inspired from my reading of Good Strategy Bad Strategy from Richard Rumelt. Besides that, it strongly relates to my own experience from four years work in a family-owned global player.
Letâ€™s start with the observations in Good Strategy / Bad Strategy:
In one of his many real-world examples Richard Rumelt remembers a conversation with Stewart Resnick, a serial entrepreneur and today one of the worldâ€™s largest almond and pistachio growers. They discuss how Resnick came to be a nut farmer and how his business could become larger and more successful than all the other small nut farmers. His explanation is
â€œA small nut farmer canâ€™t afford the investments needed to develop the market or do research on yields or do efficient processing â€¦ We were large enough to earn back the costs of research on yields and qualityâ€
And later on
â€œThings donâ€™t happen with lightning speed in agriculture. It takes seven to ten years for newly planted trees to mature. That gave us time to invest in planting, branding, processing, and merchandizing.â€
Resnick had the time and the money to develop economies of scale while his trees were maturing and while he invested in market development.
Rumelt describes this as a â€œcomplex coordinated maneuver over a decade of timeâ€. Throughout the book he writes a lot about coordinated action and design as a source of good strategy. This is all valuable. However, the really interesting statement comes a few sentences later. Rumelt elaborated on the nerve it must have taken to wait years for this strategy to work. Resnick answers:
â€œIt is one of the big benefits of being a private company. â€¦ We can do more with these (agricultural) businesses because we donâ€™t suffer the crazy pressures that are put on a public company.â€
Resnick had the money and the strategic foresight to develop a large and successful business. I guess, many public companies fulfill these conditions too. However, how many public companies could
- acquire the assets from a seemingly uninteresting business with limited potential for growth,
- invest significant amounts of money in such diverse fields as new methods of planting and breeding, processing facilities, brand and market development and more,
- over a period of eight to ten years, and
- would only after this period to be able to say if this strategy was a success or failure? This seems unrealistic, doesnâ€™t it?
For me this is by far the biggest advantage of private businesses: They can invest time and money into what they consider a promising option. They can follow all those opportunities that take a longer time to develop. In doing so, they are responsible only to the private owners. No need to explain to analysts why last yearâ€™s large R&D project still does not bring any products to market, why it is still unclear if this research will ever lead to a marketable technology and so on.
I made the same experience when I was working at Schaeffler Groups strategy department at the beginning of the century:
At that time, Schaeffler Group was a 100% family-owned private business. It was a major global player in its market segments (bearings, particular automotive components), highly successful and fairly unknown to the public. Thus, they surely met the criteria of a hidden champion, as described by Herman Simon in his Book Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders.
I was deeply impressed how long-term oriented they were in everything they did. Here are some examples:
- In their R&D activities, they regularly devoted substantial amounts of money into what you could call basic research of upcoming technologies. It was very clear to everybody that part of these investments would never pay off (as with advertising: you just donâ€™t know which part of your spending is a waste) and that another part of the investments would take several years to lead to a marketable product. Analysts would get nervous about this level of high-risk investments. However, managers and owners knew that the reminder of these R&D expenses would ensure the companies competitiveness in 5 to 10 years and thus its long-term survival.
- Management decisions were not driven by short-term objectives. Next quarterâ€™s profit was close to irrelevant, as long as the business showed a sustainable profitability at an adequate level.
- The founder-family considered the whole company as â€œtheirâ€ business. To my best knowledge, they never considered to sell the business as a whole or in parts.
- This was a strong signal of stability for everybody working there from shop floor to top management. I met many excellent people there who had spent their whole working lives in this one company and had no plans for change. If you wanted to go on in your career development, you just had to look around within the group. The company was large enough to offer abundant career opportunities of all kind.
- This, in turn, led to a strong culture of togetherness and commitment. People just knew each other from their various jobs they already had within the company. They knew what was going on in other departments and business units. It was all natural for them to consider the consequences of their doings beyond the boundaries of their departments.
Iâ€™d like to mention two more advantages of being a private company I learned to value at Schaeffler Group:
- The stability and reliability mentioned above was not only attractive to employees, but also to suppliers, customers, and many other stakeholders. I remember when we were approached from the owner-manager of a very small highly innovative company that would make a perfect fit with our product portfolio. They offered us to buy their business with everybody â€“ including themselves â€“ staying onboard: â€œWe donâ€™t have the financial muscle to bring our innovative product to market ourselves; we canâ€™t grow the business any further. We would like to become part of your group, since your culture is much like ours.â€
We acquired this business and they are now a successful competence center for their technology within the group.
- Being a privately owned business allowed Schaffler Group to be secretive with their financials. They had carefully chosen the legal form with the least disclosure requirements. Hence, nobody in the market knew about their level of profitability for sure â€“ not on company level and surely not on product level. Our sales departments often mentioned that this was a huge advantage when negotiating prices with customers.