SOLUTION AT Australian Expert Writers
Conduct a short description of the family business in the case, by using the F-PEC model and the influence dimensions of family firms (200 words). 2. Answer the 8 questions on the last page (1800 words).
KEL249JOHN WARDThe Harilela Enterprises:An Indian Family Business in Hong KongAs another Harilela Group board meeting approached, the most pressing issue on the agendawas how to ensure that the successes of the family’s vast holdings in hotels, restaurants,healthcare, food and beverage, real estate, trading, travel agencies, stock brokerage,telecommunications, watch manufacturing, and retail stores would continue. Based in HongKong, but with properties and interests all over the world, the family’s businesses had beenowned and run by six Indian brothers for decades. Dr. Hari Harilela, the second oldest, waschairman of the Hotel Group. Like most of his brothers, he was well past retirement age, havingrecently celebrated his eightieth birthday. The time had come to decide if the successfulleadership and ownership model of the past could work for another generation of Harilelas.HistoryThe Harilelas’ story began in 1922, when Hari’s father, Naroomal Mirchandani, left hishometown of Hyderabad, Sind (now Pakistan), and set off for China in search of his fortune.Shortly after his arrival in Canton, Naroomal received news that his mother was very ill. Herushed back to India and was devastated to learn upon arrival that she had passed away. Evenworse, the family had already cremated her without waiting for him to pay his last respects.Deeply hurt, he decided to break ties with his family. He eventually renounced the surnameMirchandani, and created a new surname—Harilela—from a combination of his mother’s name,Haribai, and his father’s name, Lelaram.Returning to Canton, Naroomal Harilela established himself as a trader, and opened a smallcompany, Duru Star, which sold Chinese antiques, jade, amber, embroidered items, and othercurios. After eight years Naroomal was able to send for his wife Devibai and their three children(George, Hari, and Peter). They arrived as the Great Depression, which began in the UnitedStates, was beginning to spread throughout Asia, devastating trade and commerce. Naroomal’sbusiness was among those affected.In 1934 the family moved to Hong Kong to start over. Naroomal and his family lived in a tinyapartment in Sham Shui Po, Kowloon. Naroomal and the two oldest boys, George and Hari, soldnewspapers and hawked shorts, soap, razor blades, and daily essentials outside the British armybarracks. Business improved when they were allowed to vend their wares inside the barrack©2006 by the Kellogg School of Management, Northwestern University. This case was prepared by Elyssa Tran and BhaskarSambamurthy under the supervision of Professor Suren Mansinghka of the Hong Kong University of Science and Technology andProfessor John Ward. We gratefully acknowledge the information provided by the Harilela family and the Harilela Group in the casepreparation. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources ofprimary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail firstname.lastname@example.org. No part of thispublication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249grounds. By 1937 the family had saved enough money to open a small silk shop on PrinceEdward Road.However, this venture soon failed. Naroomal once again returned to hawking at the barracks.This time, he managed to save enough money to open another shop in Mongkok within a year. Tosupplement the family income, Hari worked for an export house, while his brothers George andPeter worked for retail stores. For a few years, business flourished. The family also grew with theaddition of a fourth brother, Bob, in 1934, a fifth brother, Gary, in 1937, and a sister, Rani, in1940.When World War II spread to Hong Kong in 1941, the Harilelas once again lost all theyowned. Like many other Indian families at the time, they fled their home as the Japanese overranthe territory. When civilians were again allowed to move around under Japanese control, a familyfriend allowed them to use his shop on Hankow Road. The family earned a modest living, but lifewas harsh under the Japanese. Two more siblings were born: a sixth brother, Mohan, in 1945, andanother sister, Sandee, in 1948. These were to be the last additions to this generation of Harilelas,however: Naroomal was bedridden from a beating by Japanese soldiers and died in May 1948,soon after the war ended.The British forces had returned to Hong Kong in 1945, and the Harilela brothers againhawked supplies to them. George and Hari formed important ties with the British soldiers duringthis period, supplying them with fresh eggs and vegetables from farms in the New Territories andother daily necessities. British troops soon noticed their diligence and honesty, and appointed theHarilela brothers as the main suppliers for the army. The brothers also carried out other tasks,such as laundry and stitching uniforms from cloth that the army supplied. At first, they workedout of their small shop on Hankow Road, but eventually they moved into a larger space (laterdeveloped into the Kowloon Hotel) as business expanded. As more British and Commonwealthtroops arrived in the territory, the Harilela brothers acquired exclusive contracts to make uniformsfor the soldiers. By maintaining high quality standards and providing a wide selection ofmaterials through imports, they were able to attract a regular flow of customers—not only thetroops but locals and tourists as well. The family quickly became the largest importer of Britishtextiles in Hong Kong. Toward the end of 1959, when the Kowloon Hotel was scheduled fordemolition, the Harilela brothers moved their store to the Imperial Hotel. The new store coveredan area of more than 10,000 square feet, and was considered top-notch among clothingestablishments in Hong Kong.As the Americans became involved in the Korean War, and later the Vietnam War, theHarilelas also received contracts to make uniforms for American troops. Over time, the companyopened sixty-four clothing houses in Guam, Okinawa, the Philippines, and Vietnam, catering toU.S. Army, Navy, and Air Force personnel in the Asia Pacific region. In addition to uniforms, atthe height of their clothing business the Harilelas made 600 custom suits a day and providedemployment for 900 tailors.From Tailoring to HotelsAlthough the family’s initial wealth was made in custom tailoring, Hari recommended to hisbrothers that they diversify into other lines of business. They entered the local retail business andopened a Best Ladies’ and a Best Men’s retail store. Next, the brothers experimented with the realestate and hotel business. They bought their first hotel, the Imperial Hotel, in 1960. Hari recalled,2 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISES“Although my brothers were against me because real estate or other businesses meant very smallprofits, I kept on diversifying and I’m glad that I did.”1THE HOLIDAY INN GOLDEN MILE2In 1965 the Harilelas bought the site for the Holiday Inn Golden Mile at Nathan Road inHong Kong for HK$13.7 million3after intense negotiations with a property broker. ArchitectJackson Wong, who owned the firm Wong Ng, Ouyang & Associates, was hired to draw up plansfor the hotel, which was to have no middle columns in the lobby, three basements, and two largeballrooms. Structurally, it was to look like the San Francisco Bridge, with a 75-foot span in thebasement, 55-foot span in the lobby, and hanging floors. This was a difficult design, and Harispent a long time with Wong drawing up the plans.Construction finally began in 1967–1968, but was halted almost immediately when riots andcivil commotion broke out. Property prices crashed and tourism was at a standstill. Many peoplewere fleeing Hong Kong. Most of Hari’s fourteen business partners wanted to sell, and he boughtthem out. Progress on the hotel construction was extremely slow. First, when they started to dig,they realized that additional piling would be needed to shore up the nearby Chungking arcade.Second, they had to remove stones by hand instead of with dynamite because any kind offirepower posed danger to the adjacent buildings. Next they were plagued by Typhoon Rose,which flooded the 70-foot deep, 300-foot-by-100-foot hole that had been dug for the threebasements and two ballrooms. The many delays drove the costs up tremendously, and the familyhad to sell a number of properties, including the Imperial Hotel, as well as borrow money in orderto continue construction. By the time the Holiday Inn was finally opened in November 1975, theoriginal projected cost of HK$45 million had increased first to HK$75 million and finally toHK$145 million, or HK$100 million more than the original estimate.Hari also spent considerable time finding a hotel operator. He was initially attracted to theSheraton, which had expressed an interest in establishing Hong Kong hotels; several seriousdiscussions and visits ensued. At the same time, Hari explored other management companies suchas the Hilton, Hyatt, and Holiday Inn to compare costs and prices. He and his wife traveled andstayed at various hotels throughout the United States, and eventually decided on the Holiday Innafter a series of meetings with Kemmons Wilson, the founder of the Holiday Inn chain. Haridecided on Holiday Inn because he and Wilson got along very well, and they developed a strongrelationship based on shared values. Still, Hari realized that the Holiday Inn model had to bemodified to suit Asian conditions. The fundamental difference was that the business in the UnitedStates was a three-star hotel model, whereas Hari planned for a five-star luxury hotel. Moreover,Hari argued, the general manager of the new hotel had to possess the business mindset for a fivestar hotel as well as sensitivity to Asian cultural values. Convinced by Hari’s arguments, Wilsonagreed to allow Hari to approve the appointment of the hotel’s general manager, contrary to hisnormal practice in the United States.
1Hong Kong General Chamber of Commerce, Member Profile: The Harilela Empire, http://www.chamber.org.hk/info/member_a_week/harilela.asp (March 2002). 2From drafts of Dr. Hari Harilela’s personal memoirs, “The Story of Holiday Inn” and “Holiday Inn Golden Mile” sections, March2002.3US$1 = HK$7.8.KELLOGG SCHOOL OF MANAGEMENT 3For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249OTHER HOTEL PROPERTIESDespite an inauspicious start—their mother Devibai died on the day of the hotel’s grandopening, so the family was represented at the opening by Hari’s four-year-old son Aron—theHarilelas’ wholly owned Holiday Inn Golden Mile eventually earned the family its major fortuneas property prices rose again in the 1970s. The brothers were able to buy back the Imperial Hoteland invest in many properties in the following twenty-five years. They acquired land in Penang,Malaysia, and opened the Holiday Inn Resort there in 1979. The Grand Stanford InterContinentalin Hong Kong; the Quality Hotel Dorval in Montreal, Canada; and the Holiday Inn Park View inSingapore commenced operations in 1981, 1983, and 1985, respectively. In the 1990s theHarilelas acquired and opened several hotels—the Crowne Plaza in Bangkok, Thailand, in 1991;the Westin Resort and Macau Golf and Country Club in 1993; and the Ambassador Transit Hotelin Terminals 1 and 2 of the Singapore Changi Airport in 1995 and 1999. Hari also acquired theSheraton Belgravia in London in 1997. Operations at the W Hotel in Sydney, Australia, began in2000 (see Exhibit 1 for details about each property).The Harilela hotel interests grew from HK$50 million in 1960 to HK$250 million in 1980,and were valued at HK$3.5 billion in 2000 (see Exhibit 2 for value of the family business).OTHER FAMILY MEMBER ENTERPRISESOver the years, the wholesale and retail tailoring business declined as a result of marketconditions. Contemporaneously the family realized that the hotel business was much moreprofitable and therefore decided to slowly exit their ventures in the textile business. While theHarilela Group focused on hotels, the family members’ personal business interests furtherdiversified. For instance, the Harilela family also owned or had financial stakes in ThomsonMedical Center in Singapore, two branches of Eastbank NA in New York City, and one branch ofthe Bank of Encino in Los Angeles. George, Hari’s older brother, owned and ran a company thatfocused on event merchandising, which included manufacturing products such as toys, watches,and other memorabilia items. He obtained the license for the entire European market formemorabilia associated with the 1994 World Cup. Bob, the fourth brother, oversaw theadministration of the Group’s overseas offices (particularly India, Pakistan, and the Middle East)at one point, and ran his own travel agency, among other things. Other brothers conductedimport-export businesses, ran several upscale Indian cuisine restaurants in Hong Kong, pursuedbanking interests, and even occupied seats on the stock exchange. Sandee, the younger sister,edited and published an international magazine, Bharat Ratna (Jewel of India), for overseasIndians. (Older sister Rani died in 1992.) Overall, however, about 80 to 90 percent of the family’swealth was in hotels and real estate (see Exhibit 2).Group Structure and ManagementWhile Hari was still the spokesperson and the force behind the family, the Harilela Group,which held the hotel real estate investments, was owned collectively by the family and wasstructured in a unique way (see Exhibit 3 for the Group’s organization). Each of the six brotherswas a voting member and had one seat on the company’s board of directors. Hari served aschairman of the Group. Each brother could name only one member of his family to the board if4 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISEShe wished to be replaced. Hari emphasized this point: “There will always be only six people at thetop. If you let ten or fifteen family members into the business, you cannot control it.”4However, while each of the brothers had a seat on the board, they did not hold equal interestsin the Group. The shareholding pattern in the flagship Hong Kong Hotel Company gave Hari 56percent, George 10 percent, and family of deceased Peter, 12 percent. The other brothers Bob,Gary, and Mike held 6, 9, and 7 percent, respectively. Over the years, Hari had purchased sharesand increased his stake from an original 44.5 percent to 56 percent. He had purchased theseshares primarily from George and Bob, whose stakes were reduced by one-third and one-half,respectively.Despite the differential shareholding patterns, each brother had equal voting power on theboard. Directors’ fees and salaries were a different matter; they had no link to the profit-sharingratio, but corresponded closely to the cardinal principle of filial rank—the elder brother got morecompared to the next younger, and so on. As each new Group investment opportunity arose,funds were drawn from each of the brothers’ holdings proportionate to their ownership. And asprofits were earned, they were distributed initially according to the proportions of ownershipshares held by each brother. Hari voluntarily redistributed some of his profit share to the otherbrothers in a discretionary arrangement that honored filial rank and family welfare. If one of thebrothers died, as in the case of Peter in 1999, the shares were passed to his wife, rather thandirectly to the offspring, and then she decided to whom to pass them on.The women in the family could own shares, but a majority of them chose not to participate inor manage the family business. They had primarily focused on maintaining family harmony andunity, and had limited their direct participation in business matters of their own volition.However, the Harilela family placed no restriction or constraint on female participation inbusiness, either at the managerial level or at the board level. For example, Peter’s widow, Jyoti,sat on the board of a sub-holding company that owned one of the key hotel properties. However,she chose not to take her seat on the board of the Group in spite of the fact that she representedPeter’s family branch and was entitled to a seat. Similarly, Hari’s wife Padma sat on the board oftwo sub-holding companies. A “handcuff clause” prohibited the sale of shares to an outsider(anyone not part of the Harilela family).Although the collective family business focused only on the hotel business, family memberswere free to start other, noncompetitive businesses. As the second generation expanded, each ofthe brothers could help his children set up a business using the father’s own private funds.Alternatively, the brother could also take a loan from the Hotel Group. If so, the loan amountwould be deducted from the regular dividends due that brother. In any case, sons and nephewscould only be brought into a managerial position in the Harilela Group by consensus of the board.For instance, Aron Harilela, Hari’s son, worked in the business and attended board meetings byconsensus, but he did not have a vote (see Exhibit 4 for family tree).Being a family-owned business enabled the Group to move quickly to take advantage ofopportunities. While the board did have some regularly scheduled meetings, it operated primarilyon an ad hoc basis and met when an issue came up or a decision about prospective investmentshad to be made. In general, the board, comprising only family members, decided mainly on hotelrelated strategic investment issues, as well as loans to family members for new ventures.
4L. Melwani, “Harilelas: The Hotel Kings of Hong Kong,” Elite Magazine, 1995.KELLOGG SCHOOL OF MANAGEMENT 5For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249The board operated mainly through consensus. In several instances, when Hari had beenunable to persuade his brothers to invest in a specific property, he used his own money andinvested separately. In fact, Hari had used his veto power as chairman only once. In 1999 theGroup received a HK$4 billion offer for the Harilela flagship property, and several of the brotherswere interested in selling, but George and Hari opposed it. Their primary reason was that theyviewed the Holiday Inn Golden Mile not only as the flagship of the Harilela Group, but also as amemorial to their mother.Group ManagementAlthough the brothers were shareholders and directors, they had delegated management of theGroup to professional managers ever since the family first expanded into real estate. Thistransparency, Hari believed, was one of the great strengths of the company. It ensured thatqualified and well-trained people were at the helm of everyday functions. The managers oversawhotel operations, directed the company’s daily finances, suggested and implemented innovations,and conducted searches for new investments and for due diligence on those investments. Theybrought issues that needed the board’s attention to Hari.Qualities that Hari sought in employees included a good family background, integrity, andsincerity. The breakdown of staff figures showed that at the head office in Hong Kong, as well asat regional offices throughout the world, there were approximately five to ten core employees ateach location. The Group recruited some key managers and sent them to various business units tostrengthen the management of individual hotels. At the junior levels, recruitment was outsourcedto local consultants.No special status was accorded family members. A new entry had to prove his or her worththrough experience before assuming executive charge. It was common practice for an offspring tostart employment only on a salary basis. Hari’s own son Aron began learning the family businessat age eighteen by working in various departments—room service, kitchen, restaurants, andhousekeeping. When he returned to Hong Kong (after earning a Ph.D. in politics from theUniversity of Hull in the UK), Aron received further in-house training with the general manager,the finance department, and head office people before he was put in a position of authority. Afterhe became executive director, Aron reported to the board and oversaw the individual hotelproperties.The mix of Indians and non-Indians was approximately 50/50 at the headquarters.Worldwide, the combined work force at all the hotels that the Harilela Group owned or had afinancial interest in was approximately 2,500–3,000 people in 2002. The Group was not listed onthe stock exchange. Employee compensation included salary, housing, medical benefits, andtuition for the employees’ children. Bonuses and promotions were also used as incentives toretain employees. Although it could be viewed as somewhat paternalistic, Hari set up scholarshipfunds and other assistance programs to help employees when they or their children were facingfinancial difficulties.Management Philosophy“People work with me, not for me,” and “Nobody is perfect; everybody is different,” weretwo mantras that Hari used in his everyday dealings with employees. He saw mistakes as6 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISESopportunities for employees to improve performance. Consequently, strong disciplinary actionswere rarely required. M. S. Kalra, a Harilela Group executive, remembered an incident when headvised Hari to sell a property on Ashley Road only to find that the value of the propertyappreciated steeply within a few days of the sale. The Group incurred a loss of HK$20 million onthis deal, but Hari did not lose his faith in Kalra’s judgment—though he frequently remindedKalra of this incident in jest. Hari admitted to poor judgment in choosing ventures from time totime, and believed that failure is an important learning experience for every CEO. As a manager,Hari was consumed by work. He was a very hands-on executive and personally reviewed everydocument. However, he did not like gossip and did not discuss or encourage discussion ofHarilela family matters with employees.Many Harilela employees had been with the Group for a long time. During the Asianfinancial crisis and after the tragedy of September 11, 2001, income from operations for the HongKong hotel industry dropped to 1993–1994 levels. As a token of their support for the Group,some key staff members took voluntary salary reductions. This helped the Group streamline thecost structure and ride out a bad financial phase. On average, tenures for nonfamily executiveswere at least ten to fifteen years. Of those who left the Group, many became contractors and subcontractors to the family’s business interests.The Harilela Group rewarded loyalty and trust. Kalra and J. V. Raman, for example, had bothbeen with the Group for more than thirty years. Hari mentored Kalra when he first joined theGroup. Over time, Hari delegated to him more and more responsibility in a wider sphere ofactivities. He was treated like a family member and was invited, with his wife, to most familyfunctions and parties at the Harilela home. Occasionally the Harilela brothers requested Kalra’sadvice on various personal issues, such as a divorce related to one of the children. Kalra wasresponsible for renovations, capital investments, bank financing, and strategic hiring ofprofessionals for the Group. He also represented the owners in dealings with hotel managementcompanies. He owned a 5 percent stake in the Bangkok hotel, a reward for successfully buyingout the outside partners.Likewise, J. V. Raman worked his way through the ranks. He started in retail sales in 1969.Subsequently, he worked closely with Hari on a day-to-day basis, and came to be in charge ofoverall administration and private investments. He was also a director for the Macau property andoversaw investments in India, Canada, and the United States. Being a key executive in the Group,Raman, along with his spouse, was also invited to family get-togethers and social parties. Hedeemed it a privilege to have spent three decades with the Group. His growth in the company wasfast, and he was more than satisfied with the care and professional respect that the family hadaccorded him.Community ServiceHari believed in giving back to the community. To that end, he generously donated bothmoney and time to a variety of civic and philanthropic causes in Hong Kong. He contributed tothe education sector, providing scholarships for ethnic Chinese in Hong Kong as well as Indiansin India. Hari established his own foundation with a focus on higher education. It was expected togrow from HK$20 million in 2002 to HK$100 million over the next few years.He was also active in promoting trade and commerce and served on the board of the HongKong Trade Development Council and the General Committee of the Hong Kong GeneralKELLOGG SCHOOL OF MANAGEMENT 7For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249Chamber of Commerce. He supported social and commercial institutions of the Indiancommunity in Hong Kong. Other distinguished offices included serving a term as president of theRotary Club (Kowloon) and district governor of the 3450 Rotary Club in 1965–1966. The SpecialAdministrative Region (SAR) government appointed Hari as a Hong Kong Affairs Adviser to thePeople’s Republic of China, one of only two foreigners appointed to this post. He received anhonorary doctorate of law degree from Pepperdine University in California, and was namedOfficer of the Most Excellent Order of the British Empire by the Queen of England. Toacknowledge Hari’s extraordinary service to the Hong Kong community, the government ofHong Kong awarded him the Gold Bauhinia Star in 2000, the only person of Indian origin to bethus honored.Business StrategyHari was a conservative businessman by his own description. He believed that business wascyclical by nature, and that for every four or five good years, there would be one bad year.Hari believed that establishing and maintaining sound relationships with friends, colleagues,and government officials was essential to doing business in Asia. He frowned upon the Westernpractice of not trusting anyone unless the agreement was signed. Throughout many points in hislife, he had to rely on connections and borrowed money to start his ventures. In these cases, hisword had been the main collateral, rather than financial assets.In conducting its business, the Group had shown a marked preference for flexibility inacquiring hotel properties. For example, with the Holiday Inn projects in Hong Kong, Malaysia(partly owned), and Singapore, the Group purchased and developed the land, designed andconstructed the building, and subsequently paired up with managing partners while owning theproperty. In a departure from this practice, the Group adopted a leasing strategy in the case of thetwo Ambassador Hotels at the Changi Airport in Singapore because the properties, located insidethe airport complex, were not available for purchase. In some cases, the Group worked with otherinvestors to acquire and share the ownership in several hotels, as in the case of the GrandStanford InterContinental in Hong Kong and the Westin Resort and Macau Golf and CountryClub. In the case of Le Pavillon at Stamford, Connecticut, the Group had acquired a nursinghome, converted it into a hotel and later into a condominium complex, then divested it for aprofit. The W Hotel in Sydney was originally acquired in a semi-constructed form, and laterdeveloped into a five-star hotel to benefit from favorable market conditions. In the case of theQuality Hotel at Montreal and the Sheraton Belgravia Hotel in London, the Group acquiredexisting properties and later revamped them to suit its purposes.When the Holiday Inn Golden Mile first opened, the Harilela Group focused consistently onvalue-added services rather than on cutting costs or prices. For instance, Hari paid top fees toexpert service providers such as interior decorators to ensure a world-class atmosphere andcustomer-friendly services.The Holiday Inn property was located in the busy Tsim Tsa Tsui District, which was crowdedwith tourists and business people; the Group took advantage of the location to strengthen not onlyits hotel business, but the food and beverage business as well. In fact, the six food and beverageoutlets within the hotel were structured so that the executive chef and restaurant managers werecompletely accountable for their profits and losses. One result of this focus was that the ratio of8 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISESroom revenue to food and beverage revenue was almost even, as compared to the internationalnorm of 75/25.Hari also pushed for technology-based improvements. For instance, the Group tried toenhance the quality of client databases at the individual hotel level. Smartcard technology was inplace to capture, store, and retrieve data so the Group could offer loyalty programs to its frequenthotel guests. A wireless LAN providing Internet access for guests was being implemented insome hotels to meet the needs of business travelers. However, these improvements had to bebalanced with the need to keep costs under control, and several of Hari’s brothers and managerswould have liked to see more cost-cutting measures implemented.Family and BusinessIn an interview with CNBC in May 1998, Hari noted that tolerance was the key to keepingfamily and business together: “It’s easy for families to fall apart due to squabbling.Disagreements are best handled by overlooking each other’s deficiencies. It is good to worktogether as a team, not as competitors; to trust each other; and above all, not interfere in eachother’s private affairs.”5Although the brothers had disagreements, they usually worked throughthem together. By not letting small issues become major, they maintained harmony.To avoid conflict and to maintain a harmonious relationship between business and family, theHarilelas relied on an informal set of rules. The Group refrained from competing if one of thebrothers or his children wanted to start a business. For example, a son of one of the brothersowned a top-quality Indian restaurant very close to the Holiday Inn property in Hong Kong. TheGroup, therefore, chose not to open a competing restaurant on the hotel premises. Moreover, asdiscussed earlier, the Group supported independent business activities of the brothers and theirchildren by providing financial support as well social contacts and guanxi,6as much as possible.In addition to working together, the six brothers, their families, and their sister also livedtogether under one roof. Their spacious and opulent three-story Mughal mansion on Durham andWaterloo Road had three grand living rooms, a huge dining hall, forty bedrooms, a privateswimming pool, a massage room, a gym, and an auditorium. The garage contained more thantwenty cars, including several Rolls Royces. Each family had its own apartment within themansion, while the young married couples lived in eight condominiums that were connected tothe mansion. On Sundays, more than sixty Harilela family members got together for a familymeal in the Harilela mansion (see Exhibit 4).Hari and his family were also bound strongly by religion and faith in God. There was atemple in the home. All the wives learned Sindhi and Gurmukhi (the languages spoken by thefamily), read the Guru Granth Sahib (the scripture of the Sikh religion), and observed allreligious holidays. The children were also taught Hindi and religious instruction every week.
5CNBC interview with Dr. Hari Harilela, May 1998. 6 Guanxi usually refers to the concept of drawing on connections in order to secure favors in personal relations. The concept containsimplicit mutual obligations and governs Chinese social and business relationships. From interview with Bob N. Harilela, June 20,2002.KELLOGG SCHOOL OF MANAGEMENT 9For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249Despite the cohesion of the family, there was a time when the brothers decided to splitamicably and go their separate ways. However, when the wives heard the plans, their responsewas, “You can leave if you want to, but we are staying here.”7Eventually, it was the spouses, notthe brothers, who intervened and hammered out a solution to preserve family unity and harmony(see Exhibit 5 for a family photo).The FutureHari wanted the Group to continue its focus on the hospitality arena. He was now consideringnew hotels in Paris, New York, and Shanghai. Aron reiterated this strong preference for the hotelbusiness. He was even willing to consider a shift from Stage One (acquisition of assets) to StageTwo (portfolio management leading to possibly starting a management company).One issue that came up from time to time was whether the Group should go public and list itsproperty company on the stock exchange. While Hari preferred maintaining the Group as aprivate company, others believed that the lack of access to capital markets constrained its growth.This constraint became especially important as the Group considered entering other markets,including China.Another issue was whether to maintain the current management contract system or to adopt afranchise system (see Exhibit 6). Hari preferred to keep the management contract system becauseit allowed for learning and adoption of best practices from the global brands and providedflexibility to employ or change the general manager. A franchise system would require constantmonitoring of the competition, a global orientation (in order to achieve global standards ofexcellence), and more innovative thinking on service standards. However, other Group memberspointed out that pursuing the franchise model could be profitable because it could enhance thebottom line by saving about 1.5 to 2 percent of revenue fees. Five management contracts wouldcome up for renewal during 2004–2005. In the final analysis, Hari emphatically stated that aslong as he was in charge, he preferred the management contract system, and it was up to the nextchairman to decide if the strategy needed to be revised later.Although no formal succession plan had been discussed among the brothers or Harilelaemployees, many within the family enterprise had expressed the need to ensure a smoothtransition. Hari set the ball rolling, structuring his block of shares in such a way that Aron wouldbe the sole beneficiary from Hari’s branch of the family. This clearly suggested that Hari waspositioning Aron for a possible succession to the throne. Each of the other brothers chose todistribute his Group shares among all his children, more or less equally.There was recognition that the board structure might not work in the future. For instance,while consensus building had been a key ingredient in the decision-making process among thebrothers, the second generation might be more inclined to resort to voting. If so, the familybranch with majority shareholding would have the dominant voice. In addition, the brothers alsohad to decide whether they wanted a formal noncompete clause to ensure that future growth wasnot impacted from competing businesses started by individual family members. Such a movemight lead to a more systematic review of support for businesses started by family members, andit was possible that the board might favor business ideas that would strengthen the value chain of
7CNBC interview with Dr. Hari Harilela, May 1998.10 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISESthe family business. One such example was already in place. The hotel-supplies businessmanaged by a son of one of the brothers fit in very well as a backward integration project for themain family business, and enhanced the value chain. Likewise, the role of outsiders in the familybusiness might need to be more explicit. Independent directors were already on some of theGroup’s sub-boards. However, specific decisions had to be made about whether they could holdother positions, including chairmanship.Aron wanted to continue the family mansion through his generation. Though he had nomarriage plans, he expected to select a spouse who would accept the joint family livingarrangement.What Next?As the board meeting approached, Hari Harilela pondered the future of the Harilelaenterprises. The first generation of this enterprising family had done well by drawing strengthfrom its members’ shared identity, traditions, and values. The question now was how to ensurecontinued success.KELLOGG SCHOOL OF MANAGEMENT 11For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.H12ARILELA ENTERPRISES KEL249KELLOGG SCHOOL OF MANAGEMENTExhibit 1: The Harilela Group: Hotel PortfolioSerial # Year Property
RoomsNature ofOwnership Comment1 1975 Holiday Inn Golden Mile, HongKong600 Fully owned Acquired land; constructedand developed2 1979 Holiday Inn Resort, Penang,Malaysia350 Partly owned Same as above3 1981 Grand Stanford InterContinentalHotel, Hong Kong579 Partly owned Acquired and then fullydeveloped4 1983 Quality Hotel, Montreala 159 Fully owned Acquired existing hotel5 1985 Holiday Inn Park View,Singapore310 Fully owned Acquired land; constructedand developed6 1991 Crowne Plaza, Bangkok 726 Fully owned Same as above; bought outpartner later7 1993 Westin Resort and Macau Golfand Country Club208 Partly owned Acquired interest and thenfully developed8 1995 Ambassador Transit Hotel,Terminal 2, Changi Airport,Singapore73 Leased Manager9 1997 Sheraton Belgravia, London 89 Fully owned Acquired existing hotel10 1999 Ambassador Transit Hotel,Terminal 1, Changi Airport,Singapore73 Leased Manager11 2000 W Hotel, Sydney 104 Fully owned Acquired when partiallybuilt; developed andconverted to five-star hotellateraOwnership is outside the Group, but the hotel is managed and operated by the Harilela Group.Source: Harilela Hotels, company publications/brochure, 2000.For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELAENTERPRISES KEL249Exhibit 2: Value of the GroupVValue of Business in 1980 = HK$250 millionHotels85%Real Estate10%Others5%Value of Business in 2000 = HK$3.5 billionHotels90%Real Estate5%Others5%alue of Business in 1960 = HK$50 millionHotels50% Real Estate40%Others10%Major Business Events 1951–1960x Owned and operated tailoringstores, mail order, and retail andwholesale clothing businessx Opened 10,000-sq.-ft. retail storeon ground floor, mezzanine, andbasement of Imperial Hotelx Opened 64 clothing stores inJapan, Guam, Okinawa, andVietnamx Acquired Imperial Hotel—the firstinvestment in hotel businessx Made investments in real estate inHong Kong, United States, andCanadaMajor Business Events 1961–1980x The company that owned ImperialHotel acquired Imperial Court, andthe company went public in 1972x Sold Imperial Hotel and ImperialCourt in mid-1972x Opened 20,000-sq.-ft. Harileladepartment store in Ocean Terminalx Acquired the site of Holiday InnGolden Mile alongwith a few otherinvestors; after the 1967 riots, theother investorswanted an exit, and sothe Group bought their sharesx Completed the construction ofHoliday Inn Golden Mile Hotel; hotelopened for business on June 8, 1975x Acquired land on the Batu Ferringibeachfront in Penang, Malaysia;opened Holiday Inn there in early1979Major Business Events 1981–2000x Invested in Grand StanfordInterContinental Hotel, Hong Kong—this hotelwas known as the HolidayInn Harbor View in early 1980sx Acquired Quality Hotel, Montreal,Canada in 1983 (formerly Le PavilionHotel)x Acquired land in Singapore; openedHoliday Inn Parkview Hotel there inAugust 1985x Invested in a JV project, CrownePlaza Hotel, in Bangkok in late1980sx Acquired the Sheraton BelgraviaHotel in London in 1997x Invested in the Westin Resort &Macau Golf & Country Club, Macaux Acquired theW Hotel in Sydneywhen itwas still under construction;opened for business in June 2000Note: Values reflect the net book value of equity after deducting debt as of July 30, 2002.KELLOGG SCHOOL OFMANAGEMENT 13For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELAENTERPRISES KEL249Exhibit 3: Harilela Group: Organization Structure, 2002Harilela FamilyAsia Garden(Malaysia) Sdn.Bhd.AssetsHoliday Inn(Penang)Harilela Hotels(Australia) Pty. Ltd.AssetsW Hotel atWoolloomoollooWharf (Sydney)Harilela Hotels(Singapore) Pte. Ltd.AssetsHoliday Inn ParkView (Singapore)Harilela Hotels Ltd.(United Kingdom)AssetsSheraton BelgraviaHotel (UnitedKingdom)Hotel AdministratorsLtd.10% of Tak How Inv.Ltd. (Hong Kong)AssetsGrand StanfordHarbour View Hotel(Hong Kong)Hotel Holdings Ltd.(Hong Kong)AssetsHoliday Inn GoldenMile (Hong Kong)Hotel RestaurantHoldings Ltd.(Hong Kong)10% of STDI(Macau)AssetsWestin Resort HotelMacau Golf &Country Club(Macau)Saya (Thailand)Ltd.AssetsHoliday Inn CrownePlaza (Bangkok)Board consisted only of male family membersLegendBoard had male and female family members plus outside directorsBoard had male family members and outside directorsKELLOGG SCHOOL OFMANAGEMENT 14For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELAENTERPRISES KEL249KELLOGG SCHOOL OFMANAGEMENT 15Naroomal and Devibai Harilela(1895–1948) and (1904–1975)Bob Harilela72 yearsMarriedGary Harilela68 yearsMarried1 sonGeorge Harilela82 yearsMarried3 sons; oneinvolved inGroup’s business4 daughtersHari Harilela80 yearsMarried1 son; involved inGroup’s business5 daughtersPeter Harilelad. 1999Spouse: Jyoti72 years1 daughter2 sonsMohan Harilela57 yearsMarried3 daughters 1 son 2 sons1 daughter2 sons1 daughterRani Harilelad. 1992Spouse: Ram Hiranand65 yearsSandee Harilela54 yearsDivorced1 daughterExhibit 4: Harilela Family Tree, 2002For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.HARILELA ENTERPRISES KEL249Exhibit 5: Photo of the Harilela BrothersThe Harilela brothers (clockwise from front) George, Peter, Gary, Mike, Bob, and Hari.Source: Hong Kong General Chamber of Commerce, http://www.chamber.org.hk/info/member_a_week/harilela.asp.16 KELLOGG SCHOOL OF MANAGEMENTFor the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.KEL249 HARILELA ENTERPRISESExhibit 6: Hotel Industry—Investment and Management OptionsMANAGEMENT CONTRACT SYSTEMUnder this system, the owner owns the property and signs an agreement with a branded hoteloperator like Sheraton. The operator provides the brand name, employs and trains staff, and isbasically in charge of all hotel operations. In return, the operator receives a management fee thatmay amount to approximately 5 percent of the gross revenues. In this case, the owner is exposedto very little operational risk but also has a little less operational control and limited benefits suchas free rooms.FRANCHISE SYSTEMHere, too, the owner owns the property, but has access only to the brand (like Sheraton) andthe brand’s global reservation system and policies. All staff members are employed and trainedby the owner, thereby adding a higher level of risk. For such an active role, the owner may get toboost the bottom line by almost 2 percent because fees are only on the room revenues and not onthe food and beverage revenues. The franchising system also means that the owner may have totie his or her fortunes to one brand only, or to choose segments carefully to avoid any partnerconflict. For example, if the company adopts the Sheraton franchise for the luxury segment, itmay be difficult to obtain the franchise of another brand for the same segment.OWN BRAND SYSTEMThis system has the highest risk, but also frees the owner to drive the business the way he orshe wants it. One major advantage is that there is no agency cost associated with this investmentmodel. On the other hand, own branding requires huge capital reserves and brand advertising tocompete effectively against global brands like Sheraton.KELLOGG SCHOOL OF MANAGEMENT 17For the exclusive use of P. Cervera, 2019.This document is authorized for use only by Paolo Cervera in 2019.QUESTIONS
What are some general characteristics of family-owned businesses in Asia? How is the waythe Harilela family operates similar or different from the characteristics listed above?
Consider the Harilelas’ corporate strategy. What are the merits of the management contractsystem versus the franchise system?
Consider the Harilelas’ funding strategy. What are the pros and cons of remaining a privatecompany? What benefits and costs are associated with going public?
Consider the Harilelas’ HR strategy. How is it different from that of a multinational or a largenonfamily business?
What are the corporate governance issues of a family-owned business?
What should the Harilela family do next in terms of succession?
If Aron does finally assume leadership of the family business, what potential minefields mayhe have to navigate?
What advice would you give Aron?
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