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KEL249 JOHN WARD The Harilela Enterprises An I
1. KEL249
JOHN WARD
The Harilela Enterprises:
An Indian Family Business in Hong Kong
As another Harilela Group board meeting approached, the most
pressing issue on the agenda
was 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 Hong
Kong, but with properties and interests all over the world, the
family’s businesses had been
owned and run by six Indian brothers for decades. Dr. Hari
Harilela, the second oldest, was
chairman of the Hotel Group. Like most of his brothers, he was
well past retirement age, having
recently celebrated his eightieth birthday. The time had come to
decide if the successful
leadership and ownership model of the past could work for
another generation of Harilelas.
History
The Harilelas’ story began in 1922, when Hari’s father,
Naroomal Mirchandani, left his
3. University. This case was prepared by Elyssa Tran and Bhaskar
Sambamurthy under the supervision of Professor Suren
Mansinghka of the Hong Kong University of Science and
Technology and
Professor John Ward. We gratefully acknowledge the
information provided by the Harilela family and the Harilela
Group in the case
preparation. Cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements,
sources of
primary data, or illustrations of effective or ineffective
management. To order copies or request permission to
reproduce materials, call
800-545-7685 (or 617-783-7600 outside the United States or
Canada) or e-mail [email protected] No part of this
publication 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—
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HARILELA ENTERPRISES KEL249
grounds. By 1937 the family had saved enough money to open a
small silk shop on Prince
Edward Road.
However, this venture soon failed. Naroomal once again
returned to hawking at the barracks.
4. This time, he managed to save enough money to open another
shop in Mongkok within a year. To
supplement the family income, Hari worked for an export house,
while his brothers George and
Peter worked for retail stores. For a few years, business
flourished. The family also grew with the
addition of a fourth brother, Bob, in 1934, a fifth brother, Gary,
in 1937, and a sister, Rani, in
1940.
When World War II spread to Hong Kong in 1941, the Harilelas
once again lost all they
owned. Like many other Indian families at the time, they fled
their home as the Japanese overran
the territory. When civilians were again allowed to move around
under Japanese control, a family
friend allowed them to use his shop on Hankow Road. The
family earned a modest living, but life
was harsh under the Japanese. Two more siblings were born: a
sixth brother, Mohan, in 1945, and
another 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 again
hawked supplies to them. George and Hari formed important
ties with the British soldiers during
this period, supplying them with fresh eggs and vegetables from
farms in the New Territories and
other daily necessities. British troops soon noticed their
diligence and honesty, and appointed the
Harilela brothers as the main suppliers for the army. The
brothers also carried out other tasks,
5. such as laundry and stitching uniforms from cloth that the army
supplied. At first, they worked
out of their small shop on Hankow Road, but eventually they
moved into a larger space (later
developed into the Kowloon Hotel) as business expanded. As
more British and Commonwealth
troops arrived in the territory, the Harilela brothers acquired
exclusive contracts to make uniforms
for the soldiers. By maintaining high quality standards and
providing a wide selection of
materials through imports, they were able to attract a regular
flow of customers—not only the
troops but locals and tourists as well. The family quickly
became the largest importer of British
textiles in Hong Kong. Toward the end of 1959, when the
Kowloon Hotel was scheduled for
demolition, the Harilela brothers moved their store to the
Imperial Hotel. The new store covered
an area of more than 10,000 square feet, and was considered
top-notch among clothing
establishments in Hong Kong.
As the Americans became involved in the Korean War, and later
the Vietnam War, the
Harilelas also received contracts to make uniforms for American
troops. Over time, the company
opened sixty-four clothing houses in Guam, Okinawa, the
Philippines, and Vietnam, catering to
U.S. Army, Navy, and Air Force personnel in the Asia Pacific
region. In addition to uniforms, at
the height of their clothing business the Harilelas made 600
custom suits a day and provided
employment for 900 tailors.
From Tailoring to Hotels
6. Although the family’s initial wealth was made in custom
tailoring, Hari recommended to his
brothers that they diversify into other lines of business. They
entered the local retail business and
opened a Best Ladies’ and a Best Men’s retail store. Next, the
brothers experimented with the real
estate and hotel business. They bought their first hotel, the
Imperial Hotel, in 1960. Hari recalled,
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KEL249 HARILELA ENTERPRISES
“Although my brothers were against me because real estate or
other businesses meant very small
profits, I kept on diversifying and I’m glad that I did.”1
T H E H O L I D A Y I N N G O L D E N M I L E 2
In 1965 the Harilelas bought the site for the Holiday Inn Golden
Mile at Nathan Road in
Hong Kong for HK$13.7 million3 after intense negotiations
with a property broker. Architect
Jackson Wong, who owned the firm Wong Ng, Ouyang &
Associates, was hired to draw up plans
for the hotel, which was to have no middle columns in the
lobby, three basements, and two large
ballrooms. Structurally, it was to look like the San Francisco
Bridge, with a 75-foot span in the
7. basement, 55-foot span in the lobby, and hanging floors. This
was a difficult design, and Hari
spent a long time with Wong drawing up the plans.
Construction finally began in 1967–1968, but was halted almost
immediately when riots and
civil commotion broke out. Property prices crashed and tourism
was at a standstill. Many people
were fleeing Hong Kong. Most of Hari’s fourteen business
partners wanted to sell, and he bought
them 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 of
firepower 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 three
basements and two ballrooms. The many delays drove the costs
up tremendously, and the family
had to sell a number of properties, including the Imperial Hotel,
as well as borrow money in order
to continue construction. By the time the Holiday Inn was
finally opened in November 1975, the
original projected cost of HK$45 million had increased first to
HK$75 million and finally to
HK$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 the
Sheraton, which had expressed an interest in establishing Hong
Kong hotels; several serious
discussions and visits ensued. At the same time, Hari explored
8. other management companies such
as the Hilton, Hyatt, and Holiday Inn to compare costs and
prices. He and his wife traveled and
stayed at various hotels throughout the United States, and
eventually decided on the Holiday Inn
after a series of meetings with Kemmons Wilson, the founder of
the Holiday Inn chain. Hari
decided on Holiday Inn because he and Wilson got along very
well, and they developed a strong
relationship based on shared values. Still, Hari realized that the
Holiday Inn model had to be
modified to suit Asian conditions. The fundamental difference
was that the business in the United
States 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 five-
star hotel as well as sensitivity to Asian cultural values.
Convinced by Hari’s arguments, Wilson
agreed to allow Hari to approve the appointment of the hotel’s
general manager, contrary to his
normal practice in the United States.
1 Hong Kong General Chamber of Commerce, Member Profile:
The Harilela Empire, http://www.chamber.org.hk/info/
member_a_week/harilela.asp (March 2002).
2 From drafts of Dr. Hari Harilela’s personal memoirs, “The
Story of Holiday Inn” and “Holiday Inn Golden Mile” sections,
March
2002.
3 US$1 = HK$7.8.
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HARILELA ENTERPRISES KEL249
O T H E R H O T E L P R O P E R T I E S
Despite an inauspicious start—their mother Devibai died on the
day of the hotel’s grand
opening, so the family was represented at the opening by Hari’s
four-year-old son Aron—the
Harilelas’ wholly owned Holiday Inn Golden Mile eventually
earned the family its major fortune
as property prices rose again in the 1970s. The brothers were
able to buy back the Imperial Hotel
and 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 InterContinental
in Hong Kong; the Quality Hotel Dorval in Montreal, Canada;
and the Holiday Inn Park View in
Singapore commenced operations in 1981, 1983, and 1985,
respectively. In the 1990s the
Harilelas 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 Hotel
in Terminals 1 and 2 of the Singapore Changi Airport in 1995
and 1999. Hari also acquired the
Sheraton Belgravia in London in 1997. Operations at the W
Hotel in Sydney, Australia, began in
2000 (see Exhibit 1 for details about each property).
10. 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).
O T H E R F A M I L Y M E M B E R E N T E R P R I S E S
Over the years, the wholesale and retail tailoring business
declined as a result of market
conditions. Contemporaneously the family realized that the
hotel business was much more
profitable and therefore decided to slowly exit their ventures in
the textile business. While the
Harilela Group focused on hotels, the family members’ personal
business interests further
diversified. For instance, the Harilela family also owned or had
financial stakes in Thomson
Medical Center in Singapore, two branches of Eastbank NA in
New York City, and one branch of
the Bank of Encino in Los Angeles. George, Hari’s older
brother, owned and ran a company that
focused on event merchandising, which included manufact uring
products such as toys, watches,
and other memorabilia items. He obtained the license for the
entire European market for
memorabilia associated with the 1994 World Cup. Bob, the
fourth brother, oversaw the
administration 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 conducted
import-export businesses, ran several upscale Indian cuisine
restaurants in Hong Kong, pursued
banking interests, and even occupied seats on the stock
exchange. Sandee, the younger sister,
edited and published an international magazine, Bharat Ratna
11. (Jewel of India), for overseas
Indians. (Older sister Rani died in 1992.) Overall, however,
about 80 to 90 percent of the family’s
wealth was in hotels and real estate (see Exhibit 2).
Group Structure and Management
While 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 was
structured in a unique way (see Exhibit 3 for the Group’s
organization). Each of the six brothers
was a voting member and had one seat on the company’s board
of directors. Hari served as
chairman of the Group. Each brother could name only one
member of his family to the board if
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KEL249 HARILELA ENTERPRISES
he wished to be replaced. Hari emphasized this point: “There
will always be only six people at the
top. If you let ten or fifteen family members into the business,
you cannot control it.”4
However, while each of the brothers had a seat on the board,
they did not hold equal interests
12. in the Group. The shareholding pattern in the flagship Hong
Kong Hotel Company gave Hari 56
percent, 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 shares
and increased his stake from an original 44.5 percent to 56
percent. He had purchased these
shares 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 the
board. Directors’ fees and salaries were a different matter; they
had no link to the profit-sharing
ratio, but corresponded closely to the cardinal principle of filial
rank—the elder brother got more
compared 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 as
profits were earned, they were distributed initially according to
the proportions of ownership
shares held by each brother. Hari voluntarily redistributed some
of his profit share to the other
brothers in a discretionary arrangement that honored filial rank
and family welfare. If one of the
brothers died, as in the case of Peter in 1999, the shares were
passed to his wife, rather than
directly 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 in
or manage the family business. They had primarily focused on
13. maintaining family harmony and
unity, 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 in
business, 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 represented
Peter’s family branch and was entitled to a seat. Similarly,
Hari’s wife Padma sat on the board of
two 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 members
were free to start other, noncompetitive businesses. As the
second generation expanded, each of
the 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 amount
would be deducted from the regular dividends due that brother.
In any case, sons and nephews
could 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 by
consensus, 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 of
14. opportunities. While the board did have some regularly
scheduled meetings, it operated primarily
on an ad hoc basis and met when an issue came up or a decision
about prospective investments
had to be made. In general, the board, comprising only family
members, decided mainly on hotel-
related strategic investment issues, as well as loans to family
members for new ventures.
4 L. Melwani, “Harilelas: The Hotel Kings of Hong Kong,”
Elite Magazine, 1995.
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HARILELA ENTERPRISES KEL249
The board operated mainly through consensus. In several
instances, when Hari had been
unable to persuade his brothers to invest in a specific property,
he used his own money and
invested separately. In fact, Hari had used his veto power as
chairman only once. In 1999 the
Group received a HK$4 billion offer for the Harilela flagship
property, and several of the brothers
were interested in selling, but George and Hari opposed it.
Their primary reason was that they
viewed the Holiday Inn Golden Mile not only as the flagship of
the Harilela Group, but also as a
15. memorial to their mother.
Group Management
Although the brothers were shareholders and directors, they had
delegated management of the
Group to professional managers ever since the family first
expanded into real estate. This
transparency, Hari believed, was one of the great strengths of
the company. It ensured that
qualified and well-trained people were at the helm of everyday
functions. The managers oversaw
hotel operations, directed the company’s daily finances,
suggested and implemented innovations,
and conducted searches for new investments and for due
diligence on those investments. They
brought issues that needed the board’s attention to Hari.
Qualities that Hari sought in employees included a good family
background, integrity, and
sincerity. The breakdown of staff figures showed that at the
head office in Hong Kong, as well as
at regional offices throughout the world, there were
approximately five to ten core employees at
each location. The Group recruited some key managers and sent
them to various business units to
strengthen the management of individual hotels. At the junior
levels, recruitment was outsourced
to local consultants.
No special status was accorded family members. A new entry
had to prove his or her worth
through experience before assuming executive charge. It was
common practice for an offspring to
start employment only on a salary basis. Hari’s own son Aron
began learning the family business
16. at age eighteen by working in various departments—room
service, kitchen, restaurants, and
housekeeping. When he returned to Hong Kong (after earning a
Ph.D. in politics from the
University 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. After
he became executive director, Aron reported to the board and
oversaw the individual hotel
properties.
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 a
financial interest in was approximately 2,500–3,000 people in
2002. The Group was not listed on
the stock exchange. Employee compensation included salary,
housing, medical benefits, and
tuition for the employees’ children. Bonuses and promotions
were also used as incentives to
retain employees. Although it could be viewed as somewhat
paternalistic, Hari set up scholarship
funds and other assistance programs to help employees when
they or their children were facing
financial difficulties.
Management Philosophy
“People work with me, not for me,” and “Nobody is perfect;
everybody is different,” were
two mantras that Hari used in his everyday dealings with
employees. He saw mistakes as
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KEL249 HARILELA ENTERPRISES
opportunities for employees to improve performance.
Consequently, strong disciplinary actions
were rarely required. M. S. Kalra, a Harilela Group executive,
remembered an incident when he
advised Hari to sell a property on Ashley Road only to find that
the value of the property
appreciated steeply within a few days of the sale. The Group
incurred a loss of HK$20 million on
this deal, but Hari did not lose his faith in Kalra’s judgment—
though he frequently reminded
Kalra of this incident in jest. Hari admitted to poor judgment in
choosing ventures from time to
time, 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 every
document. However, he did not like gossip and did not discuss
or encourage discussion of
Harilela family matters with employees.
Many Harilela employees had been with the Group for a long
time. During the Asian
financial crisis and after the tragedy of September 11, 2001,
income from operations for the Hong
Kong hotel industry dropped to 1993–1994 levels. As a token of
their support for the Group,
18. some key staff members took voluntary salary reductions. This
helped the Group streamline the
cost structure and ride out a bad financial phase. On average,
tenures for nonfamily executives
were at least ten to fifteen years. Of those who left the Group,
many became contractors and sub-
contractors to the family’s business interests.
The Harilela Group rewarded loyalty and trust. Kalra and J. V.
Raman, for example, had both
been with the Group for more than thirty years. Hari mentored
Kalra when he first joined the
Group. Over time, Hari delegated to him more and more
responsibility in a wider sphere of
activities. He was treated like a family member and was invited,
with his wife, to most family
functions and parties at the Harilela home. Occasionally the
Harilela brothers requested Kalra’s
advice on various personal issues, such as a divorce related to
one of the children. Kalra was
responsible for renovations, capital investments, bank
financing, and strategic hiring of
professionals for the Group. He also represented the owners in
dealings with hotel management
companies. He owned a 5 percent stake in the Bangkok hotel, a
reward for successfully buying
out 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 of
overall administration and private investments. He was also a
director for the Macau property and
oversaw investments in India, Canada, and the United States.
Being a key executive in the Group,
19. Raman, along with his spouse, was also invited to family get-
togethers and social parties. He
deemed it a privilege to have spent three decades with the
Group. His growth in the company was
fast, and he was more than satisfied with the care and
professional respect that the family had
accorded him.
Community Service
Hari believed in giving back to the community. To that end, he
generously donated both
money and time to a variety of civic and philanthropic causes in
Hong Kong. He contributed to
the education sector, providing scholarships for ethnic Chinese
in Hong Kong as well as Indians
in India. Hari established his own foundation with a focus on
higher education. It was expected to
grow 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 Hong
Kong Trade Development Council and the General Committee
of the Hong Kong General
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HARILELA ENTERPRISES KEL249
20. Chamber of Commerce. He supported social and commercial
institutions of the Indian
community in Hong Kong. Other distinguished offices included
serving a term as president of the
Rotary Club (Kowloon) and district governor of the 3450 Rotary
Club in 1965–1966. The Special
Administrative Region (SAR) government appointed Hari as a
Hong Kong Affairs Adviser to the
People’s Republic of China, one of only two foreigners
appointed to this post. He received an
honorary doctorate of law degree from Pepperdine University in
California, and was named
Officer of the Most Excellent Order of the British Empire by the
Queen of England. To
acknowledge Hari’s extraordinary service to the Hong Kong
community, the government of
Hong Kong awarded him the Gold Bauhinia Star in 2000, the
only person of Indian origin to be
thus honored.
Business Strategy
Hari was a conservative businessman by his own description. He
believed that business was
cyclical 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 Western
practice of not trusting anyone unless the agreement was signed.
Throughout many points in his
life, he had to rely on connections and borrowed money to start
his ventures. In these cases, his
21. word had been the main collateral, rather than financial assets.
In conducting its business, the Group had shown a marked
preference for flexibility in
acquiring 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 and
constructed the building, and subsequently paired up with
managing partners while owning the
property. In a departure from this practice, the Group adopted a
leasing strategy in the case of the
two Ambassador Hotels at the Changi Airport in Singapore
because the properties, located inside
the airport complex, were not available for purchase. In some
cases, the Group worked with other
investors to acquire and share the ownership in several hotels,
as in the case of the Grand
Stanford InterContinental in Hong Kong and the Westin Resort
and Macau Golf and Country
Club. In the case of Le Pavillon at Stamford, Connecticut, the
Group had acquired a nursing
home, converted it into a hotel and later into a condominium
complex, then divested it for a
profit. The W Hotel in Sydney was originally acquired in a
semi-constructed form, and later
developed into a five-star hotel to benefit from favorable market
conditions. In the case of the
Quality Hotel at Montreal and the Sheraton Belgravia Hotel in
London, the Group acquired
existing properties and later revamped them to suit its purposes.
When the Holiday Inn Golden Mile first opened, the Harilela
Group focused consistently on
value-added services rather than on cutting costs or prices. For
instance, Hari paid top fees to
22. expert service providers such as interior decorators to ensure a
world-class atmosphere and
customer-friendly services.
The Holiday Inn property was located in the busy Tsim Tsa Tsui
District, which was crowded
with tourists and business people; the Group took advantage of
the location to strengthen not only
its hotel business, but the food and beverage business as well.
In fact, the six food and beverage
outlets within the hotel were structured so that the executive
chef and restaurant managers were
completely accountable for their profits and losses. One result
of this focus was that the ratio of
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KEL249 HARILELA ENTERPRISES
room revenue to food and beverage revenue was almost even, as
compared to the international
norm of 75/25.
Hari also pushed for technology-based improvements. For
instance, the Group tried to
enhance the quality of client databases at the individual hotel
level. Smartcard technology was in
place to capture, store, and retrieve data so the Group could
offer loyalty programs to its frequent
23. hotel guests. A wireless LAN providing Internet access for
guests was being implemented in
some hotels to meet the needs of business travelers. However,
these improvements had to be
balanced with the need to keep costs under control, and several
of Hari’s brothers and managers
would have liked to see more cost-cutting measures
implemented.
Family and Business
In an interview with CNBC in May 1998, Hari noted that
tolerance was the key to keeping
family 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 work
together as a team, not as competitors; to trust each other; and
above all, not interfere in each
other’s private affairs.”5 Although the brothers had
disagreements, they usually worked through
them together. By not letting small issues become major, they
maintained harmony.
To avoid conflict and to maintain a harmonious relationship
between business and family, the
Harilelas relied on an informal set of rules. The Group refrained
from competing if one of the
brothers or his children wanted to start a business. For example,
a son of one of the brothers
owned a top-quality Indian restaurant very close to the Holiday
Inn property in Hong Kong. The
Group, therefore, chose not to open a competing restaurant on
the hotel premises. Moreover, as
discussed earlier, the Group supported independent business
activities of the brothers and their
24. children by providing financial support as well social contacts
and guanxi,6 as much as possible.
In addition to working together, the six brothers, their families,
and their sister also lived
together under one roof. Their spacious and opulent three-story
Mughal mansion on Durham and
Waterloo Road had three grand living rooms, a huge dining hall,
forty bedrooms, a private
swimming pool, a massage room, a gym, and an auditorium. The
garage contained more than
twenty cars, including several Rolls Royces. Each family had its
own apartment within the
mansion, while the young married couples lived in eight
condominiums that were connected to
the mansion. On Sundays, more than sixty Harilela family
members got together for a family
meal in the Harilela mansion (see Exhibit 4).
Hari and his family were also bound strongly by religion and
faith in God. There was a
temple in the home. All the wives learned Sindhi and Gurmukhi
(the languages spoken by the
family), read the Guru Granth Sahib (the scripture of the Sikh
religion), and observed all
religious holidays. The children were also taught Hindi and
religious instruction every week.
5 CNBC 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 contains
implicit mutual obligations and governs Chinese social and
business relationships. From interview with Bob N. Harilela,
June 20,
25. 2002.
KELLOGG SCHOOL OF MANAGEMENT 9
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
HARILELA ENTERPRISES KEL249
Despite the cohesion of the family, there was a time when the
brothers decided to split
amicably and go their separate ways. However, when the wives
heard the plans, their response
was, “You can leave if you want to, but we are staying here.”7
Eventually, it was the spouses, not
the brothers, who intervened and hammered out a solution to
preserve family unity and harmony
(see Exhibit 5 for a family photo).
The Future
Hari wanted the Group to continue its focus on the hospitali ty
arena. He was now considering
new hotels in Paris, New York, and Shanghai. Aron reiterated
this strong preference for the hotel
business. He was even willing to consider a shift from Stage
One (acquisition of assets) to Stage
Two (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 its
26. property company on the stock exchange. While Hari preferred
maintaining the Group as a
private 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 a
franchise system (see Exhibit 6). Hari preferred to keep the
management contract system because
it allowed for learning and adoption of best practices from the
global brands and provided
flexibility to employ or change the general manager. A
franchise system would require constant
monitoring of the competition, a global orientation (in order to
achieve global standards of
excellence), and more innovative thinking on service standards.
However, other Group members
pointed out that pursuing the franchise model could be
profitable because it could enhance the
bottom line by saving about 1.5 to 2 percent of revenue fees.
Five management contracts would
come up for renewal during 2004–2005. In the final analysis,
Hari emphatically stated that as
long as he was in charge, he preferred the management contract
system, and it was up to the next
chairman to decide if the strategy needed to be revised later.
Although no formal succession plan had been discussed among
the brothers or Harilela
employees, many within the family enterprise had expressed the
need to ensure a smooth
transition. Hari set the ball rolling, structuring his block of
shares in such a way that Aron would
27. be the sole beneficiary from Hari’s branch of the family. This
clearly suggested that Hari was
positioning Aron for a possible succession to the throne. Each
of the other brothers chose to
distribute 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 the
brothers, the second generation might be more inclined to resort
to voting. If so, the family
branch with majority shareholding would have the dominant
voice. In addition, the brothers also
had to decide whether they wanted a formal noncompete clause
to ensure that future growth was
not impacted from competing businesses started by individual
family members. Such a move
might lead to a more systematic review of support for
businesses started by family members, and
it was possible that the board might favor business ideas that
would strengthen the value chain of
7 CNBC interview with Dr. Hari Harilela, May 1998.
10 KELLOGG SCHOOL OF MANAGEMENT
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
28. KEL249 HARILELA ENTERPRISES
the family business. One such example was already in place.
The hotel-supplies business
managed by a son of one of the brothers fit in very well as a
backward integration project for the
main family business, and enhanced the value chain. Likewise,
the role of outsiders in the family
business might need to be more explicit. Independent directors
were already on some of the
Group’s sub-boards. However, specific decisions had to be
made about whether they could hold
other positions, including chairmanship.
Aron wanted to continue the family mansion through his
generation. Though he had no
marriage plans, he expected to select a spouse who would
accept the joint family living
arrangement.
What Next?
As the board meeting approached, Hari Harilela pondered the
future of the Harilela
enterprises. The first generation of this enterprising family had
done well by drawing strength
from its members’ shared identity, traditions, and values. The
question now was how to ensure
continued success.
29. KELLOGG SCHOOL OF MANAGEMENT 11
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
H
12
ARILELA ENTERPRISES KEL249
KELLOGG SCHOOL OF MANAGEMENT
Exhibit 1: The Harilela Group: Hotel Portfolio
Serial # Year Property
# of
Rooms
Nature of
Ownership Comment
1 1975 Holiday Inn Golden Mile, Hong
Kong
600 Fully owned Acquired land; constructed
and developed
30. 2 1979 Holiday Inn Resort, Penang,
Malaysia
350 Partly owned Same as above
3 1981 Grand Stanford InterContinental
Hotel, Hong Kong
579 Partly owned Acquired and then fully
developed
4 1983 Quality Hotel, Montreala 159 Fully owned Acquired
existing hotel
5 1985 Holiday Inn Park View,
Singapore
310 Fully owned Acquired land; constructed
and developed
6 1991 Crowne Plaza, Bangkok 726 Fully owned Same as
above; bought out
partner later
7 1993 Westin Resort and Macau Golf
and Country Club
208 Partly owned Acquired interest and then
fully developed
8 1995 Ambassador Transit Hotel,
Terminal 2, Changi Airport,
Singapore
73 Leased Manager
31. 9 1997 Sheraton Belgravia, London 89 Fully owned Acquired
existing hotel
10 1999 Ambassador Transit Hotel,
Terminal 1, Changi Airport,
Singapore
73 Leased Manager
11 2000 W Hotel, Sydney 104 Fully owned Acquired when
partially
built; developed and
converted to five-star hotel
later
a Ownership 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.
H
A
R
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E
99. N
T
14
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
H
A
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L
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N
T
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P
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IS
113. For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
HARILELA ENTERPRISES KEL249
Exhibit 5: Photo of the Harilela Brothers
The 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 MANAGEMENT
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
KEL249 HARILELA ENTERPRISES
Exhibit 6: Hotel Industry—Investment and Management Options
M A N A G E M E N T C O N T R A C T S Y S T E M
114. Under this system, the owner owns the property and signs an
agreement with a branded hotel
operator like Sheraton. The operator provides the brand name,
employs and trains staff, and is
basically in charge of all hotel operations. In return, the
operator receives a management fee that
may amount to approximately 5 percent of the gross revenues.
In this case, the owner is exposed
to very little operational risk but also has a little less
operational control and limited benefits such
as free rooms.
F R A N C H I S E S Y S T E M
Here, too, the owner owns the property, but has access only to
the brand (like Sheraton) and
the brand’s global reservation system and policies. All staff
members are employed and trained
by the owner, thereby adding a higher level of risk. For such an
active role, the owner may get to
boost the bottom line by almost 2 percent because fees are only
on the room revenues and not on
the food and beverage revenues. The franchising system also
means that the owner may have to
tie his or her fortunes to one brand only, or to choose segments
carefully to avoid any partner
conflict. For example, if the company adopts the Sheraton
franchise for the luxury segment, it
may be difficult to obtain the franchise of another brand for the
same segment.
O W N B R A N D S Y S T E M
This system has the highest risk, but also frees the owner to
drive the business the way he or
she wants it. One major advantage is that there is no agency
115. cost associated with this investment
model. On the other hand, own branding requires huge capital
reserves and brand advertising to
compete effectively against global brands like Sheraton.
KELLOGG SCHOOL OF MANAGEMENT 17
For the exclusive use of P. Cervera, 2019.
This document is authorized for use only by Paolo Cervera in
2019.
QUESTIONS
1. What are some general characteristics of family-owned
businesses in Asia? How is the way
the Harilela family operates similar or different from the
characteristics listed above?
2. Consider the Harilelas’ corporate strategy. What are the
merits of the management contract
system versus the franchise system?
3. Consider the Harilelas’ funding strategy. What are the pros
and cons of remaining a private
company? What benefits and costs are associated with going
public?
4. Consider the Harilelas’ HR strategy. How is it different from
that of a multinational or a large
nonfamily business?
5. What are the corporate governance issues of a family-owned
business?
6. What should the Harilela family do next in terms of
116. succession?
7. If Aron does finally assume leadership of the family
business, what potential minefields may
he have to navigate?
8. What advice would you give Aron?
