Family-owned businesses are the foundation of a stable economy, yet they experience unique problems. Their troubles range from complex legal and tax estate planning issues, to family conflicts, trials and tribulations from the progression of families and businesses through evolutionary but not compatible stages of development, and last but not least, lack of succession planning. Research has clearly shown that approximately 30% of family firms succeed in making a successful transition into the second generation, while as little as thirteen percent of family businesses pass the torch to the third generation.
Intergenerational family business management education is vital for business students and for family businesses in the community in order to successfully make the transition into the next generation, and successfully continue to remain in family hands. The family business is a vital force in the Indian economy. About 80 percent of all Indian businesses are family owned or controlled. They range in size from the traditional small business to a few of the Fortune 500 firms. It is estimated that family businesses generate about half of the country's Gross National Product and half of the total wages paid.
The Indian economy depends heavily on the continuity and success of the family business. It is unfortunate, even alarming, that such a vital force has such a poor survival rate. Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. Let us explore the nature of the family business as a dual operating system, and identify issues of greatest concern to family business owners, as identified by family business owners across the world.
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As you review these issues, you will see that, although you and your family are unique, the challenges you face are not, because almost every family business shares the same problems. After reading this section, you and your family should complete the Family Business Assessment Inventory in Appendix A. What Is a Family Business? Defined simply, a family business is any business in which a majority of the ownership or control lies within a family, and in which two or more family members are directly involved.
It is also a complex, dual system consisting of the family and the cuisines; family members involved in the business are part of a task system (the business) and part of a family system. This is where conflict may occur because each system has its own rules, roles and requirements. For example, the family system is an emotional one, stressing relationships and rewarding loyalty with love and with have in the family husband/father, wife/mother, child/brother/sister carries with it certain responsibilities and expectations.
In addition, families have their own style of communicating and resolving conflicts, which they have spent years perfecting. These styles may be good for family situations but may not be the best ways to resolve business conflicts. Conversely, the business system is unemotional and contractually based. Entry is based on experience, expertise and potential. Membership is contingent upon performance, and performance is rewarded materially. Like the family system, roles in the business, such as president, manager, employee and stockholder/owner, carry specific responsibilities and expectations.
And like the home environment, businesses have their own communication, conflict resolution and decision-making styles. Conflicts arise when roles assumed in one system intrude on roles in the other, when communication patterns used in one system are used in the other or when there are conflicts of interest between the two systems. For example, a conflict may arise between parent and child, between siblings or between a husband and wife when roles assumed in the business system carry over to the family system.
The boss and employee roles a husband and wife might assume at work most likely will not be appropriate as at-home roles. Alternatively, a role assumed in the family may not work well in the business. For instance, offspring who are the peace makers at home may find themselves mediating management conflicts between family members whether or not they have the desire or qualifications to do so. A special case of role carryover may occur when an individual is continually cast in a particular role. This happens primarily to children. Everyone grows up with a label: the good one, the black sheep, the smart one.
While a person may outgrow a label, the family often perceives that person as still carrying the attribute. This perception may affect the way that person operates in the business. Family communication patterns don't always affect the business, but when they do it can be very embarrassing. Often you say things to family members in a way you would never speak to other employees or managers. This problem is compounded when your communication is misread by the family member. Often parents are surprised by a son's or daughter's negative reaction to a business directive or performance evaluation.
This reaction is probably because the individual perceived the instructions or evaluation as orders or criticism from Dad or Mom, not from the boss. The list below contains the issues that most family businesses face: resistances. 2. Leadership and ownership how to prepare the next generation to assume responsibility for the business. 4. Letting go how to help the entrepreneur let go of the family business. 5. Liquidity and estate taxes. 6. Attracting and retaining infirmly executives. 7. Compensation of family members equality versus merit. . Successors who chooses and how to choose among multiple successors. 9. Strengthening family harmony. All of these issues and the others you include, potentially cause business conflict and family stress. But there are three steps you can take to manage conflict and stress in a family cuisines: 1 . Identify issues that may cause conflict and stress. 2. Discuss these issues with the family. 3. Devise a policy to address them. The next consideration in understanding the family business is to understand the perspectives of those involved.
Without this understanding, managing a family business will be difficult. The actors in the family business can be divided into two groups: (1) Family members and (2) Non family members. Each group has its own perspective and set of concerns and is capable of exerting pressures within the family and the firm. Family Members Neither an Employee nor an Owner Children and in-laws are usually in this group. Although they may not be part of the business operations, they can exert pressure within the family that affects the business. For example, children may resent the time a parent spends in the business.
This creates a problem because parents usually develop guilt feelings as a result of their neglect and the resentment expressed by the children. In-laws, on the other hand, are viewed either as outsiders and intruders or as allies and therefore are usually ignored or misunderstood. For example, a daughter-in-law is usually expected to support her husband's efforts in the business without a clear understanding of family or business dynamics. She may contribute to family problems or find herself in the middle of a family struggle.
This family member works in the business but does not have an ownership position. For this individual, conflict may arise for a number of reasons. For example, if he or she compares himself or herself to the family member who has an ownership position but is not an employee, a sense of inequity may result. The member may voice his or her resentment: "I'm doing all the work, and they Just sit back and get all he profits. " Or resentment may occur when decisions are made by owners alone. Here, he or she may feel: "I'm working here every day.
I know how decisions are going to affect the company. Why didn't they ask me? " Family members employed in or associated with a family business generally expect to be treated differently from non family employees. An Employee and an Owner This individual may have the most difficult position. He or she must effectively handle all the actors in both systems. As an owner, he or she is responsible for the well- being and continuance of the business, as well as the daily business operations. He or she must deal with the concerns of both family and infirmly employees.
Often, the founder, as the sole owner and chief executive, falls in this category. Not an Employee but an Owner This group usually consists of siblings and retired relatives. Their major concern usually is the income provided by the business; thus, anything that threatens their security may cause conflict. For example, if the managing owners want to pursue a growth strategy that will consume cash and has an element of risk, they may face resistance from retired relatives who are concerned primarily about dividend aments.
Non family Members An Employee but not an Owner This group deals with the issues of nepotism and coalition building and the effects of family conflicts on daily operations. Owners' concerns for owner employees usually involve recruiting and motivating infirmly employees and infirmly owner- managers who will have little or no opportunity for advancement, accepting children of infirmly managers into the business and minimizing political moves that support family members over owner employees. With the emergence of stock-option plans, this group has become more important.
Employees may become owners during a succession. In companies where a foster cooperation with the new management because the employees will personally share the benefits and responsibilities of the company. In cases where there is no successor, selling the company to the employees who have helped build it makes good business sense. Employees who own the company will want to be treated like owners, which may be difficult for family members to understand and accept. When conflict occurs in the family business, it can be traced to a disparity in the goals of the individuals, the family or the business.
Perhaps a family member works in the business out of economic necessity, not because he or she wants to. Or perhaps the potential successor has plans for the business that differ from current management plans different generations usually have different goals. Whatever the cause, the conflict must be addressed and resolved to avoid and prevent more serious problems later. One way to define and align family and business goals is through business and family strategic planning. In these plans, you will create a mission statement for the business and for the family that allows each element to complement the other.
Once you have completed this task, set goals for the family business that will allow the family and business to prosper. Next, develop a strategy to accomplish these goals and, finally, formulate policies and procedures that control the family's involvement in the business. Appendix B, the Strategic Plan Checklist, can help you review the steps in strategic planning. Strategic planning involves analyzing the business in its environment and devising a process for guiding its development and success in the future. This process involves assessing the internal operations and the current external environment (I. , economic, technological, social and political forces) that affect the business. To begin this process, identify internal strengths and weaknesses that may constrain or support a strategy. Components of this assessment include : (1) the organizational structure, (2) the culture and (3) the resources. Make a list of the opportunities available (growth, new markets, a change in regulations) and the threats (increased competition, shortage of raw materials, price cutting) to your business. This should give you some insight into the current situation and provide a strategic direction.
Next, list the objectives of you and your family, identifying personal needs and risk orientation. Many of these objectives and goals will be addressed in your family strategic plan. Also, you will find that your personal opportunity for growth in your market but you have a low risk orientation and a high personal need for security, you probably should not pursue high growth. It would be not only risky but also expensive. Growth consumes cash, and cash must be generated internally or financed externally. Your personal objectives should mesh with your strategy.
Once you have identified opportunities in the industry, assessed he strengths and weaknesses of the firm and listed your personal objectives, you can proceed with the strategic plan. This will involve 1 . Developing a mission statement, 2. Setting objectives, 3. Developing strategies to meet objectives, and 4. Developing action steps to implement the strategy. Mission Statement The mission statement answers the question "What business are you in? " It defines your customers and explains why you are in business. The mission statement embodies the heart of the business and gives direction to every facet of the business.
Effective mission statements 1 . Include specifications that allow measurement, 2. Establish the individuality of the firm, 3. Define the business in which the firm wants to be involved, 4. Are relevant to all with a stake in the firm, and 5. Are exciting and inspiring. Objectives You should set reasonable objectives for the firm, based on the mission statement, to ensure accomplishment of the firm's mission. Objectives should be clearly stated, realistic, measurable, time specific and challenging. Objectives can be created for 1 . Revenue growth, 2. Earnings growth, 3. Sales and market share growth, 4.
New plants or stores, and . Product/service quality or corporate image. Strategies Strategies are determined by your answer to the earlier question: What will the firm be like in the future? Your strategic options include the following: 1 . Stability success is derived from little change (rare). 2. Profit strategy sacrifice vertical integration (expansion from within), horizontal integration (buy a competitor), diversification, merger or retrenchment (turnaround or divestment). Action Steps Once the strategy is selected, action steps should be specified that will guide the firm's daily activities.
An example of an action step is creating a budget to project the costs of a strategy. This process also is known as tactical planning. The steps in tactical planning should be practical and easy to implement and account for; their purpose is to convert goals into manageable, realistic steps that can be individually implemented. The entire family should develop a mission statement or creed that defines why it is committed to the business. By sharing priorities, strengths and weaknesses, and the contribution each member can make to the business, the family will begin to create a unified vision of the firm.
This vision will include personal goals and career objectives. An important issue to consider is how to set priorities for the family and the business, I. E. , decide which will come first, the family or the business. How you answer this question will influence your planning. Some family members will opt for the business first, reasoning that, without a business, there will be no financial security for the family. Others will opt for the family first, reasoning that no business is worth the loss of family harmony. A third alternative is to serve both family and cuisines perhaps not equally, but as fairly as possible.
Under this alternative, all decisions are made to satisfy both family and business objectives. For example, a family may have a policy that any family member may Join the business, but he or she must meet the requirements of the Job. You may find this is the best alternative because it forces a commitment to both the family and the business. Trying to plan a business strategy during normal office hours is almost impossible. Plan a family business retreat to discuss the goals of the individual family members and the goals of the business.
The first retreat should focus on reviewing the firm's history, defining family and business values and missions, creating a statement about the future of the business and reviewing areas that need more attention. The purpose of the retreat is to provide a forum for introspection, problem solving and policy making. For some participants this will be their first opportunity to talk about their concerns in a non-confrontational atmosphere. It is also a time to celebrate the family and enhance its inner strength. A retreat usually lasts two days and is held far enough away so you won't be laws, should be invited.
Begin planning your retreat about six weeks in advance. Once you have picked a time and place, establish a tentative agenda. The agenda in Table 1 is typical. Table 1 : Agenda for Family Retreat Day 1 Review family business history and current operations. 10:00-12:00 Discuss individual career goals and assess individual roles in the business. 1:00- 3:00 Discuss future plans of the company and how family members fit in. 3:30- 5:00 Prepare written statements of the family and business mission statements and goals. Day 2 Discuss areas in which policies need to be drafted (e. G. Entry exit compensation). :00-11:30 Prepare a preliminary draft of policies. 1 :O- 3:00 Discuss areas in which better communications are needed. What methods are needed to keep everyone (including non-operating family members) informed? 3:30- 5:00 Review retreat and plan for next meeting. Your actual agenda will be tailored to meet the unique needs of your family and business. Usually families will identify some of the following issues for discussion at their first retreat: 1. A family creed or mission statement. 2. Management succession. 3. Estate planning. 4. Strategic business planning. 5. The reward system. 6. Performance evaluation. Communication within the family. 8. Preparing adult children to enter the business. 9. Transition timing. 10. Exit and entry policies. A series of questions that can be used to identify topics for discussion is included in Appendix C. You may consider using a retreat facilitator, a professional experienced in helping family-owned businesses. The facilitator helps identify issues for discussion before the retreat and keeps the atmosphere non-confrontational during the retreat. The facilitator does not solve the family's problems but guides the family in doing so. The retreat is the beginning of a process.
When a consensus is reached by the participants, policies should be set, courses of action planned and responsibility for should be planned, possibly with the continued assistance of the facilitator. One important outcome of the retreat should be plans for periodic family meetings and retreats in the future, so the dialogue will continue. Open communications will enable the family to come to grips with problems and issues while they are fairly easy to solve. Once family members have reached a consensus on the continuity of the firm and their roles in it, you can begin planning for succession.
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