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THE FAMILY BUSINES AND ITS PROBLEMS

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Contents 1. Executive Summary

2. Introduction

3. Statistical data and relevance of family business

4. Notable features of a family business

5. Problems of a family business

6. Solutions of an effective family business

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EXECUTIVE SUMMARY

The report herein will discuss the concept of family business along with its challenges and

problems. Family businesses in simple terms mean the involvement of members of the same

family in a business with equivalent or similar shares of each. It is managed and owned by

members of the same family. Most often the staffs or employees in the family can be non-family

members. But the managerial and the top positions are always secured by members of a family.

Researchers say that there are three different types of ownerships that exist in a family business.

They are family owned and family managed, family owned but not family managed and family

managed but not family owned. A family business is normally set up due to the trust and reliance

one member has on another. But at the same time many family businesses have been broken and

shut down due to betrayal of the members of the family itself. In points of decision making and

success planning most of the time members involve in problems and raise disputes. The main

problem that has been seen to initiate a problem in the business is when a member’s personal

interest hampers the interest of the business. Most often is has been seen that a member who is

incapable of handling a project is still kept in that position as he is a family member. This starts

the dispute with other members of the family.

After a thorough research it has been seen that most of the CEO s of family owned companies

feel that the involvement of their siblings or children that makes their business special and

unique. But at the same time many have also complained that they failed to succeed because of

betrayal and nonalignment of the interest of the family business. There are many causes of

problems which will be describes below. There are some common problems which all family

businesses suffer and there are some unique problems which only few suffer. With illustrations of

some famous family businesses the problems they encounter will be discussed further. At the

same time the elements of problem of a family business will be discussed in details too. As we

know that all problems have solutions if handled strategically. Thus all the strategies to solve the

family problems and challenges will be elaborated in details below. The aim of the report is to

describe the concept of family business and the problems faced there. The formulation of the

report will solely base on that. Despite of various problems faced by a family business rarely

they part and start something on their own. Somewhere the blood relationship ties them tight to

propel the business together.

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INTRODUCTION

A FAMILY BUSINESS is one where two or more than two members are drawn from the family

only. However members who are not a part of the family can also are introduced in the business.

The family members are in charge of the operational aspects of the business as well as in

complete control of all its activities. It is they who does the entire decision making and does not

need any permission from any outside authority to decide about the course of action. A family

business usually signify, family values, sentiments, morality, desires and ideals. It is not driven

by the external market psychology or external constraints all the time. The families members

have to arrange the funds, organize the factors of production and then play the role of an

entrepreneur. Thus the family is ultimately benefitted for all its gains and also bears the entire

risk in case of loss as mentioned in The Wall street journal.

STATISTICAL DATA AND RELEVACE OF FAMILY BUSINESS.

1) More than 75% of the business of the world are run by the family businessmen. They are

entirely managed and controlled by members of the family only.

2) In case of USA, the contributions of family owned business to the GDP of the nation is

more than 50% ( Till 2011)

3) Another notable feature in case of USA is that more than 50% of the Public LTD

Companies in the USA are family business houses.

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4) Worldwide, the common categories of family run business consists of the following

segments, Cottage and handicraft industries in case of Asia and African countries, agricultural

farms and farm houses in case of most of the countries throughout the world. Dairy and milk

product business in case of Denmark, Holland, Switzerland. Agro food based products in case of

India. According to Liza (August 2005) Cattle rearing and ranching, especially in the case of

USA and Argentina was important.

5) Business houses do not mean only the small scale industries only. They have already

established a prominent place in the list of Fortune 500 companies. Names includes Wal-Mart,

Ford, Ikea, Tata Group, Aditya Birla group etc.

NOTABLE FEATURES OF A FAMILY BUSINESS.

1) It is a business house or a company where the decision making and operational controls

as well as voting power lies in the hands of the members of the family only.

2) According to Rick (2008) the family members are the founders of the business house.

Hence, the origin of the business has a direct link with the founders. Not like in the case of a

public Ltd company, where the promoters of the company hardly has any relations with the

owners.

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3) The directors, managers or any other key management personnel as the designation might

require would be selected from the members of the family only. Generally, any outsider

management expert is not selected as a key member for the business house.

4) The motto behind the formation of a family business is to keep the wealth of the business

house within the ambit of the family only. Hence, any investors or the public are not generally

entertained in stake in the business. Business goes on as usual and the mney gets circulated in the

hands of the family only.

5) Most important aspect of the family business is the concept of succession. A successor

inherits the position of the owner as a descendant. Once the owners leaves the business, or retires

or passes away either, the business is immediately succeeded by the next successor.

6) According to The Economic Times, India, (Nov 2007) the successor is generally being

selected by the family members who run the business. In case of only one child of the family, the

business is automatically vested into his or her hands as natural succession. In case of the

presence of the siblings, generally the elder one becomes the successor or that individual is

chosen after a common consent of the senior family members.

7) The best feature of the family business, say in case of Ford, Fiat or Tata Group is the

presence of personal care and caution in the operations. The owners are self-conscious. They are

emotionally involved in the project as the business is regarded to be a substantial part of the

family. A common concept of Family Business is the Hindu Undivided Family, i.e. HUF of the

Indian society. According to Leslie (2008) it’s a legalized mode of family business operations

where the Karta is the owner, leader and the ultimate decision maker.

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8) Maximum utilization of resources at a minimum cost, because the benefit of good

business accrues to the owners only.

9) Disadvantage is that the owners have to arrange for all the capital and hence any kind of

business loss has to be borne by the family members only. Thus, bearing of loss is the sole

responsibility of the owners.

10) According to Ram Charan and Bossidy (2005) Thompson financial study for Newsweek

shows comparisons of family firms to the rival on the basis of comparison of the six major

indexes with other non-family Public Ltd Companies. This report follows the parameters of the

specified index from London to Real Madrid.

PROBLEMS OF A FAMILY BUSINESS

There are a series of problems which are normally encountered in a family managed business

which are the major bottlenecks that hampers the business prospects as well as leads to it’s

gradual downfall. According to Bill (2009) the series of problems could be discussed are as

follows.

1) Solving the problems among the children –This has become a major issue in the overall

picture of the family business. One common example on this matter with regard to the

international business scenario is the conflict among the Ambani Brothers of the India based

Reliance Industries ltd. Soon after the departure of the Reliance Stalwart and founder Mr

Dhirubhai ambani, there was a major conflict among two of his sons, Anil and Mukesh Ambani.

According to Jonathan (2006) the business capitalization of the, then reliance industries after

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Dhirubhai’s departure was INR600 billion. Soon, the platform was split between the two

brothers with specific allotment of particular number of shares to each of them. They formed

their new entities with individual leadership, thus breaking their 30 year old traditionally

managed family business leadership.

Conflict among the descendants can also arise on account of several other reasons, such as

a) Difference of interest-. With the passage of time and increase in the number of

descendants the interest and vision of the family business changes a lot. Some members would

like to follow the mission of Management by Objectives, whereas some others would follow the

goal of profit maximization. There would be conflict of ideas, goals and applications of personal

principles.

b) Dr Marshal Northigton in his book, managing the family business, has mentioned the

point of children involved in the business. He emphasized on various details and researches

which shows that a business grows more competitive among the siblings due to the long

unresolved disputes among the ascendants. After the siblings starts applying their own business

techniques then a lot of undisputed issues and interests that started with the ascendants come

back into the picture. There could be multiple reasons such as distribution of family business

profits, ownership share, personal contribution and commitment issues.

c) According to Nicholas (2009) Educational and technical barriers and frequently

encountered legal issues. The best example in this regard will be the case of the Shoen Family.

This has been cited by Prof. Nigel Nicholson, of London Business School. The journey of Shoen

family from Garrage to the National business leadership was a remarkable one. But in 2003, it’s

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splitting off into two rival fractions, lawsuits and direct conflict among the brothers as well as

physical altercations resulted in to the bankruptcy of the company in 2003.

2) Lack of unified strategy and planning. India based age old family run business are the

Tata Group. According to Avani (2007) despite major economic crisis and downfall of the major

business houses since 2008, Tata has maintained its growth rate unaffected. The reason is a

combination of focused strategy and carefully planned goal of the business house. Prof. Nigel

Nicholson has again pointed out that the uneven distribution of management powers among the

family members, lack of open communication and non-identification of a common goal

gradually leads to the downfall of a well-established business house in due course of time. He

cites the example of a beer firm in UK, which has enough capital and resources but never had a

proper and open communication among the members. According to Boro (2008) this led to the

instigation to some of the family members who tried to focus their personal image much ahead of

the business. Thus there grew an unrest, unclear communication and uneven strategies and thus

ultimately led to the downfall of the firm as a whole.

3) Planmanship. Normally, a corporate house divides the goals of the business into three

specific categories, the long, mid and short term goals. Based on these, the goals are further

allocated to further specific categories such as the tactical, technical or the operational goals.

This leads to the allocation of resources and utilities in a very systematic manner. But a common

problem in case of a family managed business is that the members align the goals of the business

with their personal goals. The goals are mostly profit maximization, property acquiring,

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developing personal image, improving the individual social status etc. Thus from the long term

aspect, the business house lacks the feature of a stable growth orientation. It is the business

which suffers at the cost of the personal desires and benefits of the family members. According

to Jenna (2010) the members might increase their personal images and status but the business

can hardly improve its wealth.

4) Personal conflict and impact on its business- Differentiating the family dynamics from

the business dynamics is a serious subject. Like in a family, in a family business also it is

important to make compromises. According to Joseph (2010) there would be family strain,

pressures, conflicts and dis integration. But what happens is that these did orientations pre

occupies the business place and overlaps the business goals. Either the members don’t make any

compromise or they start splitting off to maintain peace and harmony. But they do not look upon

this extra strain as a source of dynamism and creativity. Instead of doing the SWOT analysis of

the business family as whole they do more focus on the personal barriers and differences of

ideas. In simple words, the family members are more concerned about the design of the boat

instead of planning out the long journey on the sea.

5) Lack of a corporate approach. One of the success stories that stand contrary to the family

business problems is the example of Joseph P Goryeb, the founder of Champion Mortgage Co in

1981. According to Jessica (2007) more than USD 20 million with 2 of his sons and daughter on

key management positions and is a regular TV Broadcasted figure on Newyork-Philladelphia

area. But unfortunately, more than 50% of the family run business in USA lacks this corporate

approach. According to Nissa (2010) the major reason is the lack of control in a centralized

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manner. Without the scope of proper control and continuous monitoring, the operation of the

business goes wayward. Conflict over control is a common feature among the family members.

This is a common scenario that every family member has their own favorite employees over

whom they delegate their controlling power. This causes non uniformity of control mechanism,

clash of interest among the employees and destruction of synergy and growth. Gradually, both

the owners and the employees develop a spirit of divide and rule.

6) Improved marketing approach- An outstanding example of marketing the family business

could be traced back to the case of India based global confectionery suppliers, Haldiram

Bhujiawala. According to Neha (2010) they had a very sharp end specific approach to modern

marketing. They introduced franchisee scheme of business, trained new business to run their

franchisee, maintenance of quality control, follow up of business policies and constant

monitoring of sales progress and difficulties. According to Shina (2010) more than 50% of the

family business houses in US, UK and Asian countries like India and Thailand don’t follow any

modern approach and innovative techniques to marketing. Following the traditional method

based technique they rely on the old customer base, old debtors and creditors. Neither they apply

modern advertisement techniques, nor advanced sales promotion, nor do they generally prefer

arranging management workshops to motivate their employees. Thus, they are stuck on to the

rots of business succession and ultimately perish when the modern business houses bring better

schemes and attractive packages for the consumers.

7) Adoption of Technology- except the biggest family managed business like The Henry

Ford, later on the Ford, Tata Group, Wal-Mart, Cargill Inc. or the Koch industries, not much of

the family business has the tendency to innovate technologies or to hire latest production

mechanism. According to Ronan (2011) with the growing competition and high edge technology

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almost 250 major family business houses starting from Wal-Mart Stores to Michelin, Hallmark

cards or Prada has converted their older technology to high edge technique. But that percentage

is nothing when compare with the rest of the family business houses in the international scenario.

The overall percentage of family business in the world wide scenario is 75% of total business.

However the less than 10% of the family run business does adopts or uses modern technologies.

In case of agro based sector, herbal products, food products, garments and fabric sector, the use

of faster and modern technology is almost absent. Though these five categories constitute a

major chunk of the family run business but use of technology has hardly been thought. This has

resulted into lower production, not meeting sales target, reduced profitability, lack of

employment generation but still hardly there has been any specific solution in this regard.

8) According to the business daily (2011) helps a Successor improve and get trained family

business research brings out the focus and problem on training a successor. Sudden death of the

head of the family, abrupt changes in the business structure, major business loss or putting an

unwilling son into the wheels of the family business can bring out certain harder challenges in

the family business. In most of the cases, the new successor is unaware about the market

changes, cannot determine the employees’ psychology, cannot co-ordinate the employees with

his family sentiments etc. On the other hand, there is no such specific technique available for the

business house to train the new successor. They have to learn through the normal process of

daily business, failure of which leads to the abrupt damage of the business unit.

9) Creating a business culture- A common feature of the family business is the prevalence of

family culture and sentiment. This in one way is a boon because it instills the bond among the

employees and the owners. But it is a difficulty in some other perspective because it does not

boost the professional behavior among the employees. According to Alisha (2008) the come and

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go as you like or the fostering of family feelings creates more room for sentiment rather than

improved professionalism. Thus it is more like a cocoon where both the employees and the

employers are tagged into a comfort zone from which they develop a resistance to change. Hence

most of the family business carries on older management formulae, slower decision making

approach, un organized workplace, slower approach to market challenges etc.

10) Room for inequality- Unlike a modern corporate house, where appraisal and promotions

are determined on the basis of well-set standard parameters, in a family business the concept of

increment and promotion hails from a separate approach. According to Julie (2007) any

employee who wins the confidence of his employer or who is much longer in service stands to

gain more in terms of monetary increment or career growth. However in certain cases the fresher

employees who though are performing extremely well does not stand to gain out of their quality.

Thus it is a decelerating source of motivation for the youngsters. Especially in case of farmlands

or the Asian cottage industries, the older are the rulers. What affects in turn is the creativity and

productivity of the young employees. They start following the set trend and gradually decline the

quality of production and creative ideas.

11) Promotional parameters- think of a corporate house like Harley Davidson or IBM.

Promotion and training goes together. Sometimes the young population leads the company and

the older minds are mostly the advisors or strategy thinkers. But in case of a Saudi based oil

company or a Switzerland based numerous watch company does not cater much to the principles

of Six Sigma, leadership formulae or delegation of Authority. Hence lack of training and a

justified approach to promotion becomes a source of insecurity for the present employees. This

derails their focus from hard labor. Also not much training is being provided. However in any

family based business like cattle rearing, ranching, and dairy and food production, newer

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technology and improved training is a must. Just because of old dated training process,

production methodology is stuck upto a particular level only.

12) Delegation of Authority- Delegation of authority denotes transfer of power and authority

from the boss to the subordinates with the purpose to ensure better control and accountability of

the operations. A family business, the family members or the owner has the complete authority

over his business and employees. Generally, the owner delegates his authority to someone who is

very close to him. But this does not necessarily denote that the best employee is being delegated

with the power. Hence the question of accountability arises. This employee in turn has the scope

to misuse his authority and exercise excessive supervision and demoralize other junior

employees. Delegation in case of a family business originates from the will of the owner and not

from any unified management decision and meeting.

13) Succession of family business. As cited before, the Indian based global giant Reliance

India Ltd had faced the major crisis of inheritance. Both the successors, Anil and Mukesh

Ambani were close competitors and had enough skills, acumen and talent to manage and lead the

business. They faced the conflict of interest, decision making and ideas. Ultimately they had to

divide the business ownership and assets among each other and carry the business through two

separate entity made by them. This resulted in the lack of investor’s confidence in 2005 and

gradual fall in the stock market prices of their individual companies share. On the other hand,

Tata Group had faced a serious crunch in finding their successor. With, Ratan Tata, the last

successor who has already decided his retirement there were no other successor in the Tata

family to inherit the more than USD 2000 billion companies. At last a distant relative, Cyrus

Misty, had to assume the post of a successor, though literally it marked the end of the Tata

succession era. Similar problem has reached the crisis mark of Switzerland. Swiss Style, the

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Swiss magazine for the business leaders has brought a report stating that around 45000-60000

Swiss based family business are hardly going to find any successor after the lapse of next five

years.

In such a case the only option left to the business house is the Management by out or decentralize

the business and make it public Ltd Company, with non-relative key management Personnel in

charge.

14) Legal hassle- In case of family managed business, the extent of litigation and legal

hassles are much more than any other form of business. As we have mentioned above numerous

legal battles and cases are fought among the family members of a business house than in case of

any other mode of business.

15) Abuse at the workplace- Mostly in case of the family business, members are tolerant

about each other in case of drug or alcohol abuse. They tend to be protective and normally does

not disclose the sensitive issues about their own members. This might create an impact on the

mind of the employees. They are always keen to find out as to how the owners react to their

problems and complaints despite personally not being conscious about disciplinary objective.

16) SWOT Analysis- If a family business is not organized then it is not much conversant with

the external environment. Only after a business is well organized about the internal and external

environment then it can do it’s SWOT Analysis well. SWOT Stands for Strength, Weakness,

Opportunities and Threats. Since this is a succession mode of business, that is why it inherits the

positive and negative strengths bestowed by the previous owner. Rarely, do the successor finds

out what is his original potential and weakness since he is caught into the circle of succession.

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Hence, most of the family businesses succumb to the external market changing forces. It believes

in the age old approach of brand loyalty and usual production technique.

17) Research and Development- The major bottleneck of a family business is that it does not

focus much on the research and development wing. Non family business houses like Sony, Aiwa

or Hyundai are the premier research oriented companies. Research requires neutral minds and

decentralized form of management. A family business is cornered with anything beyond its

normal expenses. Hence it is over cautious about its return on investment, which is sometimes a

cause of long term loss for the sake of short term savings.

SOLUTIONS FOR AN EFFECTIVE FAMILY BUSINESS

Unlike any other mode of business, the family business entails a lot of confusion and emotional

issues. These are sometimes long unresolved and remain uncovered,. Issues among the owners,

autocratic leadership or the resistance to change creates majority of the problem whereas certain

other issues also crops up among the employees. Thinking from the following perspective could

chalk out an effective solution pattern for the family business in a generic sense.

1) Family orientation with the objectives- Since family business is the source of wealth and

earnings for the family members, so they should be emotionally involved with the objectives of

the business. Once a family member gets close to the business, the motto and the ideas of the

business gets a positive approach. Members should fight for the problem together, build healthy

relation with the employees and must be creative enough to expand the business. Approach does

not mean spending half the time in the business office. Rather the owners should be coordinated

in their operations. They should control operations individually and also be accountable for their

ownership and job at the end of the day.

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2) Synergy with growth and emotion- The personal conflicts and dis integrations has a

direct impact on the business house. This degrades the growth target and hampers profitability.

Emotion can bring dynamism but into a systematic manner. If needed the owners should not put

the family tradition and ideas in the business policies if situation does not demand the same. In

any situation, business policies should be a distinct set of goals that helps both the owners and

the employees to grow and gain simultaneously.

3) Identification of the actual problem- Most of the family business crashes down due to the

personal family problem, when it enters the business scenario. An owners changes the business

policy according to his own will, or selects an employee according to his wish or wants his son

to be the next promising successor rather than his more capable nephew. These are the real life

practical instances of family business breakages. The family members along with the senior and

reliable employees must settle down with the problem together. Till the actual confusion and

problem is not nipped in the bud then the usual problems start creeping in, one after the other.

4) Analysis of the environment- A family business is knit by the family values and the way

their ascendants did the business, except the successful ones. Till the owners have a competitive

drive and psychology, they cannot compete with the major market competitors. In gradual course

of action, a successful family business brands like Fiat follows a finer strategy to Compete

Hyundai and Wal-Mart focuses on the extreme market based consumer needs to compete Metro

cash and carry of Future Group in India which are both non family corporates.

5) Mode of Leadership- As it was evident from the beginning of Tata group or Wal-Mart at

the beginning, they had an autocratic style of leadership, though gradually over time they have

changed their leadership to a participatory style. Order and get the job done have become a very

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negative aspect which demoralizes the employees. But unfortunately, in most Asian and African

family business, this form of leadership is still prevailing. Employees do not communicate

properly with their seniors, cannot suggest any better idea, feels scared to be relaxed and easy

going and thus cannot put their 100% effort at the workplace. Both Wal-Mart and Tata Group

should play the role model for the leadership management of the upcoming as well as prevailing

family business houses.

6) Proper distribution of wealth- Oppression and mismanagement by one family member to

the other is common for a business being run by a family. To prevent dispute and oppression, the

owners should have a centralized legal aid and audit system. So that there should not be any

room for misappropriation of wealth by any of the family members. It will ensure monitoring

and accountability for each of the members.

7) Training the successors- Both on job and off job training is needed to create good

successor. Through education the off job part could be settled. But to train a successor on job,

he/she should be motivated to mix freely with the employees, learn the job from them, and learn

the business as a whole. Till the successor is professionally and emotionally well used to the

business concept, he/she is an incomplete successor.

8) Prevent favoritism among employees- The employees should have a feel of equality and

p[participation. They should not be promoted only on the basis of age, behavior or favoritism.

But they should be assured a reward for their commitment, intelligence and productivity. This

alone will solve a major part of employee-owner co-ordination in a family business.

9) Justified compensation

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A common question arises very normally. An employee and a family member who does the same

job should be paid equal compensation or should they differ? Research shows that equal

compensation when paid boosts the happiness level of the employees. This is a trigger for

employee satisfaction and resolves at least half the conflict between the employer and the

employees. This ensures the employee loyalty and employers responsibility which both in turn

generates brand loyalty.

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