magt 410 chapter 1.pptx

Contemporary Topics in Entrepreneurship Chapter 1 Family Business (Understanding Key concepts) Outlines * The concept of family business (FB) * Important facts about FB * Advantages / disadvantages of FB * Issues related to fami...

Contemporary Topics in Entrepreneurship Chapter 1 Family Business (Understanding Key concepts) Outlines * The concept of family business (FB) * Important facts about FB * Advantages / disadvantages of FB * Issues related to family business structure * Characteristics of successful FB Introduction Most of the businesses around the world have started as a small family business (FB), then started to grow to become global firms. Like any business, the FB starts around a good idea then grows. Most family businesses fail when they arrive the third generation. Conflicts appear constantly during business operations. The sustainability of a family business requires special skills to build the right structure of the family business. The Concept of Family Business A family business is a business in which one or more members of a family have a significant ownership and commitment toward the business. A business actively owned and/or managed by more than one member of the same family. Some important facts about FB Over 90% of businesses around the world are family business. An estimated 70%-85% of global GDP annually is created by family businesses – key driver to economy. Between 50-80% jobs in most countries worldwide are created by family businesses. Some important facts about FB % of family % of GDP contribution businesses 9 9 9 9 US 0 0 8 A 7 7 0 5 5 German y Franc e 0% 20 40 60 80 Spai % % % % n Some important facts about FB ~ 90% firms owned and managed by family ~ 33% firms survive till 2nd generation ~ 15% firms survive till 3rd generation Some important facts about FB Some important facts about FB Family business generally take a long term view and thus balance short-term rewards with long-term sustainability and prosperity; Advantages of Family Business Advantages: Commitment by family members (sacrifice) Higher profits due to commitment Knowledge continuity Reliability and pride Raise kids around the family business Successors close to business activities Do not keep secrets Trust (loyalty) Disadvantages of Family Business Disadvantages: Hesitates to appoint outside talents Believe better to be 100% owner of stable business than to be 80% owner of a growing business Lack of initiative and creativity Lack of trust in next generation skills Hard to solve conflicts if they appear Finding the next leader of the family business Structure Model of Family Business Structure Model of Family Business Issues Related to Family Business Structure Due to the structure of FB, there are a number of common issues that arise at one time or another. These issues can cause serious problems to the business. If they are not addressed properly, they can create conflicts that disturb business activities. This is why at the 2nd and 3rd generations, many of the FBs end up losing. Issues Related to Family Business Structure Complexity: FBs are usually more complex in terms of governance (control) than their counterparts, due to the addition of a new variable: the family. Adding the family emotions to the business activities increases the complexity of issues that these businesses have to deal with. Family members can play different roles within their business, which can sometimes lead to a non- alignment of incentives among all family members. Issues Related to Family Business Structure Informality: Because most families run their businesses themselves (at least during the first and second generations), there is usually very little interest in setting clearly specific business practices and procedures. This can lead to doing things in different ways. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business. Issues Related to Family Business Structure Lack of Discipline: Many FBs do not pay sufficient attention to key strategic areas such as: CEO and other key management positions Succession planning Family member employment in the company Attracting and retaining skilled outside managers Delaying or ignoring such important strategic decisions could lead to business conflict and failure in any family business. Issues Related to Family Business Structure Employment Qualifications: Many FBs have trouble determining guidelines and qualifications for family members hoping to participate in the business. Some companies try to limit the participation of people with certain relationships to the family, such as in-laws, in order to minimize the potential for conflicts. FBs often face pressure to hire relatives or close friends who may lack the talent or skill to make a useful contribution to the business. Issues Related to Family Business Structure Salaries and Compensation: The issue of paying high salaries (and part of the profits) to family members who work in the FB. In order to grow, a small business must be able to use a relatively large percentage of profits for expansion. Also, giving different salaries to the same position can create unhealthy working environment and low commitment to work. Issues Related to Family Business Structure Succession: Another important issue relating to FB is succession—determining who will take over leadership and/or ownership of the company when the current generation retires or dies. The key to avoid conflicts about who will take over a business is having a well-defined plan in place. Otherwise, family members will fight and end up dividing the FB between them,or sell it. Examples of Famous Family Businesses Hyundai (South Korea, Automotive, $ 48 billion) BMW (Germany, Automotive, $ 53 billion) Walmart (USA, retailers, $ 621 billion) TATA (India, different, $ 49 billion) Successful Family Business The success of FB requires a balance between family members, management, and ownership, in order to minimize conflicts and address problems effectively. Characteristics of Successful FB Good management to establish best practices: Stimulate new thinking and fresh strategic insights. Attract and retain good managers and employees. Create a flexible and creative working organization. Create and maintain capital (to avoid crisis). Prepare the right successors for leadership. Characteristics of Successful FB Control family interfering: Family members must resolve conflicts with mutual support and trust Boundaries between work and family are appropriate and respected Family has the ability to make decisions and move forward Family is clear about business goals and work together to achieve them Family activities are managed by good leadership In-class Activity #2 1. Look for a family business that collapsed/ failed. Explain what happened. In your view, how could this issue have been mitigated/ avoided? 2. Look for a successful family businesses Try to find reasons behind their success, and how to overcome some challenges over the years. Part of your portfolio  Summary Family business is very critical to economic development. It can generate many advantages if managed properly. Expanding it over generations can be a challenging task, because we need to balance different issues. Good management team can build a good FB environment