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The Family Business

&

Professionalism

Poornima M Charantimath, Entrepreneurship Development, Charantimath, Pearson Education, 2006

1. Professionalism and A Professional 2. Factors that make a family business unique 3. Cultural environment in a family business 4. Complex roles and relationships 5. Management practices in a family business 6. Managerial succession in a family business 7. Problems and pitfalls of a family business

Professionalism
Professionally Managed Co. or Professionals

 Everyone wants to become a "professional" these days or to work in a professionally managed organisation.  While being professional may be a virtue, what exactly is implied by being a professional is often found lacking in individuals and companies.  In fact, some family owned companies have higher professional standards than the so-called professionally managed companies.

A Professional
 To be a professional, it implies that a person is good in his job and can be depended upon putting in his best effort.  A professional or a company needs to be evaluated against the following yardsticks. A professional therefore means:  Highly educated person (or a company employing) engaged in challenging work providing considerable autonomy of working  Highly competent and conscientious and  Trustworthy following strict ethical and moral standards.
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Family Business Defined


 Family Business is :  A company in whose ownership and/or functioning two or more members of the same family are directly involved  A firm whose ownership passes from one generation of a family to another (succession)  A company where voting majority is in the hands of the controlling family; including the founder who wants to pass on the business to his descendents. (IFC)
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Importance of Family Business


 Over 75% businesses in developed world are family businesses (OECD)
99% 90% 85% 75% in in in in Italy USA EU UK

 In India, 95% of registered firms are family businesses.  Family businesses are the key drivers of the economy.  Companies with founding family participation performed better than non-family businesses. (Standards & Poor s 500)

Largest Family Firms Worldwide

 Wal-mart, USA Revenues $245b, Sam Walton family  Fiat group, Italy Revenues $54.7b, Agnelli family  IKEA, Sweden Revenues $10.4b, Kamprad family  Tata group, India Revenues $7.9b, Tata family

Strenghths of Family Business


They outperform non-family owned businesses in sales, profits and growth indicators. Strengths are:  High commitment/ dedication from family  Family members willingness to work harder and reinvest profits into the business  Willingness to pass on knowledge and experience  Family name and pride is associated with the business.
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Weaknesses of Family Businesses


 60-70% businesses are sold or collapse in 1st Generation.  Family businesses have short life spans. 95% dont survive third generation of ownership.

Weaknesses:  Poor management, inefficient funds growth  Lack of procedures and practices (articulated)  Lack of discipline

Model of Family Business System


 Family Business System comprises of three separate but overlapping domains:
1
Ownership

4 7

2
6 Family

3
Business
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The 3-Circle Model of Family Business


Developed by Tagiuri and Davis at Harvard (1982) that incorporates Family, Business, and Ownership in the definition of family business. The 3-circle model is the established model for a family business. 1. The Ownership system: Ownership is based on another set of rules. Success of owners is measured in terms of return on investment; protection of ownership rights and owners values and philosophy of business. 2. The Family system: Families exist to care and nurture their members. Succession is measured in terms of harmony, unity and development of individuals with self esteem. 3. The Business system: Business however are economic entities where success is measured in terms of productivity, profitability, expansion, mergers and acquisitions. 11

OWNER SHIP

ROI VALUES OWNERSHIP

FAMILY

HARMONY UNITY SELF ESTEEM

BUSINE SS

PRODUCT PROFIT PRODUCTIVITY

Healthy Family Business is the one that has


 Ability to resolve conflicts with mutual support and trust  Boundaries between family and work are respected.  Unresolved relationship problems are not neglected for long periods  Communications are open and clear  Family is clear about goals and has ability to take decisions in that direction.  Intergeneration boundaries are respected.
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Institutions of Family Business


 Each of these 3-systems interacts with each other and influences their membership, goal and dynamics through family institutions. These institutions can have different forms or purposes:
 Family assembly: to discuss all business and family issues  Family council: a governance body to coordinate family members interests in the business.

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 A family constitution: helps codification of family governance structures. It defines:


Family values, philosophy, vision and mission statement. Family institutions like family assembly, family council, family office, education and other social committees, etc Board of Directors (and Board of Advisors) Senior Management

Organisation structure with authority/ responsibility relationships among the board, family and senior management Key family governance policies

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Best Business Practices for Enhancing Effectiveness


(John L. Ward, Faculty - Kellogg School of Management, North-Western University)

1. Family Meetings: where the family stakeholders meet, peers discuss issues of common interest for family business success. Lines of communication are established and opened on a regular basis at least once a year. Family Council: Many families establish a Family Council a family executive board to act between family meetings. If the family is to own and manage a business for generations then all stakeholders need a place to be heard as equals individuals need to move from family relationships to business partners. 2. Advisory Boards bring a challenge and objectivity to business management. Real outsiders as advisors are a requirement for the board to work and a true board of directors is even better. This group can help separate the family from the business issues. They can mediate big issues. They can add vision and wisdom. And, they can make management accountable. 3. Family Constitutions are nothing more than an assembly of written policies and agreements both legal and informal. Families that can identify issues, both current and future, and debate their resolution to a consensus, then put it in writing, are highly likely to run a successful business.
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Key Family Governance Policies


 Employment policy: fair without discrimination among employees / family members  Shareholding policy: rules for ownership and transfer within family  Dividend policy:  Director nomination policy: electing family members to the board  Family education policy: for generating higher education facilities for family members  Conflict resolution committee (policy): measures to resolve conflicts among family members.

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Family First vs.Business First Models


Sample Issues
Family Employment

Family First Cos.


Open-Door Policy for all family members, regardless of qualifications Equal pay for all, regardless of their experience or performance Leadership based on Seniority in Family, regardless of merit or qualifications Business Resources used for personal needs (e.g., loans, grants) Unilateral & Concentrated with Senior Family Member (e.g., Chairman/CEO)

Business First Cos.


Qualification-Based Employment, as for any other new hire Merit-Based pay, based on experience, performance Leadership granted to the right person (family or non-family), based on merit and qualifications Business resources only used for business purposes separate family reserve fund utilized for family needs. Mulit-lateral, based on Defined Governance Structure (e.g., Executive 17 Committee)

Compensation

Leadership

Resource Allocation DecisionMaking

Family and Business Concerns Overlap


 Family Concern
1

 Business Concern

 Care and nurturing of family members  Employment and advancement in the firm  Loyalty to the family

 Production and distribution of goods and/or services  Need for professional management  Need for effective and efficient operation of the firm

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Advantages of a Family Business


 Strength of family relationships during challenging periods of business change  Financial sacrifices that family members make for the good of the firm  Operation as a family business distinguishes the firm from its competitors  Higher levels of concern for its community and non-family employees  Capability to plan and prepare for the long-term  Emphasis on quality and values
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Advantages of a Family Business


 Strong motivation of family members to see business succeed.  Developing firm specific knowledge among family members  Focus in the long term of the business  Reduced cost of control  Ability to used family theme in promotions  Shared social networks among family members  Perception of the firms reputation based on maintenance of high standards.
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The Culture of a Family Business


 The Founders Imprint on the Culture  The founders core values become a transmitted part of the culture. The founders vision and mission gets transmitted.  Organizational Culture  Patterns of behaviors and beliefs that characterize a particular firm. Honouring long term employees and thanking customers and vendors.  Cultural Configuration  The total culture of a family firm, consisting of the firms business, family, and governance patterns need to be documented People in the company, industry, and the community at large, all benefit from a deeper knowledge and understanding of companys heritage. Family shareholders generally maintain their loyalty to the family business. 21

Assignment
Q DESCRIBE THE 3-CIRCLE MODEL OF FAMILY BUSINESS AND DISCUSS THE CONTRIBUTIONS MADE BY Indian FAMILY BUSINESSES WITH EXAMPLES FROM THE HOUSE OF : TATA 1-10 61-70 AMBANI 11-20 71-80 SINGHANIA 21-30 81-90 BIRLA 31-40 91-100 SHRIRAM 41-50 101-110 MODIS 51-60 111-120, 59 JINDAL Date of submission: 4/3/11 12/3/11

E-mail ID: sudhir.skgrover@gmail.com


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Business Pattern
Paternalistic Laissez-faire Participative Professional

Cultural Configuration of a Family Firm

Governance Pattern
Paper Board Rubber-Stamp Board Advisory Board Overseer Board

Family Pattern
Patriarchal Collaborative Conflicted

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Succession Planning
Family Roles and Relationships
Parental Concerns in succession of business:
 Does the child possess the temperament and ability necessary for business leadership?  Can the founder, motivate my child to take an interest in the business?  Type of education and expertise most helpful in preparing my child for leadership  Timetable for promoting my child  How to avoid favoritism in managing and developing my child?  How to prevent the business relationship from damaging or destroying the parentchild relationship?
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Role of Professional Management in a Family Business


1. Stimulates new thinking and fresh strategic insights. 2. Attracts and retains excellent managers. 3. Creates a flexible, creative organization. 4. Creates and conserves capital. 5. Prepares successors for leadership. 6. Exploits the unique advantages of family ownership.

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A Professional
 To be a professional, it implies that a person is good in his job and can be depended upon putting in his best effort.  A professional or a company needs to be evaluated against the following yardsticks. A professional therefore means:  Highly educated person (or a company employing) engaged in challenging work providing considerable autonomy of working  Highly competent and conscientious and  Trustworthy following strict ethical and moral standards.
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Elements of Professionalism
 Accountability: towards whatever job is performed by
him.

 Concern for others: without any expectation in return  Excellence: Knowledge, competency, skillful,
communicative.  Integrity: honesty, morality, values, undivided loyalty. etiquettes, manners shown towards colleagues and others.

 Dutiful and Respectful: duty bound, comradeship,  Receptive: to new ideas, ready to experiment and take
calculated risk

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Professional Management (contd.) Dealing with Non-Family Employees NonHazards:


Competition with family members for advancement Getting caught in the crossfire and politics of family competition within the firm

Solution:
Identify family-only reserved positions in advance. Treat both family and nonfamily employees fairly in matters of reward and promotion.
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Successful Leadership Succession Conditions favouring successful succession:


 A sound, profitable business  Stable, healthy family relationships  Advance planning for leadership succession  Positive family leadership and a team-oriented management structure  Presentation of career opportunities without pressure  Open communication on family business issues
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Pitfalls of A Family Business

1. Family vs. Working Relationships 2. Full Family Employment 3. Lack of Professionalism 4. No Succession Plan leading to Rivalry 5. Input from Younger Generations

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Family vs. Working Relationships vs.


Family Feuds: whether they start in the family and spill into the business; or start in the business and spill into the family. Every business, how so ever successful, has it.
Indian Family Businesses Historic Weaknesses: Four most common weaknesses are: 1. Inability to separate familys interest from interest of the business 1. Favoritism shown to family member by promoting him/her to a position of authority disregarding recruiting or retaining talent 2. They need to learn to separate interests of family from the business
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Family vs. Working Relationships vs.


Indian Family Businesses Historic Weaknesses:

2. Lack of focus and business strategy


Indian cos. want to do everything in-house. Reasons were lack of infrastructure, outsourcing avenues, etc

3. Absence of investment in product and employee development (short-term focus)


1. Rampant ad-hocism in business policy and strategies 2. Indian cos. don t invest in R&D, skill development or employee development
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Family vs. Working Relationships vs.


Indian Family Businesses Historic Weaknesses:

4. Weak marketing skills, insensitivity to customer satisfaction


Uncompetitive markets were the cause; globalization is going to change their perception

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No Succession Plan
 Lack of succession plan or otherwise are the causes of continuous sibling rivalry within the family  Sibling rivalry cant be avoided but can be minimized.  Dont use arbitrary approach to these issues; use management approach instead.

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Dealing Sibling Rivalry


 Steps to deal: 1. Create time to understand points of view of those who are low profile or disagreeing members 2. Familys values are a shared bond and represent shared commitment to common good 3. Create rules of behaviour for family meetings 4. Avoid ridicule or sarcasm while dealing with siblings 5. As a normal rule for such meetings, fix time limits; put the topic for further research and provide agenda time at next meeting.
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Input from Younger Generation


Improving Family Business Performance
 Most companies are in transition today and need to professionalize fast.  One of the important ways to deal with sibling rivalry as well as providing opportunity to them to provide input to the business policy making  This helps the family business to get business input from young minds and provide them a platform to develop their professional approach  Familial capitalism is not a weakness in the global environment; there is a need only to professionalize the family environment.
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