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What is meant by Family Firms? .........................................................3 Advantages of a Family Business .........................................................3 Problems & challenges for the family business ...................................4 World Economy and Family Business ..................................................5 Family Business and Countries ............................................................6
Italian family firms ............................................................................6
United State family firms ..................................................................7 Indian family owned business ..........................................................8 My opinion ..........................................................................................9 Recommendations ............................................................................10 References ........................................................................................11
Family owned businesses exist all over the world and some of the world’s oldest firms are family owned e.g. Kongo Gumi of Japan was founded in 578 AD and is currently managed by the 30th generation. In some countries, many of the largest publicly listed firms are family owned. Some of the world's largest family-run-businesses are Walmart (United States), Samsung Group (Korea), Tata Group (India) and Foxconn (Taiwan). Many researches focus on Family Business because 45% of publicly listed international firms are family owned.
What is meant by Family Firms?
A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being. In a family business, two or more members within the management team are drawn from the owning family. Family businesses can have owners who are not family members. Family businesses may also be managed by individuals who are not members of the family. However, family members are often involved in the operations of their family business in some capacity and, in smaller companies, usually one or more family members are the senior officers and managers. In India, many businesses that are now public companies were once family businesses. Family participation as managers and/or owners of a business can strengthen the company because family members are often loyal and dedicated to the family enterprise. However, family participation as managers and/or owners of a business can present unique problems because the dynamics of the family system and the dynamics of the business systems are often not in balance.
Advantages of a Family Business
More control. High level of trust. Family members who are involved in running a business together often are more committed to its success, because they all have a stake in seeing the business prosper. Family businesses have the potential to be more profitable than other types of businesses. No External Pressures because family businesses are not subject to the same pressures from shareholders to pay dividends and deliver quarterly results that listed
companies have to endure, they are able to take the long-term view. This means that family businesses can re-invest that money in the business when the going gets tough instead of paying out dividends to share-holders. Most family businesses have a relatively simple hierarchy and management structure. This means they can deal with problems quickly and react more rapidly to changing market conditions.
Problems & challenges for the family business
Emotions - Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members. Informality - Absence of clear policies and business norms for family members Tunnel vision - Lack of outside opinions and diversity on how to operate the business. Lack of written strategy - No documented plan or long term planning. Compensation problems for family members - Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified. Role confusion - Roles and responsibilities must be clearly defined. Lack of talent - Hiring family members who are not qualified or lack the skills and abilities for the organization. Inability to fire them when it is clear they are not working out. High turnover of non-family members - When employees feel that the family “mafia” will always advance over outsiders and when employees realize that management is incompetent. Succession Planning - Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions. Retirement and estate planning - Long term planning to cover the necessities and realities of older members when they leave the company. Training - There should be a specific training program when you integrate family members into the company. This should provide specific information that related to the goals, expectations and obligations of the position. Control - Paternalistic control is centralized and influenced by tradition instead of good management practices.
Overly Conservative - Older family members try to preserve the status quo and resist change. Especially resistance to ideas and change proposed by the younger generation. Communication problems - Provoked by role confusion, emotions (envy, fear, and anger), political divisions or other relationship problems. Systematic thinking - Decisions are made day-to-day in response to problems. No long-term planning or strategic planning. Exit strategy - No clear plan on how to sell, close or walk away from the business. Business valuation - No knowledge of the worth of the business, and the factors that make it valuable or decrease its value. Growth - Problems due to lack of capital and new investment or resistance to reinvestment in the business. Vision - Each family member has a different vision of the business and different goals. Control of operations - Difficult to control other members of the family. Lack of participation in the day-to-day work and supervision required.
World Economy and Family Business
Globally, family-owned businesses support some 50 percent of the population, and during these difficult economic times, they put many of the unemployed back on the payroll. Worldwide, four-fifths of all businesses are family owned. In Europe, more than 75 percent of all businesses are family owned, providing for close to half of all available jobs. In the United States, family-owned businesses account for roughly half of the country’s gross domestic product. Such businesses could be a small mom-and-pop store employing no more than two people, a medium-sized enterprise, or even a Fortune 500 corporation. According to Family Business magazine: 250 family-run companies, each with annual revenues of at least $1.2 billion, spread across 28 countries. Many of them dominate their national economies, but most reach far beyond national borders. Taken as a whole, by any measure they constitute a significant force in the global economy. U.S. companies again account for the lion’s share of the listed firms 130 out of the 250, far ahead of runner-up France (with 17) and Germany (16). But once again the very top of the list tells a different story. Only seven U.S. companies made the top 25, which is
spread among firms from nine countries. Korea, where power is concentrated among family-run industrial groups, placed only three companies on “Global 250” but all three ranked in the top 11, and two of those placed among the top four. Clearly, family economic power remains much more concentrated in some countries than in others.
Family Business and Countries Italian family firms
In Italy more than 90 per cent of all small and medium-sized companies and some of the largest enterprises are family owned. In the fashion industry, for example, Versace, Missoni, and Benetton are family-held firms. In addition, Italian families own important manufacturers and hold operating control of some of the major banks and transportation companies in the country. For example, the Fiat Group grosses more than $47.3 billion euros annually and employs more than 160,000 people. It does this through the Fiat Group, a conglomerate consisting of 777 firms with holdings in agricultural and construction equipment, automobiles, aviation, commercial vehicles, communications, insurance services, metallurgical products, production systems, and publishing. Another large family-owned Italian company is Pirelli, which, in recent years, has had annual revenues of around $8.4 billion and employs about 36,000 people. Most of the firm’s revenues are generated from its tire and cable businesses. Along with Benetton, Pirelli has bought a controlling interest in Olivetti, the giant Italian computer and Telecommunications Corporation. As a result of this acquisition, Pirelli now has a 27 per cent stake in Telecom Italia, a telecommunications, information, and communication technology company with annual revenues of $30 billion euros and a workforce of around 93,000 people. This acquisition has also brought both Benetton and Pirelli into the wireless telecommunications business. These two examples, Fiat and Pirelli, are typical of the holdings and influence of large Italian families in the country. Through their vast holdings and political power, they have been able to maintain a tight rein on various sectors of the economy. In addition, these family firms are protected against foreign investment by a secretive banking system that is headed by the Milan Bank, Mediobanca. This bank has financed nearly all of the takeover
deals in Italy during the last 35 years. The bank also holds board positions on many of the country’s conglomerates. On a macro basis, the Italian business system reflects the twin pressures of local family culture and the increasing demands of international business. Like their larger counterparts, small and medium-sized family businesses are now using their personal and business networks to create MNE that are branching out into the EU, as well as putting together deals in both North America and Asia. United State family firms In United State 5.5 million business are familyowned they create 57% of the nation’s gross domestic product and generate 75% of all new jobs employing 63% of the U.S. workforce. A total of 60% of all publicly held U.S. companies are family controlled. About 30% of familyowned businesses survive the transition from the first generation to the second and 12% of family-owned businesses survive the transition to the third generation. Largest family owned company in U.S is Wal mart. An American multinational retail corporation that runs chains of large discount department stores and warehouse stores. The company is the world's third largest public corporation, according to the Fortune Global 500 list in 2012, the biggest private employer in the world with over two million employees, and is the largest retailer in the world. Walmart remains a family-owned business, as the company is controlled by the Walton family, who own a 48 percent stake in Walmart. It is also one of the world's most valuable companies. The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. It is headquartered in Bentonville, Arkansas. Walmart is also the largest grocery retailer in the United States. In 2009, it generated 51 percent of its US$258 billion sales in the U.S. from grocery business. It also owns and operates the Sam's Club retail warehouses in North America. Walmart has 8,500 stores in 15 countries, under 55 different names. The company operates under the Walmart name in the United States, including the 50 states and Puerto Rico. It operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price. It has wholly owned operations in Argentina, Brazil, and Canada. Walmart's investments outside North America have had mixed results: its
operations in the United Kingdom, South America, and China are highly successful, whereas ventures in Germany and South Korea were unsuccessful.
Indian family owned business
Today’s Indian industrialists rose from the bazaar. Their roots in industry are relatively recent, going back largely to the First World War. Before that they were traders and moneylenders engaged in the hustle and bustle of the bazaar. Even in Bombay and Ahmedabad in western India, where the cotton textile mills came up earlier in the last half of the 19th century, it was the trading communities who became industrialists. Aggarwals and Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains and Banias, Muslim Khojas and Memons in the West, and Marwaris all over India did business. This clears that practically all business operations in the country were controlled by a few families. R.K. Hazari, a well-known industrial economist, had concluded after an exhaustive analysis that most of the prominent industrial firms on the contours of Indian business during the 1950s, were in the hands of just 18 Indian families and two British houses. According to a recent tally the management of as many as 461 of the 500 most valuable companies are under family control. India largest family owned companies are Tata Group and Reliance Industries. Tata Group which is an Indian multinational conglomerate company headquartered in Mumbai, Maharashtra, India. It encompasses seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. Tata Group was founded in 1868 by Jamsetji Tata as a trading company. It has operations in more than 80 countries across six continents. Tata Group has over 100 operating companies each of them operates independently out of them 32 are publicly listed. The major Tata companies are Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Global Beverages, Tata Teleservices, Titan Industries, Tata Communications and Taj Hotels. The combined market capitalization of all the 32 listed Tata companies was $89.88 billion as of March 2012. Tata receives more than 58% of its revenue from outside India.
Tata Group remains a family-owned business, as the descendants of the founder (from the Tata family) owns majority stake in the company. The current chairman of the Tata group is Cyrus Pallonji Mistry, who took over from Ratan Tata in 2012. Tata Sons is the promoter of all key Tata companies and holds the bulk of shareholding in these companies. The chairman of Tata Sons has traditionally been the chairman of the Tata group. About 66% of the equity capital of Tata Sons is held by philanthropic trusts endowed by members of the Tata family. The Tata Group and its companies & enterprises are perceived to be India's best-known global brand within and outside the country as per an ASSOCHAM survey. The 2009, annual survey by the Reputation Institute ranked Tata Group as the 11th most reputable company in the world. The survey included 600 global companies. The Tata Group has helped establish and finance numerous quality researches, educational and cultural institutes in India. The group was awarded the Carnegie Medal of Philanthropy in 2007 in recognition of its long history of philanthropic activities. Whereas Reliance Industries limited (RIL) Indian Conglomerate Company headquartered in Mumbai, Maharashtra, India. The company operates in three segments: petrochemicals, refining and oil & gas. Its other segments include textile, retail business, special economic zone (SEZ) development and telecom / broadband business. RIL is one of the largest publicly traded companies in India by market capitalization and is the second largest company in India by revenue after Indian Oil Corporation. It is also India's second largest private sector company by revenue and profit. The company is ranked 99th on Fortune Global 500 list of the world's biggest corporations for the year 2012. My opinion Globally, family-owned businesses support some 50 percent of the population, and during these difficult economic times, they put many of the unemployed back on the payroll. Worldwide, four-fifths of all businesses are family owned. Some of the largest wealth creators and businesses are family owned like Wal Mart. The issues faced and the interests involved by family-owned businesses all over the world are more or less the same. Such as recruitment and selection problem, conflicts, Paternalistic control or autocratic control which stop creativity and no clear vision and mission.
Use conflict management to avoid conflicts which create disturbance in business. Make policies and rules clear for anyone in a company. Same treatment would be used for all employees. Don't put family members on the payroll if they're not working in the company or can't make a real contribution to the business. Make sure that everyone has a role and responsibilities that are spelled out and are very clear. Establish each person's title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike. In absence of above non family member employee motivation level decreases which lead to turnover. Corporate governance should be introduced to reduce frauds etc.
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