The Family Business

Topic 5

Zainon Che Mat

 Learning Outcomes
• After studying this chapter, you should be able to:
1. Define the terms family and family business.
2. Explain the forces that can keep a family business
moving forward.
3. Describe the complex roles and relationships
involved in a family business.
4. Identify management practices that enable a family
business to function effectively.
5. Describe the process of managerial succession in a
family business.
What is a Family Business?
• Family
– A group of people bound by a shared history and a
commitment to share a future together, while
supporting the development and well-being of
individual members
• Owner-managed business
– Venture operated by a founding entrepreneur
• Sibling partnership
– Business in which children of the founder become owners
and managers
• Cousin consortium
– Business in third and subsequent generations when
children of the siblings take ownership and management
positions
 Why should anyone care about
families in business?
• Family business – an organization in which either the individuals who established
or acquired the firm or their descendants significantly influence the strategic
decisions and life course of the firm
• Family owned and controlled firms are among the world’s largest and oldest
enterprises.
• Family businesses are both common and importance because it represent 80 to 98
percent of all enterprises in the world.
The Three –Circle Model of Family Firms

5 7 6

1 4
2

• Family members: individuals in areas 1+4+5+7

• Employees: individuals in areas 2+4+6+7
• Owners: individuals in areas 3+5+6+7
 Family Business
Advantages Disadvantages
1. A family is a unit that balances
1. Family business culture relationships
2. The family seeks to perpetuate
and values traditions, while business must
innovate to grow
2. Commitment 3. A family is characterized by unity and
cooperation; but company grows
3. Knowledge through diversity and competition
4. Families tend to be stable, while
4. Long-range thinking businesses competing and often face
instability
5. A stable culture 5. For families, loyalty trumps
opportunity, but businesses
6. Speedy decisions challenged by opportunities
7. Reliability and pride 6. Nepotism – the practice of employing
relatives in the family firm
 Family Business Momentum
• Organizational culture – patterns of behaviors and beliefs that
characterize a particular firm.
• The culture of family firm can serve as either an advantage or
disadvantage.
• Organizational culture can promotes learning, risk taking and innovation.
• Family firm are capable of nurturing stewardship cultures, in which
members acre for the business as a resource to be nurtured and grown
not squandered.
 Commitment of Family Members
• Commitment • The fear of commitment
– Desire based – Fear of failure
commitment – Fear of success
– Obligation-based – Fear of commitment
commitment – Fear of disappointing
– Cost-based commitment your parents
– Need-based – Fear of disappointing
commitment others
 Commitment Through Unity
• Family unity – openness of mind, feeling and
action among family members
• Family unity important for:
• 1. business success
• 2. strategy, ownership and management-
completely unified
• 3. sales, growth and past growth
• 4. stakeholders
 Family Roles and Relationships
• Co-preneurs – couple teams who own and
manage business
• Mom or dad, the founder
• Sons and daughters
• Sibling cooperation, sibling rivalry
• In-laws in and out of the business
• The entrepreneur’s spouse
Making It in Business with Your Spouse
1. Don’t be blinded by romance; follow all the rules.
2. Define each person’s role and accentuate each other’s talents.
3. Don’t ignore business conflicts in an attempt to spare a personal
relationship.
4. Agree to disagree-set the ground rules.
5. Be clear and specific about your expectations of each other.
6. Set aside family time, and stick to it.
7. Set up a system for recognizing and rewarding hard work done by
family members.
Source: Byrd, M.J., and Megginson, L.C. (2013), Small Business Management: An
Entrepreneur’s Guidebook, 7th edition, McGraw-Hill International Edition.
 The Need for Good Governance in the
Family Firm
• Reasons for nonfamily employees:
Nonfamily employees • 1. To bridge the gap between generations
• 2. To set new directions for the firm
in a family firm • 3. To deal with change
• 4. To provide new skills and expertise

• A gathering of family members, usually at a remote location, to

discuss family business matters
• 1. Be clear about the purpose of the retreat;
Family retreat • 2. Set small, attainable goals
• 3. Use an agenda and stick to it
• 4. Give everyone a chance to participate
• 5. Know the difference between consensus and agreement

• An organized group of family members who gather periodically to

Family councils discuss family-related business issues

• A statement of principles intended to guide a family firm through

times of crisis and change.
Family business • Family creed: core values, process of decision making, benefits
from business, mechanism to introduce younger members, dispute
constitutions resolution procedure, philanthropic ambitions of the family
 Best Practices for Family Businesses
1. Promote learning to stimulate new thinking and fresh
strategic insights.
2. Solicit ample input from outsiders to keep things in
perspective.
3. Establish channels to constructive communication and use
them often.
4. Build a culture that accepts continuous change.
5. Promote family members only according to their skill
levels.
6. Attract and retain excellent nonfamily managers.
7. Ensure fair compensation for all employees, including
those outside the family.
8. Establish a solid leadership succession plan.
9. Explain the unique advantages of family ownership.
 Preparing the Next Generation
• Start at Part Time or Full Time Job?
– Allow them to be involved in the business, that might
influence them to get into or away from the company.
– Broaden their training and background
• Start at Entry Level or Higher Level Positions?
1. Never allow a child to work in senior management until he
or she has worked for someone for at least 2 years
2. Rotate the person in varying positions in your company
3. Give promotions only as they are earned
4. Devote at least half an hour each day to face-to-face
teaching and training
5. Do not take business matters home
6. If the newcomer is ready to learn the business, true
responsibility must be given, otherwise they cannot learn
to manage the business.
• Preparing for Management Succession
– Requires much training and experiences because the
decisions the person makes can affect the company and its
future.
– Vital to “ Plan early and carefully, and groom a successor.”
 Succession
Why Succession is a Problem? When Management Succession
Occurs?
1. Difficult to be fair to all 1. Dies
children
2. Some owners train their
2. Becomes incapacitated
children early to be groom 3. Leaves the company
as successor 4. Retires
3. Some owners let all children
be involved in the business
and compete, and will
choose the best candidate
without the help of board
members
The Process of Leadership Succession

• Available family talent

• Mentoring
– the process by which a more-
experienced person guides and
supports the professional progress of a
new or less experienced employee
 Preparing for Succession
Responsibilities of the Senior Responsibilities of Junior
Generation Generation
1. Communication 1. Be open to communication
2. Planning 2. Develop a personal action
3. Accountability plan
4. Owner development 3. Implement the personal
5. Long-term planning action plan
4. Prepare for ownership
5. Design life plans
 Transfer Ownership
• Transfer of ownership – passing ownership of
a family business to the next generation
 Case Study Discussion
• Brothers Sebastian and Alfonso grew up competing for their parents’ attention.
Everyone was surprised when they decided to go into business with each other.
• Alfonso was the reserved one. An engineer, he had developed the product that was
the basis of their venture. Sebastian was outgoing, a born salesman. He was CEO
of the company, while Alfonso worked in the laboratory, overseeing research and
development.
• The business took off, but building it into a national competitor required that all
profits be invested in product development and market expansion. After a few
years, Sebastian wanted to know where his share of the profits were. He knew
sales were growing exponentially.
• What was his brother doing with his money? One day, the brothers’ dad called and
offered to come in and run the business. He would make sure that everyone got
their fair share.

• Question 1
– What would you recommend to Sebastian at this point?

• Question 2
– What would you recommend to Alfonso at this point?
 References
• Petty, J.W., Palich, L.E., Hoy, F., and
Longenecker, J.G. (2012), Managing Small
Business: An Entrepreneurial Emphasis, 16th
edition, South-Western, Cengage Learning.
• Byrd, M.J., and Megginson, L.C. (2013), Small
Business Management: An Entrepreneur’s
Guidebook, 7th edition, McGraw-Hill
International Edition.