Family businesses have become recognized as powerful but complex organisations because of the interaction between the family and business systems. They are also known for their distinct characteristics. Nevertheless, these features could have a positive or negative effect on the survival of the business. This assignment will highlight the key factors that define a successful family business but it will also examine the weaknesses, which in turn could threaten the life of a family business. Furthermore, the assignment will also evaluate one of the key factors through an illustration on the family owned business, Bottle Green, a U.K. soft drink manufacturer.
1. Criteria of a Successful Family Business 1. Family Family businesses are different from any other type of business because there is an interdependence of family and business systems. The overlap can create an outstanding business performance but it may come at an expense. Kenyon-Rouvinez explains the overlapping of systems can lead to conflicts in the decision-making of the business because ‘families are governed by equality, inclusiveness and caring feelings. Business, on the other hand, are governed by meritocracy, selectivity and critical analysis.’ (2005, pg. 4) Carlock and Ward explain that families are more concerned about emotions therefore they become resistant to change.
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The figure below illustrates that the conflicts arising between the family and business for business planning and decision-making are usually around five structural issues. These issues are essential within a business therefore the family must imply plans and policies for the business. (Source: Carlock, pg. 4) Family businesses have also become known as the business of relationships. The prime factor that family businesses depend on is how strong the relationships are between family members. However, it has been highlighted by Hoover and Hoover that the ‘greatest threat to the long-term survival and success of any family business has less to do with what’s going on outside with customers, competitors and technology, than it does with what’s going on inside with relationship among the key players, especially among family members.’ (1999, pg. 2)
In order to achieve success within a family business, there must be a clear separation and balance between the family and business especially in terms of relationship and personal issues. Families who balance the family and business systems will be able to create a positive environment where the family will thrive through family harmony and the business will perform well and operate effectively. This can be seen in the figure below: (Source: Carlock and Ward, 2001, pg. 4)
Conflicts can be resolved through family business meetings where they can establish guidelines and policies before the decisions that are made become real and personal. Families who develop business values and philosophies together can help improve the performance of a business while working in the best interests of the family. Family businesses that are able to balance the two systems can develop a ‘foundation for healthy family business relationship and for the creation of family business legacy.’ (Carlock and Ward, 2001, pg. 7)
1. Business Any business including family businesses face decisions every day. These decisions can bring challenges in the running of a business today but also affect the future of the business as well as the family. Fortunately, timely business planning can effectively address any concerns and decisions, which will protect both the business and family. Business planning is especially important to successful family businesses that usually seek steady growth and performance and avoid threatening the wealth of the family and control of the business.
Discussions of the decisions made within a family business will need to go through a parallel planning process. This is the integration of family and business thinking and action in the formulation of long-term family business plans. An illustration of the parallel planning process can be seen below: (Source: Carlock and Ward, 2001, pg. 46)
Ownership strategy is defined as the family’s wealth on one hand and the family’s shared values on the other. McKinsey implies that ‘Large family businesses that survive for many generations make sure to permeate their ethos of ownership with a strong sense of purpose.’ Every member within the business will need attain the knowledge about ownership. This includes ‘understanding the rights and responsibilities of owners, the nature and structure of the family’s assets, different forms of ownership organisation and their consequences (responsibilities, tax, and so on) and the families shared goals and strategy related to ownership.’ (Kenyon-Rouvinez and Ward, 2005, pg. 62). As a family business grows, the ownership could become fragmented. McKinsey mentions that ‘family institutions play an important role making continued ownership meaningful by nurturing family values and giving new generations a sense of pride in the company’s contribution to society.’
A business will need to develop an exit strategy through a succession plan. Having a plan will help protect the business from the unexpected and give the owners time to share plans between the family and other members of the business. Kenyon-Rouvinez and Ward believe that both the family and the business benefit from preparation for succession: ‘The more family members are informed and trained to interact in a mature, respectful way, the more they will reap the benefits of the succession process. Family members should know about the family, ownership issues, leadership issues, about the company itself, and about the succession process.’ (2005, pg. 62). This will hopefully create a smoother transition.
Who takes over the business is a very significant factor in the succession plan. The future owner needs to be committed to the business especially since the preparation for succession can be a lifelong process for family members because it begins from the future owner’s upbringing. Family commitment is an important factor in the family business because ‘if the family cannot develop a shared commitment to invest and participate in the business, then it is time to sell or liquidate.’ (Carlock and Ward, 2001, pg. 51).
1. Governance Governance is known as ‘a system of structures and processes to direct and control corporations and to account for them.’ (Neubauer and Lank, 1998, pg. 60). Davis suggests that effective governance will enable a business to generate ‘a sense of direction, values to live by or work by, and well-understood and accepted policies that tell organization members how they should behave or what they should do in certain circumstances.’ It will also allow members to interact will one another while discussing important issues related to the business (2001).
Kenyon – Rouvinez and Ward explain that family business governance is a ‘system of processes and structures put in place at the highest level of the business, family and ownership to make the best possible decisions regarding the direction of the business and assurance of accountability and control.’ (2005, pg. 45). They follow by suggesting that ‘family businesses are complex entities where the roles of the family, management, and ownership can be easily confused.’ (2005, pg. 45). Davis agrees with their statement since he believes that governance within a family business can be more complicated than for a non-family owned business (2001). In order to overcome any family business problems, the factors of business, family and ownership will need governance. According to Carlock and Ward, ‘family business governance requires parallel family and business thinking to support the development of planning, decision making and problem- solving structures for both the family and business systems.’ (2001, pg.140). A successful family business will be able to understand the importance of family governance.
Kenyon-Rouvinez and Ward define the meaning of family governance. A family governance aim to ‘achieve, maintain, and increase family members’ unity both among themselves and with their family business; promote stable and committed ownership; and ensure that shareholders adopt a professional attitude towards the business so as not to impede operations.’ (2005, pg. 53). The figure below illustrates the family and business governance structure. Carlock and Ward stress on the importance that ‘sharing information and coordinated action between the family council and board of directors is often required because of the overlap in the family and business systems.’ (2001, pg.141).
With the help of a regularly scheduled family council and board of directors, a family business can provide a governance structure throughout the business, which in turn can create a forum for sharing information, allow shareholders to access the information, communicate and discuss concerns related to the business and encourage family participation in the decision making process. As a result, these factors can create a healthy family business.