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Course Pack Section 10

COMM 320 / Summer 2013

Lidia Varbanova

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I. Family Business: an overview

Represent the most prevalent type of business. Estimated that 90% of all businesses in US and Canada are

family owned.

One third of large businesses are family owned (familybusinesses are not only small companies).

They are not just like all other businesses: have to deal withtwo sociological systems: family and business.

Heterogeneous: different in age, size, etc.

Research is difficult: there arent large databases available.

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JMSB_Management: videos: Dr. Pramodita Sharma (about familybusiness):http://johnmolson.concordia.ca/html_popup/MgmtProf_Sharma_HS.html

http://johnmolson.concordia.ca/html_popup/MgmtProf_Sharma_HS.htmlhttp://johnmolson.concordia.ca/html_popup/MgmtProf_Sharma_HS.htmlhttp://johnmolson.concordia.ca/html_popup/MgmtProf_Sharma_HS.htmlhttp://johnmolson.concordia.ca/html_popup/MgmtProf_Sharma_HS.html

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Family business: definition and criteria

A family business is defined as an open system inwhich the family influences important decisionsand which is constituted by the subsystems family,ownership, leadership, and business alike.

Criteria for family owned:

Degree of ownership, 51% by single family; Management by family, at least two members;

Extent of family involvement;

Anticipation of transfer to next generation. 3

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Advantages

According to Simon Hitt Study

1. Firm-specific knowledge passed on from generation togeneration- Shared values, beliefs and vision

- Strong sense of mission2. Shared social networks

3. Long-term focus for the sake of future generations

4. Preservation of the firms reputation

5. Reduced cost of control- Less theft & better work habits- Willing to sacrifice income for the good of the business

6. Strong motivation of family members to see business succeed- Lower need for added incentives due to strong loyalty- Lower turnover rate; family sticks together

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Disadvantages Perceived nepotism by non-family employees, whether real

or not

Inherent differences between family & business life, maylead to:

Conflict Divorce

Estrangement from children Carry-over: Problems are carried from one environment

to the other; Identity: Children have difficulty forming identity

separate from family as they move through the business; Comfort zone: Too many hours together

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2. Dual Relationship

Family business mixes a social function and a businessfunction, this overlap causesproblems:

Difficult to separate roles in the family

Forming a personal identity: Children have difficultyforming identity separate from family as they movethrough the business

Zone of comfort: lack of privacy (pressure and tensions)

Nepotism: Advancement based on family relationships,not on qualifications/competences.

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Conflicts

Common sources of conflicts

Ambiguity of roles

Differences in power and status (family and non-familymembers)

Hasty or unfair succession

Rivalries among family members

Favorite son / daughter Lack of clear boundaries

Lack of clear career development policies (hiring,promotion, compensation and performance appraisal)

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Conflicts Father Son / Daughter rivalry (value differences,

generation differences)

Rivalries between Offspring

Favoritism

Unfair succession

Older son not selected as successor

Conflict between Family / non-Family:

SOB syndrome (Son of Boss)

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Managing Conflict: strategies

Setting clear goals

Policies and procedures; organizational chart

Clear guidelines: a code of conflict

Career development strategy

Face-to-face confrontation (assuming it is notdysfunctional) can be effective

The CEO plays key role, but must be fair, not take sides The peacemaker can be an external person

Succession plan

Communication is crucial!!

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Family Business: Quebec: examples

Seagrams (Bronfman)

Quebecor (Pladeau)

Bombardier

Molson

Jean Coutu

Saputo

Birks / Steinbergs 10

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3. Family Member CommitmentSee Exhibit 3.2

1. Desire-based (want to): believe in the company andgenuinely want to join- most likely to pursue long-term careers- tend to work harder

2. Obligation-based (ought to): guilt often primarymotivator- see participation as a birthright

3. Cost-based (have to): perception that the opportunity to

gain is too great to pass up or that the value of thebusiness will fail if someone doesnt take care of it-will go beyond the call of duty

4. Need-based: Perpetual state of self-doubt about

achievement of career success on their own 11

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4. Family Roles & Relationships

Mom/Dad, founders

Concerned about feasibility of succession

Work-life balance challenges

Husband/Wife, co-preneurs Must set boundaries

Advantage: Strong trust, sharing more together

Disadvantage: carry-over weakens family life

Entrepreneurs spouse One of the most critical roles: worrier, sound board, parent &

mediator

Must be effective communication between the spouse andentrepreneur for roles to be filled

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Family Roles & Relationships Sons & Daughters

70% of children intending to enter the family business workelsewhere first

Recognition from both parties that this is a choice which can be

reversed; family pressure must be minimized Sibling cooperation/rivalry

In-laws in and out of the business

Fairness & family loyalty become more difficult as the number offamily employees increases

Direct involvement of in-laws causes similar situations as siblings(rivalry/cooperation)

Sidelined in-laws still have much influence, though theirperspective becomes more distorted as they only hear half the story,the bad side

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5. The Need for Good ManagementBest practices for family enterprises

Promote learning to stimulate fresh strategic insights

Solicit input from outsiders to keep things in perspective

Establish channels for constructive communicationand use them often

Build a culture that accepts continuous change

Promote family members according to skill level

Attract and retain excellent non-family managers Ensure fair compensation

Establish a solid leadership plan

Exploit the unique advantages of family ownership

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Non-Family Employees Potential for advancement often limited, which makes

them feel cheated and frustrated

The extent of limitations depends on the number of active

family members and managerial/professional positions To avoid problems, owner should

Clarify extent of opportunities available

Identify positions reserved for family members

May be caught in crossfire between family memberscompeting with each other

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6. Leadership Succession ProcessSee Exhibit 3.3

1. Pre-business involvement

Informal; the child becomes acquainted with thebusiness

Latter phases: Part-time work to get a feel for variousfunctional areas

2. Education & Personal Development

Opportunity to chart one ones own course, but withan eye on the family business

3. Proof of Competence

Take up a position elsewhere so that the childsindependent achievements establish their credibility

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Leadership Succession Process4. Formal Start in the Business Stage

Full-time work at the family business , beginning on alow rung corporate ladder

Succession not a sure bet but likely scenario

5. Declaration of Succession

Child named president/general manager of thebusiness, though a parent is typically still in thebackground

Important to establish a written plan so that there isno doubt about the soon to be predecessors wishes, incase of an untimely death or resignation

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Leadership Succession Process

Important slide Very uncomfortable topic for all parties which makes the

plans for succession poorly developed or communicated

Entrepreneur may be unwilling because of:

Fear of retirement; Lack of other interests;

And of course the reluctance to let go.

Nearly 70% of family owned businesses fail to make the

transition from 1stto 2ndgeneration and 90% from 2ndto 3rd

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Andrew Keyt, Executive Director of the Loyola University ChicagoFamily Business Center:http://www.youtube.com/watch?v=XJ2mAQnEHis

http://www.youtube.com/watch?v=XJ2mAQnEHishttp://www.youtube.com/watch?v=XJ2mAQnEHis

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Reluctant Parents & Ambitious

Children The business is the founders baby

Doesnt want to entrust its future to someone he sees asimmature and unproven

Childs ambitious tendencies often conflict with founderscaution

Such problems can be avoided by keeping communicationchannels open to a better understanding of the

development process and how it is to unfold

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Transfer of Ownership

Final step in the traditional succession process

Tax considerations

Restructuring

Family and non-family Roles

The Inheritance Plan: Questions of inheritance & how toallot shares to children both active & non active within thebusiness

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