Family business and road to succession

Family business and road to succession

“From rice paddy to rice paddy in three generation” in Japan;

“Shirtsleeves to Shirtsleeves in Three Generations” in western world;

“The father buys, the son builds, the grandchild sells, and his son begs.” in Scotland and

“Wealth never survives three generations.” in China.

Different expressions but with the same meaning, that a family business does not last long and the cycle turns a full circle within three generations.

Table of Contents

1.  Prologue

2.  Planning of Continuity

3.  Stages of succession and continuity planning

4.  Patterns in change in leadership

5.  Key areas where the young generations need to develop

6.  Key to being a successful successor

Proloque

Hardly 30% of family business survives past the second generation while only 3 % survive the fourth.

During a survey by Kennesaw State University’s Cox Family Enterprise Center and EY’s Global Family Business Center of Excellence some interesting facts were noticed that has been the key to success for family business across many generations:

• They recognize the importance of succession.
• They start thinking about succession as early as possible.
• They clearly define who is responsible for handling the succession process.
• They foster effective communication and family cohesion through regular board and family meetings to discuss business issues.
• They develop contingency plans in case of unexpected events.
• They recognize the need for innovation in order to secure the future of the business for the long term.”

The above is an extract from “The Keys To Effective Succession In Family Business” available at http://coles.kennesaw.edu/news/stories/06-22-2015-the-keys-to-effective-succesion-in-family-business.php

Planning the Continuity

Continuity planning plays a very important role in a smooth and successful transition from one generation to next.

Difference between Change and Transition

While change is related to a new role, technology, methodology, process, location etc and is typically external, transition is the psychological process people go through to come to terms with a new situation.

William Bridges, in ‘Managing Transitions: Making the Most of Change’ says on managing change and transition, that “it isn't the changes that do you in, it's the transitions”.

Change is part of normal affairs of the business but transition can make or break an organization.

Stages of succession and continuity planning

Succession is not an event but a plan, which should be given importance from years before the succession takes place.  A family need to plan and be suitably prepared.

Stage 1 – Preparation

a.   Its first importance should be given to education of the next generation. All capable candidates should be provided with equal opportunities for education. While it is generally advocated that the line of study should be directly aligned with the business of the family, it is essential for candidates to pursue other streams related to the business as a whole. A family into production of electronics may prefer electronic engineering while finance and management are equally important for continuity and growth. Choice should be best left to the next generation.

b.   Whenever possible the candidate should undergo short term training to understand the nitty-gritty and get exposure of the family business.  It is beneficial if he/she works on non-managerial internship.

c.  Post education and most important, should be gathering of relevant experience, preferably working outside the family. It is the time when young minds need to translate their education into competency and capabilities. The next generation benefits greatly by leaving the protected life and prepares them to take independent decisions, something which is difficult or even dangerous if they work within the family business directly. The biggest counter productivity of joining straight with the family business is that new entrants are safeguarded from making mistakes because of reluctance by family elders to give real responsibility; hence they fail to learn or prove their capability. If they start outside and achieve success then they gain respect and are able to show their competency. While this has become a trend for people to work for 2 to 3 years outside their family business, some families have even extended it to more than 5 years.

Stage 2 – Entry

Next stage is the entry into the family business.

a.   Some family has made it mandatory for people from their own family to work outside and gain experience and some even ask to submit a proper resume to join their family business, as they would in any other organization.  

b.   It is imperative to give entry into an area which the family perceive as most critical to the business and let them work around.

c.   Real responsibility plays a vital role in demonstrating their competency and gives them an opportunity to discover or sharpen their talent and skills and contribute towards growth of the family business.

Stage 3 - Working with elders

a.   The core of success of a family is working together with same goals and objectives. The third stage requires new member to work together with the older generation. It adds to confusion when the new generation come in with all guns blazing and wants to make changes in whatever they determine as critical and gets stumped by the more matured older generation. Working under the guidance of and with elders gives the new generation a platform to plan new approaches and strategies.

The far-reaching consequence is that the next generation is experienced in all aspects of the business before they are ready for managerial position.

Stage 4 – Inclusion of those coming in

a.   The fourth stage relates to inclusion of those marrying in. One who comes into the family by the way of marriage, a wife for a son or a husband of a daughter, should be welcomed. By virtue of their relation they may be in a position to have some influence in family and indirectly in the family business. They have a very important stake both as parents of future generation and as spouse. Care needs to be taken to judge right candidate to involve in the business; not all members may be capable or even willing to join the business. Inclusiveness needs to with borders and in alignment with family established norms.

b.  People who can influence should be given suitable and relevant information to allow them to exert informed influence.

Stage 5 – Handing over to the next generation

a.    A elder who plans to pass on the baton to next generation, needs to find potential engagement once he transfers his responsibility to next generation. Elders with no alternate involvement can cause roadblocks based on a different perceptions on a matter, sometime which can lead to delusion among new leaders of the family business. Complaints of not given enough space and authority by the elders is often heard and should be addressed swiftly.

Another grievance of new generation is the delay in transition even after working in the business for years. This often insinuate years of conflicts while the older generation does not let go and the young ones pretend to be waiting patiently. This leads to stagnation and sometime even causes death of the business.

It is important that once transition takes place the older generation should move out to something else and let the new generation to work independently.

Of-course, the elder generation always wants to see the younger generation grow and be successful; something that would give them pride and justify their decision to hand over charge, while the younger generation are always in a hurry to prove themselves.

Stage 6 – Taking over the charge

a.   New leaders in a business should not only be capable but also willing to take up the responsibility. If the young generation is reluctant to take upon the full responsibility of the job and falls back on elders to take every decision, it may lead to void in decision making and vacuum being created in the organization. It also results in loss of respect among family and non-family members of the business.

The baton is not just passed out; it needs to be accepted too.

Patterns in change in leadership

Patterns	Why it happens	Positive	Negative
Un-anticipated	Happens all of a sudden, say because of medical conditions or death	Full control to successor	Leaves no time for development and mentoring
Delayed	Young generation feels they are ready at an end of a period. But elders feel that they are not	The family enterprise remains in the control of elders till they feel the next generation is ready	Next generation feels frustrated and delusional
Conscientious – owners handover but come back if they feel that the next generation is going wrong	Elders have a strategy and way of running business. If they feel that there is a possibility of damage to image and business, they may come back into controlling operations	Stops ruining the business	Successors feel being cheated of their chance and turn
Gradual transition	Goes as per planned transition stages	Successors are well trained and can always seek help and advice of elders	The best way of succession
Caretaker non-family leader takes over the charge for some time. Second best method of transition after Gradual transition	Elders moves out but feels next generation is not fully ready. The next generation may not be interested or capable enough at the point of time.	Business remains on track without the involvement of elders of the family. The non- family leader continues to guide the next generation for future roles	Young generation may feel neglected during the interim phase

We have till now discussed what the elders should do, the following is on what the young generation should work on.

Key areas where the young generations need to develop:

1. Understanding the business and its components.

2. Understanding enterprise configuration and the shareholders.

3. Self-development and self-management.

4. Communication skills for working together.

Key to being a successful successor

It is expected of the next generation to grow on the foundation developed by the elders, to not only continue the family business but also to take it to greater heights.

A member of next generation to be an achiever needs to have these attributes:

1. Have knowledge and understanding of the industry in which they work;

2. Determined to align the company with current requirements, be it technology or marketing or management style etc;

3. Keep a look out for things needs to change both within their organization and because of external causes;

4. Keep the values of the elders and share visions unchanged;

5. Be comfortable with negative feedback;

6. Respect others in the organization; be patience to give enough time for things to mature; be humble to be able to learn from elders and seniors and above all hard work.

∞∞∞∞∞∞∞∞∞∞∞∞∞∞∞

Vinay Pandey, 13/12/2017

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People management and peers - a short discussion

Who are peers?

Peers are people in your organization who are from similar age group, with similar educational background and may be in similar hierarchy in the organization. Peers are important stakeholder in management. Peers can be from same department or in other. Unlike co-worker or colleague a peer is more socially bonded and may contribute and influence the persons’ behaviour and beliefs.

Peers can be play intrinsic role both professionally:

A peer contributes towards professional growth, especially at entry level;

A peer contributes towards achievement of organizational objectives;

Peer is seen less as a competitor and more as a support;

Inter-dependency;

Better co-ordination;

Deliverable are related and hence peers collaborate;

Conflicts are managed better as conflicts deter deliverables. Solutions sometime turn out to be out of the box and innovative;

Positives of peers get importance within the relationship;

Clarity in understanding the business context in which peers work;

Unofficial feedbacks on work related matters help in timely recovery;

Sharing of expertise ensures accomplishment of work;

Reciprocity in work related support;

Support in each other responsibilities;

Idea centric collaboration is possible when peers co-create and execute an idea. Very important if the organization is under budgetary pressure;

Peer network creates value for the company;

and personally:

With similar knowledge and skills they complement each other;

Capabilities are enhanced as a peer influences a person to learn more;

Complements results in respect which help in building partnership;

Support and co-operation;

Friendship outside the office politics;

Fall back network of friendship and acquaintance;

Honest and transparent relationship;

Feedback on assessment of personal nature without egos.

Issues between peers

Non-aligned expertise;

Differences will keep surfacing but should be dealt harmoniously;

Departments should not be seen as boundaries;

Lack of clarity of common objectives between different departments/verticals;

Common goal is perceived by one of the partner as individual goal of his peer;

Sharing resources as human, financial or material may lead to inter-personal conflicts. Such conflicts should be sorted out among peers effectively;

Conflicts should be within the professional sphere, like task or work. Conflicts resolution should be swift and in general should be minimized. Personal conflicts are difficult to manage and can lead to breakage of relationship;

Blame game. Cornering peer creates the biggest inter-personal conflict;

Peer needs to periodical review and give feedback. Recipient should take it positively and the peer who is reviewing should lend a hand for betterment.

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Vinay Pandey, 08/12/2017

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Family business , the global growth driver

Family business - the global growth driver

Table of Contents

1. Prologue

2. Complexities and issues of family business        The Three Cycle Model        Life Cycle Diagram

3. Why are family enterprises successful?

4. Top five of world’s largest family owned companies           #Walmart           #Volkswagen           #Berkshire Hathway           #Exor           #Ford

Prologue

Family businesses are biggest mover of global economy. Rapid industrialization and liberalization has given growth opportunities to all types of businesses.  From Mom-Pop shops to big firms, family owned business has taken the most of the space, contributing 70-90 % of GDP and providing 50-80% of employment in most countries ¹. Globally, two-third of all business is from family owned firms and if indirect control is taken into consideration 90 % of all establishments would end up within the definition of family enterprise. 

Cargill is said to be the largest privately owned enterprise with $ 135 billion in revenues. Though Walmart is a publicly traded company, the controlling stake is with the Walton family who possess about 50 % of the shares ². According to Guinness Book of World Record, Houshi Ryokan, a Japanese inn is the oldest family owned business, with history since AD 717 ³.

In India, 90% of gross industry output is from family businesses and accounts for 2/3^rd of the country’s GDP ¹.

A family business is a commercial organization in which not only ownership is held by family members related by blood or marriage but decision-making and leadership is also influenced by the family.

A family enterprise takes the definition ahead to include assets as financial, real estate,heirloom and philanthropic.

Broadly there are three types of family business:

Owned by	Led by	Managed by	Generally covers
Family	Family members	Family members	Small stores, cottage and small scale production, trading business,
Family	Family members	Professionals	Medium and large scale
Family	Professionals	Professionals	Large scale, MNCs,

Complexities and issues of family business

THREE CIRCLE MODEL

While discussing family business, the Three-Circle Model needs a mention. The model was first published in the Family Business Review in 1982 in Taguiri and Davis’ classic article “Bivalent Attributes of the Family Firm.” Prior to this model the focus was on the business and family. The third aspect of ownership was not given importance. This model removed the ambiguity and interdependent relationship between family, business and ownership was established , illustrating the advantages and issues.

Each zone represents the rights and roles of a person related to the business, the family or non-family member.

FAMILY CIRCLE         Adopted or born as a member of the family,

Married to a member of the business owning family

BUSINESS CIRCLE    Consultant to the family business

Paid employee

OWNERSHIP             Owns shares in the company correct

Own preferred shares in the company

Serves as trustee of a trust which owns shares in the company

Beneficiary of a trust which own shares in the company

Ownership Circle Issues

1. Common ownership vision and goals

2. Policies of sharing of returns of ownership of business

3. Issues of trust and control between members of family

4. Dynamics of shareholders and shareholding

5. Education level of owners

6. Difference in management goals between generations of family

7. Position of members in the firm and those moving in or out of active participation in the operation of the firm

8. Entry and exit of family members from operations

9. Growth plans and liquidity

Family Circle Issues

1. Common values

2. Effective cohesion

3. Rivalry between members of family

4. Favoritism towards members of family

5. Negative and positive communication. How to hear everybody in the family ?

6. Entitlement of members and their participation in business

7. Breakage in relationship in family by the way of divorce and marriage

8. Family leadership

9. Managing conflict between members

Business Circle Issues

1. Clarity of role in the business

2. Compensation to members the family

3. Performance issues of members who are in operations

4. Functioning and composition of board of directors

5. Balancing personal and business

6. Evolution of Leadership

7. Difference in management goals between generations of family

8. Risk appetite and goals of members and balancing of the decisions

9. Tolerance of risk

10 Collective goals and vision

Please read further on the subject at http://johndavis.com/three-circle-model-family-business-system/

LIFE CYCLE DIAGRAM

Another important model for understanding family business and its attributes is the Life Cycle Diagram. This diagram represents the life cycle experience that business families go through. Manfred F. R. Kets de Vries and Randel S. Carlock with Elizabeth Florent-Treacy explains it in their book ‘FAMILY BUSINESS ON THE COUCH - A Psychological Perspective’ :

Why are family enterprises successful?

Around the world family enterprises compete with non-family owned business and large corporations. Various studies and research have revealed that family enterprises return more to shareholders over a period of time in comparison to non-family businesses.

Danny Miller & Isabelle Le Breton in their book ‘Managing for the Long Run’, identified four C’s ⁴:

1. Continuity – Family business invest for the long run. They do not adopt short term tactic, instead opt for firm’s long term survivability and continuity.

2. Connections - A family has open minded and collaborative relationship with suppliers and customers much beyond the contractual transaction based relationship of non-family business. Business world has been witness to many instances of extension of co-operation by means of funds and resources between family businesses and suppliers.

3. Community - A family is more cohesive and collaborative to workforce. Family businesses have a better connection and relationship with their employees, who share the strong values of the employers.

4. Command - They have command and control and can take action swiftly. Leaders of family enterprises are much more independent and are able to take business decisions without worrying about aligning with shareholders.

These are the four competitive advantages of family owned businesses.

Top five of world’s most successful family business

Founder, Sam Walton started his first Walmart store in 1962 at the age of 44 in Rogers, Arkansas with a strategy of offering lower prices and great service. Within 5 years Walton family had 24 stores and annual revenue of $ 12.70 million. The family incorporated itself in 1969 as Wal-Mart Stores, Inc. and the next year became a publicly traded company. By early 80's, Walmart has reached $1 billion in annual sales from 276 stores.

It may be surprising to know, that Walmart in 1987 installed the largest private satellite communication system in the U.S., linking the company's operations through voice, data and video communication.

Its first venture outside US was in Mexico in 1991 in collaboration with Cifra, a Mexican retail company. Sam Walton passed away in 1992, leaving behind 1928 stores with 371,000 employees. From 1994 Walmart started expanding to other countries, Canada, followed by China in 1996 and UK in 1998 ⁵.

Currently it operates in 27 countries and its last reported revenue is $ 486 billion and is ranked # 1 in Fortune Global 500 - 2017 list.

Volkswagen Group is a German automobile giant, the largest automobile makers in the world, with operations in 153 countries.

Volkswagen was founded in 1937, to manufacture the car which would become known as the Beetle. During WWII the company was into manufacturing military vehicles and weapons. Production grew rapidly in the 1950s and 1960s, and in 1965 launched the first post-war Audi models and in the 70s, models including the Passat, Polo and Golf were introduced. Volkswagen acquired SEAT in 1986 and Škoda in 1994. It launched lines as Bentley, Lamborghini and Bugatti in 1998, Scania in 2008 and Ducati, MAN and Porsche in 2012. China has become its largest market.

Porsche Automobil Holding SE holds around 53 % of the shares in Volkswagen. Porsche SE is a German holding company belonging to Porsche and Piëch families ⁶.

It is ranked # 6 in Fortune Global 500 - 2017 list with revenue of $ 240 billion.

Berkshire Hathway is led by famed investor, Warren E. Buffett and is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. It wholly owns GEICO, Dairy Queen, BNSF Railway, Lubrizol, among others and owns 38.6% of Pilot Flying J and 26.7% of the Kraft Heinz Company. It also has minority but substantial shares of American Express (17.15%), Coca Cola (9.4%), Wells Fargo  (9.9%), IBM (6.9%), and Apple (2.5%). The company has acquired in the last two years large holdings in the major US airline carriers, and is currently the largest shareholder in United Airlines and Delta Air Lines, and a top three shareholder in Southwest Airlines and American Airlines. 

Its portfolio of approximately $ 620 million now spans across confectionery, retail, railroads, home furnishings, encyclopedias, manufacturers of vacuum cleaners, jewelry sales, newspaper publishing, manufacture and distribution of uniforms, and several regional electric and gas utilities.

It is ranked # 8 in Fortune Global 500 - 2017 list with revenue of $ 224 billion.

Exor N.V. is a leading investment company, incorporated in The Netherlands and controlled by Italy's Agnelli/Elkann family with a history of investments running over a century and currently having a net asset value of around $ 17 billion.

It has substantial holding in finest of companies in different sectors, prominently among them are:

Partner Re Ltd                          Insurance company         100.00 %,  

Fiat Chrysler Automobiles          Automobiles                     29.23 %,

CNH Industrial,                        Capital goods                    26.90 %,

Ferrari                                     Automobiles                      22.91 %,

The Economist group                Media                               43.40 %,

Juventus F.C.                           Soccer club                       63.77 %

Its illustrious history starts in 1899, when Giovanni Agnelli with some other entrepreneurs founded the Fabbrica Italiana Automobili Torino (FIAT) ⁷.

It is ranked 20^th in Fortune Global 500 list of 2017 with revenue of $ 155 billion.

The Ford Motor Company is an American multinational automaker headquartered in Michigan. The company’s major shareholder is the Ford family. Its’ founder was Henry Ford and the company was incorporated in 1903. Under Henry Ford, the company adopted and refined Assembly line concept of mass production. Initially he procured automobile parts from different vendors under contracts but vertically integrated into in-house parts production later. His contributed towards mass production through moving assembly line is well documented and acknowledged, a system adopted by rest of the world through-out 40s, to 60s. Its' most successful model was Model T, millions of which were sold in two decades till 1927, when it was replaced by another model. In 1922, the firm took over Lincoln Motor Company to enter the luxury segment. By the end of 20^th century, Ford has launched various models, some of them turned out to be iconic brands, as Ford Mustang. Luxury car makers Jaguar and Aston Martin came under the belt in first half of last decade.

Between, 2001 to 2005, the company came under pressure from declining sales, inflated cost, high incentives and low margin, to a point where they nearly went bankrupt. However, able leadership of William Clay Ford Jr with financial restructuring, cost reduction, layoffs and asset dilutions, saw them through. Jaguar and Land Rover were sold to Tata Motors in 2008 and Ford’s subsidiary company Hertz Rent-a-Car to private players.  Various non-core operations were also shaved off.

Ford currently has operations and manufacturing facilities in the United States, Canada, Mexico, China, UK, Germany, Turkey, Brazil, Argentina, Australia, and South Africa.

Ford ranks # 21 in Fortune Global 500 list of 2017, with revenue of $ 152 billion and profit of $ 4.60 billion.

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Bibliography :

1.http://www.ffi.org/page/globaldatapoints

2.Profile of Walton family - https://www.forbes.com/profile/walton-1/

3.http://www.guinnessworldrecords.com/search/applicationrecordsearch?term=oldest+family&contentType=record

4.https://hbswk.hbs.edu/archive/leveraging-the-mission-in-family-business

5. https://corporate.walmart.com/our-story/our-history

6. https://en.wikipedia.org/wiki/Volkswagen_Group

7. http://www.exor.com

Vinay Pandey, 08/12/2017

PS : If you have a suggestion or have noticed a mistake, please leave a comment.