4381382 Etr Chapter 9 English

• Understand the importance of family business • Discuss the main components in a family business system and the differences between family values and family business values. • Identify the positive and negative characteristics of family business, and the strength and weakness of family business. • Explain the source of family business takeover and replacement development strategy. • Discuss the continuity of family business and outstanding issues.

INTRODUCTION • Generally, family business can be found in various industries. Known as ‘mom and pop’ enterprise. • Unique due to dilemmas and problems which differs to that of other businesses. Mixture of business and family matters in business management and operations.

UNIQUENESS / IMPORTANCE (US CASE STUDY) • Churns the economy of a country. • 60% of 17million business in US is under the influence of family. • Capable of generating 85% job opportunities and 49% of Gross Domestic Product (GDP) of US

• Malaysian family run businesses are small scale enterprises (51 staff and below) which are still managed by the founder with activities focused on manufacturing, retailing or construction. • most of these businesses were started by people having 6½ years or more of work experience, which means that family businesses were commenced by people with appropriate experience.

• Malaysia has great potential for growth of family run businesses, which will positively impact the country's economic growth as a whole. • Eg: ALBUKHARY FOUNDATION, YTL CORP.,

Characteristics of the family businesses in MALAYSIA • Most of the businesses (59%) are still run by the founder & the founder is supported by: - brothers & sisters (45%) - children (24%) - distant relatives (14%) • Most small scale enterprises (65%) are managed by founders • 55% of the businesses are small scale enterprises employing below 51 persons • Manufacturing (35%) is the main activity of family business

DEFINITION OF FAMILY BUSINESS • Can be defined as majority ownership and management of a family of which 2 or more of the family members are directly involved. • 50% of shares owned by a family • A family controls the business, and • Important post held by the same family. (LONDON BUSINESS SCHOOL)

DEFINITION OF FAMILY BUSINESS • Meredith (1988) defines family business as a business that has family members holding majority posts, and normally the founder and spouse holds the major equity. • Ward and Aronoff (1996), family business is as a business that involves two or more family members that controls the finances of a company.

DEFINITION OF FAMILY BUSINESS • Galiano dan Vinturella (1995) classify family business as a business of which the family members has a legitimate control on ownership. • Dyer (1986) defined a family business as an organization that is being owned and governed by a family.

SIZE AND IMPORTANCE OF FAMILY BUSINESS • La Porta, Lopez-de-Salanes and Shleifer (1999), stressed that the involvement of family members shows that they are controlling at least 69% of the management. • 30% of public listed companies in US and Canada are 75% controlled and managed by families.(Forbes, 2000; Kang 2000).

• • • • • •

10% in Australia, Jepun dan Finland 50% in Belgium 55% in Sweden, 65% in Argentina dan Greece, 70% in Hong Kong dan 100% in Mexico.

Sumbangan perniagaan keluarga terhadap ekonomi AS. Sumber: Adaptasi daripada Shanker & Astrachan (1996).

•

Total of family business in US

A(DEF LUAS) B(DEF SEMPIT) 20,332,400 4,121,300

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GDP Contribution

49%

12%

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Total workforce

59%

15%

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Job vacancy contribution

78%

19%

BACKGROUND OF FAMILY BUSINESS TYPES: •

Controlled and Managed by Family Members Wholly owned and managed by family. Directly influence the organizational behaviour of the company.

•

Family Controlled but Managed by Others Controlled ownership by family but recruit others to manage the company. Only interested in developing the mission and vision of the company, holds post as board of directors and receives profits and dividends based on their shares. Does not want to be directly involved and be responsible in the business.

•

Controlled and Managed by Non-Family Members Organization does not have any family members involved. However, any member is capable to takeover the business.

FAMILY BUSINESS SYSTEM Ownership / Control System Mission & Objectives Rules & Regulations Ownership Division

Business System Mission, Strategy, Structure, Technology, Culture, System (rewards & information), Process (communication & decision making)

Family System Role & relation Culture / Values Decision making Communication Conflict Management

DIFFERENCES BETWEEN FAMILY VALUES AND BUSINESS VALUES Conflict Division

Family System

Business System

Objective

Development & support of family

Profit, Income, Efficiency, Growth

Relationship

Personal interest

Semi-personal or no personal relationship – secondary interest

Rules

Informal Expectation

Formality & written, includes rewards & punishment

Evaluation

Rewards based on love and unlimited support

Support based on performance and outcome, can be fired or promoted

Succession

Death, divorce or illness

Retirement, promotion or resignation

Authority

Seniority or status in family

Formal in organization hierachy

Commitment

Generation to generation, long term commitment based on identity in family

Short term based on rewards while still employed

relationship

–

Primary

TYPES OF FAMILY BUSINESS

• Sole Propriety (Milikan Tunggal) • Partnership (Perkongsian) • Company (Syarikat) – Shareholders consists of family members but being managed by managing director and operated on a day-to-day basis by the employees

POSITIVE CHARACTERISTICS OF FAMILY BUSINESS BUSINESS MANAGEMENT (Pengurusan Perniagaan) • Shared knowledge and information • Knowledge used for adapting to environmental changes and competitive edge. • Decison making based on knowledge and skills. • Learning organization, highly competent and positive behaviour. • Balance of responsibility and authority. • Leadership of organization and family. • Early plans for succession.

POSITIVE CHARACTERISTICS OF FAMILY BUSINESS MANAGEMENT DEVELOPMENT AND OWNERSHIP SYSTEM (Pembangunan Pengurusan dan Sistem Pemilikan) • Clear mission and vision • Board of directors consists of outsiders • Plans of succession and change of ownership between generations

POSITIVE CHARACTERISTICS OF FAMILY BUSINESS Keberkesanan batasan di dalam sistem perniagaan keluarga • Uses family values in strategic planning • Every systems uses vision and values for implementation • Clarity and honesty ease the flow of information among systems • Does not mix family issues and business • Shared learning between systems • An individual that understands the competency of workers and organization

NEGATIVE CHARACTERISTICS OF FAMILY BUSINESS • Weak communication skills and weak conflict management • Lack of trust in family members • Unclear values and vision • Vague achievements and no strategic planning • Lack of experts and try to do everything within the family

• Does not think about successor issues • Lack of teamwork among workers (family & nonfamily) • No board of directors • No expert reference for advise in case of trouble • Mix business issues with family issues • No clear boundaries between business and family

To be continued…

DEVELOPING SUCCESSION STRATEGY (Hisrich & Peters-1998)

Understanding conceptual aspects ii. Identify the successor’s qualities iii. Understanding the reason for succession cause iv. Developing and implementing succession plan i.

1. Understanding Conceptual Aspects •

•

Time – the earlier the succession plan starts, the better the chances are of getting the suitable successor. The only problem is that there might be a time constraint in getting a suitable successor should there be an emergency. Venture effort type (Jenis usaha teroka) – if it is a Hight-Tech business, there might be a problem in getting a successor. It is also faced in business that depends heavily on personal networks.

1. Understanding Conceptual Aspects •

•

Managerial Capabilities (kebolehan pengurusan) – expertise, determination and capabilities determines the success of the organization. An entrepreneur who has the expertise of technology and management skills is more valuable than that who only has technology knowhow but does not have any marketing background. Entrepreneur’s Vision (Visi Usahawan) – every entrepreneur has expectation, hope and determination towards the organization. He has to share his vision and commit to it. A new vision needs to be implemented should the need arises.

1. Understanding Conceptual Aspects e) Environmental Factors (Faktor-faktor persekitaran) – sometimes, a successor is needed due to environmental changes that the company needs to adapt to.

2. Identifying the Successor’s Quality Needed Characteristics: Business knowledge and academic qualification  Honest and capable, healthy, energetic, alert and active.  Suitable personality with the business, proud of the firm, mature, aggressive and meticulous, problem solving skills, capable of planning and organizing, leadership talent, same vision with the entrepreneur.

3.Understanding the Reason for Succession Cause 3a) Business Culture and Family Issues     

Business Environment Company development limits Norms and business tradition Family culture, strength and influence Values and entrepreneur’s motivational factors

3b) Entrepreneur’s Concern (Keprihatinan Usahawan)  Surrendering

of power and leadership  Ensuring the family performs as a unit  Explain the roles of each family members in the business future  Ensuring a competent potential leader  Retaining non-family resources in the company

3c) Family Member’s Concern (Keprihatinan Ahli Keluarga)  Gaining

or loosing control on family asset  Protects interest when business ownership is being divided among family members  Power to decide in the firm  How to withdraw money from the firm when needed  Ensuring continuity of business operation

4. DEVELOPING AND IMPLEMENTING SUCESSION PLAN Choosing the Successor (Memilih Calon Pengganti) Entrepreneur needs to identify a suitable successor or experienced individual. b) Developing Tools for Potential Successor • Prepare a strategic future analysis • Entrepreneur has to share his vison with the successor • Openness and listen to ideas from potential successor • Explain the relation between business strategy and company success • Discuss business principles and issues • Discuss the strength and weakness of team resources • Discuss the firms reward policy • List out clients, suppliers, competitors and how to manage the relationship •

a) Developing the Succession Candidate Potential  Patience

and step-by-step power transfer  Willing to accept mistakes from potential successor  Use mistakes as a learning tool  Communicate effectively and listen to potential successor.  Willing to place sufficient hope and expectation on successor

a) Consider Assistance from Outsiders  To

identify mistakes and explaination apart from building up skills needed by the successor.  Ensuring mistakes are not repeated and operations moves accordingly.  Environmental changes can be addressed accordingly.

a) Developing Respect and Trust to the new Successor A

motivation to develop commitment and willingness to learn and gain experience in order to improve confidence for decision making  Creating an environment where clients, suppliers, workers, investors and creditors can evaluate objectively the development of successor.

The Harvest Strategy: Selling Out A. B. C. D. E. F. G. H.

Prepare a financial analysis Segregate assets Value the business Utilize appropriate timing Publicize the offer to sell Finalize the prospective buyers Remain involved through the closing Communicate after the sale

• Family Business is just like any other businesses that is profit oreinted. • The difference is in terms of ownership and management which is being done by a family that could be handed down the genereations. • The challenge is in separating family issues and business issues in order to avoid dissatisfaction. • The main issues in a family business is a suitable candidate for succession, family involvement in the business, nepotism etc. That makes a family owned business unique.