THE ADVANTAGES AND DISADVANTAGES OF A FAMILY BUSINESS
Reg Athwal | 2014-09-26 13:00:00
Before you get the idea that family businesses benefit only the family members involved, think again. Successful family businesses are a win/win. They benefit both the local and global economies, and in a big way. However, how can it also be true that fewer than 10% survive to the third generation and less than 10% of owners are financially independent from their businesses when they retire?
Family firms come with their own set of unique advantages and challenges. In order to be successful, the advantages must be capitalized upon and the challenges overcome.
Advantages of Family Firms include:
Stability: Family position typically determines who leads the business and as a result there is usually longevity in leadership, which results in overall stability within the organization. Leaders usually stay in the position for many years, until a life event such as illness, retirement, or death results in change.
Commitment: Since the needs of the family are at stake, there is a greater sense of commitment and accountability. This level of commitment is almost impossible to generate in non-family firms. This long term commitment leads to additional benefits, such as a better understanding of the industry, organization and job, stronger customer relationships and more effective sales and marketing.
Hoshi Ryokan, a Japanese inn keeping business founded in 718, is said to be one of the oldest family businesses in world. Family members have operated the business for 46 that’s right, 46 generations. That level of family commitment has led to an understanding of the business that outsiders, or those relatively new to the business, simply wouldn’t be able to replicate. Ford Motor Company managed to stay afloat during very difficult economic times, when other companies, such as Chrysler and GM, were begging for bailouts. Why? I’m sure when all is said and done there are several reasons, but I don’t think it’s any coincidence that Ford’s family name was literally on the line.
Flexibility: You won’t hear, “Sorry, but that’s not in my job description” in a family business. Family members are willing to wear several different hats and to take on tasks outside of their formal jobs in order to ensure the success of the company.
Estee Lauder, who led one of the world’s most famous family businesses and was the only woman on Time magazine’s list of the century’s business geniuses in 1998, said of her company’s success, “I have never worked a day in my life without selling. If I believe in something I sell it, and I sell it hard.” Lauder did everything from cooking up pots of face cream to personally giving free demonstrations, from designing the packaging of her products to training the saleswomen who would sell them.
Long-term Outlook: Non‐family firms think about hitting goals this quarter, while family firms think years, and sometimes decades, ahead. This “patience” and long- term perspective allows for good strategy and decision-making. In describing his reasons why he didn’t want to take his company public, Michael Otto, second- generation CEO of Hamburg, Germany’s $18.5 billion retailer Otto Group, said, “We don’t have to come up with a good story every quarter for the investors and the press.”
Decreased Cost: Unlike typical workers, family members working at family firms are willing to contribute their own finances to ensure the long‐term success of the organization. This could mean contributing capital, or taking a pay cut. This advantage comes in particularly handy during challenging times, such as during economic downturns, where it’s necessary to tighten the belt or personally suffer in order for the business to survive.
Disadvantages of Family Firms include:
Lack of interest among family members: Sometimes, family members aren’t truly interested in joining the family business, but do so anyway because it’s expected of them. The result is apathetic, unengaged employees. In the public sector, employees that fit into this category would simply be fired. It’s not so simple at the family firm.
Family Conflict: Conflict is bound to happen at any firm, but add in long histories, family relationships, and the kind of contempt that comes with familiarity, and the ante has just been upped. Deep-seated, long-lasting bitter fights and quarrels can affect every single person within the firm and can draw divisive lines. Because family members are involved, conflict can be more difficult to solve and can result in difficult endings. In 2005, a famous dispute between the sons of Reliance Industries founder Dhirubhai Ambani, Mukesh and Anil, divided India’s largest petrochemical manufacturer. When all was said and done Mukesh retained control of the petrochemical business, while Anil became chairman of Reliance Capital, Reliance Communications, and Reliance Energy.
Unstructured Governance: Governance issues such as internal hierarchies and rules, as well as the ability to follow and adhere to external corporate laws, tend to be taken less seriously at family businesses, because of the level of trust inherent at family firms. Unfortunately, this can be gravely detrimental. Take the example of Samsung Group, whose chairman, Lee Kun-Hee, was forced to resign in 2008 after being indicted for tax evasion and criminal breach of trust charges. While his three- year sentence was suspended, a fine of $109 million was still imposed. In this situation, a little governance would have gone a long way.
Nepotism: Some family businesses are reluctant to let outsiders into the top tier, and the result is that people are given jobs for which they lack the skills, education, or experience. This, obviously, has a far-reaching effect on the success of the company. In particular, it’s very difficult to retain good talent at lower levels if their performance, and their ability to succeed in the long run, is consistently being affected by incompetence at higher levels. More family firms are recognizing this issue and are taking care to strategically place outsiders in certain positions when necessary.
Succession Planning: Many family firms lack succession plans, either because the leader doesn’t have the desire to admit that he or she will, one day, need to step down, or because there is too much trust in the family to work this out when it becomes necessary. In fact, because of close relationships and long histories, it is of utmost importance in family firms that a strong succession plan is in place.
Risks associated with not having a strong succession plan include poor leadership, family quarrels and often financial or legal trouble for the company. Founder of Hyundai Motor, Chung Ju-Yung, named his son, Chung Mong-Koo, his successor in 1999. Just a year later, Chung Mong-Koo defied his father’s orders to step down.
In 2007, Chung Mong-Koo was convicted of embezzling funds from the company in order to buy corporate favors from the Korean government. As you can see, a well-run family business is capable of having a positive impact not only on the family involved, but also on the local and global economies. Family businesses are capable of promoting entrepreneurism, generating wealth and security for families and for providing employment opportunities for those in the community.
Unfortunately, the things that make family firms so wonderful are the family involvement, the highly personal relationships, the inherent loyalty and commitment, the flexible structure, but they also make them challenging to sustain for the long term. The goal, then, is to recognize and understand both the strengths and the weaknesses of family businesses, in order to better manufacture long-term success.