Why family managed businesses fail?
Introduction:
Family run businesses are the engines of growth for any economy. We have very large enterprises controlled by families in almost all economies. The statistics given below provide some interesting reading:
• In USA, 90% of the businesses are family run businesses • In UK, 75% are family owned and 99% are small and employ 45-50% of the working population. 90% of these small businesses are in the service sector. In East Africa, 85-90% are small businesses and run by families or individuals. In India, small businesses owned by families are booming and service sector is expected to contribute nearly 50 to 55% of the economy.
• 30 % of the businesses make it to the second generation • 12% make it to third • 3% make it to fourth Failures:
Family businesses fail for a number of reasons but primarily because of conflicts between the members of the family. Conflicts are bound to happen, whether the business is family driven or professionally managed. Conflicts are also inevitable, when a group of individuals come together to form a team. Our experience shows that misunderstandings between male family members are mainly due to pressures exerted by their ambitious wives in the background. One common characteristic is that personal likes and dislikes have larger roles to play in family driven organizations. Sometimes, the hatred, jealousy and political skullduggery that go on between the family members are seen to be believed. Truth is stranger than fiction. The soap operas we see on the TV are nothing.
Ownership:
The ownership issue is not discussed or resolved or agreed in the beginning. Succession plans are never discussed let alone being planned. When the patriarch passes away suddenly, many families do not even know the assets and their whereabouts. Everyone assumes that he or she is an owner in the business. In the initial explosive growth stage there is great unity and a sense of purpose and everything is hunky dory. Ownership is taken as a birthright and everyone demands equal share. It is not based on contribution to the business. The fact remains that all fingers are not equal, but the fingers must come together to form a fist. The same rule applies to family businesses. Many families take recourse to legal action to protect their interests, when misunderstandings start.
Accountability:
As the business grows rapidly and haphazardly, family members are brought in with no job descriptions or KRAs at senior positions. They neither have the qualifications nor the experience. I have often come across people in senior positions, who would not get even junior positions elsewhere, if they were not members of the family. The result is no one is accountable for a specific job. They are there because they are the trusted members of the family. Every one does every job and tries to please key members of the family. The focus is to maintain the status quo and strict family control. As the business grows and jobs get complicated, the need for formal managerial and leadership training emerges. At this stage many fail. At the first instance of failure, everyone is forgiving. They believe "Everything will sort itself out" over a period of time. But it rarely happens. They forget the saying 'If you always do what you have always done, you will always get what you always got'. However, as the realization dawns on personal inadequacies, mutual recriminations begin. People gang up into various small groups. The camaraderie and team spirit disappears completely. A few professionals get dragged into family politics and daggers are drawn and plunged into each other. Some professionals in such organizations fish in troubled waters. They forget that blood is thicker than water. The best way to survive in such an environment is not to take sides and be neutral, but it is easier said than done. The individual frustrations of family members are taken out on staff members and workers. The result is poor motivation and morale.
Human Resources:
Family run enterprises very rarely have a HRD strategy. All key positions are manned by family members. The members may not be qualified or having adequate experience and maturity. In some large family managed enterprises, young well qualified members of the family are brought in to senior positions. This upsets the few senior professionals and many leave. Family managed enterprises have no performance appraisals for family members. Salaries are fixed based on family needs and not on real contributions. These results in frustration in the limited senior professionals such organizations employ and either they leave or general apathy sets in. Since personal loyalty and trust is more important in family managed organizations, a lot of dead wood can be found. These dead wood take recourse to politicking for survival and do not allow good professionals to last. A few professionals who are left behind are as good or as bad as the dead wood. Family managed organizations very rarely put outsiders in positions where the company secrets reside. There is an atmosphere of fear, mistrust and distrust. This invariably results in frustrations leading to poor performance. The above drives even highly healthy and profitable family managed companies to their knees and eventual collapse.
Conclusion & Parting words:
The problems mentioned above are fairly common all around the world, irrespective of cultural differences, as human beings will remain human and have their failings. They are not insurmountable, as we have very successful, large family owned organizations like Wal Mart and DuPont in USA and a number of family owned organizations in UK, Europe and India. When the family problems cannot be solved, it is better to hand over the organizations to professionals and the family members can continue to be the major shareholders and enjoy a steady income in the form of dividends and/or capital appreciation. This may not always result in a successful and satisfactory outcome, as ambitious professionals may try to hijack the organization's control, as happened with HP during the Compaq takeover struggle. To keep themselves busy, they can start their own businesses and run it the way they like. This way the family owned organizations continue to exist and at the same time members of the family do not step on each others and the professional’s toes. However, they should ensure that the money for their personal business is not funded by the family business. Thomas Edison was a great innovator and founded a number of large companies but was a poor manager and leader. He was eventually booted out by the boards but given all facilities to carry out research and development, the area in which he was extremely good at. This is the best possible example of how family members can be utilized in family owned organization.
copyright. July 2007. www.madgopes.com
To learn more about this author, visit Madhavan T Gopalachary's Website.
Like this article? Share it with your friends
 |
Related Articles |
|
 Why family managed businesses fail?
|
| |
Why family managed businesses fail?
|
|
Operator Error Is Why Most Businesses Fail
|
| |
This is the column that probably gets me kicked out of the entrepreneurial chapter of the Priory of Scion. I look silly in those long robes anyway, so here goes. A thousand apologies to my entrepreneurial brothers a...
|
|
Franchising for the Family
|
| |
Business format franchising lends itself well to families wanting to go into business together, although they must all be pulling in the same direction and be competent enough for a family-run franchise to be a succ...
|
|
SME's - do you want business from government?
|
| |
Do SME's want business from government?
|
|
Is Entrepreneurship For You?
|
| |
In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and in...
|
|
|
Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name/
mtg.html
mmgconsu
lting.biz/
|
|
 |
|
Madhavan T Gopalachary's
Complete
List Of
Management
Articles
|
|
If you enjoyed this article, get Madhavan T Gopalachary's Complete List of Management Articles For FREE!
|
|
|
|
