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The Family

Business

Part 2 Starting from Scratch


or Joining an Existing Business

PowerPoint Presentation by Charlie Cook


The University of West Alabama
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All rights reserved.
Looking Ahead
After studying this chapter, you should be able to:
1. Discuss the factors that make a family business
unique.
2. Explain the cultural context of a family business.
3. Outline the complex roles and relationships involved in
a family business.
4. Identify management practices that enable a family
business to function effectively.
5. Describe the process of managerial succession in a
family business.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. 5–2
What Is a Family Business?
• Family Business
– A company in whose ownership and/or functioning two
or more members of the same family are directly
involved
– A firm whose ownership passes from one generation
of a family to another (succession)

Smith Family Hardware


Est. 1935

Welcome

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The Three-Circle
Model of Family
Business
2
Ownership

4 5

1 3
Family 6 Business

Source: Three-Circle Model developed by Renato Tagiuri and John A. Davis. Found in “Bivalent Attributes of the Family Firm.” 1982.
Working paper, Harvard Business School, Cambridge, MA. Reprinted 1996, Family Business Review, Vol. IX, No. 2, pp. 199–208. Exhibit 5.1
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Family and Business Overlap
• Family Concerns • Business Concerns
– Care and nurturing of family – Production and distribution
members of goods and/or services
– Employment and – Need for professional
advancement in the firm management
– Loyalty to the family – Effective and efficient
operation of the firm

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Advantages of a Family Business
• Strength of family relationships during challenging
periods of business change
• Financial sacrifices that family members make for the
good of the firm
• Operation as a family business distinguishes the firm
from its competitors
• Higher levels of concern for its community and non-
family employees
• Capability to plan and prepare for the long haul
• Emphasis on quality and value

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Advantages of a Family Business

Exhibit 5.2
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The Culture of a Family Business
• The Founder’s Imprint on the Culture
– The founder’s core values become a transmitted part
of the culture (for better or worse)
• Organizational Culture
– Patterns of behaviors and beliefs that characterize a
particular firm
• Cultural Configuration
– The total culture of a family firm,
consisting of the firm’s business,
family, and governance patterns

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Cultural Configuration of a Family Firm

Business Pattern Governance Pattern


Paternalistic Cultural Paper Board
Laissez-faire Configuration Rubber-Stamp Board
Participative of the Advisory Board
Professional Family Firm Overseer Board

Family Pattern
Patriarchal
Collaborative
Conflicted

Source: Adapted from W. Gibb Dyer, Jr., Cultural Change in


Family Firms (San Francisco: Jossey-Bass, 1986), p. 22. Exhibit 5.3
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Family Roles and Relationships
• Parental Concerns in Passing the Business On:
– Does my child possess the temperament and ability
necessary for business leadership?
– How can I, the founder, motivate my child to take an interest
in the business?
– What type of education and expertise will be most helpful in
preparing my child for leadership?
– What timetable should I follow in employing and promoting
my child?
– How can I avoid favoritism in managing and developing my
child?
– How can I prevent the business relationship from damaging
or destroying the parent–child relationship?

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Family Roles and Relationships (cont’d.)
• Husband–Wife Teams
– Opportunity to share more in each other’s lives
– Business differences interfere with family life
– Work doesn’t leave time for family life
– Sharing family responsibilities eases the load
• Sons and Daughters
– Personal preferences different from the business
– Personal qualifications insufficient to assume role in
business
– Desire for personal freedom to choose another career

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Family Roles and Relationships (cont’d.)
• Sibling Cooperation, Sibling Rivalry
– Best case: siblings work as a team, each contributing
services according to his or her abilities.
– Worst case: siblings compete as rivals and disagree
about their business roles.

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Family Roles and Relationships (cont’d.)
• In-laws In and Out of the Business
– Disagreements about how to treat and reward in-laws
and family members/children
• Assign to different branches or
to different business roles
• The Entrepreneur’s Spouse
– Communication between
entrepreneur and spouse is
critical for them to perform as
an effective team for both the
business and the family.

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Professional Management
of the Family Firm

• “Best Practices” (John L. Ward)


1. Stimulate new thinking and fresh strategic insights.
2. Attract and retain excellent managers.
3. Create a flexible, creative organization.
4. Create and conserve capital.
5. Prepare successors for leadership.
6. Exploit the unique advantages of family ownership.

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Professional Management
of the Family Firm (cont’d.)

• Nonfamily Employees in a Family Firm


– Hazards:
• Competition with family members for advancement
• Getting caught in the crossfire and politics of family
competition within the firm
– Solution:
• Identify family-only reserved positions in advance.
• Treat both family and nonfamily employees fairly in
matters of reward and promotion.

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Professional Management
of the Family Firm (cont’d.)

• Family Retreats • Guidelines


– Are a gathering of family – Set a time and place.
members, usually at a
– Distribute an agenda prior to
remote location, to discuss
the meeting.
family business matters
– Plan a schedule in advance.
– Use of an outside facilitator
may be necessary. – Give everyone a chance to
participate.
– Keep it professional.

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Professional Management
of the Family Firm (cont’d.)

• Family Councils
– An organized group of family members who gather
periodically to discuss family-related business issues
• Represent the family to board of directors
• Useful in developing family harmony
• Increases understanding of family
traditions and interest
• Family Business Constitution
– A statement of principles
intended to guide a family
firm through times of crisis and change

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The Process of Leadership Succession
• Available Family Talent
– Mentoring
• Guiding and supporting the work
and development of a new or less-
experienced organization member
– Allowing only qualified competent
family members to assume leadership
roles in the firm increases the value of
the firm for all who have an ownership
interest in it

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Stage I Stage II Stage III
Pre-Business Introductory Introductory
Child becomes aware of Child is exposed to Functional
Child works as part-time
facets of firm and/or business jargon,
employee. Work
industry. Orientation of employees, and the
becomes more difficult.
child by family member business
Includes education and
is informal. environment.
work for other firms.

Entry of Successor

Stage IV Stage V
A Model of
Functional
Potential successor begins
Advanced Functional
Potential successor assumes
Succession
work as full-time employee.
. Includes all nonmanagerial
managerial position. Includes
all management positions prior
in a Family
positions. . to becoming president.
Business

Transfer of Leadership

Stage VI Stage VII


Early Succession Mature Succession
Successor assumes presidency. Source: Justin G. Longenecker and John E.
Successor becomes defacto
Includes period in which the Schoen, “Management Succession in the
head of company.
successor becomes dejure head Family Business,” Journal of Small Business
of company. Management, Vol. 16 (July 1978), pp. 1–6.
Exhibit 5.4
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Conditions Favoring Successful
Leadership Succession in a Family Firm

• A sound, profitable business


• Stable, healthy family relationships
• Advance planning for leadership succession
• Positive family leadership and a team-oriented
management structure
• Presentation of career opportunities without
pressure
• Open communication on family business issues

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Succession in a Family Firm
• Transfer of ownership
– Passing ownership of a family business to the next generation
• Who will inherit the family firm?
• Should each heir receive an equal share?
• Should ownership be transferred gradually?
• How to handle tax considerations?
• What to do with other wealth and assets of the founding
entrepreneur?

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Key Terms
family business
organizational culture
cultural configuration
family retreat
family council
family business constitution
mentoring
stages in succession
transfer of ownership

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