Challenges Faced by Family Business

Kushal Pachisia - NA13030; Siddhant Jain - NA13049; Swaminathan - NA13054; Vishnu Gupta - NA13058;

CHALLENGES FOR FAMILY BUSINESSES

Family Business A family business refers to a company where the voting majority is in the hands of the controlling family; including the founder(s) who intend to pass the business on to their descendants. Family businesses have always been an integral part of the Indian economy and society. Largely founded on the joint family principle of ownership and management, their contribution has always remained very high. Family Business accounts 85% of business in India. Though this is the statistics, there are many challenges that are affecting the family business to avoid becoming a successful enterprise. Weaknesses of Family Business: There are many weaknesses because of which family business were not able to expand its business. Some of the important are as follows. Two-thirds to three-quarters collapse or are sold by the founders during their own tenure. Family business generally around the world is having a short-life span. 95% of the family business across the world does not survive third generation of ownership. Other than these two major issues, the other issues which consider being the weakness of family business are as follows. 1) Poor Management: The entire management was surrounded by the important members of the family. Hence, there is always lack of professional non-family members in the team and even though there are professional non-family members they are not allowed or consulted in a large when taking the decision. 2) Insufficient Funds for growth: Lack of funding makes impact in growing the family business. The owners of the family business do want to go for any loan from banks or VCs which they feel that
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ownership of the business will be shared and they dont want to do the same. This affects the family business to grow in large manner. 3) Non-alignment of incentives among family members: The incentives were not aligned to the family members properly which makes dispute among family members and affects the business directly. 4) Lack of Discipline: Since most of the family owned business are not running professionally there is always a problem of discipline. The lack of discipline mainly from family members.

Impact of Family Components on Business: The below are the two pictures which represents the impact of family components on business.

The first picture in the above shows that during the initial period of business, the family is having a perfect space toward ownership and management. This makes the business to grow in faster phase with skilled and professional people. However, as given in second picture over a period of time when the business is start growing, the space occupied by the family business is expanded in all the departments especially in ownership and management which affects the business. Major Challenges Faced by Family Business:

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In todays world where professionally running business are ruling and making a clear mark on all the industry, it is difficult for family business to sustain in front of them. Here, we have enlisted few major challenges which are faced by majority of family owned business.

Lets look into detail on what these problems are and how it is affecting largely. Professionalization: The following are the list of problems in professionalizing the business. Poor Management: The management of any family business is always in the hands of head of the family. Basically, in India family business is running based on the day today impacts. This results into poor management of business.

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Lack of articulated practices and procedures: Since, family businesses are not running professionally any practices and procedures were followed and articulated properly. This affects the growth of business. Lack of discipline: Since there are no articulated practices and procedures, it also brings the lack of discipline into business. 1) Since most of the family owned business is not running professionally there is always a problem of discipline. Lack of discipline mainly because of family members. Role confusion: This is another important problem towards the professionalization of business. Family members' roles in the business are not clearly defined and communicated. Another problem is accountability of family members is not defined and communicated properly. Informality and Soft Structure: In most of the business, Family hierarchy is the basis for deciding business responsibilities independent of business capabilities and also Processes/procedures are more flexible for family members than non-family members. Control of Operations: Non-Family but top Professionals are provided with less control over business activities than Family members. Operational involvement of family members is affecting their focus towards planning strategy of business. Lack of talent: Entry requirements are not followed in case of a family member as like followed for a non-family member. Performance appraisal is not done for the family members serving the business as it is done for others. High turnover of nonfamily members: Family members are not penalized for non-performance. Family members are given high preference in promotion. Non-family members have no freedom to make key decisions. Non-family members leave due to limitations to their career progression.

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Systems and Processes: Systems and Processes are not established or are not well defined in family business. Even though in some family business systems and processes are there, they are not followed in letter and spirit. Leadership: Paternalistic Leadership: Eldest family member(s) have absolute and final authority on business matters. Younger family members are not allowed to participate in business decision making process. Other Family members cannot question the business decisions made by the eldest family member. Limited or Tunnel Vision: A clear vision about future of the business exists is lacking. External inputs are not invited or considered for developing the business vision for future. Though Business vision is commonly shared by all the family members, Business' vision is limited by personal viewpoints of the head family members. Lack of Systematic thinking: Business decisions are mostly reactive to address day-to-day developments. Business is not having a clear long term strategy. Not having a documented plan for the future. Resistance to Change: Ideas for major expansion/new businesses are not encouraged from the family members. Control issues: Top leadership is not delegating key decisions with competent managers. Family members are not upgrading their business skills. Skills and talent: No effort is made to recruit high quality non-family professionals. Family members are preferred recruits over talented 'outsiders'. Succession Planning:

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Lack of Succession Planning: There is no clear plan for handing over business leadership to the next generation. There is no formal retirement age for the family members. In some business, though Succession plan is there but is unclear or not practiced. Uncertainty: Roles & responsibilities of incoming family members are not clearly defined - (i.e. who will do what etc.). Poor Training: Next generation lacks business acumen. Next generation is well groomed to take up the business responsibility. Management of Family Wealth: Wealth Management: Lack of professional expertise. Another one is there is lack of laid down policy for managing wealth. There is a lack of segregation b/w individual and family wealth. There is Non-alignment of incentives among family members. Wealth is managed at family level rather than at individual level. Professional wealth managers help is not taken with regard to the family in wealth management. Current wealth management practices in many cases not satisfying the family members. Growth Limitations: The owners of the family business always wants the control the business and hence and not opened to external funding / investments and scrutiny that comes with it. Since, re-investments of business earnings are inadequate to fuel business growth it is difficult for them to grow business to large scale. Managing Family Relationship: Non-business issues and Emotions: Irritants in business operations affect personal relations among family members. Personal /emotional issues of family members (like Separation/Conflicts/Health problems) affect business decisions and activities.

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Communication Problems: Communication forum / platform exist for family members to share thoughts and voice their concerns. Free and open interpersonal communication is not promoted across the organization. Communication gaps arise due to age/ personal matters of the family members. Compensation issues: Rewards (including salary) are determined based on the age of family members. Specific merit based criteria does not exists for deciding compensation of family members. No clear guidelines for compensating non-participating family members. Retirement and estate planning: No plans for sustaining the lifestyle of retiring family members. No Family level policies exist to meet routine and non-routine family expenses. Common Issues Faced In Different Stages: The below is a analysis which shows at which stage which problem arises.

Ownership Stage Stage 1: The Founder(s)

Dominant Shareholder issues - Leadership transition - Succession - Estate planning

Stage 2: The Sibling Partnership

-Maintaining teamwork and harmony -Sustaining family ownership -Succession

Stage 3: The Cousin Confederation

- Allocation of corporate capital: dividends, debt, and profit levels - Shareholder liquidity - Family conflict resolution - Family participation and role - Family vision and mission

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- Family linkage with the business

Overlapping Roles and Responsibilities of Family Members:

The above picture clearly shows the there is always an overlapping in others responsibilities such as owner, manager, director etc. by family members. This makes the professionals working in the family business difficult to stay long. When Putting Family First: Sample Issues Family First Cos.

Family Employment Compensation

Open-Door Policy for all family members, regardless of qualifications Equal pay for all, regardless of their experience or performance

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Leadership

Leadership based on Seniority in Family, regardless of merit or qualifications Business Resources used for personal needs (e.g., loans, grants) Unilateral & Concentrated with Senior Family Member (e.g., Chairman/CEO)

Resource Allocation Decision-Making

When Putting Business First: Business First Cos.

Qualification-Based Employment, as for any other new hire

Merit-Based pay, based on experience, performance Leadership granted to the right person (family or non-family), based on merit and qualifications Business resources only used for business purposes separate family reserve fund utilized for family needs.

Multi-lateral, based on Defined Governance Structure (e.g., Executive Committee)

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Relationship between Conflict & Success:

This graph shows the relationship between conflict and success in a family business. i.e. when the business is in initial phase the conflict will be always less. However, over a period of time the conflict is increasing as the business is also increasing and the growth of the business is started decreasing due to the increase in conflict. Conclusion: Even if the strategy is not perfect, even if the numbers are not the best, if the owners are unified we get both performance and longevity. Like mentioned in the above statement, even if the strategy of the business in not perfect, even the numbers of the business is not perfect, if the owners and employees are united we will get both performance and longevity.

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