Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership

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Overview

Based on research and interviews with leaders at family firms this book will help you evaluate what stage of growth you are in; how to begin your strategic and corporate plans; when to begin implementing growth plans and how to prepare the family for change.

Good planning is more than just thinking ahead—businesses need a strategic approach to ensuring their success.  Keeping the Family Business Healthy provides readers with a guide to strategic thinking—including

·         how to maintain growth

·         how to shape business direction

·         preparing for new leadership;

·         and working with a large and diverse family base. 

Includes tools that help you implement growth:

·         Sample business models and family plans

·         Sample business analysis

·         A questionnaire on business values

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Product Details

  • ISBN-13: 9780230111219
  • Publisher: Palgrave Macmillan
  • Publication date: 1/4/2011
  • Series: A Family Business Publication Series
  • Edition description: New Edition
  • Pages: 272
  • Sales rank: 1,426,990
  • Product dimensions: 6.20 (w) x 9.30 (h) x 1.10 (d)

Meet the Author

John L. Ward is Co-founder of the Family Business Consulting Group Inc. He is Clinical Professor at the Kellogg School of Management and teaches strategic management, business leadership and family enterprise continuity. Ward is the author or co-author of several leading texts on family business, Family Business As a Paradox, Creating Effective Boards for Private Enterprises, Strategic Planning for the Family Business, Perpetuating the Family Business, Unconventional Wisdom and Family Business Key Issues. He is also an author of many titles in The Family Business Leadership Series, each focusing on specific issues family businesses face.

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Read an Excerpt

Keeping the Family Business Healthy

How to Plan for Continuing Growth, Profitability, and Family Leadership


By John L. Ward

Palgrave Macmillan

Copyright © 2011 Family Business Consulting Group
All rights reserved.
ISBN: 978-0-230-11612-2



CHAPTER 1

The Challenge of Keeping a Family Firm Alive


Keeping a family business alive is perhaps the toughest management job on earth. Only 13 percent of successful family businesses last through the third generation (see Table 1 and Appendix G). Less than two-thirds survive the second generation. And, as indicated by other studies (Blotnick, 1984), fewer than 5 percent of all businesses ever started actually become family businesses through appointment of a successor from the next generation.

The dying family business so permeates our business culture that it has become legendary. Expressions such as "shirtsleeves to shirt-sleeves in three generations" and "rags to riches to rags" are common in this country. Similar phrases occur elsewhere: in Italian, "dalle stalle alle stelle alle stalle" sends the family "from [barn] stalls to stars to stalls"; and in Spanish, "quien no lo tiene, lo hace; y quien lo tiene, lo deshace" predicts that "who doesn't have it, does it, and who has it, misuses it." All these phrases suggest the same story. The first generation builds the business, the second generation "milks" or "harvests" it, and the third generation must either auction what is left to the highest bidder or start all over again.


Why Family Businesses Fail

To be sure, all businesses—family or otherwise—find it difficult to last a long time. The evolution of the Fortune 500 list is a case in point: since 1955, only 188 companies have kept their status on this list as independent concerns. More than 60 percent have been sold or acquired or have watched their sales decline significantly in the past 30 years. The reasons for this are many. Businesses mature. Markets and technology change, eliminating the need for various products and services. Suppliers and customers alter the "rules of the game," or competitors quickly copy successful strategies. Any of these changes can take the company by surprise, decreasing its sales and profits. Sometimes an outside buyer is simply willing to pay more to acquire the company than it is worth. Owners are unable to resist the premium and sell out.

Beyond these typical business pitfalls, however, family businesses face special challenges. Many family businesses are also private, small businesses. They lack the financial capabilities or staff skills of larger concerns. A study by the Wharton Entrepreneurial Center (1975) indicates that nearly half of the 28 family businesses under review were sold because they lacked the necessary funds or marketing expertise. Other respondents claimed that suppliers, through refusing to deal with companies they considered "too small," virtually forced them to sell out. Still others cited a lack of management depth as the cause of sale. Thus it would seem that status as a small or private company may become untenable at some point for many businesses.

Second, many family businesses find that the family itself becomes a stumbling block. In later years, the family's growing financial demands tempt owners to harvest the company's profits rather than reinvest them in additional growth. The rigors of business also sharpen such typical family problems as sibling rivalry or competition between the generations. Human emotions such as pride or jealousy may become enlarged when work and home are intertwined. The natural desire of a child to steer a course independent of his or her parents can also nip succession plans in the bud. These are emotionally trying issues for all concerned. As a result, many families abandon the effort at succession because they feel it will destroy the family. The Wharton study, in which 35 percent of all companies sold cited lack of management depth or successors as a key reason for selling out, confirms this view.

Yet there is a final reason for failures in succession, and it is a more important one than those already given: many family businessmen and women lack a clear conceptual framework for thinking about the future of their businesses. Thus, they often lack some of the modern analytical tools that might allow them to conquer business and family challenges.

The most critical of these tools is a plan to guide both the company and the family. Such a plan will help the business owner focus on the business itself—specifically, on the need for reinvesting in new strategies that will revitalize the company and promote future growth. This need is often ignored as the business matures and the family's financial demands grow. Business owners and their families must instead appreciate and address business needs; a business plan ensures that they will. Inevitably, the process of preparing the plan will spark examination of the family's own needs. That opens the door to addressing family goals as well.

At the same time, however, formal or even informal attempts at planning often threaten business owners. Many entrepreneurs think of planning as a straitjacket that will constrain instinctive survival skills and limit business flexibility. The nature of the planning process also requires these independent business owners to share decisions—and private financial statements—with others in the company. That is power and information that many owners would rather keep to themselves. Other owners object to planning because they think the future is too full of uncertainties to make the effort worthwhile. Rapidly changing markets, an unpredictable economy, and offsprings' unclear career interests are just a few of the uncertainties they foresee.

But perhaps the greatest threat of all is that planning is associated with change. For business owners, that creates nearly unresolvable dilemmas because of the inherent compromises that change always seems to require. For example, satisfying customers' demand for a new product may require that the business take money from successful projects (with a guaranteed return) and spend it on experimental activities (whose return is unknown). Again, performing the new tasks associated with change forces business owners to spend more time on activities they know less about (and probably perform with less skill). Finally, executing the changes suggested by planning often requires business owners to tailor their products to specific customers in specific markets, thus destroying the "Be All Things to All Customers" principle that guides so many businesses in their early years.

Working through such compromises is painful and, to many business owners, unnecessary. They reason that past successes mean change is not needed. They are understandably reluctant to trade proven theories for ideas that are less sure.

We have summarized these and other objections (along with our rebuttals) as follows:

ObjectionResponse

• Planning is a "straitjacket" that limits flexibility. • Planning expands options and ability to respond to change.

• Too many uncertainties make planning impossible. • Planning generates more information and reduces uncertainty
through better understanding.

• Planning requires sharing sensitive information with others. • Planning motivates, increases the ability of the organization to
understand how the business performs, and reduces
unconstructive guessing as to what is going on.

• Planning makes an owner "go public" with ideas and • Planning allows others to better understand the need for change;
prohibits him from changing his mind.
"going public" increases the ability of the organization to reach its
goals.

• Planning implies change from the comfortable (and successful) • Planning anticipates inevitable change and
to the uncomfortable (and unknown). better implements required change.

• Planning often increases "focus" on certain markets • Planning helps conserve valuable resources.
at the expense of a broader strategy.

• Planning suggests changes that may "cannibalize" past success. • Planning suggests options to minimize that possibility while
encouraging the business to compete.

• Planning identifies changes that require moving managers • Planning helps perpetuate the institution beyond the lives of
beyond their current skills; therefore, it increases their key managers.
dependence on others who can contribute or teach those skills.

• Planning challenges business assumptions that contribute • Planning confirms many assumptions while addressing those that
to clarity, consistency, and effectiveness. must change with the times.


All lead to the same decision: the owner rejects planning in favor of a more intuitive, spur-of-the-moment approach to making decisions. Unfortunately, as the business matures, that approach often strangles the ability of the business to anticipate challenges. Other observers have also noted the lack of business planning by family companies (Christensen, 1953; Trow, 1961). Lansberg (1985) has even suggested that family businesses, by their very nature, have almost insurmountable incentives to avoid planning. He explains that planning causes key members of the family business to expose themselves to uncomfortable issues. For example, parents and offspring must consider the prospects of succession. Key managers must contemplate a change in organization. And paid outside advisers must risk offending the desires of the president.


Value of Planning

Yet planning expands the options and alternatives that a business can pursue. It allows businessmen and women to anticipate opportunities and pursue potential resources or contacts. Planning also generates new, important information. Its prescribed inquiries are designed to unlock information about and insights into the company and the world in which it operates. If these inquiries are not made, new alternatives might not even be considered, let alone pursued.

The process of planning requires that certain questions be asked of family members and key business managers. Doing this not only yields new ideas but establishes a common understanding of the needs of the business and the pros and cons of alternative business strategies. This increases the organization's ability to accept required changes, such as entry into a new market or revision of current manufacturing systems. It also increases everyone's ability to execute changes. Managers and family members who understand issues and tradeoffs are far more likely to successfully implement new programs than those who do not. Such participation also builds commitment, motivation, and a sense of ownership among the key employees and family members.

If formally executed to the fullest degree, this process results in a set of written plans for the business and the family. Yet the real value of planning does not lie with these documents in themselves. Rather, it lies with the mental activity they provoke. The process of planning creates a golden opportunity to think amid the daily pressures of business activity. Through planning—one could just as easily call it strategic thinking—business owners can deliberate about larger, more abstract issues. Through planning, they can build a common understanding of business and family goals among the key players of each unit. And through planning, they can increase the odds of persuading those players to pull in one direction instead of several. That increases the chances of achieving their goals.

Of course, it is possible for businesses to survive without these revolutions, and without planning. The languishing, no-growth businesses in our life-expectancy research (Table 1) prove it. They managed to "succeed" simply by serving markets that were sheltered from competition in some way or by putting in a great deal of hard work.

But that approach leaves a lot to luck, and luck is much less likely to work in the future. For example, new technologies such as telecommunications, biochemistry, and computers are rapidly altering many methods of production, selling, and distribution. Moreover, competition has increased as traditional boundaries between industries fall; telephone companies branch into computers, soda makers expand into potato chips. The new wave of entrepreneurs (between 600,000 and 700,000 new businesses form every year now in the United States) is further intensifying competition for the buyer's dollar. At the same time, there are fewer of those dollars to go around, since the rate of economic growth in the United States has declined. Finally, participation in a worldwide economy means that standards for competition are globally determined.

The upshot of these trends is that business or product life cycles are shortening dramatically. Once lasting 60 or more years, these cycles, which are created by the laws of supply and demand, have now been reduced to 20 years (Fraker, 1984; Davidson, Bates, and Bass, 1976). They are even briefer in certain high-technology industries. This means that business change in many industries now occurs much more rapidly than in the past. The ability to adapt to such changes, successfully revitalizing or regenerating a business so it thrives from cycle to cycle, will depend on the thought processes sparked by strategic planning and management.


Strategic Thinking and Planning

The strategic planning process, elaborated throughout this book, recognizes several basic truths. First, the successful business of tomorrow will not look like the successful business of today. Second, forces are already at work influencing the future. Third, actions undertaken today will shape the business of tomorrow.

To address these premises, owners must constantly ask certain questions. This calendar of systematic inquiry provides an organized framework that helps control the destiny of both company and family. As a result, nearly all the general questions involved in planning are as appropriately asked of the family situation as of the business situation. That means involving both family members and key managers in the planning process and in developing answers to key questions. This reflects a fourth basic truth that we will return to again and again, namely, that family circumstances critically influence the choice of business strategy.

Some readers may be surprised by our insistence that the family be involved in this process. They may subscribe to the popular wisdom that suggests that focusing on the business instead of the family will solve many typical family business problems. And, to be sure, there is some truth to that view. Yet if the company is developed to the exclusion of the family, potential problems—and opportunities—may be overlooked. Family members are one of the family business's most important natural strengths. Ignoring them inevitably weakens the business. Lack of consideration of the family's interests can also lead to lack of commitment to the future of the business.

Family plans ensure that the family's interests are taken care of along with those of the business. These plans may begin with something as simple as parents asking children if they are interested in joining the business or asking them what roles they envision for themselves in the company. They may conclude with something as complex as an estate plan, covering the financial interests of all offspring. In this manner, planning helps ensure that both the family and the business recognize critical issues. And it can help the family "regenerate" its leadership along with the business.

For both the family and the business, then, the general questions involved in planning are:

• What are the forces already shaping our business and family?

• How do they influence our current business performance and behavior?

• What has made us successful so far?

• What are the keys to future success?

• What alternative directions might we consider?

• What lessons can we learn from the experiences of other families and businesses in situations similar to ours?

• How should we try to shape our future success? Should we build on our strengths? Attempt to overcome our weaknesses? Take full advantage of our resources? Seize opportunities? Adapt to threats? Exploit our motivations, values, and goals?

• How do we prepare future leadership?


Through family meetings and business planning, the following plans may be developed. They are essential to keeping the family business alive through the generations. Except for the Estate Plan, which we will leave to such legal experts as Becker and Tillman (1978) and Chasman (1983), we will discuss the following plans in detail throughout this book:

1. Plan for Family Participation in the Business:

• To educate the family about the business and its needs

• To foster the values of entrepreneurship, savings, and risk and to emphasize the importance of business success to the family

• To welcome family interest in the future of the business

• To develop future family leaders

• To shift leadership from one generation to the next

2. Business Strategic Plan:

• To address how well the business is performing, where it is going, and how it is going to get there

• To identify the fundamental assumptions of the business for discussion and monitoring

• To identify the basic values of the key owners and/or managers that influence the direction of the business


(Continues...)

Excerpted from Keeping the Family Business Healthy by John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


Foreword - Léon A. Danco
• Preface
• The Author
• 1. The Challenge of Keeping a Family Firm Alive
• 2. Overcoming Barriers to Long-Term Business Health
• 3. Ensuring Family Interests in Leading the Business
• 4. Assessing the Firm's Financial and Market Situation
• 5. Developing a Strategic Plan for the Business
• 6. Planning the Family's Role in the Company's Future
• 7. Shaping a Business Strategy that Includes the Family
• 8. The Transition to New Leadership: Promoting a Revitalized Business Vision and Strategy
• Epilogue: Making the Commitment to Plan for Future Generations
• Appendix A: Family Business Values Questionnaire
• Appendix B: Sample Financial Analysis of Business
• Appendix C: Strategic Planning Worksheets
• Appendix D: Sample Business Strategic Plan
• Appendix E: Sample Family Strategic Plan
• Appendix F: Democratic Capitalism
• Appendix G: Note on Research on Family Business
• References
• Index
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