Why do some family businesses fail? Is ineffective or insufficient governance to blame, or the lack of leadership qualities in the family?
Sanjay Goel, strategic management and entrepreneurship professor at the University of Minnesota Duluth, has researched extensively the intricacies and challenges of running a family business.
Prof Goel is also a board member of IFERA (International Family Enterprise Research Academy), which is committed to the advancement of family business research worldwide.
He expanded on some of the factors that support or inhibit the success of family businesses at a seminar, ‘Sustaining the Entrepreneurial Drive - Identifying and Utilising Source of Entrepreneurial Action in Family Businesses’, organised recently by the UOB-SMU Alliance Centre of the Singapore Management University.
‘In family business there is usually higher trust and, as such, less monitoring,’ says Prof Goel. In the context of high trust among family members, family business leaders have relative freedom to pursue the best opportunities to grow the business and achieve family’s objectives.
But if families suffer from conflict and do not trust each other and the leader, it could lead to a series of poor decisions that work against the company, as well as the family’s long term health. Another problem is uneven leadership as family business does not always source its leadership talent in the marketplace.
The upside of family business, however, is having greater control over the company on the one hand, while enjoying more freedom from interference by outside investors due to relative independence from capital markets on the other. There is also the increased likelihood of developing in-depth competence, an outcome of multi-generational commitment to the particular line of business.
Use family resources
What can be done to sustain or prosper your family business? The answer is very simple, according to Prof Goel. Use the family’s business resources to gain competitive advantage, as well as keep the entrepreneurial spirit alive. By resources, he is referring not just to wealth, but also social networks, emotional support from family members, human capital, and financial management capabilities. These resources and competencies are non-compensatory, meaning that low accumulation of one negates the benefits of others.
For example, a family’s social network is very important. Family entrepreneurs should ask themselves: How do I keep my social network alive? Do I have any connections outside the home country? The stronger and wider the social networks, the further family businesses can reach.
Emotional support in a family cannot be discounted too. How well does the family get along with each other? Do spouses of children get along with the family, or do they tend to introduce divergent ideas into the business? Family relationships, whether conflicting or amicable, will have an impact on business success. Prof Goel has found that in most families where emotional support is high, the business performs better too.
A key concern for most family entrepreneurs is how motivated the next generation is to take over the business. ‘How do you challenge the children to a new entrepreneurial opportunity?’ asks Prof Goel. Having the right educational qualifications and business knowledge will undoubtedly be an invaluable asset to the company. But of more value is their interest in the business. This will determine the size and scope of the business goals they set themselves.
Inspiring the next generation
Many factors can inspire children to be entrepreneurs too. The family’s entrepreneurial history is one. Where several generations - grandparents, parents and their children - have been entrepreneurs, chances are that the next generation will follow suit. As Prof Goel puts it, this is ‘a natural extension of your family’s past’.
Another source of inspiration for children is the assurance of capital and resources when working in the family business. Such assets are already at their disposal when they graduate from university, for instance. A family culture which encourages independence and competitiveness also helps to fan the entrepreneurial flame. On the other hand, a comfortable lifestyle and well-to-do background could indirectly contribute to the lack of interest and motivation in becoming an entrepreneur.
The family’s acceptance of its entrepreneurial identity also plays a part. While continuity in a family business is not a bad thing, it may inhibit the children’s enthusiasm about helping with the family business. Also, not every business founder is in favour of the children following in his or her footsteps.
Fuelling the children’s ambitions
How ambitious the next generation is about their business goals will depend on how they see their future, says Prof Goel. If they are entrepreneurial by nature, they are unlikely to be content with just thinking at the margins. Instead, these children could turn out to be visionaries with big plans for the family business. However, if they are closed in their thinking, more concerned with following the family traditions in running the business, and increasing growth only incrementally, they are unlikely to venture far.
Self-confidence is also a factor which can determine the scale and scope of children’s goals, says Prof Goel. If they lack confidence or are living in the shadow of the company’s past failures, they are unlikely to be comfortable with taking big risks. On the other hand, a family’s previous success will help to build up their confidence and give them the courage to launch more ambitious plans and timelines.
Another important factor is how parents in a family business affect their children’s confidence and progress, acting either as catalysts or stumbling block. Prof Goel quips, ‘In some parents’ eyes, a kid is always a kid even if he is 40 years old!’
Is there a prescription for promoting entrepreneurship in family business? Prof Goel recommends leveraging family resources and competencies which sounds straightforward enough.
But what about children who are not interested in the family business? In these cases, families should consider supporting and fuelling the passions of their children, as inhouse venture capitalists and advisers. This will keep the dialogue with the next generation alive. It may also happen that, while the old family business is sold off or run by professional managers with family ownership, a new one emerges via the next generation’s initiatives. It is important not to force children to join the family business because it could curb their entrepreneurial spirit. Unwilling leaders may make poor leaders as well.
More tips for parents
For those who have succeeded in convincing their children to join the family business, Prof Goel provides some tips for promoting further entrepreneurship. First, ‘try to meet children on an equal footing even if you are the head of the family business and feel that you have a bigger say than them,’ he advises.
One approach here is to bring the family together to discuss issues such as the division of control and shareholding. A possible downside of such a formal consultation is that it could ‘ruin the advantage of being a family business, contribute to fragmentation of control, and promote divide between active and passive investors, leading to agency problems, rather than constructive conflict’, says Goel.
What would be an optimal solution then? ‘Promote independence and self-reliance for your family culture,’ stresses Prof Goel. He encourages family management to be conservative and consistent in its values, such as punctuality and fairness, without compromises, but not with promoting innovative ideas, quality and the scale of aspirations. This would ensure that even new businesses that children may start are able to benefit from the family’s core strength - its values.
Secondly, it is not good enough to send children to good schools. They should also be encouraged to incorporate what they have learned into the family business.
Thirdly, heads of family businesses should ask themselves if they would still trust their children were they to lose a great deal of money. In other words, how high is their tolerance of failure? Prof Goel’s advice is to ‘try not to overload them (children) with your expectations’. Instead, he says that children should learn from their experiences rather than dwell on failure. This would boost their self-confidence and give them the courage to take the family business further.
Finally, family business leaders should make the best of every business challenge. ‘You have the best laboratory in the world,’ he points out. ‘Use the family business as a ‘live’ case study. Draw lessons from it; seize it as an opportunity to hone your children’s social and analytical skills.’
This article was first published on 5 August 2008, in Knowledge@SMU (knowledge.smu.edu.sg) and has been reproduced with permission.
1 comment:
Keeping the Family Business Alive
7 October 2008
Why do some family businesses fail? Is ineffective or insufficient governance to blame, or the lack of leadership qualities in the family?
Sanjay Goel, strategic management and entrepreneurship professor at the University of Minnesota Duluth, has researched extensively the intricacies and challenges of running a family business.
Prof Goel is also a board member of IFERA (International Family Enterprise Research Academy), which is committed to the advancement of family business research worldwide.
He expanded on some of the factors that support or inhibit the success of family businesses at a seminar, ‘Sustaining the Entrepreneurial Drive - Identifying and Utilising Source of Entrepreneurial Action in Family Businesses’, organised recently by the UOB-SMU Alliance Centre of the Singapore Management University.
‘In family business there is usually higher trust and, as such, less monitoring,’ says Prof Goel. In the context of high trust among family members, family business leaders have relative freedom to pursue the best opportunities to grow the business and achieve family’s objectives.
But if families suffer from conflict and do not trust each other and the leader, it could lead to a series of poor decisions that work against the company, as well as the family’s long term health. Another problem is uneven leadership as family business does not always source its leadership talent in the marketplace.
The upside of family business, however, is having greater control over the company on the one hand, while enjoying more freedom from interference by outside investors due to relative independence from capital markets on the other. There is also the increased likelihood of developing in-depth competence, an outcome of multi-generational commitment to the particular line of business.
Use family resources
What can be done to sustain or prosper your family business? The answer is very simple, according to Prof Goel. Use the family’s business resources to gain competitive advantage, as well as keep the entrepreneurial spirit alive. By resources, he is referring not just to wealth, but also social networks, emotional support from family members, human capital, and financial management capabilities. These resources and competencies are non-compensatory, meaning that low accumulation of one negates the benefits of others.
For example, a family’s social network is very important. Family entrepreneurs should ask themselves: How do I keep my social network alive? Do I have any connections outside the home country? The stronger and wider the social networks, the further family businesses can reach.
Emotional support in a family cannot be discounted too. How well does the family get along with each other? Do spouses of children get along with the family, or do they tend to introduce divergent ideas into the business? Family relationships, whether conflicting or amicable, will have an impact on business success. Prof Goel has found that in most families where emotional support is high, the business performs better too.
A key concern for most family entrepreneurs is how motivated the next generation is to take over the business. ‘How do you challenge the children to a new entrepreneurial opportunity?’ asks Prof Goel. Having the right educational qualifications and business knowledge will undoubtedly be an invaluable asset to the company. But of more value is their interest in the business. This will determine the size and scope of the business goals they set themselves.
Inspiring the next generation
Many factors can inspire children to be entrepreneurs too. The family’s entrepreneurial history is one. Where several generations - grandparents, parents and their children - have been entrepreneurs, chances are that the next generation will follow suit. As Prof Goel puts it, this is ‘a natural extension of your family’s past’.
Another source of inspiration for children is the assurance of capital and resources when working in the family business. Such assets are already at their disposal when they graduate from university, for instance. A family culture which encourages independence and competitiveness also helps to fan the entrepreneurial flame. On the other hand, a comfortable lifestyle and well-to-do background could indirectly contribute to the lack of interest and motivation in becoming an entrepreneur.
The family’s acceptance of its entrepreneurial identity also plays a part. While continuity in a family business is not a bad thing, it may inhibit the children’s enthusiasm about helping with the family business. Also, not every business founder is in favour of the children following in his or her footsteps.
Fuelling the children’s ambitions
How ambitious the next generation is about their business goals will depend on how they see their future, says Prof Goel. If they are entrepreneurial by nature, they are unlikely to be content with just thinking at the margins. Instead, these children could turn out to be visionaries with big plans for the family business. However, if they are closed in their thinking, more concerned with following the family traditions in running the business, and increasing growth only incrementally, they are unlikely to venture far.
Self-confidence is also a factor which can determine the scale and scope of children’s goals, says Prof Goel. If they lack confidence or are living in the shadow of the company’s past failures, they are unlikely to be comfortable with taking big risks. On the other hand, a family’s previous success will help to build up their confidence and give them the courage to launch more ambitious plans and timelines.
Another important factor is how parents in a family business affect their children’s confidence and progress, acting either as catalysts or stumbling block. Prof Goel quips, ‘In some parents’ eyes, a kid is always a kid even if he is 40 years old!’
Is there a prescription for promoting entrepreneurship in family business? Prof Goel recommends leveraging family resources and competencies which sounds straightforward enough.
But what about children who are not interested in the family business? In these cases, families should consider supporting and fuelling the passions of their children, as inhouse venture capitalists and advisers. This will keep the dialogue with the next generation alive. It may also happen that, while the old family business is sold off or run by professional managers with family ownership, a new one emerges via the next generation’s initiatives. It is important not to force children to join the family business because it could curb their entrepreneurial spirit. Unwilling leaders may make poor leaders as well.
More tips for parents
For those who have succeeded in convincing their children to join the family business, Prof Goel provides some tips for promoting further entrepreneurship. First, ‘try to meet children on an equal footing even if you are the head of the family business and feel that you have a bigger say than them,’ he advises.
One approach here is to bring the family together to discuss issues such as the division of control and shareholding. A possible downside of such a formal consultation is that it could ‘ruin the advantage of being a family business, contribute to fragmentation of control, and promote divide between active and passive investors, leading to agency problems, rather than constructive conflict’, says Goel.
What would be an optimal solution then? ‘Promote independence and self-reliance for your family culture,’ stresses Prof Goel. He encourages family management to be conservative and consistent in its values, such as punctuality and fairness, without compromises, but not with promoting innovative ideas, quality and the scale of aspirations. This would ensure that even new businesses that children may start are able to benefit from the family’s core strength - its values.
Secondly, it is not good enough to send children to good schools. They should also be encouraged to incorporate what they have learned into the family business.
Thirdly, heads of family businesses should ask themselves if they would still trust their children were they to lose a great deal of money. In other words, how high is their tolerance of failure? Prof Goel’s advice is to ‘try not to overload them (children) with your expectations’. Instead, he says that children should learn from their experiences rather than dwell on failure. This would boost their self-confidence and give them the courage to take the family business further.
Finally, family business leaders should make the best of every business challenge. ‘You have the best laboratory in the world,’ he points out. ‘Use the family business as a ‘live’ case study. Draw lessons from it; seize it as an opportunity to hone your children’s social and analytical skills.’
This article was first published on 5 August 2008, in Knowledge@SMU (knowledge.smu.edu.sg) and has been reproduced with permission.
Post a Comment