Why most family businesses fail

FAMILY businesses have both strengths and weaknesses. The overwhelming strength of the family business is the different atmosphere and feel that a family concern has. There can be a sense of belonging and common purpose, leading to improved performance.

Furthermore, a family firm has greater flexibility, since the unity of management and shareholders provides the opportunity to make quick decisions and to implement swift change if necessary.

Potential problems

On the downside, there are several weaknesses. Although these are not unique to family businesses, family firms are partially prone to them. These are the main ones:

Unwillingness to respond to change. This has been identified as the single most common cause of failure for family firms. Resistance to change is exacerbated by diminishing vitality as founders grow old. The second or third generation, who are usually educated abroad, have been exposed to new technology and fresh, innovative ideas. Once the young ones try to take over, they are restricted with controls and the philosophy of ‘sticking to the tried and the tested’ scheme.

Exposure to more and better career choices. The next generation, due to their much higher education and extensive exposure to new developments, are attracted to other more exciting, dynamic careers and opportunities offered by multinational firms. They may likewise prefer to join or establish ventures other than the family business.

Overreliance on family management to the exclusion or poor use of outsiders’ skills. The family may become inward-looking, insensitive to the demands of the marketplace, unreceptive to outside ideas and unwilling to recruit competent outside managers. At management level, family pride will sometimes not allow a situation where its members are subordinate to an outsider – even if the outsider is a better person for the job.

Conflict between growth and ownership. Entrepreneurs (founders) like to be in control and not answerable to anyone. They usually view the company as an extension of themselves, and later-generation family managers, accustomed to operating in an environment where owner authority is unchallenged, also have a strong desire to be their own boss.

The desire for total control may result in the firm turning down the opportunity to grow because the family is reluctant to dilute its ownership.

Extravagant lifestyle and happy, go lucky attitude. Based on research, the third generation could be spoiled brats, basking on the comforts of the family fortune with little or no desire to work or manage the business.

Failure to develop a succession plan. Few people find it hard to come to terms with their own mortality and it may be hard for an entrepreneur to recognize the time when he/she is no longer the best person to run the company. The next generation may not have been adequately trained to take over, thus, resulting in failure to continue the business.

Solutions for the founders

Here are some tips for family businesses in order to retain their competitive edge and survive from one generation to the next.

Be outward looking and willing to change. Training should never be viewed as an expense. Where possible, family managers should be encouraged to build up experience outside the family firm. Expose the next generation to the company values, culture and operations while young. Company patriarchs should be open to new ideas and system of doing things.

Establish an agreed set of family goals for the firm. There should be a clear statement of family policy regarding employment of family members, succession and ownership. The financial impact of the family’s goals should be assessed.

Set up clear ownership objectives. Examine the emotional factors behind ownership goals. The consequences of the dispersal of ownership should be fairly addressed and growth aspirations must be consistent with ownership objectives. Advice should be taken on the tax issues of passing ownership between generations. There should be a mechanism in place to reconcile potential differences in outlook between family shareholders who work in the business and those who do not.

Reward and promote family employees strictly in line with their contribution to the firm. To encourage the third generation managers who are usually idealistic, regular staff performance evaluations, including these family members, should be instituted. Effective delegation is essential. The use of outside advisers is also sensible and is especially expedient nowadays when the pace of change is so rapid.

Plan for succession early. Clear requirements should be set for the selection and preparation of the successor.

Family businesses which address the five main areas discussed above will remain outward looking, responsive to change and able to generate lasting superior performance. Properly controlled family culture and the enhanced commitment by family members to the business will allow greater responsiveness, improved effectiveness and survival in a competitive and ever changing market place.

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Prof. Soriano is the Turnaround and Family Advisor of wongadvisory.com and the Chairman of the Marketing Cluster at the Ateneo Graduate School of Business. For comments please email writer at sorianoasia@gmail.com.

Professor Enrique Soriano
Professor Enrique Soriano

Professor Enrique M. Soriano is the Chair and Professor of Global Marketing at the Ateneo Graduate School of Business. He has held key positions in a number of Asia – based corporations such as Group CEO of the Belo Medical Group, CEO of Intelligent Skin Care, Inc., Chairman of publicly listed Empire East Suntrust Developers, and Country President and CEO of Singapore based Electronic Realty Associates, Inc.

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