Family Business Dynamics - Operations, Pitfalls, and Best Practices

Risks of Small Businesses

• Half of new businesses fail within 6 years of start-up.
• Reasons for failure:
  • Excessive debt accumulation
  • Inadequate management of operations and processes
  • Poor planning
  • Starting for the wrong reasons
  • Unanticipated personal issues
  • Inability or unwillingness to see signs of demise

Why Family Businesses Fail

• Poor Succession Plan
• Lacking Trusted Advisors
• Family Conflict
• Different Vision across Generations
• Governance Challenges
• Exclusion of Family
• Unprepared Next Gen Leadership
• Poor Strategic Planning
• Not Taking Advantage of Familiness
• Fundamental Business Principles Mis-applied
• Literature focuses on Macro & Strategic Level pitfalls & Generalized Micro Best Practices
• Less is written about Micro-Operational concerns.
• In family business there is Macro, Micro, & Micro-operational

Entrepreneurship Pitfalls (Guy Kawasaki)

• Scaling too soon: need actual sales, not potential sales
• Pitching v. prototyping: people want to see working products/services
• Too much detail: 10 slides/20 min/30pt font
• Hire in your own image: Cover three functions:
  • Making it
  • Selling it
  • Funding it or collecting $
• Fails due to operational issues
• Fails due to lack of operational proof
• Fails due to lack of operational skill
• Fails due to lack of Operational diversity

Strategies for Family Business Success

• Engage in ongoing strategic planning
• Hold regular family meetings dedicated solely to issues outside the business
• Establish an independent board of advisers
• Keep open lines of communication
• Cultivate healthy relationships among the core members of the business

Operations Defined

• Your total business process
• Three types of planning:
  • Startup operations creation
  • Ongoing operations
  • Business continuity planning
• All functions responsible for creation of goods & services
• Operational Plan: procedures involved in development of your product, purchase of raw materials, manufacturing process, warehousing, marketing, sales process, purchase transaction, order fulfillment, accounting, human resources and cash management

Start-up Phase - Design

• Inputs – Conversion – Outputs
• Design product and/or service
• Design facilities & equipment
• Design processes
• The main goal of your planning is to identify realistic workable flow of procedures and processes
• Establish functions & roles in company
• Operational employees are best source of information

Ongoing Operations - Implementation & Re-design

• Communications and cooperation between departments are key to operational efficiency
  • Accounting, HR, Marketing, R&D, Legal and logistics
• Plan for variable business scenarios and evaluate the response capabilities of your administrative staff to production, sales and delivery needs
• Operations usually break down in processing and accounting functions when the business flow overwhelms the department capabilities
• Managing all the issues in the conversion stage

Role of Family (Biel et.al, 2022)

The personal objectives of the founder & family objectives significantly affect the shaping of the company’s:

• Operating strategy (which is different from business strategy)
• Operational decision-making processes (which are often family decision-making processes)
• Operational decisions (using intuition & experience)
• Family business management is a much more complicated task than non-family business management.

Design Practices

• Involve all managers and key personnel in your operations plan
• Set up an employee suggestion system
• Use Bureaucratic Principles
  • Legal-rational principles
  • Hire & promote based on skill
  • Standardize and Formalize
• Plan short-term & long-term
  • Location
  • Capital and financing
  • Customer service
  • Infrastructure

Uncertainty and Risk Aversion

• Permacrisis (prolonged uncertainty) has reshaped how family businesses operate
• In family businesses, risky decisions are usually avoided because business failure affects the functioning of the owner’s family. (Kotey, 2005)
  • Fear of serious consequences for family causes risk-aversion.
  • Fear of family dis-harmony causes risk-aversion.
  • Fear of family alienation causes risk-aversion.
• With uncertainty family Businesses tend to focus on Micro-Niche operations

Changing & Forecasting

• Understanding stakeholders
  • Market/non-market -- internal/external
• Understanding industry
  • Trends, regulatory environment
• Understanding organizational environment
  • Specific & general forces
• Need
  • Boundary spanning
  • Record keeping
  • Analysis
  • Knowledge management

Operational Trends

• Leader’s experience, expertise & skill is most valued & revered BUT education & intuition is less valued.
• Leaders are less likely to cite traditional managerial practices used BUT don’t use the language of formal business theory.
• Successful family businesses will:
  1. Adopt inclusive approaches to leadership ownership, and inheritance
  2. Embed purpose-driven visions into their core operations
  3. Champion environmental stewardship as they are built to last across generations
  4. Leverage tradition while innovating to be able to keep up with the evolving technology
  5. Adapt to crises, yet develop core family relationships that are at the core of competitive advantage
• Balancing tradition & innovation to preserve legacy while navigating an increasingly complex global landscape

Operational Issues (Davis, Aquilano and Chase, 1999)

• Reducing development & manufacturing time for new goods and services
• Achieving & sustaining high quality while controlling cost
• Integrating new technologies & control systems into existing processes
• Obtaining, training, and keeping qualified workers & managers
• Integrating production & service activities, especially in decentralized organizations – Centralized v. Decentralized
• Working effectively across functions
• Working effectively with suppliers
• Being user-friendly to customers
• Working effectively with new partners formed by strategic alliances

Operational Dissonance

Firms say they:

• Work on developing & adhering to a business mission and vision
• Compare themselves to rival firms and competitors (Benchmarking)
• Assess & monitor internal performance & the environment (SW/OT)
• Look outside the firm to fulfill tasks when needed (Outsourcing)
• Competency-based management, Knowledge- management, TQM, Process- management important

But they:

1. That is built on family values & definitions of success
2. Which has lowest correlation to effectiveness
3. But not assessing goal attainment
4. Which doesn’t correlate with attainment of goals
5. But benchmarking, ERP & outsourcing have no effect on aggregate objectives

(Biel & Ślusarczyk, 2022)

Best Practices for Family Businesses

• Don’t put family on payroll if not making contribution
  • Make sure everyone has a role
  • Have performance reviews for everyone
• Don’t create two classes of employees
  • Separate reward for ownership from reward for management
• Don’t abuse family relationships
• Communicate honestly & openly
• Don’t confuse family decisions with business ones
• Establish formal family/business boundaries
• Use a family council
  • Family v. Business values & vision may not be the same (competing)
  • Balance long-term & short-term staffing plans
  • Councils should be smaller, the more dysfunctional the family

Good Business Practices

• Making marriage work is work & a daily choice
• Get a Prenuptial agreement
• Figure out who takes out the trash
• Be realistic about time investment
• Spend quality time with the kids
• Have fun as a family
• Remember, a household is a business
• Understand family mood cycles
• The key difference between a successful family business is often the ability to manage the differences in the complex relationships between AND among family members & non-family employees.

Family Meetings

• Figure out the details of your business…
  • Specifics
  • Business Good/Service
  • Niche (or not) in the industry
  • Competitors
  • Business Philosophy
  • Business History (@ end of class)

Family Business Logistics

• Staffing: Pick several family members and determine Who gets what position? Why?
• Compensation: How much do you pay each person? What must you provide each person in addition to $ that will motivate them?
• Sustainability: How long will each person work for you in that position? Can you optimize their employment?
• Power: What power struggles will you have?

Staffing & Compensation Family Interviews HW

• Part A is to write up a summary of the roles of some of your actual personal family members, whom you envision could be contributing members of your immediate "class" family business. You could include a gap analysis of the short- and long-term viability of your staffing according to these roles (sustainability). You can change the name of your family members to protect their privacy, but the demographics of the individual should remain accurate (i.e. youngest sibling, or aunt/uncle who just lost their spouse, or cousin who just graduated with a marketing degree, etc.) You should try to identify at least 5 different family members and think of participating roles for them in the business.
• Part B is to conduct actual interviews with these real-live family members. You should try to do at least 2-3 interviews if you can and summarize the details of the interview. These are not intended to be long interviews; the goal is to address what the role would at least superficially entail, to see if your family member believes he/she could be successful in that role, and to address total compensation expectations he/she would expect if he/she was to accept the position.
• You should summarize the details of your interview (who, when, and details needed for family council).
• You will turn this in at the first fishbowl exercise (class 6). Part of your family council meeting will be to discuss the staffing of your business.

Succession Planning Best Practices

• Start Early
• Create Career Development Systems
• Seek Advice from Experts (external)
• Build Consensus
• Clarify Transition Process

Culture

• Derived from Founder
• Forged and intensified by Conflict & Crisis
• Hard to articulate, but powerful force
• Identify Rites & Artifacts
  • Rites of Integration
  • Rites of Passage
  • Rites of Enhancement