KB Akhilesh

K.B. Akhilesh is a Senior Professor at the Department of Management Studies, Indian Institute of Science, Bangalore. He has also been a visiting faculty at Pforzheim University, Germany; University of Hamburg, School of Information, Hamburg, Germany; and Indian Institute of Management, Bangalore.

Family Business Leadership – Changes and Challenges

KB Akhilesh

Web_Cover_Family Businees


Historically, family businesses are enduring institutions in socio-cultural, technological advances with globalisation. Family firms were in absolute majority during the first industrial revolution as well as pre-industrial period; family firms are now the backbone of a significant number of recently industrialised economies and still a lively presence in the ‘old industrialisers’, as well as in a large number of sectors, from the labor-intensive and craft-based to specialised suppliers (Colli, A, 2003).

In the nineteenth century, and indeed well into the twentieth, economic activity was so heavily dominated by family business (Harris, 2000). Family enterprises, irrespective of scale of operations, legal form, industrial activity, and level of socio-political and market development, have been the backbone of corporate life across nations, remaining a cornerstone of socio-economic development (P. Z Poutziouris, K. X. Smyrnios and Sabine B. Klein, 2006).

Families are concerned about emotions; they focus inward and generally resist change. Business systems take the opposite approach if they are to survive – accomplishing tasks, focusing on the external environment and looking for ways to exploit change are key success factors for them. This, in turn results in working with conflict and chaos among family members.  Only 30 percent of family firms survive the transition to second generation and only 10 percent make it to the third generation. Succession is not a single step of handing the baton; it is a multistage process that exists over time, beginning before heirs even enter the business. Furthermore, the effectiveness of succession is not limited to whether a president has been designated; the ongoing health of the firm, quality of life, and family dynamics are critical to the success of the succession process.

Most well-established family firms do not grow. Several popular theories illustrate the special challenges to growth that are unique to family-owned firms. The main causes in order of importance are (1) business maturity, (2) limited capital, (3) ill-suited successors, (4) entrepreneurial inflexibility, (5) sibling conflict and (6) disparate goals and values. The most troubling ones were primarily issues of family relationships. The most serious threat was disparate goals and values, followed by sibling team interpersonal conflict. Wise family-business leaders invest substantial energies to nurture and strengthen family-member harmony, trust and satisfaction.

This article is divided into three parts – (a) to emphasise the role of the changing business environment in influencing family business; second (b) to identify the risks and challenges faced by family firms and third (c) to define an emerging strategy for increasing leadership effectiveness.

a) New Generation Ideas vs Traditional Family Business

In order to stand out and achieve overall success in the rapidly changing business environment, organisations undoubtedly need more useful information and innovative ideas from their employees. According to a global survey of comScore, between 2010 and 2011, worldwide online population has witnessed 11 percent increase from 1,219 to 1,351 million. Asia has observed a significant growth of 15 percent. In India, results showed about 13 percent increase in online population with the average total hours spent online per visitor being 12.5 hours, contributing to the global average total hours spent online per visitor of 23.1 hours. With respect to age, the internet audience in India skews dramatically young: three-quarters of the web audience are under the age of 35, compared to 52 percent globally.

Executive Vice President (Asia-Pacific) of comScore, Will Hodgman said, “The social networking phenomenon continues to gain stream worldwide and India represents one of the fastest growing markets at the moment”. A similar survey by L2 on Millennials’ media consumption and its effects on brands reported that 81 per cent of Gen Y access Facebook, 45 percent access blogs, and 44-45 percent access newspapers and television daily (L2 Survey, 2010). This significant increase in the usage of social media among young Indian adults under the age of 35, the millennials, has drawn researchers’ interest in understanding its impact at the workplace.

The new generation’s (Millennials or Gen Y) perception towards leadership, reward systems, working styles, training and development is influenced by social media and technology. They demand more transparency, traceability, accountability and flexibility in organisations. On one side, we have new generations with plenty of ideas, while on the other we have traditional family business value systems that inhibit these new ideas (Change 1 – Idea Vs Value). What happens when the values driving powerful businesses and values underpinning a healthy family culture overlap?

b) Demand Driven Economy vs Need Driven Family Business Systems

Family businesses have to build value and steer their organisations globally. In that journey, loyalty will always be questioned on the business’s performance, at times affecting trust, collaboration and commitment among the family members and employees associated with the family business. Benson et al. (1990), stated business systems are work-oriented, focus on customers and grow through innovation, whereas family systems are people-oriented, focus on family members and are contented with self (Benson et al., 1990). It is evident that both business and family systems are pursuing different goals and conflicts are inevitable. (Change 2 – Loyalty Vs Performance).

New technologies and development are associated with uncertainties, complexity and a dynamic environment; meanwhile, family businesses struggle with traditionally existing paradigms to cope with changing business models, strategies and thinking (Change 3 – Technology Intensive Ecosystem vs Traditional Paradigms).

c) Skill Formation – Formal Education vs Family Education

Web_Family Business 1Family-owned businesses typically have a set of traditions and values that are rooted in the history of the firm. Depending on how they are viewed, deeply rooted traditions and values can have a positive or a negative influence. Research indicates that over two-thirds of all people starting businesses today grew up in a family business environment. Many share stories from early childhood when they stayed at the family store, rode on delivery trucks or went to visit customers with their parents. This early exposure enables them to hear, see, observe, and absorb the business environment. This experience can teach children about the value of money, customer relations, dealing with employees and how an organisation operates.

Skills and knowledge are the driving forces of economic growth and social development for any country. Qualifications are considered equally important. Children also study outside India. Challenges arise when they realise that the knowledge acquired in the modern education process has no relevance to their lines of the family business. (Change 4 – Current Education System Vs Family based skill learning).

d) Gender Roles vs Gender Sensitivity

Being a patriarchal society, India has submitted itself to the view that men are ‘bread winners of the family’ and women stay at home and raise children. In a family business system, their roles seem to be more or less on the same ground. Decisions regarding business were made by men while women made most decisions about the family. An unwritten procedure about managing the family and business systems was carried out. There were some instances in the past where women were a part of running the family business. This was seen when the business could not have enough family members to manage the wealth. Only in extreme conditions when a family member could be trusted more than non-family members, women were included.

In the recent past, there has been a paradigm shift and a lot of young women are takingWeb_Family Business Chages and Challenges over family businesses. More women are being educated than ever before. Families have come to witness that women can bring with themselves a host of management and leadership qualities that can nurture their businesses. Women are seen to be more empathetic to employees and able to nurture talent, making them unique with respect to leadership and management. At times, it’s not so much the gender of the person but the different perspectives that women bring. They bring more viewpoints on a situation, increasing identification of more problems and solutions. These social changes are making families open their doors to include and recognise the contribution of women where there is a lot of family wealth over the generations. Even though these changes are occurring, they are very slow. There is a need  to break away from the family ceiling that businesses have in order to encourage more women to join the family business.

Family businesses are widely seen as the backbone of the economy – they create wealth, provide jobs, are locally rooted and connected to their communities and seem to be around for long periods of time. The changes and key challenges in family businesses are summarised in Figure 1.

Leadership

The challenges lie in taking decisions between (a) profit and one’s own family members, (b)
diversification and expansion, (c) understanding the needs and aspirations of younger generations, (d) retaining next generation in family business and (e) increased sensitisation towards gender equality. Successful family-owned business leaders need to know the essentials of the emerging agenda around these changes and challenges.

Leadership Agenda

Following are five leadership agendas proposed for efficient leadership in family business.

1. Hindsight and Foresight

Web_Family Business Leadership AgendaThe first and foremost of the leadership agenda is to understand the context of family and business. Ensure that next-generation leaders have job assignments with real responsibility, accountability and face real risk either inside or outside the family business: next-generation leaders need opportunities to make complex decisions and experience the results of those decisions. The key is to build consensus and communication within the family. Hindsight involves reflecting on past failures and success stories and acknowledging lessons learnt from the past. Foresight is to use the knowledge to create the future vision and specific action plans.

2. Supportive Family Business Climate

Family climate has a strong effect on family business culture and performance. The first step is to pay adequate attention to the developmental needs of the younger generation to foster healthy family functioning. The second step is to create common worldviews, norms, and values. The third step is to provide experiences so that family members communicate openly with respect and dignity supporting flexibility and adaptability.

3. Early Orientation

Successors to family firms face unique job requirements that require specific skills to maximise their chances of leading business growth. Most of the education for successors is either unsupervised, on-the-job training or formal course work at a university or college. Both neglect some critical aspects of the job of CEO of a family firm. To fill the gaps, family business leaders must:

  • – Develop a strong ecosystem to promote a culture of change in the business to engage, involve and expand the business.
  • – Promote good mentoring for the younger family members.
  • – Carry out training and socialisation programs for the successor.

4. Supportive Experimentation

The Parallel Planning Process integrates and balances the family’s and the business’ interests. It promotes a continuous, interdependent dialogue between business management and family ownership around the issues of family and business continuity. But the most committed and progressive of business families augment “Risk Allocated Funds” to support risk investments. In the present changing business environment, risk is coupled with profit. Hence, leaders should forecast uncertainties and form road map for investments to sustain market and structural changes of economy.

5. Systematic Documentation

Family business history is the obvious rich source of information that potentially could lead to extraordinary insights and business solutions. Proper documentation of each decision taken, steps completed and milestones covered in family firms will be instrumental in planning for a successful transition to the next generation. The documented failure of successful transition to future family generations means that successors or consultants must search for and use, with owners, better methods and tools in the succession planning process. A family business history is an important document that should be written for many reasons – to reveal to today’s generation the values of earlier generations, to inspire, to inform, as a source of pride for the family and employees of the business and most importantly as a diagnostic tool.

Conclusion

There are no simple or quick solutions to the unique challenges faced by family businesses. The best family firms find their future leaders early and invest in them; whether they are cousins, grandchildren, existing non-family employees who show promise, or outsiders with no previous connection to the firm. The implications for family business owners is that they should be wise to spend as much time on fostering a positive family climate characterised by open communication as they go on creating and executing a successful business strategy, if their goal is to pass on the business from one generation of family owners to the next.


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