Free Management Essays - Review The Statistics On The Failure Rates Of Family Businesses
This paper reviews the statistics on the failure rates of family businesses; this is disproportionately high compared with business in general. Therefore these businesses face the universal economic problems, and the fact that 40% of family owned businesses survive to the second generation, 12% to the third, and 3% to the fourth.
In this study four successful family owned businesses were studied to identify what they were doing right to perpetuate survival. To study family businesses that had failed could have potentially identified reasons that are not unique to this form of business.
The literature is scant on family owned businesses, with little acknowledgement to their contribution to the economy and society. The majority of the available literature indicates that the problem of survival is in succession planning.
The four family businesses that were studied all had some form of succession planning in place. This paper concludes that lack of or inappropriate succession planning is of the main reasons for failure, and recommends the use of HR tools in the process of selection.
1.0 List of contents
1.0 List of contents
Page 2
2.0 Introduction
Page 3
3.0 Literature review
Page 5
3.1 What is a family business?
Page 5
3.2 Benefits to the economy
Page 6
3.3 Advantages of family businesses
Page 7
3.4 Competitive Disadvantages of a Family Business
Page 9
3.5 The problem
Page 9
3.6 Succession planning
Page 11
3.7 Development of a successor
Page 12
3.8 Ownership
Page 13
3.9 Generation differences
Page 14
3.10 Relationship issues
Page 14
3.11 Reward
Page 15
3.12 Entrepreneurs or not
Page 16
3.13 Frameworks and models
Page 17
3.14 Research problems
Page 18
4.0 Methodology
Page 19
5.0 Case Studies
Page 21
5.1 William Reed Publishers Ltd
Page 21
5.2 Wildlife clothing
Page 22
5.3 William Jack and sons Ltd
Page 23
5.4 Bruntwood estates
Page 24
6.0 Analysis
Page 26
5.1 William Reed Publishers Ltd
Page 26
5.2 Wildlife clothing
Page 27
5.3 William Jack and sons Ltd
Page 27
5.4 Bruntwood estates
Page 28
5.5 General analysis
Page 28
7.0 Conclusions and discussion
Page 30
8.0 Bibliography
Page 33
Appendices
Page 36
2.0 Introduction
In its composition of ownership and management the family business is a separate entity to the common perspective of businesses; it is passed from one generation to another Therefore the succession planning and subsequently the change of management is a significant moment in a family business's life cycle. Practically all worldwide organisations commenced by trading as family businesses. This is defined as one in which the family either has significant ownership or management control.
The long-term presence of the founding families within the businesses environment and is known to produce competitive advantages. Families tend to maintain longer investment perspectives than other shareholders, who cam make narrow investment decisions. This longer outlook of families implies it is vital for the survival among family firms.
With two thirds of all businesses in the industrialised economies being family businesses, and in some countries this accounts for 59% of employment as well as 49% of GDP, they should be the golden example of business. Although these statistics are ignored in management theory, and scarcely gets a mention in the leading journals of management discipline.
Therefore it can be assumed (from the statistics) that family businesses are the primary contributors to the economic and social well being in all capitalist societies. The problem is there failure to survive, it is estimated that, only 30% of family businesses survive to the second generation, while fewer than 14% make it beyond the third generation.
This is the essence of the problem, is on one hand family businesses are major contributors to economies of the world and on the other hand very little research has been conducted into the unique problems they face. This paper will discuss the reason for their failure, although there is only current literature to review that does not focus on the entity they are.
For the purpose of this paper four successful family businesses were reviewed. These have all made it passed the first generation, and against the odds one is planning the sixth generation of family ownership. The rationale behind this method of research is to identify what these successful family businesses are doing correctly to sustain their life span. All of the businesses have received recognition for their contribution to both the local and national economy.
The major problem these businesses face, is to remain a family entity, they have to promote within the family. Recruiting too many employees in management positions from outside the company would weaken the family control on the business, therefore changing the identity. There is a constant need for relatives that are willing and capable to take over the running of the business. From this it could be assumed that the failure of some family businesses is possibly the lack of suitable replacements from within to run the business.
Succession planning to continue family ownership can start when the sibling is quite young. Parents discuss at the table the business and the issues raised during the working day. This involves the children from a young age, although it is recognised that if the gain experience outside of the business this can bring new skills into the role.
The unsuccessful family businesses are evident from the statistics on failure; and to identify why they failed the economy, environment and the skills and commitment of the proprietor would have to be studied. There are a multitude of reasons for failure, not necessarily their succession planning. To study the businesses that have failed could possibly lead to conclusions, which affect all businesses, not just the family owned.
This research has identified the need for further research on what is now being discussed as new discipline within management theory. With the statistics stacked against the family business, further research could offer them an improved chance of survival past the founding generation. There contribution to the economy and society as a whole commands a greater understanding of there unique problems.
3.0 Literature Review
This section of the paper discusses the relevant literature on the topic. Until recently there has been little attention focused on family businesses from management authors and academics. It is considered a relatively new topic, and therefore the majority of the material is from journals that focus on family businesses.
3.1 What is a Family Business?
Family businesses differ from the common perspective of businesses. Ward (1987) describes a family business as a business that will be passed from one generation to another (Ward, J 1987). Therefore the succession planning and subsequently the change of management is a significant moment in a family business's life. Virtually all firms commence as family businesses, this can be loosely defined as one in which the family either has significant ownership or management control. Therefore the qualities of family ownership versus ownership by assorted shareholders as an organisational structure remain controversial (Lee, J 2006).
The contemporary form of business organisation features a separation of ownership from control, with professional managers rather than shareholders in control of key business decisions. Lee (2006) discussed this as a drawback of this type of corporate governance is generally known as the principal agent problem, where shareholders (principals) and managers (agents) have diverse interests. Additionally, ownership by diverse shareholders potentially creates difficulty in monitoring manager performance (Lee, J 2006:103) This agency or contractual problem of the firm, which involves the costs of writing and enforcing contracts, is the key issue for most existing studies concerning the relationship between firm ownership and performance (Lee, J 2006).
In every area and culture in the world there is a unique make up to the type of family firms that are culturally dominant. The most discussed and economically significant family business structures are the zaibatsu and business networks of Japan and the chaebol business networks of Korea. These business enterprises started as traditional family trading and textile firms, operating on a small scale; these were transformed during their countries' industrialisation. They are now industrial conglomerates, with one or a few families maintaining the management. A few examples of this are Mitsubishi, Mitsui, and Sumitomo of Japan are contemporary extensions of the original keiretsu structure, with Samsung, Hyundai, and Daewoo are examples of the Korean chaebol (Jones, A 2005).
The majority of family businesses are small and sole proprietorships; nevertheless, families can be found in many large public organisations. Numerous shareholders own the majority of public corporations, family firms are epitomize by a combination of ownership and control by concentrated shareholders. This concentrated equity situation and control of management, along with the founding family's historical presence, offer a beneficial position for the family to monitor its business. These large concentrated investors are more likely to avoid the conflicts between owners and managers and to maximize firm performance (Lee, J 2006).
The long-term presence of founding families within businesses can produce competitive advantages. First, the family's lengthy tenure can extend the firm's learning curve in monitoring employee performance. Second, as James (1999) indicates, families tend to maintain longer investment horizons than other shareholders, who may make narrow-minded investment decisions that boost current or short-term earnings. Family firms may also attempt to invest more resourcefully; they view their firms as an asset to pass on to succeeding generations. The family's longer outlook also implies a more vital role of firm survival among family firms (James, H 1999:47).
The composition of family businesses is unique in their funding and partnerships, and offer society a great deal. The offer security, stability and employment for current and future generations of the family.
3.2 Benefit to the Economy
It is estimated that two thirds of all businesses in the industrialised economies are family firms This figure accounts for about 59% of employment in the United States, as well as 49% of GDP. This statistic is ignored in management theory, Nigel Nicholson from the London Business School's has suggested, Family business is a forgotten world in the field of management. It scarcely receives a mention in the leading journals of our discipline or in the pedagogy of most leading business schools (Nicholson, N (2003) cited in Jones, A 2005:276).
In economies around the world, the majority of businesses and the most of the world's employment are in the family business sector. Dyer (2003) estimated that as many at 90% of all companies, worldwide, can be classified as family firms (Dyer, W 2003:403). The most convincing examples of dominant and great family firms are in Italy, Japan, and Korea, where intricate networks of family businesses have dominated national economies for over a century. For example in Italy 42 of the top 100 firms are family owned businesses. The Wallenburg family of Sweden controls 43% of the Swedish economy as measured by ownership of companies traded on the Stockholm stock exchange (Jones, A 2005).
These family businesses have a lot to offer society worldwide, with employment, sustainability, and to the economies of individual nations. Family businesses can be traced back to nearly every organisation in the world's history. They are found in the majority of industrialised countries in the world, they are valuable to the world's economy.
3.3 Advantages of Family Businesses
It is acknowledged that family run businesses have advantages over their non-family counterparts. The literature discusses several resources that are unique to family businesses. These include a unique work environment that motivates employee care and loyalty, lower recruitment and human resource costs. There is the family language, which lets them communicate more efficiently and with greater privacy, they can exchange more information. The family relationship produces extraordinary motivation, strengthens loyalties, and increases trust (Hoffman, J et al 2006).
Other advantages include the tendency to be more creative and pay more attention to research and development; they have more of a capacity for self-analysis. These businesses tend to have a reputation for their integrity and commitment to relationships. They are less dependant on their environment and therefore they are less vulnerable to negative downturns in the economy (Hoffman, J et al 2006)
The family norms provide social control within family businesses. These norms include internalised sets of accepted behaviour for members, a shared belief system that allows family members to communicate their ideas, and to make sense of common experiences. These norms share strategic visions, systems of meanings, and normative value. These norms then increase effectiveness of action and decrease external unknowns. They then share a common knowledge and history in the organisation. This then represents the accumulated history of the organisation in the form of social structure (Nahapiet, J & Ghoshall, S 1998).
These family norms lead to obligations and expectations, these are the positive interactions that take place between individuals in a network. These interactions can be viewed as positive because of the high levels of trust and reciprocity that they produce. The existence of these obligations and expectations of future benefit are nurtured in a family business environment with strong family ties, although they are at a disadvantage where these do not exist (Lesser, E 2000).
An expression of these obligations and expectations is in the reputation of the business. This is the expectation of others (external to the network) concerning an organisation's future conduct. This occurs from the outcome of the competitive process, when an organisation indicates their key characteristics, to maximize their social status. Then their social status is interpreted as their reputation, this cannot occur in an open structure, there must be closure and supporting social norms. Increased reputation reduces the necessity for continual monitoring; therefore reducing costs. This organisational reputation is apparent transactions with those outside the social network. This includes name recognition and respect in the community, conformity to social norms and goodwill (Fombrun C & Shanley, M 1990)
The moral infrastructure is the interpersonal network that reinforces beliefs about self, family, business, and the larger community. It enables the family business to encourage norms of conduct within the organisation's scope of influence. The community level is the network of civic engagement; this refers to their connections with the life of their community (Hoffman, J et al 2006).
The norms and values of family life are transferred in the majority of family run businesses, these is viewed as ethical and responsible. These key values are only present in family businesses. Strong family ties are advantageous when conduction business.
3.4 Competitive Disadvantages of a Family Business
Questionably, family ownership or control can also produce competitive disadvantages. Numerous studies have highlighted the intricacy of running a family business. For example Lansberg (1983) observed that a family firm shares values and characteristics with both the family and the business entities, but the fact that the business is not free from family influences creates many unique challenges. Such challenges include the balance between equity and efficiency and the problem of succession (Lansberg, I 1983:45). The predicament is that as head of the family, the parent is unselfish toward his or her family members, but as manager, he or she is motivated to follow sound business practices (Lansberg, I 1983).
Experimental evidence on the relationship between firm ownership and performance is quite sparse. The popular empirical studies rely on subjective observations, although recently, some studies have found that firms controlled by founding families perform better financially than do other firms. In particular, Anderson and Reeb (2003) show higher leverages for family firms than for non-family firms. In addition, there is evidence that management's equity ownership helps decide the agency problem and thus improve the firm's stock performance (Anderson, R & Reeb, D 2003).
The majority of problems within family owned businesses stem from a loss of control by the founding family. Although this is an area that requires further research to identify if there is a decisive link.
3.5 The Problem
>From the previous sections it is difficult to believe that family businesses share one common problem that can affect their life span. One of the most significant contributors to wealth and employment creation in virtually every country of the world is Family business (IFERA, 2003). Family businesses are fast becoming the leading form of business enterprise in both the developing and developed economies. Both their influences, and their numbers, are expected to increase substantially in the near future. Globally, the majority of these family businesses are small or medium sized (Venter, E, et al 2005).
Therefore family businesses are the primary contributors to the economic and social well being of all capitalist societies, it is their lack of prolonged existence that is the problem. It is estimated that, internationally, only 30% of family businesses survive to the second generation, while fewer than 14% make it beyond the third generation. Smaller family businesses are in particular vulnerable; they usually survive only five to ten years (Venter, E, et al 2005). Other commentators agree with this statistic, Aronoff (1999) observed that 30% of family businesses made it to the second generation, 10-15% make it to the third generation and 3-5% make it to the fourth generation (Aronoff, C 1999).
Family business failure is statistically predictable, and is universal condition, that is embedded in the national culture. The Americans discuss this as shirtsleeves to shirtsleeves in three generations the Chinese have a proverb, rice paddy to rice paddy in three generations and the Irish have a proverb, clogs to clogs in three generations. This is rarely caused by financial practices, family businesses most often fail because of poor long-term succession planning, there have been several studies that come to the same conclusion (Grote J 2003).
According to numerous authors and consultants, the single most important reason for this high failure rate is their inability to manage the complex and highly emotional process of ownership and management succession from one generation to the next (Venter, E, et al 2005). The average life span of a family business is 24 years, which corresponds to the number of years that the founder is in charge of the business. Following this moment in time, the business may continue to exist, but can lose its family personality. It is often stated that a family business goes to the dogs in three generations, an observation that is expressed in some countries; for example, in Mexico the statement is father-entrepreneur, son-playboy, and grandson-beggar (Davis, J 1997).
Research has reviewed the acceptance of failure, and has revealed statistics that agree with the proverbs. In 1998, when Family Business Review compiled a balance sheet of 10 years of scientific study on family business, succession and interpersonal family dynamics appeared to be the most frequently occurring reasons for family business failures (Dyer & Sánchez, 1998).
It is accepted in the majority of societies globally that family businesses are doomed to failure. The majority of these businesses fail in line with the time span of the founder, which then questions the lack of succession planning by the organisation.
3.6 Succession Planning
The succession of a family business is one issue that necessitates scrutiny from the perspectives of family, management, and ownership systems in order to identify all the different stakeholders. Lansberg (1988) discussed that succession planning is a topic that encroaches on an assortment of significant changes on the family firm. The family relationships need to be realigned, traditional patterns of influence are redistributed, and longstanding management and ownership structures must give way to new structures (Lansberg, I 1988:121).
Literature on both family business and executive succession emphasizes the importance of the relationship between the successor and the current leader in determining the process, timing, and effectiveness of the succession. A smooth succession requires the cooperation of the current leader and the successor. A good personal relationship between these individuals will contribute to the training and development of the successors (Lansberg, I 1988). Succession represents a mutual role adjustment process between the founder and next-generation family members during which the predecessor lessens his or her involvement in the firm over time (Brockhaus, H 2004).
In Lansberg's studies it is suggested that succession of a family business affects the founder, the successor, the family, the managers, the owners, and other stakeholders. All those that are affected should to be involved with the planning of the successor. Communication reduces uncertainty during a period of change and will assist the smooth transfer of power (Lansberg, I 1988)
The senior generation will commonly provide experiences that assist the junior generation in learning how the business works, but quite often is unsuccessful in providing them with the skills to recognise opportunities and to develop strategies (Brockhaus, R 2004). Although Levinson (1971) recommended that businesses with significant growth should professionalise the business by eliminating family members and hiring non-family managers (Levinson, H (1971) cited in Brockhaus, R 2004:166).
To date there are no studies that have examined these factors and related them to succession issues, and certain industries are better for family management than for non-family management (Brockhaus, R 2004).
Succession planning is vital to the family business to nurture and develop suitable members to run the business. Without this it will either ceased to exist or be sold to another organisation, and loss its unique features.
3.7 Development of Successor
Progressively the selection criterion for succession in a family business is becoming more objective. The criteria now being used in evaluating a potential successor's abilities to meet the strategic plans of the family business: education, technological skills, managerial skills, and financial management skills. Of less significant are the age, sex, and birth order. There has been a growing tendency by family businesses to select a successor who was not the eldest son, thereby setting aside a long-established norm, integrity and commitment to business more important than gender and birth order (Brockhaus, R 2004).
It has been stated that the transfer of management is a long one, beginning in childhood, with the two primary points in time being when the successor enters the business on a full-time basis and when the leadership role is transferred. From childhood the business is discussed in every day conversation, this is the norm (Brockhaus, R 2004).
Consultants recommend at least three years in another business, will help the successor gain experience, while others suggest that at least one promotion should occur, thereby demonstrating the individual's ability. Experience outside the company helps the successor develop an identity and practise solving problems that may meet the organisation. The junior generation needs ever-increasing management responsibilities and width and diversity of experiences in the family business. This enables the successor to develop relationships within the company and understand the culture and intricacies of the business (Brockhaus, R 2004).
The child is part off the extended business group and therefore succession planning commences in early childhood. This can be developed further by work experience out side the family business. Therefore the successors knowledge of other business can be added to the family's knowledge.
3.8 Ownership
Within family businesses ownership is a contentious issue, which can divide families and lead to business failure. There is an assumption that the owner-ship of the business will be changed by inheritance at the death of the senior generation, or by purchase from the senior generation, or by gifting of the ownership by the senior generation These three circumstances are burdened with financial and legal issues related to taxation, and are compounded by fairness issues within the family. While numerous families hope to continue family ownership, there are other businesses that decide to sell the business is in the family's best interest (Brockhaus, R 2004).
The family's welfare is closely tied to the businesses performance; family members have a powerful incentive to monitor professional managers. As a consequence, the free-rider problem connected with non-family firms with diverse shareholders can be reduced. With their concentrated ownership, family members also have more power than other shareholders to achieve their goals. In addition family businesses with more active involvement by the founding family tend to perform better financially (Anderson, R & Reeb, D 2003).
It is vital for the business to put in place guidelines of ownership and finance. The consequences of poor financial control can lead to family arguments, loss of business and ultimately failure.
3.9 Generation Differences
There has been inadequate previous research into generational differences among family businesses. First-generation family businesses do less succession planning than second, and third-generation family firms, and there are no differences between first-, second-, and third- generation firms with regard to the influence of the firm's founder (Sonfield, M & Lussier, R 2004).
First-generation firms had the highest use of equity versus debt financing. A first-generation family firms (IGFFs), is defined as a family-owned and managed firm, with more than one family member involved, a second-generation family firms (2GFFs) and a third-generation family firms (3GFFs) are defined as firms in which the second or third generations of the family are also involved in the ownership and the management of the company (Sonfield, M & Lussier, R 2004).
Within 2GFF or 3GFF, the original founders and other members of earlier generations may be retired or deceased; therefore not all generations need be currently working in the business. Dyer (1988) established that 80% of IGFFs had a paternalistic management culture and style, but in succeeding generations more than two-thirds of these firms adapted a professional style of management Paternalistic management was characterized by hierarchical relationships, top management control of power and authority, close supervision, and distrust of outsiders. While the professional management style involved the inclusion, of non-family managers in the business (Dyer (1988) cited in Sonfield, M & Lussier, R 2004:191).
3.10 Relationship Issues
The attitude of the family is important, and this will affect the management succession. If a family member assuming the leadership role does not have the support of the family, then it is not likely to happen. This factor goes further than succession, personal relations among relatives often take priority over maximum profit in family firms (Brockhaus, R 2004) Churchill and Hatten (1987) developed a life-cycle approach to illustrate the succession process between father and son in a family firm. They identified four stages (1) a stage of owner management, where the owner is the only member of the family directly involved in the business; (2) a training and development stage, where the offspring learns the business; (3) a partnership stage between father and son; and (4) a power transfer stage, where responsibilities shift to the successor (Churchill, N & Hatten K 1987).
The unwillingness of the senior member to let go of the business could be underpinned by doubt in the successor's ability, willingness, and desire to take control. Lansberg (1988) discussed the degree of willingness of a senior member to leave the family business to a successor, is eroded by feelings of rivalry and jealousy toward the potential successor. This then becomes evident in a constant distrust of the latter's competence and ability. Credibility of the successor is decisive to successful integration into the business, without credibility, the successor cannot attain legitimacy. There is considerable evidence that in successful transitions heirs are generally reasonably well prepared (Venter, E, et al 2005).
Lansberg (1988) discussed the founder fear of losing control, they are anxious that retiring from the firm will mean a demotion within the family. The loss of identity and power could relate to loss of stature in the community (Lansberg, I 1988). Quite a few methods have been suggested for overcoming this resistance to change through succession. By keeping the founder aware, or by encouraging the senior member to leave the old venture and start a new one. The value of the relationship between the senior member and the successor is a critical determinant of the succession process (Brockhaus, R 2004).
For succession to be affective senior members must withdraw from the organisation, although this can be problematic. Founders can be reluctant to let go of their business, when they have been involved for numerous years. Succession planning can address the issues with all parties understanding the changes in their roles.
3.11 Reward
A factor that could draw children closer to or distance them from the family business is the reward they will gain from attachment in the business. It can be the financial security associated with the family business that would make the business more attractive to potential successors. Dumas et al. (1995) recognized in their study that favourable financial opportunities offered by parents serve as a source of motivation for successors to join the family business (Dumas et al. (1995) cited in Venter, E, et al 2005:287)
On the other hand a study by Sharma (1997) found little or no evidence that there is a relationship between rewards from the business and the propensity of the successor to take over the business. However, it was discussed that the propensity of the successor to take over the business is positively influenced by the alignment of the career interests of the successor, with the opportunity available in the business (Sharma (1997) cited in Venter, E, et al 2005:287).
The reward on offer can attract future generations, if it is in line with reward packages outside the family business. The succession also has to be in line with their career aspirations, to attract them to the business.
3.12 Entrepreneurs or not
Entrepreneurship is a vital factor in many businesses. It is described as The innovative process, involved in the creation of an economic enterprise, based on a new product or service, which differs significantly from products or services in the way its which production is organised, or in its marketing"(Curran and Burrows (1986) cited in Morrison 1998:2). While the entrepreneur is described is "a person who attempts to profit by risk and initiative". This relates directly to the person, and their business sense (Morrison 1998).
Most organisations (even the very large) have their foundations in one or two individuals who have the determination to turn a vision into reality. These founders are said to possess entrepreneurship. These leaders are embedded in the culture of organisations. The stories, myths and artifices from their work are used as a tool to reinforce the values and norms to the members (Morrison 1998).
However the terms 'entrepreneur' and 'entrepreneurship' are most commonly linked to small and family businesses. The environment of the entrepreneur is a constantly changing, with high levels of risk, ambiguity and uncertainty. They are always willing to take the risk, but they will calculate it thoroughly to minimise the chances of the risk going wrong (Stokes, 1998). When an entrepreneur is running a small business, the majority of them are self employed, working for the family interest.
Although not all family businesses are entrepreneurial, the founders tend to have the qualities to take the risk and start the business, these founders are then embedded in the culture of the organisation.
3.13 Frameworks and Models
Ward (2004) presented a series of best practice frameworks from successful long-lasting family business. This includes the use of business strategic planning, as the issues facing business-owning families are family-based issues rather than business-based issues. Theses key issues differ depending on where the business is in its evolution. The primary critical components of long-lasting family businesses is in their ability to manage changing family dynamics across generations as well as the three evolutionarily business stages of development: (1) owner managed, (2) sibling partnership, and (3) cousin collaboration (Ward J 2004).
One model that was drawn from the work of Ward (2004) is the Four Ps, which investigates the fundamental dilemmas that family businesses face up to because family and business needs are often different and thus create conflict. The Four Ps are (1) Policies before the Need, (2) Sense of Purpose, (3) Process and (4) Parenting. The importance of "good parenting" is the impact on the future of the business. There is a correlation with successful family businesses in different cultural contexts and stages of development. Forward planning is essential to continuity of then business (Ward J 2004).
From this research Ward (2004) identified five common beliefs within the family (1) We respect the challenge, (2) Family business issues are common and predictable, and perspectives on the same issues will be different (3) Communication is indispensable (4) Planning is essential to continuity and (5) Commitment is required of us. These five beliefs are valuable not only to business-owning families, but to all families. Strength and adaptability is key to the family and, in the role of parenting, these will assist a long-lasting successful family business (Ward J 2004).
Commentators now agree that there is no need to look any further than the human resource to gain competitive advantage. Pfeffer (1998) argued that the only advantage is to manage people right in an employee-centred approach, introducing a model of seven practices of successful organisations. This is the foundation for best practice, demonstrating how human resource practices can be aligned with the skills and behaviours needed for business strategy (Pfeffer, J 1998).
The future needs of the organisation are reconciled against the current workforce to assess if there is a gap, and if so how will this be addressed. The organisation identifies where they strategically want to be, and introduces policies and procedures to achieve these goals. Resources are then allocated based upon the HR requirements internal competencies and shortcomings, and predictable changes the workforce (Bratton, J & Gold, J 2003).
There are few models available that are solely devised for the family business. The ones discussed are the most revered in the topic, and should not be overlooked. HR is a model that could be applied to the family business in succession planning.
3.14 Research Problem
Until recently research on family business has been scant, as research grows, six key trends have become evident. These include a continuing exploration of topics such as succession, a strong preference for practice-oriented research methods, a tendency to borrow heavily from other discipline, and a strong fondness to talk to other researchers conducting research on family firms (Zahra, S & Sharma, P 2004).
There is a growing consciousness among policymakers of family business role in creating new jobs, nurturing new businesses, and promoting economic development of local communities (Heck, R & Stafford, K (2001) cited in Zahra, S & Sharma, P 2004:331). Family firms are treated as obsolete oddities by management science and the business media, even though they account for the majority of firms in every economy and a considerable percentage of GDP (Jones, A 2005).
4.0 Methodology
This section of the paper discusses the research methods used for the project, and will justify there choice. It discusses methods that were not used; with a critique of methods selected, and with hindsight this identifies any changes that would have enhanced the research (Saunders, M. et al 1997).
This paper critically evaluates the statically strong evidence of why so many family businesses fail beyond the third generation. Family businesses are the primary contributors to the economic and social well being in all capitalist societies, it is their lack of prolonged existence that is the problem. It is estimated that, internationally, only 30% of family businesses survive to the second generation, while fewer than 14% make it beyond the third generation. The outlook is bleaker for smaller family businesses; they usually survive only five to ten years
To focus on the nature of the research it was discussed with colleagues and fellow students, this not only added practical ideas and suggestions; it also opened new avenues of thought. This was the discussed with lecturers sounding out ideas, gauging opinions and clarifying the question. Focusing in on the question was obtained by employing relevance trees, narrowing the research area. This gave direction to the research, although with reviewing the literature this direction changed several times (Buzan, J. 1995).
The literature review, discusses theories and ideas that exist on the topic, this section formed the foundation of the paper. The findings from the research are then tested on theories for validity (Saunders, M. et al 1997). The literature review was challenging, there is a vast amount of articles on the subject, with little academic research. There are several specialist journals that focus on family business, but few main stream management publications mention the different issues that family run businesses face. Therefore the journals proved the most important source of information (Saunders, M. et al 1997).
Tertiary data sources, such as library catalogues and indexes were used to scan for secondary data. This produced journals and newspaper articles, and Internet addresses. With the amount of literature, it took time to sort out relevant material to the research. Narrowing down the search Bell's (1993) six point's parameters was applied. Applying key words that were identified in the first search produced relevant and up-to-date material (Bell, J.1993). A limitation on the literature search was the amount of time to read all articles and books on the subject. Whilst reviewing the literature references to other relevant publications was followed and reviewed. Bells checklist on identifying the relevance of literature found was a practical method to reduce the amount of reading (Bell, J. 1993).
Case study approach was chosen for the primary research, the organisations web sites were reviewed identify which current generation lead the business and they methods they had employed to sustain this factor (Yin, R 2003). The four family business that were chosen for case studies have all received recognition in the way they have conducted their business. All four are successful in different fields, and are in ownership of the second generation plus. These factors were used when choosing the business to identify how they have challenged the statistics, to survive.
To produce primary data on family businesses survival proved to be a vast task, taking a lot of time to produce results. Internal and external operations of several organisations would have to be compared to reach any level of validity. Therefore the case studies would be compared to the literature review and the statistical data in the appendices (Saunders, M. et al 1997).
The major limitation of the study lies in its relatively small sample size and the limited coverage. This was mainly attributable to the limited time and resources available for the study.
5.0 Case Studies
The four family business that were chosen for case studies have all received recognition in the way they have conducted their business. All four are successful in different fields, and are in ownership of the second generation plus. These factors were used when choosing the business to identify how they have challenged the statistics, to survive. The information was gathered from their web sites.
5.1 William Reed Publishing Ltd
The business was founded in 1862 and is currently in the 5th generation of family ownership. The firm represent all the qualities of a well-run and successful family business, in both sustainability (past consistency and future promise) and suffusion (spread of values and practices). The company has a diverse and comprehensive portfolio of products covering the food, drink, hospitality, retail and leisure sectors (www.william-reed.co.uk).
The company's roots are rural; the founder William Reed was a sugar-beet farmer and trader. In 1862, he launched The Grocerto provide the latest news and analysis of the trade on a weekly basis, and it has continued to do so ever since. The business has seen many launches, acquisitions and changes, which have created a legacy for the company (www.william-reed.co.uk).
Even though the organisation has a tradition of family management, they make a conscious effort not to let the ancestry affect decisions. The current Managing Director of William Reed Publishing Ltd is Charles Reed. The business radiates a strong contemporary style, Charles Reed, stated, It's wonderful to have such a tradition. But it's even more exciting that we now have the kind of technology that allows us to use all our experience and connections in powerful and previously uncharted ways (www.william-reed.co.uk).
Over the two decades momentous changes have taken place in the company. This has included a generational shift, when Charles Reed took over the managing directorship. The businesses has relocated and changed some of its key operations, through a mix of organic growth and acquisitions. The relocation saw a reduction in employee numbers (through voluntary redundancy) and great changes in terms of culture. In 1997 they employed 68 staff, today they have 250, this figure continues to rise (www.william-reed.co.uk).
The Reeds have cultivated a long line of male descendants. They live close to one another, and spend much time together. The family is described as extremely close and conservative in the traditional sense. The ownership structure of William Reed Publishing resembles that of a third generation rather than a fifth-generation company with the first three generations being sole proprietors. 85 per cent of the shares are held in trusts, half being owned by the fifth generation. The family temperament of commitment and pragmatism is recognised as something members exhibit. Familiness is a tangible asset in terms of continuity of management (www.william-reed.co.uk).
5.1 Wildlife Clothing
A family run clothing business, which has expanded across Cornwall and launched its own, award winning organic clothing brand. Wildlife has grown from a former Army and Navy surplus store in Penzance to six branches across Cornwall and also supplies national outlets. The three brothers who run Wildlife, David, Neil and Leigh Chadwick, are trying to combine ecologically friendly methods with their sales success and have launched their own organic clothing brand - Seasalt. In doing so they became the first fashion brand to have clothing certified to Soil Association standards. They have also won the Green Business Cornwall Sustainability Award 2005 for the Seasalt label (www.wildlifeonline.com).
The clothes made under the Seasalt brand include sailing jackets, caps and T-shirts. Seasalt is not only sold in Wildlife but is distributed nationally. They are attempting to be an environmentally aware business. They import their own clothing, which meant establishing a supply chain and developing our own brand, Seasalt. The principal reason behind this was to protect the business in the face of growing competition (www.wildlifeonline.com).
Their father Don Chadwick founded General Clothing Stores, in Penzance, in 1988, which has evolved into Wildlife, which now employs 47 staff at stores in Penzance, Falmouth, St Ives, Truro, Fowey and Padstow. The organisation is in the first and second generation of ownership. The company has won several awards including the Orange Best Family Business Award 2004. Their website was runner up in the Sage & The Daily Telegraph Business Awards for Best Website. Wildlife has also been named the UK's Best Family Business after winning the national final of the Yell Best Family Business Awards 2006 (www.wildlifeonline.com).
5.3 William Jackson and Son Ltd
The organisation was founded in 1851 and is currently in the 5th generation of family control. The business is located in Hull and is manufactures of frozen foods under the Aunt Bessie brand name, as well as chilled Oriental ready meals for Kwoks Foods, and bread for many of Europe's sandwich makers. William Jackson's is a privately owned family business with nearly 90 per cent of the shares in family control (www.wjs.co.uk).
William Jackson's and son ltd have won the family governance honour, it is a business that takes governance seriously, and has demonstrated the power of its culture and structures. This is demonstrated supporting employees through difficult business and family transitions. The organisation has repeatedly been able to undertake strategic disinvestments and cope with crises situations. This is directly attributable to the William Jackson's powerful model of family governance, which combines flexible processes with stable structures. These are adaptive enough to stay in tune with the evolution of the generations and the business (www.wjs.co.uk).
The family motto is Be merry and welcome; this is part of the heritage that both the family and the company put into practice. William Jackson's is an organisation where stories are told and treasures are found. The founder William Jackson son in law took over from him, and the family of Oughtreds regard themselves as custodians of the culture, ownership and management. Christopher Oughtred, Chairman and joint MD, describes their pride in something which William Jackson's has that few of our competitors can copy or invent: namely, a great heritage. Part of understanding where our business is today comes from knowing where we have come from (www.wjs.co.uk).
The recent sale of Jackson's Stores, is now allowing William Jackson to focus on core businesses. The group ceased to employ nearly 2,500 employees, although many of these were in part-time employment. The impact of this loss was inevitably felt across the business. The top management handled communication regarding the sale in an exemplary manner, reassuring, explaining and thanking the Jackson's Stores team. The company is in the process of planning the 6th generation of family control (www.wjs.co.uk).
5.4 Bruntwood Estates
The organisation was founded in 1977 and is currently in first and second-generation ownership. They are located in Manchester and are one of the largest privately owned commercial property investment, development and management companies in the north of England (www.bruntwood.co.uk).
Michael Oglesby founded the company after the property crash in the 1970s. During this period it was difficult to raise cash to buy property, so instead, Michael joined with a partner, who lived in Bruntwood Lane, to help finance the project; consequently this formed the company name (www.bruntwood.co.uk).
In the beginning the business struggled, the vision for Michael was to support his family, he used his skills as a graduate and a builder, to rejuvenate a mixture of redundant industrial buildings, bought cheaply following the regional deconstruction of the manufacturing industry. In 1982, during the market crash one third of Bruntwood's income was lost, buildings were sold, and the company took on a new direction, shifting its focus to office buildings, which has been the way forward for the company since (www.bruntwood.co.uk).
Michael Oglesby's father was a plumber by trade and had expectations of involving his son in the business that he had founded in 1939. When he left school Michael joined as a plumber apprentice, though, the father and son relationship proved to be too turbulent to sustain a business. Michael then went to college to get a degree; based on this experience he launched his own business. The entry of his son Chris into the business took place slowly. After having worked for other employers in the property industry, he began working at Bruntwood with the aim of getting training. Chris's success and entrepreneurial spirit eventually brought him into close teamwork with his father, rising to the role of company CEO (www.bruntwood.co.uk).
The ownership structure of Bruntwood consists of four family members who hold 99 per cent of the shares, with the company's staff hold the remaining 1 per cent. Last year, the shareholders distributed 12 per cent of the profits to the staff share schemes, and 8 per cent to local charities. The organisation employees over 270 people and is seen as a model employer (www.bruntwood.co.uk).
6.0 Analysis
This section of the paper will analysis the case studies and then compares them to the literature review. Discussing each family business separately and then the overall findings from the research.
6.1 William Reed Publishing Ltd
This business has successfully passed ownership through five generations of the same family. The organisation is a well-run and successful family business, and is sustainable. Their diverse portfolio is one of the factors that has attributed to their success. The current Managing Director of William Reed Publishing Ltd is Charles Reed manages the business in a strong contemporary style (3.3, 3.6 & 3.9)
The family values and norms are instilled in the organisation's culture. The founder is part of the company's culture and reminders of their roots are evident. Even though the organisation has a tradition of family management, they make a conscious effort not to let the heritage affect decisions (3.2, 3.6 & 3.12).
The organisation has kept up with changes in the market forces. The business has relocated and through organic growth and acquisitions has changed some of their core competencies. Although this saw a reduction in employee numbers, there numbers are now rising (3.2, 3.3 & 3.12).
These changes have included a recent generational shift, when Charles Reed took over the managing directorship. The Reeds have cultivated a long line of male descendants. They remain close as a family, transferring this value to the work environment (3.3 3.6 & 3.7).
The ownership structure of William Reed Publishing resembles that of a third generation rather than a fifth-generation company with the first three generations. 85 per cent of the shares are held in trusts, half being owned by the fifth generation (3.1, 3.8 & 3.9).
The family temperament of commitment and pragmatism is recognised as something members exhibit. Familiness is a tangible asset in terms of continuity of management (3.1, 3.3 & 3.6).
This family business is a good example of how family businesses can reach the fifth generation of family control (3.9).
6.1 Wildlife Clothing
This is a family run clothing business, which has expanded, and has won awards for its clothing range. The organisation started with one store, now has several and trades on the Internet (3.3 & 3.12).
The organisation is in its second generation and being run by three sons of the founder. The founder still has an interest in the business; therefore it is first and second generational. The organisation has won a business award for Sustainability in 2005 (3.2, 3.6, 3.9 & 3.12).
The founder Don Chadwick founded the company in 1988, which has evolved and now employs 47 staff. The company Wildlife has also been named the UK's Best Family Business after winning the national final of the Yell Best Family Business Awards 2006 (3.2, 3.3, 3.6 & 3.9).
6.3 William Jackson and Son Ltd
The organisation was founded in 1851 and is currently in the fifth generation of family control. T William Jackson's is a privately owned family business with nearly 90 per cent of the shares in family control (3.1, 3.3, 3.6, 3.8 & 3.14).
William Jackson's and son ltd have won the family governance honour, this is through taking corporate governance seriously, and has demonstrated this through the power of its culture and structures (3.2, 3.9, 3.10 & 3.12).
The organisation has repeatedly been able to undertake strategic disinvestments and cope with crises situations. This is directly attributable to the William Jackson's powerful model of family governance, which combines flexible processes with stable structures (3.3, 3.6, 3.8 &3.9).
William Jackson's is an organisation where stories are told and treasures are found. The founder William Jackson son in law took over from him, and the family of Oughtreds regard themselves as custodians of the culture, ownership and management (3.3, 3.8 & 3.12).
The organisation understands the survival process and is currently in the process of planning the 6th generation of familycontrol (3.6, 3.7 & 3.8).
6.4 Bruntwood Estates
The organisation was founded in 1977 and is currently in first and second-generation ownership. Michael Oglesby founded the company after the property crash in the 1970s (3.2, 3.3, 3.9 &3.12).
The founder Michael Oglesby's father was a plumber by trade and had expectations of involving his son in the business that he had founded in 1939. When he left school Michael joined as a plumber apprentice, though, the father and son relationship proved to be too turbulent to sustain a business (3.5, 3.6, 3.7 & 3.9).
The entry of his son Chris into the business took place slowly due to his own failure to go into business with his father. First working with other employers to gain experience (3.36, 3.7 & 3.9).
The ownership structure of Bruntwood consists of four family members who hold 99 per cent of the shares, with the company's staff hold the remaining 1 per cent. Last year, the shareholders distributed 12 percent of the profits to the staff share schemes, and 8 per cent to local charities (3.6, 3.8 & 3.11).
6.5 General Analysis
There are few statistics available on the success of family run businesses; the majority only records the failure rates (3.5). The frequently available statistics record all small and medium enterprise as one statistic (appendix one & two).
The organisations in the case studies have exemplified the models of family business, attracting reward and recognition though their values and strategies. They have contributed to both their local and national economy (3.1, 3.2 &3.12).
The failure rates for all small and medium enterprise are stacked against success of the business within the first few years (appendix one & two). This factor is the compounded when family succession is involved (3.5, 3.5 & 3.7).
From the case studies all four of the organisations have a succession plan. This factor has contributed to the success of maintaining them as family businesses. Two of the organisations in the case studies are on their firth generation of family management, with one in the process of planning their sixth. They are heavily owned by the founding family. This has defied the statistics on survival that is stacked against them (3.6, 3.7, 3.8, 3.9 & 3.9).
The organisations have all been adaptive to changes in the environment and economy, and have changed direction and strategy where and when needed (3.2, 3.3 & 3.12).
7.0 Conclusions and discussion
The factor that family businesses are the primary business form contributors to the economic and social well being of all capitalist societies, is in itself enough reason for in-depth studies on the problem of succession. There is little information on why family businesses fail only statistical data; therefore by studying businesses that have survived, conclusions can be drawn from their management procedures.
With only 30% of family businesses surviving into the second generation, and fewer than 14% make it beyond the third generation could be economic disaster for some economies. All the current literature would indicate that the problem is in succession planning in family businesses. The examples in the case studies have all uses succession planning to perpetuate the business. Although from this small sample it cannot be assumed that those who do not plan for succession, will fail.
The examples in the case studies demonstrate that family businesses can be successful with the right planning and strategy. They have to be similar to all other forms of businesses adaptive to the environment, and change where necessary. They both have the same external pressures, therefore is the problem of failure internal in family businesses.
This aspect again leads to the problems associated with succession planning; to keep the business in the family it is imperative they promote from within. Therefore they need relatives that are willing and capable to take over the running of the business. It could be assumed that some business will fail if there are not suitable replacements within to run the business.
It is not just the succession; the successor must be suitable for the role in the family business. The motivation of the successor to take over the business is an important factor that influences both the satisfaction with the succession process and the continued prosperity of the business. Vital elements of this include whether the successor aspiration to manage the family business, and will they find the work rewarding. Successors who replace the current generation should join the family business for the right reasons. Parents should not presume this, so they pressure their offspring to join the business.
Using an external consultant could help identify a suitable successor, and assist with their management development. This would tap into the knowledge of the wider business world, and set the criteria needed. To be a family member is not enough qualification to run the business, skills are required that other forms of businesses select their employees by.
Other forms of bushiness would not promote or select a candidate without using HR tools. Therefore introducing basic HR practices, can assist the business in successful succession planning.
The family business should make informed decision about their future possible successors their family relations, and their shareholding in the business. Potential successors need experience from the wider business environment, and this experience is valuable when added to the business.
Succession planning has been in this paper been the major focus of research, the consensus of the contemporary theorists all point to this being a vital factor in the success of the family business. This has limited the research, as there is little other literature relating to the failure rates of family businesses to review.
Family businesses face the same economic and social problems of all organisations, but to remain an entity the have further issues of nurturing and developing family members to perpetuate the family control of the business. In some societies around the world these businesses have grown into multinational conglomerates. Therefore with more understanding they have the potential to survive and grow, further contributing to the economy.
This has led to several questions,
Why is family business not researched as in depth as other areas of business when it is so vital to the economy?
Why are models of organisational survival not transferred from other forms of businesses?
If the majority of businesses commence as a family business, then without doubt there should be a greater interest in the topic?
Each one of these warrants further study. It is apparent to the researcher that in academia and business research the family business gains little attention and credibility. Further research could help develop models to assist these businesses in increasing their chances of survival.
This paper concluded that family businesses offer a great deal to the economy and society, and therefore succession planning is vital to their survival. For them to defy the statistics on failure they need a suitable family member as a successor. Without this it will either ceased to exist or be sold to another organisation, and loss its unique features.
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Web Sites
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www.equifax.co.uk
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www.wjs.co.uk
Appendix One
Business failure rate soars in 2005 (05/01/2006)
Source www.equifax.co.uk
High-energy costs and tightened consumer spending helped push company failures up by 11% in 2005, new figures reveal. After falling for two years, corporate failures in the UK jumped to 18,122 last year, the highest number recorded since 2002, according to a report from financial data firm Experian. The company said that 4,501 businesses closed down in the final three months of the year, a 7% rise over the fourth quarter of 2004. Firms in England's northeast suffered the worst, as the region's insolvency rate rocketed by 59%. The West Midlands finished a distant second with a closure rate of 19%. "The financial landscape for UK companies had already begun to change by the start of 2005 as rising interest rates and the consumer slowdown all took their toll," said Richard Lloyd, managing director of Experian's business information division. And, of course, the rapid rise in energy prices hasn't helped." Experian expects the rise in company failures to continue in 2006.
Among major sectors, non-food retail stores saw the largest increases in closures, shutting down at a rate of 40% over 2004 totals. Diversified industrials, media, business services and construction firms failed at rates of 19%, 15%, 12% and 8%, respectively, over the previous year. Together, these five sectors accounted for over a third of all business failures. However, some sectors improved. Insolvencies among post & telecommunications firms dropped 13.4%, while leisure and hotels fell 10.7%.
The latest Industry Watch report from accountants and business advisers BDO Stoy Hayward predicts a business failure rate of just 1.0 per cent for the next two years, with 17,215 UK business failures forecast for 2006 and 17,355 for 2007. This is due in part to the stable economy created by Gordon Brown during his nine-year chancellorship. Recent improvements in the UK and global macro-economic outlook have had the effect of slowing the rate of business failures and Britain will, over the next two to three years, see a stronger outlook for businesses. This economic improvement has already translated itself to the retail and wholesale sectors, with business failures in these sectors forecast to drop sharply in 2006 and 2007.
Quarter One 2006 UK Business Failures Figures
Quarter One 2006 % Difference vs Business failures Quarter One 2005
Retailing
+19%
Services
+14%
Construction
+8%
Trans/Comms
+7%
Manufacturing
+4%
Wholesales
+1%
Other
-3%
Sector unknown
31%
Total
+13%
Quarter One 2006 % Difference vs Business failures Quarter One 2005
Wales
+35%
West Midlands
+23%
East of England
+18%
London
+15%
North West
+15%
East Midlands
+11%
South East
+10%
South West
+9%
Yorkshire and the Humber
+7%
North East
+2.5%
Northern Ireland
-7%
Scotland
-8%
Total
+13%
