PPT01
Transcript of PPT01
Chapter 1
Family BusinessWhat Makes It Unique?
Family Business, First Edition, by Ernesto J. PozaCopyright © 2004 South-Western/Thomson Learning
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Course Goals
Gain an understanding and respect for family business continuity
Understand better the challenges and advantages faced by your own family business
Learn managerial, governance, and family practices that increase odds of family business success
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Family Business: Working Definition A family business is a synthesis of:
Ownership control by members of a family or consortium of families
Strategic influence of a family in the management of the firm
Concern for family relationships The dream (possibility) of continuity across
generations
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Family Businesses . . .
Constitute 80–98% of businesses in U.S. and other free economies
Generate 49% of GDP in U.S. and more than 75% in most other countries
Employ 59% of private sector U.S. workforce and more than 85% of working population overseas
Created about 80% of all new jobs in the 1980s and 1990s
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Other Statistics
Between 17 and 22 million family-owned businesses in U.S.
Annual revenues exceed $25 million for 35,000 family businesses
Family-controlled companies comprise 37% of all Fortune 500 companies 60% of all publicly held companies
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The Bad News
In their first 5 years of operation, 90% of family-owned companies disappear
Of remaining 10%, 67% die or change ownership after first generation
Only 12% survive under current ownership past the third generation
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What Makes the Difference Presence of the family Owner’s dream to keep the business in the
family Overlap of family, ownership, and
management Competitive advantage derived from
interaction of family, management, and ownership
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Family Business Theories
Systems theory Agency cost theory Resource-based theory
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Systems Theory
Model shows overlapping subsystems of family, management, and ownership
Firm is dynamic system in which integration achieved by adjustments to subsystems
Individual perspectives of family and firm may differ, leading to overemphasis on one sub-system at expense of others
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Systems Theory Model
Family Management
Ownership
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Blurred Boundaries
Boundaries among family, ownership, management systems may become blurred Problems determining if decisions relate to family,
ownership, or management issues Family rules used in the business Problem-solving ability diminished by blurred
boundaries Businesses may become family-first,
ownership-first, or management-first
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Family-First Businesses
Employment in business is membership right Members of same generation paid equally Extensive family perks from business Secrecy often paramount and family
members protect each other Business becomes part of lifestyle Commitment to continuity depends on
agendas of individual family members
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Business-First Firms
Employment on the basis of qualifications—family discouraged from working in business
Performance of employed family members reviewed as for nonfamily
Compensation based on responsibility and performance
Conversation between family members is all business
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Business-First Firms, continued Business growth, market share, profitability,
return on assets, return on equity constitute the scorecard
Next generation viewed in terms of how they can manage and grow business
Family events often cancelled/delayed for business reasons
No automatic commitment to family business continuity
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Joint Optimization Alternative Family employment policy guides employ-
ment of family Some family members are employees; others
responsible shareholders Performance of employed family members
reviewed as nonfamily
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Joint Optimization, continued Family members encouraged to work outside
business to get experience When family members meet, conversation is
both family and business oriented Commitment to family business continuity
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Agency Cost Theory
Traditional theory: Alignment of owners and managers decreases need for agency costs
Recent research: altruism of owner-managers leads to increased agency costs
Agency costs can be controlled by managerial and governance practices
Board of directors important in monitoring managerial behavior and controlling costs
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Challenges to Continuity
Shortening product life cycles High transfer tax penalties High market valuations of ongoing businesses
by historical standards Family businesses considered outdated Family structure far from stable Next generation family business leaders
unable/unwilling to accommodate CEOs living longer—obstacles to succession
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Resource-Based Theory
Resource-based theory highlights unique capabilities or resources that family firms convert into competitive advantage
These resources referred to as organizational competencies
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Competitive Advantages of Family Business Speed to market Strategic focus on market niches Concentrated ownership structure Lower overall costs Quality of product/service Agility and flexibility Owner-manager and long-term view
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Speed to Market
0
5
10
15
20
25M
onth
s
>$100 <$100
Sales in millions
U.S. Japan Europe
Source: Boston Consulting Group.
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Strategic Focus: Niches
Size of Market and Business Performance
Under $50 million 28.1% ROI*
$50 to $100 million 26.8% ROI
$100 to $250 million 24.2% ROI
Over $1 billion 10.9% ROI
*4 year average ROI.Source: PIMS Program
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Concentrated Ownership
Ownership structure impacts corporate productivity
Stock concentration positively correlated to Related diversification R & D expenses per employee Training per employee Overall corporate productivity
Source: Hill and Snell, Academy of Management Journal, 32#1.
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Lower Overall Costs
Cost of capital is nearly 0% when owner controls stock
Financing for other businesses: 25–30% for venture capital 17–20% for mezzanine financing Prime rate for bank financing
Administrative and control costs also reduced absent need for principal supervision
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Quality
Relative Product Qualityand Business Performance
High relative quality 27.1% ROI*
Medium relative quality 19.8% ROI
Low relative quality 16.8% ROI
*4 year average ROI.
Source: PIMS Program
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Agility and Flexibility
Flexibility of new manufacturing and distribution technology makes smaller runs economically attractive
Customization, changing consumer preferences, shorter product life cycles reward agility
EDI/Internet-based partnerships make agility possible across value chain
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Owner-Manager
Focused on customers, family, employees, profitability, lifestyle
Experiences conflicts between family, management, and ownership and optimizes links
Average tenure of 18 years vs. 3 years for public company CEOs