What Is Family Business - Assignment Example

1. What is family business? A family business is one characterized as being a profit making entity which has a significant number of voting shares ownership within a single extended family or by a single member of the family who is influenced by it. Other characteristics include legal control, major stock ownership, management involvement and decision making authority within the family. A business is called a family business when the business entity is strongly associated with a family, at least two generations of the family to be specific; furthermore, the family link is directly involved in or has a direct influence over the management or policy making in the business. Simultaneously, the family’s goals and interests, e.g. financial, social status, are directly served by the business. This way, the business and family share a mutually beneficial relationship. To satisfy this definition, the following conditions are met: Family members such as the wives, sons and even daughters of the CEO serve on the Board and have voting rights. The values of the business are dictated by the family and are in conjunction with the family values. Extended family, such as the brothers, sisters and cousins of the ket family members, may hold stock on a minor level. The family and the business activities are closely linked and reflect upon each other in the sense that the ethics of the business and family activities are held in similar regard by the stakeholders. The business influences the social status and standing of the family, especially if one member serves as the CEO, then he or she vis-à-vis holds a significantly powerful position in the family. Family is chiefly considered in succession planning. 2. Describe the three circle model. Give three examples, of the potential causes of disagreement that may result from a situation in one specific family business where; The Three Circle Model in Family Business is a very important tool in understanding the motivation and influences that will play a role in people that are directly or indirectly associated with the business or the family. It plays a crucial role in decision making. The three circles that make up this model include the Family circle, Business circle and Ownership circle. The family circle represents the impact that the family has on the business itself and the ownership of it and how these factors correlate with each other. Similarly, the business circle represents how the business is interlinked with the family and the ownership. Lastly, the ownership circle displays the impact and interaction that the owners have with the family and the business. This way, these are all interlinked, interdependent but each circle represents its own set of motivations and goals, which can conflict and results in disagreements. The mother, father and eldest son are in all the three circles of family, ownership and the business. These three people occupy all three circles and thus are closely linked, with very similar interests and motivations. The likelihood of disagreements is very low. The few disagreements will not be fuelled by different goals and will mostly include: 1. Difference of opinion over day to day affairs in the business based on different personalities. 2. Strategic focus of the family business in case of business expansion needs based on different career aspirations as well as position in the company. 3. Difference of opinion over external stakeholders and the depth of business relationship with them based on work ethics and interpersonal skill set. The younger son and the parent’s eldest child, a daughter, are just in the family circle. With no direct interest in the business and no direct benefit from it, conflicts can arise due to the following: 1. Indignation and resentment over not having any shareholding in the company while bearing the indirect impact of the performance of the family business. In case the business is in recession, these members will suffer but will have no power. 2. Expectations from the business for their own future interests, and from the family for more time and affection. 3. Potential disagreements when they get married and their partners will want ownership in the thriving business. • The father’s younger brother with a minority shareholding is in both the family and ownership circle. 1. Minority ownership means fewer dividends. In times when business is growing, will expect more benefits. 2. Very little say in management decision making but being a family member, will expect to be heard and given control. 3. Disagreement with sister in law or other members of the family. • The elder son has a long term partner and has announced that they intend to marry 1. Relationship with the members of the family, especially the parents-in-law. 2. The personality and aspirations of the partner. 3. The future plans of the newly-engaged couple. 3. Define the term values. Give some examples of typical family and business values, that can influence the way in which a family business operates(300 words) Very simply defined, Values are the qualitative aspirations and goals of a business that it wants to uphold in all its business endeavors. These values cannot be disregarded in any situation and in any circumstance because these have a direct impact on the business reputation and how the business is perceived by clients and communities. Values are the motivation and the aspirations that the company provides to employees so that they achieve their goals through tactical strategies. These also are the impetus to owners to create business policy and strategy. The values will also direct how the finances are used and reported, the investments that are made, how the family and the owners direct employees to perform their day to day activities. Values can be described as the standards and morals of the company. Examples: The family is very closely knit and believes in helping and assisting each other. They are big on philanthropy and keeping their environment clean and healthy. These family values will translate into these business values: Reliability, Responsiveness, Community Conscious, Safety, Cooperation and Coordination, Longevity, Respect for everyone. The family believes in living with humility and without wasting resources. But this is not done at the cost of the standard of living of the family. They spend wisely and save accordingly. Business values will be Efficient Utilization of Resources, Service and Product Quality, Cost Effectiveness, Standardization. The family is strict about punctuality. Every activity, including dinner parties, birthday events, weddings, etc. are done in a very timely manner so that nobody is unhappy due to waiting in vain. Business values will be Punctuality, Meeting Deadlines, Efficiency, Discipline, Customer Satisfaction The family is adventurous and likes to do unique, fun activities together. They like to keep doing new things and are allergic to the status quo. Business values will be creativity, innovativeness, resourcefulness. 4. Define the term Agency Theory. How can this theory help us increase our understanding of the family business? (300words) The Agency Theory is concerned with the relationship between the principal who delegates a work activity to the agent, who performs that activity. This theory basically addresses issues like resource utilization and cost management which lead one party to ask another party to perform the job as it is unable to perform itself. This agent-principal relationship has some pitfalls as well because of the nature of it. In family business, this is important because the owners of the business who happen to be members of the family (principal) often hire another group of people to perform tasks such as management in the role of an agent in the company. Most family businesses start at a small sized level, with the key members of the family playing major roles in the company, as well as minor roles such as bookkeeping. They are the owners but they are very heavily involved in day to day operation. As the years pass and the family business enters the medium sized company level, it will need more personnel for everyday activities, while the management and owners’ time will need to be spent on bigger strategic issues. This is when the agency theory comes in. In family businesses, the risks associated with the use of agents are higher as the ownership and financial interest is vested in the family and should the agent fail to perform the task as required, the family will be the first to suffer. Therefore, there is still a lot of need for the family to stay involved and keep monitoring checks to ensure that they agent has performed satisfactorily. The agent must be selected scrupulously to ensure that he abides by the values upheld by the family. 5. Outline the challenges faced by the family partnership. What do the key family members have to focus on, to ensure, a smooth transformation to a sibling partnership form of family business ownership? The challenges faced by family partnerships are very similar to those faced by a matured family business in general. These include the constant need for cash availability for personal use as well as business use, interpersonal work relations, conflicting personalities, investment and capital requirements and decisions, impact on personal accumulated wealth, degree of power and control over assets by the partners, relationship with stakeholders and owners including founder, succession planning, relationships with non-family management team members, jealousy and rivalry among involved family members and different work ethics. There should be a clear code of conduct that should dictate how the partners behave so that there is minimal conflict. In the event of disagreements, family elders should be asked to step in and play the role of moderators so that issues are swiftly resolved, with no harm to the family or the business. The key decision maker in the family partnership should be someone who is experienced but neutral in that he has no obvious biases or inclination towards one person. Once the decision maker and influencers have been established, the criteria that they should focus on should be marked. This includes: It must be determined that among the potential candidates, which one displays the most leadership potential and the ability to take the business forward in the long run. Aside from leadership, candidate must possess trustworthiness, long term vision and must have superior decision making skill. The candidate must see the business and family as mutually coexistent and must manage the interests of both. The company must have a policy of meritocracy and complete disclosure so that no one can doubt the decisions made. Compensation, investments, savings, expenses drawn on the company account and personal estate must all be transparent for maintaining family relations and company longevity. Finally, the values of the company and the family must be upheld at all costs. 6. Describe and explain what the stages in development of business are. Any business will go through a number of stages in its lifecycle. Some businesses fade when the lifecycle is complete, whereas others, which are well planned and have strong management, start another cycle after the completion of one. The stages of the development of business are as follows: Start Up This is the first stage when the business plan is developed, owners and investors are established, business model is appraised and activities are planned. Now the business is set up and registered. Existence The business is now open for business and starts marketing products and services. Finances are reported, cash flows are established and the business moves towards breaking even. The company will likely make its first profit now as well. Success Growth The company is established in the market with a healthy market share. The profits are steady and cash is constantly flowing in. Success Disengagement After years of an increasing growth graph, the management voluntarily decides to put a kibosh on further growth and maintain business activity as it is. 1. Take Off As mentioned previously, some firms are unable to maintain their success by adapting to changing times. And thus are forced to close. Whereas other firms - utilizing innovation and resources - are able to achieve the next level of growth. 7. Stakeholder analysis. (250 words) Ever since the idea of shareholders was advanced to that of stakeholders, many theories have been developed that address how to conduct a stakeholder analysis and mapping. For a small to medium sized business, it is imperative to define its primary and secondary stakeholders. The primary stakeholders are those that are directly affected by the operations of a business, either negatively or positively. They engage in business activity with the company and exchange directly with it so the successes or downfall of the company has a direct effect on them. These can include staff, contractors, management, shareholders and customers. The other category is the secondary stakeholders which includes those people who are indirectly affected by a business’s operations. These can include the communities in which the business operates, government and non-governmental agencies and the environment. Taking into account both categories, one other category of key stakeholders should be defined by the company as the relation with these stakeholders is of important consequence to the company and its operations. The say of these stakeholders is impactful. At the onset of every project, this exhaustive category should be considered so that projects are successful and the reputation of the company is intact. Read More