renewal processes in family firms fernando alberti, phd renewal processes in family firms

RENEWAL PROCESSES IN FAMILY FIRMS

Fernando Alberti, PhD




Transition from entrepreneurial to professional management

The most likely causes of business failure are the problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team.

Accomplishing such transition is a difficult task……so difficult that some said that the best way to make such transitions in organizational evolution is to pursue them when the entrepreneur retires or dies and a new generation of management takes over the direction of the organization.

How to make successful transitions without a drastic change?



Entrepreneurially managed firms

SMEs RENEWAL PROCESSES THROUGH GROWTH

•Identifying opportunities

•Vision

•Moderate risk taking

•Charismatic leader

•Hate for bureaucracy

•Oriented towards the environment

•Decision making style based on intuition

•Very personal leadership style

•Action oriented

•Search for direct personal feedback

• A highly centralized decision making system;

• An over-dependence on one or two key individuals for its survival and growth;

• An inadequate repertoire of managerial skills and training

• A paternalistic atmosphere



Professionally managed firms


•A formal organization structure

•A formalised management system

•delegation and management by exception;

•profit centres;

•formal plans and budgets;

•written rules and procedures;

•information systems;

•formal coordination and integrations;

•mechanisms and control systems.



The transition


Given the characteristics of the typical entrepreneurially managed firm, it is not likely that successful transitions to professional management will occur very often unless they are planned carefully and implemented gradually.

In general, the transition process is slow since it involves organizational and personal learning and because it is necessary to preserve old strengths while developing new ones.

The transition itself will usually involve five or more of the following seven steps…



Steps to transition




Factors favoring the transition from entrepreneurial to professional management


1. Management support for intrapreneurship.Management encouragement for innovative activitiesTop management experience with innovationTop management sponsorship“Risk-taker” is considered a positive attributeSmall and experimental projects are supported

2. Organizational structure.Mistakes as learning experiencesTeam buildingLack of excessive concern for job descriptions

3. Reward and research availability.Flexible budget processAdditional rewards/compensationProblem solving time



Transition from entrepreneurial to professional management in family firms


In family firms, transition from entrepreneurial to professional management is even more problematic.

This is due to the interplay between family and business typical of such firms.

family firm



What is a family firm?


• some degree of effective control by the family over strategic direction (family members sitting on the board or owning a significant percentage of stocks)

• business it is intended to remain in the family

• the founder or a descendant runs the company

• multiple generations involved in the business

• direct family involvement in daily operations

• more than one family member have significant management responsibility





By calling attention to the transitions, it does not mean to imply that periods of stability within each stage should be taken for granted.

Transitions are opportunities for reassessment of the coursee the business is following and for fundamental change.

Stability periods are opportunities for focus and growth.






The vast majority of family businesses disappear or are sold and continue to exist outside the family’s hands.

The succession stage, in particular, is the most critical transition a family firm can face and is often accompanied by a transition from an entrepreneurial to a professional management.

Transitional periods in family firms are:


Controlling owner

Sibling partnership

Cousin consortium



The interplay between family and business in family firms


Area of overlap Family Firm

Reason of existence

Take care of and nurture family members

Produce goods and services Engine of social development

Selection Provide opportunities for children, regardless of

competencies

Hire only the competent

Appraisal Parents do not differentiatee between children

The CEO differentiates between employees on the

basis of performance

Allowances Parents allocate allowances in accordance with the

developmental needs of children

CEOs allocate salaries base on performance and market worth

of employees

Training Parents provide learning opportunities designed to satisfy organizatiol needs

CEOs provide learning opportunities to satisfy organizational needs



The interplay between family and business in family firms


Management perspective Family perspective

only relatives with necessary skills should be taken into the business

relatives keen on joining the firm should be given opportunities to acquire the necessary skills

the salary of relatives should be based on their market worth

any extra income should be distributed through stocks and dividends

Relatives should be subject to objective evaluation by peers, subordinates, and superiors

if found incompetent or unsuitable for organizational responsibilities, family members should explore alternative career paths

employment of relatives whose interests or needs fail to match with the organizational goals should be reconsidered

relatives whose interests or needs do not match organizational goals should maintain a share of the family's assets.



6 components of transitions in family firms


1. The continuous accumulation of developmental pressures (the process of aging; psychological and family changes; economic or political change)

2. The trigger (mandatory retirements; trust or legal enactment dates; unanticipated events)

3. Disengaging of the owner/entrepreneur

4. Exploring alternatives (testing, learning, revising)

5. Choosing (selection of an alternative to follow)

6. Commitment to the new structure (declaration, actions)



Management succession in family firms




The relevance of a management succession plan


After having considered that the management of succession is a process that requires time and it is not a single event in time, a management succession should be accompanied by a plan in order for a transition to occur, minimizing the risk to transform in a failure.

Planning succession is often at odds with being a family firm and having an entrepreneurial management, so it is a process which is frequently introduced by the outside (business associations, consultants, lawyers, etc.)



STEP 1. Select the successor


• based on a real personal interest, skills, abilities and experience

• involving relatives and outsiders in the decision;

• don’t postpone naming the successor;

• consider also non family members.



STEP 2. Create a survival kit


• strategic analysis for the future

• share vision

• teach and learn

• explain strategies

• explain k.s.f.

• people in the business

• key customers

• how to manage people

• knowledge and job inventory



STEP 3. Groom the successor


• gradual transfer of power

• the successor will make mistakes

• good communicator / tolerant listener

• establish reasonable expectations

• articulate keys to successor’s performance



STEP 4. Promote an environment of trust and respect


The successor can be developed in a period of 5 to 10 years.

During this period the successor must be empowered:

•Gradually delegating responsibilities;

•Hence allowing customers, creditors, suppliers, employees, other relatives to evaluate him/her;

•Hence allowing a gradual development of confidence in the successor.



STEP 5. Cope with the financial realities of estate and gift taxes


There are several alteernatives:

•Buy/Sell agreement

•Lifetime gifting

•Setting up a trust

•Estate freeze

•Family limited partnership



10 most prevalent obstacles to family business succession planning


1. Lack of appreciation, recognition and love

2. Lack of forgiveness

3. Control

4. Other-oriented regarding change

5. Overlook history

6. Scarcity of resources

7. Sense of entitlement

8. Indirect communication

9. Differences are liabilities and not assets

10. Poor expression of feelings and wants



Quebecor case discussion


1. What kind of overlap can you identify in the case between the family system, the ownership system and the business system? Who is belonging to what?

2. Where does prevail the family perspective and where the management perspective in critical issues (recruitment, salary, evaluation, …)

3. Which of the 6 components of transitions in family firms can you identify in the case?

4. Which obstacles you see in this renewal process?

renewal processes in family firms fernando alberti, phd renewal processes in family firms

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