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Chapter Five

Diagnosing the Family Business and Creating Conditions for the Continued Spirit of Enterprise

Chapter 2

Challenges to Continuity

Neither the classic system model by Davis & Tagiuri2, nor the widely known McKinsey 7S Model3, helps us sufficiently understand the complexity of the family firm.
Coupling this with the superimposition of family and ownership creates challenges for understanding, leading, and providing advice to:
family-owned or
family-controlled businesses

2Gersick, K., Davis, J., McCollom, M., Lansberg, I. (1997). Generation to Generation, Harvard Business School Press, Boston, MA.

3Waterman, R. (1982). The seven elements of strategic fit, Journal of Business Strategy, Vol. 2, No. 3, 69-73.

The Systems Theory Model

Family Members

Other Shareholders

Family Shareholders

Owner-Manager Family Members

Owner-Managers

Family

Employees

Non-Family Managers & Employees

Source: The Systems Model. Adapted from Davis and Tagiuri, 1981.

Family

Management

Ownership

The Systems Theory Model

Source: The Systems Model. Adapted from Davis and Tagiuri, 1981.

The McKinsey 7S Model

Where is harmony captured?

Strategic Business Integration Model

Resources
Organization

Culture, Structure, Systems, & Relations

Management

Adapted from: D’Souza, D.E., and Miles, G.E. (2005) Business Strategy Integration class at the University of North Texas.

Is There a Better Model?

Anecdotal evidence and empirical research now suggests that multigenerational family business success requires:
getting the business strategy right
building trust and family harmony, and
installing governance mechanisms (boards and family councils)
The author suggests that a more holistic, particularistic and robust diagnosis and intervention model would prove useful to family business owners, advisors and scholars alike.

The 12S Family Enterprise Model

Complex for

first-generation businesses.

Information Systems

The Family Enterprise Model

Family Vision & Commitment to Continuity

Diagnostic Questions from the F.E. Model

Is the owning family clear on what it wants from the business?

Are each of the family businesses pursuing growth opportunities?

Are successors pursuing a vision and plan based on their experience managing profits and losses?

Is there a board of directors for the enterprise or the family office that meets regularly?

Is there a family council that meets regularly?

Is there financial transparency in the family enterprises and family office?

Long Term Commitment

Multi-generational family shareholders must be treated transparently and professionally.
Why? Ownership structure; the advantage of patient family capital and active oversight by responsible shareholders.
Movie; Million Dollar Arm
This resource can only be tapped and turned into competitive advantage:
through “family handcuffs”
by nurturing family members not employed in the business into remaining “patient capitalists.”

Protecting the Ultimate Resource

Dysfunctional family dynamics can undermine trust in the assessment of family business performance.
Stock sales are not an option because shares in a privately-held family company are illiquid and unmarketable.
Families have to continually re-invest in the development of a culture of trust in order to protect patient family capital.

Organizational Culture

A set of values, beliefs, and assumptions that influence the practices and behaviors of organizational members
Stories, pictures, trophies, flags, etc.
Largely reflects what has proven successful over time, to an organization
It becomes so matter of fact that the culture, and its values and beliefs, drop out of awareness (back stage or not reinforced)
That is, until the culture is found wanting or
There are new challenges to the established culture

Chapter 2

Cultural Blur

Little differentiation of the assumptions that go into decision making on the basis of it being a family, an ownership, or a management issue
Family values and rules are often used in the business
Business values and rules are used in the family
Cultural blur may enable families in business to avoid conflict and the anxiety it provokes
By minimizing differences that sometimes lead to conflict, problem-solving ability is diminished
We don’t do what is right for the business
Going too far

Chapter 2

Cultural Blur (cont.)

Cultural blur may endow the business with “invisible crossovers” that provide it with what the strategy literature refers to as “intangible assets” that can be turned into competitive advantages, e.g.:
Love – quality and caring customer service
Commitment – patient capital and transfer of knowledge
Independence – low debt/equity ratio
Work ethic – productivity
Creativity – entrepreneurship and innovation

Enterprise Success and Longevity

Research suggests that success and longevity are linked to:
Strong culture
Stable culture
Culture that fits the strategy of the business
Culture that is flexible and agile when needed
Biz Mart

Chapter 2

Problem: Erosion of the Entrepreneurial Culture

The family becomes paralyzed because of conflicting views across generations, can become inward-looking fertile ground for turf wars and feelings of entitlement.
This causes them to forget the most basic competitive advantage in relation to larger, more bureaucratic corporations—its nimbleness
By focusing inside, it can lose the ability to keep an eye on new competitive dynamics and the ever-changing marketplace
The family becomes a cost to the firm

The Family-Business Crossover Effect

“Most American newspapers have switched from family to corporate ownership, the latest example being Times Mirror. But I don’t think it’s an accident that the newspapers best known for quality in this country—The New York Times, The Wall Street Journal, the Los Angeles Times, the Boston Globe, the Washington Post…are family controlled.”

- Katharine Graham, WSJ, March 20, 2000.

Chapter 2

Incumbent Generation Leadership

Keeps the business healthy and successful
Builds the institutions that will effectively govern the family-business interaction:
strong board, family meetings, key nonfamily employees in top management, equity structure that facilitates control, and buy–sell agreements
Too easy to give up!
In effect “cleans house for the next generation” before transferring power
This then allows the next generation to focus on the future, not on the past
Steel fabrication plant case

Chapter 2

Next-Generation Partnership

The next generation:
Provides the customer-driven vision that promotes innovation and regenerates the company
Creates a partnership with:
Other family members through the family council, family meetings, shareholder meetings and hundreds of informal conversations that inform and educate
Newsletter? Instagram?
Key nonfamily management through top management team, operating committees, etc.
Boards of directors
New members of the ever-changing supply chain
Banks and creditors
Engage in a lifelong journey of preparation for leadership rather than “rushing to the Presidency,” and then act as stewards of the family and its wealth

Chapter 2

Change and Competitive Advantage

Change agents must work toward building organizational competencies
Beyond capabilities (which are good)
Resource view of organizations suggests that family businesses have specific, complex, and intangible resources
These include:
Structure & Management systems
Social capital & Staff
Brand & reputation

Capabilities to Competencies

Firm’s collective skill in using resources to create goods and services
Often called capabilities and may be outsourced
Distinctive Competencies
Unique to our firm
Core Competencies
Central to the firm’s main business operations

Followers Need To Know…

What is being changed.
Why the change is needed.
What is expected of them.
What are the benefits to them.
What problems may arise and how they will be handled.
What changes in behavior are required in programs, tasks, & activities.