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M. Akbar

M. Akbar. April 30, 2011 AKW/IIA. Family firms are the dominant Business structure worldwide. 50% registered companies contributing 35-65% of GNP in EU 65-90% cos. contributing 50-70% in Latin America 95% of North America contributing 40-45% of GNP

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M. Akbar

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  1. M. Akbar April 30, 2011 AKW/IIA

  2. Family firms are the dominant Business structure worldwide • 50% registered companies contributing 35-65% of GNP in EU • 65-90% cos. contributing 50-70% in Latin America • 95% of North America contributing 40-45% of GNP • In India 95% Companies contributing 65-82% • Ver few family firms survive beyond three generations • About a third in fortune 500 are family firms • Walmart, Samsung, Cargil are family businesses • Some notable family business groups in India are Marugappa, Dabur, Wadia, Godrej,Kirloskar, A Birla and TataS • Although most are smaller in size than the widely held firms

  3. Key concerns • Human resources- annual bonus key incentive • Succession planning- more than 50% want to pass the company to family members, 70% expect the family members to assume top management role • Poor knowledge of inheritance/ wealth tax • Two-third firms do not have any defined criteria/ mechanism to select family members in business • Tow-third have experienced family member conflicts during last five years • 50% members are selected without competition • There are more conflict on strategy and style than on family issues

  4. In general • Family firms are older, and have lower sales, fewer employees, fewer permanent employees, a smaller share capital, and higher proportion of family board members • They are driven by personal preferences about growth, risk and ownership • They lack genuine long-term business policy or a commitment to growth and evolution • This may endanger the future competitiveness of the firm

  5. Types of Family Firms

  6. 3-D Forces Ownership Business Family

  7. 3-D Developmental Model Family System 4.Passing the Baton 3. Working Together 2.Entering the family business 1.Young business family 1. Controlling owner 1.Start up 2.Expansion/ formalization 2. Sibling partnership 3.Cousin Consortium 3. Maturity Business System Ownership System

  8. Challenges of Growth • Maturing Business Life Cycles • Limited capital for family and business • Weak Next generation leadership • Entrepreneurial inflexibility and resistance to change • Conflicts among sibling successors • Desperate family goals, values and needs

  9. Avoiding stagnation: Best Practices • Single authority • Succession to most suitable next-gen entrepreneur • Assure Fresh strategic insights: strategic experiments, budget strategic expenses, encourage independent consultants/ directors on the board, expose next gen to international environment • Attract and Retain excellent Non-family managers: emphasize merit. Help them accumulate good capital,, assure career growth

  10. Best Practices ……… • Create Flexible, innovative organization: share business information openly, champion change and celebrate new ideas, constantly change some things • Create and Conserve capital: use other people’s money, manage strategy to be less capital intensive, quickly establish share redemption plan and dividend policy • Prepare successor for Leadership: Inculcate the culture of change in successor; Promote good mentoring for successor; Set a date to transfer the responsibility • Exploit the Unique Strategic Advantage of family ownership: Long-term investment orientation, build strategy around relationships; get into business requiring fast decision making

  11. The Pyramid of ownership Motivation Contribution to society Responsible / collective stewardship Strong family purpose Legacy of values Best investment Loyalty to employees Employment opportunitiues Keep family together Avoid passive wealth Actualization/Realization Achievement /esteem Social satisfaction Comfort & security

  12. Important family-business conflict resolution mechanisms institutions • Family council 31% • Shareholder agreement 30% • Family constitution 28% • Third party mediator 27% (Price water Coopers 2007-08)

  13. Conflicts between business and family • Lack of communication internally and externally • Lack of control about holding managers or business accountable • Time management especially the succession planning • Organization structure to facilitate interaction among employees • Family goals and business goals • Conflicts within families

  14. Three ideological dimensions • Paternalism • Managerialism • Entrepreneurialism Each business has a dominant paradigm: through business life cycle and across businesses . All three can be symbiotically orchestrated

  15. Correlates of successful Family business • Family transitions do occur more smoothly when heirs are better prepared, when relations among family members are trust-based and affable • When family business engage in planning for taxation and wealth management • Even some conflict and strife may be responsible for success • Yet family relations should be managed as well as we do for customers and suppliers

  16. Succession to professionals • Ranbaxy • Lalbahi group • Piramal group • Azim of WIPRO group • Harsh Goenka of Goenka group • Eicher group are example where succession has been transferred to professional managers

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