Small Business Management in st the 21 Century

COPYRIGHT PAGE Published by: Flat World Knowledge, Inc. One Bridge Street Irvington, NY 10533 © 2012 by Flat World Knowledge, Inc. All rights reserved. Your use of this work is subject to the License Agreement available here http: //www. flatworldknowledge. com/legal. No part of this work may be used, modified, or reproduced in any form or by any means except as expressly permitted under the License Agreement. © 2012, published by Flat World Knowledge 2

Assessments • World Trade Center, did you go? • Discussion-family business, anything have you

Chapter 3 Family Businesses © 2012, published by Flat World Knowledge 4

News & Books • Family Business Website • L. C. Duncan has run his successful car dealership in Jamaica, Queens, for more than 30 years, but when the recession hits and the competition gets a little rough, some say it's time for him to retire. Which one of his kids can he trust to run the family business? © 2012, published by Flat World Knowledge 1 -5

Funny © 2012, published by Flat World Knowledge 1 -6

Small Business • A Day in the Life © 2012, published by Flat World

Learning Objectives 1. Explain what a family business is. 2. Understand the role that family businesses play in the US economy. 3. Explain the advantages and disadvantages of family businesses. © 2012, published by Flat World Knowledge 8

Learning Objectives 4. Explain why communications, employing family and nonfamily members, professional management, employment qualifications, salaries and compensation, succession and ethics are important issues for all family businesses. © 2012, published by Flat World Knowledge 9

Learning Objectives 5. Explain what conflict is. 5. Explain why positive or constructive conflict can be helpful to a family business. 5. Explain why negative or destructive conflict can damage a family business. 5. Identify sources of negative conflict in a family business. 5. Identify some ways in which negative conflict can be avoided. © 2012, published by Flat World Knowledge 10

Learning Objectives 10. Explain how a family business adds to customer value. 11. Explain how being a family business can positively and negatively impact cash flow. 12. Explain how technology and the e-environment are impacting family businesses. © 2012, published by Flat World Knowledge 11

Class Participation • Pair up with a partner, use your digital device (tablet, cell phone, laptop) – Does your family have a business and are you apart? – Have you ever thought about a family business? – If you did, why? If you didn’t, why? © 2012, published by Flat World Knowledge 1 -12

Economic Power of Family Businesses • Family-owned businesses are represented across the full spectrum of American companies, from large to small businesses. • Family businesses account for 50 percent of GDP. • Family businesses account for 60 percent of US employment and 78 percent of the new jobs created. • Family businesses are a powerful economic force. © 2012, published by Flat World Knowledge 13

Advantages and Disadvantages of Family Businesses Advantages Disadvantages • Family businesses frequently have entrepreneurial spirit, flexibility, and opportunism. • Family businesses actually outperform public companies. • Family businesses are often seen as ideal because of the loyalty and dedication to common goals. • Family businesses tend to be stable organizations, sometimes making it difficult to change. • Family closeness can lead to sibling rivalry or parent-child conflict when both want control. • The interests of one family member may conflict with the interests of the business. © 2012, published by Flat World Knowledge 14

Advantages and Disadvantages of Family Businesses Advantages Disadvantages • Culture is more frequently based on very personal emotional values. • There are deeper roots and commitment. • Family businesses are becoming more attractive to undergrads who face a bleak job and salary outlook. • Family ties have a downside: work harder, more commitment, get paid less. • Automatic promotion of a family member can cause dissension among other employees. • Deteriorated relationships between parents and children and between siblings. © 2012, published by Flat World Knowledge 15

Advantages and Disadvantages of Family Businesses Advantages Disadvantages • Emphasis on professionalism has made family business more daunting and attractive. • Stability of many family businesses makes them better equipped to survive economic difficulties. • Strength of family businesses helps to create competitive advantage. • May be a breeding ground for jealousies, resentment, anger, and sabotage. • May be plagued with managerial incompetence, lack of exposure to other businesses, and inability to separate family and work. • Have difficulty attracting and keeping highly qualified managers. © 2012, published by Flat World Knowledge 16

Advantages and Disadvantages of Family Businesses Advantage Disadvantages • May be more open to flexible or part-time schedules; attractive work environment for people who need to attend to family. • Tend to operate more ethically, deeply embedded in their communities. • Exhibit more social responsibility than their competitors; concerned about image and reputation. • Limited sources of external capital because they tend to avoid sharing equity with nonfamily members. © 2012, published by Flat World Knowledge – This may curtail growth. • Not all children of ownermanagers may want to join the business; one study reported that 80 percent of children who work in the business do not intend to go into it. 17

Advantages and Disadvantages of Family Businesses Advantages Disadvantage • Incur lower costs. • Have greater independence of action. • More resilient in hard times. • Less bureaucratic and less impersonal, allowing for greater flexibility and quicker decision making. • Offer possibility of great financial success. • Family members can learn the business early. • Some of the reasons for childrens’ reluctance to join the family business: © 2012, published by Flat World Knowledge 1. Parents would not want child to join 2. Could not work for parents 3. Not interested in the type of business 4. Can earn more money elsewhere After hearing these, would you own a small business with family? 18

The Importance of Communication • Communication is important in any business. • Complexities of communication in a family business are particularly problematic. • Critical that there be a commitment to communicating effectively with family and nonfamily members of the business. © 2012, published by Flat World Knowledge 19

The Importance of Communication • One important issue: Should there be a line drawn between family and business discussions? • Recent survey: 1. 19 percent of family businesses reported talking about business at home 2. 37 percent talk about business in the workplace 3. 44 percent talk about business when and wherever • Particularly important not to be secretive with nonfamily members of the business. © 2012, published by Flat World Knowledge 20

Risks of Bad Communication • Family members assume they know what other family members feel or want. • Personal ties inhibit honest opinions being expressed. • The head of the family may automatically assume control of the business even if they don’t have the best business skills. • One family member ends up dominating the business. • Family member shareholders that are not active in the business fail to understand the objectives of those who are active and vice versa. • Personal resentments become business resentments and vice versa. • Family Business Communication 3: 00 © 2012, published by Flat World Knowledge 21

Hiring Family and Nonfamily Members © 2012, published by Flat World Knowledge 22

Hiring Family and Nonfamily Members Pros Cons • Improved customer relations through family contact • Intergenerational continuity • Long-term stability • Shared values • Loyalty and commitment • Inherent trust • Willingness to sacrifice for the business • Dispute among family members can spill from home into the workplace • Newly hired family members may feel that they do not have to earn their positions • Their success will be seen as linked to their name instead of their abilities Fair Salary in Family Business-Article © 2012, published by Flat World Knowledge 23

Hiring Family and Nonfamily Members Pros Cons • Emotional attachment to the business • More willing to contribute to its success • Share the same culture • The business may be subject to charges of discriminatory hiring practices if job openings are not published • There is always the possibility of managerial incompetence • Hiring as a Entrepreneur 6: 00 © 2012, published by Flat World Knowledge 24

Class Participation • • Get into groups (split class) Read directions Pass out page

Professional Management • The decision to hire a professional manager will be difficult. • Professional managers not always prepared to deal with the special nature of familyowned businesses. • A professional manager from the outside is not always prepared to deal with the special nature of family companies. © 2012, published by Flat World Knowledge 26

Professional Management • The hiring of an outside manager should include an assessment of format and cultural competence – Formal competence: formal education, training, and experience outside the family business – Cultural competence: an understanding of the culture of a specific firm • Not sufficient for managerial effectiveness © 2012, published by Flat World Knowledge 27

Class Participation • Get into groups, what are your thoughts about the difference in

Employment Qualifications • A very difficult challenge for a family business: determining employment qualifications for employees, both family and nonfamily. – Why do you think? • Lack of a clear employment policy and process can lead to major conflicts in the company. • Written family-business employment policy can solve a myriad of problems: spells out the specific terms for family and nonfamily members with respect to recruiting, hiring, promoting, compensating, and terminating. © 2012, published by Flat World Knowledge 29

Salaries and Compensation • Decisions about salaries and compensation are probably even worse than hiring decisions. • No matter how well intentioned and well designed the compensation plan, there will still be jealousies, hard feelings, severed sibling relationships, and even lawsuits. – Glassdoor, Salary, Payscale sites © 2012, published by Flat World Knowledge 30

Salaries and Compensation—Some Common Mistakes Made (T/F) • • • Fair compensation is considered to be equal compensation for all family members, sometimes even the owner. Family businesses do not compensate wives for the work they do. Why? It saves on taxes. This approach leaves wives isolated from the business, invisible in the decision-making process, and unappreciated. Compensation for family members is higher than that for nonfamily members, but the difference is not tied to the actual job requirements or performance. The family business overpays family members compared to nonfamily members. Emotional pressures are allowed to determine compensation policies. Emotional pressures are allowed to determined compensation policies—which means that compensation is not correctly determined by job requirements and performance in those jobs. There is no template for designing a compensation plan for a family business, but there are recommendations. Work little pay 3: 00 Any thoughts? © 2012, published by Flat World Knowledge 31

Succession • Succession: passing the business to the next generation • Video 1: 35 • Decisions have to be made about who will take over the leadership and/or ownership of the company when the current generation dies or retires. © 2012, published by Flat World Knowledge 32

Class Participation • Individual have you thought about this succession? • Group, split class

Succession • Only one-third of all family businesses make it successfully to the third generation. • Roughly 40 percent of US businesses are facing the issue of succession at any given point in time. • Several factors work against succession planning: – – Founder Family Employees Environmental © 2012, published by Flat World Knowledge 34

The Succession Plan • This is the “If you got abducted by an alien, what would happen to your business? ” plan! • A good succession plan will: – – – Recognize and accept people’s differences Not assume that the next generation wants the business Determine if heirs have enough experience to run the business Consider fairness Think and act like a business • Every success plan will be different, but there are several components that are necessary for a good plan. © 2012, published by Flat World Knowledge 35

Components of a Succession Plan 1. Establish goals and objectives. The family business owner should establish his/her goals and vision for the business and your future in its operation. 2. Family and stakeholder involvement in the decision-making process. This may alleviate the problems related to inheritance, management, and ownership issues. 3. Identify successor(s). This section of the plan addresses the issue of who takes over ownership and management of the business. © 2012, published by Flat World Knowledge 36

Components of a Succession Plan 4. Estate planning. Important if the family business owner is planning to retire or if s/he wants to take precautionary measures regarding the future of the business in the event s/he is unable to continue operating the business 5. Contingency planning. This is about “what if” situations, i. e. , unforeseen circumstances 6. Company structure and transfer methods. Involves the review and updating of the organizational and structural plan for the organization, taking into account the strengths and weaknesses of the successor © 2012, published by Flat World Knowledge 37

Components of a Succession Plan 7. Business valuation. Only relevant if the family business is being sold. 8. Exit strategy. Ownership will be transferred, and the owner will remove himself/herself from day-to-day operations 9. Implementation and follow-up. The succession plan should be reviewed regularly and revised as situations change. It is important that it be a dynamic and flexible document. © 2012, published by Flat World Knowledge 38

Class Participation • Get into groups, what succession number do you think would be

Positive vs. Negative Conflict Positive Conflict Negative Conflict • Increases opportunity recognition • Produces high-quality decisions • Encourages growth • Strengthens groups and individuals • Damages the harmony of familial relationships • Discourages learning • Causes ongoing harm to groups and individuals in the business • Frustrates adequate planning and rational decision making © 2012, published by Flat World Knowledge 40

Positive vs. Negative Conflict Positive Conflict Negative Conflict • Increases the learning necessary for entrepreneurial behavior • Increases the level of commitment to the decision being made • Results in poor quality decisions • Greater likelihood of inter-role conflict: when a family member has simultaneous roles with conflicting expectations • Role pressures from work and home are incompatible © 2012, published by Flat World Knowledge 41

Sources of Conflict • The causes of conflict in a family business are many. • The typical understanding of conflict in family businesses is that conflict refers to negative conflict that is unhealthy and disruptive. © 2012, published by Flat World Knowledge 42

Sources of Conflict • The family business is a fertile field for negative conflict. • A sampling of sources of conflict, all of which have the potential to adversely impact family relationships, business operations, and business results: – – – – Rivalry Differing vision Jealousy Succession Playing by different rules Decision making Compensation and benefits © 2012, published by Flat World Knowledge 43

Negative Effects of Conflict • Some measure of squabbling is expected in a family business. However, there are negative effects of this squabbling: – Unprofessional image presented to employees and customers – Uncomfortable environment that can cost you customers and employees – Discrimination issues that may arise because of the perception of disparate treatment between family and nonfamily members – Legal troubles from family disagreements over business. This can lead to lawsuits © 2012, published by Flat World Knowledge 44

Avoiding Conflict • Avoiding conflict is no easy feat. – Forbes 2: 00 • Several things that a family business can consider to help resolve conflict: 1. 2. 3. 4. 5. Consider bringing in a consultant in conflict resolution, if the budget allows Differentiate emotional reactions from problem-solving reactions Focus on the professional role instead of the family role Encourage honesty from the beginning Try to keep the conflict constructive © 2012, published by Flat World Knowledge 45

Class Participation • Individually, think of ways you would deal with conflict in your own small business? • Then as a group, talk about ideas and see if there is neutral ground. © 2012, published by Flat World Knowledge 1 -46

Sources of Customer Value From a Family Business • When customers think about family businesses, they usually think friendly, quality, wholesome, and continuity. • There is feeling of connection to the business, a feeling of trust. • Customers are reminded that there is a family behind the business, not a faceless corporate entity. • Perception of greater value comes from the high priority that a family business places on community involvement. © 2012, published by Flat World Knowledge 47

Cash Flow Implications • A family business can help or hurt its cash flow depending on whether it compensates family members at market value. • Excessive pay for parents and children being paid at less than market value will have an inflated profitability, but the company’s cash flow will benefit because the company will have more money for the business. • By contrast, if the childrens’ compensation is excessive, as opposed to being determined by their worth to the business, there will be an unrealistically low portrayal of the company’s profitability. © 2012, published by Flat World Knowledge 48

Digital Technology and E-Environment Implications • One of the main reasons for businesses not being passed down successfully to a third generation is that technological change moves to swiftly that it bypasses the older generation. • Family businesses will have different technology needs depending on their size, industry, and growth objectives. • For many family businesses, the move to greater technology integration should be seen as a natural part of business evolution. © 2012, published by Flat World Knowledge 49

Follow-Up • Module 3– Extra Credit: World Trade Center, Why? ? – Discussion #1 – Chapter 3 Test • Due on Sunday • Module 4– Extra Credit: Small Business Center, Why? ? – Chapter 4 Test • Due on Sunday © 2012, published by Flat World Knowledge 1 -50