successful family business final paper

Running head: HOW SUCCESSFUL ARE FAMILY BUSINESSES?

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Topics of Entrepreneurship

How Successful are Family Businesses?

Billal Yamak

002130478

Harry Saporta

002146419

Topics of Entrepreneurship BMG320

Bishop’s University

Mr. Steve Karpenko

Wednesday, April 8, 2015

HOW SUCCESSFUL ARE FAMILY BUSINESSES?

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Abstract

I) Introduction

II) The five pillars of a successful family business

III) Balance in daily life

IV) Family Passion

V) Biggest family businesses in North America

VI) The Middle East

VII) How It works

VIII) Advantages of family owned businesses

IX) Disadvantages of family owned businesses

X) Saudi Arabia

XI) Israel

XII) A comparison

XIII) Risk of failure

XIV) Conclusion


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Abstract

This research project will focus on one of the main forms of entrepreneurship; family

businesses. The paper will outline the main forms and ways of success of family businesses.

Research will be carried out using online sources, local book sources as well as knowledge and

research about family businesses overseas in Saudi Arabia and Israel and giving a brief

comparison of both cultures. The predicated outcome of this project includes the fact that most

family businesses are in fact successful, however to a certain extent depending on many different

factors such as geography and legal issues. Implications that could hold back research include

the wide scope of possible results as well as lack of time to carry out a full-out research project.


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Introduction

Family-owned business have remained fairly common in most societies. There are a

number of reasons for this, along with disadvantages that make many families choose not to

implement them. Perhaps most importantly, these family-owned businesses allow for a greater

degree of tightness and closeness between the employees, but this strength can also be one of its

greatest weaknesses as well. Therefore, it is necessary to examine how these family-owned

businesses work exactly, including discussing a number of individual components that are

crucial to their operation. Next, it will be necessary to examine the pros and cons of family-

owned businesses by analyzing some of their unique strengths and weaknesses and analyzing

them. Lastly, it will be necessary to examine a number of risks of failures of these businesses,

especially by examining specific "traps" that can lead these family-owned businesses down the

wrong path.

The Five Pillars of a Successful Business

According to the Entrepreneur, there are five extremely important pillars for a successful

family business:

1. Human capital

Human capital or ‘inner circle’ is one of the most essential parts to any business. What this

basically refers to is using your resources wisely in regards to using the human force you have in

terms of bringing all experiences together in one field. The likelihood of future success improves

significantly

2. Social capital


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Family members also bring a great deal of value in other areas of the business, social capital is

more easily explained into ‘word-of-mouth’ and networking in general, where family members

are again used as a resource to gain customers and increase the awareness of a business.

3. Patient financial capital

This part is rather simple and refers to the fact of using the family’s personal capital within the

business through debt financing and equity. This is also aimed at reducing the effects of

liquidation.

4. Survivability capital

Businesses should surely take advantage of family members in order to survive. Yes this might

sound difficult, however having free labor every now and then such as a certain individual

working over hours with no extra pay is extremely beneficial and will result in a more efficient

workforce. This again could refer to emergency loans so that a business does not fail.

5. Lower costs of governance

Next and arguably the most important out of the five pillars is focusing on lowering the cost of

governance. This should be evident in all businesses across the board. However, in a family

business it should be a huge focus. These costs include; special accounting systems, security

systems, policy manuals, legal documents and other things that help protect the business and

reduce theft (Entrepreneur staff, n.d.)

Balance in daily life

The Family Business Success Model.


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Another very important aspect to have a successful family business is to outline the specifics of

balance in daily life of an individual. When running a family business there should be a balance

in the following three points:

The first point is ‘family and interpersonal’, when dealing with ‘soft issues’; it has

become an issue in any business especially when discussions are not balanced out properly. For

example, every business manager or owner should keep family issues at home and business

issues at the office, if these two get mixed up then there will be problems created at work. In

other words, the office environment should not be affected by issues that could have happened


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within the family, this also is important the other way around, business should not be brought up

in a family environment because if anything gets out of hand, a lot of tension could be created

The second point would be ‘management and operations’, this term refers to the chain of

authority and again how there should be no conflict between the business owners, managers and

employees just because they are family. Again, in other words for example if a manager has his

son working for him, he should be treated just like any other employee, so special treatment

should be shown as it would cause jealousy and conflict from other non-family employees.

The third and final point is ‘wealth and ownership’. Ownership of the business should be

clear; it is known that family businesses will struggle to put in place an owner or a manager.

“Just as managers have defined roles and responsibilities, owners do too, but because closely

held enterprises generally fail to make a clear distinction between ownership responsibilities and

family business management responsibilities, conflict and confusion are the results”, states the

Family Business Institute (2009). Moreover, wealth should not be discussed amongst family

members as well, especially extended family members who also work for the same business, this

again could cause a lot of turmoil and conflict.

Therefore, there should be a clear balance between all 3 points listed in the family

success business model. If these points are not fully followed and carried out, a business will find

a rocky road ahead of it.


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Family Passion

Another important point to include when owning and running a family business is the

family passion in general towards a certain business. A family business bas have a great deal of

trust in all areas, sometimes when it comes to family one might not trust the other in doing

something because they know they are not the best at it. Another important thing is to never keep

secrets from one another especially within the business environment, if something is wrong, all

must know in order to deal with issues in the right way. A family business must also keep a high

synergy and possible family successors close to the business, which relates to the next subject

which is raising kids around the family business in order for them to be familiar with the

business environment, especially if they will have a position in the business in the future.

Biggest Family Businesses in North America

Although this study will eventually focus on areas outside of the Western world, the biggest

businesses in North America play a huge role in the worlds global economy and a lot could be

learnt from the path to success of all these businesses, here are a few:

Mars which is worth around $30 Billion and is still 100% family owned till this very day

The Washington post which is worth around $4.72 Billion) and is 70% family owned


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Wal-Mart which is worth around $419 Billion and is 44.7% family owned

Jean Coutu, a Canadian pharmaceutical company which is worth $2.54 Billion and is

55% family owned (CampdenFB, 2011)

The Middle East

As the Middle East is one of the main focuses in this project, here a few statistics that

will help one understand why family businesses are in fact so significant and important for the

Middle Eastern economy.


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As cultures differ from continent to continent and country to country, the culture of

family businesses in the Middle East is significantly different to the culture of family businesses

in the western world. For example, many studies show how after a son for example is done

studying, he is somewhat obligated to continue the legacy and work under his father, however in

the western world, they would usually have more choice as to what they want to do.


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How it Works

Family-owned businesses are unique in that, as their name implies, they involve the use

of either exclusively family members in the business, or predominantly family members. In fact,

according to one article, most firms in the United States are actually classified as "family

businesses," organizations where two or more extended family members are responsible for the

direction of the business through the exercise of kinship ties, management roles, or ownership

rights (Taguiri & Davis, 1996). Essentially, this means that the commonplace nature of family-

owned business is one of the most crucial components of how these businesses work because, at

this point, there are certain best practices that can be examined and implemented. For instance, it

has been shown that a clear understanding of the tasks for any given job is essential within the

purview of virtually any family-owned business. The underlying reason for this is that it allows

everyone in the business to know everyone else's role. This can, if not managed correctly,

become a big problem in many family-owned businesses because many family members will

make assumptions about a particular family member's role, based on what they think that family

member would be best suited for. In business, however, this is not how things work, and these

assumptions can be toxic.

Another crucial component to making these family-owned businesses work is simple:

clear communication. Although clear and early communication are both crucial elements in

virtually any business, because of the close-knit nature of many family-owned businesses, this

communication is all the more important. Furthermore, family members rely upon each other a

great deal in these businesses, meaning that elaboration through communication, especially

during particularly stressful or trying times during the business, is essential. Furthermore,

according to one study, the development of a professional system of management, implemented


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in a uniform way, is essential to the long-term success of these family-owned businesses (Dyer,

1989).

This brings up the concept of using real names for employees vs. nicknames. Within

family-owned businesses, nicknames can seem to be beneficial because they lend a casual air to

the business, allowing all family-members to work in a less stressful environment. However,

while this is no doubt true for many businesses, it should also be noted that nicknames also have

the potential to create tensions between non-family employees and family employees by creating

a sort of "secret club" mentality that non-family employees will feel they are not a part of.

Furthermore, using real names lends a greater degree of professionalism to the business, even if

it requires a sacrifice of the more casual air that nicknames provide.

Finally, the concept of diverse opinions is a necessary one within family-owned

businesses because it allows for a greater degree of options available to the management at any

given time. One example of this would be the CEO of a family-owned business who has a family

member working for him or her using the opinion of this one family member as a partial source

of opinions when making important decisions for the company. These diverse opinions can also

be beneficial because they allow for a much wider array of voices to be heard in the business.

Too often in business, there forms a very small upper echelon of decision-makers, and the

opinions of everyone else in the business are simply discarded.

With family-owned businesses, this problem is still very real, but dialed down somewhat.

Therefore, it can be said that one of the most important elements, in terms of how these family-

owned businesses work, is the element of connections between upper management and other

managers and employees. This creates something of a balancing act. According to one article,

one of the most important ways to make a family-owned business work is to form concrete


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relationships, extending beyond the family, between the founders of the business and the upper

managers (Kelly et al, 2000). This would allow family-owned business to leverage the fact that

there is a clear connection between the founders and management, forming the backbone for the

business itself, as well as providing a clear reason for why, exactly, these family-owned

businesses work so well (Kelly et al, 2000).

Advantages of Family Owned Businesses

Despite what the general message of this paper might seem like, there are actually a large

number of advantages to owning a family-owned business. One of the first, and perhaps most

obvious, of these advantages, is a sense of loyalty among the employees and upper management.

The concept is simple: an individual will be more loyal toward their family than a stranger in an

equal situation. This becomes especially important when one considers the capacity for a more

engaged and loyal employee, and then multiplying this capacity by whatever the number of

family employees are in the business. The results, of course, are massive. In fact, one study

actually states that family-owned businesses are objectively superior than those that are not

because they have that element of control and ownership that is not present in other

organizations, lending these family-owned businesses a distinct advantage over their peers

(Denison et al, 2004).

Another key advantage of family-owned businesses is the willingness of family members

to put themselves on the line, so to speak. More simply, family members are more willing to

make sacrifices for the good of the business as a whole. The reasoning behind this is similar to

that of loyalty. Essentially, it is human nature to have a greater chance of making a sacrifice for

the good of someone who is family than someone who has only been known for a few years.


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Humans simply have a closer bond with family, speaking generally, and this bond manifests

itself in the form of a willingness to make sacrifices, among other things. This represents a

profound advantage for family-businesses because it allows these business many more options.

Having family members willing to make sacrifices allows plans that would not have been

possible otherwise.

Another key advantage of family-businesses is flexibility. Essentially, family members

are able to have much more freedom in regards to things like schedule and pay because they

oftentimes work closely with their peers, literally and figuratively. More specifically, family

members oftentimes tend to work from the same house or neighborhood, and oftentimes within

the same hourly schedules. This means that it is possible to assign family members to specific

roles or tasks fairly easily because their schedules are so flexible and aligned with everyone

else's.

Perhaps one of the most important advantage of family-owned businesses is that of

communication. Quite simply, communication between family members in a business is easier

than for non-family businesses. This leads to a greater ease of understanding, allowing for fewer

errors due to miscommunication, along with countless other minute benefits. One of the most

important reasons why this communication is so important is because it directly contributes to

the long-term success of the business. This is essential, because, according to one study, only 13

percent of family businesses actually lasted to their third generation (Ward, 1988). Of those, only

three percent actually "prospered," according to the study (Ward, 1988).

The final main advantage of family-owned businesses is that each employee has a greater

degree of knowledge about his or her co-workers. Quite simply, family members working within

the business understand the strengths and weaknesses of their fellow co-workers, and even


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managers, in a way that is simply not common in other businesses. However, this advantage

extends far deeper than merely knowing one's co-workers on a deeper level. In fact, according to

one article, the concept of strategic planning is both more important for family-owned

businesses, and easier to implement because of this aforementioned aspect of knowledge of all

members of the company (Ward, 1988).

Disadvantages of Family Owned Businesses

There are, unfortunately, a number of cons of family-owned businesses, in addition to the

advantages. For starters, sensitive topics are a major issue because these topics, oftentimes,

simply cannot be spoken of openly. That is to say, for the very same reasons that family-owned

businesses can be effective (easier, smoother means of communication), they can also be

detrimental for all parties involved. Having an elephant in the room means that all employees

will work less efficiently, in some way, as a result of the tensions that are in the air as a result of

these sensitive topics. This, of course, is a problem that can affect any business, but due to the

close-knit nature of family-owned businesses, they are much more susceptible to the backlash

from sensitive topics.

Another con of family-oriented businesses is that of overcoming obstacles with family

members. This particular con is important because it covers a wide range of potential roadblocks.

These obstacles are especially messy when it comes to family because they have more of an air

of permanence to them. Furthermore, according to one study, working in a family-oriented

business creates even more obstacles than normal by highlighting the differences between

different family members, especially those working in similar areas (Hubler, 1999). For example,


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two family members working in upper management might be more likely to disagree and have to

overcome obstacles because of their ties as family making more visible their differences.

This brings up the concept of pressure: another key disadvantage to family-owned

businesses. Essentially, pressure affects every facet of a family-owned business because it causes

many members of the family to not want to let down or otherwise disappoint other members of

the family, leading to an increased amount of undue stress, which can easily have an impact on

their work. This can work in the opposite direction too. Upper managers might place unfairly

heavy workloads on family subordinates who they believe can "handle it" or because they

themselves feel pressured to satisfy a family member's need to prove themselves in some way.

This pressure can also cause family members to argue or lash out at one another in a way that

would not be as problematic in a more conventional business setup. Much of this has to do with

the constant nature that many families implement. That is to say, for many families, especially

those that go into business as one family, tend to share everything with one another, meaning that

a simple mistake at work could potentially make one employee the laughing stock of the family.

This, again, creates a great amount of undue pressure and stress.

Lastly, socialization is a large potential disadvantage for many family-owned businesses

because it can get in the way of work. Family members will naturally feel more inclined to talk

to one another simply because they have, in general, known each other for far longer than two

random acquaintances in most businesses.


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Saudi Arabia

Having mentioned all the above, this paper has promised to focus on Saudi Arabia and

Israel as well, outlining the difference of two cultures that are so close together yet so far apart.

To begin with, as shown in the table below, 6 out of the top 10 highest revenue family businesses

in the Middle East are Located in Saudi Arabia.

90% of businesses in Saudi Arabia are wholly family owned as opposed to 70% in the European

Union, just to show small statistical difference in how successful family businesses in Saudi

Arabia are.

(Family Business Yearbook, 2014)


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According an article in the Arab News, approximately 25% of Saudi Arabia’s gross domestic

product (GDP) is contributed by family owned businesses; this is equivalent to 350 billion Saudi

Riyals ($93 billion). The chairman of the General Council for Islamic Banks, Saleh Kamel

states:

"There are more than 5,000 family businesses across the Kingdom, of which only 156 are listed

on the Saudi bourse. This is a small figure compared to the prospects this market holds," (Al-

Jassem, 2012).

This brings up a controversial topic as to how successful are the future of family business in

Saudi Arabia, the fact that only 156 of these family businesses have gone public which reveals a

culture weakness because many families are reluctant to sell any part of their business, even if it

was a small percentage. This is not good for family businesses because as they grow they should

eventually have the power to sell some of the company in order to have a fresh new start that will

help a family business flourish into new areas they were not familiar with before. On the same

note Saleh Kamel also pleaded the local authorities to make it a much easier process to enable

family businesses to go public, this shows how legal issues could in fact hold back a business,

but currently these business are successful and aim to be in the future, even after selling stocks

on the public market (Al-Jassem, 2012).

Mr. Khaled Yamak a Lebanese Canadian and Vice President Development and Communications

of Arkinvests Holding Co. in Jeddah, Saudi Arabia who also has over 20 years experience in the

Saudi market believes:

“Saudi family businesses follow old traditional methods that seem to work because they do it out

of long term experiences from generation to generation, over seen by family members who truly

care for the success of the businesses and take that extra mile towards the benefit of the business

and hence the family”


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This continues to raise interesting topics to Saudi family businesses, maybe the reasons Mr.

Yamak has mentioned is why there are so many rich and successful family businesses in Saudi

Arabia and it doesn’t seem like they will be held back anytime soon. Therefore as proved above,

Saudi and the Middle East in general develop extremely successful family businesses that might

be running on older, more traditional ways, however as the world becomes more technologized,

they might need to start altering their ways gradually to become more technological in order to

adapt to the changing global environment.

Israel

Andre Messika Diamons

During a stay and assessment at Andre Messika Diamonds in Tel-Aviv there was an

opportunity to observe many traits of a successful family-owned business. The first fact that

makes this business profitable is that employees (family members) are trained at the youngest

age, between five and ten years old, in order to make a proper decision whether this is the career

they want to pursue or not. Another noteworthy fact about this business is that tasks are clearly

divided between family members. For example one of the sons of the CEO only deals with rough

diamonds, the younger one is specialized in diamonds coming from Africa only. This avoids

potential work related conflicts between employees since each family member knows its daily

role in the business. Another important point is that the office is very large allowing physical

space between individuals. This helps to reduce the risk of creating tensions between family

members, who already spend a lot of time together outside of work. Real names versus

nicknames are used during the day in the office to put emphasis on the fact that there is a fine

line between office hours and family time. During my stay at Andre Messika Diamonds, It was


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realized that there was a very easy communication between family members, which is one of the

perks of owning a family owned business. Family members know them selves well; therefore

communication is very smooth between them. From what was observed, the Messika family

would not talk about work at home unless it is critical to do so. Working for this family was very

instructive and interesting. It was amazing to notice how peaceful the relationships between

employees was on a daily basis and how all kind of tensions was very brief and meaningless. The

third generation of the Messika family has been properly trained from what was observed. Since

these family members don’t even go to college and immediately devote their life to the diamond

industry, they therefore need proper and serious training. Non-family mentors have trained this

third generation in order for them to provide truthful feedback, which is crucial in order for

family owned businesses to prosper. Hence the belief that the latest generation of the Messika

family is passionate about the diamond industry and have made a mature decision to pursue a

career in that domain after being trained at such a young age. The fact that they could observe

the way the business works for so long and has been raised in such surroundings, gives the

relatives a very clear image of what their future will look like. All the points aforementioned

prove from my point of view that these family members will one day be fit to take an executive

role and will influence Andre Messika Diamonds positively by seeking for growth and

expansion.

A Comparison

A brief comparison of these two countries in the Middle East shows how family

businesses in the same area could be so alike yet so different. The way that families deal wth

their businesses is extremely different from one country to another, some depend on tradition and

old traits whilst others depend on new comers who bring in new experience and a more up-to-


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date approach of daily procedures and businesses activity. Hence, this proves how family

businesses are successful in many different and unique ways that essentially build a successful

businesses environment.

Risk of Failure

Family-owned businesses are susceptible to a number of pitfalls that other businesses

might not be exposed to. For this reason, there are a number of unique ways that these family-

owned businesses can fail. Many of these ways they can fail operate more as risk factors,

meaning that many family-owned businesses can scrape by simply by ignoring many of these

risk factors. As such, these different ways that they can fail involve a number of unknown or

highly variable factors, and, in order to understand exactly how these businesses can fail, it is

necessary to examine some of these traps and factors.

One of the most prominent ways that family-owned businesses can fail is because of the

"There's always a place for you here" mentality that permeates so many of them. Although

largely subconscious, this creates an air of cronyism that makes the business appear to be much

less approachable to other potential employees. This means that many family employees do not

take the job seriously and only rely upon it as a "fallback option." Furthermore, this mentality

breeds attitudes that are not necessarily beneficial for the long-term success of a business. For

instance, according to one source, the size and overall composition of these family-owned

businesses means that there is a lessened degree of delegation of authority, meaning that

managers and others are not allowed to practice their skills in the same way they would be able

to in a more conventional business (Fox et al, 1996).

Quite simply, this traces back to this issue of cronyism, which can lead many family-

owned businesses in something of a death spiral because they believe in solving these internal


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problems internally, using the same tools (i.e. family member employees) that might have caused

them in the first place. There are solutions, however. Utilizing a proper training and screening

process will go far to ensuring that family members are not simply given the job based on some

sort of entitlement to it. This would also provide the image of a fair and accommodating

business that prefers to hire within its own family, but will consider other candidates, if there is a

practical benefit to doing so. Doing this would also serve to provide incentive for members of the

family who take the job less seriously, using it primarily as little more than a "fall-back" option,

to actually make an effort to apply themselves to the company. This helps to create employee

engagement, which is a tricky proposition when the company with employees that need

engagement is, in fact, family-owned.

Another key downfall to family-owned businesses is that they simply cannot grow

quickly enough to support everyone. This mainly becomes a problem over the course of several

decades, as the size of the family begins to grow. For example, if the company founder has three

children, and each of those children marries and has three children of their own, then, including

spouses, that would form 25 new employees, over the course of just a few decades. This might

seem advantageous, and, to some extent, it is, but it also greatly complicates the business,

especially in regards to its decision-making ability. This creates a situation akin to having too

many cooks in the kitchen. Every family-owned business has some sort of threshold for how

many employees can reasonably be supported, and founders and upper managers must be

vigilant for signs of this threshold being reached.

One possible solution to this problem is simple: grow the business. Expanding the

business, especially in ways that certain family members feel they are well-accustomed to, would

serve to kill two proverbial birds with one stone. On the one hand, it would allow the business to


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grow and expand in new ways, possibly into entirely new industries. On the other, it would allow

for the creation of sub-groups of family members. For example, the youngest of the founder's

offspring from earlier could form the head of a new department in the business, with this

offspring's own children working as managers and potential successors within that department.

In doing this, the democratization problem mentioned in the article would be largely eliminated

because there would be smaller, segmented groups of family members making decisions, rather

than one larger group.

The third and final major trap that these family-owned business can easily fall into is that

family members remain in silos according to the bloodline. Essentially, this means that the

family members, especially the offspring, of the founders of the company will tend to specialize

in the same facets of the company, such as finance, operations, or marketing. This is problematic

because it causes those who stay in these "silos" to be denied the cross-functional experience that

they need to be an effective executive leader. Furthermore, when these family members engage

in the same core departments as their relatives, it tends to prevent truthful feedback, interfering

with the coaching process. This creates something of a leadership vacuum that often prompts the

current generation to stay in the top positions for far too long.

Solutions to this problem involve the appointment of non-family mentors to act as guides

for every category of business involved. Furthermore, according to one source, the use of a broad

degree of family involvement can be extremely effective because it allows for the family to focus

more on controlling the strategic direction of the company, rather than the minutiae of mentoring

(Shanker & Astrachan, 1996). The appointment of these mentors can also take a more narrow, or

focused, degree of family involvement in the business by using older, more experienced family

members as mentors, rather than hiring externally (Shanker & Astrachan, 1996). This would


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allow for the job to stay within the family, while also ensuring that there would remain some

degree of objectivity when dealing with the process of teaching and critiquing the efforts of the

family member. According to the source, this is crucial because it allows for family-owned

businesses to find solutions to problems involving personnel and management internally, by

leveraging the advantages and strengths of the family-owned business itself (Shanker &

Astrachan, 1996).

Conclusion

Ultimately, there is no real clear-cut answer in regards to whether or not family-owned

business are, on the whole, superior to those that are not owned by families. As explained in this

essay, there are key advantages and disadvantages to family-owned businesses that every

potential family should consider before making the decision to go into business together. One of

the most important things to consider, though, is that many of the pros of family-owned

businesses also operate as cons, such as the close-knit nature of families lending itself to both

positive and negative aspects. Success of family-owned businesses, then, requires proper

management of these potential factors and hurdles. Moreover, as this paper has shown, family

businesses in Saudi Arabia, Israel and the Middle East in general focus on factors that differ

from the western world; hence, there is no real mixture of success.


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