Family Business And Management Failure - Part 1

There are several explanations including: The widespread belief that most family businesses generally do not survive the second generation of ownership; the supposition that the life cycle of a business is somehow synonymous with the life cycle of a new product from introduction to maturity to decline; and the experience of reengineering consultants that most businesses fail at attempts in reengineering themselves and thereby, revitalize and reposition themselves.

Telltale Signs

There are, of course, telltale signs of a business decline, such as falling profits, a squeeze on margins, or dropping sales. If these financial indicators or others persist for too long, they may be followed by a cash squeeze as the company juggles payments to suppliers and lenders in order to produce product and make shipments to key customers.

However, signs abound that some companies are predisposed to fail long before these financial indicators appear. If family business owners and managers can recognize these signs and act to correct them, then declines can be short-lived or avoided entirely. One of the most important predictors of eventual decline is that management is impacted, that is, management is unable to change its business processes. Why is this a critical predictor? In today’s competitive environment, the one certainty is change. Family managers not only have to be willing to change, but they also have to be fast on their feet, and be prepared and organized for change.

Predictors of Change

Changes are driven by numerous factors such as:

• Advances in technology, which can render obsolete overnight existing products;
  
  
• Revisions in law and regulations, which can create new demands or declines for certain services;
  
  
• Alterations in public taste, which can start new trends;
  
  
• Shifts in channels of distribution, which can require or dictate a new way of getting products to customers;
  
  
• Revolutions in communications, which can open up untapped markets, and;
  
  
• Cycles in the economy, which can depress the availability of credit.

Conclusion

Family business owners who are unable or unwilling to recognize and adjust to foregoing changes are likely to see their customers gradually drift away and their financial performance decline. Sometimes the loss is imperceptible because it occurs over several years and is masked by several other factors.

Typically, owner-managers attribute to competitors a squeeze on profit margins or a decline in revenues. However, while it is very useful for an owner-manager to know how competitors go to market, it is fundamental for the owner-manager to know what the customer wants. In-depth analysis of customer needs and perceptions is what guides owner-managers to appropriate changes in business processes and is a basic tenet for reengineering, again driven by new technology and by other low cost providers.


This article has been extracted and modified from Smith, B. (1994). Management turnaround: Reinvigorating the family business. Proceedings of the 1994 Family Firm Institute Conference, October 5-8, Scottsdale, Arizona, USA.


Further reading: Family Business And Management Failure - Part 2

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