Family Business And Management Failure - Part 2

In "Family Business and Management Failure - Part 1", the article outlined briefly characteristics which indicate management failures. One of these characteristics was the inevitability of change surrounding business operations, the types of change factors that have an impact on the firm, and the necessity to recognize and adjust to these changes. This article discusses other operational characteristics that indicate management failure.

Inventory and Assets

The love of inventory is frequently a villain in the decline of family owned businesses. Stock keeping units are added with ease, to give everyone a chance to show what they can do or give their favourites a chance, but not dropped quite as equally with resulting growth in inventory and cash tied up therein. No one wants to hurt someone else’s feelings.

Capital assets, such as new plants or new machinery, are sometimes added with little apparent economic justification. This action can increase the expenses of the company without significantly increasing revenue. Ineffective sales forecasting, for example, based on a percentage of consolidated annual sales rather than on a customer-by-customer basis, frequently leads to missed projections and poor coordination between sales and production. Similarly, poor production planning can create inefficient operations and drive up costs.

Budgeting and Goals

In some family companies projections are “divined” and budgets formulated from the top down. The subsequent guessing at the cost of sales frequently short-circuits the company’s financial results. As a result, the company often misses its forecast and operations slip out of control as employees are conditioned to disregard agreed-upon budgets and goals. It is also typical for companies with the guesstimate approach to cost of sales to have an unfocused pricing strategy. Unsurprisingly, such companies may not only be unaware of the pricing strategy required for their customer’s customers, but may be selling below cost.

Performance Evaluation

Another indicator of a predisposition to failure is an ineffective or non-existent employee performance evaluation system, particularly for family members or cronies. In contrast, successful family-owned businesses utilize both a performance evaluation system and performance based incentive compensation program. In predisposed companies, ineffectual performance is overlooked time and time again.

While many a poor performer has neglected to recruit and hire strong and competent chief financial officers with resultant disarray in management systems and controls, it is also typical that top management itself is unable to explain concisely the strategic purpose of the business. Rather the company has simply evolved while looking in vain to the founding family member for leadership and direction.

Conclusion

Although the foregoing indicators can be powerful predictors of trouble down the road, the assumption is incorrect that family businesses cannot implement the needed changes to reengineer business processes and position the company for success. Reasons for this incorrect assumption are many, but centre on the belief that the personalities and prejudices of the family ownership not only will remain unchanged but also will actively prevent much-needed changes in the business processes. Unfortunately, some family managers can’t bring themselves to make such changes until they see financial disaster staring them in the face. But no one should assume that every family business is unable to make needed changes.


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.


Related reading: Family Business and Management Failure - Part 1

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