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Due to confidentiality reasons, the names of company members have been changed. Also, no financial figures could be disclosed.
Table of contents Overview.3 Key players .3 History.4 Family dynamics.6 Issues...7 Questions.8 Theoretical notes.8 Succession.8 Ownership...10 Decision-making process12 Bibliography..13 Appendix A...14
Overview The McMillan family manages a portfolio of 4 companies in Galati, a city in the southeast of Romania. One of the most successful is a medical center SanaVita set up in 2007, which currently offers a wide range of services and collaborates on a part-time basis with 10 specialists, both doctors and psychologists. This is only one of the organizations developed by the McMillans which comprises of 3 sisters, one brother and the husband of one of the sister. One of the other firms deals with land transactions and another with second-hand pneumatic tires. Another area of operations is the construction industry. The newest addition is a recovery medical centre that includes counseling, swimming and massage facilities. But how did it all start and how is such a big portfolio being managed? For this we would have to turn to the family members and their incremental approach towards entrepreneurship. Key players Cynthia is the oldest sister, now aged 46, and is married to George who is also 46. She oversees all the activities within the portfolio but has an active role in Sana Vita and The Dolphin, the recovery medical centre. Although George has a full-time managerial position in the logistic department of the County Police he is also responsible for the second-hand car tires business. Occasionally, he also keeps accounting records. Both of them are engineers, Cynthia graduating from Food Chemistry and George from Transports. They have a daughter, Dana, currently 22, that has a degree in business administration and will soon complete a master in Entrepreneurship who is willing to be involved in the family business. Donna is 43 and she is currently the manager of SanaVita. She is in charge of most operational decisions within the clinic and she supervises the activities of all employees. Customer relationship management is also in her job description. She is also married, but her husband is not involved in any of the companies nor will he ever be. She has a 6 year old daughter but at this point and time there is no certainty as to her future in the organizations. Donnas academic degree is non-related to medicine or business.
Vivi is 41 and momentarily holds a full-time managerial position at the City Hall. She does not work in any of the companies, but she is informed about daily actions and participates in the decision-making process concerning SanaVita and The Dolphin. She is momentarily considering quitting her job and dedicating her entire time to the family business. Dex is 39 and he was the pioneer in creating the family business. At the moment he single-handedly runs the construction company. He is in charge of concluding contracts, one of their most significant customers being ArcelorMittal, the biggest steel manufacturing corporation in Romania. His expertise also comprises of land purchase and sale, including speculating the market in this sense. In order to better view the family relations, turn to the Family Tree in Appendix A. History In 1995, after setting money aside for several years, Dex approached his oldest sister with the proposal of buying a small kiosk that would bring additional income to the entire family. Cynthia saw the potential of this idea and immediately asked for the advice of her 2 other sisters. Mutual consensus was established and plans were undertaken in order to set up the business. Meanwhile, Dex was offered a job in Italy and Cynthia and her husband were left in charge of the store. They worked after office hours for several years, but their efforts paid out since the business quickly took off. 4 years later, Dex raised enough money to afford to quit his job and came back to Romania where he invested in a second-hand pneumatic tires company. While managing this company by himself he also started to buy land with the view to subsequently sell it years later when the prices would go up. In 2001 he followed his passion and opened a construction company which mainly dealt with interior design, reparations and building small edifices. He quickly realized that the land transactions had huge potential and that he needed to invest more time in looking for the best deals to buy land both in and outside of Galati. Not wanting to give up the
administration of the construction company, he turned to his brother-in-law for help with managing the tires organization. The 2 of them worked together until 2005, when George took over. 2001 was also the year in which the kiosk was sold in order to allocate more effort and time for the bigger projects. In 2004, the entire family reunited to discuss the possibility of setting up a real estate agency. This plan was approved and set in motion 4 months later. By this time, Cynthia had taken the role of the intermediate between the companies and bank institutions and was managing the revenues of the entire portfolio. In order to cope with the amount of work, she resigned her full-time job outside the family business so as to develop the real estate agency. In the meantime, Donna was dissatisfied about the restructuring and internal changes of ECOSAL, a company in which she was the operational manager. She decided to quit and, while on the lookout for another job, she started considering the prospects of taking an active role in the family business. As a result, in 2005 she took over the real estate agency at Cynthias recommendations. However, the group noticed that the return on investment was not very high and it was a very time consuming business because the real estate market implied that one always has to be on the lookout for properties. They closed down in 2006 because they wanted to focus their attention in the medical field following discussions with several doctors about the shortcomings of hospitals. The competitive advantage was that a network of doctors already manifested enthusiasm in working in this project if the medical equipment were to be state-of-the-art. The main obstacle remained the lack of funds for such an ambitious project, so the family tried to find prospective investors. In 2 months time, through an acquaintance, Vivi met the president of an Italian charity that was willing to partly fund the center in exchange for the clinic performing free tests and check-ups for poor people. An agreement about how many gratuities should be given followed and within a year the medical clinic was already functioning. The combination between a new concept of working part-time with respectable doctors in Galati and the modern facilities and apparatuses propelled the clinic among the market leaders. Moreover, the strategic proximity to many driving
schools secured significant revenues since future drivers needed some legal medical documents before taking the driver license exam. As previously mentioned, Donna became the manager and closely worked with Cynthia to grow the business. In 2008, the construction company received an important contract from the steel manufacturing company ArcelorMittal and rented heavy machinery like bulldozers to honor the contract. That was an important step in terms of revenue because as the economical crisis set in and the construction industry crashed, it did not suffer any loss. However, the family had to stop operations after the contract ended. The latest venture is The Dolphin, a combination between a medical recovery centre and a spa which was just opened 2 months ago. Cynthia and Donna joined forces to define the concept because it is similar to SanaVita and are currently involved in marketing activities. Vivi also receives daily updates and participates with suggestions. Family dynamics Dex and his sisters came from a close family and used to share everything as children. As they grew up, they always helped each other financially and did not expect anything in return. This is why, until now, there was no equal profit sharing. What is special about this family is that the money generated by all businesses is common property and everyone has access to the funds in accordance to personal needs. The first step in the decision-making process is to hold weekly family gatherings and analyze strategic options in terms of re-investing the profit. Consequently, the family regards every members needs and decides by consensus how to share the money. It is not uncommon for some members to receive more in one year and less in another by comparison to other members. However, this never generated conflict so far. For example, the money to pay Danas tuition fees was taken from this joint account.
Issues The main problem is that no succession plan has been established so far. This generation does not pose many problems because there are only 2 children so far and the family is very close-knit. However, a formal plan should be created in order to include all existing and potential children of the founders. Also, the future grandchildren should be included in the chart. Secondly, since there are currently only 2 members from the 2nd generation and only one is old enough to join the business there might not be enough manpower to manage all companies in the future. External management should be considered at this point. This brings into question another aspect, which is the delimitation between ownership and management. Until now, there was a clear necessity for family control over the business. Ownership and management have never been considered as separate parts of the business. However, as more information is available on this topic worldwide, the family has to differentiate between owning the company and receiving dividends and managing the company while being involved in all the decisions. Also, members have to decide if the shares or profit will be divided according to family or members. For example, both Cynthia and George are managing part of the portfolio but Donnas husband is not involved. Another problem is the decision-making process. Although the consensus ensures harmony within the family, sometimes it is not beneficial for the business because it might take a long time until agreement is reached. Likewise, if one member is more persuasive than others, the likelihood is that the ideas which are better explained are implemented as opposed to suggestions which respond more to customers needs. Also, the familys history includes both successful and unsuccessful businesses. They adopted a diversification strategy and operate in many areas instead of restricting the activities to complementary domains. Recently, they specialized in the medical industry but it is uncertain which strategy is better to be applied on the local market. The first
option is to keep expanding in different fields, whereas the second is to restrict their activities to one or two areas.
Questions 1. How can the family plan the transition to the 2nd and 3rd generation so that the portfolio will remain a family business? Make a succession and ownership plan. 2. Which companies should bring external management and why? Which option better fits each firm in the portfolio: external management or a board or advisers? Please explain your choice. 3. Provide a framework for an efficient decision-making process that would successfully apply in a family business.
Theoretical notes Because the study of family business has been a relatively new occupation for academics, no concrete frameworks for the issues with which they are faced have been created. Nonetheless, many theories have been developed based on the study of several family businesses. Succession is regarded by most scholars as being the main issue in a family business. Handler (1989) presented a model that describes the succession process and emphasizes that the predecessor holds on longer to his role in the company and that the heir enters the firm on a different position than that of the CEO. In order for the model to work, the previous leader must transfer the experience, decision-making authority and equity to the next generation. In return, the one who inherits the business must take all the necessary steps: working in one department, being a manager, a leader and ultimately a decisionmaker. Handlers findings are presented in figure 1.
Source: Handler, 1994, p 136 KPMG specialists, on the other hand, offer a newer perspective to the succession process. Walsh (2011) presents a model (figure 2) that includes both management succession and ownership. The management succession is described as a prerequisite of ownership and is advised to be implemented years before the ownership scheme. He explains that it is better for the next generation to draft the management and succession plan with the approval of their predecessors. Also, he states the importance of communication and the existence of two types of business gatherings: family business meetings which only involve the ones active in the daily activities and family councils that reunite the broad family. The reasoning is that the setting and process are different and thus outcomes are different. He also stresses the role of family rules which reduce conflict because they provide a set of guidelines by which all members should abide. The next step called grooming successors refers to assessing the skills and shortcomings of the family members who want to work in the company and developing a training program to improve their abilities. The final stage requires setting compensation for the family employees, creating performance reviews and agreeing to what extent outside expertise is needed.
Source: Walsh, 2011, p 15 Ownership includes a series of privileges and obligations. For example, one responsibility is to financially support the company and inject capital in order to invest. One right is to receive dividends or to elect the board of directors. Aronoff and Ward (20202) argued that there are 6 types of owners. The problem faced by any family business is to identify the type of owners that the next generation of the family belongs to and bridge the gap between their expectations and the predecessors ones. Figure 3 illustrates the possibilities.
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Walsh (2011) explains the concept of family business in terms of ownership (figure 2) by integrating, apart from the family meetings previously discusses, governance and shareholder agreement. Firstly, the family can name a board of directors to be in charge of the performance of the business and the way it carries its activities. In most family businesses, these comprise of family members but the biggest companies include nonfamily members as well. Apart from that, a board of advisers can be enforced to provide advice on strategy or legal matters; it is not liable for any action, since it has no legal power. A shareholders agreement is the last stage of the process, because it has the purpose of formalizing and legalizing succession and ownership. However, many family firms do not resort to this document because of uncertainty, the lack of a formal setting to
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discuss it and the reluctance of the owners to plan for the eventual transition of the business. (Walsh, 2011) The decision-making process can be consensus or voting based. Consensus entails gathering ideas from all participants, synthesizing them and then arriving at a decision accepted by all. The advantages are that everyone is involved, both by speaking and listening, every idea is expressed and individual inputs and preferences are taken into account. Hartnett (2011) states that through this method, one can reach better decisions, better implementation and better group relationships. The basic model (figure 4) explaining the process includes coming up with a proposal, raising issues and improving the proposal so as to touch as many areas of concern and finally obtaining agreement. Figure 4. The Process of Consensus Decision Making Step 1 Step 2 Step 3 Step 4 Step 5 Step 6
Identify any Collaboratively Assess the Finalize unsatisfied modify the degree of the concerns proposal support decision OR circle back to Step 1 or 3
Source: Hartnett (2011) One of the disadvantage, however, is that consensus is time-consuming due to the uneasiness with which all ideas are stated and analyzed. Also, when pressured to find a quick solution, members might choose the first option just to be sure that they solved the problem. Voting represents a decision-making process by which an alternative is chosen out of several listed. It assumes a certain amount of competitiveness as well as compromise. As opposed to consensus, the majority rule is focused on building a coalition and does not necessarily serve the interests of all participants. Voting is recommended when a large number of people must make a quick decision or when the issue is not significant. However, when the problem concerns everyone voting can be inefficient because those who do not agree may block the implementation. 12
http://www.starhawk.org/activism/trainer-resources/consensus.html [Accessed 29.03.2013] Handler, W, 1994. Succession in Family Business: A Review of the Research. Family Business Review. 7 (2) p 133-157 [pdf] available at http://www.uk.sagepub.com/chaston/Chaston%20Web%20readings%20c hapters%201-12/Chapter%2011%20-%2014%20Handler.pdf [Accessed 21.03.2013] Hartnett, T, 2011. The Basis of Consensus Decision-Making [online] available at http://www.consensusdecisionmaking.org/Articles/Basics%20of%20Cons ensus%20Decision%20Making.html [Accessed 29.03.2013] Institute for Family Business, 2007. Family Business. Perspectives on Responsible Ownership [pdf] available at http://www.ifb.org.uk/media/44271/perspectivesonresponsibleownership. pdf [Accessed 21.03.2013] Niculae, C, 2013. Discussion about the portfolio of companies, the succession and ownership, employee motivation and decision making (personal communication, March 2013) Walsh, G, 2011. Family Business Succession. Managing the All-Important Family Component [pdf] available at http://www.kpmg.com/ca/en/services/kpmgenterprise/centre-for-family-business/documents/3468_succession.pdf [Accessed 20.03.2013]
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N Niic ck k
M Ma ar ry y
J Jo oh hn n
C Cr riis st tiin na a
G Ge eo or rg ge e
D Do on nn na a
V Viiv vii
D De ex x
D Da an na a
D Diia an na a
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