HOW TO AVOID THE "FAMILY TRAP"
In order to grow beyond the early stages, a company must become less reliant on its founder
By Ichak Adizes
Material for this article was taken from one of his nine books, Managing Corporate Lifecycles (the third re-print has been published by the Adizes Institute Publishing, January 2005.
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This article has recently been published by the “FAMILY BUSINESS” magazine, winter 2005 issue
Like any other organization, family businesses undergo life cycle stages. They are born, they grow and – unless management knows how to adapt – they wither and die.
As a business evolves from one stage to the next, problems inevitably arise. They result from change and can be predicted, just as a parent can predict how a two-year-old or a teenager will behave.
Although it is tempting to forestall problems by resisting change, that would be tantamount to committing organizational suicide. Instead, family business leaders must guide the necessary change that creates new problems, structure the organization to solve them and prepare to change again and to have new problems.
Family business founders are the glue that holds their company together. But as the business grows, that glue no longer binds the entire company – there simply is not enough of it. The organization must design new, depersonalized “glue” by institutionalizing leadership.
A family company must change from management by-intuition and management-by-the-seat-of-the-pants to a more professional process. Companies that fail to make this shift fall into the “family trap.” These family businesses are primed for a crisis.
Here’s where “family trap” problems arise in the three earliest stages of a company’s life cycle.
The courtship stage precedes the organization – when the company exists only as an idea. During this stage, the founder builds commitment while testing the idea on others. Near fanatical commitment is necessary for a successful courtship without it, a company can break apart in tough times. But later in the life cycle, commitment can become pathological.
Consider a startup business that chronically loses money because its product is poorly positioned. It must adapt in response to customer needs.
The founder, who is technically brilliant but inept at marketing, resists the adjustment. The more he denies reality, the deeper into trouble his company sinks.
Founders must recognize when it’s time to adapt their dreams to reality. Successful founders are highly committed but also willing to learn from experience.
A family business changes dramatically in its infancy, when it must shift from ideas to results. The infant company hasn’t mastered time management yet; it responds to the squeakiest wheel (management by crisis).
Managers of infant companies, who tend to be product rather than sales-oriented, keep tinkering with the technology. It’s a neverending process not of continual improvement, but of continual perfectionism. A sales orientation usually doesn’t develop until the next life-cycle stage, but if it’s delayed too long, the business will fail.
The family ethic dominates; everyone is on a first-name basis, with little hierarchy. There are no systems for evaluating performance, particularly of family members.
The organization lacks managerial depth and has no capable leaders to replace its founder. It has no track record, so a mistake in product design, sales, service or financial planning – which is highly probable-can have fatal repercussions.
The enthusiasm typical of founders during courtship often leads to undercapitalization during infancy. Entrepreneurs project extravagant sales and conservative capital needs. Instead of planning for the worst and hoping for the best – as they should – they plan for the best and expect it. The family’s collective enthusiasm sustains the delusion.
The problem grows more acute when the company succeeds, since the more it sells, the more working capital it needs to finance its receivables and inventory.
Founders constantly face problems they are ill prepared for: dissatisfied customers, lousy suppliers, reluctant bankers, unproductive family members and employees. Their commitment to the venture is tested daily. With few policies and an expedient need for cash, they develop bad habits and make decisions that set precedents. If the organization is to develop, its management must also develop. That means change.
The founder’s hard work, refusal to delegate and emphasis on short-term results are the crucial elements of organizational survival during infancy. But those same traits can stifle a company during the next stage in its life cycle – the go-go stage.
Measured in terms of sales, the go-go company is successful. Climbing sales are proof that the product works. Proud of their success, founders want to extend their reach and move beyond the day-to-day operations. Bored with the details of running their organizations, they yearn for the excitement of courtship and infancy, when everything was new.
Go-go companies are organized around people rather than tasks. Leaders of these businesses react to opportunities rather than position themselves to exploit future opportunities they create. Family members are assigned tasks based on availability rather than competence. Decisions are made in piecemeal fashion under duress, with expediency the ruling factor. Under such conditions, how can anyone really know who’s supposed to do what? Whenever a question arises, only one person can provide the answer: the founder.
At this stage, the organizational structure must change. Appropriate functions must be identified and an evaluation conducted to determine who should perform those functions. To institutionalize the process, family business owners must ask some hard questions:
- What is our vision?
- What do we stand for as a company?
- What is our plan for the future?
- How should the company be structured to achieve our plan?
Consider this case example: A family construction .business had hired six chief financial officers in five years. The founding brothers had repeatedly hired managers with financial experience, but they were all too much like the brothers-entrepreneurial types who were unable to implement operational systems and controls. The first step was to fix the structure, then bring in appropriate hires. After going through the sequence above, they formed a long-term plan and were able to restructure their organization, hiring managers with complementary strengths to help them achieve their goals.
The complicated dynamic of the go-go stage is that founders want to escape day-to-day management, but they don’t want to yield control, even to other family members. So what happens? The founders distance themselves incrementally, but no one else has the authority (or the courage) to make decisions. Go-go leaders believe that after they delegate authority, their children or subordinates will run the show. So they take off-but not forever or for a predictable amount of time.
When they return, all hell breaks loose. The changes made in their absence displease them; the founders always have better ideas. They quickly re-centralize power; only to disappear again to take care of their latest outside project. Afraid of being reprimanded for taking initiative, the subordinates do nothing. When the go-go leaders reappear, they’re frustrated over the lack of progress in their absence.
Escaping from the trap
To escape from the family trap, organizations must move from an absolute familial monarchy to a constitutional monarchy. What makes this so difficult is that most founders do nothing to facilitate the transition. It’s hard for them to believe that anyone else can pick up the torch and continue the level of commitment and capability they have invested in the organization. As one family business CEO told me, “You can never see’ the picture you and your family are in it.”
For a family business caught in a family trap, the death of the patriarch likely means the death of the company. A family trap can also develop when the company fails to separate ownership from management and a family member takes over on the basis of bloodlines rather than competence. Defection by the professional managers follows shortly.
Our firm was hired to help a company that had been founded 20 years earlier by three brothers. The brother who had had the original idea for the business had the strongest commitment and entrepreneurial skills; he had assumed the role of CEO and primary decision-maker. After two decades, he wanted to step back from day-to-day operations. Although he wanted his older brother to take the reins, he was acutely aware of the brother’s shortcomings, so he was reluctant to relinquish leadership.
We suggested delegating authority to an executive committee, composed of key employees in the organization whose managerial styles were different from, but complementary to, the CEO’s. This made delegation easier because the deficiencies of a single person could be overcome by the competence of the group as a whole. Delegating to a team can also provide the CEO with built-in control mechanisms to keep him abreast of-and provide veto power over-agendas and decisions.
Ownership vs. management
Leaders of go-go organizations typically feel invincible. They spin off in a dozen different directions, rarely aware that they are constantly teetering on the brink of disaster. These business leaders must force themselves to set priorities and develop policies.
For family businesses in particular, an important step is to recognize the distinction between ownership and management. A board of directors with both family and outside members is highly recommended. The inclusion of non-family members is an important step toward institutionalizing leadership. It also requires a certain degree of maturity on the part of the family. The presence of outide directors forces the CEO to report on the company’s operations and be accountable for results.
For families not yet ready to bring in outside board members, an intermediate step can involve creation of a family-only board to facilitate strategic decision making and help the family grow accustomed to the structure. Once family members are comfortable with the change, outside directors can be added.
Successful management means continually solving problems. Learning which problems typically arise in a company’s various life-cycle stages can help you predict what lies ahead for your business, manage your time better and avoid the family trap.