The Importance of Family Businesses in the United Kingdom

Kilo and Family Components Manufacturer is a family owned business that specialises in the production of furniture mechanism components as well as producing high-quality furniture products. James Kilo founded the company in 1990 as a small proprietorship business in Liverpool. Upon completion of his degree in interior design from the University of Liverpool, James decided to venture in furniture components to create architecturally designed frames for tables and chairs. The management of the company entails a the founder, two of his friends, financial advisor, legal advisor and four children. Although not all the children are involved with the company, I am actively concerned with the success of the company being his eldest child. In the recent past, the company has undergone tremendous growth. However, at the initial stages of its foundation, it was not possible to envision that the company would become one of the leading mechanism components and furniture manufactures in the United Kingdom. Besides, the company has experienced a myriad of challenges ranging from management, transition, profitability, marketing and constitutional problems. Therefore, this report reviews the issues that the board of trustees has identified and the possible ways of addressing the problems with the primary goals of increasing profitability, efficiency in management, financing and transgenerational transition.

The business has not been running smoothly in the last three years despite its success in the early stages of its inception. The company profit margin has stagnated from 2015 to 2017 creating a significant concern from the board of trustees on the future prosperity of the business. The primary objective of the founder is to make sure that the family remain the majority shareholder and control the business operations hence creating a conflict of interest between the family members and the board of trustees. Besides, lack of family business constitution has been identified as one of the major areas of contention. Therefore, the report investigates the implications these factors have on the business using system approach as a philosophical foundation.

System Theory and Family Business

Family business refers to a commercial organisation where control, management and decision making depends entirely on multiple generations of a family.[1] The members of the family have a substantial influence on the organisational decisions, vision and mission and use their power to further family interest. Kilo and Family Components Manufacturer (KFCM) depends significantly on the decisions made by the board of trustees constituted by James. In addition, James four children also have an interest in the company. However, the problems that the company is currently facing is resulting from a failure in a system that was working previously. Therefore, using systems theory to analyse the challenges provides an insight on how to mitigate the problems and increase the efficiency in the management of the firm. System theory treats an organisation as a system that has several factors within and without the business that interact freely to determine the success of the company. Sibling rivalry and conflicts are rampant in family-owned businesses and may affect the working relationship between the essential components of the system. Despite the existence of the three subsystems that are instrumental in the success of the business, the family factor is sometimes overemphasised thereby affecting other subsystems like ownership and management.

The problems affecting KFCM originates from the three subsystems of the system theory. Businesses work as a system that is either open or closed. The KFCM system is open because it interacts with an environment that has factor inputs such as raw materials, the human resource and the market.[2] Family owned and run businesses adopt an open system approach where the family dominates thereby emphasising the interaction between family and business.[3] The ideal systems theory should have the three subsets of the system such as family, ownership and management. However, ignoring ownership by family members creates a two-dimensional arrangement of family and business. Crisis in KFCM arises when the distinction between ownership and family interest cannot be clearly defined. The use of the two-dimensional model in family business research focuses on how positively or negatively the family affects business operation. For instance, Chrisman, Chua and Sharma discussed how family norms and interest creates human resource conflicts within the firm.[4]

Despite the family owning the business, the company relies on the inputs from employees and suppliers who play a pivotal role in the success of the company. Although research by Chrisman, Chua and Sharma indicate that family-owned business is affected by family influence[5], a study by Chrisman, Chua and Sharma indicate that companies owned by families are more successful due to strong supervision and coordination that many non-family businesses lack.[6]

A survey by Neubauer and Lank criticised the two-model systems approach to management on the basis that it neglects one of the primary components of the system that is ownership.[7] Further criticism by Kezar led to the review of the theory to incorporate ownership as a sub-element of the system theory.[8]

Kezar indicates that one of the essential factors of production is ownership which is a crucial factor in decision-making. Strategic decisions must be consistent with the interests of the majority shareholder. However, lack of clear succession policy on who acquires the majority shares of the company is one of the major cause of the issues affecting the company. Besides, ownership creates conflicts of interest between the managers of the business and the owner of the company as he tries to influence the formulation of company policies. As a result, the business problems are instigated by the lack of clear boundaries between the systems.

Using System Theory to Resolve Management Issues

Management challenges facing Kilo and Family Component Manufacturers (KFCM) majorly depends on the conflict between ownership and family influence. The contention may not be resolved permanently if the apparent sources of disputes are not exhausted. Harmon indicates that management issues have a significant impact on human resources functionality and company revenue.[9] Using the theory to identify the possible solution to the problems is essential because a business is a system and dysfunctionality in one area of the system may cause significant reputational and financial losses. However, solving management issues requires short-term and long-term. The report identified six factors creating management conflicts such as business succession, the conflict between business and family interest, the role of the business to family members, remuneration for active family members, and role of family members in the business and integration of family members in the management.

The theory provides a theoretical foundation for approaching these issues. First, the company would formulate a working policy document called the family business constitution to help in monitoring and evaluating the performance of the family and non-family members alongside the business progress. Kezar accentuates that the most successful approach to managing conflict within family businesses is to formulate a family business constitution.[10] Harmon defines a family charter as a statement of general principles that outline the business vision, mission and core values alongside the family commitment to upholding the set standards.[11]

Although Hietschold and Gurtner highlight that family business constitution is a practical guide for running the business and handling business issues[12], Başkurt and Altindağ confirm that creating the business charter is a collaborative process that involves all key players in the family business thereby improving teamwork while minimising conflicts.[13]

The company charter would entail leadership structure, business goals, vision and values, rights and responsibilities of shareholders, entry principles for family members and methods of succession. The charter will also contain the powers, duties and obligations for family appointment, rights and responsibilities of family members not engaged in the management of the business, training and remuneration of employees, channels of communication and procedures for conflict resolution. 

The creation of the family guiding principles based on the systems theory approaches will enhance the effectiveness of management through the following ways. First, the policy will require the administration to formulate a clear succession plan that improves the organisational values and policies instead family dynamics. If KFCM adopts a clear succession plan as indicated in the family charter, it will help the business in protecting family harmony over other costs associated with the administration of the examination. Secondly, formulation of the family business charter will help the company to create a legacy in the furniture industry as the best provider of quality affordable furniture. Heritage is a valuable tool in enhancing the competence of future managers, as they will have to outperform their predecessors.[14]

The application of the principle of legacy in the family succession in the management of the business will retain the control of the business within the family, and other family members will act stewards. The company stewards will protect the family business and work towards its betterment for the future generation.

Thirdly, formulating family charter will outline the role of the business to the family and non-family members. For instance, Chrisman, Chua and Sharma suggest that creating clear policies on opportunities and entitlements by the family members will enable the members of the family to understand the role of the business in their lives.[15]

The entitlements principle will keep the dreams of the family members alive by reminding them that they have an opportunity to manage the company in future as well as understanding that the company would create opportunities for them to work and develop their skills further. The success of KFCM will enable all family members, both in the management and quality positions to understand that it is the business that provides the opportunities that they enjoy and that the interest of the family business should be given priority in the event of a conflict between the business and personal interests.[16]

Besides, the other siblings are engaged in another career thereby putting in the critical position of assuming the company ownership. Studies by Neubauer and Lank indicates that business ownership is a significant determinant for the success of family businesses.[17]

For instance, family businesses that provide opportunities for senior family members to assume leadership of the company are more successful than those managed by junior members of the family. Further, the constitution will provide a basis for allocation of shares based on the role an individual has intentionally played towards the creation of the family wealth and if some members decide not to participate; they will be allocated wealth from non-business assets of the company. Nonetheless, the charter will provide a clear guideline on when a person ceases the leadership and management of the company and the succession process. As a result, I propose that the company will adopt an executive structure where the first male child of the company founder assumes the chief executive position in the company and acquires the shares previously owned by the predecessor. The company will adopt the genogram below.

The father who is the founder of the company owns 75% and is the president of the company. Board of trustees is responsible for the succession and administration of the family business alongside the formulation of policies. The first son will be the vice president of the company and will own 10% of the company shares. The remaining three siblings will have 5% stake in the company. The family members who have no interest in the company management or have not attained the majority age will nominate a representative to further their interest with the advice of the trustees.

Increasing Company Profitability

The business has consistently stagnated in the last three years although there was no change in the management and leadership style in the company. Analysis of the report by the board of trustees revealed that the level of competition is rapidly increasing and the businesses have to adopt innovative approaches in producing furniture mechanism components. Further analysis of the market shows that key competitors have adopted pricing as a competitive strategy by offering a shallow process for their products.[18]

To change the profitability of the company and increase its market share, I will invest in total quality management, team building, cohesiveness, and more investment in market research and development.

The company will adopt performance targeting as a strategy to increase its revenue. How will this work? The company will adopt predictive tools based on sufficient market research to works backwards to ensure that the forecasted performance is realised.[19]

KFCM faces intensive completion from a Swedish multinational corporation IKEA that specialises in the manufacturing of furniture and home accessories alongside mechanism components. IKEA has 18 stores in the UK and is the major threat to the survival of the company. Besides IKEA, other competitors include Capital Bedroom and Kitchens Ltd, Rhino Bedrooms, Strachan, Paolo Marchetti Interium, Hamonds and Sandbone among others who key players in the industry. The current problems in the company such as negative company culture, low employee morale, conflict between management and the family work in favour of the major competitors. However, changing the company image through the formulation of goals, vision and mission statements is a positive step toward creating the desired change.

I will initiate an overall change in the company by reviewing the working practices, the company culture and the reward system. Business success depends on positive company culture and focussing the synergy towards a common goal. The inherent conflict between the three principal organs of the business is a negative culture that needs immediate elimination. The current workforce is characterised by poor morale and conflict, adversarial relationships and low level of trust between the employees, management and the family. As a result, productivity has been very low for the last three years.

Moreover, it evident that the company cannot continue with the current state of affairs as it has compromised the international competitiveness in the European market. To initiate the change process, the company will enforce team building workshops, review the remuneration of the workers, train workers to acquire technical skills related to their areas of expertise and create reward system the identifies individuals efforts within the team.[20] The targeted result will be the creation of flexible working hours, high productivity and low unit costs resulting from training and changing the organisational culture to a win-win situation.[21]

Performance targeting will increase the confidence and competency of the workers in accomplishing tasks because they will be aware of the quality and quantity of the output for each employee. The further investigation concerning the stagnating growth identified the need for a new company vision that will promote a positive culture where all the stakeholders in the company benefit and share in the vision of the company. The new vision is to create an environment where employees enhance their skills and significantly reduce the level of supervision. In addition, simplifying work be having only three categories of employees such as craft worker, workshop managers and the executive will minimise friction between employees and increase their productivity. Farther, the new vision will ensure that employees are given competitive pay to reduce employee turnover and attract expertise from other companies to help fast-track the company progress through creativity and innovation in manufacturing the furniture and components.

Further, the company will adopt team training to increase cohesiveness and increase employees’ involvement. Research by Harris indicates that team training and integrated working is an essential factor in creating the change.[22] Harris confirms that team training help in eliminating demarcations among employees improves employee commitment and morale.[23]

After performance targeting, I will adopt the total quality approach.[24] The total quality approach will help in identifying wasteful practices and make necessary improvements in specific areas of interest such as increasing productivity, minimising costs and maximising returns. The company will adopt quality and affordability as a marketing strategy to counter the competition, gain substantial market share and increase revenue. The new company mission and vision will quality both a company and employee culture hence a branding strategy. I will develop a total quality approach model that will identify barriers to employee involvement in the company processes. The employees and managers will work because of mutual interest alongside the family members. Secondly, I will develop a common vision. Arsić confirms that managers and employees may share common vision by building a highly flexible and skilled workforce.[25]

Thirdly, develop a plan to motivate employees through competitive pay and employee integration through integrated working. The other targets of the total quality approach model will involve keeping people informed, building support infrastructure, and developing facilitators to help workers perform technical works. I will focus on empowering employees by instituting improvement teams to do routine monitoring and evaluation of the company progress; enhance customer needs by focusing on customer needs and devising continuous improvement plans.

Capital Financing and Administrative Structure

Family businesses are founded on the basis promoting family interest in a given sector. The intention by the leading furniture manufacturer IKEA to acquire the company will shift the control of the company from the owners to outsiders. Başkurt and Altindağ observed autonomy in business is essential when it comes to making decisions. Increasing the number of shareholders in the business may affect the family norms and culture that are incorporated in the business.[26]

Although Mande, Park and Son highlight that equity financing relieves the company from external liabilities,[27]  Neubauer and Lank, contradicts that it invites outsiders into the business that may positively or negatively affect the structure and composition of the management board.[28]

Therefore, I will advise the company not to allow IKEA to become majority shareholder if the company decides to offer some stake to the company. The company financing will be sourced from within the family and through debt financing. Despite debt financing increasing liability to third parties, it promotes autonomy and allows the family to have full control over the business. 

Also, the business will adopt a formal governance structure instead of the current independent structure where the management reports to the founder. Research by Arsić indicates that a formal business structure secures the future of family businesses in cases of crisis resulting from economic problems and abrupt succession.[29]

The formal structure will help the business in several aspects such as ownership, routine management, strategic decision-making and the impact of social investing. I suggest that the company adopts a formal business structure to create strong family governance by creating owners council and family council to assist in managing the relationship between the business and the family. The owners’ council will set strategic goals for the business while the family council will ensure the transfer of family culture to the next generations. Besides, the board of directors or trustees oversees the strategic plans of the company while the management board runs the business. Therefore, a formal structure creates structures, policies, contracts and governance rules helps in maintaining the relationship between company ownership and continuity.

Conclusion

The continuity in family businesses depends on an effective governance structure that supports a peaceful resolution of conflicts between the family, ownership and management of the business. The report has identified that system theory helps in instituting an effective company constitution with a guiding principle that ensures smooth business transition and understanding the role of the business to family members. Increasing the revenue of the business requires a change process through total quality management, reducing costs and maximising employee output through training. Performance targeting will enable the company to work from the result backwards hence increasing the competitiveness of the company through creativity and innovation in producing mechanism components. Adoption of a formal business structure will help in reducing problems such as succession issues resulting from sibling rivalry and ensure business survival during a period of economic crisis.

References

Arsić, S. (2018). Key Factors of Project Success in Family Small and Medium-Sized Companies: the Theoretical Review. Management: Journal of Sustainable Business & Management Solutions in Emerging Economies, 23(1), 33–40. https://doi.org/10.7595/management.fon.2017.0013

Başkurt, G., & Altindağ, E. (2017). The Impact of Institutionalization of Family Business on Strategic Human Resources Management and Company Performance. Business Management Dynamics, 7(3), 10–25.

Chrisman, J. J., Chua, J. H., & Sharma, P. (2003). Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman white paper series, 4(1), 1-63.

Halachmi, A. (1993). From performance appraisal to performance targeting. Public Personnel Management, 22(2), 323.

Harmon, P., & Trends, B. P. (2010). Business process change: A guide for business managers and BPM and Six Sigma professionals. Elsevier.

Harris, K. J. (2000). Integrated Justice Information Systems: Governance Structures, Roles and Responsibilities. Retrieved on July, 10, 2002.

Hietschold, N., Reinhardt, R., & Gurtner, S. (2014). Measuring critical success factors of TQM implementation successfully – a systematic literature review. International Journal of Production Research, 52(21), 6254–6272. https://doi.org/10.1080/00207543.2014.918288

Kezar, A. (2004). What is more important to effective governance: Relationships, trust, and leadership, or structures and formal processes?. New directions for higher education, 2004(127), 35-46.

Mande, V., Park, Y. K., & Son, M. (2012). Equity or debt financing: does good corporate governance matter?. Corporate Governance: An International Review, 20(2), 195-211.

Neubauer, F., & Lank, A. G. (2016). The family business: Its governance for sustainability. Springer.

[1] Fred Neubauer & Alden G. Lank (2016). The family business: Its governance for sustainability. Springer

[2]

Kezar (2004). What is more important to effective governance: Relationships, trust, and leadership, or structures and formal processes?. New directions for higher education, 2004(127), 35-46.

[3] Fred Neubauer & Alden G. Lank (2016). The family business: Its governance for sustainability. Springer

[4] James Chrisman, Jess Chua, and Pramodita Sharma (2003). Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman white paper series, 4(1), 1-63.

[5] Ibid., 28

[6]

Ibid., 44

[7]

Fred Neubauer & Alden G. Lank (2016). The family business: Its governance for sustainability. Springer.

[8]

Kezar, A. (2004). What is more important to effective governance: Relationships, trust, and leadership, or structures and formal processes?. New directions for higher education, 2004(127), 35-46.

[9] Paul Harmon. (2010). Business process change: A guide for business managers and BPM and Six Sigma professionals. Elsevier.

[10]

Kezar (2004). What is more important to effective governance: Relationships, trust, and leadership, or structures and formal processes?. New directions for higher education, 2004(127), 35-46.

[11] Paul Harmon. (2010). Business process change: A guide for business managers and BPM and Six Sigma professionals. Elsevier.

[12] Reinhardt Hietschold & Gurtner. (2014). Measuring critical success factors of TQM implementation successfully – a systematic literature review. International Journal of Production Research, 52(21), 6254–6272. https://doi.org/10.1080/00207543.2014.918288

[13] Gülcan Başkurt & Erkut Altindağ, E. (2017). The Impact of Institutionalization of Family Business on Strategic Human Resources Management and Company Performance. Business Management Dynamics, 7(3), 10–25.

[14] James Chrisman, Jess Chua, and Pramodita Sharma (2003). Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman white paper series, 4(1), 1-63.

[15] James Chrisman, Jess Chua, and Pramodita Sharma (2003). Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman white paper series, 4(1), 1-63.

[16] James Chrisman, Jess Chua, and Pramodita Sharma (2003). Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman white paper series, 4(1), 1-63.

[17] Fred Neubauer & Alden G. Lank (2016). The family business: Its governance for sustainability. Springer

[18] Fred Neubauer & Alden G. Lank (2016). The family business: Its governance for sustainability. Springer

[19]

Arie Halachmi (1993). From performance appraisal to performance targeting. Public Personnel Management, 22(2), 323.

[20]

Paul Harmon. (2010). Business process change: A guide for business managers and BPM and Six Sigma professionals. Elsevier.

[21]

Arie Halachmi (1993). From performance appraisal to performance targeting. Public Personnel Management, 22(2), 323.

[22] Harris, K. J. (2000). Integrated Justice Information Systems: Governance Structures, Roles and Responsibilities. Retrieved on July, 10, 2002

[23] Ibid., 122

[24] Reinhardt Hietschold & Gurtner. (2014). Measuring critical success factors of TQM implementation successfully – a systematic literature review. International Journal of Production Research, 52(21), 6254–6272. https://doi.org/10.1080/00207543.2014.918288

[25]

Sinica Arsić. (2018). Key Factors of Project Success in Family Small and Medium-Sized Companies: the Theoretical Review. Management: Journal of Sustainable Business & Management Solutions in Emerging Economies, 23(1), 33–40. https://doi.org/10.7595/management.fon.2017.0013

[26] Gülcan Başkurt & Erkut Altindağ, E. (2017). The Impact of Institutionalization of Family Business on Strategic Human Resources Management and Company Performance. Business Management Dynamics, 7(3), 10–25.

[27]

Mande, V., Park, Y. K., & Son, M. (2012). Equity or debt financing: does good corporate governance matter?. Corporate Governance: An International Review, 20(2), 195-211.

[28]

Neubauer, F., & Lank, A. G. (2016). The family business: Its governance for sustainability. Springer.

[29] Sinica Arsić. (2018). Key Factors of Project Success in Family Small and Medium-Sized Companies: the Theoretical Review. Management: Journal of Sustainable Business & Management Solutions in Emerging Economies, 23(1), 33–40. https://doi.org/10.7595/management.fon.2017.0013