“ A Family Business: Applying Strategic Management to Family Business “

1. “ A Family Business: Applying Strategic Management to Family Business “

2. Family businesses merit special attention because they are especially complex, definitely more so than a “regular” enterprise owned by public shareholders. The reason for this is that in family firms there is an added dimension of real relationships—between parents and children, brothers and sisters, husbands and wives, cousins, in-laws, grandparents, etc. In all or most of these, love or affection is involved. In other words, the people who own and run the business are bound together by ties that go beyond a mere shared desire for profit. 8

3. Family firms can address this dilemma by implementing the following steps: • Acknowledging and accepting the difference between corporate ownership and professional management • Establishing separate processes and structures for dealing with purely family issues and purely business issues • Professionalizing the business by delegating management tasks to qualified family and nonfamily professional managers who can make logical and unbiased decisions • After these three steps have been taken, taking the final and most important step, which is to introduce Strategic Management as the process for managing the organization. 9

4. We often use the term “family business” without having a clear definition of just what the term really means. There is actually considerable definitional confusion concerning the term family business. While coming up with such a definition is more difficult than it might at first seem, it would be very useful for a number of reasons. For example, the question of what defines family business succession and what distinguishes it from management succession, leadership succession or executive succession will be very critical to determining the basis for successful or effective family business succession. • Given estimates that in the Philippines close to 100 per cent of all business establishments are either family owned and/or family controlled, this definition question demands much more attention than it has received to date. 4

5. The definition of a family business has been further confounded because of confusion with two variables. Family business is often subsumed within the general area of entrepreneurship. However, the two concepts are entirely different. A family business may or may not be headed by an entrepreneur. Entrepreneurship has been defined as a demonstrated willingness to initiate risky and innovative actions which are not a necessary characteristic or value in a family business.  A second variable that confounds the defining of family business is that of size. Family business is often assumed to be synonymous with small business. However, any survey will show that in the Philippines practically all the largest business entities are family businesses. 5

6. The economic landscape of most countries, including the Philippines, remains and will continue to remain dominated by family firms. Therefore, it is not surprising that management practitioners and scholars have begun to realize the importance of family business studies. However, a visit to the management section of any library and bookstore will confirm that the literature on family enterprise is relatively sparse compared to other major management areas. • There are currently no dominant theories of the family firm unlike in the fields of marketing management or strategy. For example, there continues to be a controversy over the definition of a family business. 1

7. “A business firm may be considered a family business to the extent that its ownership and management are concentrated within a family unit, and to the extent its members strive to achieve, maintain and/or increase intra-organizational based relatedness.” • Unfortunately, researchers have had problems making any of precise definitions. For example, does family ownership require 100% ownership, controlling ownership or effective control? Does governance by the family suffice or is management a necessary condition? Is a substantially concrete possibility of succession within the family necessary or is the possibility of such occurrence enough? Researchers following this approach have proposed a wide variety of definitions. 3

8. Proposition 1: A business firm may be considered a family business to the extent that its ownership and management are concentrated within a family unit. Proposition 2: A business firm may be considered a family business to the extent that its members strive to achieve, maintain, and/or increase intraorganizational family based relatedness. Proposition 3: A business firm may be considered a family business to the extent that its ownership and management are concentrated within a family unit, and to the extent its members strive to achieve, maintain and/or increase intraorganizational family based relatedness. The Litz definition of a family business, therefore, incorporates three broad issues: the extent of ownership and or management, the degree of family involvement’ and the availability of family members for generational transfer. 7

9. Family controlled enterprises drove the economic development process in the early phases of the industrialization age as evidenced by the success of the pioneering activities of the Vanderbilts, Rockefellers, Astors, Carnegies and Fords of the United States; and the Rothschilds, Zegnas, Heinekens and Henkels of Europe. • Hongkong was literally transformed from a fishing village into an international entrepot by the noble houses of the” taipans”, the Jardines and Hutchisons. Certainly in the Philippines, all the major businesses today are family-based such as the Ayala, Lopez, Aboitiz, Cojuangco, Sy, and Gokongwei families. 2

10. Utilizing the framework of strategic management in the management of family business firms can, therefore, make Filipino firms globally competitive, and , in turn, break the cycle of poverty that has become the tragic trap for millions of Filipino families. 10

11. There is a misunderstanding, even among professional managers, of the real meaning of strategic management. Most businessmen believe that this is the same as strategic planning, when in fact strategic planning is merely one of the tasks included within the larger framework of strategic management. The first thing that needs to be done in introducing strategic management to any corporation, especially family firms, is to clarify its real meaning. 11

12. STRATEGIC MANAGEMENT

13. Strategic Management • Forming a strategic vision of where the organization is headed. • Setting Objectives • Crafting a strategy to achieve the desired outcomes. • Implementing and executing the chosen strategy efficiently and effectively. • Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy or execution in light of actual experience, changing conditions , new ideas and new opportunities. 5 TASKS 13

14. Task 1 Task 2 Task 3 Task 4 Task 5 Evaluating Performance, Monitoring New Developments, and Initiating Corrective Adjustments Developing a Strategic Vision And Business Mission Crafting a Strategy to Achieve the Objectives Implementing and Executing the Strategy Setting Objectives Improve/ Change as Needed Improve/ Change as Needed Recycle to Tasks 1,2,3 or 4 as Needed Revise as Needed Revise as Needed Strategic Management 5 TASKS 14

15. Task 2 Setting Objectives Basic Concept: Objectivesare an organization’s performance targets – the results and outcomes it wants to achieve. They function as yardsticks for tracking an organization’s performance and progress. 15

16. Task 2 Setting Objectives STRATEGIC OBJECTIVES: Relate to outcomes that strengthen an organization’s overall business position and competitive vitality. FINANCIAL OBJECTIVES: Relate to the financial performance targets management has established for the organization to achieve. 16

17. Task 3 Crafting a Strategy to Achieve the Objectives Basic Concept: A company’s Strategy consists of the competitive efforts and business approaches that managers employ to please customer, compete successfully and achieve organizational objectives. 17

18. Task 3 Abandoned strategy features Crafting a Strategy to Achieve the Objectives PLANNED STRATEGY Company Experience Know-how,Resource Strengths and Weaknesses, and Competitive Capabilities New Initiatives plus ongoing strategy features continued from prior periods Actual Company Strategy Adaptive reactions to changing circumstances REACTIVE STRATEGY Strategy is both proactive (intended and deliberate) and reactive (adaptive): 18

19. Who performs the five tasks of STRATEGIC MANAGEMENT An organization’s chief executive officer, as captain of the ship, is the most visible and important strategy manager. The title of CEO carries with it the mantles of chief direction setter, chief objective setter, chief strategy maker, and chief strategy implementer for the total enterprise. Ultimate responsibility for leading the tasks of forming, implementing, and executing a strategic plan for the whole organization rests with the CEO, even though other senior managers normally have significant leadership roles also. What the CEO views as strategically important usually is reflected in the company’s strategy, and the CEO customarily puts a personal stamp of approval on big strategic decisions and actions. 19

20. THE BENEFITS OF A STRATEGIC APPROACH TO MANAGING Provide better guidance to the entire organization on the crucial point of “what it is we are trying to do,” Making managers and organizational members more alert to new opportunities and threatening developments, Help unify the organization, Creating a more proactive management posture, Promoting the development of a constantly evolving business model that will produce sustained bottom-line success for the enterprise, and Providing managers with a rationale for evaluating competing budget requests – a rationale that argues strongly for steering resources into strategy-supportive, results-producing areas. 20

21. Three Elements of aSTRATEGIC VISION Coming up with a mission statementthat defines what business the company is presentlyin and conveys the essence of “who we are, what we do, and where we are now.” Using the mission statement as a basis for deciding on a long-term course, making choices about “where we are going,” and charting a strategic path for the company to pursue. Communicating the strategic vision in clear, exciting terms that arouse organization wide commitment. 21

22. Business Strategy Two-Way Influence Functional Strategies (R & D, manufacturing, marketing finance, human resources, etc.) Two-Way Influence Operating Strategies (regions and districts, plants, departments within functional areas) Strategy-Making Pyramid A SINGLE BUSINESS COMPANY Responsibility of executive-level managers Responsibility of heads of major functional activities within a business Responsibility of plant managers, geographic unit managers, and lower-level supervisor 22

23. Management’s Direction – Setting Tasks (Key Points) Charting a company’s future strategic path, Setting objectives, and Crafting a strategy. 23

24. Management’s Direction – Setting Tasks (Key Points) • Management’s views and conclusions about the organization’s future course, the market position it should try to occupy, and the business activities to be pursued constitute a strategic vision for the company. • A strategic vision indicates management’s aspirations for the organization, providing a panoramic view of “what businesses we want to be in, where we are headed, and the kind of company we are trying to create. • Effective visions are clear, challenging and inspiring; they prepare a firm for the future, and they make sense in the marketplace. • A well-conceived, well-worded mission/vision statement helps managers manage – serving as a beacon of the enterprise’s long-term direction, helping channel organizational efforts and strategic initiatives along the path management has committed to following, building a strong sense of organizational identity and purpose, and creating employee buy-in. Charting a company’s future strategic path, 24

25. Management’s Direction – Setting Tasks (Key Points) • Establish strategic and financial objectives for the organization to achieve. • Objectives convert the mission statement and strategic vision into specific performance targets. • The agreed-on objectives need to spell out precisely how much by when, and they need to require a significant amount of organizational stretch. • Objectives are needed at all organizational levels. Charting a company’s future strategic path, Setting objectives, 25

26. Management’s Direction – Setting Tasks (Key Points) • The third direction-setting step entails crafting a strategy to achieve the objectives set in each area of the organization. • A corporate strategy is needed to achieve corporate-level objectives; business strategies are needed to achieve business-unit performance objectives; functional strategies are needed to achieve the performance targets set for each functional department; and operating-level strategies are needed to achieve the objectives set in each operating and geographic unit. • Lower-level strategies should contribute to the achievement of higher-level, company wide objectives. Charting a company’s future strategic path, Setting objectives, and Crafting a strategy. 26

28. Thank you!