The Succession and Development of Family Business

The Succession and Development of Family Business
 

For more than three decades we have seen Chinese family firms go through the entrepreneurial stage of development. Today, as the global economic landscape has evolved, the primary focus of these firms is gradually shifting towards upgrading and transforming their business. Meanwhile, these firms also face an additional challenge not faced by their non-family counterparts - how to ensure a smooth transition of the family business from one generation to the next. The striking differences in thinking patterns and values between generations will directly influence family firms’ future development orientation. This is especially true for China-based family firms. Should they further explore the domestic market, or head towards the global market? This is a pressing decision Chinese family firms must make during the process of corporate transformation.
 

Based on a survey on family businesses in nine different regions and countries across Latin America, North America and Europe, Prof. Jon Martínez from ESE Business School summarized the main succession characteristics of family firms, as well as the major challenges they face in exploring their internationalization and competition. How established family firms in Europe and America have evolved and passed the baton from one generation to the next has significant implications for the relatively younger Chinese family firms. In addition, Latin American family firms share some common traits with their Chinese counterparts. The problems Latin American family firms face now will, in the future, also confront Chinese family firms. Prof. Jon Martínez also urged family firms to support and facilitate their globalization efforts by taking advantage of their family values, beliefs and strengths.
 

Family firms are the backbone of China’s private economy, accounting for a considerably large proportion of all private firms in the country. A-share listed family firms constitute nearly half of all listed private firms. As China’s economy has become more market-driven, globalization is becoming a major trend in the economic environment. Since their inception, family firms have seen a comparatively smooth development period during these years of fast economic growth. Nevertheless, there are both opportunities and challenges ahead of them. If their long-established business models still work, even in a new economic environment, and if the domestic market, where the founding generation built up their family wealth, is far from fully exploited, continued efforts should be made to fully tap China’s vast market potential. Where the allure of foreign markets is considered, new business philosophies introduced by the second generation who have studied or lived abroad can also have a direct influence on the future development of a family firm.


Internationalization
 

We can evaluate the degree to which family firms are internationalized by asking five questions: Where do they source their raw materials? Where are their products manufactured? Where are their employees from? Where do they sell? Where do their main competitors come from? Answers to these five questions can well shed light on the business model of a company, including its supply chain, human resource costs, marketing channels and market competition, and thus clearly indicate whether their focus is on the domestic or the international market.
 

Family firms’ degree of internationalization varies greatly by region. Most family firms in Latin America put more focus on defending their position in their domestic markets. Their European and American counterparts, however, are comparatively more internationalized. In China, going global has become a popular trend in recent years. The European debt crisis has created a good opportunity for Chinese enterprises to expand overseas through M&As. For example, China's SANY Heavy Industry Co., Ltd acquired 100% of the shares of Putzmeister Holding GmbH (the “elephant” company) in a EURO 360 million cash transaction.
 

However, family firms focusing on domestic growth cannot remain untouched by the internationalization trend. As China continues to open up its market, increasing numbers of foreign enterprises are flooding in, presenting a significant threat to the local family firms. Considering the limited support the Chinese government has given to the private sector, Chinese family firms are not born into particularly favorable conditions. As the number of foreign competitors continues to increase, family firms in China must utilize every means possible to protect their domestic market share. In order to develop, they must navigate their way through a difficult path in which they may face threats from both State-owned and foreign-funded enterprises. Therefore, they should be very careful when making decisions with regard to their corporate transformation and brand building.
 

Family reputation tends to play an increasingly important role in the development of a family business. A positive family image and family relationship can generate positive social influence and public trust for a family firm, thus facilitating its development. Today, more and more entrepreneurs are generously supporting charitable causes which, in turn helps elevate the public image of their firms. Both competent successors and a well-established corporate image are precious intangible assets for family firms. Take Ningbo FOTILE Kitchen Ware Co., Ltd for example. Founder Mr. Mao Lixiang has been known for maintaining a good and close relationship with his son Mao Zhongqun, and this has ensured a smooth intergenerational transition of the corporate culture, operational philosophy and controlling power. As a result, FOTILE’s domestic brand image has been continuously improved and consolidated to allow it to compete more forcefully against foreign brands In China.
 

As far as family businesses are concerned, the family is always put ahead of the business. Whether they focus on domestic growth or international expansion, successful family businesses have some elements in common. First of all, they are able to align family strategy with business strategy. This alignment can encourage family members to make concerted efforts towards the long-term future benefit of their company while also fulfilling their personal interests and objectives. It is this unique strength of family businesses generates a virtuous cycle that leads to stronger corporate growth. Secondly, they can facilitate the corporate internationalization process by leveraging the power the family. With a sense of family honor and close family ties, members of a business family are more inclined to show loyalty to their business and contribute more to business innovations. They often have a strong sense of belonging and identify more with the company than non-family members. With shared objectives, family members are willing to work harder and sacrifice more in order to mobilize and maximize family resources for the good of the company. Thirdly, they provide critical support for the company’s globalization efforts in terms of family values and beliefs, which encourages these business efforts. In other words, the family heritage can inspire family members to fully dedicate themselves to the family business. The shared values of two or even three generations are critical for a family business to sustain its success. Last but not least, successful family businesses should build trust with non-family managers and let them take charge of corporate operations. The family resources, though powerful, are not inexhaustible. Effective integration of internal and external resources is helpful for the maximization of corporate benefits.
 

Characteristics of Latin American Family Firms and Their Implications
 

The characteristics of Latin American family firms, and the problems they face, have important implications for Chinese family firms.


Most Latin American family firms adopt a patriarchal style of management, as evidenced by their corporate culture and values. A family firm is like a small empire where the founder or the “emperor” enjoys absolute authority and makes dictatorial and unchallengeable decisions. Nevertheless, such founders/“emperors” often have clear and unshakable objectives and visions, as well as extraordinary business skills and a steadfast entrepreneurial spirit, and thus can steer their business through its development. Corporate decisions are made with high efficiency but low cost. Both the controlling power and decisions are highly centralized, leading to effective execution. However, there are also disadvantages. When the firm is tightly controlled by and overly dependent on one individual, the other family members can hardly develop a strong sense of belonging to the firm. Some Chinese family firms are run this way as well. For example, Zong Qinghou, founder and CEO of Chinese beverage giant Wahaha, has been acting as a patriarch in the company. He is too attached to the company, attending to everything personally and assuming an authority and leadership that are neither replaceable nor reproducible. For these reasons, his only daughter Zong Fuli hasn’t had the opportunity to have a hand in Wahaha’s core businesses, which may become a major obstacle to an effective succession in the future.
 

Conflicts and rivalry among potential successors are often seen in Latin American family firms. In most cases, the firm’s founder has several children working in different divisions. It’s inevitable that they will fight with each other to win the chance of being named as the successor of the family firm. In contrast, the “one child” policy in China, to a large extent, relieves the founding generation from this thorny problem. But Chinese entrepreneurs have other concerns: should they appoint a successor on merit or due to family bond? Many family firms were founded by joint efforts of brothers and sisters, and sometimes also friends and partners. It will become unavoidably problematic for them to decide whose offspring should be appointed successor of the firm. If only one family is involved, the ability and motivation of the founder’s offspring can directly influence the succession plan. In addition, many Chinese family firms cannot be sure whether or not the non-family professional managers are trustworthy. In short, succession is a significant milestone for every family firm. The grooming and appointment of competent successors are critical to the survival and development of family firms.


China’s corporate systems are still far from perfect, and its macroeconomic environment is undergoing radical changes. Against this backdrop, Chinese family firms are bound to encounter big challenges on their way towards internationalization. Corporate systems and business context vary from country to country. Many details, especially the striking cultural differences, need to be considered before a local enterprise sets about marching into the overseas markets. Therefore, family firms in different regions and countries should be encouraged to form a cooperative partnership to facilitate each other’s efforts towards internationalization. This partnership should not be confined just to the business aspects; it should involve more sharing of families’ internal bonds, resources and experiences.



Source: Prof. Jon Martinez’s Speech at the First Closed-door Roundtable meeting of CEIBS Kaifeng Centre for Family Heritage: Family Business in Latin America, North America and Europe, March 12, 2013