CONCERNING family businesses, it has been repeated ad nauseam that "the grandfather starts a business, the children weaken it, and the grandchildren bury it." Another way, especially in Europe, of expressing this same observation is to talk of a "grandfather who is an entrepreneur, a son who is an engineer, and a grandson who is a poet." Having read a book by an authority on family business in Europe, Professor Miguel A. Gallo of the IESE Business School in Barcelona, Spain, I have begun to question this untested theory. Without denying that there may be indeed cases in which the third generation witnessed the demise of a business started by the grandfather, Professor Gallo in his very wide experience of working with hundreds of family businesses in Spain and other European countries, puts the primary blame on the first generation. The eventual failure of a business founded by an entrepreneur is usually the result of sins of commission or omission of the founder himself.

The eventual failure of a business may be traced to two problematic situations that have not been addressed by the entrepreneur founder himself. These situations have to do with the maturity of the business model and to a structural crisis. In the first place, all businesses go through a cycle which inevitably ends up with maturity. Maturity is reached when sales have reached a plateau, then start to decrease, first gradually and then precipitously. Some businesses mature faster than others, but it is rare for a business not to reach maturity after 20 to 30 years of existence. It is notable, for example, that some family businesses that started in the booming industries like textile, flour, chemicals, shoes, etc. in the 1960s and 1970s are no longer around. In contrast, those who were able to diversify into other growth industries are still very much around like Carlos Chan of the famous brand Oishi that came VILLEGAS

from the Liwayway "gawgaw’ industry or the Gokongweis who started in textile. Or also notable are the Chiongbians who knew when to move out of shipping and diversify into the sunrise supply chain industry. Also more recently, we have seen the Aboitizes recognizing that shipping is a mature industry and decided to focus on energy.

Not only do businesses mature. The very founders of these businesses also reach old age. As Professor Gallo observed, it is predictable that the founder of a business after 20 or 30 years of being at the helm of the organization may no longer have the same entrepreneurial spirit and energy to undertake important changes in the activities of his business. This may be compounded if the founder has not brought in younger managers, with the result that the entire human organization has aged together with him. There may also be changes in the human needs and motivations of the founder. It is possible that after 20 or 30 years, the founder’s preferences may have changed. He may be more interested in preserving his status, with his desire for economic security diminishing his ability to take risks.

These three changes – the maturity of the business, the aging of the organization, and the diminished ability to take risks – can pose a serious problem to the sustainability of the business. The business may be precisely at a point at which some radical changes may be needed but an aging and a more conservative organization may not be up to the challenge of making these changes. Because the problem has become quite complicated, the founder of the business may be either in a denial mode – he refuses to accept the need for change – or he leaves it to the next generation to make the necessary changes. Unfortunately, postponing the solution for the next generation to apply may already introduce the business to a process of decline that will see its final outcome in the inevitable demise of the business by the time the third generation takes over. Such a tragic end could have been avoided if founder had enough foresight and remaining energy to diversify into new businesses, incorporate young blood into the organization, and look for alternative funding sources so as not to commit the entire wealth of the family to the business he founded. For comments, my email address is bvillegas@uap.edu.ph.

BERNARDO VILLEGAS - MARCH 6, 2009

Don’t blame the third generation

PART II

The second challenge to the founder has to do with the very structure and strategy of the business. There may come a time during the life of the founder when the strategy that has to be developed for his business is no longer in consonance with the existing management structure (remember that structure follows strategy and not vice versa). The same mismatch may exist between the desirable strategy and the capabilities of the managers. In many family businesses, this weakness tends to be chronic and "terminal," and usually occurs when the firm finds itself in an advanced stage of the second generation. It is usually the case that in this second generation, the responsibilities are shared by the brothers or children of the founder, resulting from some agreements reached during the first generation or tacitly accepted by all to foster coherence or harmony. There may also be a distribution of management tasks, such as, for example, "some are assigned to sales, others to manufacturing, and still others to personnel management." These agreements may remain in force for a long time, independently of the changes in the business environment, the number of products or size of the enterprise, thus making it difficult for the business to modify its structure in response to significant changes in the business environment.

In non-family businesses, the structural changes are made more easily. Their top management analyzes the problem of the lack of fit between structure and strategy and applies the solution by defining the new functions, changing the responsibilities that have to be assumed by the persons in command, retiring some of the managers, hiring new talents, modifying the remuneration packages in order to reward those who are able to achieve the new goals that have been set, etc. In family businesses that have reached the second generation, however, instead of acting swiftly to identify necessary changes and implementing them no matter how painful, the members of the family usually blame the lack of coordination among themselves as the root cause of the problems. They spend an inordinate amount of time focusing on improving family relations. Their efforts to improve the situation do not succeed because the root problem is not the lack of coordination among family members. Still unable to see the objective causes of the problem, they turn to a mediator, a "third person," who is asked to resolve the perceived conflicts.

Another long period transpires after which the so-called "good person" asked to mediate either does not know how to resolve the problem or, proposing an adequate solution, is ignored. As no solution is found and thinking that everything possible has been tried, each member of the organization goes back to what he/she was doing before. What is worse is that, in order to avoid conflicts, the painful decisions that have to be made in order to go to the root of the strategic problem are indefinitely postponed. The inability to make these difficult decisions may give a false sense of security and peace to the family members. But as time goes by, the enterprise is weakened for not doing what is demanded by changes in the business environment. Such a debilitated business is what is inherited by the third generation, the so-called "poet" who may have no alternative but to preside over the death of moribund enterprise and to finally bury it.

Family businesses that find themselves either in the first or second generation should give serious consideration to these reflections of Professor Miguel Gallo who continues to actively advise family businesses in Europe. Among his many publications on the issue of succession in family business is the one entitled "La Sucesion en la Empresa Familiar," (Succession in Family Business) published by the IESE Business School. Information on this book and other IESE publications may be found in the website www.iese.edu. For comments, my email address is bvillegas@uap.edu.ph.