Economic Importance of Small Family Businesses
The Department of Trade and Industry (DTI) in the UK published a paper in 2002 entitled Small Business and Government. It contained the following facts about small businesses and their importance to the UK economy.
• The UK has 3.7m small businesses
• They employ 12.5m people
• They represent 51% of private sector turnover
A press release from the DTI on 31.8.2006 brought the picture right up-to-date:
• There are 4.3m businesses in the UK, of which
• 99.3% are small and only
• 1.2m have employees (the rest are sole proprietorships and partnerships)
Unfortunately there do not appear to be available DTI statistics on small family businesses in the UK, and the proportion they constitute of the above 1.2m, but at least the statistics demonstrate the economic importance of small companies in terms of employment generation and wealth creation, particularly at a time when larger companies in the West are always looking at ways of shedding staff, even at times of growth.
The Business Insight website, www.bestforbusiness.com , asserts that 60% of UK businesses are family run and that, compared to non-family-run businesses, they have more productive employees, survive longer and provide more opportunities for women. Despite these positives, only 25% make it to the next generation.
Statistics from the USA provide a more comprehensive picture on the importance to the economy of specifically small family businesses. According to Ronald Reece in his paper “How to Mix Blood and Business Safely and Successfully” there are
• 10-12m family-owned businesses in the USA
• These represent 90% of all US businesses
• 70% of these businesses are managed by the family
• Family businesses provide 55-60% of the workforce and
• Contribute 50% of GDP
So, they are certainly important economically, but small businesses are prone to early failure and family businesses, despite possibly lasting longer than non-family businesses, also have a 75% chance of not making it to the next generation.
The next section examines definitions and characteristics of small businesses in general and small family businesses in particular.
Small businesses are defined by the DTI in the UK as businesses employing 0-49 people. Once above the 50 they become “medium-sized” businesses.
It is difficult to arrive at an acceptable, precise, definition of a small family business as there are so many different types of business but the simplicity of the following definition is appealing:
“…a family business is one where a family strongly influences its
management”
A small family business becomes therefore “a business employing no more than 49 people, where a family strongly influences its management”.
So, what are the particular characteristics of small businesses in general and small family businesses in particular?
Small business owners of my acquaintance often use the expression “feast or famine” to describe the state of their businesses. In other words, things never seem to move along steadily. Either things are wonderful (usually meaning that there is cash in the bank) or things are terrible (usually meaning there is little, if any, cash in the bank and there are few, if any, orders in the pipeline). The reasons for this endemic volatility in small businesses, and resulting financial swings and roundabouts, are often due to:
• Reliance on a small base of customers
• Too little time spent extending the customer base
• When business is good the boss is too busy servicing current customers to spend time on lead generation for the future – and is either unable or unwilling to delegate to others
• Little business planning – the company is managed on a day-to-day basis
• Little financial planning and hence poor management of working capital
• Customers pay late and the boss is loth to chase debts too hard for fear of losing future custom. Non-paying customers therefore continue to receive deliveries, which just reinforces the cashflow problem
Some observers of such common situations would say that small business owners rarely think strategically (we shall see that “strategic thinking” has a wider dimension in the family business) and that they do not learn from their own mistakes and the mistakes of others. Mike Pedler and his fellow authors examine the stages which companies go through and the questions which need to be raised at each stage if the company is to avoid the (seemingly inevitable) downward slope of the sales and profit curve. It has to become a “learning company”, if it is to adapt successfully to the different stages and small business owners find this particularly difficult.
The following describes the stages which small companies go through, if they are to develop successfully. It will be related later to the specifics of the family business:
According to Pedler et al a company will go through the following “life” stages:
1. The Infant Company
2. The Pioneer Company
3. The Rational Company
4. The Established Company
5. The Wilderness Company, followed by either
6. The Dying Company or
7. The Transforming Company
The obvious point at stage 5 is that, if does not want to die it needs to transform itself. The relevant question here for the family company with succession problems is: At what stage are we now? Should the successor reinforce the business within its current stage or is there the need to move the company to a new stage – even to “transform” it if it has reached the wilderness stage.
A brief summary of the characteristics of each life stage:
• The infant company is a start-up – either by one entrepreneur or a group
• The pioneer company is small and fast-growing with, usually, a central, powerful figure or group driving it
• The rational company has outgrown its founders and has become more independent of its founder(s) , more decentralised and more complex
• The established company has become more formalised in its decision-making and applies modern management approaches and techniques
• The wilderness company has lost its way and is out of touch with its market and other stakeholders
• The dying company is one that is failing or bankrupt, or where the initial purpose of its being has been fulfilled
• The transforming company is one that has decided not to die. It has found new purpose, new identity and new life.
Each stage makes different demands on the founders and upon management. Different questions need to be asked and appropriate answers found. Key stages for the family business are stages 2 and 5.
At stage 2 the following questions need to be asked by the founders:
• Do we stay small or get bigger?
• If we grow what new systems do we need to cope with expansion?
• What new people do we need and how will they be integrated?
• Who can replace the leader(s) and what plans do we have (or should we urgently introduce) for succession?
• Do we need a new leadership style (very important if succession is to work)?
At stage 5 the following questions need to be asked:
• How can we change/improve our relationship with our customers and suppliers?
• Do we have the right clients?
• How can we change our view of the outside world from one that is full of enemies and threats to one which is full of opportunities and potential allies?
• What are we here for?
• What should our new purpose be?
The relevance of this biographical, or life stage, approach for all companies is that it forces owners and managers and family to make plans for the future based on the firm foundation of understanding what and who you are and where you have come from. It involves an investment in time to bring the relevant people together to discuss the various stages and to frame and answer questions at each stage.
The above was an attempt to bring out the characteristics of all small companies. The following section focuses exclusively on small family businesses.
What should be evident from the above discussion of the life stages of businesses is that survival is anyway tough and one only needs to look at the current problems of Ford, GM and Dell to realise that it is not only small and medium-sized companies (SMEs) which have problems, but family businesses add a new dimension of complexity .
The hope that family business owners have is that families, when working together, have more commitment, work harder and more productively than non-family members and this leads to economic success. Traditional family restaurants in France or Italy are a good example of this. The downside is that, as soon as the founder of the business brings in other family members, his purely business focus becomes tempered by his concern for the welfare of his family. This can cause conflict and managing these conflicts is never easy.
Peter Leach and Tony Bogod in their Guide to the Family Business give an interesting overview of the typical characters in a family business:
i) The Male Business Owner
The owner of a family business is likely to be male, married with two children and in his 50s. He usually has no formal business training but is very conscious that the business and the well-being of the family depend upon his ability to succeed.
Such people will often be very sure of themselves; they can be difficult individuals with a strong drive to win. Their management style will usually be based on instinct; there may be little formal planning.
It is clear that such an individual fits well with a stage 2 company (see above) but not with a stage 3 company which has become more rational, decentralised and independent of its founders. Such a person will find it anyway (irrespective of any family issues) difficult to make the transition from stage 2 to stage 3.
ii) The Male Business Owner’s Wife
Often sees herself in the supporting role of background adviser, assessing the character of others involved in the business – possible mediator between husband and children.
The potential here for conflict based on non-business criteria is immediately apparent.
iii) The Female Business Owner
..women business owners are frequently more creative and assertive than men…they are often tough negotiators….they find delegation difficult.
Similar problem therefore with making the transition from stage 2 to stage 3.
iv) Husband and Wife Businesses
Success here requires a clear understanding of how the roles and responsibilities are to be divided. There needs to be an agreement about the interaction of their work and home lives; above all they must both respect the contribution the other makes and know how to handle disagreements without them developing into something destructive.
v) Sons, Daughters and other Siblings
Sons: father wants son to succeed but also wants to retain power as long as possible….the son naturally rebels against parental authority
Daughters: fathers and daughters are more likely to work in harmony – daughter does not represent the same threat as the son.
Other Siblings: old sibling rivalries can be continued into the commercial arena – who will succeed, who will be the favoured one, how to ensure fairness?
No clear conclusions can be drawn from the above other than that with good planning, good will and clear thinking all these potential problems can be overcome.
The next section will examine selected approaches to managing the family business.
Tags: department of trade and industry dti, employment generation, family businesses, generation statistics, productive employees, small businesses, uk economy
