Family Business Exam 2 Study Guide
Family Business Exam 2 Study Guide
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This 8 page Study Guide was uploaded by Monica Garcia on Wednesday October 12, 2016. The Study Guide belongs to at University of North Texas taught by in Fall 2016. Since its upload, it has received 8 views.
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Date Created: 10/12/16
Family Business, Fall 2016 Study Guide of Major Concepts for Exam 2 Lessons 6, 7, 8, 9 REMINDER: EXAM IS Thursday, October 13 th EIGHT PAGES OF GLORIOUS DETAILED STUDY NOTES. DOWNLOAD MY CHAPTER NOTES FOR MORE IN DEPTH NOTES OR REFER TO SLIDES OR BOOK FOR FURTHER STUDY. I ALSO COVERED TOPICS THAT ARE NOT MENTION ON GIVEN STUDY GUIDE BUT WERE HIGHLY EMPHASIZED IN CLASS. GOOD LUCK! Chapter six Characteristics of successful successors o They know (and fit) the business well – they like or even love the nature of the business o They know themselves (strengths and weaknesses) have the necessary outside experience and education o They want to lead and serve Can control the firm and respect the past o They are responsibly guided by the previous generation, by advisors, and by a board of outside directors And count on their support o They have good relationships and the ability to accommodate others They have earned respect of nonfamily employees, suppliers, customers, and other family members Challenges and rewards for latter generation family members o REWARDS Biggest thing is there’s less risk. They have lived around the business Accumulated knowledge transfer: see things that could not be seen from someone outside of the firm. No way to codified some of the knowledge that is tacit (more action based) Outsiders will be exposed to books, but insider family member will know things by experiencing them. Reputation of the established firm-taking on a firm that’s been around for a while. Knowledge of the work environment and key management-different structures, how things are set up. Have better career opportunities than non-family business family members o CHALLENGES The shadow of the founder E.g., Walt Disney -> Roy. O Disney: Afraid to make decisions different from founder Lingering questions about the ability to run the business E.g. Thompson family and 7-eleven-1927, founded in Dallas, Tx. Sold bonds, family was getting involved, yet there were external stakeholders. Became a public firm, 1946 became officially 7/11. Late 60’s became 24/hrs. Late 80’s, threat of hostile takeover corporately. John Thompson completed 5.2 billion dollar bailout. Tried to build twin towers in Dallas, but stock crisis led to them pulling back on the second one. Had a lot to do with the evolution of North Texas specifically Dallas area. In the crisis, (1987), needed to make a crucial change, so they transferred 70% to Japanese partner Ito-Yokado, left them with 5%. Recently sold the last bit of that so no longer family company. Need to prove merit vs. nepotism-This is the ideal situation that firm wants to see from new successor. Nepotism means that they are shown favoritism due to who they are rather than actual ability and skill as a leader. Endowment effect: greater value placed on what has been attained rather than future opportunity: Prefers actual data rather than projection ex: track records. Value of what was already accomplished Resistance to change especially under conditions of great success in previous generations.-Previous leaders’ success can act as a hurdle as to change. Hard thing to overcome. Ingredients for responsible leadership o This is demonstrated in a 2x2 Matrix that you will need to have MEMORIZED. It’s on the Ch. 6 slides. Basically has two dimensions, FAMILY & BUSINESS Each dimension has positive and negative categories Four boxes labled I-IV describe the cross between the categories and dimensions IT IS IMPORTANT TO KNOW WHICH EACH BOX MEANING IS! Questions on test may not be clear cut so you need to know the meaning behind each box and be able to apply it to a scenario. These are the 4 boxes o Warm Hearts /Deep Pockets (I) *Ideal High emotional and financial capital o Pained Hearts Deep Pockets (II) High financial but low emotional capital aka family problems but the firm is doing well ex: Freedom Communications o Warm Hearts/Empty Pockets (III) *Most common scenario High emotional but low financial capital aka healthy family dynamics but not a profitable business, perhaps they make more decisions that benefit family but not the firm. o Pained Hearts/Empty Pockets (IV) All has gone mad, low financial and emotional capital, business is failing and so is family dynamics o OTHER EMPHASIZED NOTES DURING LECTURE BUT NOT INCLUDED IN GIVEN STUDY GUIDE Vision: Next-generation leader provides a vision that rejuvenates the business and makes it competitively fit in the succeeding generation. Want it to still makes sense 5 years from now. Very vague that sets a firm down a certain path. Take what we want to happen and make it OVERLY vague. Unmeasurable. Set a vision first, than your mission that is consistent with vision. Next Generation Development 3+3+3+1=10 Rule Implies that you spend 10% on charity, 30% on spending, 30% for training, 30% for future endeavors (savings/invest). More on the individual level than on business level. Help’s train up the next successor in managing their life and firm, and thought to help with not having a problem with finding a successful successor. Training the Next Generation Important Term o Heir apparent: designated successor for the firm o Train the successor to know that the firm is defined by stewardship and responsibility. o A good suggestion is: Allow them to experience different areas of the entire businesses to develop a passion and understanding of the company. Chapter seven CEO exit styles and their implications o The Monarch Doesn’t leave until forced out Imagines no one could ever replace him/her Ex: the FOX NEWS CEO: BoDs asked driver to keep driving around to avoid dropping him off o The general Leaved the office reluctantly and plots a return Hopes the next-generation leader proves inadequate Can’t let it go, try to get back in. o The Ambassador Retires but hold some ceremonial role Allows others to learn the business first-hand and then eventually manage it Potentially a good thing, keep them as a figurehead role o The Governor Leads for a limited term, then moves on Ensures their successor will be trained and ready o The Inventor Returns to development activities Takes a key position in another enterprise o The transition Czar Provides active leadership during the succession process. o Implications Monarchs and generals are the WORST enemies of succession. They hate to give up power Monarchs and Generals may be the reason why the average tenure of CEOs in family owned businesses is more than double that of CEOs in management-controlled companies (17 vs. 8 years) Other exit styles allow for a generational transition to be planned and eventually executed How CEOs build governance o They need to set up a clear hierarchy o There should be accountability and have clear expectations of tasks and then delegate them o Have a system so you can tell early on if there is problems. o Blurred system boundaries present the strongest case for the need to build institutions to.. Govern the relationships among the family o Basically they establish the roles of the Systems Theory Model (Family- Ownership-Management Venn Diagram). MEMORIZE THIS THERE’S ANOTHER EXAMPLE IN CH 7 SLIDES. Roles of the CEO spouse o CEO and CEO spouses (Moms or Dads) Informal but very critical Business Partner Chief Trust Officer (informal) o Sit in family council, personal issues conciliator Advisor/keeper of values o Generating interest in the family for the children The free agent o Often aware of both family and business matters, but chooses to grow and develop a separate identity o Usually available for consultation and advice during challenging times in the life of the family/business Jealous spouse (personal) o Resent business due to impact on relationships. Interim CEO o Successor is too young or not ready OTHER EMPAHSIZED NOTES METIONED IN LECTURE BUT NOT ON GIVEN STUDY GUIDE o Porter’s Generic Model of Competition Two Dimensions: Strategic Targets(Broad or Narrow/Niche Market) & Competitive Advantage (differentiated/unique & low cost/quality) Basically Niche markets are always pricier Goal of low cost strategy is keep costs low but maintain the same level of price. Cost and price are two different things: cost is what the company pays; price is what the customer pays. The difference has to be something the customers actually care about o CEO’s main responsibility for the firm is to keep it COMPETITIVE AND PROFITABLE o Transfer of power is problematic when: CEO’s don’t want to leave the company Don’t prepare or train the next generation; doesn’t train the next person to lead. One of the MAIN reasons. o Internal hires versus external hires: 3 types of succession Followers (internal, promoted following retirement) Contenders (internal, predecessor was fired)- could be a worst case scenario-tend to fire all other staff from different levels. Outsiders- CEO was pushed out and the next person was from the external environment. Could be a worst case scenario-tend to fire all other staff from different levels. Contenders/outsiders are correlated with high executive turnovers. CEO Succession o Scenario shareholders like to see is whether you bring someone from the outsiders or followers succession types. They like a heir apparent (when they know the present leader is getting ready to retire or leave, so they prepare to find successor). Heir apparent is the next person designated to take over. Should be announced or publicized, because it can reduce the chaos. Like outsiders because they could see some new changes with new perspective. o What they don’t like is a contender; no heir apparent involved. Implies there was no plan to begin with. Shareholders want to see preparation and planning in their CEO’s. Don’t like that successors are also terminated. Or when there is a temporary CEO, shows unpreparedness and also next CEO is most likely going to get fired. o Chapter eight Change formula / what it means o The Change Formula C=D*V*FS>>RC C=change D=dissatisfaction with the status quo V= vision of desired future FS= First steps in getting from "here to there" RC= Natural resistance to change Sell change so that the first steps are manageable The Change process / the steps o Present StateTransition State Future State (diagram on Ch. 8 slides) o The Future State (FIRST STEP) define the future state before beginning the process of change. Give people some sense of hope. sell people on it. scenario should be precisely defined. Write one scenario for the business and another for the family. Both sides are going to be looking for different things. Scenario should be concrete and honest. Change agents will help implement the change o The Present State (SECOND STEP) assessing the current situation is the key task when facilitating an evolution can include surveys, educational sessions, "open ear" meetings assessment must include an evaluation of readiness for the particular change that is being contemplated o The Transition (THIRD STEP) Where you implement change Action plans- take a big lofty goal and break down into smaller parts. leader must decide where to begin the change process ex: top management, family, ownership... Helps hold people accountable, if something doesn't happen you still have a chance to do it on your own. Ensuring continuity – how to? o Plan transfer with agility: you can still make adjustments when you need to make them. Your future almost never looks like the way you say it’s going to look. o Assume appropriate leadership roles. all about delegation o build on the core competencies of the firm: something the company does well. Take advantage of something you already do well. Don't build on something you don't have any experience or are not successful in. o Develop the leadership capability of the next gen and encourage a vision of innovation. You're trying to ready the next gen to eventually replace you. o Nonfamily managers: you have to hire nonfamily managers. They are only going to hire non-family managers when the environment leaves them no choice. The right thing to do is to hire them especially goes through change. Can easily replace them and they should be ideally more trained and capable. o welcome the outside review of board members: should have independent board members. o Promote communication: Lewin's Development Model: UnfreezeTransformRefreeze o First step in making a change: Unfreeze the firm o Second: transform-make the change o Third: refreeze: becomes the identity or institutionalize Business rejuvenation matrix: Degree of Innovation vs. Degree of Customer Focus o Picture is on ch. 8 slides o Make sure you can reproduce this 2x2 for TEST!! o Best place to be= Enterprising Businesses: Focused on Customers and High Innovation o High Degree of Inn./ low degree of focus = Dot Coms o Low Degree of Inn./ low degree of focus = mature, declining, cash cow, o High degree of Inn./focus = enterprising businesses o Low Degree of Inn. And high degree of focus = business re-inventors OTHER IMPORTANT CH 8 NOTES MENTIONED IN LECTURE BUT NOT ON GIVEN GUIDE o Term: Inertia-when things don't change. What once was an advantage at one point is now a disadvantage. o Blending Cultures combine elements of both cultures OR completely replace one culture with another <---this one almost NEVER works o Organic Competencies of a Family Company o organizational capabilities: people, skills, systems o customer-supplier integration: relationships and systems o product/service price and performance o brand equity: reputation o concentrated ownership structure o family unity and business opportunity o ways family firms can have an advantage over non family firms o Refer to Examples in my Ch. 8 Changing Leadership Tasks about Nestle, Instagram, FB, Daimler/Chrsyler and pay attention to bolded parts. Those are the take aways from their attempts to change culture. Chapter nine Family governance o A system of joint decision-making that helps the owner family govern its relationship with the enterprise. o Enhanced by contributions mostly from the family o You want to maintain the voice of the family. Main board responsibilities o Provide resources-formal role, finance business endeavors, issue bonds, sell stock or find new investors. o Council the CEO-informal role o Control, if necessary-formal role, replace CEO when and if necessary. Guidelines for selecting good board members o Members are independent outsiders—people with whom the CEO feels comfortable and who will be supportive but not necessarily agree with the CEO o Suggestions for finding good directors include networking through professionals and organizations, using relationships established with businesspeople in other situations, and framing a brief statement of the type of person being sought as a board member o Board members should have experience in managing, hiring, and firing; have acuity with financial statements; have a sense of human resource management; be ethical; and be passionate about wanting to make a difference Advisory board – who are they?More listed on slides but these are the most important. o Informal group of people (usually professionals) that helps develop firms. Giving advice to company. o Size should be limited to 5-9 members o Independent outsiders should constitute the majority o They derive no revenues from their relationship with the company except through board service fees. Make no salary, only possibly a fee. o No managers IMPORTANT TERMS o Family MEETINGS: Including all members specifically those not actively involved in business Update family members Opportunity communication Educate family members Problem solving and conflict resolution Pass on family values and traditions Doesn’t have a specific duty. o Family COUNCILS: Serves SIMILARILY like a BoD does to a firm but instead to the family Governance body that focuses on family matters- has the specific duty that could make decisions that affect the firm. Family Council Cautions Don’t bring together relatives who aren’t speaking to each other Don’t have the first meeting during a significant family conflict Start small, with direct descendants, and the grow Consider inviting a facilitator Don’t use the family meeting to rehash old conflicts or blame others for past actions. o Family ASSEMBLY-not much said during lection or on slides about this one. These were the two points he wanted us to take away from this. Operates in conjunction with the family council Useful when the size of the family prevents all from sitting on the family council. o Family OFFICE- Not directly or heavily involved with management and daily operations/ inactive owners in daily operations. Family offices assist shareholders with the responsibilities of their ownership relation to the company How are they going to invest or direct their money is one of the main ones. Think of Disney example and 7-eleven. Evolution of family business and wealth o Stage 1: firm starts to exist; family commits their money to it o Stage 2: begin to professionalize the business; start to hire outsiders, or being open to public o Stage 3: firm is professionalize, non-business investments and diversify. Starting to transfer some of the assets to the next generation. Also where you set up the philanthropy. o State 4: the family office(operating independently of the firm itself) is the family business; the family has more or less left the business. Family Constitution o NOT A LEGAL DOCUMENT o Aka family charter o Important asset to family unity especially with SECOND generation firms o Why FC? No amount of legal expertise or foresight in the drafting of legal documents is going to equal the goodwill and personal responsibility that family members begin to assume. They are concerned with each other’s socio- emotional wealth (SEW). Family members are going to want to do what’s right because the firm is like a part of the family. More consistent with stewardship theory than agency theory. Stewardship theory is probably the best theory for family business. This pretty much covers all of chapter nine, the given study guide included all the emphasized topics in lecture.
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