The Challenges Faces By Family Business Information Technology Essay

There are many types of business entities that contribute and add value to the economic growth of the country. In Malaysia business ownership can be categorize into three types which are sole proprietorship, partnership and corporation. Each type of these business entities has different way of ownership and operating style.

Basically the sole proprietorship is a business owned and operated by an individual. The owner operates the company by his or her own or may have employees to help them operate the business. The owner has the control on the business liability and responsible for the company operation and finance including of the business profit and loss. The business taxes are paid to the government by the owner through his or her personal income tax return.

Partnership

A partnership is the business owned by more than one person and the maximum number of persons allowed in a partnership is 20. According to Malaysian Partnering Act, partnership is defined as relationship subsisting between persons carrying on business in common with a profit objective. Partnership can be classified into three categories which are general partnerships, limited partnerships, and limited liability partnerships. Different from sole proprietorship the profit, loss and managerial duties are shared among the partner and each partner is liable to the partnership debts. Most decisions for the business required the agreement from majority of the partners and the change of business nature required consent by all partners.

Corporation

Corporation is defined as the legal entity that exists independently of the person who created it. Corporation can be either privately owned or government owned and it can be categorize whether for profit or nonprofit company. The profit corporation especially for a privately owned can either be privately held or publicly held. Usually a profit corporation’s shareholders will elect a board of directors to direct the corporation and hire its managerial staff. Companies in Malaysia are governed by the Companies Act 1965, which protects the rights and interests of shareholders and investors, and provides regulations for the incorporation of companies, the formulation of company constitutions, management and closures. If a corporation fails, shareholders normally only stand to lose their investment, and employees will lose their jobs, but neither will be further liable for debts that remain owing to the corporation’s creditors.

Anglo Saxon

Anglo Saxon is a linguistic word that still used as a term for the original West Germanic component of the modern English language. In the 19th century the term “Anglo-Saxon” was broadly used in philology and sometimes used to refer to peoples descended or associated in some way with the English ethnic group. So in the context of this writing Anglo Saxon can be relate to the company successor since it was pass from one family member to other family members in order for the business to continuously sustain and making profit.

Family Business

Base on different business ownership and categories available in Malaysia the decision how to run the family business can be base on advantage and disadvantage of each type of business structure. The decision how to run the business should also based on advice from the consultant as well as legal advice. This is important because the right decision and direction for the family business structure will ensure the business can last for a long term over the generations.

According to article ‘A Curse Upon Family Enterprises’ by Jean Lee and Hong Li(2008), Family enterprise is the most common business all around the world and 40% of the world top enterprise are owned and run by families which contribute to the gross domestic product (GDP) and job opportunity in the country. In US, half of the GDP and job opportunities were contribute by family enterprise and same pattern was seen in Great Britain which 50% of the country’s workforce was the employees in family enterprise. In Germany, family enterprises have created 66% of GDP and 75% of the total national employment. In Southeast Asian nations the GDP contribute by family enterprise was as follows with Korea reaching 48.2%, Taiwan 61.6% and Malaysia 67.2%. In developing countries, almost all of the private enterprises are family owned.

DEFINITION AND BACKGROUND

Family business can be describe when business own by one or more families members directly or indirectly and have significant ownership and commitment toward the business well being. Family business can be consist of numerous combination of family members such as husband and wife, parents and child, extended family and also multiple generations such as grandfather, father and son. These family members also play roles as stakeholder, board members, working partners, advisor and employees for the company.

Most of the successful business in the world started with family owned business. The example of family business in Malaysia that were famous and successful are Kerry Group, IOI Group, Genting Group, YTL Group, Tan & Tan, Royal Selangor and MK group. This shows that although a business was handling by family members it’s for some instances can be a big and successful as any non family business. The business was manage properly and can sustain throughout generation. In order for the family business to develop into an excellent company they need to inculcate a certain rules, practices and philosophy. Besides maintaining a good relationship among the family members they need to balances between family and business matters.

In Malaysia majority of family run their businesses in small scale enterprises which are still managed by the founder with the number of workers varies from 51 staff and below .The business activities focused on manufacturing, retailing and construction and the business were started by the people having six and a half years or more working experience. This shows that the trending of family business in Malaysia were commend by people that have appropriate experiences to run the related business that related to their working experience.

PROBLEM STATEMENT

The trend of family business survival through generation

Through out the time the family business will face the new challenge due to the changes of business, political and socio-economic in Malaysia. Only few family businesses that are willing to move with the times have survive and others simply slip into obscurity without even reaching the second or third generation. The example of family business that not even last for second generation is the famous sawmiller Ong Kian Teck of the 60’s and 70’s .This family business fell apart at the moment of the founder pass away due to feuds between the family members. Instead of cooperated to sustain and continue the business they became entangled in quarrel and today the company reduced to a small supplier of building materials.

One of the oldest surviving family businesses in Malaysia is Royal Selangor International Sdn Bhd which is established on 1885 by Yoon Koon. This company is the maker of world renowned pewter that survives more than 125 years and currently headed by the third generation Yon Poh Kon. Other successful family businesses are YTL Group with the Yeoh Cheng Liam as the founder, who had turned the small timber concern of the 1920s into a construction company in the 1950s .Later his son Yeoh Tiong Lay went on to obtain a Class A status from the government in 1955. Currently YTL Group manages by third generation leader Francis Yeoh who ventures diversities business such as property, manufacturing, hotels, power generation, water treatment, information technology and overseas business.

Genting group also a good example of the successful family businessas with the Lim Goh Tong as the founder. This company is the casino operator that started the business in 1971 and later traverses to his son Lim Kok Thay in 2003. Genting Group has diversified into many other industries such as plantations, property, paper, power generation, oil and gas exploration and cruise boat industries.

Before the introduction of public limited company system in Malaysia the companies basically are owned by individual and family. Sometimes business was handling by the family members who are not expert in business management. The family business management usually comes from founder natural talent and their experiences in business during the child. Generally there are three different stages of family business had gone through in order for the business to growth from inception to maturity. Different skills are required in each stage and family issues might happen when the business moving from one stage to another stage.

The first stage is called as start up stage where the business is still new and varies from 1st to 5th year after the company started to venture their business in the market. The direction and business objective is clear since it more focused on the creation of the new business .The culture is in revolutionary change since everything is new and everything has to be created first. Family and ownership is not an issue since the founder dedicated all available time to developing the business. Raising the startup capital is the critical barrier since the business might face the danger of undercapitalizes during the initial period of business initiation and the family members are an important source of finance and business advice. Inadequate estimation of initial capital, operating cost and stream revenue will contribute to cash flow problem starting from the beginning of the business started.

The second stage is survival and stability stage where the related period is between 6th to 15th years after the business was started. During this period the company needs to consolidate and structure their business function and area due to rapid growth and positive cash flow. The culture is in evolutionary stage since it building on what founder has created rather than changing tremendously. The ownership become important to a small number of family members however the newer generations tend to escape and create their own path rather than submission to the founding generation.

The third stage is success stage where the business was already running for 16 year and above. During this period the business will traverse to a different generations and there can be several hundred of family members who already inherit share in the business. The ownership becomes to the fore since the family members with minority ownership tend to wonder about their roles in the business since they don’t work in the business and not sit on the board. They might want to sell their share and invest the money elsewhere for themselves.

The business might also face a difficult decision in how they want to manage the company whether they should continue running the business according the old ways as determined by the founder or adapt to the new market needs and requirement. The culture during this period can be evolutionary, revolutionary or the mix of both. During this period most of company will growth and expend their capacity or business .Sometimes the company will neglect the financial planning, control procedure and contingency plan for worst case scenario. When the crises occur it might result in some loss of credibility and exposed their weakness to the customers and shareholders.

Challenges faces by family business

The family business can be described as two competing system which is family and business. Since the relationship between the family members is unique with uncertain boundaries and different rules the conflicts might arise due to overlap of the roles such as siblings, husbands and wives, parents and children, extended families, and multiple generation roles in company. The context between the business and family also different where the business focus more on profitability and productivity while family more encourage for nurturing and acceptance .Beside that individual communication within the family members also might be inappropriate in business situations .

The tension will exist between their personal life and career pursuit of the family member where the personal concern and argument may carry over into workplace and cause detriment to the company. For example the husband and wife who is a partner in a company might not able to make a good business decisions without marital problems turning the discussion into an argument .They may confuse their roles of business partner and spouse. Other example is when mother work with her son in the same workplace where this two people need to manage two relationship simultaneously where she is the mother/ boss working with her son/employees.

Rules are important concept whether at the workplace or in the family. The conflict arises when the family rules is incompatible after they are transferred to the business system. For example in family context the nurturing, advices giving and considerate by parent are accepted rules apply at homes. However in the business context the parenting style rules might be embarrassing to the children as the employees and this will disrupt their productivity and working relationship between the parent and child.

The guideline and qualifications for family members to enter and working at the family business also will cause the conflict since some of them are not qualified due to lack of talent or skill to fit in the work position and make useful contribution to the company. Once hire it was difficult to fire if they are troublemaking family members that cause a problem to company such as reduce the motivation of other employees by exhibit a poor attitude and cost the company money since it involve unique relationship.

When this conflict occur attracting and retaining nonfamily employees will be problematic to the company although the outsider can provide fair and impartial perspective on business issue that can stabilizing force in family business. For the example employees might find it difficult to deal with family conflict in the job because the special treatment was accorded to the family members and the opportunities for advancement will also be limited. Some family members might also resent the outsider and purposely make thing difficult for nonfamily employees to retain in the company.

Another challenge for family business is the issue such as money, personalities and trust. For the money in family business it involved the payment of salaries and dividing the profit among the family member who participate in the company. In order to growth the company needs to use quite large percentage of the profit for expansion especially for small business firm. However some family members who are the owner but not employees of the company need to be convinced about the value of investment for company future and why they receive small amount of dividend cause by the expenditures.

In term of personalities and trust it involves the succession of the family business. As the founder of the business he needs to determine who will take over the leadership and ownership of the business to continue their legacy when current generation retires or dies. Without proper planning for current generation to step down it might cause a jealousy among the family members. If it not handled sensitively when deciding who will be the successor and CEO it may result the conflict and hostility among the siblings on final decision and it has a potential to divide the family harmonies and destroy the business. Beside that when the succession is postponed the older relatives who still remained in the family business tend to maintain at their status quo and resist to change and take the risk although this attitude can inhibit the growth of business.

Why family business cannot sustain over the generation

Conflict is inevitable in any business and in family business it was one of the major factors that contribute to the destructive behavior to the firm and family. When the conflict is not control properly it will disturb the rationality of decision making, adequate planning and in the worst case situation it will contribute to the mortality rate of family business. Although most of individual growing up in a family it doesn’t mean they are an expert in solving family problem. This concept is same for family business problem since most of the individual have poor and lack of skills for conflict management and resolution among the family members it will contribute to too many conflict to arise. Major sources of conflict included rivalries among founder, siblings and family members, lack of guideline for career enhancement, differences status and power between family an non family employees, and unfair succession process.

The key success for the family business is a good management especially in financial management and willing to take risk in order to achieve business success. Poor financial management was the main reason for the family business failure and as the owner need to learn how to ensure it meets their financial obligation. Beside that poor operational management that involving day to day running of businesses was also the failure ascribe from overwhelmingly owners.

Succession planning is a long process where most family business lack of good succession plan and it becomes more crucial in the event of sudden death of the founder. Base on typical Asian culture usually the son will takes over the family business. The lack of planning from first to second generation was the fault of the founder himself and as the result his business dies with him and this is the reason why most of family business does not succeed to the next generation. Sometimes some owner especially in small and medium enterprise prefers their heir to become professional and does not encourage their child to inherit their business so the company was sold and close down.

LITERATURE REVIEW

Base to article ‘Gale Encyclopedia of Small Business’ by The Gale Group Inc (2002), Family businesses might be the oldest form of business organization and today it was as important and distinct participants in the world economy. Most of the family business will face a set of unique management challenge from the overlap of roles and responsibilities as the family and business leaders. When the emotion intrudes in work relationships the inevitable conflicts between family members arise and if this happen the business leader must intervene and make the objective decisions necessary to protect the interests of the firm.

Base on study conducted by Hemalatha Mahenthran in article ‘Financial Management Knowledge Among Malay Family Owned Business (MFOBs) Entrepreneurs’ most of the family businesses fail due poor financial management and in order to be outstanding companies they need to maintain good balance between family and business matters . Conflict in family business is unavoidable since each system has its own roles, rules and requirement. In order to resolve the conflict they may be have their own style and unique communication that already been practice for years and sometimes it good in family situation but not the best ways to resolve the business conflict.

Malaysia has a great potential for the growth of family business and the study was conducted around Penang with involvement of 100 Malay entrepreneurs. During the survey session the three stages of family business being use as the guideline to conduct the research which are started with start up stage, continue with survival and stability, and later success stage. Base on the research most of the respondent are still in start up stage and more focus to growth their business.

Base on Andrea Ganzaroli, Gianluca Fiscato and Luciano Pilotti (October 2006) Business succession will take place in 30% of European firms within 10 years and this process could affect about 690,000 small and medium enterprise. In 1996 European Commission estimated that 30% of these enterprises will disappear because of inadequate business succession management (European Commision, 1996, p. 183).However base on recent data shows that in Italy about one third of firm have survive to first generation and the number goes down to 15% from second generation on.

Base on AsiaViews, Vol.II (Dec 2008) by Stephen Ng ‘The Survival of Malaysian Family Businesses’ the three main things he discuss that can contribute the survival of family business until second or third generation are succession issue, globalization and branding. He stated that base on author of ‘Success Beyond Three Generations,’ Dr. Ong Hean-Tatt, blames failure of Malaysian family businesses on the lack of a good succession plan. Legal tussles are not unusual within the controlling family in the business and it sometimes making the succession plan almost impossible and its will be worse when the founder is more than one. In order to survive the family businesses have to adjust to new competitive environment and adapt to the challenge of globalization, e-commerce and liberalization.

The biggest drawback to family business is when the leaders resistance toward the change and not ready to adapt to this challenge and this has caused the business eventually fail and cannot sustain through the generation. Branding is very important in business since today consumers are spoilt with a lot of choices. Base on Paul Temporal in his book, Branding in Asia, what is greatly lacking is the failure of Asian family businesses to create strong brands and this is in fact what keeps some family business still afloat. Some company in Malaysia that survive through generation due to international Malaysia brand are Royal Selangor pewter and Shangri-la Hotel that owned by the Robert Kuok group. Figure 1 shows the list of tycoons whose second or third generation that have joined them in handling the business.

Figure 1: List of tycoons whose second or third generations have joined them

NAME

COMPANY

Robert Kuok

Kerry Group

Lee Shin Cheng

IOI Corp

Lim Goh Tong (deceased)

Genting Group

Yeoh Tiong Lay

YTL Group

Mustapha Kamal

MK Group

G. Gnanalingam

Westports

F. D. Mansor

Glomac Group

Yong Poh Kon

Royal Selangor

Tan Chin Nam

Tan & Tan

Lim Kim Hong

I-Bhd.

A. K. Nathan

Eversendai Engineering Group