02 October 2017 Business Family Businesses

MBA: A School For Scions

Research favours the specialised MBA for family businesses
MBA: A School For Scions
Illustration by Sajith Kumar
MBA: A School For Scions
outlookindia.com
2017-09-23T10:44:49+0530

Family businesses are different.  For most of us, the term evokes a picture of a mom-and-pop store, or some other small enterprise catering to a local market. “But they could also be unimaginably big,” says Arvind Nigam, an INSEAD graduate who’s with Zoho. Take for instance India’s Tata group, the Future Group, Wal-Mart and even Porsche. Even in such behemoths, decisions are often taken by close-knit groups. Management gurus say that such businesses inevitably face the same problem: when and how to pass the baton to the next generation.  When should heirs be given full executive powers? Sometimes, the problem lies at the opposite end of the spectrum: reluctant heirs, who have their own plans. And when the next generation does take over, the biggest challenge that lies ahead of them can be how to expand and where. Should they remain core-business focused or should they diversify? When is it good to go from private to being publicly traded?  All this really boils down to a single issue: how do family-run enterprises differ from publicly traded, board-run busines­ses, and do the scions of such families require special training that takes these differences into account? Business schools now tout MBAs for family businesses as the answer.

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Before examining the details of these programmes, it is important to address the first half of the question; that is, we must acquire an understanding of the substantive differences between family-­owned and non-family-owned firms.  One of the best answers comes from a 2012 study by Nicolas Kacha-ner, George Stalk Jr., Alain Bloch and Sophie Mignon, published in the Harvard Business Review. Conven­tionally, they say, it is assumed that family-owned firms have a structure that gives them a “unique ownership structure” that ­“traditional public firms often lack”. Yet, until their study, there was very little to say how family businesses differ from non-family ones when it came to their economic behaviour, their investment decisions and their broader goals.

The researchers studied 149 publicly traded but family-controlled businesses drawn from seven countries. They ­selected their samples in such a way as to account for a variety of national ­economic environments. Each of the businesses they selected had a family that owned a significant stake and were involved in management decisions. Their results show illuminating insights that confirm what has long been ­believed: family businesses are different. When the larger business and political economy environment is bright, family firms don’t profit as much as “companies with a more dispersed ownership structure”. During slowdowns, on the other hand, the former outperform the latter. Analysing data from 1997 to 2009, the researchers find that “average ­long-term financial performance” was far more efficient for these firms in each of the seven countries.

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“The simple conclusion we reached is that family businesses focus on resilience more than performance,” they write. Other distinguishing features identified by the study include the ­following. Family enterprises invest and spend in a more measured way in both good and bad business environments. They make more efficient use of capital expenditure (capex) and save more for bad times. Their average debt levels tend to be lower than those of ­non-family firms, and they don’t go on acquisition sprees. They also tend to stay focused on their core business, and it is not common for them to diversify. Lastly, they are better at retaining talent.     

Thus, family businesses are ­characteristically peculiar, and running them needs a tailored ­education. “Family businesses are highly complex. They must continuously align the interests of the family with the ownership and ­objectives of the business,” ­according to Joachim Schwass, a professor at IMD school’s Global Family Business Center. According to PwC’s 2016 Family Business Report, the ­challenge for such enterprises lies in the medium ­term—the need to have a ­strategic plan that links where the ­family is to where it wants to be. This is the so-called ­`missing middle’.  As the report points out, “With the biggest intergenerational transfer of wealth happening, it’s now more important than ever ­before to get succession right,”

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A big stumbling block is succession, says Schwass. The presence of multiple children and heirs often leads to business-internal bickering. How can the firms apportion roles during succession and avoid disputes? That’s where MBAs tailored for such businesses come in.

“Family conflicts can flare up over a lack of clarity on the evolving roles of family members or diverging business visions.”

“Complicated and sensitive family, business, ownership and financial issues can often present a tough challenge for family businesses. Family conflicts can flare up over a lack of clarity on the evolving roles of family members or ­diverging business visions. These issues present risks to both the family and the business,” a statement on the IMD’s Global Family Business Centre site says. The Swiss school was one of the ­pioneers in this field, having launched the first ‘Leading the Family Business’ (LFB) programme, helmed by professors John Davis, Ivan Lansberg and John Ward, in 1988. Today, most business schools offer allied programmes and MBAs for family enterprises.

Take for instance IIM Bangalore’s management programme for ­entrepreneurs and family businesses.  The basic idea of the course is to ­prepare heirs for entrepreneurship, which will involve “the process of creating or spotting a business opportunity, making ­substantial investment, often more than the ­financial resources available with the entrepreneur, formulating strategy to expand the business and continuously repeating the opportunity-­investment-expansion cycle”.

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As the course manual says, a family business is an existing business built by family members, “who were ­entrepreneurs at some point of time”. How is the opportunity-investment-­expansion cycle also relevant for such enterprises? The IIM-B programme seeks to ­“provide inputs that are ­relevant for ­entrepreneurs and ­members of family businesses in creating and managing new business as well as existing ­businesses”. The programme is offered by the Nadathur S Raghavan Centre for Entrepreneurial Learning (NSRCEL) of IIM Bangalore.  

Indian business schools say that their offerings in this area are a sell-out. The Indian School of Business offers a ­15-month postgraduate programme in management for family business that it claims is “contextualised to the needs of family businesses”. “While each family business is unique, these best practices can be applied across family businesses,” a spokeswoman said.

Overseas, similar courses are offered by institutions such as the UNC Kenan-Flagler Business School. Its MBA Family Enterprise Focus customises the curriculum to “create a ­learning plan that will address the strategic vision of their family firms and that will build upon their individual strengths”. INSEAD also has an elective on ‘Family Business Management’ for ­students from family-­owned businesses. The Wendel International Centre for Family Enterprise is a Centre of Excellence at INSEAD dedicated to this field.

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One of the electives offered at Harvard Business School is a course in the management of ­family businesses. It seeks to ­enable students to understand the ­dynamics of a family-run ­enterprise and how to give it a professional outlook, manage shareholder relationships and handle disputes. To receive a certificate of ­completion for the Family Enterprise Focus, students must complete a total of five courses. Similarly, the Kellogg School of Management offers the ‘Family Enterprises: Success and Continuity’ programme. This course aims to ­educate those “involved in ­family business on various topics ­including succession and family dynamics to continuity planning and strategic ­performance”. The suite at Kellog ­covers issues such as “family business strategy, governance and succession planning to entrepreneurship, family offices and family business culture”.  

Family businesses need to critically review their models as they face a hugely changed business ­environment, with challenges that range from ­e-commerce to start-ups to ­automation. Often, ­macroeconomic policies are geared more ­towards the interests of big, ­diversified ­corporations. Keeping such an ­outdated model ­running can ­itself be the biggest challenge. These ­dynamics have ­created a subfield of family ­business within the ­discipline of ­business ­administration. Customisable, tailored and ­individualised.

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