George Hughes operated a pump sales and repair outlet in a rural Victorian city with his wife and employed his eldest son, Mike. In 1968, the opportunity to diversify into the expanding motorcycle market arose. There was no competitor in the region, so George negotiated the purchase of a Japanese motorcycle agency.
From the outset, the business relied on family members. George was an accountant, and had retail experience and enough capital to begin the business modestly. Mike, was a motorcycle enthusiast, an adequate mechanic and had excellent product knowledge. At this time, Mrs Hughes was largely involved with bringing up the two younger children. She was a silent partner, but was formally and legally a part owner of the original pump business.
The business flourished; so much so that, three years later, the family decided to expand. They opened a retail outlet in a nearby town and Mike went to run it. Although the younger son was still at school, he gradually became involved in the original motorcycle shop, which George managed alone.
After the expansion, things improved. It was an exciting business and one filled with potential. Of the rush to expand, Mike said: “Everything happened so quickly. There didn’t seem to be time to do the paper work. We just set it up and away I went.”
Although the business was doing well, it provided only a modest income for Mike and the rest of the family. George had a policy of re-investing as much of the profit as possible into the business; stock was expanded and the growth of the repair and servicing side of the ventures created the need to employ non-family workers.
Initially, disagreements between Mike and his father were infrequent. In fact, Mike dismissed whatever problems they occasionally had as merely a normal part of living and working in a close family environment. However, two changes occurred by the late 1970s to alter the business and the family relationship.
First, Mike had, by this time, started his own family. This demanded time and greater income. He had to balance the demands that the business and his own family partners placed on him with those of his wife and young children. This is a natural but challenging shift in loyalties for all family members in business partnerships.
The second change related to the motorcycle market. In Mike’s opinion, during the first 10 years: “The business sold bikes to the average guy. Most of our customers were young guys who could afford a bike but not a car.”
However, by the end of the decade, the market had changed in practically every way. There still were the small, utilitarian models, but increasingly, new models were more elaborate, expensive and performance oriented. According to Mike, the market for motorcycles had changed from one dominated by utilitarian design to one offering luxury and sophistication. In his words, “Mister Average had been replaced by Mister Specialist.”
Mike wanted to take on new brands, increase the range of associated add-on products, expand the service and repair facilities, and expand into related product markets. In particular, he saw the opportunity for including a range of off-road or farm-oriented products as well as the new products for the leisure markets. He explained: “I knew the business was still good, but I knew we had to change to keep growing. To develop we had to go in new directions.”
As the market changed, the conflict between father and son became more pronounced. At every meeting, whether social or business, they argued. Mike constantly pressed his point, and his father resisted the demand for change on the ground of fiscal responsibility.
Their perspectives moved further apart. George was cast as the sober financial controller who wanted to consolidate. Mike was seen as the aggressive risk-taker who wanted to venture into uncharted waters. Although Mike controlled the daily operations of his outlet, he was unable to modify his stock or product range. As a result, there was little resolution of the issue, and an uneasy truce ensued.
Fighting over the future
In the late 1980s, Mike again tried to assert himself more forcefully. Unable to change the direction of the family business, he began to demand other changes. Specifically, he advocated the purchase of a computer system, which he believed would improve stock and financial management. He also recognised that, with the more sophisticated computer technology then available, the two outlets could be better integrated.
But George saw these demands differently. In his opinion, Mike was directly challenging his authority and style of business management. George liked arriving unannounced at Mike’s motorcycle shop to observe and criticise what was happening by going through the books. He also liked the way things were being done. It was the way they had always been done. George understood the manual stock and business control systems. He had designed them. He felt that there was no need to change the systems, because they worked. To introduce new approaches and buy computers was, in his opinion, simply throwing good money away. “We did not need to change and we could not afford to change.”
Mike felt that the business could not afford not to change. There were now more competitors, and the market for motorcycles was expanding more slowly. Mike also saw the problem with the computers in more personal terms. He felt it reflected a generation gap. He explained: “The Old Man always treated us like kids and, as long as we were kids, it meant he was still the boss.”
However, Mike persevered. At every opportunity he raised the issue of computerisation. He talked to his brother and mother but, increasingly, his arguments fell on deaf ears.
Relations between father and son deteriorated further. Work for the entire family was stressful and unpleasant. Social occasions were soured. As with all families in business together, the social interactions were well and truly bound up in the details of the business.
As working relationships soured, so too did personal relationships. Mike’s wife recalls that Mike continued to press for change. “We both thought he had a right to speak his mind. Besides, for twenty years, he had been told that one day it’ll all be yours and, well, he was just trying to make sure it was still there.”
The arguments grew more bitter. Every meeting between father and son turned into a slanging match. The family was in the grip of a deep conflict. The family had no natural mediators, and no one thought of seeking outside advice.
However, the problem was eventually resolved: George sacked Mike. It was possible because this was a family business in terms of emotion and personnel but not in any legal sense. Mike did not own any share of the business. It was owned entirely by his parents. So, when the conflict became too disruptive and painful, the easiest solution was simply to remove the supposed troublemaker.
How could Mike have changed his approach to get a more amicable and balanced result? What were the business issues that caused this crisis and how could it have been avoided?
Bill Robbins is a lecturer at the School of Business, Charles Sturt University, Albury.
A more detailed account of this real-life case study and the analysis of its problems can be found in Bond Management Review September 1998.
Proposed solution #1
Jean Roberts is director of Roberts Management Concepts
Pty Ltd. She is author of a number of books on management and business practices and behavior
The issues that contributed to the family enterprise crisis were wider than business issues; they included personal issues.
Father and mother were likely to have been teenagers in the 1950s. Their own parents would have been directly affected by the Great Depression of the 1930s and World War II.
An important factor in personal and business relationships is the matter of values, and our adult values are determined largely by our childhood environments.
It can be assumed that both parents were conservative and cautious, with George assuming the responsibility to provide for his wife and three children and Mrs Hughes assuming home duties.
In business, George was doing what he did well: his accounting and retail knowledge would have been his mainstay in bringing in enough money each month to meet his financial obligations.
Presumably, Mike had entered the business informally and gradually, with his motorcycle enthusiasm and ability as a mechanic influencing his father’s decision to buy the Japanese motorcycle agency. Although this move could be described as “entrepreneurial”, it is more truly described as “safe”. Even expansion into another city and relocating his eldest son to run this outlet was safe, given the absence of competition and the size of the market in existence.
The family business had all the features that characterise a small business in a rural setting. George would have considered his careful management of “money, materials, machinery, methods and men” to have been the basic set of business skills needed to ensure success. Investing profits back into the business would have been at the expense of family treats, as the business was the backbone of the family.
The eldest son was probably brought up to understand the importance of the business to the family’s wellbeing. Indeed, his willingness to take what sounds like minimum wages for a number of years supports this surmise.
Doubtless, Mike had no business or management training before assuming responsibility for running the second retail outlet. We can almost feel the mounting frustration in his life as his suggestions were spurned by his cautious father. Similarly, George would have felt mounting frustration as his eldest son continually nagged about the need to expand the product range.
Ideally, Mike would have changed his approach early in his career in his father’s business. If he had treated George as a businessman rather than as his father, he could have shown respect for George’s values and business methods by preparing a case for gradual expansion that would have met the need for caution.
Mike presents as an entrepreneur, his father as a maintainer. An entrepreneur who wants to encourage a maintainer to move into an entrepreneurial frame of mind must present a carefully costed and validated plan that caters for the natural caution of the maintainer.
The elements of crisis
The absence of four “family business” principles was at the heart of the crisis:
- Separation of family and business dynamics and roles.
- Delegation of authority.
- Climate of trust that would have permitted decision-making.
- Monitoring the market.
Separation of family and business
In any family business, there should be accepted times when family members act as business associates, and other accepted times when they act as family members. Agreement on the demarcation should be reached as early as possible.
Delegation of authority
Mike and George both assumed that George had authority for all financial matters in the business, as evidenced by George’s unscheduled visits to check Mike’s records.
Even in a family business role, clarity is essential. This means that responsibilities are clearly defined, with adequate and appropriate authority delegated to match the nature and degree of responsibility.
Climate of trust
It seems that Mike had little freedom to be entrepreneurial. Most decisions have financial implications: as George managed the finances, he would make all the decisions. Neither party displayed trust: otherwise, Mike would have felt free to discuss his ideas with George rather than nagging him. Where there is a clear separation of family and business, and where authority is delegated in accordance with responsibilities, trust can be built.
Monitoring the market
Every business depends on its interaction with the market. A good business monitors the market for opportunities and for competition.
However, the market can best be read with the aid of an agreed strategy and a commitment to the uniqueness of the business. Forward planning and retrospection are fundamental family-business practices.
Proposed solution #2
Ken Webb is chairman of the WA Chapter of Family Business Australia, a national organisation established two years ago to support and promote family business. He is also managing
director of BurkeAir, a second-generation commercial building-services company, and was responsible for steering it through the succession process, in similar circumstances and as the son-in-law.
Mike was right when he surmised in the early days that the problems experienced were “merely a normal and expected part of living and working within a close family environment”. Although his father may have been unaware of this, Mike’s error was to dismiss these thoughts rather than implement steps to ease the concerns and plan for the future. Mike could have pushed his case, but the other stakeholders were just as responsible. Mike’s becoming more amicable was not of itself going to achieve a balanced result.
Succession and generational control issues are the most emotive and most common that families in business face. They bring down empires and regularly result in family disunity. Unfortunately, due to the private nature of many families, this is the most difficult conflict to resolve.
The Hughes family had the classic dynamics. George, an accountant and most likely conservative by nature, was protective of his “baby”, a business that had grown to a size he was comfortable with. Thus, he was resistant to change. The business was meeting his needs.
Mike, from another generation, had a different set of needs and outlook on how to be successful. As George gave him more autonomy, he developed his own business style. The problem was that George still wanted control and retained full ownership. He dismissed Mike’s business style as that of erroneous youth rather than of a new generation.
Besides, as Mike was more intimately involved in the hands-on side of the business, enjoying motorcycles himself, he was more attuned to market demands and was the principal source of initiatives in the business.
The result was a clash between the family business meeting its “business” demands and changing to meet market demands. These are common business issues, which only compound the family business situation and emphasise the need for greater involvement of all parties in strategic planning, including succession.
Most family businesses fall into the natural trap of trying to keep the business and family separate. Although they recognise that they are a family business, and it is great to work together and build up family pride, they still insist on making the separation, in the hope that the business will not affect family life.
But it must be recognised that you are a family and the business is an integral part of your family’s day-to-day existence, apart from being your livelihood. Consequently, you must treat it in the same way as any other aspect of your family relationship and, if necessary, seek mediation and have regular meetings on how to develop the relationship further.
This is where the Hughes family failed. If their marriages had been in difficulty, they would have increased the level of communication to ensure their survival. They failed to recognise that they needed to do the same with their business relationship. Regular communication in any relationship is vital and, even in the early days, the objectives, including exit strategies if necessary, of each active member should have been clearly laid out. A “family council” should have been established and held regularly to ensure that everyone’s needs were being met.
Such measures require concessions from all parties involved. And, although it may hinder the growth initiatives of the business in the eyes of some, the goodwill and synergy generated more than compensate. This is the value of family businesses to society. When working well, with constant communication, they have an energy and understanding far superior to those businesses that are purely profit driven. They also provide a higher level of ethics and service because of this understanding of personal needs.
Get a family business adviser. There are an increasing number of these with a range of tools and techniques for helping families in business to achieve unity of purpose. In the Hughes case, there is no doubt that the early engagement of a good adviser would have prevented the life-long regret that they now face.
The Hughes family is not alone. Family business is 70% of all Australian business, so the chances of other families going through the same crisis are high. In fact, it would be rare for a family not to experience something similar. For this reason it is important that businesses, such as that of the Hughes, seek out like families and share their experiences.