ENTRE 520: ENTREPRENUERSHIP AND SMALL BUSINESS MANAGEMENT

FAMILY BUSINESS

PRESENTED BY:

STEPHEN MASIKA SIMIYU-GMB/NE/2786/09/18

JANET KIBOGO-GMF/NE/0177/01/19

JACKLINE WANGARI MWARI-GMB/NE/3226/09/18

VINEETA CHEPKORIR-GMF/NE/0178/01/16

FANCY CHEROP-GMF/NE/0321/01/19

SUBMITTED

TO

PROFESSOR ROBERT OTUYA

A Term Paper Submitted in Partial Fulfillment of the

Requirements for the Degree in Master of Business Administration

(MBA), School of Business and Economics, Kabarak University

MARCH 2019

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TABLE OF CONTENT

1.0 Introduction ............................................................................................................................. 3

1.1 Concern for Business ................................................................................................................ 3
2.0 Definition of a Family Business.............................................................................................. 3
2.1 Characteristics of Family Business ........................................................................................ 4
2.2 Types of Family Business ....................................................................................................... 4
4.0 Need for Good Governance in the Family Business ............................................................. 7
5.0 Non-Family Members in the Family Business. ..................................................................... 8
6.0 Leadership and Succession Plan in the Family Business. .................................................... 9
6.1 Stages in Succession ................................................................................................................ 9
7.0 Advantages and Disadvantages of Family Business ........................................................... 10
8.1 Advantages of Family Business: ................................................................................................ 10
8.0 Challenges in Family Business. ............................................................................................ 13
9.0 Case Study: Khetias Supermarket. ..................................................................................... 14
10.0 References .............................................................................................................................. 17

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FAMILY BUSINESS

1.0 Introduction

A family business is a commercial organization in which decision-making is influenced by

multiple generations of a family, related by blood or marriage or adoption, who has both the
ability to influence the vision of the business and the willingness to use this ability to pursue
distinctive goals. They are closely identified with the firm through leadership or ownership.

1.1 Concern for Business

Concern for the family business is due to the fact that these businesses are among the world’s
largest and oldest enterprises. For instance, in USA, family businesses are estimated to
represent over 90% of all the enterprises in addition to accounting for 60% of total
employment. Therefore, it is critical to care about family business. More often, if one starts a
business, family members are likely to take an active role in its operations. Furthermore, you
also join a firm owned by one or more of your relatives. Regardless of whether it is your
family or not, you are likely to work for a family owned and controlled enterprise.

Famous family businesses in Kenya include Tuskys supermarket, Naivas Supermarket,

dModern Coast, Kheatia in Kitale (case study), Kabarak University etc.

2.0 Definition of a Family Business

Broadly, family business has been defined as a business that is owned and managed (i.e
controlled) by one or more family members.

According to Davis and Tagiuri, family businesses are “organizations where two or more
extended family members influence the direction of the business through the exercise of
kinship rights, management roles, or ownership rights”.

There is no consensus of opinion as to what exactly is a family business. There have been
varying definitions and a review of the definitions will reveal the elements used by the
authors to construct their understanding of the term. The following list outlines the gist of
various definitions of family business used by various authors and academicians:

 High percentage of share capital owned by a family either jointly or individually.

 Family members of share capital owned by a family either jointly or individually.

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  Expression of intention to maintain family involved in management or ownership.
 A number of generations of the same family involved in management or ownership.
 Management or ownership control by direct descendants of the founders.

In a family enterprise, there is a unique source of competitive advantage derived from the
interaction of family, management and ownership. But, it is usually true only when the family
unity is high.

2.1 Characteristics of Family Business

 A group of people belonging to one or more families run one business enterprise.
 Position in family business is influenced by the relationship the family members enjoy
among themselves.
 Family exercises control over business in the form of ownership or in the form of
management of the firm where family members are employed on key positions.
 Family exercises the influence on the firm’s policy direction in the mutual interest of
family and business.
 The succession of family business goes to the next generation.
 Family business in India is largely caste-related.
 Every caste enjoys a dominant culture which gets duly reflected in their family
businesses also.
2.2 Types of Family Business

Family owned business-

This is a profit organization were numbers of voting shares but not necessary majority of
significantly influenced by other members of family.

Families owned and managed business

Is a profit organization were number of voting shares but not necessary majority of shares
one owned by members of single extended family family.in this business has active
participation by one family member in the top management of company so that one or more
family members have ultimate management control

3.0 Approaches to Planning in the Family Business

Family businesses often have intimate histories and complex cultures that are hard for
outsiders to understand. Families today are often more complicated and less traditional than

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they once were. Family businesses have several other issues that work against the successful
continuation of the business. Fortunately, with focus and planning, most of these can be
easily overcome by paying attention to the details.

A planning process to guide and coordinate both company and family actions is critical. First,
a planning process will encourage the family to examine its values, needs and goals on a
regularly scheduled basis. Too often, families fail to appreciate the critical role that their
commitment plays in family business success and how that commitment may change. An
effective family business planning process is concerned about improving business
performance, addressing family expectations and sustaining trust.

Improving Business Performance

The essence of planning is setting goals and describing actions to achieve those goals.
Businesses need to change and develop new strategies if they are to remain healthy and
financially viable. The dynamic external environment, driven by increasingly competitive
markets, makes it difficult – if not impossible – for any organization to maintain the status
quo. However, planning allows management to identify new opportunities that are
compatible with the business’ resources and capabilities.

Addressing Family Expectation

As the family grows and matures, planning is crucial for accommodating changing family
relationships and changing agendas. Negotiating life transitions in families is more difficult
than managing business change. Well-structured inquiries should be designed to unlock
information and new ideas about how changes in the family influence the business. If
families do not ask these tough questions, new alternatives might not be considered, let alone
pursued.

Family business planning must take into consideration the particular challenges of familial
cooperation, including estate planning and business strategy development. However,
oversight and cooperation can help alleviate some of these potential tensions.

Sustaining Trust

Trust is based on individual experiences with the family or business. A business family
creates trust when it works together to plan or problem solve around tough issues. Fairly
dqqeveloping family rules and then applying them consistently to all family members builds

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trust. Each family member knows what to expect from his or her interactions with the family
and business. Trust is a special form of business capital that is a critical to all organizational
relationships. The willingness to risk vulnerability and rely on another person is rare in a
world dominated by cynicism.

Business Strategy

Family business planning may include developing strategies for business stability and
growth. Issues may include marketplace assessments, technology adoptions, competition
assessments, the development of financial goals, and the fine-tuning of the company's
mission and long-term goals for the family business.

Estate Planning and Succession

Because family businesses become extremely vulnerable to instability and collapse during
times of generational transition, it’s important to have family business planning processes in
place before transitions are imminent. Two-thirds of family businesses don’t survive
generational transitions, according to “Family-Owned Businesses.” Effective family business
planning can outline steps leading to transitions, including buy-outs and shifts in
responsibility and duties. It’s probably a good idea to work with an estate lawyer when
drawing up the mechanisms proceeding major transition

Communication

In some instances, communication during family business planning can be facilitated by a

third party. Third-party groups can lead negotiations surrounding family business planning to
avoid conflict. If conflicts have already arisen during the family business planning process,
including litigation, third-party groups can provide additional confidentiality and disclosure
protection.

Oversight

Family businesses are especially vulnerable to embezzlement because of inherent trust levels,
according to “Employee Fraud and Embezzlement.” Family business planning may include
oversight and internal checking measures for prevention. In some instances, family business
planning guidelines might include prohibiting the same person who records receipts from
booking sales or generating invoices. Family leaders can also require authorization before

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checks exceeding a specified amount are approved. Forensic accountants can be hired to
complete periodic audits to ensure transparent, accurate bookkeeping.

Challenges

Conflicts can arise in family business planning when business matters leach into the family’s
life outside of work, according to “The Family Business.” Familial rivalry, family members
assuming roles not their own and unchecked family conflicts can all lead to instability within
the business during planning processes.

To accomplish this balance, business families need to identify plans and policies to address
five pivotal variables:

1. Control: Establishing, in a fair way, how the family will address decision making in the
family, in management and in ownership of the business.

2. Careers: Making it possible for various family members to pursue rewarding careers or
other roles in the business with advancement and rewards based on performance.

3. Capital: Creating systems and agreements so that family members can reinvest and, if
necessary, harvest or sell their investment without damage to other family members’
interests.

4. Conflict: Addressing the conflicts that business families face because their work and
personal lives intersect so closely.

5. Culture: Using family values in developing plans and actions. Family business culture
represents enacted family values.

4.0 Need for Good Governance in the Family Business

Several characteristics make family firms distinctively different from manager-controlled

firms. Most notable are goal orientation towards both financial and non-financial goals,
dominance of relational contracts, reliance on relational trust, and non-existence (or a
different aspect) of the agency problem. These characteristics form a set of governance needs
for family firms, i.e. overall motivation forces for implementing governance in the firm.
These needs, being substantially different from the governance needs in managerially
governed firms, influence the functions of the board of directors.

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 Positive consequences of good governance

It assists in enhancing the firm’s competitive position, including reputation enhancement as

well as access to external financial and non-financial resources. The perceived adoption of
independent directors as a symbolic gesture through impression management and the
fulfillment of societal expectations may benefit companies both reputation-wise but also in
terms of creating access to investor capital.

5.0 Non-Family Members in the Family Business.

Recruiting non-family members into a family business is the key to business continuity. As
family businesses have grown, they have focused on professionalizing their operations and
implementing key corporate governance measures to ensure business continuity. Bringing
outsiders into a family business poses unique challenges and requires the employment aspects
of the process to be carefully considered and well-documented. The steps that the family
business can take to cover the risks involved in recruiting outsiders into the business include:

a) Create detailed job descriptions

Job descriptions are integral to the process of securing the right candidate and also managing
them after they join the business. Defining the scope of appointment and the way the role will
interact with other senior management is critical to success.
b) Perform due diligence and background checks
The recruiting process will involve the candidate submitting a variety of background
documents such as educational and professional certificates.
c) Carry out extensive interviews
Conducting panel interviews as well as one-on-one meetings with key decision makers is
useful to achieve a consensus on the hire. It is also important to be clear about the process
and what it involves as well as the time frame. Good candidates can be lost if the decision
process is prolonged.
d) Invest in a thorough employment contract
Once the candidate is chosen, negotiations on the terms of entry will begin and it is important
that these are truly reflected for both the business and the managerin the employment
contract. This contract will need to be aligned with the information or documents registered
with relevant authorities.
e) Define compensation and benefits from start: shares, bonus or commission

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 A critical factor in bringing an outsider to a family business is ensuring engagement and
commitment to the business goals which is typically achieved through incentive schemes.
f) Opt for fixed term engagements
Engage individuals in a fixed term contract. Fixed terms can always be renewed, however if
they are terminated prior to completion, compensation would usually be payable.
The reasons why the leader of a family owned business might decide to bring in a non family
member as an executive with the firm comprises the following:
i. An outsider leader may possess certain executive skills and strengths not possessed by a
family member, such as communication skills.
ii. An outsider can offer a different perspective from the family viewpoint.
iii. To bridge the gap between generations
iv. To set new directions for the firm
v. To deal with change

6.0 Leadership and Succession Plan in the Family Business.

Family-owned businesses are led by unique entrepreneurs who strive to live a legacy for
future generations of their family. Succession planning for a family-owned business is a
delicate procedure. Owners must factor on the longevity and legacy the business will leave
while ensuring the family stakeholders are happy with their role in the family business.
Succession planning is essential for every family owned business. They are highly specific
and based on the individual needs of the company; they try to solve the dilemma of who will
take over upon the founder’s retirement.

Facets to plan for when developing a succession plan:

1. Owner- the person who will take over the title of CEO and will succeed the founder.
Founders should choose a future owner who will have the ability to carry out their vision to
ensure a lasting legacy.
2. Executives(s) - Executives will oversee the achievement of long-term goals and will be
integral to developing a strategy to take the business to the next level.
3. The governing board- in most family owned businesses, the governing board is responsible
for ensuring the founder’s core values are consistently represented through the generations.
6.1 Stages in Succession
STAGES IN SUCCESSION

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The succession process in family business has been described in terms of stages that lead in
time, to the transfer of leadership to the next generation.
STAGE I : PRE BUSINESS STAGE
The potential successor becomes acquainted with the business as part of growing up. This is
where the young child accompanies the parent to the office. This stage does not call for any
formal planning hence it is termed as foundational. At maturity of this phase, the child is
introduced to people associated with the firm and later begins to work part-time in various
functional areas to have taste of the business.
STAGE II: EDUCATION AND PERSONAL DEVELOPMENT STAGE
The potential successor goes off to study at a college or university and this is often viewed by
the parents as a time to “grow up” in an environment that facilitates intellectual growth,
personal maturity and network development. The emphasis which is placed on formal
education will vary with the type of family business.
STAGE III: PROOF OF COMPETENCE STAGE
To establish the competence of the son or daughter by proving that he or she can do the job,
the parent will push the potential successor to take up position in another company before
returning to the family firm. The skills gained will stand out as handy for the business.
STAGE IV: FORMAL START IN THE BUSINESS STAGE
This is when the successor begins to work for the family business on a full time basis. The
family members start out by working in various departments in the firm to prove themselves,
to win the confidence of the employees, and to learn about the business at all perspectives.
STAGE V : DECLARATION OF SUCCESSION STAGE
The son or daughter is named the president; hence exercise overall direction although the
parent is still usually in the background. At this point, the successor may have not mastered
the complexities of the role, and therefore the predecessor may be reluctant to give up
decision making completely, but the process is now complete. A written plan is crafted at this
stage to remove doubt about the soon to be predecessor’s wishes, which could otherwise be
questioned in the event of untimely death or resignation.
7.0 Advantages and Disadvantages of Family Business
8.1 Advantages of Family Business:

The overriding characteristic that distinguishes most family businesses is a unique

atmosphere that creates a ‘sense of belonging’ and an enhanced common purpose among the
whole workforce. Although being intangible, this factor manifests itself in a number of very

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competitive edges. These are summarized in the panel opposite, but it is worth examining
them in detail:

 Commitment: People who set-up a business can become very passionate about it is their
creation, they nurtured it, built it up and for many such entrepreneurs their business is
their life. This very deep affection translates naturally into dedication and commitment,
which extends to all the family members who come to have a stake in the success of the
business. They feel they have a family responsibility to pull together and, company’s
success than they would dream of devoting to a normal job.
 Knowledge: Family businesses often have particular ways of doing things special
technological or commercial know –how not possessed by their competitors; knowledge
that would soon become general in a normal commercial environment, but which can be
coveted and protected within the family.

This idea of knowledge is also relevant in relation to the founder’s sons or daughters
joining the business. Children grow-up learning about the business, infected by the
founder’s enthusiasm, and when the time comes for them to consider joining they may
already have a very deep understanding of what the business is all about.
 Flexibility in Work, Time and Money: Essentially, this factor boils-down to put the
work and time into the business that is necessary and taking –out money when you can
afford to. A further aspect of commitment is that if work needs to be done and time spent
in developing the business, then the family puts in the time and does the work—there is
no negotiating of overtime rates or special bonuses for a rushed job.
 Long-Range Thinking: But although families are good at thinking long-term, they are
not so good at formalizing their plans—writing them down, analyzing the assumptions
they are making, testing past results against earlier predictions, the strength means that
the long- range thinking is there, while the weakness is that this thinking is undisciplined.
If the right environment exists for a family to build on its vision of the future and to focus
on and get behind the type of long- term to focus on and get behind the type of long-term
strategic intent that has characterized Japanese business, then the possibilities are
immense.
 Stable Culture: For a variety of reasons, family businesses tend to be stable structures.
The chairman or Managing Director has usually been around for many years and the key
management personnel are all committed to the success of the business and they too are

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 there for the long-term. Relationships within the company have usually had ample time to
develop and stabilize, as have the company’s procedural ethics and working practices-
everybody knows how things are done.

Like some of the other factors working in favor of family businesses, however a strong,
stable culture can be a two-edged sword.
 Speedy Decisions: In a family controlled business, responsibilities are usually very
clearly defined and the decision- making process is deliberately restricted to one or two
key individuals. In many cases, this means that if you want the company to do something
you go and ask the boss and the boss will either say ‘yes’ or ‘no’.
 Reliability and Pride: Commitment and a stable culture lie behind the fact family
businesses are generally very solid and reliable structures—and are perceived as such in
the marketplace. Many customers prefer doing business with a firm that has been
established for a long time, and they will have tended to build-up relationships with a
management and staff that are not constantly changing jobs within the firm or being
replaced by outsiders.

8.2 Disadvantages of Family Business

As well as immensely valuable advantages, family businesses are prone to some serious and
endemic disadvantages. In the same way that family business strengths are not unique to
family firms, neither are their weaknesses, but family businesses are particularly vulnerable
to these failings:
 Rigidity: walking through the doors of some family businesses can be like entering a
time tunnel. Sentiments such as, ‘Things are done this way become dad did them this
way’ and ‘You cannot teach an old dog new tricks.’ Reflect the ways in which behavior
patterns can become ingrained and family businesses become tradition- bound and
unwilling to change.
Business Challenges: The business challenges that particularly affect family firms can
be divided into three categories:
 Modernizing Outdated Skills: Very often the skills possessed by a family business are
a product of history and, as a result of developments in technology or a change in the
marketplace; these skills can quickly become obsolete. Problems in this area are not

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 necessarily triggered by drastic changes such as the effect of word- processing
technology on typewriter manufacturers.
 Managing transitions: It represents another major challenge for family businesses—it
can often be the make or break for a family firm. In summary, the challenge to the
business is typified by a situation in many companies where the founder is getting- on in
years and his son, the heir apparent, is convinced that things need to be done differently.
The merest hint of this potential conflict can be disruptive, causing enormous uncertainty
among staff, suppliers and customers.
 Raising Capital: In comparison with the wide range of funding alternatives open to
publicly held companies with a diversified shareholder base, family businesses
obviously have much more limited options when it comes to raising capital..
8.0 Challenges in Family Business.

1. Family problems. Physical, emotional and financial problems among family

members can greatly impact the day-to-day operation of the business.
2. Informal culture and structure. For many businesses, having a laid-back culture is a
positive. However, the informal structure and culture found in many family
businesses can equate to a lack of documentation, policies, and defined strategy and
goals.
3. Pressure to hire family members. It can be difficult to resist the pressure that comes
along with requests from family members who want to join the business. This
becomes especially complicated if they lack the basic skills and experience needed for
the position.
4. Lack of training. The informal culture found in many family businesses can result in
a lax approach to training new employees, whether they are family members or not.
5. High turnover of non-family employees. Non-family employees may feel that
greater opportunities exist within the business for those who are a part of the family
and may grow tired of the culture.
6. Sources for growth. A huge challenge for family businesses can be determining
where and how to get the capital and resources needed to grow the business.
7. Lack of an external view. While family members may not always have the same
opinions, they often have similar upbringing and life experiences which may lead to a
uniform view of the business. Businesses need to have external views of their
company and their competition in order to thrive.

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 8. Misunderstanding the value of the business and how it is to be divided. Owners of
family businesses may have varying opinions on the value of their business, or even
worse, they may have no knowledge about the value of the business and what things
contribute to or detract from that value. Further complicating this matter is
determining how to split the profits of the business or owners’ stakes.
9. Who will take over the business? It is important for family businesses to plan ahead
for business succession. Many family-owned businesses do not have a plan in place
and this can be a source of heated debate and intense family politics when the time
arises to select new leadership.
10. No exit plan. Family businesses often lack a defined strategy for what will happen if
an owner wants to retire, sell the business, or transfer responsibility. This goes hand in
hand with succession plan issues. All businesses need a plan for the future.

9.0 Case Study: Khetias Supermarket.

Early Years

Mzee Durlabhram Khetia came in Kenya from India in the early 1970s as a Hindu priest send
by the Hindu community back at home to come and administer the holy word to their
worshipers in Kenya.The Kenyan Hindu worshipers had requested for a priest to be sent to
them after starting their temple in the town and thus, Khetia was picked upon to take the
mandate of preaching in the country.After serving for several years, Khetia started a retail
shop at Laini Moja Street in May 1982 which he later in 1985 registered it as a limited
company.

The businesses run by Khetia’s

At the moment the company is running five supermarkets,three wholesale outlets in

Bungoma, Webuye and Kitale, distributions in Eldoret, Kitale and Bungoma and the mineral
water plant based in Kitale.

The supermarkets include; Khetia’s GigaMart in Kitale, Khetia’s euro, Cross Roads and
Center point that was recently acquired from the former Shariffs Supermarket in Bungoma
town and Khetia’s Express in Mumias within Kakamega county.The sixth supermarket is
under construction in Eldoret town and shall be unveiled later by the company.

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Catchment area

The company distributes its goods to major towns and grassroot areas to as far as
Lokichoggio, Lodwar, Burnt forest and other border towns such as Busia, Suam and Malaba
along the Kenya Uganda border.However business operators from neighboring countries
including Uganda and Southern Sudan purchase commodities from the company’s outlets
within the operators’ reach.According to Ashok Khetia one of the directors of Khetia
Drappers who is also one of the five sons who are the company’s directors, the company has
plans to expand their services nationally and even have outlets in the newborn republic of
Southern Sudan but after peace has been fully restored.

Employment creation and corporate social responsibility

Khetia’s company has a total of 1308 permanent workers spread in all its business ventures
across the regions it covers with 20 per cent being women.The company also plays diverse
roles in its corporate social responsibility program whereby it sponsors various projects
within its areas of operation.Among the projects there is educational sponsorship whereby the
company sponsors three bright children annually to join secondary schools; it contributes
towards building schools, churches, hospitals, cleaning programs in towns and maintenance
of some round-abouts especially within Kitale town.It has also been in the forefront in
promoting environment by being involved in tree planting exercises annually by contributing
100 tree seedlings towards the programs in different institutions.

Acquisition of products

The company gets it products from manufacturing companies within the country and a few
others imported from foreign countries such as united Kingdom, China, India, Thailand,
Malaysia, Egypt and South Africa among others.Most of the products imported from foreign
countries include electronics, household goods, mobile phones and accessories, furniture and
many others deemed necessary by the market demand.

Challenges

Despite the company’s upward trend in achieving and expanding its business empire, the
company just like any other company or business operator has not been exempted from
challenges along its road to success.

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Poor infrastructure especially roads within Western and North Rift regions where it majorly
operates has been a major impediment to their businesses especially while transporting goods
to their customers or to their outlets such as supermarkets and distributions within the area.

Supplying of commodities to Lodwar and Lokichoggio to access their Southern Sudan

customers has been a major concern bearing in mind that the road from Kitale through
Kapenguria to Lodwar is in a bad state.

Insecurity within the region has also impacted negatively towards the company’s attainment
of its full potential in offering the services. Kitale town in particular has denied the company
full exploitation of its services especially the supermarket unlike in other major towns where
supermarkets can operate to as late as 10pm here they are hurriedly closed shortly before 7pm
fearing for their security hence late customers get stranded whenever they want to purchase
goods.

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10.0 References

1. (Miller and Le Breton-Miller, 2006; van den Heuvel et al., 2006).

2. Bammens et al., 2008
3. Craig and Moores, 2004
4. JAMES, H., and KOBRAl<, C. (2004). "Persistent Traditions: Business in German':
Working paper quoted with permission of the authors.
5. JEREMY, and SHAW, C. (eds.) (1984-6). Dictionary of Business Biography: A
Biographical Dictionary ofBusiness Leaders in the period, 186a-1980, 6 vols., London:
Butterworths.
6. JOLY, H. (2003). "Ende des FamilienkapitaHsmus': in Die deutsche Wirtschaft im 20
Jahrhun dert. Essen: Klartext Verlag.
7. PORTER, G. (1993). The Rise of Big Business; 1860-1920, 2nd edn. Wheeling, 1II.:
Harland Davidson.

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