Why does 70% of family-owned businesses fail when they make transition to second generation?

My Inspiration to write on this topic came from one research study conducted by one of leading Management advisory group who had highlighted the reasons pertaining to failures of family-owned businesses as they approach their 2^nd or 3^rd generations.

Passing control from one generation to the next is a critical moment for a family-owned business. It can be positive, but often businesses lose momentum. It can bring a family together, but too often it drives a family apart.

Study reveals:

·        An impressive 88% of current family business owners believe the same family or families will control their business in next five years, but succession statistics undermine this belief.

·        Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.

The role that family-owned businesses play in the economy should not be underestimated. For one, they are in fact the most common type of business organizations, this becomes more complex when we talk about Middle Eastern region due to cultural and social sensitivities.

Post deep diving into this topic and post doing my own research by interviewing with industry leaders who are either from a 1^st generation or 2^nd generation of family business, following are my findings as to why the majority of family-owned businesses fail to achieve success in their 2^nd or 3^rd generation.

My few insights:

a) Lack of Leadership & strategy:

Most of the founders of successful family businesses are too overly conservative i.e. they do not have clear vision nor they know how to manage funds either internally or externally borrowed & use it for scaling the business. They lack scalability approach.

b)    Excessive dependence on founders i.e. 2^nd generation leaders often lacks hunger for success which is found in first generation founders. They look up to their first generation leaders for every petty issue.

c)     Too engrossed in the day to day activities/operations, owners often miss long-term vision or strategy.

d)   Secretive style of management :

Lack of information sharing with core management team, lack of sharing of IP (Intellectual property rights), Believes in just informing Decisions and taking control on a daily day to day operations.

2. Lack of succession planning

As per Mr Vijay Madhavan, Sales Director of Petra insurance Brokers LLC, this is one of the main reason as to why family-owned businesses fail to survive in their 2^nd & 3^rd generations.

a)    Handing over is hard. 

Company founders have often given their lives to their businesses. So naturally many feel protective and reluctant to step back.

b)    It’s also “Emotional”. 

A good handover is crucial for the business, but it can also have a big impact on relationships within the family. Where there are several children who wish to be involved, someone needs to decide who will take which role. There is always the risk that someone will feel left out.

c)     'Eldest first' rule doesn't have to apply. 

The best succession plans are based on a cool-headed appraisal of the different strengths and preferences of the next generation of potential leaders. That might mean favouring younger siblings over elder siblings, skipping a generation or going outside the family.

d)   The next generation may have a different perspective. They may want to take the business in a new direction, seek a new relationship with employees, and branch out into new markets. Their aspirations need to be understood and aligned with the overall plan – if there is misalignment it needs to be addressed.

One of the best ways to address these issues associated with Succession planning is by:

“Combining energies of new generation and experience of the older generation”.

Another way which I feel has been successfully implemented across family-owned businesses (likes of Tata group, Hindalco or in some of the Middle Eastern family-owned businesses).

 I strongly believe, “Sometimes, it's best for the family to step back”.

When the business has reached a certain size, the founder might decide it needs the leadership of a seasoned CEO from outside the family – potentially disappointing children who had hoped to take over.

Ownership and management are two different things and offer different ways of contributing to the firm's success. Family members can play an important role in the firm’s success by being good owners, putting in place strong governance and processes at the ownership level.

3)    Introduce the concept of Wealth management in sync with succession planning.

Founders can avoid failures of their businesses by:

a) By defining internal equity of family members at the entry of business and at the exit of the business.

b) Introduction of external equity or PE equity in business in order to take it to scalable levels.

c) Clearly defining compensation for participating family members & non-participating family members.

This is very important as most of the times it is found that Money divides the family and its businesses.

2) Evaluate both Management Buy Out or a Management buy-in options in ensuring the business is managed more efficiently and effectively.

I would like to conclude this article by a quote from Mr Sushant Upadhyay, Client Partner of m/s Corn Ferry who quoted:

“De-link Ownership from Management”

 I feel this concept and his quote summarizes the entire topic and would help all my readers, who are either first-generation business owners or 2^nd generation business owners to plan for their organization’s future and growth initiatives.

Contact me in case you are looking at the fresh perspective of your business strategy, I would be glad to share my wisdom with my industry friends and connections.

About the author:

Ritesh Mohan is a passionate retail professional with over 20 years in the retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region. He specializes in Retail management, Product development, Brand management, Retail operations, Sales management, Business Management & Empowering business owners with his wisdom & experience of around two decades in the industry.

Markdowns – A strategic business tool for Inventory planning.

As most of my readers know that I am very passionate about Retail management and have been responsible for managing some of the regional brands in terms of Retail operations, Brand management, merchandising planning, Sales, Visual Merchandising.

I have always noticed that most of Retail CEOs/ CFOs often takes a downward look when it comes to “Markdowns”. I recall, my previous boss (who is also my mentor) used to give me a very awkward and nasty look every time I proposed using Markdowns as Marketing tool/ event.

My article will talk about as to how markdown planning can help retailers increase sales, improve margins and better manage product lifecycles.

It is my attempt to clear some concepts and convince senior management to adapt to this wonderful planning tool which can prove to be very effective in their Inventory Planning goals.

Markdowns are often associated with margin degradation and profit loss—and some companies believe that cutting prices for their products could negatively impact their brand image. Although inevitable, retailers have historically viewed markdowns as a necessary evil designed to help sell old or slow-moving inventory.

A) View Markdowns as a function of Price Elasticity: Matching Perceptions with Pricing.
An example of a markdown would be if you had a sweatshirt for sale that was originally priced at Dhs 100 and after one month of slow sales, you decide to markdown the sweater to 20% off, making it Dhs 80 at retail.

Although you just lost Dhs 20 of your intended markup on that sweatshirt, in return, you are also inviting more people to purchase it at a price they may prefer vis a vis the original Dhs 100 price. Since the shirt had not been selling well at Dhs100, offering a nice, mark downed price can often result in sales that would not happen otherwise. Hopefully a 20% discount will do the trick, however often you will find that you need to continue your markdown strategies based on slow sales, moving product from 20% off to 30%, 40% and more if necessary.

Most Retail CEOs and CFOs (especially organizations run by finance professionals and not by Retail mindset professionals) often confuse Markdowns with Discounts model.

A discount is a reduction in the price of an item or transaction based on the customer making the purchase. Many retailers offer discounts because they find that customers return to their store versus others because of the discount provided to them. Discount offers “Instant gratification”.

Customers often enjoy the advantages they feel that discounts often give, such as being a preferred customer and therefore getting special treatment. Some boutiques & Spas offer friends and families discounts, which benefits both the retailer and those getting the discounts. It’s a win-win on both sides.

Both a markdown and a discount can be temporary or permanent, depending on how you market them to your customers.

An example of a temporary discount would be "Get a discount equivalent to your waist size". If your waist size is 32 then avail 32% discount on your purchases.

A temporary markdown example would be if you had a one day sale, offering mark downed prices for only a specific amount of time.

A discount strategy is more Tactical whereas Markdown strategy is more organic in nature. Both should be an integral part of the marketing mix.
I recall the statement of Sir Martin Sorrell (CEO, WPP- an advertising agencies conglomerate), who once quipped, “Discounts are like bad cholesterol and Markdowns are like good cholesterol; there has to be less dependence on discounting model, instead push more brand-building efforts”.

B) Using Markdowns to control Inventory Ageing:

You can use both discounts and markdowns as part of your sales strategy to help make the most out of your inventory sell thru and ultimately, your sales goals.

Wasting your retail floor space with products that are not selling will not help you at all, so consider how markdowns and discounts may be able to work for you in your sales strategy.

C) Tie your Markdown planning with your financial plan- how much hit are you willing to take in markdowns?
A markdown plan means nothing if it’s not tied to the financial plan. Retailers should determine how much they are willing to spend on markdowns to hit their financial targets. This information ideally flows either from CFO/ CEOs while preparing budgets for next fiscal.

It’s equally as important that retailers are able to not only execute on the markdown plan once it’s in place but also monitor it in real time. This will ensure that adjustments can be made as the season progresses.

D) Determine early on which items you are willing to reduce in price over time and for how much:
It implies whether you want to run it on category or on specific collections. Monitor its sales-through rate and then decide the markdown %.

E) Managing Product lifecycles more effectively:

Smart retailers will leverage effective markdown planning to not only ensure that there is less stock left over at the end of the season but to also manage new product introductions and phase-outs.

Caution to Retailers who shy away from Markdowns strategy:

Retailers that avoid putting a markdown plan in place may experience increased cannibalization of new product lines and decreased sales.

The impact could even extend to the store level as new and old products are shoved together on store shelves or displays, resulting in cluttered and disorganized stores that even the most loyal customers will find difficult to shop in.

A Perfect example is “ Part Sale” that we find very commonly in retail stores these days in the Middle East, wherein new merchandise is being sold with that of discounted merchandise in separate enclosures or gondolas.

I would like to end my article by sharing a video wherein an industry practitioner and a successful retailer Mr Kamel Shaban, MD -Capacita brands, has offered one valuable tip to Inventory planners and Merchandise Managers as to how they can use Markdown strategy to keep “freshness of assortments” in their stores by avoiding discounting model trap.

           
In case if any of my readers, want to know & streamline Inventory planning strategy for their brand then I would be more than glad to share my ideas acquired while practising & closely following this topic.

You can reach me on riteshmohan@yahoo.com in case this topic also excites you.



About the author:
Ritesh Mohan is a passionate retail professional with over 20 years in the retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region. He specializes in Retail management, Product development, Brand management, Retail Operations, Sales Management, Business Management & Empowering business owners with his wisdom & experience of around two decades in the industry.

Can a business model of fast food Quick service restaurant transform healthcare & wellness sector?

My inspiration to write on this topic came when I was approached by a senior personnel of a reputed healthcare chain in India, resulted in our discussion about their future plans and industry overall.

My brief interaction with the senior management of this reputed healthcare chain inspired me to look at healthcare sector more closely as it is already billion dollar industry itself & growing.

With modern times as the life expectancy rate has increased and with the advent of the modern sedentary lifestyle that we all are living in modern cities have given birth to a new breed of Specialty healthcare clinics & centres/hospitals. 

I initiated my research limiting myself to Eyecare clinics and my findings have truly amazed me with new age speciality eye care clinics and their business model.

Background:

I limited my scope of the study to two big Eyecare speciality clinics in Southern India, which are now spreading their wings in other parts of the country as well as in the Middle East and the Far East countries.

(I would not like to divulge names of these two eye care chains since the brand name is not important but how they have transformed their business model is what I am going to highlight in my article).

How the Journey started?

Both these chains were started by legendary family icons who were specialist doctors & now being managed by 2^nd and 3^rd generations and it all began with a noble cause which has formed the SOUL of the organization & gave them their WHY (Purpose).

  1)   Startup mentality & Positive state of mind:

Starting small but with limited resources at hand but with clear VISION in mind that they need to provide eye care to the poorest of the poor in economic strata.

Ideation & concept came from the business model of fast food chain business model i.e. turning out millions of dishes (burgers/pizzas) in shortest possible time. Serving good food in the shortest time is the main premise of any Quick Service Restaurant.

These Eyecare speciality chains have adopted the same style of operations i.e. bringing Economies of Scale in their operations by treating the maximum number of patients which drives their fixed costs to go downwards (benefit from economies of scale operations) resulting in bringing down the cost of treatment.

   2) Ethical way for imparting treatment and giving optimum satisfaction to all its patients

These chains treat eye illness like cataracts at so subsidized costs and sometimes free to poor patients who could not afford the high cost of treatments. Their costs are compensated by those patients who could afford to pay for the treatment or are covered by health insurance. Patients are told in advance as to where their fees or cost of treatment would be utilized so that there is transparency which results in gaining TRUST from higher economic strata who feels happy and satisfied that at least their money which he/she is paying towards medical treatment is being utilized to give treatment to poor patients who could hardly afford the treatment.

GIVING selflessly to society is the main objective of Spiritualism.

Such a noble thought, which has turned these brands into million dollar brands and still growing.

3)  Using technology & Six Sigma principle:

- ERP systems keep records of all patients which are made available at the click of a button to any doctor at given point of time. Patients diagnosed with cataract are given appointments for next day surgery.

- Automated queue system; clear indicators of the free patient facility and Paid patient facility.

- Daycare clinics wherein patients need not stay post-surgery but can go back to his/her home same day.

- Using Six Sigma systems:

Eliminating defects in any process – from manufacturing to transactional and from product to service is the main promise of Six Sigma processes which has helped these speciality eye care clinics to scale up faster than any other service provider.

- Optimum utilization of facility:

Treating Operation theatre as Production/ Assembly line i.e. while the earlier patient is being operated in OT, the second patient is being prepared in the preparatory room next to OT so that there is minimal wastage of time and this process brings Operational efficiency thus bringing the cost down.

4) Team management

Challenge comes when you have to manage both technical staffs (doctors) along with paramedical staffs and admin teams. How to bring all of them together and work in a synchronized way is a big task itself.

One of my core learning while studying their business model is the fact these successful eye care speciality clinics chain have mastered the way of Internal communication right from senior management to lowest ranks of helpers.

Everybody knows what is going on and what needs to be done, they all work as a single unit.

Management has ensured that every member of these clinics shares same VALUES and Purpose (Why) as that of their founders. Their values & ethical principles have been aligned and imbibed in each and every staff member.

 If you analyze, this is the main principle behind Robert Kaplan’s “Balance scorecard” theory.

I would end my article by saluting these founders & visionaries of these Eye care speciality clinics operating in Southern India and their current management who is not only following their founder’s VISION but also showing the world a NEW WAY OF DOING BUSINESS ETHICALLY.

You can reach me on riteshmohan@yahoo.com in case this topic excites you.

About the author:

Ritesh Mohan is a passionate retail professional with over 20 years in the Retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region. He specializes in Retail management, Product development, Brand management, Retail Operations, Sales Management, Business Management & Empowering business owners with his wisdom & experience of around two decades in the industry.

Freenomy or Freenomics – A strategic tool for creating disruption & gaining Market share.

My inspiration for writing this article comes from telephone card vendors distributing small pamphlets outside popular malls/hypermarkets in Dubai/ Sharjah. 

My article is dedicated to all hardworking people who make their living by selling telecom products & services.

How often do you come across a pamphlet or brochure which says, broadband 4G connection free for 4 months including the hardware if you subscribe to it for a year?

“Lease now and avail 4 months EMIs free” – in case of realtors.

As a management professional and hardcore marketer, this aroused my curiosity as I felt there is a science behind giving anything Free in lieu of a subscription. How does the economic model work?

Why Google is offering its search engine as free to worldwide users?

Why Skype is offering free VOIP calls and video chats free to its users?

Why YouTube is offering free video content to its viewers?

Post deep diving myself & doing research on this topic, I came across an interesting term i.e. Freenomics… which I shall explain very briefly:

Free-nomics is a business model that promotes the idea of businesses giving away their goods/services because it will result in more customers entering the market.

This is different than Sampling which is just giving away some samples in hopes of attracting new customers or doing pro bono work to help a charity or singular individual.

It involves giving away something for free to everyone and for an ongoing period of time.

While Free-nomics is not a new concept, it has certainly gained in popularity by those using social media. Some examples outside of social media include Skype letting people use their basic service for free to do video calls and Google’s free email service to attract users, which in turn, hopes to attract advertisers.

a)    Evolution and where are we heading:

Our society has drastically changed over time. First, we used to have the Agricultural age, followed by the Industrial Age. Today, we live in the Information age.

What is next? (That’s the big question)

According to many, it is actually our creative power, our brain! It is our limitless ability to generate new IDEAS, imagine and create new opportunities, conceive new products or services, invent new business models. Note that we are all equipped with this idea generation ability: it is given to us and it is FREE to use.

For the first time in our history, we are approaching the age of UNLIMITED resources. The Internet has just accelerated this trend. IDEAS are the new currency in the new economic world.

The dominant business model on the internet today is making money by giving things away. Much of that is merely the traditional media model of using free content to build audiences and selling access to them to advertisers. But an increasing amount of it falls into the free-sample model: because it is so cheap to offer digital services online, it doesn't matter if 99% of your customers are using the free version of your services so long as 1% are paying for the “premium version”. After all, 1% of a big number can also be a big number.

For example:

If you want uninterrupted videos on your YouTube, you pay some amount for browsing your favourite shows without any advertisements.

If you want more storage (above 5GB) for your data on the cloud, you pay some fees for buying cloud storage space.

You can listen to your favourite songs online free but if you want to enjoy same songs in offline mode (download) you need to pay minimal subscription fees to the app service providers.

b)     Creative disruption:

Bandwidth too cheap to meter/measure gave us YouTube, which is revolutionizing and possibly destroying the traditional television industry, and Skype, which is disrupting the phone industry.

In the Aviation sector, Ryanair or for that matter our Indian airline i.e. INDIGO, for instance, has disrupted its industry by defining itself more as a full-service travel agency than a seller of airline seats.

Many companies have got it. They have successfully entered this new age, Idea Age, the age of unlimited resources.

They have offered:

FREE (Google), FREE e-mail (Hotmail), FREE or unlimited Internet access (AOL), FREE ways to connect with friends (Facebook,  Skype), FREE video entertainment (YouTube), FREE e-cards (Hallmark)…even

FREE cell phones based on purchased minutes of service –commonly called as Payment plans (Etisalat/ Virgin mobile/ Du)…

“FREE Strategy” will soon be required part of any marketing plan.

In case you want to know & develop Freenomy strategy for your brand then I would be more than glad to share my ideas acquired while researching & closely studying this topic. In fact, I am in love with this term “Freenomics”.

Believe me, it’s the most exciting times & period for our generation since Information is never an issue. 

You can reach me on riteshmohan@yahoo.com in case this topic also excites you.

About the author:

Ritesh Mohan is a passionate retail professional with over 19 years in the retail sector, handling some of the biggest brands in beauty, fashion and fragrances retail & FMCG sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region.

He specializes in Retail management, Product development, Brand management, Retail Operations, Sales Management, Business Management & Empowering business owners with his wisdom & experience of around two decades in the industry.

The Retail apocalypse – Transforming role of Leasing professionals and Mall Managers.

The Retail apocalypse! - is the buzzword that I hear very often within my retail fraternity & in Retail forums while talking to brand owners as well as landlords (mall developers).

The panic words often said are: “Shopping is changing forever! ; Brick-and-mortar stores are dying! ”

This negativity in the retail sector prompted me to write & take a deep dive into the phenomenon that’s taking place in Middle Eastern Retail sector.

In my quest to embark on this challenging topic, I conducted face to face interviews with Retail industry Leaders, various telephonic interviews with my friends in Leasing fraternity and one to one discussion with my retail fraternity members as to how they feel about the challenges that new economy is going to pose and how their job profile would need to adapt to new economy.

I started asking each one of them about the challenges they would be facing in retail leasing in 2018. I got a mixed bag of responses:

Few Main Challenges:

a)     E-commerce is posing a severe threat to mall’s footfalls resulting in overall traffic drop which reflects in category decline in spends.

b)    Competition from other malls as they try to lure tenants/brands with attractive rent free period options in order to retain tenants in their malls

c)     Small retailers are shutting down, bigger ones are not expanding and new brands are being very cautious to enter the market in the current scenario. They prefer playing wait & watch game.

d)    Striking a good merchandise mix balance in maintaining a good brand/tenant mix within the mall despite various brand’s shop closures.

Let’s start with the definition of Apocalypse, as per dictionary it means “the final destruction before the end of the world”.

My sincere request to all my fellow Retailers and Retail fraternity members would be instead of thinking of it as the end of the world, we should really be looking at this as the natural evolution of life and business. 

If stores can’t adapt to changing trends and technology, they will die of natural causes.If malls fail to impart an exceptional customer experience which millennials desire then they would too fail. 

Oftentimes, you walk out of the stores empty-handed, frustrated, and feeling like you just wasted your time. These mass experiences with mediocre customer service are exactly what we are trying to get away from!

Instead, World is moving towards personalized experiences that are tailored to our every need.

Challenging times requires each one of us to do the following:

a)     First & foremost stay Positive.

b)    Adapt to the current situation & innovate in order to re-engineer your business model.

c)     Most of the industry leaders mentioned that 2017 was one of the worst periods and they all are looking forward to 2018 as there are signs of improvement for the economy

d)    Positive Economy indicators: Oil prices are becoming stable hovering around USD 62/- per barrel. New VAT implementation is a move to become less dependent on oil resource. Growth in tourist traffic.

All these positive indicators are good indicators for a Retail industry which thrives on customer’s spending and tourist’s inflow.

The retail apocalypse is simply an evolution of our society. People can buy almost anything online now and have it delivered within a few days—if not the same day. 

Today, the role of leasing manager/Head has become more dynamic, it has transitioned from traditional property manager to Business Development/ Marcom Manager kind of role.

The new role demands Retail professionals to adapt to new thinking i.e. Instead of being used for the old way of shopping, perhaps malls should transition into venues for live events where people can come together. Closed stores can be put to good use such as exercise spaces, concert venues.

Basically, let’s get creative about how to use the physical space.

Categories that would drive growth in 2018:

a)     F&B – with an ever-growing list of innovative food /cuisine concepts this category would be most promising category from revenue generation point of view for malls. The trend of eating out amongst millennials is increasing day by day.

b)    Wellness – with more and more people becoming health conscious, the trend for wellness retail is increasing and can be targeted by malls. Hitech Gyms, swimming facilities inside malls, Ayurveda retail concepts and spas would be a growing segment in near future.

c)     Rise in speciality concepts like Daiso, Mumuso & other Korean, Japanese concepts would also contribute in helping malls to resist the retail apocalypse.

d)    A home segment including Home furnishing: This segment has always been underplayed by the majority of malls due to earlier space limitations, now with changing economy, I foresee this category to do well.

e)     Luxury Retail: Luxury is never impacted by any kind of downturn, this category remains evergreen.

f)      Family & Entertainment sector: Cinema would drive this sector’s growth especially when KSA has granted permissions to malls to build cinemas in the kingdom.

For Retailers, this is a chance to get creative in their approaches to customers. Clearly, the old method isn’t working, so now the retailers that are still around have a chance to innovate. They need to find new ways to be relevant and think about how they can make customers’ lives easier in our modern, connected world. 

For malls & landlords, I have shared my wisdom i.e. on which segments they need to focus; I hope mall owners, mall CEOs would find my insights useful in developing their strategy and budgets for 2018.

I would like to close my article with special mention to Mr Marcello Larizza, GM, Line Investments (lulu group), who quoted “In order to succeed, the new upcoming malls have to be developed according to the customer needs and expectations. Online e-commerce business was never an issue”.

I would be more than happy to share more insights with my retail fraternity members who need cutting-edge solutions to their existing issues. You may feel free to contact me anytime as I strongly believe that by sharing knowledge and wisdom, we all can create a wonderful society and wonderful future. You can reach me on riteshmohan@yahoo.com.

About the author:

Ritesh Mohan is a passionate retail professional with over 19 years in the retail sector, handled some of the biggest brands in beauty, fashion and fragrances sector. He has been instrumental in the growth of some of the regional brands as well in Middle East region. He specializes in Retail management, Product development, Brand management, retail operations, sales management, Franchising  & empowering business owners with his wisdom & experience of around two decades in the industry.