The Three-Circle Model of Family-Owned Businesses

Discuss about the case study Entrepreneurship Business for Australia Premier Chocolate Families.

1. Darrell Lea is one of the Australia’s premier Chocolate families. The company had seen a four-generation long rise and then fall to oblivion.  The company at one time had 83 stores and managed 900 distribution licenses along with more than 1200 staffs (Ward, 2016). However, due to the inefficiency of family members, the $100 million business was insolvent in the year of 2012. According to Müller and Timofeev (2016), family businesses are by definition three overlapping systems. These three systems are such as family, owners, and managers-employees. From this three-circle model, it has been found that there are mainly three types of owners (Weiss, 2016). These include owners who work in the company but do not own any share, owners who have shares in the company but do not work and family owner-employees. Overlapping of these circles can create confusion and give rise to a conflict of interests (Gosnell, 2015).

Figure 1: Three-circle model of family business

(Source: Weiss, 2016)

Jason Lea had first spotted the brewing trouble during the late 1990s. He could see the inevitable after he became the Managing Director. He had come across the three circle model and appreciated the confusion that occurred in the innermost segment. For this reason, Jason had dismissed his own son and brother (belonging to the employee owner segment of the three-circle model) from the company due to their incompetence. He also sacked himself and started to look for independent management. He had realized that none of the family members (belonging to the innermost section of the three-circle model) were capable enough to handle this business.  In the year of 1996, during the 17^th anniversary, Jason had appointed an outside chairperson Alan Batley and Jeff Moore, who was the first non-family CEO for the company. 

As Hartley (2013) stated that, in reality only 33% of the family owned business becomes globally successful. It has been found that only 5% family businesses are able to create shareholder value beyond the 3^rd generation. The main reason for failure of the family-owned companies like Darrell Lea is that they had the same leader for 20-25 years. On the contrary, in public owned companies, the average CEO tenure is 6 years. It increases the difficulty for the company to cope up with the shift in technology, business model, trends and consumer behavior. Various other challenges rise due to the overlap of the business circles in the family business of Darrell Lea. These include messy structure and no clear division of tasks (Ward, 2016). In addition, the family business is not able to adapt professional management. Two specific problems have been found for the company Darrell Lea and the first one being the “Spoiled-kid syndrome.” The third generation of the Lea family took wealth as an entitlement and began to squander it. The fourth generation of the family had totally lost the spot. Secondly, the family members were resistant to change. They resisted the effort of Jason Lea as he tried to introduce non-family members as CEO and the chairperson. The family had resisted his plans before Jason died in 2005.

Challenges of Family-Owned Businesses

2. In the classic case of this classic third-generation family business, the formula is well-known. Pitcher established the chocolate company. The second generation inherited the business and increased it. The problem started to grow in the third generation. They were not able to operate the business properly. The fourth generation of the Lea family had totally lost the plot.

Jason Lea, the eldest of the third generation had spotted trouble in 1983. He had sensed the relational sloth. He had dismissed his own son and brother from the business for incompetence. He even sacked himself and hired Allen Batley during 1996. However, this change gave rise to emotional problems in the family. They were disenfranchised overnight. They did not take it lightly (Merigó et al., 2016).  Once, 13 family members were working in the business. During 2006 there were only three, one of them being Michael Lea’s son, Nicholas, who was a management consultant. He provided the slender thread between the family council and the Board.  They became resistant towards any change. The company kept on producing products that did not sell and other that they sold at a loss. The management was not able to erase the family entitlements. For all these problems the company was insolvent and placed it in the administration by the creditors.  Holmlund Kowalkowski and Biggemann (2016) stated that there were a lot of family members involved in the business but none of them had an interest in running it day-to-day. They did not want to be bothered with the hard work of the business. There were many people involved in the company, but none of them were actually interested in running the daily business. Due to their emotional strain and resistive behavior, $100 million worth company became unsuccessful.

3. The entitlement issue of the company started during the third generation of the family-owned business company Darrell Chocolates. They took the wealth as an entitlement and started to squander it. Most of the CEOs of the company were family members (Marjanovic, Dinter & Ariyachandra, 2016). They were operating on a business model that was 40 years old. Many people recommended change, but the board developed by family members knocked it back as they did not want to lose the heritage. According to Sumaya (2016), tradition killed most of the family business. It was applicable to the company Darrell Chocolates also. As a senior member of the company, they were not able to adapt change. There did not want to bother them with the hard work of running the business. There were a lot of people involved in the company, but none of them were actually interested in running the day-to-day business. They never invested their own money into the company when it went to through bad phases. As Weiss (2016) stated that only Jason Lea had the vision and plan. However, nothing had done since his death.

The Spoiled-Kid Syndrome and Resistance to Change

4. Any family business organization, in order to retain its position in future, must consider the task of succession planning in a very serious way. Approximately 88% of the family business owners intend their family members to join the family business. Yet according to the research conducted by Family Firm Institute, 30 % of the family businesses survive into the second generation, and only 3% survive into the fourth generation (Benavides et al., 2013). Darrell Lee belonged to the second generation, and as such he inherited the family business directly from his father. It is noteworthy here that patriarch of the family business, Harry started the business around the time Darrell was born. As such Darrell grew up watching his father introducing innovative business ideas, and adopting strategies, for the successful operation of the business (Darrell Lea, 2016).

Darrell not only acquired the necessary business skills, but he gradually developed a clear understanding about the vision of the organization and its immediate goals. As a result, till the second generation, there was no issue at all. However, from the third and fourth generation onwards, issues cropped up, because the family members did not have a thorough understanding about what was happening in the business. These family members did not see the business grow, but found it when it was already established. As a result, they lacked in-depth knowledge about the business operation, and were more concerned with the question of succession. What happens in case of the third and fourth generation is that the family members have a very remote or rather no understanding about the mission, vision or plan of the family business. Although these members intend to represent the status and glory associated with the family business, they lacked the skills, knowledge and expertise needed to operate the business activities smoothly (Kennedy, 2013).

Jason was indeed right, when he thought of recruiting the manager from outside his family. A business organization, that wishes to sustain itself in future, must ensure that the management authority consists of employees who are highly experienced in the field of business. Family emotion should be set aside, and only those family members, who are capable, experienced and resourceful enough must be chosen for succeeding the business. The downfall of a business organization is inevitable, if the successors are not able enough. They have to be qualified, highly experienced in order to sustain the business in a highly competitive world of the 21^st century. In absence of a suitable member, the family business may be succeeded by the next generation, but the management authority of the organization should consist solely of non-family members.

Importance of Succession Planning

5. After the downfall of the family business of the Leas, it was being taken over by the Quinn family. Tony Quinn was highly experienced in the field of business, and as such he had thorough knowledge about the Do’s and Don’ts of running a successful business. As a result, he possessed the necessary business skills and expertise. However, it is equally important for the Quinn family not to repeat the same mistake already perpetrated by the Leas. If a family business is well-managed over the successive years, then its growth can be ensured as well as preserved in the future. However, in case the successors of the Quinn family are lacking in entrepreneurial skills, entrusting the business to the successors would be a wrong decision (Neubauer & Lank, 2016).

The Quinn family must ensure that family business sustainability is maintained over the coming years. Tony Quinn must inculcate his own long term vision and business values and intentions, in the mind of his son. At the same time, he has to ensure that the basic business values, such as trust, commitment, responsibility, are being carried and passed over from one generation to the next. In case, the family member lacks entrepreneurial skills, he should be wisely kept away, from handling major business decisions (Hall, 2013). The family successors should acquire business management degree from any recognized university, or should at least work in a business firm for a couple of years, before he thinks of participating in the family business. It may also happen that the family successors are willing to join the family business itself. In such a situation, it has to be firmly stated, that the new, inexperienced member would be allowed to work under a strong management authority. For at least two years, he should learn, and try to polish his business skills.

An inexperienced, young family member, under no circumstance shall be allowed to take important business decisions. While the older, experienced family members may be entrusted with significant responsibilities, the young and less qualified family members should be provided sufficient training, before they assume important roles in the management authority (Gibbon, 2015). In case, a Quinn family member in future, is not provided the same designation in the family business as his brother, family rivalry and jealousy can crop up, which may destroy the family bond. Hence, the family must keep up a tradition of holding family reunions whereby the young members have to be educated about the necessary rules for conducting business over the coming years. A family council should be set up, comprising of the family members of the older generation, who will take decisions regarding the issue of family succession, depending on the competence of the successors (Pwc, 2016).

6. The false advice here is that one does not need to pay the family members at market rate, since they are earning value elsewhere. It should always be remembered that a business organization can succeed, flourish and prosper, only if it knows how to motivate its employees. Even if the employees are a part of the family, they should always be motivated to work harder. The payment must be made in compliance with the market worth of the job duties being performed. In case a family member is underpaid, he may feel exploited; he may lose interest or enthusiasm in bettering his performance (Prochazka, 2014). This will ultimately lead to the downfall of the family business.

Reference list

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