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Institutionalization of Family Businesses

Family Business — SUMMARY

Every business needs a disciplined and sound management in order to survive for a long time. Similarly, family businesses should be managed in the best way to ensure continuity for many years. Family businesses; In this context, it needs institutionalization and professionalization to be managed in the best way and to ensure its continuity. In the study, the definition and structure of family businesses are discussed, their strengths and weaknesses, opportunities and threats are discussed, and then institutionalization, institutionalization problems and professionalization issues are examined in family businesses.

Family businesses all over the world have an important place economically. For this reason, family businesses have a lot of impact on the country’s economy.
Family companies, like every successful business, should be managed according to certain rules and methods.
The family business is the family’s livelihood. Naturally, the positive or negative point that the company will reach in the future will definitely affect the family.
Increasing the impact of globalization on businesses day by day has made change and renewal inevitable for businesses. Family businesses, which have an emotional structure, have started to face harmonization problems in the global market, where change is taking place swiftly and where there are fierce competition.
When family businesses that cannot provide their continuity for a long time are examined; It is observed that this problem is caused by the lack of institutionalization and professionalization concepts. Institutionalization; Although it is accepted by the family companies as a concept, it is inadequate in practice.
In this study, which involves institutionalization and professionalization in family companies, the concepts are examined together with their problems.

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1.1. Family Business Definition
Family businesses are businesses where family-related decisions are made by family members whose members are mostly made by family members, or those who carry out the management business are affected by the family, and the people who have shares are family or relatives.
1.2. Family Business Structure
Family businesses have a certain founder, and these businesses are often set up with limited expectations in the first place. The name and reputation of the business develop with the family. The company’s policy is in line with the family’s interests. Any change in the family structure is also reflected in the organizational structure of the company. Emotional situations caused by family ties can sometimes conflict with the logical behavior that business relationships require. There is no official organization in the structure of family businesses. Relations in these businesses are based on a natural organization. Age and gender play a determining role in employment and promotion in family businesses. Intra-family ties and affinity are also effective in determining the executive position. These positions in the business may also affect family members’ situation within the family. Patriarchal structure and understanding is dominant in family businesses.
1.3. Positive Aspects of Family Businesses
Each business type has strengths and weaknesses based on different reasons. There are several factors that make family businesses advantageous and disadvantageous. When we evaluate family businesses in this context, some advantages can be listed as follows:
1. A family that is accepted and well known by its environment will not have much trouble in overcoming the problems it faces.
2. When evaluated financially, it is much more advantageous in terms of using own resources compared to multi-partner companies. Family; he uses his own funds for his companies. This strengthens the hand of family businesses in terms of financial resources.
3. Family companies that hold their capital; From a financial point of view, it has the opportunity to apply new methods, and to make quick decisions in different techniques.
4. It is important for the management staff in the family businesses to change much later than other companies and to be managed by the same managers for a long time in order to create a sound management culture in the business.
5. Family members; Within the framework of the emotional and sincere bond between them, they do not have difficulty in transferring the problems encountered in the business to each other. The fact that they come from the same culture, spend most of their time together, significantly increases the coordination between them. This emotional unity between them enables problems within the business to emerge very quickly and helps to resolve it quickly.
6. Members in the family business; Thanks to the less bureaucratic procedures between them, they act more flexibly and the adaptation processes in the enterprise are shortened.
1.4. Negative Aspects of Family Businesses
Family businesses have some advantages, as well as some disadvantages. We can mention some of these disadvantages as follows:
1. One of the biggest problems experienced in family businesses is nepotism. The priority of relatives in transition to management-related positions prevents institutionalization of family businesses, which results in failures in the business.
2. Investments for family companies can be conservatively blocked by some family owners. Professional managers can manage capital more dynamically and make quick decisions. They do not avoid bold decisions and can achieve better results for the initiative.
3. In family businesses, when members are evaluated in terms of family competition, they are prone to encounter big problems. Family groupings damage harmony and communication, which are the factors that keep the family business together, and may lead to an unsuccessful period in the business.
4. In family companies; The problem of not being capable of running the business of the transferred son, which occurs in father-to-son transfers, will have negative consequences for the future of the company. In terms of management and leadership concepts, an unskilled son can bring the end of a family business.
5. Emotional closeness in family ties; It causes weakening of the formal structure and subordinate-upper relations of the business. For this reason, the responsibilities in the enterprise may not be determined and determined. This causes disruptions in the workflow.
6. It is difficult to establish a board of directors in family companies. Since family ties play an important role, a non-family manager may think that the working environment will not be comfortable and under pressure in this business and may be shy about choosing such businesses.

Strengths and weaknesses of family businesses; It includes the evaluation of opportunities and threats.

1.5.1 Strengths
First of all, a family business is established only by family members and they have common values, strong commitment, loyalty, stability, and also lower costs than employees of other companies. A family is likely to share the same belief and motivation as to how things should be done. This belief and motivation will provide an extra purpose and sense of pride to the enterprise, and will ensure its competitive edge. Family in family businesses; When it aims to establish a permanent family institution, we can say that there is a high probability of working overtime and making efforts to be more successful. Providing this motivation is much more difficult in businesses that do not have a family business. Family members may be more willing to make financial sacrifices for the sake of business.
Second, family businesses have vertical or horizontal hierarchical organizational structures. When evaluated from this point of view, it was observed that less hierarchical layer reduces waste and enables employees to make better decisions. Thus, it leads to more profitability. Ford has seventeen layers of management between its CEO and its employees. However, in Toyota, which is a more successful company in terms of profit, this number of layers is only seven. In family businesses, the organizational structure is clearly more horizontal than other companies. The board of directors can realize a common decision or strategy faster and perform internal communication smoothly and easily. This means that family businesses have a more effective organizational behavior. In a family business, the decision is usually taken by family members. Therefore, when they encounter some problems, they communicate with each other more easily, ignore the more complex meeting process and quickly accept the joint decision. In the first stage of a family business, the family always keeps property and management together. Due to this special internal organizational structure, the chairman and CEO are usually the same person. So when the company encounters a problem, the family can solve the problem faster.

1.5.2 Weaknesses
Family businesses are generally short-lived. In family businesses; the founder or owner-manager decides everything in the company, and in this case some wrong decisions are inevitable. According to some studies, most of the family businesses either collapse or are sold during the tenure of the first generation, that is, when they are led by the founding family. With only 5% to 15%, companies continue to the third generation. The biggest reason for this phenomenon is the wrong decisions and repeated mistakes chain made by the owner and the founder manager.
Why are family businesses so short-lived? Apart from making wrong decisions, there are also problems such as human resources problem, lack of a standard organizational structure, being unable to create a company culture and family members not being able to adapt to non-family employees. A company must develop or hire some talented people to grow. A Family is only a very small group, it is difficult to find a suitable professional person to run the company, and therefore a family business should find some skilled managers from the outside. It is easy to find a skilled person; however, it is difficult to make him show his talents in the family business. Because family members always join the management in family businesses. And they don’t always trust non-family workers. Therefore, talented managers who will come from outside may not be included. If the family members do not trust the outsider, the talented person can never show his talents due to the pressure on him. This is why some family businesses are developing slowly. Because they do not have fresh blood to accelerate them during their development. Although family members have a significant positive impact on development, family business; it can be a breeding ground for family issues, jealousy, anger, anger and so on. There are few reservations about exporting emotions among family members, and family problems can easily flow into the workplace. The manager of a family business may find it difficult to turn down their qualitatively poor relatives in hiring. Relatives who are allowed to enter the company may abuse their family ties and feel that they can underperform only because they are relatives. Non-family workers may think that they are not treated equally and therefore do not have enough passion for their jobs.

1.5.3 Opportunities
Family companies may have different opportunities in different countries or settings. Here are some opportunities for family businesses in China. In 2005, the Chinese government issued a policy to encourage and support family-owned and operated companies. This policy means that family businesses can enter any industrial area they want and further increase the enterprise standard. The Chinese government supports family businesses with this policy to purchase state-owned businesses. On the other hand, the Chinese government has increased its financial support for small and medium family businesses to reduce tax costs.

1.5.4 Threats
Family businesses are established by a family and in the first period they control ownership and management. Therefore, he must develop his own ways of making more profit. It is one of the biggest threats to the development of a family business. Because the wrong decisions to be made at the profit making stage may lead to a very short life of the company. Family businesses can move to the sinking stage by not overcoming financial problems. Creditors and banks may not have enough confidence in small-medium family businesses. Therefore, they can only take short-term or high-interest loans. For this reason, most family businesses try to get their funds from their own endeavors, and because they do not get enough support, they may face major financial problems.

2.1. Institutionalization
Management of the business with standards and rules, independent of individuals; establishing systems that can adapt to the renewed external world conditions, transforming the business systems that it has developed in a unique way into a corporate culture, is institutionalization.

2.2. Institutionalization in Family Businesses
The establishment period of the family business is called the entrepreneurship period. Family businesses often have a very short life, although their numbers are numerous. The founder tries to activate business functions in this period. Efforts to get a share from the relevant market. In this period, family businesses are not generally in a formal structure. The second stage is the growth process. A family business that has reached this stage feels the need to institutionalize to make the work done more systematic and to manage the growing company more regularly. The most important factor of institutionalization in family businesses is to create a successful and sustainable system. The family company’s mission and vision should be determined and adopted by all employees. The company should have a strategic management plan. The distribution of duties among the employees should be fair and within the framework of the rules. The most important factors that ensure institutionalization in family businesses are the family constitution and the family council.

2.2.1 Factors Providing Institutionalization
The institutionalization of family businesses is important in terms of having a long-term future. There are some factors that ensure institutionalization. These factors are family constitution, board formation and family assembly.

  • Family Constitution
    The family constitution is one of the important factors for institutionalization. The constitution of the family is “written and unwritten basic rules for the family and the family’s relationship with the business and it is accepted by the family members who act as a guide in the relations with third parties and the business, who deserve to have the same surname by joining a family with marriage or blood ties. rules and values ​​that apply to all family members in the same way and have certain sanctions if not followed. ”

The family constitution is an important handbook in terms of preventing the problems that may arise between family members, ensuring the continuity of the business, enabling individuals to come together and discuss the problems. When the family constitution is created, the functioning of the institution is shaped within certain rules. The basic principles and advantages of the family constitution can be listed as follows:
- It divides family relations and company relations into two separate structures.
- It separates the issues such as managing the family and the company and having shares.
- It creates a continuous trust.
- It ensures that decisions are taken systematically and clearly.
- Provides respect and support environment.
- It provides a corporate company structure.
- Strengthens family relationships and ties.
- It provides a healthy family relationship and a healthy business relationship.
- It is seen as a guide for family members.
- It ensures that employees are satisfied about their work.
- It provides the transfer of the basic values ​​of the family.

The formation process of the family constitution is important. It may take a long time to prepare, and disagreements may arise in its formation. The items of the family constitution are sharp items and are not easily exchanged after they are presented. Having a family constitution in an institution positively affects the institutionalization process by creating a unique identity of the institution. At the same time, in the event of a conflict in which a family constitution may occur, there will be pre-presented openings on issues where conflict may occur, allowing problems to be easily resolved. In order to prepare the family constitution with an objective view, it should be created by experts and non-family members. Apart from consulting the subject within the team that will prepare the constitution, there must be one or two experts responsible for information gathering and research and development (R&D), as well as a lawyer.

  • Family Assembly
    It is important to create family assemblies to ensure the institutionalization and permanence of family businesses. The family council is where family constitutions are implemented. The family council is present in large-scale family businesses, and the transfer of every issue related to the business to the family members is carried out by the family councils. Finding a family assembly is important in terms of eliminating management problems in the enterprise to a large extent. This provides institutionalization of the business. The important features for the family assembly to be useful for its purpose are as follows;

-The establishment goal of the family assembly should be to strengthen communication between individuals in the family.
- Those who have an interest relationship in the parliament must be included.
- Meetings should be regular and participation is important.
-The rules of the parliament should be determined according to family ties and business structure.

  • Board of Directors
    The board of directors established in family businesses is effective in forming the organizational chart. It is the highest level executive body in the enterprise. It is one of the important structures for institutionalization. The management strategy and objectives of the business are determined in this board. In family businesses, the shareholders and the board of directors are generally composed of the same people. The board of directors has three objectives. These are protecting the interests of business owners, creating strategies to ensure the longevity of the business, and being the first place for general managers to consult. Members of the board of directors play an active role in the implementation of the family constitution as in the family assembly. The members of the board of directors should be determined according to their abilities and the training they receive and take parallel responsibilities. Since the members of the board represent themselves as well as their institutions and family values ​​in their business and social lives, they should be familiar with the values ​​of the institution and the family and take attitudes and behaviors towards it. The board of directors should primarily be an organization based on business relations. Board members should be independent individuals who can make objective decisions. People with leadership qualifications should be on the board of directors. If there are no leadership members among family members, external experts can be included in the business or consultancy services can be provided for family members on such issues. The purpose of the board is to clearly demonstrate what attitudes can be against the future opportunities that may threaten the future of the business or the opportunities that may occur in the future. Opposing views may arise from time to time. It is natural to have opposing views and these opinions should be evaluated carefully.

The institutionalization process is a time-consuming process and there are certain stages that lead the business to this process. This process should be adopted, supported and monitored by everyone in the business. The problems that will adversely affect the institutionalization process in family businesses can be listed as follows;
- Do not create the organization and organizational chart targeted
- Planning not done properly
- Internal regulations are not prepared
- The uncertainty of powers and responsibilities prevents the transition to professionalism
- The interplay and imbalance of family relationships and business relationships
Written rules are not defined
Failure to establish a continuous and versatile communication system
- Lack of information about institutionalization (Owners of family businesses who do not know exactly what institutionalization means, think that the cost of institutionalization will be high, see unnecessary in country conditions. On the other hand, business owners understand with institutionalization, it is imperative to employ professional employees instead of family members. professionalization of family members or outsourced personnel.)
- Making people who do not have leadership qualities to become managers.

3.1. Professionalism

Professionalization, as the meaning of the word; is to reach the highest level of competence in any field in a social process. In this process, individuals or institutions obtain acceptable qualifications related to the relevant field.

3.2. Professionalization in Family Businesses

The desire to grow in family businesses over time and thus the need for institutionalization also requires professionalization. The professionalization process requires working with professional staff and trust in professional people. Family members can be experienced and successful in most departments in the company, but this does not mean that they will be competent and good at every task. That’s why professionalization is important. Good follow-up and performance evaluation of professionals working together is also important. The advice of professional people should be taken into consideration and given importance. Steps to follow when moving to the professional management process are as follows;
- Obtaining support from experts by determining the company’s goals
- To take the opinion of all units up and down when making strategic decisions
- To provide financial management with support from experts in this field.
- Following the transition process to professional management well
The process of transition to professionalization can be a difficult process for individuals in terms of communication, relationships and psychology. Such problems in this process can damage the transition process. It is important to correctly apply what should be done in the control, planning and institutional process in order to prevent these negative effects from being reflected in the professionalization system negatively and slowing down the process.

Today, family businesses are in the growth phase; With the pressure created by globalization, it feels the need for institutionalization. However, family businesses that try to gain a formal structure at the stage of institutionalization also resist to comply with the rules required by the formal structure. This resistance damages the institutionalization process and prevents the business from growing and developing. If family businesses overcome this resistance against change with various methods of institutionalization and professionalization, they successfully carry out institutionalization and professionalization processes. It can establish effective systems and takes firm steps towards becoming a successful and sustainable company.
Family businesses strengthen their relationship with the outside world when they enter the professionalization process. In particular, family companies that have made some progress need access to important external resources to maintain their growth momentum. If a family business that is growing and offered to the public manages the professionalization process correctly, it can be a much larger, formal and systematic organization.
Professional family business management requires both formal and cultural competence. When it comes to professionalization in family businesses, formal competence usually comes to mind. However, cultural competence is also very important. The founding entrepreneur in the family company establishes a cultural bridge between family members. It tries to eliminate the negative aspects of being family and relatives and ensures focusing on the positive aspects. In this way, it can succeed to be a company that has a strong and professional communication skills.

If you need help, please contact me: ahmetkonak55@gmail.com

Written by

Entrepreneur. Master’s Degree: Entrepreneurship konakakademi.com

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