Thursday, 31 May 2012

Some more M.B.O.


INSTALLING THE MBO PROGRAM

When installing an MBO program, start by asking your managers to define their jobs, including their major responsibilities. Then, for each responsibility, you and your managers must decide the most effective way to measure performance in terms of results. The outcome of this exercise may surprise you. You and your managers may not agree on the major responsibilities of a certain position. Also, you may find that no one is performing some functions that you consider important. If the MBO system is to succeed, you must show interest from the beginning and set the example for your subordinate managers.

The education of your managers may be a formidable task. Until this time, they have thought in terms of specific functions managing a sales department, directing a credit office, etc. rather than in terms of goals that contribute to the organization.

One way to introduce the MBO system to your managers is in a seminar conducted by you or i-City However, if you choose i-City, be sure that you are present for the entire seminar. In this way, you will communicate to your managers that the MBO system is a management priority.

During the seminar, ask each participant to prepare an actual goal. Also, in small group sessions, have your managers review each other's work plans and offer suggestions to improve them. The experience of setting and reviewing goals makes MBO a learning experience for all employees.

Encourage your managers to express their doubts, reservations or opposition to MBO. They should get their feelings out in the open as soon as possible. You, the consultant or other participants can help to ease their concerns.

In the beginning of your MBO program, your managers will have to learn to measure their own performance accurately, anticipate real problems that will thwart their progress and take steps to solve delays and other problems. During this learning period, your managers should set fewer goals than would usually be expected, perhaps three or four. After they develop and achieve these goals, they can extend the number and area covered by each goal.

MBO may look simple on the surface, but it requires experience and skill to make it work effectively. If managers set annual goals, it may take three to four years before good results from this new system appear.

THREATS TO AN MBO PROGRAM

Not all MBO programs are successful. Some of the reasons why programs fail to reach their potential are 
  • Top management does not become involved.
  • Corporate objectives are inadequate.
  • MBO is installed as a crash program.
  • It is difficult to learn the system because the nature of MBO is not taught
WE CAN MAKE IT HAPPEN
By trusting your MBO to i-City our team of experts is capable to determine specific objectives under "The Big Think Approach"  that has been succesfully implemented by a variety of organizations. We will make sure that from your "Centric Vision" will be converted to specific WHATs, HOWs and WHOs so you will manage thoroughly the performance and achievement of the actions toward achieving your objectives.

Tuesday, 29 May 2012

Management By Objectives


Setting Goals

Long‑range business goals will be the cornerstone of your company's MBO program. To achieve these goals, you must have a method to communicate them to your managers and employees. One way is to bring managers and employees into the process by asking them to help formulate the company's short‑ and long‑range goals. If they have a role in establishing the goals, they will be more committed to achieving them.

All goals should relate to and support the long‑range objectives for the company. In this way, you can ensure that the goals of all levels of management are consistent. If goals are incompatible, you may find that employees feel like the middle manager of a research and development company who exclaimed in a seminar, How can I set my goals when I don't know where top management wants to go?

Types of Goals

What areas of your managers' work are suitable for goal setting? Ask managers to identify the most important aspects of their work. In each area, they should set both short‑ and long‑term goals. Carefully developed goals, if attained, should give the manager better control of the job. Each manager should define one or two goals in each of the following categories: 

  • Regular work goals.
  • Problem‑solving goals.
  • Innovative goals.
  • Development goals.
By asking your managers to set at least one goal in each of these four areas, you may open their eyes to new possibilities they had not seen before. The goal‑setting process can be a very useful educational step.

Regular Work Goals

These include the major part of the manager's responsibilities. For example, the head of production should focus on the quantity, quality and efficiency of production and the head of marketing should concentrate on developing and conducting the market research and sales programs. In defining their regular work goals, employees should include ways of 
  • Operating more efficiently.
  • Improving the quality of the product or service. 
  • Expanding the total amount produced or marketed.

Problem‑Solving Goals

These provide managers an opportunity to define their major problems and to set a goal to solve each one. There is no danger of ever running out of problems; new problems or new versions of old problems are always present.

Innovative Goals

Because of the push for new products and new methods in today's marketplace, innovation now gets much attention in seminars and publications for top managers. Managers and workers should seek new and better production methods, explore better ways to serve customers and propose new products for the company. Managers will need to use innovative approaches to make the company competitive in a fast‑changing national and international economic environment.

Development Goals

In setting development goals, you and your managers recognize the importance of acquiring new skills. Managers should plan for the continued growth of each employee, both in technical areas and in work relations with fellow employees.

Devising a Work Plan

You and your managers should use a miniature work plan to develop goals that are complete and useful (see Exhibit 1). In developing the plan, the following five areas should be addressed:
  • Goal
    •  Be specific and concise.
  • Measurement 
    • What benchmarks will you use to measure whether you have achieved your goals? These usually can be expressed in quantitative terms.
  • Major problems anticipated.
    • Work steps -- List three or four of the most essential steps. Give completion dates for each.
  • Supervisor's goals 
    • Employees should identify which of their manager's goals relate to their own goals.

Monday, 28 May 2012

How much money will you need?

Every business is different, but it is still possible to get a reasonable idea of how much cash your
business is likely to need by considering a few key factors.

Does Your Business Produce a Product or Provide a Service?

Initially, a service business will require less cash because it will not have high material and
equipment costs. If you intend to manufacture a product, you must consider the type and amount
of direct materials and equipment needed and expenses incurred.

Who Will Provide Labor?

Do you intend to do most of the work yourself or will you hire employees to assist you?
Contributing your own time to the business is one way to keep costs down. Later, when your
business is firmly established, you may wish to hire employees to take over many of the day-today
operations.

Do You Have Personal Funds to Invest in Your Business?

Almost all investors prefer or require that you contribute some of your money to the business.
This contribution of unborrowed funds is called equity. There is no fixed percentage for this equity contribution, but most lenders require at least 25 percent of the total amount needed to establish
the business. The amount of equity required is also influenced by other credit factors, such
as management experience and adequacy of collateral.

Can You Provide for Your Personal Expenses While the Business Is Getting Started?

It is unusual for a beginning business to show a profit in the first few years. It's good strategy to
plan to cover your personal living expenses for at least six months while your business is getting
started.
If your business is already operating, it may be necessary to reduce your salary while you
try to expand. If you have your own funds set aside for your personal expenses during these
periods, you will have one less expense for which you will need borrowed funds.


Why i-Fund is the solution to your start-up finance
Just think all the people you know, family, friends, former classmates everyone, they are your potential cutomers so you can approach them and ask to pre-buy your products and services in order to raise the necessary capital to start up your business.
Here are the steps on how i-City is able to help you do this.
What are you waiting for to start up your own business?
 

Sunday, 27 May 2012

Creativity in Anything We Do


1.      You are creative. The artist is not a special person, each one of us is a special kind of artist. Every one of us is born a creative, spontaneous thinker. The only difference between people who are creative and people who are not is a simple belief. Creative people believe they are creative. People who believe they are not creative, are not. Once you have a particular identity and set of beliefs about yourself, you become interested in seeking out the skills needed to express your identity and beliefs. This is why people who believe they are creative become creative. If you believe you are not creative, then there is no need to learn how to become creative and you don't. The reality is that believing you are not creative excuses you from trying or attempting anything new. When someone tells you that they are not creative, you are talking to someone who has no interest and will make no effort to be a creative thinker.
2.      Creative thinking is work. You must have passion and the determination to immerse yourself in the process of creating new and different ideas. Then you must have patience to persevere against all adversity. All creative geniuses work passionately hard and produce incredible numbers of ideas, most of which are bad. In fact, more bad poems were written by the major poets than by minor poets. Thomas Edison created 3000 different ideas for lighting systems before he evaluated them for practicality and profitability. Wolfgang Amadeus Mozart produced more than six hundred pieces of music, including forty-one symphonies and some forty-odd operas and masses, during his short creative life. Rembrandt produced around 650 paintings and 2,000 drawings and Picasso executed more than 20,000 works. Shakespeare wrote 154 sonnets. Some were masterpieces, while others were no better than his contemporaries could have written, and some were simply bad.
3.      You must go through the motions of being creative. When you are producing ideas, you are replenishing neurotransmitters linked to genes that are being turned on and off in response to what your brain is doing, which in turn is responding to challenges. When you go through the motions of trying to come up with new ideas, you are energizing your brain by increasing the number of contacts between neurons. The more times you try to get ideas, the more active your brain becomes and the more creative you become. If you want to become an artist and all you did was paint a picture every day, you will become an artist. You may not become another Vincent Van Gogh, but you will become more of an artist than someone who has never tried.
4.      Your brain is not a computer. Your brain is a dynamic system that evolves its patterns of activity rather than computes them like a computer. It thrives on the creative energy of feedback from experiences real or fictional. You can synthesize experience; literally create it in your own imagination. The human brain cannot tell the difference between an "actual" experience and an experience imagined vividly and in detail. This discovery is what enabled Albert Einstein to create his thought experiments with imaginary scenarios that led to his revolutionary ideas about space and time. One day, for example, he imagined falling in love. Then he imagined meeting the woman he fell in love with two weeks after he fell in love. This led to his theory of acausality. The same process of synthesizing experience allowed Walt Disney to bring his fantasies to life.
5.      There is no one right answer. Reality is ambiguous. Aristotle said it is either A or not-A. It cannot be both. The sky is either blue or not blue. This is black and white thinking as the sky is a billion different shades of blue. A beam of light is either a wave or not a wave (A or not-A). Physicists discovered that light can be either a wave or particle depending on the viewpoint of the observer. The only certainty in life is uncertainty. When trying to get ideas,  do not censor or evaluate them as they occur. Nothing kills creativity faster than self-censorship of ideas while generating them. Think of all your ideas as possibilities and generate as many as you can before you decide which ones to select. The world is not black or white. It is grey.
6.      Never stop with your first good idea. Always strive to find a better one and continue until you have one that is still better. In 1862, Phillip Reis demonstrated his invention which could transmit music over the wires. He was days away from improving it into a telephone that could transmit speech. Every communication expert in Germany dissuaded him from making improvements, as  they said the telegraph is good enough. No one would buy or use a telephone. Ten years later, Alexander Graham Bell patented the telephone. Spencer Silver developed a new adhesive for 3M that stuck to objects but could easily be lifted off. It was first marketed as a bulletin board adhesive so the boards could be moved easily from place to place. There was no market for it. Silver didn't discard it. One day Arthur Fry, another 3M employee, was singing in the church's choir when his page marker fell out of his hymnal. Fry coated his page markers with Silver's adhesive and discovered the markers stayed in place, yet lifted off without damaging the page. Hence the Post-it Notes were born. Thomas Edison was always trying to spring board from one idea to another in his work. He spring boarded his work from the telephone (sounds transmitted) to the phonograph (sounds recorded) and, finally, to motion pictures (images recorded).
7.      Expect the experts to be negative. The more expert and specialized a person becomes,  the more their mindset becomes narrowed and the more fixated they become on confirming what they believe to be absolute. Consequently, when confronted with new and different ideas,  their focus will be on conformity. Does it conform with what I know is right? If not, experts will spend all their time showing and explaining why it can't be done and why it can't work. They will not look for ways to make it work or get it done because this might demonstrate that what they regarded as absolute is not absolute at all. This is why when Fred Smith created Federal Express, every delivery expert in the U.S. predicted its certain doom. After all, they said, if this delivery concept was doable, the Post Office or UPS would have done it long ago.
8.      Trust your instincts. Don't allow yourself to get discouraged. Albert Einstein was expelled from school because his attitude had a negative effect on serious students; he failed his university entrance exam and had to attend a trade school for one year before finally being admitted; and was the only one in his graduating class who did not get a teaching position because no professor would recommend him. One professor said Einstein was "the laziest dog" the university ever had. Beethoven's parents were told he was too stupid to be a music composer. Charles Darwin's colleagues called him a fool and what he was doing "fool's experiments" when he worked on his theory of biological evolution. Walt Disney was fired from his first job on a newspaper because "he lacked imagination." Thomas Edison had only two years of formal schooling, was totally deaf in one ear and was hard of hearing in the other, was fired from his first job as a newsboy and later fired from his job as a telegrapher; and still he became the most famous inventor in the history of the U.S.
9.      There is no such thing as failure. Whenever you try to do something and do not succeed, you do not fail. You have learned something that does not work. Always ask "What have I learned about what doesn't work?", "Can this explain something that I didn't set out to explain?", and "What have I discovered that I didn't set out to discover?" Whenever someone tells you that they have never made a  mistake, you are talking to someone who has never tried anything new.
10.   You do not see things as they are; you see them as you are. Interpret your own experiences. All experiences are neutral. They have no meaning. You give them meaning by the way you choose to interpret them. If you are a priest, you see evidence of God everywhere. If you are an atheist, you see the absence of God everywhere. IBM observed that no one in the world had a personal computer. IBM interpreted this to mean there was no market. College dropouts, Bill Gates and Steve Jobs, looked at the same absence of personal computers and saw a massive opportunity. Once Thomas Edison was approached by an assistant while working on the filament for the light bulb. The assistant asked Edison why he didn't give up. "After all," he said, "you have failed 5000 times." Edison looked at him and told him that he didn't understand what the assistant meant by failure, because, Edison said, "I have discovered 5000 things that don't work." You construct your own reality by how you choose to interpret your experiences.
11.   Always approach a problem on its own terms. Do not trust your first perspective of a problem as it will be too biased toward your usual way of thinking. Always look at your problem from multiple perspectives. Always remember that genius is finding a perspective no one else has taken. Look for different ways to look at the problem. Write the problem statement several times using different words. Take another role, for example, how would someone else see it, how would Jay Leno, Pablo Picasso, George Patton see it? Draw a picture of the problem, make a model, or mold a sculpture. Take a walk and look for things that metaphorically represent the problem and force connections between those things and the problem (How is a broken store window like my communications problem with my students?) Ask your friends and strangers how they see the problem. Ask a child. How would a ten year old solve it? Ask a grandparent. Imagine you are the problem. When you change the way you look at things, the things you look at change.
12.   Learn to think unconventionally. Creative geniuses do not think analytically and logically. Conventional, logical, analytical thinkers are exclusive thinkers which means they exclude all information that is not related to the problem. They look for ways to eliminate possibilities. Creative geniuses are inclusive thinkers which mean they look for ways to include everything, including things that are dissimilar and totally unrelated. Generating associations and connections between unrelated or dissimilar subjects is how they provoke different thinking patterns in their brain.  These new patterns lead to new connections which give them a different way to focus on the information and different ways to interpret what they are focusing on. This is how original and truly novel ideas are created. Albert Einstein once famously remarked "Imagination is more important than knowledge. For knowledge is limited to all we now know and understand, while imagination embraces the entire world, and all there ever will be to know and understand."
And, finally, Creativity is paradoxical. To create, a person must have knowledge but forget the knowledge, must see unexpected connections in things but not have a mental disorder, must work hard but spend time doing nothing as information incubates, must create many ideas yet most of them are useless, must look at the same thing as everyone else, yet see something different, must desire success but embrace failure, must be persistent but not stubborn, and must listen to experts but know how to disregard them.

Wednesday, 23 May 2012

Make a Budget


What Is a Budget?

Although you might not know it, you prepare a budget each time you estimate how much cash you will have left at the end of the month after paying your bills.

A budget is a forecast of all cash sources and cash expenditures. It is organized in the same format as a financial statement, and most commonly covers a 12-month period. At the end of the year, the anticipated income and expenses developed in the budget are compared to the actual performance of the business as recorded in the financial statement.

Why Create a Budget?

A budget can greatly enhance your chances of success by helping you estimate future needs and plan profits, spending and overall cash flow. A budget allows you to perceive problems before they occur and alter your plans to prevent those problems.

This publication covers the basic concepts of budgeting and takes you through the step-by-step process of constructing a budget.

How to Use a Budget

In business, budgets help you determine how much money you have and how you will use it, and help you decide whether you have enough money to achieve your financial goals. As part of a business plan, a budget can help convince a loan officer that you know your business and have anticipated its needs.

A budget will indicate
  • The cash required for necessary labor and/or materials 
  • Total start-up costs.
  • Day-to-day maintenance costs.
  • Revenues needed to support business operations.
  • Expected profit.
 If your budget indicates that you need more revenue than you can earn, adjust your plans by 
  • Reducing expenditures (e.g., hiring fewer employees, purchasing less expensive furniture, eliminating a telephone line).
  • Expanding sales (e.g., selling additional products or services, conducting an aggressive marketing campaign).
  • Lowering profit expectations (usually the least desirable option).
 Every business should create a budget before investing money in new equipment or other assets and before signing leases. To ensure your goals can be reached, first put all the numbers down on paper so you can adjust and rework them as many times as necessary. Mistakes are far less costly when made on paper than with actual dollars.

Basic Budgeting Concepts
 The three main elements of a budget are

  1. Sales revenue
  2. Total costs
  3. Profit

Sales Revenue

Sales are the cornerstone of a budget. It is crucial to estimate anticipated sales as accurately as possible. Base estimates on actual past sales figures. Once you target sales, you can calculate the related expenses necessary to achieve your goals.

Total Costs

Total costs include fixed and variable costs. Estimating costs is complicated because you must identify which costs will change and by how much and which costs will remain unchanged. You also must consider inflation and rising prices when applicable.

Variable Costs

Variable costs are those that vary directly with sales. One example is the purchase cost of inventory. The more inventory you sell, the higher your purchasing costs; the less you sell, the lower your purchasing costs. Similarly, freight and special packaging costs will vary directly with sales; these costs will not be incurred without a sale.

For example, a store owner pays 350,000 for supplies and sells them for 500,000. To calculate the cost of inventory purchases as a percentage of sales, the owner divides the amount paid by the amount received in sales (350,000 500,000 = 70 percent). This means 70 percent of sales will go to pay for the cost of inventory. If the store owner estimates 600,000 in sales for the next year, he or she should budget 70 percent of 600,000, or 420,000, for inventory purchases.

Fixed Costs

Fixed costs are those that do not change, regardless of sales volume. Rent is considered a fixed cost because it is totally independent of sales activity and, for the duration of the lease, will not change. For example, a five-year lease with an annual rent of $24,000 must be paid even if there are no sales. It doesn't matter whether sales are high or low; the rent is still $24,000.

Semivariable Costs

Semivariable costs, such as salaries, wages and telephone expenses, have both variable and fixed components. For budgeting purposes, you may need to break semivariable costs into these two components. The fixed element represents the minimum cost of supplying a good or service. The variable element is that portion of the cost influenced by changes in activity. Examples of semivariable costs are the rental of delivery trucks and photocopying machines for a fixed cost per month plus a variable cost based on the volume of usage.

Inflation and Other Adjustments

A budget will be as good as the numbers used to make it. Therefore, it is important that your estimates and calculations be as accurate as possible.

Profit

Profit should be large enough to make a return on cash investment and a return on your work. Your investment is the money you put into the firm when you started it and the profit of prior years that you have left in the firm (retained earnings). If you can receive 10 percent interest on $25,000 by investing outside of your business, then you should expect a similar return when investing $25,000 in equipment and other assets within the business. When preparing your budget, add the expected return on investment to your targeted profits. Check with your trade association, accountant or banker to make sure that the rate of return on your investment is what it should be.

In targeting profits, you want to be sure you are receiving a fair return on your labor; your weekly paycheck should reflect what you could be earning elsewhere as an employee.

Basic Budget Equation

                                                           Sales = total cost + profit

This equation shows that every sales dollar you receive is made up partly of a recovery of your costs and partly of profit.

Another way to express the basic budgeting equation is

                                                           Sales - total cost = profit

This equation shows that after reimbursing yourself for the cost of producing the product or service, the remaining part of the sales dollar is profit. For example, if you expect $1,000 in sales income and you know that it costs 750 to produce, market and sell your product or service, your profit will be $250.

Realistic Estimates

In calculating an operating budget, you will often make estimates based on past sales and cost figures. You will need to adjust these figures to reflect price increases, inflation and other changing factors.

If your business is a new venture and has no past financial records, rely on your own experience and knowledge of the industry to estimate demand for and costs of your product. In i-City we provide you wit a sofistitcated template -ready to work- in order to be able to make your own Budget forecast and compare your actual results against those forecasted. Our team of experts is available during working days to chat with and provide you with the most valuable help and infrormation on your HOW TO.

The Budgeting Process

Before you can create a budget, you must answer three questions: 
  •  How much net profit do you want the business to generate during the calendar year?
  • How much will it cost to produce that profit?
  • How much sales revenue is necessary to support both profit and costs?

Monday, 21 May 2012

Choosing a successor for Transferring Management in the Family owned Business


CHOOSING A SUCCESSOR

Succession is the transferring of leadership to the next generation. It is a process rather than an event. While there is a time frame within which the transition will occur, the actual amount of time taken for the process is arbitrary. It will depend on you, your family and the type of business you are in. This is a difficult process for most family businesses. Succession occurs in four phases: initiation, selection, education and transition. A discussion of each phase follows.

Initiation

The initiation phase is that period of time when the children learn about the family business. It occurs from the time the children are born. A child can receive either a positive or a negative impression of the family business. If parents bring home the negative aspects of the business, complaining about it and about employees and relatives, the children will view the business in a very poor light. Other ways to destroy children's interest in the business is to be secretive about it or to convey an unwelcome or a hands-off attitude. There are families in which children are welcome to join the family business, but no one has told them so.

Owners are often cautious about systematically conditioning their children to enter the family business, an attitude that stems primarily from their awareness of individual differences and their belief that their children should be free to select a career path. If you do want your children to enter the business, or at least have that as a career alternative, there are some steps you can take to initiate them into the firm. The first step in motivating your children is to be certain that is what you want. Your lack of conviction about their involvement will be communicated to them. This may be interpreted as doubt about their ability, about the viability of the business or about the potential of the parent-child relationship to survive the strain of succession. Any of these situations can cause your child to lose interest in the business.

Assuming your children know that you want them to enter the business, you should talk with them often and openly about it. Be realistic, but stress the positive aspects. Your business provides you with many positive experiences to share with your children. Your children should learn what values the business represents, what the business culture represents and where the business is headed.

Selection

Selection is the process of choosing who will be the firm's leader in the next generation. Of the entire transition process, this can be the most difficult step, especially if you must choose among a number of children. Selecting a successor may be viewed by siblings as favoring one child over the others, a perception that can be disastrous to family well-being and sibling harmony. Owners select successors on the basis of age, sex, qualifications or performance. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of Let them figure it out when I'm gone.

Nevertheless, there are several solutions to this dilemma. Assuming you have more than one child who is or can become qualified for the position of president, you can select your successor based on age. For example, the oldest child becomes the successor. Unfortunately, the oldest may not be the best qualified. Placing age or sex restrictions on succession is not a good idea.

Alternatively, you could have a horse race. Let the candidates fight it out, and the best person wins. While this is the style in some major corporations, it is not the best option for all family businesses.

Family business owners may want to take advantage of a successor selection model developed for corporate executive succession. In this model, family members, using the strategic business plan, develop specific company objectives and goals for the future president or chief executive officer. The job description includes the requirements for the position -- such as skills, experience and possibly personality attributes. For example, if a firm plans to pursue growth in the next five years, the potential successor would be required to have a thorough understanding of business valuations and financial statements, the ability to negotiate and a good relationship with local financial institutions.

Designing such job descriptions provides a number of benefits. First, it removes the emotional aspect from successor selection. If necessary, the successor can acquire any special training the job description outlines. Second, it provides the business with a set of future goals and objectives that have been developed by the whole family. Finally, the founder may feel more comfortable knowing objectives are in place that will ensure a growing, healthy business.

If you have an outside board of directors, you may want to solicit their input regarding successor selection. The form in Appendix D will help assess the potential successors in your company.

Education

Training or educating the successor in the firm is a delicate process. Many times a parent finds it difficult to train a child to be successor. If so, an alternative trainer may be found within the firm. A successful trainer will be logical, committed to the task, credible and action oriented. These attributes, when tied into a program that is mission aligned, results oriented, reality-driven, learner centered and risk sensitive, will produce a well-trained beneficiary. All of this, of course, is easier stated than accomplished.

A training variant of the management by objectives (MBO) concept is the training by objectives (TBO) concept. This concept can be an effective method for providing both the training for and the evaluation of successors. In the TBO process, both the trainer (you or a nonfamily manager) and the trainee (potential successor) work together to define what the trainee will do, the time period for action and the evaluation process to be used. This system allows the successor to be placed in a useful, responsible position with well-delineated objectives. It also provides for steps of increased responsibility as goals are met and new, more rigorous goals are established. It is important that the successor enter the firm in a well-defined position. Instead of entering the company as assistant to the president, which requires that he or she follow the president around all day, the successor (or any other child) should enter with a specific job description. In a small business this is very difficult because everyone is usually responsible for all tasks. Nevertheless, the successor cannot be evaluated effectively if he or she is not given responsibility and authority for certain tasks.

Your business will enable you to determine which criteria are necessary for good training. Usually, an owner wants to assess a successor in the following areas:

            -          Decision-making process.

            -          Leadership abilities.

            -          Risk orientation.

            -          Interpersonal skills.

            -          Temperament under stress.

An excellent way to assess these skills is to let the successor give his or her insight on a current problem or situation. This is not a test and should not be confrontational. Instead, solicit advice and try to determine the thinking process that is generating your successor's suggestions. For example, you may be faced with a pricing decision. Give the successor all the information needed to determine whether or not to raise prices, then sit back and listen. Ask questions when appropriate -- these should be Why? and What if? After the successor is finished, say I was considering. . . . This way each of you can learn how the other thinks and makes decisions.

It is possible that your leadership style differs from that of your successor. Your employees are used to your style. If your successor's style is very autocratic and uncaring, your company is going to experience problems. Potential successors should be introduced into your outside network (e.g., customers, bankers and business associates), something many managers neglect. This will give everyone time to get to know your successor and allow the successor to work with business associates and bankers, and to get acquainted with customers.

Transition

The actual transfer of control to the successor occurs when you retire. Research indicates that transitions are smoothest when

            -          They are timely.

            -          They are final and do not include the entrepreneur's participation in daily activities.

            -          The entrepreneur is publicly committed to an orderly succession plan.

            -          The entrepreneur has articulated and supervised the formulation of company principles regarding management accountability, policies, objectives and strategies.

The transition can be effected gradually by relinquishing more and more responsibility to the successor. One expert advises the entrepreneur to take a number of planned absences before actually relinquishing control. Let the successor see what it is like to manage the business alone. Also, this allows you to see that the business is not going to fall apart without you.

Once you announce your retirement date, do not rescind it. There is no such thing as semiretirement. By the time your children are in their 40s, they expect leadership roles in the firm. If you refuse to let go, they may leave.

Letting Go

There are many reasons why entrepreneurs cannot let go of the family business. Primary among these are financial ones. As a business owner, you may be used to a large salary and benefits, such as a car or insurance. After working hard in the business most of your life, you want your retirement years to be comfortable, not filled with financial anxieties. There are several ways to ensure your financial security after retirement. Business owners usually consider either taking what they need from the company after they retire or arranging a buy-out that will give them the needed liquidity without placing an undue financial burden on the company. If you don't sell the company and your financial security is contingent on its daily operations, you will be less likely to retire completely. Your successor needs full control, and you probably won't let that happen. Also, the company may not be able to support you and the successor and still pursue the strategy you have set for it. Finally, you may not be able to meet your financial goals from income generated by the company.

To avoid these problems, consult with a financial planner or an attorney to determine the method of transfer that is best for you. There are tax consequences to the outright sale of the business to your children. Also, an outright sale may burden the company with too much debt. Other alternatives include an installment sale or private annuity, or funding a buy-sell with insurance proceeds. To provide effectively for your retirement, seek professional assistance in this area.

There are other reasons why the entrepreneur doesn't want to let go. One of the primary reasons is the fear of retirement. To understand this fear, it is necessary to appreciate the relationship between work, the meaning of life and social evaluation. For many founders, work and the business are synonymous with a meaningful life. The intense involvement the entrepreneur has with the business increases the importance of the job and his or her identity. Removal from work is like losing a part of oneself. Work is important to the entrepreneur because it provides

            -          Economic returns.

            -          Opportunities to contribute to society.

            -          Status and self-respect.

            -          Social interaction.

            -          Personal identity.

            -          Structured time.

            -          Escape from loneliness and isolation.

            -          Personal achievement.

That's a lot to ask someone to give up. Especially important is the loss of status and social power. The leader of a firm wields a great deal of influence and enjoys public impact and public exposure. Retirement means giving up this power. Because this loss is unpleasant, it is not uncommon for a founder to give a successor the responsibility for running a firm and still try to retain power and privileges from a position on the board of directors.

The entrepreneur who successfully lets go has (1) a sound financial plan for retirement, (2) activities outside the business that can provide social contact and power, (3) confidence in the successor and (4) a willingness to listen to outside advisors.

Friday, 18 May 2012

Transferring Management in the Family Owned Business part III


BALANCING FAMILY AND BUSINESS GOALS

When conflict occurs in the family business, it can be traced to a disparity in the goals of the individuals, the family or the business. Perhaps a family member works in the business out of economic necessity, not because he or she wants to. Or perhaps the potential successor has plans for the business that differ from current management plans -- different generations usually have different goals. Whatever the cause, the conflict must be addressed and resolved to avoid and prevent more serious problems later.

One way to define and align family and business goals is through business and family strategic planning. In these plans, you will create a mission statement for the business and for the family that allows each element to complement the other. Once you have completed this task, set goals for the family business that will allow the family and business to prosper. Next, develop a strategy to accomplish these goals and, finally, formulate policies and procedures that control the family's involvement in the business. Appendix B, the Strategic Plan Checklist, can help you review the steps in strategic planning.

Business Strategic Planning

Strategic planning for family-owned businesses requires that you integrate family issues, such as:

            1.         What are the long-term personal and professional goals of family members?

            2.         What is the family mission? Why are you committed to establishing and operating the business?

            3.         How do you envision the firm in the future?

            4.         Will family members be active in management or will they be passive members?

            5.         How will issues such as compensation, benefits and performance evaluation be handled?

The answers to these questions will affect the business strategy and should be resolved before strategic planning begins.

Strategic planning involves analyzing the business in its environment and devising a process for guiding its development and success in the future. This process involves assessing the internal operations and the current external environment (i.e., economic, technological, social and political forces) that affect the business. To begin this process, identify internal strengths and weaknesses that may constrain or support a strategy. Components of this assessment include (1) the organizational structure, (2) the culture and (3) the resource. Make a list of the opportunities available (growth, new markets, a change in regulations) and the threats (increased competition, shortage of raw materials, price cutting) to your business. This should give you some insight into the current situation and provide a strategic direction.

Next, list the objectives of you and your family, identifying personal needs and risk orientation. Many of these objectives and goals will be addressed in your family strategic plan. Also, you will find that your personal objectives will affect the strategy you choose. For example, if there is a great opportunity for growth in your market but you have a low risk orientation and a high personal need for security, you probably should not pursue high growth. It would be not only risky but also expensive. Growth consumes cash, and cash must be generated internally or financed externally. Your personal objectives should mesh with your strategy.

Once you have identified opportunities in the industry, assessed the strengths and weaknesses of the firm and listed your personal objectives, you can proceed with the strategic plan. This will
involve

            -          developing a mission statement,

            -          setting objectives,

            -          developing strategies to meet objectives, and

            -          developing action steps to implement the strategy.


Mission Statement

The mission statement answers the question What business are you in? It defines your customers and explains why you are in business. The mission statement embodies the heart of the business and gives direction to every facet of the business. Effective mission statements

            -          include specifications that allow measurement,

            -          establish the individuality of the firm,

            -          define the business in which the firm wants to be involved,

            -          are relevant to all with a stake in the firm, and

            -          are exciting and inspiring.

Objectives

You should set reasonable objectives for the firm, based on the mission statement, to ensure accomplishment of the firm's mission. Objectives should be clearly stated, realistic, measurable, time specific and challenging. Objectives can be created for

            -          revenue growth,

            -          earnings growth,

            -          sales and market share growth,

            -          new plants or stores, and

            -          product/service quality or corporate image.

Strategies

Strategies are determined by your answer to the earlier question: What will the firm be like in the future? Your strategic options include the following:

            -          Stability -- success is derived from little change (rare).

            -          Profit strategy -- sacrifice future growth for profits today.

            -          Growth strategy -- growth may be achieved through vertical integration (expansion from within), horizontal integration (buy a competitor), diversification, merger or retrenchment (turnaround or divestment).


Action Steps

Once the strategy is selected, action steps should be specified that will guide the firm's daily activities. An example of an action step is creating a budget to project the costs of a strategy. This process also is known as tactical planning. The steps in tactical planning should be practical and easy to implement and account for; their purpose is to convert goals into manageable, realistic steps that can be individually implemented.

Family Strategic Planning

The entire family should develop a mission statement or creed that defines why it is committed to the business. By sharing priorities, strengths and weaknesses, and the contribution each member can make to the business, the family will begin to create a unified vision of the firm. This vision will include personal goals and career objectives.

An important issue to consider is how to set priorities for the family and the business, i.e., decide which will come first, the family or the business. How you answer this question will influence your planning. Some family members will opt for the business first, reasoning that, without a business, there will be no financial security for the family. Others will opt for the family first, reasoning that no business is worth the loss of family harmony. A third alternative is to serve both family and business perhaps not equally, but as fairly as possible. Under this alternative, all decisions are made to satisfy both family and business objectives. For example, a family may have a policy that any family member may join the business, but he or she must meet the requirements of the job. You may find this is the best alternative because it forces a commitment to both the family and the business.

The Family Retreat

Trying to plan a business strategy during normal office hours is almost impossible. Plan a family business retreat to discuss the goals of the individual family members and the goals of the business. The first retreat should focus on reviewing the firm's history, defining family and business values and missions, creating a statement about the future of the business and reviewing areas that need more attention.

The purpose of the retreat is to provide a forum for introspection, problem solving and policy making. For some participants this will be their first opportunity to talk about their concerns in a nonconfrontational atmosphere. It is also a time to celebrate the family and enhance its inner strength.

A retreat usually lasts two days and is held far enough away so you won't be disturbed or tempted to go to the office. Every member of the family, including in-laws, should be invited. Begin planning your retreat about six weeks in advance.