Organisation Transformation in an Entrepreneurial Family Business

The passage from one organisational phase to another is often difficult in entrepreneurial and family owned organisations. Our experience having worked with numerous such organisations is that one of the major problems is the inability of the founders and his or her managers to navigate the change from an entrepreneurial business to a professionally managed business.

Organisations evolve through various stages of development as they scale up. This pattern of growth is fairly consistent and predicable. Each stage is characterised by the organisations size or complexity; the business task and the managerial role requirements. Different managerial leadership capabilities are required at each stage. Therefore management should build the foundations for the organisation structure and people within the structure based on the tasks associated with each stage. Unfortunately the entrepreneur frequently does not go through or want to go through that rigour unaware of the consequences down the track. As a result of these choices the organisations structures systems and processes emerge. These may enhance but frequently inhibit successful passage to a higher level.

The successful passage requires the founder / leader and their managers to grow and acquire new skills (both vertical and horizontal skills) as the business expands. The changing skills include a greater understanding of best practice functional skills, good people management skills but most importantly the ability to process and interpret information to make conclusions, plans and decisions and take action to take the organisation to a higher level. Their ability to assimilate new skills and knowledge may be based on their mental models and action logic as outlined by Jacques(1989) and Torbert (2007).

I  will review the evolution of an entrepreneurial family business to highlight the difficulties and the changes that are required to transition the business from one organisation stage to another. The organisation is a second generation, family owned, mid-sized Australasian based company in the fast moving consumer goods industry. The company is growing rapidly in recent years due to the drop in the Australian dollar and people seeking contract manufacturers locally and due to changes in the Australian retail sector with other players entering the market.

The company is, in the main, in private label so there is constant cost pressures in order to remain competitive. In more recent times retailers have looked to the private label sector for innovation rather than just reverse engineering of product and this has increased cost pressures and complexity to the business.

It must keep pace with the multinationals as they are also focused on cost management as well as new, high value products. Whilst the Company has always offered good customer service it recognises that it needs to become more professional in order to compete and grow. The owner / Chief Executive Officer was concerned that the company did not have enough capable people to fill the roles. Therefore in a break from tradition the CEO started to go outside of the organisation to bring in talent. He was concerned this would change the family culture but recognised this was an essential trade-off. The new talent found the existing culture challenging and were frustrated by the constraining nature of the organisation.

The owner brought us into the business to discuss lean / continuous improvement and the approach that we would follow. We outlined our approach and indicated we would undertake a business review to identify opportunities and an action plan. Once this was completed we presented this back to the management team. During the course of the interviews we became concerned about the lack of management and people capability within the business. We were concerned about some of the senior middle managers and supervisors who had grown up with the company. Previously when a supervisory or management position was available the person next in line was usually given the position – “it was part of being a family business” was the explanation given to me. In addition the company had not made concerted efforts to hire employees that would have the capabilities to address the more complex jobs that would arise due to growth. Also there had been little management development so whilst there had been limited attendance at appropriate workshops and the reading of books on continuous improvement there was not the capability to turn it into action. In fact some senior managers did not believe it was needed and thought they were different so there was passive resistance to new ideas.

Getting Underway

We kicked the project off by identifying some high impact projects and working with operators and shop floor employees to implement some lean tools. As we moved forward we introduced performance measurement and the initial focus was on a waste and loss analysis. This received an immediate push back from some of the senior managers who disputed the findings and challenged whether there was any validity in this approach. We had introduced performance measures and these were immediately contested and the measures were manipulated. Some systems that had been introduced and had provided significant insight and improvement lasted 3 to 4 months and then became more erratic. Whilst we had resistance from some quarters we managed to achieve a productivity improvement of over 60% in one area and a 34% in another. Customer service also improved significantly as well but we were critically aware that we did not believe these improvements were sustainable.

Following these experiences it was decided to bring forward to leadership development that had been integrated into the program. We undertook 360 degree feedback on 12 of the senior managers and personnel and also had a consolidated view of the organisation by averaging the 12 scores. We ran a workshop and explained the model we had use which was LSI and then gave each individual their scores. The next few days I went around and discussed the individual scores with the people and helped them to interpret the results. We then ran subsequent workshops helping them to problem solve and reflect on their approach to problem solving. We also covered the role of problem solving in creating a learning organisation and how this may be progressed.

The LSI uses a circumplex with 3 behaviour styles – constructive, passive defensive and aggressive defensive.  What arose was that the organisation profile clearly showed that the organisation had a bias toward passive defensive and then some people clearly in the aggressive defensive styles. Some of the senior leaders where in the to 10 percentile and this helped to explain the defensive behaviour. Having interviewed these people they showed clear alignment with the diplomat and some were at the Expert action logic.

We needed to strengthen the supervisory and team leader ranks and we used IRIS (Initial Recruitment Interview System) to determine the level of thinking of the applicants. The outcome of this is shown below in table 2.

There are a number of interesting observations that come out of the study. One of the most critical is that nearly 50% of staff in supervisory and more senior roles were not at a development stage to adequately perform within their roles. The second observation is that within the organisation there were people with potential capability to perform higher roles. In fact some of those identified when given new roles performed these extremely well and made a positive impact on the department and company. They added a whole new dimension to problem solving that led to improvements. Another critical observation is that due to the number of people who were not at the necessary level that it stopped good practice and improvements taking place. They tended to operate out of the diplomat action logic of not rocking the boat and always wanting to please people so contradictory decisions were the norm. Therefore the decision facing the Chief Executive was to determine whether he could develop those people who were in the wrong position or was it possible for him to restructure the organisation and place these people into roles more appropriate to their capability.

The second major challenge was to strengthen the people systems so that there was clear roles clarity at the appropriate level, then recruit to the right level and competencies and hold people to account and give appropriate support and coaching so they can perform.

The re-structuring has commenced and people have been moved to more appropriate roles. Greater clarity around the roles is emerging and this process is strengthening.

The organisation performance is improving and more resilient, may I say just in time, as sales have grown by 15% year on year and the old systems and people would not have been able to manage the increased pressure. The other element that is emerging is that the organisation has created more space to think about its future and its strategic intent, this is a very positive outcome for the organisation.

This case study highlights some important issues that need to be addressed when embarking on transformational change.

1. Ensure that there is a clear understanding of the organisation culture and its impact on the change process.
2. Understand the leadership styles and capability as this can trip up the change process whether it is in a private or public sector organisation.
3. Review the stage of the development of the organisation and its alignment with its strategy. Often this is not done and then the change process is blamed whereas it may be a number of other factors.
4. Be prepared to negotiate a change of approach and support your recommendations with evidence.

The organisation still has some way to go but by getting the right foundations in place it is far better placed to succeed in the future. The change has not ben easy due to long held relationships changing due to organisation growth but open and honest discussions have prevailed along with respect for people. This has lead to a more robust, innovative organisation better able to face the future.