5 Stages of Family Business: From Prosperity to Failure

“Whether you succeed or fail, stand or lose,

It all depends on what you do to yourself rather than what the world does to you.”[1] - Jim Collins

The Rise and Fall of Family Businesses

A family business is like a big tree with deep roots in the earth. But no matter how big and strong the tree is, if it lacks proper care it can be knocked down by a storm. Many times, the failure of a family business does not come from external threats, but from internal root problems that have accumulated to the point where they are difficult to resolve. This article will take you on a journey. “Challenge” Various challenges that family businesses face over a long period of time, divided into 5 stages.[1] As follows:

1. Hubris Born of Legacy-

Family business success can be a double-edged sword when family members begin to believe that success is permanent. That confidence becomes ““Arrogance” This may cause them to overlook two important questions: “What is the essence of family business success?” “Are we still improving?” A case study from the Guinness beer business shows us the consequences of holding on to past success and refusing to adapt to the present.

Guinness was founded in 1759 by Arthur Guinness in Dublin, Ireland. With its unique taste and excellent quality, Guinness' stout has become so popular that it has become an icon of Ireland and is known around the world. This success has made the Guinness family very proud of their heritage and believe that traditional methods of doing business will continue to bring success to the company.

But in the 1970s, the company faced changes in the global beer market, increased competition from new producers, and changes in consumer behavior that shifted to other types of beer. But that did not worry the Guinness family. Confidence in its past success led the company to continue to use the Mergers and Acquisitions (M&A) strategy to push for further expansion (rather than returning to the “core” of success).

M&A strategies, coupled with declining performance, resulted in a reduction in the family's shareholding and an increasing transfer of management control to outsiders. In 1997, Guinness merged with Grand Metropolitan, forming part of Diageo Plc, a large international alcohol producer and distributor. The merger left the Guinness family with a minority stake and lost control of the company they had created.

2. Undisciplined Expansion

When a business is doing well, ambitions for the next phase of expansion can lead to decisions that are not well planned. Some family businesses seek to expand or start new businesses in which the family does not have expertise. Many families reason that: "When you grow up, you'll break." Or want “Expanding the family business portfolio” To reduce risk, but does such expansion actually help or hinder, increase or reduce the risk of the family business?

In 2010, WeWork was hailed as a game changer for co-working spaces, offering cutting-edge shared workspaces and amenities geared toward millennials. The company grew rapidly in major cities like New York and London, establishing itself as a “Community of the Future” However, a lack of planning and ambition quickly turned WeWork from a rising star to a flop. Under the leadership of founder Adam Neumann, WeWork expanded into smaller cities and markets where there was no demand for co-working spaces.

At the same time, the company has invested in projects outside its core business, such as WeLive (a co-living space) and WeGrow (a private school for children), without carefully assessing the returns. In 2019, ahead of its IPO, WeWork came under intense pressure when its financial report revealed that the company lost more than $1.9 billion in a single year and was still burdened with massive debt.

The impact of the uneven expansion made WeWork lose its stability, having to postpone the IPO and then follow up with an offer to buy all the shares of founder Adam Neumann, citing a lack of confidence in the governance under Adam Neumann's leadership. And although the company hired new executives to save the business and successfully IPO, the timing coincided with the global COVID pandemic that severely affected WeWork's business. WeWork filed for bankruptcy in 2023.

3. Denial of Risk and Peril

Troubled family businesses often refuse to face reality. They may convince themselves that the crisis is temporary, or blame external factors such as the economy or competitors, rather than admit their own problems and adapt.

In the 90s, Blockbuster was the king of video rentals. With over 9,000 locations worldwide, people would line up to watch a movie every weekend, making it a family affair. But as technology began to change consumer behavior, Blockbuster ignored the changes. In 2000, Netflix offered to sell the company for just $50 million, but Blockbuster executives laughed at the offer. They believed that customers would still prefer the in-store experience over renting by mail or online. In the meantime, Netflix had developed online streaming technology that quickly became popular. Blockbuster continued to expand, regardless of changing consumer behavior.

Eventually, when streaming became the industry standard, Blockbuster couldn't compete. The company fell into bankruptcy and closed down in 2013. Blockbuster reminds us that in a rapidly changing business world, past success is no guarantee of the future. Adaptability is the key to survival in an era where everything can change in the blink of an eye, and that adaptation is the key to success. “Dead point” Family business Because when it is a family business with multiple owners, multiple generations, there are both those who do and those who do not do the family business.

Different ideas and perspectives often make decisions difficult. "paralysis" Often, when we can’t reach a consensus, we just let it go and nothing changes, or it’s a small change that isn’t enough to keep the business afloat.

4. Grasping for Salvation

When a business faces a downturn, desperation often drives leaders to seek quick-fix solutions, such as hiring a professional executive who doesn't understand the family culture or investing in high-risk projects with short-term returns. The big win or home run is what they dream of.

In the late 1970s, Mac Monroe founded Carolina Construction Supply (CCS). Mac was a dedicated businessman who firmly believed that hard work and determination would overcome any obstacle, and over the decades, his business grew into a major community hub for construction supplies.

But as the 1990s approached, cracks began to appear. Mac, now in his seventies, refused to let go of the business. Even as the market became more complex and new competitors surpassed him with cutting-edge technology, Mac stuck to the same old strategies that had made him successful, ignoring warnings from the market that his business was falling behind.

When the business began to suffer, Mac decided to bring in his two sons to help him: John, who had an interest in technology but no business experience, and Mike, who was good at sales but lacked management expertise. But instead of giving his sons clear roles, Mac let them experiment with their own choices without proper guidance. As a result, the business did not progress and family conflicts began to escalate, while CCS's financial situation worsened.

Mac began to make haphazard decisions. He took on high-risk projects, hoping to make enough profit to save the day, but they caused more problems than benefits. He also borrowed more money to plug the financial holes, and the company's debt skyrocketed. One of the most reflective moments of his life was his failure to make ends meet. “A desperate search for help” Most obviously, Mac tried to pivot his business to online sales, despite having little understanding of technology. He hired expensive consultants to build an e-commerce platform, but the project fell through due to poor management.

Not only did the business suffer, but family relationships were also damaged. Discussions about the family business became constant arguments. When CCS was at a critical point, Mac tried to get funding from a private equity firm, but the firm had a condition that Mac would appoint an outside CEO to run the company. Mac did not accept the offer and chose to move forward on his own. In 2002, CCS was sold to a major competitor for a price significantly below its real value, marking the end of the family business.

5. Failure to Forward Business (Succession Breakdown)

Succession in a family business is often a complex matter. Without a clear plan, conflicts within the family can arise, and conflicts can escalate to the downfall of the family business.

Reliance Industries was once one of the greatest business empires in India, founded by Dhirubhai Ambani in 1966 and growing into a powerhouse in the energy and petrochemical industries. However, despite its great success, Dhirubhai missed out on the most important aspect of the family business: “Business Succession Planning”

Dhirubhai had two sons, Mukesh and Anil Ambani, but he did not lay down clear guidelines about their roles in the company. When Dhirubhai died suddenly in 2002, without leaving a will or agreement on the management of the business, conflicts erupted within the family. Mukesh was a cautious manager who focused on the stability of the company, while Anil was an investor with a proactive and risk-taking management style.

These differences led to a competition for control of the business. With no clear succession plan in place, the conflict escalated until in 2005 the Ambani family decided to split the business in two. Mukesh took charge of the energy and petrochemical businesses, while Anil took over telecom, finance and infrastructure.

A split might seem like a logical solution, but in the long run it would weaken the Ambani empire. Mukesh was able to grow Reliance Industries into a global powerhouse, but Anil's business struggled financially and eventually faced bankruptcy. The case reflects “Failure to forward business” (Succession Breakdown) If Dhirubhai had clearly planned the transfer of power and defined the roles of his sons, the business might have been stable without being split into two.

An important lesson for family businesses is that smooth succession requires planning in advance, not letting the future be determined by the outcome of conflict. Even if a business can weather the challenges that come its way, without a clear succession plan, everything a family business has built can crumble in a single generation.

Family businesses may be big and strong, but they are not immune to failure. “5 Stages of Family Business from Prosperity to Failure” It is a reminder that the success of a family business cannot be sustained without careful care, adaptation and planning. If leaders are aware of the risks and committed to continuous development of the business, the family can create a solid and sustainable foundation for generations to come.

References:

• Baron, J., & Lachenauer, R. (2021). Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise. Harvard Business Review Press.

[1] Adapted from the concept of “5 Stages of Decline” by Jim Collins and combined with case studies of both family businesses and other business organizations.

[1] “Whether you prevail or fail, endure or die, depends more on what you do to yourself than on what the world does to you.” – Jim Collins