The challenges of family businesses in Mexico

We can identify successful Mexican family businesses such as Coppel, Farmacias Benavides, Grupo Bimbo, Zapaterías 3 Hermanos, Televisa, Walmart, Cemex, Grupo Modelo, BBVA, Vitro, among others.

The challenges of family businesses in Mexico
The family business is an organization in which culture is transcendent. Photo by Andreea Avramescu / Unsplash

Family businesses represent the engine of growth, job creation, and wealth by contributing 70 to 90 percent of the annual gross domestic product (GDP) worldwide. They represent more than 65 percent of companies worldwide, while in Mexico more than 90 percent are of this type, 95 percent of which are managed by a family member.

The family business is an organization in which culture is transcendent and complex, and integrates a set of attributes of the owner's family and the organization. It is an organization in which decision-making power is usually linked to capital ownership; family members play governance and management roles in the bodies that exercise power; some of them are of the second generation.

This type of company is characterized by control of capital, ownership, and management in the hands of the family, there is an intention of continuity of transmission to future generations. A vision is shared with family members and decision-making is generally centralized, there is an identity of belonging and attachment to family values; the founder promotes the creation of a stable working relationship and its development.

Another relevant aspect is the kinship relationship between some of its members, who share values, beliefs, and norms of conduct that come largely from their family environment. Values constitute the foundation of this type of organization, which has a significant impact on business decision-making. In other words, family values remain unchanged and are transmitted between generations, which is relevant to achieving continuity.

Family business goes through four stages: creation, growth and development, succession process, public ownership, and professional management. However, they are vulnerable and survival rates are low. For example, between the first and second generation, the survival rate is between 20 and 30 percent, while between the second and third generation it is only 10 to 15 percent. Nevertheless, we can identify successful family businesses such as Coppel, Farmacias Benavides, Grupo Bimbo, Zapaterías 3 Hermanos, Televisa, Walmart, Cemex, Grupo Modelo, BBVA, Vitro, among others.

The challenges of family businesses in Mexico.
The challenges of family businesses in Mexico. Photo by / Unsplash

Theoretical approaches that have dealt with the family business are diverse

A very important contribution is undoubtedly the three-circle model of Tagiuri and Davis, which emphasizes that the ownership, family, and management of the business must be separated. This model affirms that it is a complex system integrated by the subsystems owners-family-business supported by systems theory.

For its part, the socioemotional theory is a recent approach that captures the affective legacy of the family. This theory explains that the main reference of family businesses is the loss of their socioemotional wealth and to avoid it its members are willing to accept certain significant risks for their performance.

In this type of company, agency costs are minimized since the owner and CEO are, most of the time, the same person or first-degree descendant, which motivates, from a long-term perspective, a greater commitment on the part of the family leaders of these organizations. However, they have been associated with high costs and inefficiencies.

For example, the interests of family members could be favored to the detriment of other minority shareholders, and opportunistic behavior could affect corporate performance. Hence, family businesses in Mexico have important challenges to face. This paper aims to identify the challenges and actions that can be taken to ensure their permanence.

Different theoretical approaches have dealt with the family enterprise.
Different theoretical approaches have dealt with the family enterprise. Photo by Kylie Haulk / Unsplash

a) Professionalization of the company. This is a gradual transformation process that implies having clear, orderly, and standardized processes. This implies that the company has clear goals, is distributed in the short, medium, and long term, and implements planned strategies that support the achievement of corporate objectives. Through the constitution of governing bodies such as the family and administrative councils, as well as the establishment of a corporate governance system and family protocol, the members commit to adopting the best corporate practices and promoting a culture of institutionalization at all levels of the organization.

b) Develop and implement a successful succession plan. The founder of the company must be prepared to make the transition with the successor. It is essential to select and prepare the successor in advance. Whoever hands over the leadership must inform and mold the company for the change, as well as define the direction and type of leadership required for it to last.

c) Reconciling interests between the company and the family, i.e. clarifying the roles of each member and establishing rules in the structure, organization, expectations, and goals. Conflict-generating factors such as authoritarianism, resistance to change, restricted information, or unjustified salaries should be avoided.

d) The family protocol must contain at least the following points: family and values, governing bodies, incorporation into the family business, remuneration and ownership, business and social conduct, marriage contracts, testamentary policy, and company history.

e) Developing strategic alliances. It allows family businesses to grow without compromising the firm's control. The process of internationalization and globalization requires access to resources that the company lacks to enhance its growth.

f) Define a decision-making process, an administrative scheme, and a strategic planning process to optimize the use of human and financial resources.

g) Retention of talented management personnel. The company usually favors family members to occupy managerial positions. This is a positive thing if the family member has the profile and capacity to lead the company; however, it is also recommended to take care of non-family collaborators who generate value.

h) Understanding the generation gap. This can create a conflict because, with the advance in technology, new generations have skills that the family business must appreciate, the wisdom of each member can contribute to the business and a balance must be found between the new and old ways of doing things.

At present, the family business needs to regenerate itself and adopt a competitive and global vision, where it works with institutionalism and strategic tools that allow it to grow and endure. It is recommended the elaboration of diagnoses and improvement proposals, the development of planning, organization, management, and control processes, the setting of professional goals and challenges, the responsible management of financial resources, as well as the promotion of human talent based on competencies and performance, avoiding the prioritization of family ties.

Sources: UASLP, Universitarios Potosinos No.202. Author Carlos González López. He has a degree in Administration and a doctorate in Economics and Business Administration. He was president of the National College of Graduates in Administration, A.C., and currently serves as director of the School of Accounting and Administration of the UASLP.