UEH expert: Family business and generational transfer challenges

26 Jul, 2021

[Saigon Entrepreneur Online Newspaper] The family business model in Vietnam is increasing in quantity and developing in quality. However, the recent generational transfer is creating enormous challenges and barriers, requiring family businesses to have prudent strategies.

Family businesses account for more than 70%

According to statistics, Vietnam has 800,000 operating businesses, among which 98% are private businesses. Although the scale is enormous in quantity, most private businesses are classified as small and micro businesses, contributing 40% to the national GDP.

Significantly, among private businesses, more than 70% are family businesses or have characteristics of family businesses such as family members will control as well as hold key management positions, controlling the majority of shares; family members take control of strategic or investment decisions; the business' culture derives from the "spirit" of the family culture.

In countries with developed economies such as Japan, Korea, the US or the EU, family businesses account for more than 60% of the business scale, are considered to be the world's oldest business model, play a pivotal role and contribute to the national economic development in terms of dynamism and creativity, preserving the national culture in the process of global integration.

In Vietnam, the transitional economy after 1986 only started to form a group of initial family businesses (namely Bitis, Minh Long, An Phuoc, Thanh Thanh Cong, Nova Group, Alpha Nam...), having many difficulties due to their small scale, low access to social resources and a lack of strong support from the State and the community. In the past ten years, this issue has only been researched and encouraged, so Vietnam's family businesses have numerous disadvantages and much slower growth rates than the region and the world. Currently, there are only about 50 family businesses that are listed on the stock exchange and really "revolutionize" in terms of scale.

In addition, the building of the successor generation and preparation for the generational transfer capacity is not methodical and is only transferring to the second generation, so it is really "young" in capacity and long-term vision. In addition, the ability of Vietnam's family businesses to reach the world is still limited due to their slow scale and low adaptability, and at the same time, it is "cautious" in internationalization when bringing capacities from outside the family for shareholding and governance.

The motivation of family businesses

The driving force of family businesses is formed by the founders who have a start-up spirit. However, to overcome difficulties and gather initial resources, it is necessary to have assistance from internal forces within the family such as spouses, siblings and close relatives. Together, they build businesses, possess their own values or business secrets, create and lead businesses through difficulties. In general, the first factor is taking the family as the pillar of development; family trust and consensus will be easy to manage and share risks for the family businesses.

In addition, the Vietnamese culture, which values family and always wants to leave an inheritance to their children, has motivated them to pass on the inheritance to their children, forming a link in the businesslike spirit from families to the nation.

Challenging the next generation

Family businesses in Vietnam are currently in the transition phase of the F2 generation. The biggest challenge of the next generation is that the "shadow" of the founder is overwhelming. To continue well, the F2 generation needs to skillfully implement the five pillars of business and family, including Protecting the core of the family's business processes, products and creativity; Protecting the family reputation in business activities and social relations; Prove leadership through real combat; People management skills cross generations and ultimately, the ability to optimize business relationships between families and companies.

As a rule, building a successor should be planned from 10 years old depending on the size of the company and the complexity of generations of leaders. This plan includes a rigorous process from building capacity, challenging work, empowering and seeking support outside the family. Currently, many large family businesses in Vietnam have done methodically, even more rigorously than some countries in Asia.

MSc. Huynh Phuoc Nghia - Deputy Director of the Innovation Institute, University of Economics Ho Chi Minh City (UEH), commented: “The next generation of family businesses in Vietnam must know the challenges they face, mainly in the business environment, building talented associates of the same generation and applying leadership in a new environment. These changes, the founding generations must also be aware that if they do not adapt, the next generation will surely have difficulties and fail. Therefore, many people believe that the biggest barrier to succession is generational conflict in governance. That is not the case, but the capacity to lead the subsequent development of family businesses is the core. Therefore, the strategy is to reconcile the old foundation but be creative in the new context, as well as the ambition of sustainable development for family businesses instead of falling into a spiral of competition and conflict."

According to reports, only 20% of family businesses can plan succession smoothly, most of which have to deal with the succession crises. Therefore, at present, Vietnamese family businesses are having to deal with many relationships as well as adjust their business models to adapt to changes, in which they have built a code of conduct for governance in the family to all family members who are involved in or related to the company's interests. This rule governs the distribution of powers, the legal basis for property (physical property, intellectual property/know-how) and the behavior when the family business falls into difficulties.

Not all Vietnamese family businesses can successfully conduct generational transfer, but rules must be established to prioritize business development, with consensus from relevant family members. In addition, the family culture that governs the business also needs to be appropriately measured, prioritizing the transformation of governance for the next generation to absorb new cultures, create values, and build consensus among the employees and adaptability to the times, typically improving digital transformation capabilities in response to the requirements of the solid industrial revolution 4.0. Only in this way will Vietnam's family businesses have an elevated and sustainable development step in the next succession period.

In fact, in Vietnam, there are still no professional and methodical training programs in family business management. Meanwhile, worldwide, many famous universities have put their knowledge on family business into research and teaching, such as NUS Business School has a Faculty of Training, Research and Consulting on Family Businesses; Kellogg Business School has a center specializing in researching, training and consulting Family businesses from start-up - management - capitalization and internationalization; or Harvard University, MIT all have training programs, research centers, scientific journals discussing this issue.

"In my opinion, with Vietnam's context, the family business model will develop and contribute more to the economy in the future. Therefore, the fields of management, start-up or innovation need to address the family business issues in research and teaching” - MSc. Huynh Phuoc Nghia said.

Author: MSc. Huynh Phuoc Nghia.

Source: Saigon Entrepreneur Online Newspaper.