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Complex but Valuable
Family businesses are inherently complex: in addition to dealing with business issues, they must also deal with ownership and family issues. This complexity confers tremendous strength – families have values and look towards future generations and sustainability; ownership is independent and long-term, and the company can adopt unconventional business models. Because of this, family businesses can and often outperform publicly-held corporations. However, conflicts stemming from the three dimensions can make this complexity an inherent weakness: each dimension may move in a different direction, causing tensions to rise between family members and even the business to fall apart.
How can family businesses minimize their inherent weakness and leverage their inherent strengths? Our research indicates that successful family businesses do this by – both deeply and broadly – understanding their complexity and preparing for proactively dealing with particular issues that arise at different stages.
The three stages of a family business
We have identified three predictable stages that family businesses pass through, each with its particular interplay of business, ownership and family issues, as well as its own culture. These stages are:
1. Entrepreneurial stage: The entrepreneur forms the founding generation (although entrepreneurship can also arise in later generations). The business side is clear: the entrepreneur is focused on the creation of a new business, which is the main issue that needs to be addressed. The culture is that of revolutionary change – everything is new, different and has to be created first. Ownership is not really an issue. Family too is not a real issue, tending to stay in the background while the entrepreneur devotes all available time to developing the business.
2. Early generations and smaller families: These are the children of the founders. On the business side, there is a need for consolidation – the rapid growth of the entrepreneurial stage needs to be structured, and profitability comes to the forefront. The culture tends to be evolutionary – building on what the founders established rather than changing the business completely. Ownership becomes an emerging, and often emotional, issue: a small number of family members tend to have equal ownership in the business, and as such, a question mark hangs over what would happen if one of the family members wanted to leave. Our research shows there is very little proactive planning for this. The major issue, however, comes from the family side: the newer generations feel a sense of trying to escape from the submission of the founding generation, wanting to create their own new sense of personal worth.
3. Later generations and larger families: In later generations, there can be several hundred family members, all with an inherited share in the business. Here, the business faces one of the most difficult questions: should the business continue with the old way of doing things as determined by the founder (tradition), or adapt to new market needs (innovation)? Thus, the culture can be evolutionary, revolutionary or a mix of both. The ownership issue really comes to the fore. Family members with minority ownership, who neither work in the business nor sit on the board, often wonder about their role in the business and whether they should sell their stake and invest the money for themselves elsewhere. On the family side, there is a need to address the larger degree of diversity – of interests, backgrounds, and needs – that comes with a larger number of family members and the addition of new blood through spouses.
Reconciling tensions for long-term success
This evolution of issues and cultures does not mean that family businesses are “doomed” to inevitable tensions. Instead, the predictability of when and why issues arise means that they can be planned for and managed in a structured way.
The first step is to identify which stage the family business is at, and highlight relevant issues and conflicts associated with that stage. The key here is to take an unemotional, rational approach that separates out the three dimensions of business, ownership and family.
Solutions for reconciling conflicts can come from a forward oriented vision for wealth and business growth. By employing a wise mix of revolutionary and evolutionary change, the business can reach a “generational equilibrium”, in which the different and diverse needs of the family, ownership and business dimensions can be aligned.
For example, the Italian clothing company Zegna, which is in the fourth generation, has a business model of evolutionary growth in which each generation adds new value: the first generation started with spinning; the second generation added weaving; the third added confection, and the fourth added retail. This forward vertical integration model fits their business logic of total quality control, as well as their family logic of showing respect for previous generations and building on what they have achieved. The model thus expresses and sustains the culture of family entrepreneurship through evolutionary change.
As another example, the privately held German company Haniel, with six hundred-plus family owners in generations six to nine, shows a mix of revolutionary and evolutionary change. The family logic of ‘together we are much stronger’ gives a strong incentive for this large family to stay together. This has served them well in their business logic of wanting to out-perform capital markets through risk diversification for shareholders inside the business – which they have realized through a business portfolio approach – a structure vastly different from the company’s origins in transport and mining.
In both cases, the long-term success of these family businesses has come by meeting the needs of each generation to re-affirm their commitment as responsible owners and proactively anticipating the future needs of the family and the business.
One person who truly understands the complexity and value of family businesses is Warren Buffett, the CEO of Berkshire Hathaway and one of the wealthiest men in the world. He summed up the uniqueness of family business by stating, “Most of the companies we invested in were family-owned businesses. It’s because they share our long-term orientation, belief in hard work and a no-nonsense approach and respect for a strong corporate culture that they’re attractive investments for us. And we offer continuity and freedom to them. They come to us because we have a common philosophy and make a good team.”
Family businesses have a higher degree of complexity than any other form of business organization. This complexity brings both challenges and opportunities. Owning families need to better understand and plan for them.
Tharawat Magazine, Issue 2, 2009