The complexity of the family-business ecosystem requires a holistic approach to transforming family companies. We are living in a new context, the society of change, shaped by globalization and digitalization, a reality that, in terms of transformation, affects not only businesses, but also togetherness, family harmony, and the growing generational gap.
Up to five generations can co-exist in a family ecosystem; in other words, people born in the digital age may live alongside others brought up in accordance with early 20th-century values. At businesses, they moreover coexist with globalization and digitalization. Therefore, family companies need to ask themselves whether the growing weight and power of the competition pose a sustainability risk. In order to thrive and survive, these companies need to effect changes in terms of individual, collective and organizational self-knowledge with regard to the coming types of talent, which they will need to integrate if they are to meet current and future challenges.
Business families should think in terms of creating shared value and wisely combine traditional assets with the adaptive innovation needed to transform and acclimate to the changing environment. Each generation has to contribute its project, its strategic vision, a philosophy that requires dialogue. In this regard, our IE Business School program helps business families build the necessary conversation for every family member to give his or her opinion, in order to create a shared vision, a clear roadmap focused on their strategic, business-related, and even social and emotional challenges. We provide knowledge, tools, and best practices to support business families’ efforts to meet their growth and family cohesion challenges in complex, global, digital contexts.
Business families should wisely combine traditional values with the adaptive innovation needed to transform and acclimate to the changing environment.
Managing singularities
Nothing is as powerful as a family company that manages its singularities well. I say that from experience, as a member of a business family who has moreover spent part of his career in academia and as a director and advisor to family businesses in Europe and Latin America.
What the rake gathers, the fork scatters. As clichéd as it might be, there is a grain of truth to this saying. With each passing generation, the mortality rate for family businesses climbs ever higher. According to some studies, only between 5% and 15% of family companies make it to a third generation. But that holds true for other types of companies, as well. The figures for new businesses show that only one in ten reaches the three-year mark. Clearly, certain challenges are inherent to business and entrepreneurship in general.
Specifically with regard to family business, two factors in particular often impede progress. The first is social and emotional problems, i.e. problems of the heart, which can hinder transformation. As families grow larger and more complex, allowing such conflicts to fester increases the odds of friction between people with vastly different worldviews. The second is problems of a business nature. Many family businesses go under because they lose competitiveness and, as a result, not only downsize, but also become firms with no clear path forward.
Nothing is as powerful as a family company that manages its singularities well.
Shareholder control
Another key defining trait of family businesses is control. In a certain sense, successful families succeed because they have a very clear strategic vision; it is thus essential to ensure, through their control of the business, that this vision persists and is not lost. In this regard, today, many family businesses are considering or have already taken the first step to begin to compete on the capital markets; however, they go to extraordinary lengths to retain a controlling stake in the company, i.e., to ensure family control of the business. The transformation effect must play a critical role in the strategic vision families should have.
Financiers say that past performance is no guarantee of future success. The same could be said of business families. In today’s business world, practices, systems, cultures, and leadership styles used a generation or even just a few years ago are no longer applicable. It is thus vital for business families to think increasingly in terms of their legacy. A business family is much more coordinated when all its members share the higher purpose of forming part of a legacy being built around a family project and values. It is important for each generation that holds relevant positions in the company to bring its vision to the table, to ensure that the legacy is ultimately built based on the value of successive generations. This will facilitate the family business’s transformation, as each generation will be better positioned to understand what is happening around it.
An evolving vision
The family-business ecosystem begins with the founding generation, i.e., the one that starts the business. The founders’ guiding purpose must be to consolidate the project. Once they have achieved that, the second stage is to begin making the decisions to turn the business into a family business, that is, there must be a desire to bring the clan into the business, to grow, and for the company ultimately to be led by children or grandchildren. The third stage in the evolution of a family business is professionalization, which happens once the family project has jelled. This is the point I believe many business families are at today, but they need to be ambitious and take the next step. They need to become businesses 4.0, i.e., the ones that are really transforming to adapt to the new environment, at both the family level, with different worldviews, and the business level, wherein the golden rule is that the business must grow faster than the family.
I usually advise families to follow a simple model. First, they should consider their singularities as a family business and manage them, defining a project, values, and rules, and creating a governance system. This is increasingly complex, as the ever larger number of different worldviews and longer average life spans have widened the generational gap. Once these singularities have been addressed, it is time to focus on the business, which means three things: first, there needs to be a strategy, which has to be written down and shared to ensure that everyone has a clear understanding of the path forward; second, each generation has to add value; and, finally, third, the company needs to have the necessary resources to enable this growth in terms of transformation, since, as noted, good returns on past practices do not guarantee good future initiatives.
This need for transformation is particularly acute in today’s diverse, global, and digital environment, which requires thinking in terms of transformation and leads to huge competition. With regard to this transformative agenda, I recommend that family businesses plan and build their own strategic agenda, a roadmap for what they need to do to improve management or with regard to their business in order to keep growing. Additionally, they need to take a balanced approach, so as to achieve the transformation while remaining true to their essence.
The society of change requires companies to think in terms of 4.0. The challenge is intergenerational sustainability, i.e., for the business to continue to thrive generation after generation.
Traditional values and innovation
Striking the right balance between traditional values and adaptive innovation is vital. The society of change requires companies to think in terms of 4.0. The challenge is intergenerational sustainability, i.e., for the business to continue to thrive, generation after generation. That means keeping the family connection.
Transform or die, there is no other option. In the family ecosystem, that is a hard point to agree on. One very widespread model is that of the Sun King, a competent person who has led the operation from the start. The problem is, once that person is gone, it is virtually impossible to find a replacement. That is why family companies need a more shared form of leadership, in order to define, through intergenerational dialogue and quality conversations, the project that will ensure the family legacy continues to grow. Another key factor is that simply denying that we are living in a new world is irresponsible, and if there is one thing a business family has to be, it is particularly responsible.
It must likewise be borne in mind that transformation is worthless if it does not begin with personal change, which may sometimes need to be prompted by a good advisor or training program to encourage us to embark on this personal transformation. We need to change our mindset before we can use the tools. In this regard, I believe that governance is essential: creating spaces for internal strategic discussions. I have attended many governance body meetings held solely for purposes of informing: to share the auditor’s report, etc., nothing more. That is a wasted opportunity to hold intergenerational conversations. It is necessary to share, reach consensuses, and get the entire family to commit to the transformation strategy.
Transformations need to be managed at both the family and business level. Here I would like to share two quotes. The first is from the founder of Johnson & Johnson, who said that each generation has an obligation to provide the company with its own vision of the future, the real value of knowing how to transform the company without losing. The second is from Jorge Sendagorta, president of Sener, who has noted that, in order to grow, we must not fall into a routine, but rather transform ourselves, because doing the same thing we have always done is unlikely to lead to growth.
Family businesses are the lifeblood of the productive sector, and they help create a middle class. The successful development of today’s family-business ecosystem requires talent in a variety of areas, not just business. No one is superfluous and incorporating family knowledge is important. It is necessary to have people in governance positions to provide their strategic vision, together with a good, talented, well-paid family leader, as well as people to oversee the company’s social action or philanthropy. Many different profiles are needed to drive and transform family businesses.
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