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Better built to last longer

John Ward is the Wild Group Professor of Family Business at IMD and Professor of Family Enterprises at Kellogg. www.JohnLWard.com

For family firms, the company is more than just a company – it is an institution. In contrast with non-family firms, the purpose of continuity, prudence and proactive adaptability assure continuing family business success, writes John Ward

Let's explore business longevity. Much recent research, including that by the IMD-Lombard Odier Darier Hentsch Family Business Research Center, has proclaimed the superior financial performance of family-controlled firms. But what about the life expectancy of a family firm versus a non-family firm?

Surprisingly, despite the extra challenges for family business perpetuation, evidence suggests that family-controlled firms are more enduring. Research into the largest firms in the world by McKinsey & Co. consultants shows that only about 15% of non-family firms survive 35-40 years or longer. Our own research shows that 20% of family controlled companies last, as independent institutions, for at least 50 years.

So, what helps family firms last longer? Insights can be drawn from our own case studies of 100+ year old family firms, plus ideas drawn from two classic books addressing business longevity. The two books – not intended as family business books, yet full of great family business examples and insights – are The Living Company by Arie de Geus (Longview Publishing Ltd, 1997) and Built to Last by James Collins and Jerry Porres (HarperBusiness, 1994). The lessons from these books are reviewed with the perspective and insights of family firms.

First, the anti-argument is proposed. Family firms shouldn't be able to last longer, as they have extra difficult challenges to continuity. All businesses, of course, face the troubling and turbulent times of global competition, fast change and new technologies.
 
Over and above that, family firms must confront death taxes, the special struggles of succession, and family calls for liquidity. For family firms to last they must have particular ways of doing business that more than overcome these extraordinary, extra challenges.

Our studies of centenarian companies suggest the following key characteristics:

- The purpose of the company is continuity – to be an enduring institution – much more than profit maximisation.
- The special competency of the company is proactive adaptability rather than economic core capabilities.
- The culture of the company emphasises prudence and sensibility in decision-making – never wanting to risk the company.

Before examining these insights further, let's compare them to the lessons from the books previously mentioned.

The Living Company was written by a Royal Dutch Shell internal consultant and planner to commemorate the company's 125th anniversary. To mark the occasion, Shell wanted to study other very large companies which had sustained themselves as long as Shell. They were struck by the fact that one-third of the Fortune 500 didn't stay intact for even 15 years. They were further impressed by the finding that only 30-40 companies had, like Shell, become a leader of their industry and survived more than 100 years. Some of the companies they found and studied were DuPont, Kodak, Unilever, Mitsui and Sumitomo.

The conclusions for longevity by the Living Company study are the following:

- Sensitivity to the environment allows the company to learn and adapt.
- Cohesion and identity help the company build a community within itself.
- Decentralised, autonomous units create new business relationships in different areas of activity.
- Conservative financing assures growth and evolutionary development.

We can see here lessons for survival, resilience, and adaptability. Further, the author notes, these companies are more focused on perpetuating themselves as an ongoing community than on seeking an economic return.

Built to Last also looks at long living companies to look for lessons of endurance and economic success. Their methodology was to match a great performer in an industry with a not great performer and look for differences. For example, they compared General Electric with Westinghouse, Merck with Pfizer, Proctor & Gamble with Colgate, etc. In all, they had 18 pairs to examine.

Though not noted in the book, it turns out that almost half the 'successful' firms were family-controlled or influenced and nearly none of the 'unsuccessful' firms were so. Some of the favourable companies were Ford, Wal-Mart, Marriott, Nordstrom, Motorola, and Hewlett-Packard.

Analysing their pairs, the authors concluded with six propositions to explain the success of those built to last.

- Develop a strong core ideology of values and purpose.
- Use 'big hairy audacious goals' (BHAGs) to stretch the company.
- Promote a cult-like organisational culture.
- Pursue evolutionary progress through experimentation, decentralisation and autonomy.
- Keep leaders in place for long periods to gain consistency and stability.
- Improve continuously by investing heavily in people, early market adoption and long-term asset growth.

These propositions have since become famous in managerial conventional wisdom.

There are, of course, several similarities between the books and our cases.

- Purpose is more than profits.
- Adaptability comes from tolerance for autonomous experimentation.
- A strong, distinct culture is a company's foundation.

Before elaborating on our own research insights, let's look deeper at the Built to Last companies.

How did the successful family firms compare with the successful non-family firms on their six propositions?

Revealingly, the family firms averaged stronger scores on all of the Built to Last propositions, but one. The one exception was the advocacy for BHAGs.

This contradiction is no surprise to those from family firms. The prudence of family firms keeps them from stretching into the speculative world. They adapt, they improve, but they don't exaggerate their ambitions or their risks.

One of the Built to Last propositions is particularly stronger in the family firms: cultist culture. Firms with cultist cultures put a lot of energy in distinguishing their culture and clarifying how it's comfortable for some but not for others. They work hard at employee orientation, articulating their values, promoting from within, employee communications and social activities. They promote past 'heroes', story telling and company rituals.

In our research, as mentioned, we concluded three characteristics of 100+ year old family firms: continuity as purpose, proactive adaptability, and prudence. A focus on continuity, more so than profits, was common in all three studies.

For family firms the company is more than a company; it is an institution, and institutions deserve a life of their own.

Prudence is more than financial conservatism, which it certainly requires. Prudence is also the care to "do the right thing" and to protect the firm's (and its owners') reputation. Prudence also leads to sensibility in not only risk-taking, but in spending and managerial incentives.

Our studies, we believe, shed a special light on adaptability and evolutionary development and growth. We call this proactive adaptability. The phrase suggests more than the resilience to endure negative surprise, and more than the flexibility to adjust plans as needed. Long-lasting family firms are also proactive at seeking new opportunities to adapt to. Because they tend to have vertical integration and more diversification, they are constantly sensing and testing new ideas all around themselves. Because continuity is the purpose, with prudence as the governor, they make lots of little experiments all the time. They develop the ability to be adaptable, deliberately.

The three studies discussed show lessons for longevity. Family businesses – better built, to last longer.

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