John Ward and Colleen Lief are with the Lombard Odier Darier Hentsch Family Business Research Center at IMD.
Family businesses are different to non-family businesses – they have staying power borne from a commitment to impart to the next generation what was passed to them. John Ward and Colleen Lief discuss the importance of flexibility and adaptability
Short-term wins are hard enough to achieve. But to stay profitable in business decade after decade requires a lot more. We have been studying what ingredients allow a few select companies to remain intact long after competitors have vanished.
One thing is for sure – family businesses seem to be better at it. In a recent study, we examined the components of the Fortune 500 in 1992 and in 2006. Our aim was to see which firms remained on that vaunted list even for as short a period as 15 years. The results were surprising. Among the family businesses on the list, 53% earned a place in both 1992 and 2006. For non-family businesses the results were much more dire, with only 29% having the staying power to appear in both years. In another study we examined the 1,000 largest family firms in the world and found that 30% of them are over 100 years old.
The reasons behind this curious performance can be found in any number of phenomena. Family businesses fundamentally believe their goal is not maximising profit but rather continuity – passing on to the next generation what has been passed on to them. This approach which emphasises preservation and perpetuity differentiates family firms in a profound way.
Completely different definitions of success and purpose lead to the pursuit of unconventional strategies. Family leaders and veteran employees can be said to have greater innate understanding of their business and industry and are more replete with stores of institutional memory. The confidence this strong background inspires leads many family firms down a less worn path. They may not be running with the pack, but they act in accordance with their knowledge and convictions. Because of a command of their business' fundamentals, their passion for it and a willingness to be guided only by their own compass, family enterprises can act in an authentic and appropriate manner to unusual situations.
A personal, sincere, genuine culture goes hand-in-hand with differentiating strategy in family businesses. Because the culture has not been professionally engineered but has usually emerged naturally from the vision and philosophy of the founder and successors, a culture that fits the organisation arises over time. Less time and energy spent struggling for conformity from employees and synchronisation with strategy means more focus on stakeholders.
Finally, a key element in this integrative approach incorporating strategy and culture, adaptability allows a company that knows itself well enough to act independently on its convictions and to be open to new possibilities and dangers. The internal consistency that characterises these enterprises supports an external awareness of threats and opportunities that keeps it nimble and receptive. But how does the intention to stay agile translate into real action?
Adaptability: much pursued but little understood
Amazingly little is written about adaptability. So much space in business literature is devoted to leadership and change management that this critical issue in achieving long-term viability has been relatively ignored. The researchers who have examined it say that adaptability is largely a question of flexibility and fit. We propose eight key elements that dictate the degree of a company's adaptive tendencies and success. The emphasis is on more evolutionary movement that can be as powerful and innovative in the long-run as any revolutionary change programme.
- Slack resources – maintaining liquidity and a modest leverage position to protect the company from unexpected shocks.
- Commitment to continuity – taking the long-term view even during periods of disappointment and danger.
Example: Thomson Corporation, the Canadian information provider, recently announced its intention to divest some assets in its educational division to free up resources to redeploy into the petrochemical, insurance and aerospace industries.
- Sensing fronts – holding a diversified mix of businesses provides a firm with more vantage points of change and opportunity.
- Experimenting fronts – tinkering with strategic formulas at each frontier yields more new insights.
Example: Franz Haniel & Cie pursues many paths to success and financial security, but in service of a single vision. This German company's history is filled with vertical integration, international expansion and diversification initiatives. The focus, however, remains on the firm's overarching strategy and long-term health.
- Tradition of change – confidently seeking to learn and to share the lessons from new experiences.
- Resolving paradoxes – having the courage and capacity to face paradoxical choices patiently.
Example: Beretta Holding, the prestigious Italian gun maker, innovates not in spite of its history but because of it. Beretta has been on a path of continuous change since its founding in 1526. The firm constantly seeks the next big thing through a commitment to systematic investment in research and development. Its corporate culture is not unhinged by apparent contradictions, like a dedication to the newest technologies and craftsmanship, to tradition and innovation, to a focus on the individual and a collective spirit.
- Meaning and mission – feeling a special motivation to endure and conquer challenges.
- Personal security – knowing change and down periods aren't capriciously threatening to individual jobs.
Example: Cargill promotes its purpose to improve the standard of living in the world and has a long record of secure employment and promotion from within.
Four barriers to adaptability*
Many things can get in the way of the evolution a firm knows it needs.
- Successful past rules.
- Paradigms of experience.
Sometimes the wins of the past cloud our vision of tomorrow. The external environment never stands still. Assuring fresh perspectives from others is crucial.
- System size.
- System integration.
- System diversity.
While decentralising and diversifying the decision-making team, the business system benefits are assumed to be positives, but come with a price. What may be gained by empowering more and different people may be lost by too many interest groups in the process.
- Resource particularity.
- Resource optimisation.
Highly focused strategy is efficient, but also limits resources to experiment and explore. When change is needed there is no capacity to do so.
- Exaggerate own talents.
- Exaggerate personal impact.
- Anchor on to first impression.
- Don't like negativism.
People are apt to claim talent and success for themselves and blame unfavourable performance on others. Optimism is reinforced by a leadership culture that favours positive thinking. As a result, people underestimate threats and over-commit to the status quo.
It's a marathon, not a sprint
Developing resilience while adopting the 'antennas up' stance of proactive searching and maintaining a learning and sharing posture are the key conditions for long-term adaptability. Momentary profitability pales in comparison to steadfast survival. More attention to the bigger picture is also likely, paradoxically, to result in near-term performance that enhances overall company health.
Adaptability is not something that just happens if you maintain the status quo long enough. It requires proactive vigilance to protect the values and mission that propel the firm forward.
Choice can be an enemy of long-term survival. Embracing paradox, ambiguity and constancy go a long way toward corporate vibrancy and viability. Resist the temptation to rush to solve contradictions between two truths. Hold them both in mind and hand and patiently watch them unfold.
(*Adapted from Eric Beinhocker, The Adaptable Corporation, McKinsey Quarterly 2006.)