Andrew Keyt is president of the US chapter of FBN International and executive director of the Loyola University Chicago Family Business Centre.
With the threat of local competition being eroded by global challenges, family businesses need to strive towards increased flexibility, says Andrew Keyt. Good governance could be the key to keeping your business competitive in a quickly changing marketplace
The world is becoming a smaller and smaller place. With the advent of technology allowing us to be contactable round the clock, and business cycles forcing companies to innovate more quickly, the survival challenges that businesses face are growing in leaps and bounds. The increasing competition from Asia, and other emerging markets creates competitive challenges not seen before. For the family business the threat is even greater.
The 67% mortality rates for family businesses in each generation will certainly grow if family businesses aren't prepared to compete in this dynamic and ever changing environment. For a family business to survive in a fast-moving environment with its increasing challenges, they must have adaptability. This characteristic needs to exist throughout the leadership of the company, both family and business.
The image that most have of family businesses is of small 'mom-and-pop' operations and it is this image that is indicative of the adaptability challenges facing family-owned businesses. This stereotype exists largely because family systems have a different focus, and purpose, than business systems. The purpose of the family system is to create a stable and caring environment within which family members can grow and develop. It often focuses on the protecting and nurturing of family members. When this protectionist attitude flows over into the business, family businesses often develop an inward focus, they focus exclusively on the needs of the family, forsaking the needs of the business. This internal focus can be like quick drying cement, preventing the pursuit of important business objectives due to a focus on protecting family. Adaptability and flexibility require measured risk-taking and decisiveness which is difficult in an environment focused on creating stability and family protection.
So how does a family increase its adaptability? The answer can be found in having strong leaders, a strong family and strong business processes.
In times of change, people need strong leaders to prepare them for and lead them through challenging environments. For family businesses, this includes both family and business leaders. These leaders need to have a wisdom and knowledge about the challenges of their environment and the self-confidence to act, despite resistance and opposition to their ideas. The most successful leaders exhibit a humility and inner calm that allows them not to get too high or too low, and to make the decisions that need to be made. They know the key success indicators for the industry or the family, they stay on top of the trends, and have a vision for the future. They focus on the customers not the competition. A key component of this is that they are strong communicators. Having leaders who exhibit these characteristics gives stability when adaptability is critical.
Increasing adaptability in the family can be a challenge even with strong leadership. The foundation for family adaptability is strong communication, a common vision and a strong level of trust between family members.
In a family business the differing goals, needs and objectives of family members can create forces that pull family members apart. The strength of these forces increases with the number of family members involved. When the business has a need for reinvestment and a family member has a need for liquidity, there is tension. When one family member wants to invest in technology and another wants to invest in human capital, there is tension. When one sibling wants to take a risk on a new expansion opportunity, and their sister has a more conservative approach, there is tension. This tension can be like molasses: slowing the decision-making process and eliminating one of the strategic advantages of most family businesses, the ability to move quickly.
How does a family mitigate this? The answer is effective communication through strong family governance. For families smaller than ten individuals, this can be accomplished through holding regular family meetings. These family meetings are not business meetings and they are not family dinners. They are structured forums to address the important issues of overlap between family and business. They keep the family issues from interfering with the business and vice versa.
As a family grows to more than ten members, the family business typically needs to move to a more representative family governance structure – a family council. Because of the difficulty of communicating with a large and growing group of shareholders, the family creates rules and structures and elects individuals to represent the interests of the family.
The focus of both the family council and family meetings is to create a common mission, vision and values for the future of the family and business. This sense of commonality and unified vision gives the leadership of the family business the platform and confidence to make important decisions quickly, thus providing adaptability in the market place.
A key component in the family process is a high level of trust. Trust is the currency of the family. When trust is high, leaders can take greater risks. When trust is low, leaders typically focus on regrouping and taking the least divisive course of action regardless of whether it is in the best interests of the business.
This trust is not built overnight. It is built by listening to each other in family meetings and family councils. It is built through taking the time to truly understand each other's points of view and showing respect. It is built through spending and enjoying leisure time together. All of these actions and experiences are deposits in the emotional bank that you can draw on during harder times.
With a foundation of communication through family governance, a common vision and a high level of trust, a family can maintain a level of adaptability that will be a strategic advantage in a quickly changing global marketplace.
While having strong leadership and an adaptable family is important, this alone will not guarantee the flexibility to move and react in a globally competitive business environment. Strong business processes also need to be in place.
It starts with having the right leadership team in place, but there must also be clear lines of authority and the processes in place to assure the articulation and execution of the business vision and strategies.
In most first generation firms, the vision for the future exists solely in the entrepreneur/founder's head. As family businesses move to the second and third generations, and more family members become involved, it becomes increasingly important to make sure there is a clear vision and strategy in the direction of the business. The most important vehicle is the family business board.
For some companies this may mean a board of advisors and for others it may mean a board of directors, but the core being should be a body of governance providing accountability that is consistent with the mission, vision and values of the family.
This body can be an objective resource to aid the family in making difficult decisions. It can bring industry knowledge and experience assuring the viability of business strategies, and it can be the body that helps ensure a family business has strong leadership and strong family communication.
The increasing competitiveness of the global marketplace is presenting unique challenges for family businesses around the world. While some may think that the business challenges would be the greatest threat to a family business, it is, in fact, the lack of adaptability that may keep a family from adjusting to a quickly changing marketplace.