As a result, we ask the question: what can businesses learn from family business? Harvard Business Review (HBR) recently published an article, by Nicolas Kachaner, George Stalk, and Alain Bloch, looking at the key characteristics of family businesses that help them thrive in different economic situations.
In their article, the trio notes that a recent Boston Consulting Group analysis identified that family business “account for more than 30% of all companies with sales in excess of (US) $1 billion”. This counteracts the long-held opinion that family businesses fall exclusively into the small-to-medium size business category, inhibited by internal family conflicts.
Family business: a significant economic contributor
It’s interesting to note that while family businesses may not enjoy the same peaks in profit during economic buoyancy, they enjoy longer-term and sustained success, weathering economic downturn much more profitably than their non-family counterparts. Kachaner, Stalk, and Block note that their investigation into family businesses revealed that over the long term, family businesses tend to outperform non-family businesses:
“The simple conclusion we reached is that family businesses focus on resilience more than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times.”
Key drivers of sustained success in family business
“Conventional wisdom holds that the unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. But beyond that, little is known about exactly what makes family businesses different.” – Kachaner, Stalk, and Block, 2012
While this may be the case, we can look to key points of differentiation of family business as potential indicators or secrets to more sustained success. The above-mentioned HBR article indicates that the family’s focus and commitment to the business may be one of the key drivers. Curt Finch, of Small Business Trends, notes that family business owners tend to have a vested interest in the future success of the business.
He attributes this to their desire to secure financial longevity for the family and future generations. He also notes that there are usually higher-levels of employee buy-in demonstrated in family business structures when compared to non-family organizations. This makes it easier to retain valuable employees and to develop a strong and consistent work culture.
A central family focus
Having a unique set of guiding principles (family values) that determine business interactions and transactions can facilitate sustained success. Often the business vision and the associated value set are more readily communicated in the family-business setting than in non-family firms. This assists employees with delivering a consistent experience, aligned with the standard of delivery expected from the family business.
“The leaders of family companies extol the benefits of longer employee tenures: higher trust, familiarity with coworkersʼ behaviors and decision making, a stronger culture.” – Kachner et al, 2012
Effective money management
According to Kachner et al, family frugality is one of the key drivers of sustained success. The trio notes that family businesses tend to be very conscious of spending patterns regardless of the macro-economic conditions at play. As result there is less ‘waste’ of key funds on window-dressing tactics such as “luxurious offices”.
“Family firms seem imbued with the sense that the companyʼs money is the familyʼs money, and as a result they simply do a better job of keeping their expenses under control.” – Kachner et al, 2012
Linked to their financial consciousness, the HBR article states that family businesses never spend beyond their means. They tend to keep within their earnings, ensuring that extra is available for unexpected costs or requirements. Kachner et al state that family businesses seldom run into debt, as they tend to associate it with “fragility and risk”, while “in modern corporate finance a judicious amount of debt is considered a good thing because financial leverage maximizes value creation”.
Kachner et al highlight the fact that family businesses tend to be conscious of their acquisition trail, focusing on smaller companies at a reduced frequency in comparison to traditional corporate companies. It is noted that family businesses tend to opt for “organic growth” and sooner “pursue partnerships of joint ventures instead of acquisitions”.
“Of all the plays a manager can make, a sparkly transformational acquisition may be the hardest to resist. It carries high risks but can pay large rewards. Many family businesses we studied eschewed these deals. They favored smaller acquisitions close to the core of their existing business or deals that involved simple geographic expansion.”
By pairing organisation-wide culture and vision, with conscious spending, and clever, but careful, acquisition family businesses are able to sustain success in the long term. A strong commitment to the longevity of the business by all members of the organisation facilitates consistent performance, and a business culture that encourages continuity.
For further reading: Harvard Business Review, What You Can Learn From Family Business: Focus on resilience, not short-term performance (PDF 2.1 MB) by Nicolas Kachaner, George Stalk, and Alain Bloch, published in November 2012.