Families that want to stay in business for another generation don't have a choice except to encourage entrepreneurship in and out of their company. There are
and family reasons
Need for being “Change-oriented” rather than “Preservation-oriented”
. We need to regularly change what we make and sell, and even how we make and sell it. We must be nimble and, as certain lines of business wane, be able to identify growth opportunities in and out of the core industry and pursue them in experimental, cost-effective ways.
Risk-taking, resourceful attitude of an entrepreneur is the key.
Families that maintain a culture that encourages family members to create things of lasting value i.e.
emphasize growing assets, and consume relatively little of their wealth
. A sense of entitlement among key members of the family causes lack of vitality over time. Resources are consumed and not regenerated at a pace that is sufficient to remain strong and competitive. [Creation vs. Entitlement/Inheritance perspective]
In some families, growing the business to its full potential requires lots of negotiation, over very long periods of time that may affect their ability to embrace critical windows of business opportunities.
Aligning goals and ambitions can become a tenacious exercise.
Some family owners of different age and ambition levels might not like the potential consequences of rapid or intense business growth.
To develop scale, the family firms need to increase the rate at which they generate novel ideas
. Secondly, scale can be achieved by moving upstream or downstream in an industry
where the company is successful. For this, the family needs to think ahead of time about the next growth areas and step out of its comfort zone. A family-owned company whose core competency is in one area, and who intends to remain vital and growing, will need to transfer some of its unique skill sets in adjacent sectors.( Adjacency Theory)
Over a period of time, family outgrows business
as the rate at which the business grows is unable to meet the aspirations of the family members especially across multiple generations. Therefore, in family firms,
business and family strategic planning
are critical in order to promote continuity.
In order to scale and grow the Family Business at a rate that matches the family growth rate, it needs to transform from a Family Business to Business Family
. This involves:
- Moving from traditional business of family to new avenues
- Family values, legacy & heritage is continued in Business Family
- New areas of doing business is encouraged for the Next Generation
- Funding for new ventures is also done through a resource pool within the family
- Cross-holding of ownership ensures accountability to each other (family members)
According to a study on Asian Family Businesses, the firms loose almost 60% of their value in the first transfer of their power
i.e. when the founder steps down and transfers the business to the second generation. Key reasons pertain to incompetence of the successor, owner’s values, their connections and their social reputation. Family firms need to plan their family and business future at least 20 years before older generation retires as it takes 2 decades or more to cultivate intangible assets
such as values & relationships in the younger generation.
Therefore, given the critical role played by entrepreneurship in the family (across generations), only relevant and long-term education/development opportunities provided to the family members will determine the success and long-term continuity of the family firm.
The author of this article is Mr N.Krishnan, CEO-Parampara Family Business Institute (PFBI).
You may get in touch with PFBI at email@example.com