Infighting, succession issues, and an aversion to innovation: family-owned companies are often criticised by proponents of modern business practices as having inherent weaknesses that inevitably lead to their demise. Yet some of the world’s biggest household names – think Walmart, Volkswagen, or L’Oréal – provide strong evidence to the contrary. A growing body of research shows that these companies have many strengths that can put them ahead of the competition and perhaps even teach it a lesson or two.
Family-owned businesses come in all shapes and sizes, from your local convenience store to international conglomerates. They can be privately or publicly held, and cover the full spectrum of products and services. Accounting for 80 to 90 per cent of the world’s companies, they are the pillar of most economies. The Global Family Business Index, a study published by the Center for Family Business at the University of St. Gallen in Switzerland, examines the largest 500 family-owned businesses worldwide in terms of revenues. It found that these companies contributed USD 6.5 trillion to global GDP and employed almost 21 million people in 2015. Could it be that the family business model contains elements that can help businesses in general endure long into the future?
Long-standing relationships as social capital
Founded in 1610, Japan’s Takenaka Corporation is the oldest firm featured in the Global Family Index, and speaks to the incredible staying power of well-run family companies. The architecture, engineering, and construction company is owned by the latter generations of the founding family and reports annual sales of around USD 9 billion. Its 400-year legacy would suggest that the concept of ‘shirtsleeves to shirtsleeves in three generations’ is by no means a foregone conclusion.
Marc van Essen, Professor at the University of South Carolina and Professor and Lecturer for the Global Center for Entrepreneurship and Innovation at the University of St. Gallen, has interviewed and researched hundreds of family-owned companies. He sees their strength in factors such as their focus on the history and tradition of the firm, as well as their long-standing relationships with customers, suppliers, and employees. In his view, these relationships are a form of social capital that provide continuity, and as a result a high level of commitment and loyalty from the various stakeholders. He says the success of family-owned companies can also be attributed to their often efficient leadership in the form of lean organisations and swift decision-making processes that keep them flexible and agile.
“The long-term orientation is a crucial factor in my view,” says van Essen. While many non-family-owned companies are under pressure to deliver results within a short time frame, when successful, the family-owned model can give a business the luxury of patient capital, which translates into enough time to pursue long-term strategies. This also allows them to implement and see longer projects through to completion while learning from failures along the way. But the family-owned model also has its challenges. Although 44 per cent of the companies in the Global Family Business Index are owned by the fourth generation or older, longevity is not a typical hallmark of familyowned firms. In fact, many of them struggle to survive past the first generation.
New ideas and clear direction
Past success does not guarantee future prosperity. Keeping a step ahead of changing consumer behaviour, shifting markets, and technological developments is important for any business and requires openness to change and an ability to innovate. In its 2016 Family Business Survey, PwC canvassed 2800 family businesses across 50 countries and found that the biggest challenge identified by respondents over the next five years is the need to innovate continuously. “Because innovation and longterm commitment to R&D appear to be the most important drivers of family-firm performance, second-generation leaders should emphasise innovation over legacy preservation,” says van Essen.
A study co-authored by van Essen, entitled ‘Doing More with Less: Innovation Input and Output in Family Firms’, found that family companies invest less in innovation than other firms and that on average, they have smaller R&D budgets than other companies of a similar size.Interestingly, however, the study reveals that family firms are more efficient in their innovation process. This is in part attributed to their perspicacity in terms of risk; being highly invested in a single company often translates into particularly careful investment in new ideas. The high level of control families have over their companies also allows them to closely monitor and influence processes, and finally outcomes. The study concludes, “For every dollar invested in R&D, they get more innovative output, measured by number of patents, number of new products, or revenues generated with new products.”
Formalising the future
But families are by definition complicated constructs. Differing visions, abilities, and objectives – particularly between one generation and the next – can pose a major challenge and lead to internal conflicts and succession issues. “Leadership transitions are an important cause of family-firm failure,” says van Essen. With one of the world’s biggest generational changes in recent history just around the corner, this matter is now more timely than ever. While, according to PwC’s 2016 Family Business Survey, 43 per cent of respondents do not have a succession plan in place, van Essen is seeing a rise in the number enrolling in workshops and courses geared towards managing family-owned businesses. In addition, he notes that the popularity of consulting services in this area is also increasing. If family businesses can ensure smooth transitions between generations, they can find themselves in a very strong position – a position that many other businesses would be envious of.
Business model of the future?
Family-owned companies have brought us revolutionary innovations such as the moving assembly line (Ford) and low-cost furniture in a box (IKEA). Some of the world’s finest wines are produced by estates that have been handed down the generations for centuries. The fact that many of these companies continue to thrive in this age of fastpaced change and digital disruption is reflected in the countless products and services they deliver to consumers around the world every day. Other companies might do well to look at the strengths of their familyowned counterparts and see whether these could also benefit their own models as they look to the future.
Life, business, investments, aspirations - what matters to you matters to us. This article is part of our Wealth Planning series, in which we have a close look at what lies close to your heart and how foresightful planning may help you achieve your objectives.