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Next Generation for the Family Business Future

TECHNOLOGICAL ADVANCES and globalization are creating change at an unprecedented pace, quickly and fundamentally transforming business environments along with the rest of society. How hard is it for families in business to capitalize on opportunities in a world that are constantly changing shape?

Conventional wisdom holds that family businesses have a long-term view, often rooted in shared values, vision, and culture. They are also known to be flexible, able to adapt to events as they happen, and resilient in turbulent times. Armed with these characteristics, family businesses have continued to play a major role in the global economy even as disruption has transformed nearly every dimension of the marketplace.

Given family businesses’ long-term orientation, one might assume that they are facing the future with solid plans around business ownership, governance (both business and family), succession, and strategy. But our survey found that many family businesses lack clarity in at least one of these areas. For these businesses, it will be important to find ways to align stakeholder goals, develop a strategy that matches short-term actions to long-term priorities, and explore diversification in order to become sustainable for the long period.

Overall confidence gauge

Technological advances and globalization are creating change at an unprecedented pace, quickly and fundamentally transforming business environments along with the rest of society.

Agility is a key asset Key intangible assets often help a family business whether conflict and remain sustainable. Family businesses can take decisive action when called for, and many have a streamlined decision-making process that positions them well to adapt to changing.

Appetite for innovation

Some family businesses are inclined to be risk-averse and unwilling to innovate, even when they have the resources to do so, due to concerns about the possibility of a negative outcome and a reduction in the family’s wealth. However, family business leaders should beware of falling prey to a phenomenon known as the “ability and willingness paradox.” Compared to non-family firms, research has shown that family businesses, although they usually have a lower impulse to engage in innovation, tend to achieve better results. If a family business can overcome any initial reluctance to embrace innovation opportunities, it may reap the rewards of faster and more effective innovation than its competitors.

Exploring diversification

This is consistent with the idea that family business owners tend to protect the “core” businesses that represent their legacy, and may be reluctant to move beyond this comfort zone. However, some family businesses are breaking this mold by embracing a portfolio management approach to growth and investing in more peripheral businesses (such as expanding by industry or geography). But although investing family business funds in a diversified portfolio can be beneficial, it can also be difficult if family members are not aligned in both vision and risk tolerance.

Matching actions to long-term views

Markets are in a constant state of flux, presenting companies with changes driven by factors such as consumer preferences, economic cycles, and, more recently, disruptive developments. Given sudden shifts in immediate business demands, it can be difficult for family-owned companies to integrate long-term goals with short-term actions. Yet such integration can be vital to continued success.

LIKE ANY ENTERPRISE, a family business should have a clear sense of direction: without it, a business risks being consumed by the accelerating pace of change and disruption. The challenge is to maintain that sense of direction throughout the company’s ongoing adaptations to the needs of the day—making sure that the path one chooses still leads to the desired destination.

Financial goals and disruptors

This prioritization is reflected in day-to-day decisions—including among first-generation business leaders. Rather than placing their sole focus on new endeavors that could build the business in the short term, even these younger family businesses tend to make decisions that focus on increasing long-term value. Long-term value is more important than short-term results.

Non-economic priorities

Family businesses often have priorities that extend beyond the economic goals that are typical for non-family businesses. For instance, family harmony and family members’ identification with the firm are two key non-economic goals that act as reference points for making decisions. While non-family firms tend to focus on maximizing their financial benefits, family firms also value their identity and cohesion as a family—a non-financial form of wealth often referred to as socioemotional wealth.

Typically, family businesses are careful to manage the risk incurred by their strategic actions, since behind their strategy for growth is a strong desire to preserve the family’s capital over generations. This prompts many families to set up a family office as a vehicle for managing joint family investments in (for instance) philanthropy, stakes in other companies, or special projects such as private equity ventures. For many of these families, capital preservation and growth is a central goal that upcoming generations need to understand and embrace.

Preparing the next generation

Another urgent priority for family business leaders is to prepare the next generation for leadership by helping them to understand the business and encouraging their intellectual curiosity. Newly-appointed family business leaders have the vital task of keeping the business flourishing after they take over, preserving the family’s legacy and traditions while still—in what is known as the “continuity paradox”—enacting change when change is needed. There is no such thing as a “best time to start,” as an individual’s readiness for leadership ultimately depends on his or her personal development. However, preparing for succession well in advance and helping a successor to understand the business—ahead of time and in a calm atmosphere— reduces the potential for unexpected problems and disagreements. In addition, succession planning may increase the chosen successor’s “hunger” to become the next leader.

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