An oft-cited statistic is that only 30% of family businesses make it through the second generation, 10-15% through the third, and 3-5% through the fourth. These are disheartening numbers.
But let’s put them in perspective. A study of 25,000 publicly traded companies from 1950 to 2009 found that, on average, they lasted around 15 years, or not even through one generation. In this context, family businesses look pretty enduring.
In the context of competition in the 21st century, family businesses have innate strengths over others forms of ownership, especially public companies. In this brave new world, public companies are losing their dominance: their share of America’s GDP, workforce, and assets has fallen by 50% over the last quarter of the 20th century.
The qualities often associated with family businesses that were a handicap in the previous century are turning out to be powerful sources of advantage, giving them the potential to be more adaptive to the increasingly intense competition that all businesses are facing. Specifically, family businesses have the opportunity to achieve sustainable advantages in five key areas:
Talent: From Mass Employment to a Higher Calling- Businesses need to do more than offer competitive wages and benefits; they have to provide a “higher calling” that makes clear the intrinsic value of working for their companies. Much has been written about values-based cultures, but families are the primary carrier of values, and business families can weave their values into the very fiber of the organizational culture.
Investment: From Other People’s Money to Captive Capital- Outside funds bring with them a pressure to achieve short-term results that trade-off with value creation. Family businesses don’t have these problems because they can obtain “captive capital” that will not easily migrate to other firms. Their owners often think in generational terms – in decades rather than quarters or years.
Reputation: From Profit Motive to Sustainable Footprint- Family businesses have a big head start in building a “sustainable footprint.” There is often a personal connection between the family and the communities in which it operates; reputations matter to families.
Organization: From Managing Complexity to Rapid Response- Instead of managing highly complex structures, the greatest organizational challenge of the 21st century is dealing with change. Family businesses are well-suited to dealing with this imperative of “rapid response.” They tend to have nimbler and flatter structures, where information flows quickly and easily in to the leaders and decisions come out.
Governance: From Separation of Powers to Engaged Owners- The principal agent problem is far less severe in family businesses because they foster “engaged ownership.” The simple fact that there are fewer owners makes the oversight of decisions far easier; even family businesses with hundreds of owners are better positioned to provide effective oversight than public companies, whose owners can number in the hundreds of thousands. And when family members with large ownership stakes are also involved in managing the business, incentives are easily aligned.
The public corporation has been the dominant model for business enterprise for most of the last century, and this reflected the fact it was the best solution to a particular set of economic circumstances. But those circumstances are changing and family businesses that manage the five sources of advantage described above are well placed to make the 21st century a family business century.
Source: Baron, Josh., March 28, 2016; https://hbr.org/2016/03/why-the-21st-century-will-belong-to-family-businesses
