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Preparing Your Family Business for Strategic Change
By Craig E. Aronoff, John L. Ward
Palgrave MacmillanCopyright © 2011 Family Business Consulting Group
All rights reserved.
Reaching Your Family Business's Strategic Potential
It is no longer the leader's job just to create strategy. It is the leader's job to ensure the organization stays fresh strategically. The difference is profound.
When Jim launched his first computer store 20 years ago, he had the skills and vision to unleash a long and exciting wave of success. Over time, he expanded his one location into a chain of 15 stores throughout the tristate area. His two daughters and one son, now all in their 30s, joined the company and proved themselves to be very capable in their respective areas of sales, management, and finance. However, the company eventually hit a bumpy plateau. Sales flattened, margins tightened. The founder felt that his tried-and-true strategies and tactics—so successful a few years ago—were no longer working. Challenges and threats, internal and external to the business, were becoming constant preoccupations. Family stress began to mount. What was going on?
SORTING THROUGH MIXED SIGNALS
Business owners often wear two hats. Problems can be difficult to diagnose and decisions can be tough to call because business and family perspectives overlap. Table 1 illustrates some of the mixed signals Jim must weigh.
By separating the business concerns from the family concerns, Jim stumbled on many strategic issues that he never had to address before. The best approach for him depends on which phase his business has reached along what we call the "family business strategic path." Understanding the developmental path family businesses typically follow may shed light on Jim's situation, as depicted in Exhibit 1.
UNDERSTANDING THE FAMILY BUSINESS STRATEGIC PATH
In Phase 1, the founder builds a company from scratch around an innovative product or service. With a blast of entrepreneurial fervor, vision, energy, and commitment, the founder engages in many trials and errors that enable the company to grow in fits and starts. And with the help of a little luck, the founder finds a "magic" formula that helps the company ride a comfortable wave of success.
As the business vaults past its startup period and into Phase 2, its leader appreciates that success came from more than a flash of inspiration. The founder therefore tries to identify and define the ingredients of his or her successful strategy and installs a structure and policies to support it. That strategy may sustain growth and profit in the intermediate term. But the danger of Phase 2 is that the founder often becomes married to this original strategy, which may not be responsive to the new demands of a constantly changing market. Eventually, this limits growth. It's better in this phase to appreciate that the strategic genius is temporary. In the long run, it's the whole organization that is responsible for success, not just the founder's brilliance. Effective leaders in this phase deflect the credit and depersonalize the reasons for success.
In Phase 3, the business works harder and harder just to avoid losing ground. Profit margins erode because the company has already harvested the easiest, most profitable sales. Many businesses bog down in Phase 3. Running a treadmill, they feel frustrated and discouraged. They've enjoyed a wonderful ride on a beautiful wave, but now they're paddling furiously to hold their own.
Before the original strategy fully runs this course, early in Phase 3 owners must identify their fundamental business strengths and competencies and learn to apply them in new ways. Here are two examples of companies facing these challenges:
A food products company began by supplying its local ethnic market, then expanded regionally. Thanks to new distribution ideas and creative marketing along with efficient production, the business successfully became a national firm. Now very large, the company's growth has slowed. Profit margins are shrinking. Generating new sales has become more costly. If the business is to maintain its multigenerational commitment to growth, new strategies will be required. While the company traditionally grew by emphasizing its products and brands, strategic planning helped the food products firm recognize that distribution had emerged as a core strength. Developing new products and brands for its distribution system became the company's new growth strategy.
Jim's computer outlets hit Phase 3 when the company exhausted prime store locations and consumers were buying more from discounters and by direct mail. The solution, which Jim almost ignored, was to start a field service organization that focused on helping schools and small businesses with repairs and new software installations.
Invariably, what worked in one set of internal and external circumstances may not work as those circumstances change. Jim ultimately realized (with input from one of his daughters and coaxing by his board of directors) that his original strategy had peaked. Typical of many leaders in Phases 2 and 3, Jim initially had a hard time adapting. Business founders tend to feel convinced that theirs is a sacred, winning formula for success. The problem is, they may not be sure precisely which parts of the strategy, structure, and policies were most responsible for their success. Founders therefore may resist tampering with any part of their tried-and-true formula. Those who are able to challenge their strategic paradigm are likely to find a new wave to ride.
This is especially true as they reach Phase 4, when the next generation may come of age, with younger family and non-family employees joining the family business. Now the senior generation leader confronts issues that challenge the company's ability to satisfy family as well as business needs. Family members may want money, jobs, and a say in how the business is run. Those new demands confront the founder, who is now typically stressed by flagging business strategy, the personal challenges of aging, and concerns for personal financial security. Change is now needed to integrate the next generation's needs, goals, and hopes. Change is also threatening to the senior generation as they contemplate the needs and fears of retirement.
Reaching Phase 5—liberation and renewal—requires that owners recognize the dynamic relationship between strategy and organizational design. They must challenge the reasons for success and explore new formulas and strategies as a regular part of managing. The strategic process becomes continuous. More than ever, this requires owners to champion change and to step outside the position where everyone looks up to them as the heroes with all the answers.
AT WHICH PHASE IS YOUR FAMILY BUSINESS?
Table 2 and Table 3 will help you find your place on the typical family business strategic path.
GETTING TO THE NEXT PHASE
Founders who tend to take personal responsibility for all aspects of the company—and who continue to rely on their own wit, energy, and vision—have an especially tough time moving from one phase of their family business strategic path to the next. They feel their strategies are diluted or compromised by family interests. Some owners, though, see this time as an opportunity. Those who succeed in reinvigorating their company:
* Do not feel as possessive of the business and its strategy
* Do not feel a need to know or control everything
* Trust that input from other people can help the business grow
* Recognize that change is not the enemy
* View the business as a powerful strategic entity with a life of its own, separate from that of the founder
* Have a positive outlook toward their children as resources, not constraints
Owners who agree with most of the above sentiments will have an easier time making transitions that go all the way into Phase 5—strategic liberation and renewal, where their companies can enjoy a new burst of energy and success by incorporating new ideas and sharing responsibility and control.
Clearly, getting from the early phases (relying on a rigid, personal strategy) to Phase 5 (staying fresh strategically as a management team) is no easy task. As we will see in the next chapter, the leadership requirements after the original entrepreneurial insights have been dissected and demystified are to develop a structure and strategy to maintain that success.CHAPTER 2
Demystifying Past Success
Once the business starts taking off, the factors that brought success tend to become institutionalized into a rigid strategy and structure. That dampens, not enhances, future growth.
UNLEASHING STRATEGY AND STRUCTURE
Ask family business owners why they have been successful and you will likely hear, "We found just the right strategy at just the right time." When you ask them to describe that strategy, they tend to talk about how they always get in before 7:00 a.m. and work until 10:00 p.m. or about their innovative product line. These may, indeed, be contributing factors to their success, but they are not strategic factors at all.
That doesn't mean such entrepreneurs don't have a strategy. It's just less conscious and less clear in their mind at this phase. By definition, every business has a strategy—whether people know it or not, whether it's good or bad, whether people can explain it or not. The mere existence of the business means there is a strategy. Sometimes the strategy is brilliant. It's something the entrepreneur learned through trial and error and intuitive insight.
But because entrepreneurs may not be fully aware of their strategies and their important ingredients, they may become confused about their reasons for success. That's why when someone asks them about their strategy, they talk about their own qualities or philosophies. The danger of lacking clear understanding of why a business succeeds is that an entrepreneur may cling to every business policy and structure and every personal trait for fear that changing any aspect of how the business is run might destroy success. "If it ain't broke, don't fix it" is the operating philosophy.
Dissecting, demystifying, and demythologizing implicit strategies identify true contributions to success as well as factors that may no longer work (and actually could be dragging the company down) in today's market.
A particular strategy or structure may have been right for the circumstances as the business experienced initial success. Yet as the company enters Phase 2 of the typical family business strategic path and as times change, owners who have not isolated the ingredients of their success tend to institutionalize every minute detail of their behavior and their initial, successful strategy and structure. They further bog down the business in policies and procedures that ensure the company doesn't veer from its original path.
Other inhibitors of change in family firms include:
* Institutionalization of operating details and specific behaviors
* Deeply entrenched values
* Long tenures by each generation of leaders
* Long-term loyalty to managers and advisors
* Autocratic/paternalistic management style
* Insulation from changing conditions outside the business
* Tendency to be risk- and debt-averse
These traits have their advantages. But they can also inhibit change. Entrepreneurs often have invested everything in their company. Once success hits, instinct makes owners want to cling to their winning structure and strategy. But what brought a family business its early success may not ensure its future. The family keeps changing. Technology keeps evolving. Markets keep maturing. Competitors keep competing, and new competitors enter the fray. If the business doesn't respond and transform, it will lose ground.
LOOSENING RIGID STRATEGIES
Sometimes the damage is not apparent for years. Market share, return on sales, and return on investment are increasing in Phase 2. Things seem great. Nothing seems impossible. Why fiddle with a winning formula?
For one thing, market share will surely top out at some point. Margins will be pressured. Others will find better ways of doing what you do. And then, winning formulas will become losers. Second, while success is mounting, the ingredients to future problems and decline may already be slipping in:
* A homogeneous management team is focused on implementation and keeping up with current growth. Often a team built to implement one strategy will be unable to embrace, let alone develop or implement, a new strategy. The owner of one company that sells one very successful product through an independent distribution network decided it was time to better utilize that network by acquiring other companies that produce other products for the same market. The sales manager kept saying, "No, we just need to sell more of what we already produce." The financial vice president, who'd been financing growth through cash flow, was adamantly opposed to taking on significant debt that acquisitions would require. Despite its terrific track record to date, the management team clearly is unprepared to adapt to the new vision or move the company in this new strategic direction.
* Fear, intense demands, and mistakes make the entrepreneur extremely self-reliant and autocratic. Such an entrepreneur will seek out and latch on to any source of stability and peace available. This is an understandable reaction to a situation the entrepreneur is less able to control. The natural tendency is to work harder, take more control, retrench, and do all the things that are most likely to make the organization unable to make the transition that's required. These inclinations are bound to further undermine creativity and change.
* Loyalty is treasured. Turnover can be traumatic for entrepreneurs. How dare anyone leave? How dare anyone challenge the strategy? That attitude is counterproductive. It is bound to further alienate and aggravate key employees who may be even more inclined to bail out when the owner stifles their input and authority.
* The entrepreneur invests his or her entire self into the business, often neglecting time with the family. Tireless commitment demanded by a business's launch and growth becomes a habit that continues even when it becomes less of a necessity. Moreover, entrepreneurs sometimes feel more comfortable at their businesses than they feel with their families. The result can be a weakened foundation of rapport and give-and-take between the entrepreneur and his or her children. When new business strategies are required, entrepreneurs and their successors can be uncomfortable with the necessary negotiations and can find themselves in a frustrating stalemate.
Rather than succumb to these temptations, farsighted business owners and entrepreneurs stress:
* Organization. As one company's factories expanded from five to eight, future success grew more dependent on its ability to better organize and coordinate production facilities. In the past, each factory was treated as a separate unit. The second-generation owner is in the process of reorganizing to treat all facilities as a unit and has created a new position of executive vice president who will report to the CEO and to whom the plant managers will report. The marketing department, which in the past operated on strict production goals, has had the attitude, "If we get enough sales, the rest of the company will take care of getting profits." To gear sales and marketing people toward profitability, the pricing function has been moved from the chief operating officer's office into marketing. New product development is now being integrated into marketing in addition to its historical focus on production.
* Underlying values. Periods of intense change are good times for owners to consider why growth is so important. They should consider why they are operating the company and whether it is time to sell or whether it's important to keep the business in the family. It's good to take a new look at values and re-articulate them and reassess how the company measures success.
* Openness, reduction of secrecy. Many owners hold financial information close to the vest. At the family business in the process of reorganizing that we mentioned above, the CEO kept profit figures even from managers of profit centers. Now the family is beginning to meet and share more information—including a conceptual picture of the reorganization. They are learning to share preliminary ideas with key managers, getting input earlier in planning and decision-making processes.
* Competencies, not products. Once the market for a hot product has been saturated, or tastes or technology change, evaluating what organizational strengths contributed to the companies initial success makes sense. This does not require abandoning the company's traditions. Instead, the company uses its traditional culture to build an appreciation of change and innovation.
Excerpted from Preparing Your Family Business for Strategic Change by Craig E. Aronoff, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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