Recently, I met with the CEO of a highly successful, multi-generational, family-owned luggage company. The company has shown enormous resilience over the years, during many different business cycles.
Since the company is facing another transitional period, I asked the CEO whether he could identify the secret to the company’s resilience over the many years of operation. Without hesitation, the owner indicated that the secret to the company’s resilience was a very tempered approach to business, in which the owners and members of senior management had always emphasized planning for the long term, while at the same time, staying in the game by going for the base hit, rather than for the homerun.
In many ways, these responses seem to typify the differences in approach between family and non-family businesses, as more specifically described in a November 2012 Harvard Business Review article by Nicolas Kachaner, George Stalk and Alain Bloch entitled, “What You Can Learn from Family Business.”
The article is based on a comparison study between 149 family-controlled businesses and an equal number of non-family businesses, each within the same countries and business sectors, and all generating more than $1billion in worldwide revenues. The overall conclusion of the study was that family businesses are, in fact, more resilient than their non-family business counterparts. Though not doing as well as their non-family peers during good economic times, family businesses outshine their non-family peers when the economy slumps. The reason why? Family businesses forego the excess returns available during good times, in order to enhance the chances for survival during bad times (see “What You Can Learn From Family Business”, Kachaner, Stalk and Bloch, HBR, 2012).
More specifically, the article focuses on several key differences in approach between family businesses and their non-family counterparts, 5 of which are as follows:
1. Frugal in Good Times and Bad. Non-family businesses generally keep expenses under control. They do not spend more than they earn and, in fact, always try to put money away for the proverbial “rainy day.” As a result, during the last recession, they were responsible for fewer layoffs than their non-family business counterparts.
2. Judicious about Capital Expenditures. As the article aptly points out, one has only to walk into the lobby of a non-family multinational and a family multinational business to see the difference. The non-family multinational often exudes luxury. The family business shows less attention to luxury and more attention to simplicity of style and décor.
3. Carry Little Debt. Though modern corporate finance favors a judicious amount of debt, family-controlled firms associate debt with fragility and risk. For a family-controlled business, debt means less room to maneuver, if a problem or setback arises.
4. Acquire Fewer (and Smaller) Companies. Non-family businesses have difficulty resisting a transformational acquisition, i.e., they are more oriented toward going for the home run, if a particularly good opportunity avails itself. Though the opportunity might carry high risk, it can also result in a big reward. By contrast, family businesses favor smaller acquisitions to their core business, or deals that provide the opportunity for geographic expansion. Family businesses generally prefer organic growth, i.e., the process of growing the business by expanding output, the customer base and engaging in new product development, as opposed to growth by mergers and acquisitions, which pose the possibility of large capital outlays or the incurrence of huge debt, big expansion risks and an alteration of the fabric and culture of the company.
5. Retain Talent Better than Their Non-Family Business Peers Do. In order to retain talent and create longer employee tenures, family businesses rely on creating trust, a commitment to culture and purpose, efficient team dynamics and promoting from within. Their non-family business counterparts rely to a much greater degree on financial incentives (not loyalty or commitment to purpose) to increase retention.
These 5 principles create synergies. Frugality and low debt help reduce the need for layoffs. Fewer acquisitions avoid a build up of debt. Money saved through frugality can be invested back into the company, increasing the company’s ability to stay afloat during stormy weather (see “What You Can Learn From Family Business”, Kachaner, Stalk and Bloch, HBR, 2012).