Most businesses start as family-owned enterprises. Family businesses are estimated to comprise 65-90% of all businesses across the world. This is especially true for the Philippines where the largest corporations began as or remain to be family businesses. However, successful, enduring family businesses are a minor breed. Research shows that more than 70 percent of family businesses fail to survive into the third generation of family ownership. But the small number of family businesses which do succeed tend to perform better even when compared with non-family businesses.
What makes one family business more successful over another? One study of family businesses in Spain found that a common characteristic among successful family businesses was the adoption of certain values, which over the long term formed the basis of the company’s culture. This article will identify and discuss what these important values are, why they impact the enduring success of a family business and how these values can be perpetuated over succeeding generations of family ownership.
There are five essential values that were commonly found in successful family businesses:
- Excellence: The continuous seeking of excellence in all aspects of the business and the openness to learn how to keep and further enhance the current level of excellence. All possible sources for learning were tapped, from the practices of other companies to advice from nonfamily managers and external consultants.
- Labor ethic: A strong belief that success depends on hard work and dedication.
- Initiative: A willingness to change and take on financial risk for growth. Most family businesses prefer to fund growth via reinvestment of profits rather than taking on external debt.
- Simplicity: The avoidance by family members of having flamboyant lifestyles.
- Austerity: Exercising prudence in expenditures and carefully studying investment opportunities.
More often than not, these critical values describe the qualities of the founder of the company. These values were the same which the founder practiced when expanding the initial entrepreneurial venture into a thriving family business. The founders of enduring family businesses not only succeeded in growing their ventures, but also succeeded in building strong company cultures based on these essential values. The founders properly conveyed these values to the next generation of family managers who in turn became committed to perpetuating the same values. This allowed the family businesses to continue to flourish along the same values that guided their initial success, even when the founder was no longer actively involved.
The remaining question is how can founders ensure that succeeding generations indeed perpetuate the above values? The future success of any family business is determined by the proper hand off to the next generation of family managers. Thus, the criteria for selecting which family members to run the business need to be carefully developed. Enduring family businesses usually adopt a meritocratic approach when deciding which family members can take on senior management roles. Work outside the business and substantial experience within may be required before a family member can be considered. Some family businesses demand even higher performance standards from family members. For example, some family businesses may require family members to come to work earlier than other employees, recognizing that they should serve as role models for the rest of the organization.
To help prepare the next generation, founders should expose family members early on to the culture and dynamics of the business. For those without any prior exposure, family members can prepare themselves by trying to gain a better understanding of the business. It would also be mutually beneficial if the responsibilities and expectations of family members are very clear before formal work in the family business begins. Ensuring the next generation of family members are professional and competent, are ready to serve as role models for the organization and are fully aware and committed to the business culture will help perpetuate the values needed to make the family business endure and succeed for the long term.
Written by: Richarest Barreto