Lego is not only great to build a model of a family business but also a model for family business … [+]
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A growing body of evidence indicates that family-owned operations outperform non-family owned ones in every sector across the globe over the long term and especially during times of recession. This finding has been reflected in Credit Suisse Research reports since 2006, as well as research conducted by McKinsey and the Boston Consulting Group.
What gives family-owned organizations this unique edge? To answer this question, researchers Danny Miller and Isabelle Le Breton-Miller studied various global family businesses. These organizations were assessed based on a specific set of criteria. The companies in question were placed either first or second in the world in their industries, they had been through the succession process at least once in their generations and they held at least $1 billion in assets or sales. Their samples included companies like Michelin Tyres, Estee Lauder, Hallmark cards, Walmart, Cargill and L.L Bean.
What they discovered was that the best performers pursued what they referred to as the “the 4C advantage” that enabled them to compete effectively. These include continuity, community, connection and command.
While most publicly traded companies invest with their quarterly earnings or next shareholders report in mind, family businesses invest in the long run. Founders and next-generation heirs aren’t thinking about the next month but rather the next three decades to ensure business continuity so that their organizations can support both their children and grandchildren.
The long-term mindset and focus on stewardship afford family businesses a significant advantage. This is because it often translates into capital being allocated in a more pragmatic, sustainable and disciplined manner.
One such example, drawn from the Miller and Breton-Miller study, is that of Cargill. A few years back, the grain giant took their record earnings and invested 110% of it into global enterprise expansion, something you probably wouldn’t often see taking place in public companies.
While long-term capital preservation and value creation may be favored when it comes to the overall strategy, successful family-run businesses don’t just sit on their assets. They aggressively pursue and leverage opportunities and strategically plan trajectory shifts to create higher value for both the family and their investors. This often explains why family- and founder-owned companies generate better financial metrics, exhibiting more significant growth and profitability than their non-family counterparts.
Family businesses start as just that – family. Families naturally have a degree of unity that becomes an inherent part of the company. As the operation grows and other family members or external parties are brought into the fold, the sense of unity holds from it, a sense of community forms.
The family’s objectives and values are shared and adopted by all parties involved, essentially uniting the tribe. As the company continues to expand, the shared values and goals are instilled in all who join it. This helps to develop a cohesive, collaborative workforce.
As family businesses often begin as local mom-and-pop establishments, the foundation of these organizations is built on more than just an exchange of goods or services. As business owners, the founders generally invest time and effort in forging connections and shared experiences with both their clients and suppliers. As their business grows, these strong relationships continue and help to foster loyalty.
A great example of this is illustrated in IKEA’s early growth phase. When one of its suppliers was struggling to keep up with IKEAs growing demands, instead of taking their business elsewhere, IKEA extended a loan to the supplier to develop its own business. To this day, supplier relationships remain an integral part of IKEA’s business, and the company continues to invest in suppliers’ companies as it pursues its business objectives.
As family-owned companies are in command of their own operations, they are more agile, can make decisions rapidly and act by moving into markets relatively quickly. This offers them a considerable advantage over their non-family peers when it comes to taking advantage of opportunities that arise.
Within families, communication is usually honest and unencumbered. Ideas can be discussed at breakfast; plans can be made at lunch and development can be actioned by dinner. In other types of organizations, especially those constrained by bureaucracy, the same process can take months.
A proposed fifth “C”
In addition to Miller and Breton-Miller’s 4Cs of advantage, conclusions drawn from recent research could lead to the proposal of a fifth “C”, one that is emerging as a significant differentiator between successful family-owned businesses and their competitors — Conservativeness.
Credit Suisse research shows that family-owned companies typically have less leveraged balance sheets, a fact that helps to insulate them during times of financial crises. What’s more, is that they are also able to reduce leverage more rapidly in the years following such periods. This not only contributes to their resilience but also ensures continuity, a concept in which conservative long-term views often find their origin.
This is because founders and family owners with long-term views tend to be cautious about spending and more mindful of the returns when doing so. For example, some research shows that family-owned organizations generally have lower research and development budgets than other businesses, both public and private. This, however, doesn’t mean that they are less innovative. The study shows that they are more innovative in their processes and gain higher innovative outputs. The researchers suggest the reason for this is that family owners ensure that their staff only make sound investments as part of the broader business strategy.
Coupled with higher top-line growth and margins as well as reduced dependence on external funding for growth, these factors suggest that family businesses may also be better at generating cash flow returns as a result.
As families consider continuity and continuity planning, they need to be mindful to do so in a manner that celebrates and preserves these inherent competitive advantages and prevents anything that would diminish them.