Conventional wisdom darkly dictates that a family business will generally fail by the third generation. John Davis, Senior Lecturer in the Family Enterprise Executive Education Programs, says this doesn’t necessarily have to be true. He recently presented a webinar about how family enterprises can overcome the challenges of today’s world and achieve multi-generational success.
The current statistics do, unfortunately, support the conventional wisdom above: only fifteen percent of family-owned businesses are successful by the end of the third generation. The reasons are varied and include industry changes, missed opportunities, inadequate talent/resources, mismanagement, decline in risk taking, loss of family interest, family conflict, succession problems, and unpredictable changes.
So how have the family companies that have survived generations done it? According to Davis, they’ve scaled as much as they can, then at appropriates times, they’ve diversified into new growth areas. Reinvention is also a smart way to survive—the new generation can sell their parent’s company and use the money to start a completely different enterprise that reflects more of their interests and current market opportunities. The practice of reinvention will likely be more common in the future, because industries age sooner in this fast-paced, disruptive world, also known as a VUCA world: volatile, uncertain, complex, and ambiguous.
Some strategies that family businesses can implement today to encourage their success include:
- Be aware of industry trends, and be realistic about how these trends will affect their business. Instead of ignoring trends, families need to make a clear plan for how they’ll adapt.
- Truly question their mission to ensure it’s as compelling as possible. With the right mission, companies can achieve agility and momentum, two vital qualities in today’s VUCA world.
- Know what their family is and isn’t good at. This goes hand-in-hand with finding the right mission. Being honest about strengths and weaknesses lets families know where their growth opportunities are and where they need to hire talent to fill gaps.
- Owners need to think more like owners and less like operators, who are concerned with the daily realities of running the company. They should regularly take a step back and think about big-picture items.
John A. Davis is a Senior Lecturer in the Family Enterprise Executive Programs at the MIT Sloan School of Management. He is a globally recognized pioneer and authority on issues related to the family enterprise, family wealth, and the family office. He is the author of the book Enduring Advantage: Collected Essays on Family Enterprise Success and coauthor of the books Generation to Generation: Life Cycles of the Family Business and Next Generation Success.
John Davis teaches two programs at MIT Sloan Executive Education that focus on family-run businesses:
- Founder to Family: Sustaining Family Business Success is for founder-controlled companies as they transition to the second generation.
- Future Family Enterprise: Sustaining Multigenerational Success is for multigenerational family enterprises controlled by the second generation or later, to prepare for the future.