October 2008 | By Cristina Cruz, Professor of Entrepreneurship at IE Business School.
The world has changed and family businesses must change with it if they are to avoid high mortality rates. But this transformation has to come from the top, from the company leader.
Millionaire grandfather, spendthrift son, beggar grandson, or so the Spanish saying goes. In other words, grandfather founds company, comfortable son rests on his laurels, and by the time the third generation comes along thereâ??s nothing left. This particular saying describes the problem facing family businesses on a daily basis.
Only 30% of family businesses reach the second generation and only 15% carry on to the third. The statistics are universal and the phenomenon is repeated everywhere in the world despite cultural differences. Why do family businesses disappear? Problems related to the lack of understanding between members of the family who own the business, the companyÂ´s incapacity to adapt to environmental changes, the lack of professionalization and/or the lack of commitment of subsequent generations are some of the most frequent reasons mentioned by family entrepreneurs and researchers. Behind all these reasons lies one common denominator: an inappropriate substitution of leadership which means there is no effective leader to help the company successfully overcome the transitions it is faces. Hence, if leadership is a critical factor for any companyÂ´s success, the evidence points to its being even more important for family businesses.
Given the key role of these businesses in the economies of the world, it would seem logical to wonder what makes for a successful family business leader in todayÂ´s environments. The answer to this question requires an analysis of the leadership style of successful family businesses, which in turn requires a definition of the meaning of success for a family business. There is also a need to consider issues related to two overlapping dimensions common to all family businesses when assessing success: family and enterprise.
However, we find that family businesses react to the overlap in two distinct ways: on the one hand, “traditional” family businesses focus on survival and on maintaining family harmony; on the other we have a newer model, that of “entrepreneurial families” which focus on change and are committed to generating wealth over generations. This new family business model is the logical result of much more complex environments in which competitive advantages evolve quickly. In todayâ??s competitive context, unlike what happened in the past, most family businesses complete their life cycle in one generation and, consequently, only family owners that understand the need for finding new ways of creating wealth over generations will successfully overcome the different transitions they face and stand as an exception to the family business mortality rates.
To achieve this aim, a very particular style of leadership is necessary. The leader of an entrepreneurial family must view interpersonal relations from a collaboration viewpoint rather than the individualism that characterises the traditional leader, since the aim is not only to maintain family harmony, but also to ensure the participation of all stakeholders, whether they belong to the family or not, in order to achieve a shared vision of the family businessÂ´s future.
Furthermore, it must be someone with a certain sense of urgency, aware of external threats and the opportunities offered by the environment, looking for new opportunities to generate wealth, rather than someone with the mentality of the more traditional family business leader, who focuses on survival. If there is no action, there are no results, so the family business leader must be someone who is capable of implementing the changes required to meet the objectives for creating wealth.
Family business leaders must know that the necessary changes can only be achieved by inspiring enthusiasm among family members, and must be willing to share values and expectations, insisting on the importance of family commitments rather than focusing on keeping control, like the traditional family business model. Finally, it vital to understand and make others see that it is not only a question of how the family uses the business to create wealth, but rather of how it maintains the capacity to generate wealth in the long term over generations. It is therefore necessary to prepare future generations for this desired change sufficiently in advance, thus ensuring continuity in the leadership model.
Family business leadership models
StakeholdersÂ´ interests : Family interests
Family participation : Family hierarchy
Future vision : Legacy, Inheritance
Delegation : Dependence
Family commitment : Family control
Leadership development plans : Assumed leadership
Entrepreneurial family : Traditional family business
The challenge is not easy, but in my opinion family businesses would be more successful if they managed to understand that the challenge is not so much “who”, but rather “which” is the ideal profile for leading a family business in the 21st century. As this article has explained, the profile includes the search, selection and preparation of entrepreneurial managers capable of generating commitment to the family project. If this profile is that of a member of the family or someone else will depend on the analysis of each case. What is important is for our business fabrics to include more and more entrepreneurial families with leaders who are capable of generating wealth over generations.