Learning from Family Businesses

If you’re like me when you think of family businesses, then the image of a rustic mom and pop shop may spring to mind.  Personally, it just reminds me of a cheap hair salon in the middle of Chinatown that I used to go to.  However, such a view is influenced more by nostalgia than sensibility because there are many large family run businesses.  This article delves into the nature of family businesses and how it figures into their formula for success.  What the researchers discovered was that family run businesses generally don’t perform spectacularly, even in situations ripe with opportunity, but on the flip side they also tend to stay afloat where others sink.  The focus, then, is resilience.  How do these companies integrate this theme into their overall strategy?

The key concept here is being conservative.  As it turns out, perhaps unsurprisingly, the average family business thinks similarly to how an average family might think – frugally.  The concept of spending only as much as you can afford seems strange in general business practice, but is a strong foundation that family businesses build and rely upon.

As a result of conservative spending, capital expenditures are scrutinized closely and debt is seen as a threat to the family control of the company and thus taken with caution.  Acquisitions of other companies are taken in small quantities at a time; large acquisitions are generally completed in dire ‘make or break’ situations that threaten the future of the company.  In fact, family businesses prefer partnerships and joint ventures to acquisitions – there’s less risk to the family business.  On that note, family businesses generally prefer to grow organically and prefer to be self-reliant rather than put the family’s fortunes in outside hands.

With all this talk of conservative family business practices, one might be surprised to find that family businesses are actually more diversified than their ‘normal’ counterparts by a large margin: 46% of family businesses show a high degree of diversification to 20% of normal businesses.  One would assume that if normal businesses are themselves wary of over diversification then it would follow that family businesses would approach it with an even longer stick.  As it turns out, family businesses either approach these ventures organically or with the view that the new additions are part of an investment portfolio to reduce risk.  With recessions becoming more frequent, some expansions may not be as affected as, for example, the core business, and the revenues generated by these expansions help the company weather the storm and invest in the future when rivals are too busy keeping all hands and feet inside the vehicle.

Lastly, an interesting aspect that the research touched upon was how family businesses approach new markets – with patience.  Because of their resilience, family businesses can be as patient (or stubborn) as a mountain that outlasts everything around it.  For this reason one could say when confronting a well run family business that time is the enemy.

Putting this all in perspective, the research concluded that the success of family businesses is due to their frugal and conservative decision making, which lends a natural resilience against forces beyond their control.  With a low cost structure and aversion to debt, these companies can afford to avoid layoffs and invest in their employees, which leads to higher talent retention.  To keep debt levels low, companies are careful with their decisions that may require financing – such as taking small acquisitions.  In short, the greatest strength of these companies is their resilience, and certainly there is a lot to learn from it.

As an aside, I personally feel that the business environment is already becoming too conservative.  I might just be a cynical jerk (which I am), but I feel that music these days is all starting to sound the same, and Hollywood only seems interested in pushing out remakes, re-imaginings, and reboots.  Is this the pinnacle of ‘capitalism’?  It’s fine if commodity industries are for the most part conservative, but when the arts and sciences must obey the bottom line, then everything stagnates and progress plateaus.

Kachaner, N. & Stalk, G. & Bloch, A. (2012, November). What you can learn from family business. Harvard Business Review, pg. 103 – 106.