The Backbone of America

Small business form the backbone of the American economy, and family owned businesses comprise the majority of small businesses. It should be a concern to everyone, then, that family business are dying at an astonishing rate.

First generation family businesses have a 70% mortality rate. That number should cause the most hard-nosed economist to shudder. Worse, still, is the percentage of second and third generation family businesses that fold—up to 90 and 97% respectively.

Not only are these numbers tragic for the families who own failing businesses, but also for the communities in which they exist. Failed businesses do not contribute to the local tax base, they do not attract growth to the community, and they do not provide jobs.

There are many reasons family owned business fail, from challenges posed by globalization to the self-imposed challenge of a status quo form of management. In this article, we will look at some of those reasons, and how they can be overcome.

Too Slow to Keep Up & Too Proud to Change

A sad commentary on the average family business is that the very quality that lead to its success is leading to its doom. That quality is pride—pride in turning out high quality products built according to family traditions, even if quality meant taking extra time to do the job right. Quite simply, customers no longer allow business extra time to do a good job. A sign in an old hardware store once read, “We can be fast, good, and cheap. Just pick which two you want.” Today, customers want all three.

Failure to change one’s way of doing business in order to deliver all three is the greatest cause of failure among family businesses. A generation ago, customers ordering a custom product, such as custom-made shoes or a piece of hand-crafted furniture, were not only willing to wait for delivery, but they expected to do so. And cheap prices meant cheap quality, which was hard to sell. Although customers still expect quality, they have redefined their expectations to be in line with a disposable mentality. Moreover, customers want what they want now, and at competitive prices.

Delivering on all three expectations can be difficult for many family businesses, for doing so means admitting that their way is no longer the right way. It also means lowering their self-defined expectations for how their products should be produced. But it must be done.

Reluctance to make the necessary changes usually lies with the company founder. Having overseen years of success in pridefully producing the best products possible—and doing it their way, they are suddenly faced with the reality that what they offer may no longer be what customers want. It matters not that the dresses a company makes have double stitching, if that detail elevates the price point above what the customer expects to pay.

The stubborn refusal to adapt to customers’ expectations—whatever they may be, and whatever may be necessary to meet them—will bring a premature end to any family business. The Burger King mantra, “have it your way,” must now be the philosophy of every company.

Sometimes, the decisions on what must be changed cannot be made internally. Company founders and senior family members may simply not know how to do things differently. Sometimes, the solutions lie outside the family. Whether talented workers or consultants, outsiders can often break the impasse and help the company to move forward. But, of course, all the solutions in the world will not help, unless ownership is willing to change.

Failure to Involve Younger Family Members in Decisions

Family businesses are affected by dynamics that are not present in traditional companies. Rivalry between father and son, between brothers, or even between mother and daughter, often result in strict subordination of the younger member. Alternatively, the younger generation typically fails to demonstrate the same work ethic as senior family members, causing strife and disharmony. Be it an issue of personalities, unquestioned family tradition, or overt distrust, younger members are often related to positions of servitude, rather than co-equal members of management.

As reasonable as their exclusion may seem to the decision makers within the family, failure to actively involve younger family members in decisions sets the company on an inevitable course toward dissolution.

One of many reasons this is so is technology. It is technology that will transform a slow, unresponsive business into one with the flexibility to meet its customers’ demands. And it is the technologically savvy younger generation that understands and can implement the technology the family business needs to function in a changing world.

The older generation, however, is often fearful of technology. They do not understand it, they have no interest in learning it, and they feel it is unnecessary. The result is a staunch rejection of the only solution that can save the company, and a purposeful effort to keep younger family members from invading the company with the tools necessary to save it.

While the need for technology is the primary source of dissension between senior and younger family members, there are other reasons the younger generation may be excluded from decisions that affect the company. One reason is that the ideas they introduce are often radically different from what senior family members are used to and comfortable embracing. It seems to older members that those younger do not understand the business and would, therefore, wreck it with careless notions. In reality, family businesses that defy the odds and actually continue into a third generation usually do so only because of the fresh ideas younger family members introduce.

Innovator’s Dliemma

In 1997, Professor Clayton Christensen of Harvard Business School published a book titled The Innovator’s Dilemma. In his book, Christensen proposed that companies often fail by “doing everything right” in meeting customers’ current needs because they fail to also focus on yet-unrealized needs their customers will have in the future. According to Christensen, in order for companies to survive, they must exercise the foresight to anticipate their customers’ future needs and to look for ways to meet those needs as they occur. He called the process disruptive innovation. Disruptive because the fruits of such efforts often make the company’s current products or services obsolete, and innovation because the solutions must be so new as to not yet exist. The dilemma comes about as companies ponder whether to take resources from current operations in order to fund solutions for problems that customers do not even know they have.

No class of business enterprises fail to embrace Christensen’s ideas so much as family owned businesses. The conservative, close-to-the-vest approach many family business follow does not lend itself in any way to investing to solve nonexistent problems. However, the principles described by Christensen have propelled companies such as Apple and Google to mega status, and they can also work well for the family enterprise.

Implementation of disruptive innovation begins with knowing one’s market so well that one can envision how advancing technologies might affect that market. A family business that provides printing services for local companies might realize how useful it would be for their customers to be able to access their materials online. As a result, they may invest in a mobile app that, if successful, would reduce their sales of printed material. Ultimately, the transition would have happened, anyway, but through disruptive innovation, the company could profit from the change rather than suffering loss because of it.

Muscle Memory & Shifting Expectations

You became familiar with the concept of muscle memory at a young age. From the first time you learned to walk, you demonstrated the principle of muscle memory in action. At first, simply standing on your feet required great conscious effort. As you progressed, you had to focus on each of skills necessary to walk—balance, distributing your weight, controlling your feet and legs, and trial and error were a necessary part of the learning process. Eventually, the process of walking became less and less a conscious effort, and more of automatic. It was as if your muscles learned what they needed to do and the only conscious effort you needed to make was deciding where, rather than how, to walk.

A similar phenomenon exists within businesses, and family businesses are no exception. Processes, policy implementation, and ways of doing business are apt to become learned behaviors that occur with little conscious intervention, with both good and bad consequences.

The muscle memory effect, as applied to workers, can significantly improve efficiency. In fact, one of the primary purposes of training is to condition employees to perform routine tasks in a more or less automatic fashion. The less time spent contemplating the next step, the less time and money is wasted.

An autonomic approach to job performance does not apply solely to subordinate members of the organization. Management and senior decision makers are also subject to the influence of autonomic behavior. Whatever business model, whatever strategy lead to the family business’s success continues to remain the standard against which all decisions are made.

In years past, adhering to proven methods may have been brilliant. In the face of the modern marketplace, it is proving fatal. Whether manager or material handler, every family member engaged in the family enterprise must unhinge himself or herself from conventional ways of working, or the business will surely die.

Today’s customers have something they did not have yesterday: choices. And those choices are not, as they were in the past, limited to a few competitors’ with stores located across the street. The globalization of the marketplace gives customers a literal world of options when making a purchase. Whether shoes or secretarial services, companies across the globe are competing for every customer. Economies and the competition that drives them are becoming increasingly global.

While an expanded marketplace has increased the number of companies that can meet customers’ needs, changing technology is rapidly redefining what those needs may be. What this means for family businesses is the absolute necessity to become flexible in the light of shifting customer expectations. From how decisions are made to how widgets are made, family businesses that will survive are starting to ponder whether old ways of working are still the best ways.

No longer can a family business afford autonomic decision making, autonomic processes, or autonomic people. Key to their success is ability to pause, re-examine, and change every detail of the operation until the company is as agile as its customers’ expectations. Failure to do so will continue to cause more and more family businesses to be left behind.

Failure to Invest in the Unknown

In 1989 Kodak’s Steven Sasson and Robert Hills made the first DSLR camera. The innovative product was possible because of developments Sasson had made in CCD technology. Kodak’s marketing department deemed the camera marketable, but Kodak shelved it for fear that it would bite into their film sales. In 2012, Eastman Kodak filed for bankruptcy.

This case typifies what happens in family owned business every day. For fear of losing current market share, management refuses to invest in new ideas or new technology. While the same can certainly be said of publicly held companies, family businesses often feel least able to afford uncertain investments. The problem is, they are also least able to afford NOT to do so.

Investments are inherently uncertain. Without uncertainty, it would not be called an investment, but merely an asset purchase. Unfortunately, the leadership of many family businesses take an ultra-conservative approach to taking chances with company money, resources, or its reputation. The result is the failure of these companies to expand and grow their business, which leads to atrophy and eventual death of the business.

Companies that survive into succeeding generations are companies that are not only willing to invest, but that seek out investment opportunities. Wise investments may come in the form of—you guessed it—technology with which to run the company or develop new products, money spent expanding the facility, or any number of other endeavors where a satisfactory ROI can be realized.

Companies that do not invest are often companies that do not distinguish between an expense and and investment. Where attitudes of complacency prevail, where a good bottom line today is all that matters, any expense is viewed as grievous. There is no distinction between spending $10,000 on a new computer system that could improve efficiency and spending $10,000 on a new air conditioning. In each case, money would leave the coffers. The company that survives will calculate how soon improved efficiency could pay for the computers and the air conditioning, and will proceed to buy both.

How KDG Can Help

Do you struggle to keep your family business afloat? Your solution may well lie in hiring an expert. KDG specializes in developing technological solutions for small and medium size businesses of all types. Our team of professional consultants can analyze your needs and propose solutions that will underpin and empower your business well into the next generation.

You family and your business deserves the best you can give them. Why not contact us, today, and see how we can help?