Why Do Family Businesses Self-destruct?

Long before the industrial revolution and before we had multinational corporations, there were family businesses. In fact, long before the empire of Rome, there was family business. Family businesses have always been the backbone of sound economic structure and are the biggest contributor to financial markets around the world.

To give it some context, family businesses account for 70 to 90 percent of global gross domestic product (GDP). In the United State, the world’s biggest economy, family controlled businesses account for 57 percent of the GDP, 63 percent of the workforce and 35 percent of the Fortune 500.

Unfortunately, the outlook for any given family business is not as encouraging as these statistics. As the old saying goes ‘the first generation starts the business, the second generation grows the business, the third generation squanders the business’. This piece of wisdom actually comes from Imperial China and is based on centuries of observation. Today it is no different.

A dismal 20 percent of family businesses make it to the second generation and only 10 percent make it to the third generation.

When you take a step back and think, the reality is disturbing. Essentially, we have a global economy completely dependent on a business sector that only has a 10% chance of still existing by the third generation.

An alternative perspective is that the robust global start-up scene has a huge responsibility if it is to replace the demise of traditional enterprise.

Before proceeding, let’s be clear. We cannot blame any generation for the demise of family businesses. As we know the problem has existed for hundreds if not thousands of years. Traditionally the first generation built the businesses from the ground up, handed it to the second generation to take from good to great and then watched in horror as generation number three began a crazy course of self-destruction.

Has ‘Generation 3’ ever intended to do irreparable damage? Definitely not. The world they knew, and we know to is evolving exponentially. We need to accept that future generations are not going to do things the way that we have always done them. If we setup oncoming generations to do things how we’ve always done them we are setting them up to fail.

That said it is irresponsible and dangerous to assume that has proceeded to be antiquated and ineffective. There needs to be inherent resect for what has worked traditionally coupled with a fresh approached to new challenges. For family businesses to thrive it takes cooperation, alignment and focus. Unfortunately, these traits that you think would normally be front of mind for families often are missing from business strategy.

So what can be done? The good news is that history doesn’t have to repeat itself and with careful consideration given there is no reason why a business can’t be a legacy to serve many generations to come.

It’s about people

Any business needs clearly defined roles and responsibilities, a family business is not different. There is a tendency in family business for job roles to vague and flexible to the point of stupidity.

The first things required is a proper management structure and clearly defined job roles. This should be matched with qualifications and ability not some obscure family agreement. When it come to people, keep the ‘family’ factor out of your family business.

You need to diversify

Most business started as the result of a driven individual with a one great product or service to offer. Whilst that carved out a niche you need to think about ways to diversify your product portfolio. Leaving a business to oncoming generations dependant on any given product or service is dangerous.

For example, recently hundreds of family run SMS marketing businesses in India went out of business when TRAI (Telecom Regulatory Authority of India) restricted the bulk SMS limit. To be truly future proof your business, you must create a diversified product portfolio.

Rethink previous strategies

You would have heard the expression “What got you here, won’t take you there”. This simply means that the strategies that you used to build the business to where it is most likely won’t work moving forward. Nothing could be truer when a business is transitioning between generations.

For example, a lot of businesses traditionally depended on print advertisements to acquire customers. With the rise of social media and new avenues such as SEO, traditional marketing has changed beyond recognition. Keeping alive means staying educated and to how you need to be speaking to the marketplace.

Listen to customers

As a family business grows everyone is kept busy with product development and sales targets that they often completely forget their main stake holder – the Customer. This can be particularly detrimental in a growing business as often persons in managerial roles or ‘family members’ are no longer customer facing.

Many retail business owners never anticipated the onslaught of eCommerce and consequently thousands went out of business. Perhaps if changing customer behaviour had been observed and monitored closely then risks could have been mitigated and the business could have shifted the strategic direction relatively simply.

…but don’t listen all the time.

Motor vehicle mogul Henry Ford famously once said ‘If I had asked people what they wanted, they would have said faster horses’. Sometimes you need to tell you customer what they need, not just listen to what they want.

One great trait of family business is they tend to be visionary and have a rich heritage of bringing unique and compelling products and services to market. It’s important that a growing business doesn’t lose its ability to reinvent, educate and inform. If you stay too focused on core products, you could be missing a lot of peripheral opportunities that you and your customers may not even know exist.

Monitor your industry abroad

One of the easiest ways to stay ahead of the game is monitor what your industry is doing the world over. With the information on hand thanks to technology, today’s generation can compare, monitor and build a global network of resource. This allows your business to establish best practice and procedures with the indirect input and experience of industry contemporaries.

An example of monitoring industry on a global scale was when home improvement platform Houzz launched globally. Some architects, decorators and builders felt the sting of a new competitive marketplace. However, some that were aware of the developments adopted the platform early and utilised the opportunity to grow and solidify their brand.

Watch for influencing factors

Technology is nothing new and if you really want to future proof your business, you need keep an eye on anything that has the potential to disrupt your industry.

We all know how smartphones killed the camera industry. Camera and film maker – Kodak was once a billion-dollar company. It failed to see the future and this 130yr old company had to file for bankruptcy in 2012. Apart from cameras, smartphones are guilty for killing other successful products like music players, handy cams, portable gaming consoles like PSP, GPS devices, Paper Maps and telephone directories like yellow pages.

In summary you cannot fight disruption, so look for opportunities to disrupt. If a business is operating exactly as it was several generations ago, chances are it’s ripe for disrupting.

Like every generation before us we cannot predict the future, but we can create it! If you currently work in a family business it is time to ask the uncomfortable question – ‘Are we here for the long haul or are we with the other 90%?’.

It is never too soon to start future proofing and mitigating risk. Why not get everyone on the same page and write a new chapter? It could be the best yet.