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Published 07 December 2012 05:43, Updated 10 December 2012 15:30
Family businesses tend to invest only in very strong projects so they miss some opportunities during periods of expansion, but in times of crisis their exposure will be more limited. Photo: AP
To many, the phrase “family business” connotes a small or midsized company with a local focus and a familiar set of problems, such as squabbles over succession. While plenty of businesses fit that description, it doesn’t reflect the powerful role that family-controlled enterprises play in the world economy. Not only do they include sprawling corporations such as Wal-Mart, Samsung, Tata Group and Porsche, but they account for more than 30 per cent of all companies with sales in excess of $US1 billion, according to the Boston Consulting Group’s analysis.
Conventional wisdom holds that the unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. But beyond that, little is known about exactly what makes family businesses different. Some studies suggest that, on average, they outperform other businesses over the long term – but other studies prove the opposite.
To settle that question, we and Sophie Mignon, an associate researcher at the Centre for Management and Economic Research at Ecole Polytechnique, studied 149 publicly traded, family-controlled businesses with revenues of more than $US1 billion. Our results show that during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure. But when the economy slumps, family firms far outshine their peers.
The simple conclusion we reached is that family businesses focus on resilience more than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times. A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms, but the familial obligation he feels will lead to very different strategic choices. Executives of family businesses often invest with a 10- or 20-year horizon, concentrating on what they can do now to benefit the next generation. They also tend to manage their downside more than their upside, in contrast with most CEOs, who try to make their mark through outperformance.
At a time when executives of every company are encouraged to manage for the long term, we believe that well-run family businesses can serve as role models. So how do family-run firms manage for resiliency? We’ve identified seven differences in their approach:
Examine these seven principles, and it becomes clear how coherent and synergistic they are: Adhering to one of them often makes it easier to follow the next. Frugality and low debt help reduce the need for layoffs, thus improving retention. International expansion provides a natural diversification of risks. Fewer acquisitions mean less debt. Money saved through frugality is invested wisely if the company keeps a high bar on capital expenditures. Instead of working in isolation, these principles reinforce one another nicely.
Though executives at family-controlled firms realise they are missing opportunities by being overly prudent, they hope to generate superior returns over time as business cycles turn from good to bad.
It’s evident that those cycles are speeding up. If that trend continues, the resilience-focused strategy of family-owned companies may become more attractive to all companies. In a global economy that seems to shift from crisis to crisis with alarming frequency, accepting a lower return in good times to ensure survival in bad times may be a trade-off that managers are thrilled to make.
Nicolas Kachaner is a senior partner and managing director in the Paris office of the Boston Consulting Group. George Stalk is a senior adviser and BCG Fellow at the Boston Consulting Group. Alain Bloch is a professor at CNAM and HEC Paris, the academic director of HEC Entrepreneurs, and a co-founder of HEC Paris Family Business.
Harvard Business Review