Preparing Your Family Business

for Strategie Change

AFAMILY ·

BUSINESS PUBLICATION

Family Business Publications are the combined efforts of the Family Business Consulting Group and Palgrave Macmillan. These books provide useful infor­mation on a broad range of topics that concern the family business enterprise, including succession planning, communication, strategy and growth, fam­i1y leadership, and more. The books are written by experts with combined experiences of over a century in the fjeld of family enterprise and who have consulted with thousands of enterprising families the world over, giving the reader practical, effective, and time-tested insights to everyone involved in a family business.

f: :G, founded in 1994, is the leading business consultancy exclusively devoted to helping family enterprises pros per across generations.

FAMILY BUSINESS LEADERSHIP SERIES

This series of books comprises concise guides and thoughtful compendiums to the most pressing issues that anyone involved in a family firm may face. Each volume covers a different topic area and provides the answers to some of the most common and challenging questions.

Titles include:

Developing Family Business Polieies: Your Guide to the Future Effeetive Leadership in the Family Business Family Business Compensation Family Business Governanee: Maximizing Family and Business Potential Family Business Ownership: How to Be an Effeetive Shareholder Family Business Sueeession: The Final Test of Greatness Family Business Values: How to Assure a Legaey of Continuity and Sueeess The Family Constitution: Agreements to Seeure and Perpetuate Your Family and Your

Business Family Edueation for Business-Owning Families: Strengthening Bonds by Learning

Together Family Meetings: How to Build aStronger Family and a Stronger Business Finaneing Transitions: Managing Capital and Liquidity in the Family Business From Siblings to Cousins: Prospering in the Third Generation and Beyond How Families Work Together How to Choose and Use Advisors: Getting the Best Professional Family Business Adviee Working for a Family Business: A Non-Family Employee's Guide to Sueeess Letting Go: Preparing Yourself to Relinquish Control of the Family Business Make Change Your Family Business Tradition Making Sibling Teams Work: The Next Generation More than Family: Non-Family Exeeutives in the Family Business Nurturing the Talent to Nurture Ihe Legaey: Career Development in the Family Business Preparing Successors for Leadership: Another Kind of Hero Preparing Your Family Business for Strategie Change

All of the books were written by members of the Family Business Consulting Group and are based on both our experiences with thousands of client fami­lies as weil as our empirical research at leading research universities the world over.

Preparing Your Family Business

for Strategie Change

Craig E. Aronoff and John L. Ward

palgrave macmiLlan

* PREPARING YOUR FAMILY BUSINESS FOR STRATEGIC CHANGE Copyright© Family Business Consulting Group, 1997,2011.

All rights reserved.

First published by the Family Business Consulting Group Publications, 1997.

This edition first published in 2011 by PALGRAVE MACMILLAN® in the United States-a division of St. Martin's Press LLC, 17S Fifth Avenue, New York, NY 10010.

Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 7B5998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world.

Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries.

ISBN 978-Q-23Q-111 07-3 ISBN 978-Q-23Q-11619-1 (eBook)

00110.1057/9780230116191

Library of Congress Cataloging-in-Publication Data

Aronoff, Craig E. Preparing your family business for strategic change I by Craig E.

Aronoff and John L. Ward. p. em. -(Family business leadership series)

Includes index.

1. Family-owned business enterprises-Management. 2. Family corporations-Management. I. Ward, John L., 1945- II. Title.

HD62.25.A766 2011 658.4'012-dc22 2010035809

A catalogue record of the book is available from the British Library.

Design by Newgen Imaging Systems (P) Ltd., Chennai, India.

First Palgrave Macmillan edition: January 2011

10 9 8 7 6 5 4 3 2 1

Contents

TAB L E SAN D E X H I BIT S . . . . . . . . . . . .. ix

PR E FA CE. . . . . . . . . . . . . . xiii Shorter Life Expeetaney of Strategies . xiii The Family Faetor . . . . . . . . . xv

Chapter 1: Reaehing Your Family Business's Strategie Potential . . . . . . . . . . . . . . . . . 1

The leaders job is no longer just to create strategy. The leader's job is to ensure that the organization stays fresh strategically. The difference is profound.

Sorting through Mixed Signals . . . . . . . . 2

Understanding the Family Business Strategie Path . 3 At Whieh Phase Is Your Family Business? 6 Getting to the Next Phase 6

Moving Forward. . . . . . . . . .10

Chapter 2: Demystifying Past Sueeess. . 11

Once the business starts taking off. the factors that brought success tend to

become institutionalized into a rigid strategy and structure. That dampens, not enhances, future growth.

vi CONTENTS

Unleashing Strategy and Strueture .

Loosening Rigid Strategies. . .

Making Change Part of Tradition

Moving Forward. . . . . . .

.11

.13

.16

. 19

Chapter 3: Preventing Past Business Strategy from

Limiting Future Sueeess. . . . . . . . . . . . . . . 2.1

Paradox: How you define your business and what brought it sueeess determine

your ability and freshness to see new ways to do business. A narrow definitir of the business and its sueeess factors ean lead to paradigm para lysis.

Just What Business Are You In? . . . .2.2.

Getting Over Resistanee to Planning .

Developing Strategie Skills. . . Making Change Less Threatening

Moving Forward. . . . . . .

.23

.26

. 31

.33

Chapter 4: Responding to Family and Business Needs. . 35

As the business and the family members mature, their needs, expectations and goals may eonfliet. It's imperative for the eurrent leader to sort through and address these needs.

The Power of Family Values . . . . . . . . .. . 36

Reducing Personal Financial and Emotional Inseeurity . 37

Matehing Family Faetors with Business Strategy. . 41

Assessing Risk T oleranee of Family Members . .44

Developing Stewardship . . 45

Moving Forward. . . . . . . . . . . .48

Chapter 5: Strategie Liberation and Renewal . 49

Strategie planning is not neeessarily a simple, objeetive proeess in a family

business. Current and future leaders who understand this spare themselves, their managers and their families eonsiderable frustration.

New Models for Strategie Sueeession. . . . .. .49

Appreeiating Inherent Family Business Advantages. .52.

CONTENTS vii

Understanding Inherent Family Business Disadvantages . . . . . . . . . . . . . .. . 58

T urning Disadvantages into Advantages. . . . .. . 59 What Have You Done for the Family Business Lately? .61 Depersonalizing Disagreements ab out

Succession or Strategy. . . . . 62 Getting Input from the Outside . . 65

Moving Forward. . . . . . . . 66

Conclusions: Getting from Here to There . 69

To navigate your way to where you want to go (Phase 5). you need to know whm you are now.

APPENDIX: FINANCIAL PERFORMANCE

OVER THE FAMILY BUSINESS STRATEGIC

PATH.

INDEX

THE AUTHORS

.73

.77

. 83

Tables and Exhibits

Table 1

Business vs. Family Issues. . . . . . . . . . . . . . . 2

Table 2

Family Business Strategie Challenges and Responses. . . . 7

Table 3

Typieal Attributes of the Family Business Strategie Path . . . . . . . . . .

Table 4

........ 8

Reframing Assumptions ab out Planning. . . . . . . . . 24

Table 5 How to Depersonalize Change . . . . . . . . . . . . 30

Table 6

Inspiring an Effective Mission. . . . . . . . . . . . .40

Table 7

Matching Families to Strategies . . . . . . . . . . . . 41

Table 8

Keys to Strategie Renewal . . . . . . . . . . . . . .51

x TABLES AND EXHIBITS

Table 9

Ask Not Wh at the Family Business Can 00 for You,

but What You Can 00 for the Company . .. ....61

Table 10

Questions to Help Owners Move through Their Family Business Strategie Path. . . . . . . . . . . . . 63

Exhibit 1

The Typieal Family Business Strategie Path. . . . . . . . 3

Exhibit 2

Exereise A: Re-examining Your Company's History and Lore. . . . . . . . . . . . . . . . . . 17

Exhibit 3

Exercise B: Oepersonalizing Your Company's Sueeess Faetors. . . . . . . 18

Exhibit 4

SampIe Strategie Budget. . . . . . . . . . . . . . . 28

Exhibit 5

Strategie Budget Ratio. . . . . . . . . . . . . . . . 29

Exhibit 6

The Family Effeet: Family Ownership as a Competitive Advantage. . ....... 54

Exhibit 7

Liquidity . . . . . . . . . . . . . . . . . . . . .73

Exhibit 8

Return on Investment . . . . . . . . . . . . . . . .74

TABLES AND EXHIBITS xi

Exhibit 9

Sales Growth . . . . . . . . . . . . . . . . . . . 74

Exhibit 10

Strategie Budget . . . . . . . . . . . . . . . . . . 75

Exhibit II Strategie Experiments. . . . . . . . . . . . . . . . 75

Preface

r.e purpose of strategie planning is not just to produee a document eal/ed a "stra­tegie plan." The purpose also is to introduee a process of gathering information,

thinking about it in particular ways, and reaehing conclusions that become the basis for direetion and action. The process is demanding of time, energy. and team­work ... But it does not have to be as painful as many business owners expeet.

The genius of many entrepreneurs is their ability to pull together a successful strategy based mostly on instinct and passion. Many recognize a niehe, single-mindedly go after it, and prosper by their efforts. They may not check out empirical data. They prob­ably haven't written a strategie plan. They certainly don't discuss strategy at directors' meetings (because start ups are unlikely to have an active board). But make no mistake: entrepreneurs have their implicit strategies and they can work very, very weil.

SHORTER LIFE EXPECTANCY OF STRATEGIES

Many family businesses have been able, in fact, to grow substan­tially without going through the time-consuming, sometimes

xiv PREFACE

emotionally threatening, proeess of explieit strategie planning. When the world ehanged slowly, explicit strategie planning was less important. Find a town that laeked a c10thing store and start a c10thing store. Build relationships with eustomers and suppliers . and enjoy reasonable prosperity for a eouple or three genera­tions. A retail c10thing store in a sm all town may have served its market weil for several generations.

Then along comes a mass merehandiser, or perhaps, an interstate highway puts the store within 45 minutes of a regional shopping center. Transportation, eommunications, and teehnology present many opportunities for new businesses and new ways for existing businesses to operate more sueeessfully. But these advanees also made it tougher to eompete with eompanies that ean invest more financial and managerial resourees in keeping up with change. Few industries have been untouehed. Retail, wholesale, and other ser­vice businesses, the bastion of family ownership and operation for most of the 20th eentury, have been particularly hard hit.

In the early 1900s, a business eould follow the same strat­egy for perhaps 50 years and still enjoy sueeess. By the 1950s, ehanges in teehnology and tastes shortened the strategie path to more like 20-25 years, whieh was mighty eonvenient in terms of generational sueeession. lust when a strategy was beginning to burn out, the owner might be ready to retire-the perfeet

time for the next generation to step in and breathe new Iife into the eompany with a new strategie direetion. As we look

at the next generation of leaders in the family business, they will be required to develop new strategies as many as three to

five times before passing the baton to yet another generation. The strategie path from innovation through maturity to decline ean be as short as five years. The skills and attitudes required to rethink the business strategieally frequently differ dramatieally

from those of many past leaders.

PREFACE xv

This is not another book about how to do strategie planning. It is a guide to help owners to view their family businesses strategi­eally, whether the eompany is in its first or fourth generation.

Responsible and disciplined strategie integration of business and family goals, strengths and values produees powerful results.

We seek to he1p readers view the business through a variety of lenses, so that family business owners ean participate in the proeess of redefining their business. This is an important step in the proeess of ereating a strategie eulture that ean reeognize and adapt to ehanges that will inevitably affeet the business and the family. Business survival and the family's eommitment may depend on it.

THE FAMILY FACTOR

Strategies for family firms, unlike those of other businesses, ean and should ineorporate family factors. Family goals, needs, relationships, and strueture impact the business and its strate­gie direetion. Family faetors ean energize, foeus, and build the business-or they ean sap a business's strength. Dur experi­ence with hundreds oE Eamily businesses has convineed us that responsible and disciplined strategie integration oE business and Eamily goals, strengths and values preduces powerEul results.

This book will guide family business owners and their sue­eessors through the strategie business and family issues they need to identify and eonfront in the proeess of planning and

xvi PREFACE

implementing any strategy. Foeusing on these issues will help

family businesses maximize their inherent advantages and mini­mize the inherent disadvantages of running a family business.

We hope to help family business owners and sueeessors to think strategicalIy. We wilI help to point out the skilIs needed to ereate a strategie eulture that ean harness the power of the family busi­ness's inherent strategie advantages.