Inheriting a family business comes with a great level of responsibility. Ideally, these companies will last into future generations, and it’s up to heirs to maintain a trajectory of steady business growth. Maintaining primacy in the marketplace through these transitions isn’t guaranteed, however, and the fast-moving modern business climate has put extra pressure on family firms to adapt and grow.
Family business leadership teams stepping into this challenging arena should make sure they’re fully aware of the best practices that will help them aim for success, along with insights to shape their own succession plans.
How does family business planning differ from general management?
Leading a family enterprise combines all the pressures of conventional corporate management with added complexities, such as the need to develop equitable, effective generational succession plans.
Family firms compete on the same playing field as other global enterprises but with the additional legacy aspects of family ownership. Leaders may feel constrained by what has come before, seeking to maintain traditions and dealing with deeply ingrained power structures.
Observing the complex landscape for today’s family organizations, MIT Sloan Senior Lecturer John A. Davis emphasized the importance of keeping up with fast-changing norms. Davis, a globally recognized expert on family enterprise leadership, warns that many management groups don’t feel prepared to change their processes and meet the new business world on its own terms.
Davis polled leaders about whether they could shift their mindsets. While respondents largely said they realized they would need to evolve rather than merely provide steady stewardship, they were often hesitant about taking the necessary leap in strategic planning.
External change drivers facing family enterprises
Davis highlights four specific forces family organizations will have to contend with to remain competitive. These include:
- The environment: Climate change and general environmental disruptions require action plans.
- Technological advances: Family enterprises with long histories may currently be tethered to legacy systems but should attempt to innovate and disrupt their markets.
- Geopolitics: Following eras of global expansion, a period of conflict and trade restrictions has introduced new pressures and complexities, even while international collaboration remains important.
- Sociopolitical and economic factors: The public image of a business can shift along with the perception of its owners.
Safely navigating these factors is a job for current generations of family business operators, intertwined with the need to plan for the future.
What’s the importance of effective family business planning?
By definition, a family enterprise is a legacy business that comes down through generations. Embedded in this structure is both the strength of an established brand and the complexity of years of systems and structures.
Adaptation and flexibility are the keys to staying viable and competing with newer, fast-moving companies. Davis cautions that, according to conventional wisdom, family enterprises are in danger of falling behind their peers once they reach the third generation.
In Davis’s work, he has found that a variety of factors combine to put family enterprises in this tenuous position. Sometimes, industries change around companies, in other cases those businesses fail to seize opportunities or fall behind in terms of talent and resources. Family members may also become disinterested in the business, enter into conflict with one another, or fail to create solid succession plans.
Family business succession planning in a changing world
Family organizations may find that it’s not just the world around them that is changing. Internal relationships can shift considerably, carried along by major cultural trends. Due to the intertwined nature of family dynamics and business success, leaders need to acknowledge these changes when they happen.
Relevant issues include the general reduction of hierarchy among generations, as well as the tendency of heirs to scatter around the world. With Generation X in power and millennials rising toward positions of authority, succession planning norms and expectations are different than they were when baby boomers gave way to Gen X. There may be more room to radically reshape companies’ missions or draw up a family business succession plan based more on interest and aptitude than birth order.
How do successful family enterprises endure through generations?
Lasting family business success means building value. Companies that have lasted for generations will likely have equity that comes from sources other than their day-to-day operations. They have multiple kinds of holdings, intellectual property, and an established reputation.
Davis, in collaboration with fellow MIT Sloan Senior Lecturer John Jay, lists four areas of business that family firms should maintain to endure over time:
- Portfolio: Enterprises should have a well-balanced portfolio of holdings that evolves and adapts over time to suit new market conditions.
- Management and organization: A capable, well-aligned management team is essential for any company, including family organizations.
- Ownership approach: Current family business owner groups must make sure their own stewardship aligns with the greater good of the company.
- Family harmony: Personal agreement and cooperation on key values and major objectives are essential, along with an effective succession plan.
Building a business strategy that will endure
Once they’re aligned on the big picture, family member teams can engage in strategic planning that will keep their organization strong for generations to come. This is far from a rote or automatic process. Davis recommends useful practices to follow, which include:
- Proactively dealing with industry trends
- Keeping the mission compelling:
- Being self-aware about strengths and weaknesses
- Thinking like owners, not operators
Family business planning deserves specialized education
Due to the unique challenges and opportunities inherent to managing a family firm, leaders need to learn practices that specifically target their most pertinent issues.
The Future Family Enterprise Program encourages family members to enroll as teams. By working and learning together, these relatives and colleagues can discover more about their specific visions for the future of their enterprises. Teams work on the most pressing issues facing their firms and their own family relationships, while building a business strategy to match.
Enroll in the Future Family Enterprise Program to deepen your understanding of the structures driving your firm.
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