How strategic management can help family firms succeed

Research shows us that the average tenure for a CEO at a successful family-owned business is roughly 25 years. For large, publicly traded firms, the average tenure is only seven years. One can easily surmise why this discrepancy occurs. Most next-generation family CEOs succeed their parents when the next generation is in their 40s. In publicly traded firms, the next CEO normally is selected from a group of managers much closer in age to the departing leader and with much more general management experience.

The protracted length of the CEO's tenure in family firms drives the need for an effective strategic management system. There are two reasons for this. The first is quite simple. It is natural for anyone in control of any organization for an extended time to become set in his or her ways with respect to what the business does and how it does it. Strategic management will continually challenge the business model and thus protect the firm from problems due to unexpected, and often rapid, changes.

The second reason is also straightforward. If the next generation is expected to take over the firm upon retirement or death of the current owner, they need to understand how the business works and must have an effective management system in place to make key resource allocation decisions. Since this next generation often is young and inexperienced, strategic management is critical to afford them the best chance to continue on successfully.

Strategic management vs. strategic planning

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Virtually every businessperson has heard the admonition that to be successful, a company must have a written strategic plan. But my own experiences, both as vice president and general manager of a technical firm and as an academic researcher, suggest that not all strategic planning activities are beneficial. On the other hand, I believe that a strategic management system can be extremely valuable.

What is the difference between a strategic plan and a strategic management system? A strategic plan is a set of activities that a firm develops to achieve some objective, while a strategic management system continually monitors a firm's resource allocation decisions.

The problem with strategic plans is that once developed, they are almost immediately obsolete. Especially today, changing circumstances render the plan invalid at worst and less than effective at best. Many firms work long and hard to create a plan that sits on a shelf, never to be referred to by management again.

A strategic management system, by contrast, aims to develop a framework for decision making that allows for continual changes and managerial adaptation. This framework influences every opportunity and every resource allocation decision that the firm confronts. In contrast to the static nature of a strategic plan, a strategic management system is dynamic and thus can provide value in an ever-changing environment.

Developing a strategic management system

If you are currently in business and have been successful, you already have a strategy. You just may not have written it down. Therefore, the first step is to formally write down what you want from the business.

In a family company, unlike a public firm, the wishes of the family will determine the goals of the business. Obviously, the majority family shareholders have the right to determine the goals and strategies of the business. But unlike a public firm, a family firm must be sensitive to the effects of these decisions on family relationships. An active family council is critical to the ultimate success of the family business—it connects family shareholders, family employees and family who do not have an ownership stake or work in the firm. This may seem obvious, but unfortunately many firms I have worked with over the years have never discussed or communicated the basic business goals and strategies to their family members or employees.

The second step is to develop the critical assumptions that underlie your business model. Critical assumptions make up your belief system, which determines the actions you take. If these assumptions are not correct, you may be making poor decisions. If you have accurately identified your strategy based on an honest evaluation of your actions, you must deduce what you are assuming to be true if this is what you are doing.

Then, you must examine your assumptions and ask two questions. First, am I sure the assumption is true? In other words, is the assumption actually a fact, or is it a belief? If it is a fact, then move to the next assumption; if it's a belief, then ask the next question: Would I change my behavior if the assumption were not true? If the answer is yes, you have identified a “critical assumption.” Once you have a set of critical assumptions, you have established the issues that must be further verified for continued success.

Here's a simple example. Let's say you are an options trader. If you believe the long-term forecast of the Farmer's Almanac, and it says we will have an unusually cold winter in Florida this year, you may purchase a large options contract on orange juice. By asking the two questions above, you determine that cold weather in Florida is a “critical assumption” for your strategy. Obviously, you will focus hard on checking or challenging that assumption as time goes by, since if that assumption is not true, you may no longer want to hold those options.

Clearly, this is an obvious example; however, all decisions we make to allocate time and resources are based on a set of assumptions, and many times we do not identify them. Most of us are focused on operations. We don't want to be bothered with continually challenging the assumptions upon which our actions are based. This is human nature. But failure to challenge assumptions can result in surprises and poor performance.

Once you have identified the critical assumptions, you should begin to look for evidence that suggests your assumption may not be correct. In one company I am familiar with, the CEO believed that the only way to achieve sales success in his business was by making lots of cold calls. His sales VP did not believe cold calls were worth any time or effort. These two argued vehemently for years about their conflicting approaches to sales, with the sales VP's job obviously on the line. A close examination of how they actually obtained the top 80% of their customers clearly revealed that referrals were critical. Once this information became clear, the firm revamped its marketing and sales strategy—no more direct mail and a whole lot more account management activity. In other words, without looking closely into the underlying beliefs driving its actions, this company would have performed suboptimally at best and would have gone out of business at worst.

Manage strategy and operations

A strategic management system can be critical to your success as a family firm, but it doesn't take a lot of time or resources to develop and use. It simply requires you to decide what you want and how you want to achieve these things. Then you deduce the critical assumptions underlying these choices and continually monitor them for changes that might affect your business. In short, you are managing your strategy as well as your operations. You and your family will be glad you did.

Sidney L. Barton, Ph.D., is executive director of the Goering Center for Family and Private Business at the University of Cincinnati (www.business.uc.edu/goering).

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