Understanding the family business life cycle

Dr Eric Clinton, Director of the DCU Centre for Family Business discusses the factors that affect the long-term sustainability of family businesses through the generations.

In long-lived family businesses, only one certainty exists: the minefield that is intergenerational succession cannot be side stepped. For the fortunate minority that overcome the dangers, the dubious reward is the prospect of negotiating it all over again once the generational cycle comes full circle.

THE SECRETS OF SURVIVAL

Research from Professor Ward of the Kellogg School of Management estimated that 30% of family businesses will survive to the second generation; only 12% will survive to the third. Optimising the likelihood of business survival requires family businesses to lay forth a workable plan in securing next-generation involvement.

The normative family business life cycle encompasses four distinct phases, according to Professors Moores and Barrett, who developed the 4Ls Framework and identified these four phases as: Learning Business (L1), Learning Our Family Business (L2), Learning to Lead Our Business (L3) and Learning to Let Go Our Business (L4).

The first two phases, known as the apprenticeship stage, involve individuals working ‘in the business’. During the final two phases or stewardship stage, individuals work ‘on the business’. Each phase has a set of priorities, paradoxes and pathways.

In ‘Learning Business’, the business aspirant discovers both practical and theoretical skills required for leadership but where best to do so is a topic of universal debate. In the first phase of the  cycle, learning sourced outside the family business can prove advantageous. The skills and knowledge acquired outside could later be transposed to the family business. The caveat, of course, is that once outside, the individual may not desire a return to the family firm.

PROTECTING CORE VALUES

While concentration is focused on preparing the successor for eventual leadership, it must be noted that not everyone will be ‘the leader’. During the phase, ‘Learning Our Business’, (L2) preparing the successor may run concurrently with planning the incorporation of other family members in the business, possibly by appointment to leadership roles in a nonoperational capacity.

Continuity of these core business values is essential for upholding a long standing, business image, which both external and internal stakeholders will recognise.

ADAPTING TO CHANGE

However, business leaders must adapt to the continuously changing market, especially when products or industries become obsolete. The next generation must consider how they will ‘continue differently’ in the business.

Acquiring business knowledge and knowing how best to implement it are two different things. However, the gap between the two is bridged by what is called ‘a special perspicacity’; which is the insight upon which the third phase ‘Learning to Lead Our Business’ (L3) is based. Leading any company is a difficult undertaking, but due to the increasingly expansive family system, leading a company with family involvement is exponentially more challenging.

Transitioning to the final phase, ‘Learning to Let Go Our Business’ requires a degree of foresight and preparation. Adequate planning is a pre-requisite of a smooth transition, as is the willingness of the incumbents to lead their own departure, rather than simply to acquiesce to it. There are three main guidelines to follow when stepping out of a leadership role:

• develop a defined timeline for retirement;
• create management development systems; and, most importantly,
• stick to the plan.

Family businesses that embrace the learning curve set out in Moores and Barrett’s 4Ls model position themselves as ‘families in business’ or ‘business families’, according to Professor Justin Craig  of the Kellogg School of Management in Chicago. They do this, he says, “by signalling to the next generation that, while we, the incumbents, have concentrated on a particular business which has served the family well, the leaders appreciate that this industry or this particular business may not be as attractive or have the same meaning to following generations.”

THE DCU CENTRE FOR FAMILY BUSINESS

Through leading research and engagement, the DCU Centrefor Family Business facilitates the advancement of family businesses in Ireland. From its workshops and round table discussions, it supports family businesses by translating knowledge into practice.  Please email familybusiness@dcu.ie or go to: dcu.ie/centreforfamilybusiness for more information.

This Business Support article featured in the March/April 2016 edition of The Hardware Journal.