John L Ward is the Co-Director of the Center for Family Enterprises at Kellogg Graduate School of Management (USA) and the Wild Group Professor of Family Business at IMD (Switzerland). He serves on the boards of four family companies in Europe and the USA.
Imbedded values tend to lead the strategy selection process of family businesses. John Ward explains that if the family's core beliefs are not compatible with the chosen strategy, the chances of success are much lower
After 20 years of studying family firms, I have come to believe that family values and family vision drive business strategy. Two important observations have lead me to this conclusion: (1) strategy formulation is a very subjective process reflecting the desires and prejudices/biases of the CEO (or controlling ownership team) and (2) no one particular strategy is uniquely suitable for a given company at a given point in time.
The conclusion I draw from these two observations is that embedded values tend to lead the strategy selection process of family businesses. Rational analysis – examination of strengths, weaknesses, opportunities and threats – is a valuable planning tool, but it does not provide a complete answer in the choice of strategy. Ultimately, the best strategy is the one consistent with the owning family's collective values and vision.
This is a valuable insight for one, very clear, reason. No pre-planned strategy is foolproof. Unexpected issues and changes will inevitably shake any chosen strategy's implementation. The key to success is the owning family's devotion to the business, its resilience in coping with disappointment, and the intensity of its long-term commitment to the business. If these are strengths, strategic adaptation will take place. New competitive solutions will be found and embraced. Fundamentally, the question is whether the business's leadership loves its strategy more or the business more? The former risks intransigence and "good money after bad" bets. The latter motivates keen sensitivity to apparent threats and extra energy to overcome obstacles.
The essence of family business strategy is matching the values of the owning family with the opportunities of the marketplace. But to better understand how families make fundamental strategic choices, we need to understand what values – what core beliefs – drive the family's business thinking. However, before studying these factors and the strategic results, let's consider two examples.
A third generation owner-leader of a large trading company, at a moment of keen frustration in the strategic planning process, said: "I couldn't figure out why everyone was always in disagreement. We all liked and respected each other. Then I realised how we all inherited different versions of our founder's vision.
"For example, I'm convinced the founder loved the business so much that he would never, ever compromise the business's welfare with family considerations. In fact, we bought out his brother-in-law many years ago, when he thought the brother-in-law was no longer devoted to his job – with significant family friction ensuing. My cousin, on the other hand, argues that it was grandfather's dream to promote opportunities for his sons and for his sons' sons to work in the business and to seek their own destinies through independent, entrepreneurial opportunities the business would provide."
In another example, a retail company moving from the first to second generation, the founder explains his strategic vision as a "hub with spokes". He says: "Each family member can run their own region of stores. Everything can be coordinated through a central office run by a non-family executive. That way none of the kids will have to work for each other. That's one nice thing about retail – there's plenty of room for growth without stumbling over each other."
In all family businesses, an overall "vision" for the family and the business profoundly shapes strategic thinking. In the first example, although in dispute, the founder's attitude toward his family working in the business was at the base of the problems, as were his ideals for family entrepreneurship. In the second example, the founder appeared worried that the business might cause family conflict. His solution was a non-family executive and separate territories for each offspring.
Three core beliefs seem to shape predominantly the family's influence on strategy. The first, and perhaps most powerful, is the belief about the purpose of the family and the purpose of the business. Does the family believe that the business is a sacred institution, to be protected at all costs from any potential meddling by the business-owning family?
If so, the family has a "Business First" belief. There is much evidence of this type in businesses where the founder set up a trust or foundation with independent trustees to control the business explicitly to keep the family out.
On the other hand, some families believe that preserving and enjoying the family is paramount and that owning a business provides resources and latitude to benefit the family. An extreme form of this belief is when the business freely funds family needs and family activities.
Early signs of this relative emphasis may be seen by how the founder spends his or her time – the family versus the business – and whether the business's early culture is paternalistic or professional. As we will discuss later, this core belief alone may well describe most of the first generation's business decision-making.
The second core belief relates to whether the family feels that owning the business is a source of cohesion or conflict. Does the business provide "glue" for the family or is it more likely to be a "threat" to family cohesion? This belief is often translated into one of two outlooks: "If it weren't for the business, we'd probably all drift apart" or "Family businesses usually tear families apart." Usually, it is easy to detect these tendencies by prompting two conversations. Given examples of family businesses, which are discussed more – disasters (eg, Gucci) or success stories (eg, Wal-Mart)? Also, ask about the family's rules for working in the business – are they relaxed or rigid? Often this core belief is shaped by the family's experience in earlier generations.
Whether the business is a threat or glue for the family typically begins to influence family business strategy in the second and later generations. At this point, the dominant power of the founder, and their conception of the business, is replaced more and more by other cultural influences.
Finally, the third core belief regards the nature of leadership. Does the family believe that a single "boss" or controlling decision-maker is the best way for any organisation (business or family) to work? Or does the family feel that teams are more effective and a better social order? If the former, then there is a deep assumption that a single leader must be selected. If the latter, then a group (ie, siblings or a family council) can be equally empowered to sort things out.
Evidence regarding this core belief can be found in how the family includes or excludes in-laws or females in privileges and decision-making.The family's comfort level with a strong, independent board is also a key indicator. This core belief necessarily comes into play in the second generation or whenever the family involved in the business is more than one person.
Ownership and leadership vision
While these core beliefs ultimately shape strategy, they do not do so directly. Instead, attitudes about these core beliefs forge the family's vision for business ownership and business leadership. That vision is what more directly drives business strategy.
If we accept that family business strategy is a product of the owning family's values, then we are accepting a position on an age-old, fundamental, strategic planning debate. Does strategy determine structure or does structure determine strategy?
Those who argue the former assert that once a business decides where it wants to go, then it designs its structures, systems and leadership selection to achieve that goal. Those who argue the latter offer that a company's organisation and current leadership see and prefer certain strategic options that fit their world view. Who we are, in a sense, determines where we imagine going.
While both arguments have validity and the strategy and structure argument is really circular, I believe – especially for family firms – that structure (existing systems and leadership preferences) leads strategy.
Over time, an owning family's core beliefs become imbedded in particular structural arrangements. These structural "givens" reveal what I call the Family's Ownership and Leadership Vision. This vision then shapes what strategies are seen and preferred. For most business families, I find these connections to be unconscious and implicit.
I believe that the thinking of decision-makers flows naturally from beliefs to concepts to applications. Making these connections in a more explicit manner can enhance and improve family dialogue and decision-making.
The relevance of different types of ownership-leadership vision depends on the stage of ownership evolution of the family. Common family business theory presents three stages of ownership evolution:
1. Owner-Managed (one person owns and leads the business);
2. Sibling Partnership (several family members, typically brothers and sisters, co-own the business);
3. Cousin Collaboration (many family members participate in a fragmented ownership group).
Each ownership-leadership vision leads to a likely strategic profile with four elements: Scope of Strategy, Sources of Capital, Risk Level and Leadership Decision. Each element would be assessed according to following criteria:
- Scope: focused or diversified;
- Capital: closed (family only) or open (includes external sources);
- Risk: high or low;
- Leadership: family or non-family.
A strategic profile for each type of ownership-leadership vision exists that brings together the above elements. Remember that each ownership-leadership vision was formed initially by the family's core beliefs.
The owning family's values and vision drive business strategy. To consider how this works in your family business, discuss your family's core beliefs and compare them to the ownership-leadership visions proposed. Do they match? Then, consider your business's strategy and see if it fits the proposed profile.
Furthermore, during your family business's strategic planning process, reflect on the core beliefs of your family. If they do not lead you to the strategy you or your management team would like to pursue, explore the historical foundations of those beliefs. Perhaps, on conscious re-examination, those beliefs are no longer relevant. If that is the case, you can focus first on revising your firm's culture before reviewing an inconsistent strategy.
If the family's core beliefs are not compatible with the chosen strategy, the chances of achieving successful strategic implementation and harmonious family ownership are much lower. If your core beliefs and strategy are aligned and compatible, ownership and leadership commitments will overcome any likely strategic change or adversity.