Strategies for Sustaining Family Businesses Across Generations
Family businesses constitute the majority of companies worldwide, contributing 70% of global GDP and providing 60% of global employment. They are the primary drivers of business and global growth. Therefore, the sustainability of family businesses is crucial in the long term. However, achieving success across multiple generations is not easy. So, how can family business owners tackle the challenges of sustainability?
Waleed Alkalash, a certified family business advisor, addresses these questions in detail in the following article:
The Importance of Strategic Planning in Family Business Management
In Saudi Arabia and the UAE, family businesses account for 90% of all companies, and their success directly impacts the economy. This is why strategic planning for sustainability serves as the compass guiding family business management through the rapidly changing and dynamic market conditions.
The ability to adapt to changes is essential for the sustainability and prosperity of family businesses. As leadership transitions from one generation to the next, it is crucial to enhance the ability to adapt to changes, embrace new ideas, business models, and market strategies to ensure the business remains competitive.
Through strategic planning, family businesses can mitigate risks, seize new opportunities, and ensure a smooth leadership transition across generations.
How to Ensure a Smooth Transition of Family Businesses Between Generations
Several factors influence the creation of a successful sustainability strategy for family businesses. While each family develops its own framework, there are broad guidelines that can be summarized in the following points:
1. Building a Governance Structure in Family Business Management
In public companies, owners are often investors with limited influence, leaving the management of the business to the board of directors.
Conversely, family businesses possess unique strengths in governance, including delegation and empowerment capabilities, the ability to produce inspiring leaders, and providing opportunities for career advancement and recognition of good work, according to a study by McKinsey.
In an era characterized by intelligence and speed, the main challenge for many family businesses is finding the right path to transition from centralized, informal decision-making to empowering the senior leadership team.
Balancing family relationships with business priorities is a significant challenge in family business management. To overcome this, companies need to establish a family constitution as a guiding document that defines the company’s goals, values, and decision-making mechanisms.
2. Defining Entrepreneurial Goals in Family Business Management
Business owners have the right to set the purpose of their company, and with this right comes the ability to define success. For publicly held companies, the goal is often to maximize shareholder returns.
However, the goals of family businesses extend beyond these terms, offering more flexibility and freedom to set long-term entrepreneurial goals, allowing for greater innovation.
Effectively exercising this right can be an incredible advantage in ensuring business longevity, as it enables a long-term, generational approach that challenges the achievements of public companies.
However, not all families are clear about their goals and values, and this lack of clarity can lead to conflicts over priorities, missed opportunities, or the loss of talented employees, all of which negatively impact the company’s growth and its transition to new generations.
To avoid this outcome, successful family businesses need a specialized strategy that defines objectives divided into three main categories: financial growth, liquidity, and maintaining decision-making authority within fixed boundaries through practices such as avoiding external debt.
3. Effective Communication Within the Family Business
Business owners have the right to know a great deal about their businesses, including financial data, regulatory records, and ownership documents. They are also not obligated to share this information with anyone except the government. This means that family business management controls communication, and no information can be shared without their permission.
The way business owners exercise this right greatly affects the longevity of the company because effective communication is essential for building trust-based relationships, one of the most valuable assets of family businesses, both financially and socially.
4. Preparing the Next Generation to Lead and Manage Family Businesses
A McKinsey survey found that next-generation family members are ready to take on more responsibility in managing family businesses, but they lack the confidence to do so.
While two-thirds of this generation wish to be in positions of responsibility, only 30% feel confident in making decisions related to family businesses. Furthermore, only 30% of them feel they truly own these businesses, compared to family members actively working in the company.
Engaging the next generation in the business from an early stage is crucial as it nurtures entrepreneurial spirit among younger family members by providing the experience and understanding necessary for the business world.
The next generation can gain this experience through internships, mentorship programs, or involving them in decision-making processes.
The benefits of involving the next generation extend beyond preparing them for leadership roles; it also instills fresh and innovative perspectives into family businesses, which are vital for sustainability in competitive and ever-changing markets.
A successful sustainability strategy in family businesses is a delicate balance between the past, present, and future. However, delaying the moment of effective communication between generations hinders growth and exposes family businesses to challenges and risks.
Waleed Alkalash, a certified family business advisor, offers specialized consulting services tailored to your needs and goals. Don’t delay strategic planning for your business’s sustainability to ensure a successful transition and effective communication between generations. Contact today to book your consulting services.