Opinion

What makes family businesses tick

Vikram Bhalla | Updated on March 12, 2018

We can see the future: Our expertise is needed in emerging markets

Families take a long-term view of their enterprises. They have expertise in their DNA. Why should they withdraw?

Family businesses are not just your small mom-and-pop stores or small firms. They represent a very large proportion of the largest companies in the world. In fact, one in three of the large companies in the US and Europe is a family business. In the emerging markets, the share of family-owned businesses is even higher, up to 50-80 per cent of the largest companies.

There is a lot of research and wisdom on family businesses. Typically this research talks about two things. First, this research says that family businesses tend to focus more on resilience rather than breakout growth. Data shows that they grow slower than other businesses, have more stable profits, take less debt, do smaller mergers and acquisitions, and take less risk — all the signs of being more focused on stability and resilience. Second, as the business and family grows, families evolve to stop running the business themselves. They move from being owner-managers, to owner-investors to just investors, and bring in non-family leaders to take the companies forward.

Both these findings seem logical and what you might expect. And they have been influencing the thinking of several family businesses across the world, including those from the emerging markets.

Developing differently

What has troubled me is that a lot of this research is based on data and extrapolations from the developed world. In many parts of business, we have learnt that the lessons from the developed world do not necessarily translate to the emerging markets — is that also true here?

So I studied family businesses in emerging markets. I looked at more than 1,500 such companies across India, SEA, Brazil and Eastern Europe. I analysed their performance and their evolution, contrasting the findings with the established wisdom on family businesses from the developed world.

What we found was fascinating — family businesses from emerging markets perform and evolve exactly the opposite of what family businesses in developed markets do on every aspect of performance and evolution.

For example, family businesses from emerging markets are the fastest growing breed of companies in the world! They outgrow any other form of corporate enterprise, including non-family businesses in their markets, in good times and in bad times. They even sacrifice profitability for growth. They take on as much debt and do significantly larger mergers and acquisitions than non-family businesses.

In terms of the role of family in the family business in the emerging markets, more than 90 per cent of family businesses have families playing an active role in management as owner-managers. And when we studied the evolution of this over 200 years, we found that the role of families reduced in developed markets over time, but in emerging markets the role of families often even increased over time.

Exactly the opposite of what we saw in the developed world and what you would expect from conventional wisdom! Therefore, family businesses from the emerging markets should not only be looking at developed world benchmarks and data, but they need to chart their own, distinct course.

Things to think about

They need to think differently about, amongst others, three main things.

1. Stay, don’t leave: It is not essential for a family to step back from a family business in an emerging market. I asked the families, “What do you bring to the business that is distinctive and relevant?” Some of them, not all, bring something that is very valuable.

One of the families said: “We bring credibility and trust — banks, governments, partners place greater faith in companies backed by people they trust, and this is even more important in emerging markets. We also know this business really well, having done it for generations. It’s in our DNA. And we lend direction, speedy decision-making and long-term orientation — not to get trapped in pleasing the equity analysts every quarter, but run the business for the long term.” For such families, it is not essential for the family to step back into being pure investors.

2. Define, don’t copy: Given how fast these companies are growing, at some stage it becomes tough for a superman or superwoman entrepreneur to manage the company purely on will power, charisma and hard work. Unfortunately, quite often though, family businesses then put in place all kinds of systems, processes, structures and key performance indicators inspired by some of the large developed world companies, and end up in a mess! They get neither the entrepreneurship that made them special nor the efficiencies they wanted.

What is needed is to put in place their own “ways of working” that combine the discipline of processes, where needed, and the speed of entrepreneurship, where needed. For example, a family in the shipping industry really knows how and when to buy ships. In such companies the family needs to remain involved in these key decisions to be entrepreneurial and distinctive. So in some areas you retain the entrepreneurship while bringing the minimum critical set of processes in other areas.

3. Stewardship, not greed: Family businesses need a special quality that I like to call stewardship. This is the quality of patience, equanimity, generosity and purpose — putting a larger good before the pursuit of wealth. Family disputes are the single biggest destroyer of value in family business. Many families invest a lot of time in creating family contracts to manage for family risks. These contracts and constitutions are certainly important and needed. But in my experience, the only thing that helps with such risks of family disputes is stewardship and a bedrock of values that say that the family is a trustee of the future.

The future belongs to these family businesses from emerging markets. They are the real growth champions of the future. They are winning across industries and becoming market leaders. I believe they will change the world of business forever, but only if they recognise their uniqueness and chart their own course.

The writer is a senior partner and director (leadership and talent enablement), Boston Consulting Group

Published on December 23, 2015

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