- change ups
Strategic plan Key pillar for successful family firms
In order to succeed in today’s global economy, the family firm needs to plan for change. This was what presenter Nate Young, president of NewNorth Center for Design in Business, told the audience at a Family Business Alliance event on “Innovation in the Family Owned Business.”
National and local studies show that the vast majority of our local economy is comprised of family owned businesses, and the majority of those businesses will not survive into the second generation. In fact, only 12 percent of family businesses survive into the third generation. Those rare firms should be celebrated and honored. They are the innovative companies where the family has played a significant role in the community by employing the local work force, hiring local contractors and giving philanthropically to local not-for-profit organizations.
There are four “best practices” that have been discovered by experts who have studied hundreds of multi-generational family businesses. Successful multi-generational family businesses tend to have:
- A strategic planning process.
- Non-family board members on the board of directors.
- Family meetings.
- A plan for succession.
This column will highlight a few reasons strategic planning for family businesses is different from other types of businesses.
According to John L. Ward, co-author of the “Family Business Sourcebook” and author of the section “The Special Role of Strategic Planning for Family Businesses,” strategic planning for family firms is different because the family firm must incorporate family issues into the plan.
In order to be successful, strategic planning needs commitment from the family and other key individuals; resources such as time and money; a skilled planner who understands family business dynamics; and a great strategic team with knowledge of the internal business and outside business environment.
Ward suggests that for family firms, strategic planning is a six-step process:
**Family commitment to the future of business.
**Assessment of the family business’s health.
**Identification of business alternatives.
**Consideration of family and personal goals.
**Selection of business strategy.
**Assessment of family’s interests and capabilities.
The family needs to establish the level of commitment to the future of the family firm. Is the family interested in the long-term future of the firm? Are they committed to taking the time and resources necessary to plan for that future? Will the family members take the time needed to build the business? Does the next generation have the qualifications needed to be a future leader? Will the generation leading the company be able to hand over the reins when the time arrives?
These questions should be asked and discussed in a safe environment before the planning can begin.
Creating buy-in within the family and key employees will insure a smooth and successful strategic planning process.
Top managers should be involved in the strategic planning process. In fact, Young suggests that everyone in the company should be involved in some capacity when planning for change. He cited an example of an extremely knowledgeable line manager who knows his job well and has ideas on how to make the process better.
Hiring a skilled planner who has worked with family businesses can help move the process forward. The planner can interview key individuals, identify the business’s needs and who from the family is interested in the business, what skill sets are needed, etc.
The plan should focus on the next two to three years, with some room to expand the timeline further. There are many strategic planning templates out there, and the planner will be aware of all the components necessary for a good plan.
After the family’s commitment has been secured, the remaining foundation for this planning process is comprised of the financial and market analysis of the business. The family needs to discuss and decide how much the family is reinvesting back into the company, and whether or not the family is taking too much out of the business.
According to Ward, if the family is considering a long-term future for the family firm, then family salary and perks should be no more than 33 to 50 percent of the operating income for mid-sized companies with more than 20 employees. Anything greater could have a negative effect on the company down the road.
Understanding the family firm’s identity and niche in this ever-changing environment is critical to the strategic planning process. What are the company’s competitive strengths? Strengths could include being nimble and focused on understanding customers’ needs, and being able to deliver on time and as promised. Longstanding relationships with customers is another differentiating characteristic to be identified in the strategic plan. In addition, the company’s values as a family firm are an important strength to highlight and share with owners and employees because these values shape the legacy, continuity and success of a family business.
Why is it hard for family owned businesses to plan for strategic change? A few inhibitors of change according to John Ward and Craig Aronoff in their book, “Preparing your Family Business for Strategic Change” include: deeply entrenched values, long tenures by each generation of leaders, long-term loyalty to managers and advisors, insulation from changing conditions in the marketplace, and tendency to be risk and debt-adverse. Sound familiar? Some of these things are good things, but Ward and Aronoff still say that, nonetheless, they inhibit change.
Has the lack of strategic planning ever hurt your business? Most business owners and some research studies would say yes. Then why not plan? It has been said that in today’s fast-paced environment, each generation is going to have to come up with two to three new strategies for their business in order to stay competitive. Is your company ready for this challenge?
Ellie Frey is the director of the Family Business Alliance. For more information on the resources cited in this column, please e-mail firstname.lastname@example.org. To find more resources about family business, please visit the website at www.FBAgr.org.