By Professor John A. Davis, Faculty Chair of the Families in Business program. Harvard Business School
The big lesson I want to communicate is that long-term success is created mostly by uncommon habits, things that take real discipline to do on a regular basis and requires sacrificing some things in life to maintain this discipline. After all, if long-term success were easy, more people, families and companies would achieve it. But you, your family and your company can achieve it. And I will tell you how, with one exception.
Luck clearly influences long-term success, and I wish I could tell you how to be lucky. If I could, I would fill stadiums of people wanting to learn this lesson.
People generally highly value success that lasts for a long time—for people, companies, and also other institutions. Success at anything doesn’t need to last for a long time and generally it doesn’t, which may be partly why we value it and are intrigued by it. Businesses tend not to last very long. Most businesses have a particularly short life. In the US, half of all businesses fail within five years. Only 15% live 25 years, about 5% survive for two generations, 3% for three. Families that become successful financially tend to decline—along with their businesses—within three generations. This axiom is enshrined in the so-called Three-Generation Rule: Shirtsleeves to Shirtsleeves as we say, and this trend is supported by my research.
The root cause of all declines is entropy or the wearing out of things. It is easiest to observe in biological systems. Our joints wear out over time. Our minds and other organs seem to have an expiration date. Medical science is busy trying to extend the life of our organs and bodies and they have been pretty successful. Average life expectancy has increased about 14 years in the past generation.
Organizations and social systems are less limited by human frailty because they can renew themselves with new people over time but they also tend to wear out. Fundamentally, biological beings and social organizations decline and eventually disappear when they stop growing and they lose their sense of unity. And it’s difficult for a company, a family, a social organization, even a country to do this—grow and stay united—for very long. I have studied families that have businesses that last for many generations. This is what I observe about their long-term success:
- Family companies that stay around for more than a generation or two have a strong sense of mission or purpose and clear core values. So do the families that own these companies. The purpose and values can change a little over time but they are relative constants that invigorate the families and their companies.
- They build relationships that last a long time with employees, customers, suppliers, their communities.
- Long-term success requires a lot of steady reinvestment. Families renew their companies by reinvesting aggressively into their core business to rejuvenate it and also smartly diversifying into new activities, growing their assets over time. This requires smart risk taking, industry understanding, and planning. And it also takes capital and a discipline of saving. These companies and families have strong balance sheets.
- These families grow the talent of their family members in each generation, which requires not only challenging the next generation but also empowering them. They also grow talent in their business. Empowering the next generation requires that the senior generation first share and then transfer power to the younger generation at the right time.
- Finally, these families invest time and attention in building unity in the family and business. This is accomplished with respected leadership and governance and results in a feeling of purpose and fairness in the family and company. This allows the family, itself, to be decisive and take bold actions when necessary.
- These are the practices that reverse entropy or wearing out in family businesses. There are business families that are taking the uncommon, more difficult path we describe here. They’ll be around in the next generation. Will your company? Will your family?
These sound like common sense practices, don’t they? In the family business program I lead at Harvard, I once had a 17 year-old participant who attended with his family from Brazil. At the end of this six-day, very intense program, with many lively discussions about family business issues, participants tell us what they learned. This 17 year-old young man, with a half or third of the life experience of most people in the classroom, said: this all sounds like common sense! We all laughed because he was right. The lessons of success for family business are mostly common sense. But the difficulty with common sense is that it’s not that common.
The fact that you can understand this simple explanation of success doesn’t mean you could implement it because implementation of these simple concepts is uncommonly challenging. And that’s what separates the families and companies who achieve long-term success and those who don’t. This path is “the road less traveled” because it requires persistence, hard work, planning and sacrifice and means that from time to time, leaders have to make tough decisions that displease some owners, managers or family members.
Having a successful family business, like having a successful life and career, means making choices about your priorities and time that will please some people and disappoint others. You must be willing to make decisions that will keep you, your family, and your enterprise on the right path.
Professor John A. Davis