Author: Lori Mansfield

To deal with the rising vulnerabilities of this turbulent environment, business families must prepare not only their business, but their family for disruption. The five habits below offer a blueprint for families to intelligently and proactively get ready.

Once exclusive to the military, the acronym VUCA has secured solid foothold in the business world, where companies must navigate increasingly volatile, uncertain, complex, and ambiguous environments. Today, change is rapid, problems are multifaceted, and predictability is by and large an assurance of the past.

For business families, this new landscape presents an existential challenge to traditional ways of doing business—of owning and leading their companies, building consumer loyalty, retaining talent, investing, and planning for the long-term. The VUCA environment is demanding a new kind of ownership and leadership among family enterprises.

To deal with the rising vulnerabilities of this turbulent environment, business families must prepare not only their business, but their family for disruption.

The five key habits below offer a blueprint for families to intelligently and proactively get started.

 

Habit 1: Get altitude and consider the big picture.

Families can no longer focus exclusively on their competency of operational excellence—the incremental tinkering to their established business. They must equally be able to step outside this day-to-day activity, zoom out, and “gain altitude.” From a birds-eye view, families can study how the world and their industry are changing, recognize new opportunities and challenges, and then deploy capital accordingly to maintain the sustainable growth of their assets.

It is only from a high altitude (30,000 feet or 9,000 meters) that families keep abreast of important changes—obvious or subtle—in their sector. What are new threats? Where is relevant technology moving? Where are startups focusing? What is trending among the next generation? How are demographic shifts affecting our market?

Gaining altitude also affords perspective on broader concerns like how the family’s interests and aptitudes are shifting, how environmental degradation may impact the business and family, how political changes and globalization are influencing their markets, among other mega trends. These variables, often in confluence, can compound the change that companies and families experience, generating new instabilities alongside new windows for value creation.

A third-generation CEO of a multi-billion dollar family business in the U.S. notes the importance and difficulty of gaining altitude. “Sometimes it’s hard to get people to think about what’s the next new thing,” she says. “When everybody is running the machine there’s a tendency to look at the short-term and focus on incremental opportunities and not look ahead to the really big opportunities.” She makes it a priority to talk frequently with people who are scanning what’s ahead, and she encourages her team to do the same. “What’s on the horizon? What’s beyond the horizon?” she asks.

One’s board of directors is a vital resource for this kind of big-picture talk, so families must recruit strategic thinkers, family and non-family, to serve on the board. In addition, convening an owner’s council to focus on owner-level decisions is beneficial. Both of these groups, after all, will comprise the most trusted and knowledgeable people when it comes to strategic, owner-level decision-making. In addition to good external advisors, periodic learning trips away from the workplace help to shake off blinders and illuminate what’s happening in business and in the world.

 

Habit 2: Redefine what it means to be stewards.

Being ready for disruption as a family means being prepared, even on short notice, to let go of businesses and people that aren’t working in order to embrace new growth opportunities. It is a readiness, in other words, to split with some tradition.

Families often consider it difficult to divest legacy businesses or let go of certain people because they believe that holding on and being loyal is part of what makes them “stewards.”  For generations, this idea has asked families to nurture and cultivate a family business, take care of it, grow it if you can, and pass it, along with important traditions, to the next generation.

In today’s environment, families must reconsider what it means to be “stewards” of their enterprise. Today’s turbulent environment calls for a reinvention of the idea of stewards as care-takers of a specific business. It is no longer reasonable for families to insist on owning one or another particular business; they can no longer devote their efforts (and their name) to a specific product or service tied to a specific geography. Given the rapidity with which industries transform, businesses turnover, and family members’ interests and skills change, stewardship today implies managing and growing assets and values in broad pursuit of a family mission.

This approach gives successive generations the necessary latitude to define their business and investment activities in new ways, and to craft a new vision for the family enterprise as the environment calls for it. They can rely on a deeper family mission to move misallocated resources, finding economic and social value not according to a particular product or service, but a particular approach and mentality.

Family enterprise should tackle this identity shift as early as possible. Instill in your family a presiding comfort with change—with a willingness to turn away from some traditions or some parts of the family’s legacy. Stewarding a family enterprise today means responding agilely to threats without losing sight of the family’s mission. The most successful enterprising families today embrace this broader notion of “stewardship.”

 

Habit 3: Keep up with new technologies.

Modern technology is driving cycles of disruption more quickly. While the transition from steam power to electric power took a century, the last production era recognized by scientists (automation and computers) lasted only 17 years. Another is now underway, driven by AI, robotics, blockchain, and connected technologies. Experts predict these cycles will only accelerate.

The speed at which technology is changing the status quo is profound. Societies and businesses move almost continuously into new ways of doing things. Families must be keenly aware of when technologies are poised to disrupt their industry—a historical weakness of family enterprises.

Importantly, keeping up with new technology doesn’t mean simply adopting new tools that do old things better; it also means understanding the manifold spheres of innovation that overlap with your core business, including your suppliers and customers. Consider the Schaeffler family of Germany, which manufactures ball bearings. 60% of its products are sold to auto companies for use in combustion engines. By 2018, this sales channel was drying up given the auto industry’s investment in electric engines. Schaeffler is adjusting, belatedly and reactively, to new products, but only after losing substantial value.

Don’t wait until value has been lost before you pay attention to new technologies that will impact your business. Watch startups in your sector and in those of your customers and suppliers. Attend conferences and education programs to learn the latest in technology. Invite technology experts to present at board meetings. Heed the warnings.

 

Habit 4: Learn to experiment.

The biggest threat to incumbents today tends to be nimble startups. This means big firms need to think like small firms. And since a culture of innovation must start at the top with the owners, families need to get comfortable with experimentation.

This is not an easy change. Experimentation is not built into the DNA of most families. Rather, families tend to be risk averse with a low tolerance for failure and a low desire for frank conversation. But an experimentation culture requires a lot of risk-taking, some failure to learn from, and real candor. Even though it is not instinctive to families, the process of experimentation must be learned.

A number of pathways can help families incorporate an experimental culture into their companies. They can, for instance, seek young, strategic acquisitions and invest in startups.  Another pathway is to launch a startup of your own. Cox Enterprises, a fourth generation conglomerate with over $20 billion in revenue, did this in 1997, a year before the company’s centennial. As an experiment, Cox launched its own startup, Autotrader, an online portal for finding new and used cars. This subsidiary now has roughly $1 billion in revenue. In addition, to keep their finger on the pulse in their industries, Cox is a supporter of several business accelerators and venture capital funds.

Not every experiment will succeed, but even in the face of failure, the learning gained from a contained experiment is worthwhile.

 

Habit 5: Partner Across Generations.

Steering the family enterprise toward success should be a generationally inclusive project, not one led by the oldest generation and observed by the younger. Think NASA’s mission control crew, not the few astronauts on-board the shuttle.

The senior generation has accrued deep operational and strategic expertise over time, and will be intimately familiar with the distinct facets, values, and mission of the family enterprise. But this set of knowledge cannot replace insight into probable technological disruptions, novel competitive threats, or changing consumer trends—areas in which the next generation may be better equipped. In short, constructing bulwarks against disruption is too big a task for one generation to manage alone. Families should involve the talents, capabilities, ideas, networks, and capital of every generation.

Such collaboration is also essential for speaking with a unified voice to the board and executive team. No matter which generation is talking, the message should be the same: we, as a family, are ably prepared for disruption.

Are you?

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Having an owner’s mindset in today’s disruptive environment means excelling at making four types of owner-level decisions. All four are central to the long-term success of the family and its enterprise.

To remain competitive in today’s environment—one defined by disruption, borderless competition, rapid economic transitions, and constant technological transformation—families need to reconsider the way they own and lead their companies. Strategies that have remained reliable for centuries may no longer deliver results.

The traditional road to success

Family companies have historically focused on operational excellence. They have emphasized quality and steady improvements; aggressive reinvestment in their business; growing within their industry or in related areas; building loyalty among customers, employees, and suppliers; and choosing the right successor to lead the business. This has served family businesses well: when it comes to profitability, growth, and other performance measures, family companies have an impressive record of outperforming and outlasting their non-family competitors.

Traditionally, as family business have recognized the need for change, they have approached change slowly and circumspectly. They may acquire better equipment, work faster in some areas, improve processes somewhat, tinker with products and services, and promote talent as needed – but they make these changes incrementally with the goal of keeping things steady. This is an ownership and leadership style rooted in stability, tradition, and deep familiarity with a particular corner of the economy. It is informed by specialized knowledge and methods that have been passed down from generation to generation.

Professor John Davis of M.I.T. calls this approach to business the operators’ mindset. It has long suited family enterprises. But the reason such a mindset has worked is because industries and business models in the past have evolved slowly, over long periods of relative stability. Dramatic shifts or disruptions have occurred infrequently When change has been needed, adaptation could take place naturally, as the pace of the business world moved in step with families’ natural instinct to change slowly, wait for the right time, and obtain unanimous agreement.

We now, of course, live in a different world. Reliance on this approach alone appears to be a liability rather than an advantage.

The importance of an owner’s mindset

Success today requires blending the “operators’ mindset” with the owners’ mindset.

In contrast to operators, owners:

• Gain altitude to take a high-level view of the trajectory of their businesses, industry, markets, competitors, assets, and family. They integrate plans across all of these considerations;
• Move into growth opportunities by prioritizing value-creating activities and rejecting value-destroying activities sustained from old senses of loyalty, tradition, attachment, or conflict avoidance; and
• Detach from businesses, investments, and people that aren’t working. Tradition and legacy are important, but they are not inviolable reasons to hang on to something that is no longer making—or in some cases even losing—money.

Families often have a particularly difficult time with this last one. Leaders who possess an operator’s mindset can be slow to recognize losing bets. They may be too attached to the business, to a tradition or legacy, or to specific people to admit that things need to change. Or, when they see problems, they think (in good operator’s style) that they can innovate their way out of the mess.

That should scare you, because if there is anything that families in business have to be good at in these disruptive times, it’s letting go of what isn’t working. This requires business leaders and owners to, first, clearly recognize when an investment has lost its momentum and, second, understand that they cannot necessarily make their bet succeed. When the problem before you is a changing industry trend, hanging on to practices that don’t work is foolhardy.

Industries are like a casino: you shouldn’t bet that you can outsmart important trends. You are unlikely to beat the house.

How to think like an owner

The mindset of active owners emphasizes long-term value creation through agility, entrepreneurial experimentation, and thoughtful diversification. It embraces new thinking,  prudent consumption by the family and its company, and letting go of value-destroying and outdated activities in a timely way. These owners focus, most broadly, on growing and passing value in ways consistent with their values—whatever those may be. That is, the mission of the family enterprise from the owners’ perspective must be about growing and transmitting economic, social, and relational value while living by the values the family and enterprise determine are meaningful. We call this growing value through your values.

Having an owner’s mindset means excelling at making five types of owner-level decisions:

1. Setting the owners’ Strategic Vision for what they want to achieve and own with their jointly-held assets
2. Good bets on Capital Investments (including when to exit bad capital investment bets)
3. Good bets on key People (including when to change people in key roles)
4. Setting, protecting, and adjusting the Culture that is key to the family enterprise’s success
5. Designing the right Governance for the family enterprise so decision-making structures and processes are effective

All five are central to the long-term success of the family and its enterprise.

Some active owners are capable of having the mindset of both an operator and an owner at once. Others readily embody just one, which is fine as long as they appreciate the value of the other. What you must avoid in ownership groups is one mindset—usually the operators’ mindset—becoming the religion of the group. When some owners or advisors point out that the industry is maturing or being disrupted, and the family business can’t succeed in such an environment, and that maybe, just maybe, it’s time to sell the family business and invest in new growth areas, they shouldn’t be branded as heretics. Owners need to appreciate the value of both perspectives.

Build a team to represent both mindsets

Ultimately, both mindsets—operator and owner—help to cultivate the success and sustainability of the family and its assets. Good owners do not neglect operational excellence by any means, but rather delegate operational excellence to a capable management team (whether family, non-family, or both). Owners need to embed the family’s values within the company; they need to arm managers with the owners’ vision and the board’s approved strategy, and let them operate. Charge them with designing better products and processes then step out of the way and work to solve owner-related challenges.

For example, as noted above, big bets on investments and on high-level talent recruitment often rise to the level of the owners for input or decision. Should we take on more debt, bring on an investor, or go public? Should we sell a particular line of business or the whole company? Should we enter this new industry? Should the next CEO be a family member or non-family? Counsel from the board and other advisors is useful for informing such owner-level decisions, but the final choice ultimately lands with the family owners.

To achieve parity between these two mindsets, families should establish forums where owner-level issues and important owners’ goals can be discussed, owner-level policies decided, and new directions set. One way to do this is an owners’ council. Also, under the right circumstances, a portfolio board that recommends portfolio strategy is useful. Independent advisors on boards and elsewhere are a third resource for assuring an owners’ mindset has room to guide the company and family assets. In short, give yourselves permission to think like owners by structuring regular owner-centered conversations.

In disruptive times, it is owner-level decisions that often make or break a business. And it is precisely these types of decisions that demand an owner’s mindset. Without taking steps to establish and reinforce an owners’ mindset at the top of your family enterprise, the past epoch of success may become nothing more than that—something of the past.