How family businesses can thrive into the next generation
WRITER: Will Venn
PHOTOGRAPHER: Jacqui Way
Family businesses are the backbone of economies the world over. But sustaining them across generations is a challenge. Here, Dr Shruti Sardeshmukh discusses sustainable entrepreneurship and the keys to successful succession.
When Tony Abbott claimed victory as Australia’s Prime Minister in September 2013, the focus was on how a change of government could reinvigorate Australia’s business sector. While the new government may offer a different business environment, the key to the success of family business is sustainable entrepreneurship.
In the US, family businesses collectively represent 57% of employment (and a similar proportion of gross domestic product) yet, across the world only 10-15% of family businesses make it to the third generation. One of the reasons behind the decline is the fact that many family businesses stop innovating.
According to Dr Shruti Sardeshmukh from the UniSA Business School, the key to a sustainable family business is to maintain and foster the very essence of entrepreneurism that spurred the founding of the business.
“Family businesses are the backbone of economies of almost any country in the world. They can be as large as the Murdochs or as small as your local deli,” says Sardeshmukh, “but each is born through the same entrepreneurial energy and determination.”
Innovation and reinvigoration are vital to the existence and survival of family businesses, especially as they grow older and become more risk averse.
“Many family businesses fail due to inaction and reluctance to seek out new opportunities. Second and third generations need to spark their own sense of innovation to add to the business and keep it alive.”
Entry of the next generation can drive a new wave of innovation to bring about the strategic renewal of family businesses. But in order to achieve this, it’s vital to develop human capital in the new generation.
Discovering entrepreneurial opportunities requires that individuals not only possess diverse knowledge but that they also have the cognitive abilities that allow them to value and exploit that knowledge. This is necessary for the growth and regeneration of family businesses.
“Education and experience outside the family firm can help develop those abilities,” says Sardeshmukh. “Innovation by definition requires doing something new, and getting outside experience is essential if family businesses want to innovate.”
However, it’s not just any kind of experience—it has to be management experience that builds human capital. Interaction with different bosses and stakeholders in various circumstances can help develop managerial skills and judgement, and advanced managerial development outside the family business creates exposure to new ideas and situations. This can help identify patterns to spot profitable opportunities.
At the same time, this innovation must build upon the existing foundation; how you groom your successor is just as important as external experience, and family successors need to have qualitatively-rich internal grooming and experience of running the business.
“It’s a duality, and a balancing act that every family business should do,” says Sardeshmukh.
- Working outside the family business in a managerial position can help successors hone in on their human capital.
- Working within the family business can help successors to develop the entrepreneurial energy and self-efficacy that is necessary for identifying new opportunities.
- University education is important for family business successors. it can be a source of fresh ideas for the business.
- Balancing the duality of developing successors within and outside the family business can help family businesses grow entrepreneurial next generation leaders.
“Exposure to the business when a child is young, and growing up in the business, can give them tremendous entrepreneurial self-efficacy which combined with fresh knowledge and ideas can really transform that business and take it up to the next level.”
The dual approach of internal and external experience, armed with relevant education, seems to be the ideal blend of factors necessary to ensure the ongoing success of family businesses.
Interestingly, the Australian Government’s inquiry into Family Businesses in Australia, prepared by Deloitte Private, also highlighted the value of outside experiences in providing subsequent generations of family employees the opportunity to “join the business with more to offer, having gained confidence and self-esteem from working in and proving themselves in an independent organisation.”
For family businesses to thrive, Sardeshmukh suggests it’s families themselves who need to address the issue of succession planning and successor development. Family businesses need to allow time for successors to get an education, work outside the family business in positions of responsibility, all the while maintaining a close relationship with the family business during the planning process for succession.
“While governments haven’t typically focussed on family business, we know from our research that children of self-employed parents are more likely to start their own business. Rather than relying on government encouragement, family businesses themselves will need to encourage their successors to fly out and then come back.”
The old adage, if you love somebody set them free, is advice usually dispensed in agony aunt columns. In the absence of other literature it is advice that could equally be applied in a textbook on family business, particularly when what is at stake is not just the survival of a relationship, but of a whole business—and one that could potentially span future generations.
Spanning over four generations, the Robern Menz family business has over 150 years of tradition. Pictured from left: Richard Sims, General Manager Operations; Grantley Sims, Chairman; and Philip Sims, Chief Executive Officer. The family are all members of UniSA's alumni.
Shruti Sardeshmukh is a member of the Centre for Human Resource Management. Her research interests include HR issues in family businesses and start-ups, entrepreneurship, and opportunity recognition.
CEO of fourth generation family-run business, Robern Menz (producer of the iconic Menz Fruchocs).
Discussing the importance of experience outside the family business:
"We have existed since 1908 and have remained relevant and embraced change. If we hadn’t we wouldn’t be here now.
“We have managed transition in the market place, and as market demands and consumer preferences change, we’ve been able to adapt and make products relevant for the day. It’s been important for us to embrace change and innovation.”
Sims admits that the generational transition of responsibilities for the family business has not been without challenge, but generally an acceptance of the need to change has helped ensure that business success has endured.
“I didn’t just come straight into the family business, neither did my brother. We both worked outside the business until an appropriate time, and then were able to bring in an educational and practical background.”
After graduating with a Bachelor of Business majoring in marketing at UniSA, Sims joined Schwarzkopf, progressing to the role of sales manager for New South Wales. Here he was responsible for merchandising and key account management on the grocery side of the business.
“That experience is relevant to our business today, because grocery and supermarket accounts are major accounts for our family business. It doesn’t necessarily matter what product you’re selling into those market channels, if you’re getting experience and understanding how that industry sector works, that’s what counts.”
Sims asserts that outside experience and exposure to other business practices gives you additional confidence and credibility to bring back into the family business.
“For somebody to come straight out of school and go into the family business—that doesn’t add as much value as if that person has further educational experience and practical experience within the industry.”
Partner at South Australian law firm, Caldicott Lawyers
Reflecting on his son’s decision to join the family firm:
“The fact that James grew up around law has very much shaped what he wanted to do; all I've suggested is that he experience other parts of law. With that in mind, he’s been to the Crown Solicitor’s Office, has worked with firms interstate, and is now visiting the Inns of Court in London. He has also taken part in advocacy competitions.
“I never had such experiences when I was creating my practice. I learnt everything from scratch and it took a long time to build my expertise in certain areas, such as trials and guilty pleas. James, on the other hand, has hit the ground running because the experiences he's had have given him the abilities to learn quickly.
“There was no advocacy course or practical aspect to law when I trained, it was all learnt on the job. Now, that has all changed. By taking advantage of these new opportunities, James is a fairly good advocate right from the start. He has the ability to appear in court years in advance of what I had.
“I think in terms of the law, you need to have a lot of experience across many areas because it helps you to decide on what area you want to partake in.
“And it’s not just solely those outside experiences which enhance James’ abilities; it’s a combination of that, plus internal experience and changes in the way law is taught.
“It’s important to pass on both good and bad experiences to the next generation so they can learn from our mistakes. Sometimes they learn, sometimes they don’t, and sometimes they have to experience things by themselves. Hopefully we can pass on lessons, but it can be hard for the next generation to view the first as anything but Mum or Dad.”