Familienunternehmen Source: Björn von Schlippe

Resources and burden – the two faces of family-owned businesses

Family-owned businesses are considered to be the “backbone of the German economy” – over 90% of German companies can be regarded as family businesses. Especially in the era of globalization, they enjoy an excellent reputation being the guarantors of real economic orientation that didn’t lose sight of people and that combine employee orientation and loyalty to location with high performance and modern forms of management. Family-owned businesses are the “human face of the economy”.

At the same time, family businesses differ from other organizations in a special way, just like many entrepreneurial families differ from usual families. It is not simply about managing a company but additionally a family and shareholders – three very different systems. Besides, these are systems that continuously develop, they grow, and thus also their complexity increases – one owner family with four members is more manageable than a shareholder group of 35 members, 120 or even more. The management is therefore confronted with the balancing of three complex and growing systems and the alignment of their needs. If it succeeds – and it succeeds surprisingly often – the “familiness”, i.e. the resource bundle that is provided by the owner family to the company, can be fully utilized. In that case, this company type experiences an enormous competitive edge compared with other companies. The owner family and company are constructively developing together.

Family-owned Businesses

Source: Based on Gersick et al., 1997, p. 6f.

Still, there is also another side: In some family businesses the interaction of the three systems can be difficult. Time and again, involved parties could be confronted with situations that cannot be solved without a shareholder or company member feeling offended, hurt, insulted or misunderstood. The resources cannot flow freely into the company, sometimes also family conflicts spread – unfiltered – into the company resulting in threatening situations.

The different logics of the family, company and shareholders and their special requirements present a particular challenge for those involved: The logic of the family have different demands regarding the behavior than that of the company or shareholders. A company decision can be experiences as an insult in the logic of the family, a family decision can be regarded to be a dramatic mistake in the logic of the company and similar. Often, this dilemma is seen as a paradox by the management: No matter what one does, it is wrong. How to feel the moment in which this “turnover” happens? How to counteract as early as possible? How to establish regulation systems that can cope with possible problematic developments or how to manage and solve an already existing conflict situation?

Development of family business governance with S&P

In the literature, the management of the complexity inherent in family businesses is often allotted the unwieldy term “Family Business Governance”. We stick to it, since this term is more comprehensive than “Family Business Management”. What this means is the consistent look at the link between the three systems and their integration in each company decision. This includes the formulation of a family strategy, which can be reflected e.g. in the regulations adopted by the family. Furthermore, it also considers questions concerning the concrete family management, regulation of controversial issues and the development of routines that connect the owners, family and the company. In the context of “parallel planning”, all found solutions are viewed and reflected from the perspective of the other system.

Therefore, family business governance is a key term that includes different measures of the integrated management of the three social systems. S&P places a special emphasis on handling challenging situations regarding critical transitions in the family business management.

S&P – the specialists for transition design

Often, family-owned businesses are particularly vulnerable in transition situations. Transitions appear when a company comes to a point at which habitual forms of economic activities reach their limits and fundamental strategic reorientation is necessary. This can happen at various times for a family business, depending on economical or family-related changes. One of the critical transitions is the company succession – be it operative or within an owner system. Many dramatic changes happen here simultaneously: roles change, communication and decision routines are scrutinized, new structures are being developed, and much more. On the family system side, this can lead to powerful emotions, such as disappointment or mortification, which have to be dealt with. At the same time, it is expected that the business side will also produce turbulences which require a delicate management.

Though oftentimes not easily distinguishable, a fast growth and the usually related internationalization of the company also play an important role. Both put pressure on organizational routines. Established leadership structures and cultures, sometimes grown over the course of multiple generations, are questioned. Complex changes become necessary, the ownership family is required to adapt to new financial requirements or to satisfy external quality measurements.

Since decades, S&P has been accompanying organizations facing the necessity of self-renewal. The creation of new structures and the execution of required changes in organizational design are therefore part of our specific competences. We combine this expertise with a profound systemic knowledge of the dynamics in family businesses and have an in-depth understanding of organizations. Individual solutions are produced based on the specific situation of the respective family business.

In close cooperation with our clients, our competences allow us to design new structures and organizational routines suitable for the specific conflicts of the company, concretize the related fuctional challenges, and translate them into requirement profiles for key players. As part of the procedure, we create a process architecture, which reflects the different logics of the systems “family, company and ownership”.

1. Sharpen and, if necessary, realign the strategic positioning

Transitions always signify a self-renewal for the company. This implicates the need for an enhanced strategic positioning. For family businesses this process is particularly complex, because it affects the three different systems “company, family and shareholders” at the same time. This entails a list of tasks:

  • Evaluate previous economic activities
  • Critically reflect own methods of observing the environment
  • Question established paradigms, premises and own “mental models”
  • Manage emotions such as anxiety and concerns in the different sub-systems and balance them through suitable communication methods
  • Incorporate these factors to make creative and future-oriented decisions for the positioning of the company

With its experience, know-how and competences, S&P is able to support and accompany companies through these critical periods. In this regard, S&P stands for a dynamic strategy development process, which builds on the initial situation as well as the framework conditions. Numbers and schemes are not the focus. Instead, the goal is to use the strategy process and the cooperation of the family business to develop a process architecture, which best approximates the complexity of the reality.

2. Strategic support in personnel decisions

Employing the right people in the right positions denotes one of the hardest and most consequential challenges for the company leadership. New people enter positions with decision power and have to adapt to existing structures – and at the same time have to critically reflect in how far these structures and routines suit their own personality, disposition and leadership style. In the short or medium term, this can lead to changes, which can be perceived as severe and irritating.

Especially the succession procedure in family businesses exerts particular pressure on those responsible, because making a decision with the family logic can have fatal consequences for the company – and vice versa. On the one hand, a family will not and cannot forego the chance of using family-internal human potential, whether for the management or supervision of the company. On the other hand, reality may show that the necessary resources are neither present in the family nor in the company and therefore have to be recruited externally. In any case, the decision taken can produce tension and perceived insults.

Such a situation requires objective support in making decisions to mitigate the conflict potential that lies in personnel decisions. S&P provides the necessary tools, which allow for valid personality measurements. Our way of suitability diagnostics is much more than an “assessment”. We enable a precise matching of organizational requirements with personality profiles and with the competences that are necessary for the function. Especially with regards to the company succession, it is possible to mitigate the question of the suitable successor with a system based on objective evaluation. The system does not only answer the question regarding the suitability. It is also able to identify the strengths and weaknesses of the respective personality, determine compensation needs and derive targeted support measures.

3. Support in growth and internationalization processes

Growth and internationalization, especially if they happen fast, present a special challenge for each company. Established routines have to be adapted quickly, structures suddenly seem “too tight”. Family businesses are particularly vulnerable with regards to its “family” leadership structure if there is a strong adherence to familiar procedures.

The focus of our work with family businesses is the question in how far the planned steps fit the “DNA” of the previous organizational growth. Family businesses are particularly known to align their growth to their core competences and it is not uncommon that they attain global market leadership in a specific niche. Growth is either closely linked to core competences or is complementary to them. Together with the company, we analyze its ability to integrate the otherness of the new or acquired businesses. Under certain circumstances efforts are made to develop organizational competences that are necessary for the integration. Time and again, this includes the reflection of the change steps with the owner family, since growth is a particular challenge for the shareholders when it becomes necessary to successfully accompany the growth process.