Fall 2010: by Brent Banda, MBA

Improving Performance in the Family Business

When considering how to improve the performance of a family business, it is natural to focus on the interpersonal relationships between family members. These relationships are what make a family business unique. However, the true opportunity to dramatically improve performance in a family business often rests in an entirely different area: how business strategy is created and implemented.

Whenever possible, family goals must be balanced with consideration for factors that influence corporate direction such as the level of risk that the business will take on and desired market share.

Strategic Marketing in a Family Business
The Strategic Marketing process selects industries in which the company will compete. It also creates the product strategy that is used (e.g., the segments the business will serve, the products offered, or the prices charged).

It is absolutely crucial to acknowledge and fully understand the family goals that influence these strategic decisions because they impact the direction and financial performance of the business.

Balancing Corporate and Family Goals
The family dynamic has an impact on high-level corporate strategy, not just the company's culture and management style. For example, some of the most important strategic decisions that a business owner can make are influenced by an important family goal - building the family legacy. Risky growth strategies might be discouraged as failure may tarnish a respected family name in the business community. There is also pressure to ensure future generations have the opportunity to continue in the business.

Family goals are varied in nature. The same family business might value providing a rich and rewarding management training experience for an upcoming generation, as well as protecting wealth as a method of financing the exiting generation's retirement. Other family goals may be entirely personal in nature, such as increasing local employment as a way of giving back to the community.

As these examples illustrate, family goals are often inherently interrelated with corporate goals such as target financial returns and the company's mandate for growth. Whenever possible, family goals must be balanced with consideration for factors that influence corporate direction such as the level of risk that the business will take on and desired market share.

The Succession Plan & Corporate Strategy
A succession plan involves more than transfer of equity. It involves transferring the business to a new generation of owners who must make complex business decisions.

The nuts-and-bolts process of preparing a Business Plan or Strategic Marketing Plan can ensure the business addresses the issues of the day while helping prepare the business to operate without the founder.

This is accomplished when two generations work together to develop strategies to drive longterm growth. If both generations collaborate in this planning process, both will feel ownership of the direction of the plan and genuinely view this next phase as a natural step in the historical growth of the business.

The process creates a venue to ask sensitive questions, such as:

• Who should take over the business? Will this selection be made in the family's best interest (maintain the family legacy), or the company's best interest (promote the individual with the greatest experience, whether this is a family member or not)?
• What is the appropriate equity structure? Should the outgoing CEO draw as much personal wealth from the business as possible, or leave equity in the business to provide stability? Should debt or an equity partner be taken on to facilitate the exit?

Engaging multiple generations in a strategic planning process also encourages diversification. Entrepreneurs flourish when they are personally interested in the industry in which they operate. It enables them to see trends and understand nuances in consumer preferences, resulting in good business decisions. It is common for family businesses to diversify as younger generations have greater authority over corporate strategy, begin to select which industries to enter, and define how the business will be structured to compete within those industries. A healthy family business will embrace these diversification opportunities.

Practical Marketing Considerations
Marketing decisions must take the unique characteristics of the family business into consideration.

The founder's personal influence can have significant influence on the company's brand image. Founders are often magnetic personalities, and the company's reputation may be built on decades of their own individual public exposure. The founder is the business. Care must be taken to adjust the company's reputation so the business will not only benefit from the credibility and history of the founder, but also reflect the additional depth and substance of the broader organization. Adjusting a company's brand image is a fundamental component of a Strategic Marketing Plan and must be carefully managed over a period of time. It is best not to tackle this task the day the founder leaves the business.

The family reputation itself can be a source of credibility and a powerful component of the company's brand image. When appropriate, this can serve as a foundational plank on which the company identity is built.

Other benefits can also stem from this credibility, such as providing political influence on government policy decisions that impact a company's operating environment.

Marketing and finance are tied, as a cash reserve is often required to generate growth. One of the primary benefits to many family businesses is that a war chest may exist after decades of profitable operations. A growth plan developed for a business with access to capital that thinks in the timeline of generations has the benefit of tremendous flexibility. For example, a family business may be more likely to invest in high quality equipment that provides lower operating costs (and therefore establishing a competitive advantage), with the view that the premium price tag can be amortized over many years.

Successful entrepreneurial businesses that transfer to a second generation must prepare for the change that inevitably must take place. Ideally, the founder would begin removing his or her own personal influence on the business over a period of years. For example, it's feasible that 20 years ago the founder entered a handshake deal with a supplier and that relationship is now integral to your business. That relationship has potential to deteriorate over time with the founder's departure. What can we do today to ensure that arrangement remains in place for another 20 years?

A structured approach to planning can improve the performance of a family business by aligning corporate and family goals, and ensuring marketing decisions within the organization respect the unique characteristics of the family enterprise.

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