Innovation – why family firms lead the way

http://www.ifb.org.uk/ The FBN International Summit in Chicago, where over 650 owners gathered this earlier this month, highlighted how innovation runs through the veins of the family business sector. With shortening business cycles, the advent of disruptive technology, globalisation and hyper competitive markets there is no room for companies to hide. Family enterprises have to embed into their organisations a culture that embraces change and promotes innovation –their survival and growth depends on it.

At the Summit global players such as Odebrecht from Brazil, FIAT of Italy, and North America’s Bechtel Group shared how their values and culture supported innovation. By embedding progressive employment practices that embrace change and continuous improvement these organisations have risen towards the top of their respective sectors.

In the case of smaller family firms focused on niche markets the same rings true. The owners generally set the lead, seeing their primary role as recruiting a team of highly motivated and skilled entrepreneurs and managers. Some of the best exemplars included Radio Flyer, a Chicago based third generation toy company who have won numerous awards for their achievements, creating a culture of innovation among their 110 employees. Revenues here have leapt four-fold since the current generation took over leadership. From Spain, Leche Pascual stands out for the transformation of their corporate culture since the third generation took the helm, embedding a systemic approach to innovation within the organisation. This has lead to 50% of their EUR 900M turnover being generated from new products that did not exist a generation ago.

The key learning’s on innovation from the FBN Chicago Summit include:

• Start with the company’s values; ensure they support innovation and change

• Ensure the board is committed to embedding a culture of innovation through choosing leaders who will help drive change

• Develop employee practices that reward entrepreneurship and innovation at all levels

Family business entrepreneurship is alive and well in the Midlands

http://www.ifb.org.uk/ This year’s Midlands Family Business Awards, are helping put the spotlight on family business entrepreneurship, and the huge importance of British business families in the drive to grow the private sector as we rebuild our way out of the recession.

The awards, organised by third generation family business the Wilson Organisation, include a New Family Business category which I am judging alongside James Timpson (Timpsons) and Annabel Prow (Wilson Organisation). Meeting the shortlisted candidates for the award it was clear that we had a group of highly committed and passionate family business entrepreneurs. Each of the founders shared a strong sense of enthusiasm and the drive to succeed; above all everyone was passionate about serving their customers. Although making a profit is critical to secure the next stage of growth for the business, the path to success is through delivering excellent customer service. A common thread was the need to have clarity of vision and to stay focused, but also to have the flexibility to adapt to the customer’s needs.

Another common thread running through each business was the huge amount of personal effort and financial sacrifice made. The level of hard work that goes into getting early stage ventures going can put pressure on family life - sacrifices are made to ensure the new business gets the required effort. Some also cited the advantage of bringing family members into the business who can offer a wide range of skills; but it was equally important to be honest about individual strengths and weaknesses. Another factor that was cited as key was having excellent communications at all levels; something that becomes even more vital when the pressure is on. Communication will also be the subject at the IFB Regional Roundtable meetings this autumn in Yorkshire and the North-West.

The winner will be announced at a black tie evening reception at the family-owned Thrumpton Hall, just south of Nottingham on Thursday, 11 November.

Family ownership and the life cycle of firms

http://www.ifb.org.uk/ Why are there significantly more large family-owned businesses, as a percentage of all companies in Continental Europe, compared to the UK? A study by Professor Julian Franks, of London Business School, has come up with some fascinating findings.

Professor Franks’ analysis of the top 1000 firms in France, Germany, Italy and the UK showed that 12% of large British firms are family owned compared with 40-45% in the major European economies. Analysing the life cycle of family firms from 1996-2006 showed that only 50% of firms in the UK that were in family ownership at the beginning of the period remained so a decade later, whereas in Germany the figure is 75%.

Image via WikipediaFranks explains that the cause of the UK exception is an ‘outsider’ system where the private benefits of family ownership are smaller, the opportunities for risk diversification are greater, raising equity is more expensive and the market for corporate control is more active. The study also observed that in the UK family ownership was likely to be concentrated in industries with less need for external capital.

The study implies that in the UK owners of large family businesses lean towards the shareholder value model, whereas on the Continent the family business stewardship remains more entrenched and is more favourably dealt with by the markets. The study concludes that family business does bring diversity to a modern economy, and providing owners generally are prevented from abusing their position for private benefit that we should promote a debate in the UK on how to encourage more owners of large family firms to retain control.

I believe that if we are to see lower attrition rates for large family firms we may need new approaches to policy, for example in relation to the protection of minority shareholders. But our culture may also be a significant factor and there needs to be more understanding of the real benefits of the family business stewardship model to the UK economy. This is the topic of new work being conducted at the IFB and a key theme of our national conference next year..watch this space.

A better path in business

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In his book “Good Value”, HSBC Chairman Stephen Green argues that the values of capitalism need reassessment and suggests that businesses should be focused on the pursuit of two distinctive but complementary goals: profitability and sustainability. Shareholder value maximisation in isolation is no longer an acceptable aim. Adam Smith the father of free markets, recognised early on the threat to the public of un-trammelled capitalism writing “the proposal of any new law or regulation that comes from (businessmen) ought to be listened to with great precaution...it comes from an order men who’s interest is never exactly the same with that of the public.” Smith is arguably suggesting that there should be checks and balances for an orderly functioning capitalist society to flourish.

Image via WikipediaGreen also accepts that regulation is necessary to ensure market driven excesses are avoided. He also argues that there has to be a return to more robust values and a “renewed morality” within the corporate world. Individuals are held accountable to the law, but should also be expected to take responsibility for their actions. Green argues that the same applies in companies: boards should take responsibility to ensure that corporate culture supports the pursuit of profitable and sustainable business.

Progressive family firms understand the need to balance their responsibilities to towards their multiple stakeholders, holding to a code of ethical behaviour, while ensuring the prosperity and growth of the enterprise. Responsible ownership of this nature is commonly referred to as “stewardship”.

The IFB has long held that the family business sector recognises the critical importance of stewardship. Looking ahead towards 2011 this issue is high on the association’s agenda and we will be debating during the coming year how family businesses can strengthen their organisations through successful stewardship.

The debate on family business branding

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Attending the 10th IFERA World Family Business Research conference at Lancaster University provided the chance to hear some leading edge thinkers on family business discuss how the sector is creating competitive advantage. One area of potential is the opportunity for family firms to take advantage of family business branding either at the corporate and/or product brand level.

Successful branding relies upon a combination of differentiation and demonstrating added value, and in this context family business provenance can lend good support. Research teams from Jönköping University, Sweden, and Ilinois State University agreed that there are opportunities when developing a firm’s branding strategy to highlight family firm credentials.

The researchers emphasised that the prime attributes for consumer choice will normally relate to good customer service, strong product features etc. It’s worth noting that family firms may have some inherent advantages in this area as the recent IFB/YouGov survey of the UK public showed that 62% already think that family firms often provide better customer service than other types of business.

According to the experts family business branding should therefore best be viewed as accompanying the overall effort to brand the company and its products. The result is that it helps strengthen the reputational capital of a firm - robust reputation capital is an asset that can allow a firm to extract a premium price for goods and services offered.

Successful examples range from huge corporations such as SC Johnson to small family firms such as Darlington and Daughters, both of whom helped illustrate the point that family business branding can lend credence either at the corporate (SC Johnson), or product brand level (Darlington’s). However IMD, who are also researching the subject through testing consumer’s knowledge about brand provenance, caution that the 50% accuracy score of family firms is low. They say this should make us think where and how to position family business corporate brands with the general public.

Values 'define success' says top business leader

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After a varied and highly successful business career IFB guest speaker, Javier Ferran, offered some valuable advice to a gathering of Next Generation members in June, on the importance of building and maintaining family values. Javier spent 20 years in the wine and spirits industry with family firm Martini and Rossi which was acquired by Bacardi Group, where he was President and CEO and is now at private equity firm Lion Capital.

He described the best-run family businesses as a ‘superior model’ because they gave the opportunity for long-term planning and the owners and employees could work in alignment. The complications for family firms tend to start in the transition from a single controlling shareholder to several owners when family emotions can get entangled with the business.

He believed that the most important thing a family business needs to do is define its values. The main role of the family should be to safeguard the values and lead by example. Family councils and advisors are only tools they are not solutions to family business issues. Javier observed: “It’s important to talk about these values all the time and to preach them. So that if someone in the business talks against the values it is immediately obvious and they will be embarrassed at what they have said.”

Trust - a source of competitive advantage

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This week’s IFB national conference has the theme Trust: A source of competitive advantage. Our view is that family businesses are uniquely placed to be at the forefront in the drive to revive trust in UK business.

Progressive family firms place great importance on a clear set of values, such as:

• Entrepreneurship - having a can do attitude

• Respect for People - fostering a strong workplace environment

• Social Responsibility - engaging with local communities

• and Sustainability - taking responsibility for the environment

Combine these values with a sense of stewardship, of being in business to succeed in the long-term and we have created a solid foundation for Trust. And this is of course Trust in the widest sense with all stakeholders; customers, employees, the supply chain, the public and indeed Government.

Knowing how family firms are perceived by the British public is important so the IFB commissioned a YouGov survey– over two thirds of the public recognise the important role family businesses play in economic growth and employment (68%) and almost two-thirds believe family businesses provide better customer service than other types of business (62%) – a key measure of trust in a business.

Sector firms of course, have to deliver strong business performance, but there is a growing and understandable pressure from society to broaden the measurement of success, beyond profits alone.

The benefits of a high trust organisation are immense: highly trusted companies can maintain strong levels of employee morale reducing staff turnover, absenteeism and associated costs. Their brands can achieve high trust status with the consumer. Mars and Beaverbrook the Jewellers are two family firms speaking at the IFB conference on how they are achieving strong trust.

But family firms have their challenges, such as;

• Improving decision-making, both at the owner and the business level through more robust governance

• Ensuring that the transition of ownership between generations is planned and doesn’t disrupt the business

• Making sure there is no glass ceiling for employment opportunities for non-family employees and being open to ideas and innovation

What we see is that the best family firms are embracing these challenges while building and sustaining high trust organisations.