The author of this research, Maria Jose Parada, teaches on the CEMS Masters in Management program at ESADE – and this Idea is part of our CEMS series.
Managing the family as well as the family business, maintaining dynamic portfolios of businesses, and ensuring continued family control of the organization are some of the factors for keeping family businesses entrepreneurial across generations.
Launched in 2005, the STEP (Successful Transgenerational Entrepreneurship Practices) Project is a global research initiative involving 35 universities in various regions of the world, including 10 in Europe, that studies entrepreneurship within business families. In 2017, the European STEP Council released the results of a survey of more than 350 successful transgenerational family businesses in 11 countries focused on the question: What makes business families entrepreneurial and successful across generations? In 137 of the businesses surveyed, two respondents provided answers.
The survey yielded the following insights:
Entrepreneurial Orientation (EO): Business families that have balanced levels of Entrepreneurial Orientation is key. Based on the measures of EO, successful family businesses earn an overall average score — rating high on innovation and proactivity, for example, but low on risk-taking. Therefore, balanced portfolios of EO are present in European family businesses that have been around for many years.
Resources: Human capital and social capital (notably a positive reputation and good customer relationships) are key drivers of success for these family businesses.
Family Business Governance: A strong family influence at the board of directors level and/or in the top management team is key to keeping the entrepreneurial spirit alive across generations.
Family Governance: Managing the family is as important as managing the family business. While most families rely on informal mechanisms, complex family structures require formal mechanisms as well.
Portfolio Entrepreneurship: Successful business families own more than one firm. Refusing to focus only on the original business, they seek out opportunities beyond the core business and manage the resulting business portfolio in a strategic and dynamic way. On average, business families in the survey founded 6 companies in their history. The dynamic business portfolio of these family businesses also included companies over time that were added through mergers and acquisitions or spun off, divested or shut down.
Based on the survey results, the survey report offered the following recommendations:
Be entrepreneurial when the time is right. Family businesses should be aware of their EO profiles — which include ratings of the firm’s autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness — and manage the profile strategically.
Don’t let family issues impede access to critical resources. For example, because human capital is a key driver of transgenerational success, all levels of the firm should be open to non-family members of the business when the family business requires it. Reserving top positions for family members may only lead to the loss of your best employees to your competitors.
Be aware of social capital advantages (and disadvantages) of being a family firm. The business families surveyed stated that they possessed more social capital resources, including a positive reputation and good relationships with customers, than any other category of resources (financial capital, physical capital, or human capital — although human capital resources were a close second).
Make sure the family has a controlling influence on the business. On average, family members hold two-thirds of the seats on the board of directors of successful family firms. In one-third of the successful family businesses surveyed, only family members were on the board of directors. Top management teams were also controlled by the family, with 54% of the TMT positions held by family members on average.
Don’t underestimate the importance of managing the family. Most families rely on informal team meetings and other informal mechanisms to manage family issues. But as the family grows and relationships become more complex, more formal family governance mechanisms, such as formal family meetings, formal family protocols and a family constitution, should be implemented.
Look beyond the core business and manage the various entrepreneurial activities of family members wisely. Opportunities for collaborations, sharing resources, diversifying risks and accumulating wealth can be found within family business portfolios.
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