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Entrepreneering Your Family Firm

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Entrepreneering Your Family Firm:
Can You Engineer the Entrepreneurial Spirit?

Ellen Frankenberg, Ph.D.

The failure rate of family firms - that less than 12% survive the third generation - gives pause to many founding entrepreneurs. Yet the most powerful companies in the US also struggle against the death knell. 70% of the original 1955 Fortune 500 companies are now gone, not quite 50 years, not quite three generations later.

All companies, like their human founders, follow a predictable life cycle:

  1. Start up phase: tremendous entrepreneurial energy, grounded in the realization that "you eat what you kill", and an urgent conviction that the world cannot get along without buying their great inspiration, their great idea.
  2. High growth: the company takes off, production swells, sales and employees grow, debts are paid, the founders and their families enjoy significant profits.
  3. Decline: many companies lose agility as they grow larger; complacency and bureaucracy set in, reinforced by predictable paychecks; and, perhaps, in family firms, second or third generation kids who were never challenged and feel entitled to an affluent lifestyle.
  4. Survival: competition increases, economic conditions get tough, new technology requires major investment, sales keep slipping, lay-offs sap morale, the bank asks questions, and the company begins to chart losses.

How do you "engineer" your company, so that the entrepreneurial spirit endures and sustains continuing cycles of growth? How do you pass on, not only good DNA and business savvy, but also the entrepreneurial drive that makes the difference between growth and failure? How do you "entrepreneer" your family firm?

According to Larry Farrell, author of The Entrepreneurial Age: Awakening the Spirit of Enterprise in People, Companies and Countries, the answers are not complicated. There are four fundamental practices that characterize great entrepreneurs:

  1. Sense of mission: They are convinced that what they do is valuable, and they generate enthusiasm in others. Their business plan may have been written on the back of an envelope, but they are absolutely clear about what product they want to produce, and what market they want to target. They develop "no frills" links connecting business strategy and a few clear values (exceptional customer service? cost efficiency? innovative products?) that give them the competitive edge in their marketplace. Microsoft's early mission statement, considered outrageous at the time, was: "A computer in every home".
  2. Customer/product vision: Successful entrepreneurs relentlessly focus on the needs of their customers. Larry Farrell describes Gotlieb Daimler, of Daimler Benz, as a "near fanatic" in responding to customers' needs. In 1900, when threatened with the loss of his best distributor for his automobile in Vienna, Austria, Daimler promised that he would do anything to keep their business. The response: "My daughter's name is Mercedes". The rest is history.
  3. High speed innovation: Family controlled firms sometimes hold an advantage in quick decision-making, when owners share a common history, close communication and the ability to anticipate each others' thinking. But the weight of shared history and a family mind-set - "we've always done it this way" - can stiffle innovative thinking.
    Six miners in Minnesota faced bankruptcy in 1906 when they realized that they had put their life savings into a worthless gravel pit. Motivated by the prospect of disaster for their families, they invented sandpaper, the first product of the 3M company - a company that has fostered a culture of innovation ever since, and nearly 100 years later, ranks 36th in today's S& P 500.
  4. Self-inspired behavior: Great entrepreneurs possess both a high level of commitment and a high level of performance: they love what they do and become very good at it. They are determined to win and willing to face the consequences of their behavior every day.

Larry Farrell identifies Walt Disney as the quintessential, self-inspired entrepreneur, who invented not only several enterprises, but a whole new industry: "The inclination of my life has been to do things and make things which will give pleasure to people in new and amazing ways. By doing that, I please and satisfy myself."

In my experience consulting with family firms for more than 10 years, I have come to respect their ability to accomplish step 1 (they usually have a high sense of mission) and step 2 (they usually focus quite well on the links between customer and product. I think they falter most often, especially when they move into a successor generation, when they reach step 3 (high speed innovation) and step 4 (self-inspired behavior). If they are unable to innovate and inspire, they step onto the slippery slope of decline. This predictable stage in the life cycle of any business often coincides with a transition to the second generation.

The current emphasis on succession planning and estate planning may become irrelevant, if family firms do not know how to engender the entrepreneurial spirit in successor generations. Sometimes the deepest motivations within a family - to provide generously for all their young and to protect them from painful consequences - work directly against the entrepreneurial spirit.

If family firms want to continue to grow, here are some simple, practical steps to take:

1. Find ways to foster innovative thinking:

  • require potential successors to work first for a company one step ahead of yours.
  • hire and promote non-family managers who score high on creative thinking.
  • bonus those employees, including family members, whose ideas improve the bottom line.
  • in team meetings appoint one person a "devil's advocate" to challenge current practice.

2. Develop compensation systems that motivate employees to inspire themselves.

  • stop paying siblings or cousins at the same rate, regardless of performance.
  • pay family members for the job they do, according to goals that stretch them.
  • develop a profit-sharing system for all employees.
  • don't protect family members from the consequences of bad business decisions.

3. Expect each generation to re-invent the company.

  • require family members to make a commitment by purchasing shares, rather than being gifted.
  • gradually transfer risk to competent successors, as they become bankable.
  • encourage each successor to demonstrate leadership by developing a new project or service.
  • complement them when they do something better than you could.

Managers of successful family firms know how to foster inspiration, and also allow successors to experience the consequences of failure. If family members don't feel consequences (as the leaders of other successful firms do every day) then both commitment and performance will slip.

Engendering the spirit of entrepreneurship means encouraging your sons and daughters to dive into the deep end of the pool, while you watch from the side, knowing that their struggles will ultimately breed skill and confidence, and the ability to dive deeper and farther than you ever imagined.

 

Dr. Ellen Frankenberg, President & CEO

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