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‘Entrepreneering’ your family firm

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Can you engineer the entrepreneurial spirit?

By Ellen Frankenberg

The failure rate of family firms—fewer than 10% survive to the third generation—dismays many entrepreneurs. Yet even the biggest non-family firms are no safer from the Grim Reaper. Some 70% of the original 1955 Fortune 500 companies are gone today, barely two 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 a conviction that the world can’t get along without your product or service.

2. High-growth phase. The company takes off, sales and employees increase, debts are paid, and the founders and their families enjoy hefty 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 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?

The answers are not complicated, according to Larry Farrell, author of The Entrepreneurial Age: Awakening the Spirit of Enterprise in People, Companies and Countries. Great entrepreneurs are characterized by four fundamental practices:

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’re 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 (such as exceptional customer service, cost efficiency or innovative products) that give them a competitive edge. 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. Farrell describes Gotlieb Daimler, founder of Daimler Benz, as a “near fanatic” when it came to 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 other’s thinking. But the weight of shared history and a family mind-set—“We’ve always done it this way”—can stifle 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. Thanks to its innovative culture, 3M 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’re determined to win and willing to face the consequences of their behavior every day.

Farrell identifies Walt Disney as the quintessential self-inspired entrepreneur—a man who invented not only new enterprises but also a whole new industry. “The inclination of my life,” he said, “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 ten years of consulting with family firms, I’ve 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). They falter most often when they reach Steps 3 (high-speed innovation) and 4 (self-inspired behavior).

If they don’t 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.

Today’s emphasis on succession and estate planning may become irrelevant if family firms can’t instill 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 you want your family firm 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.

•  Offer bonuses to 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. Implement compensation systems that motivate your 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.

•  Compliment them when they do something better than you could.

Managers of successful family firms 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 commitment and performance alike 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.

Ellen Frankenberg, Ph.D. ( is a family business psychologist based in Cincinnati. Her book, Your Family, Inc., is also available in Spanish.

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