Article:

Preparing the next generation

31 December 2015

Susan Rix AM , Partner, Business Services |

Key to the successful evolution of any family business is the development of the younger generation of the family members for the leadership, commercial and general business skills demanded of the family by the business. In addition, younger generations should understand the responsibilities that success can bring, and how best to ensure their positions of commercial influence and the benefits given to them by personal affluence, are deployed in ways which will give them the best chance of fulfilled, productive and happy lives. Key challenges include:

  • Development of family members involved in the business and preparing them for future leadership if appropriate
  • Educating the next generation to be responsible owners of the business
  • Encouraging them to be responsible with wealth
  • Developing a cohesive team in the next generation which can work together to arrive at consensus, allowing continued business success and family harmony.

Challenges facing the next generation

The next generation often have a tough act to follow. This, coupled with the normal challenges of family life, presents a particularly demanding set of challenges, including:

  • Increased choices - not all will want to join the business straight from study, if at all
  • The pressure of living up to expectations
  • Sibling rivalry
  • Knowing how to connect with the business if they are not directly involved
  • Changing lifestyles - children in family Businesses are often raised in a culture of wealth and entitlement
  • Loneliness and/or a lack of peers within the business.

Negotiating such challenges successfully and supporting and preparing the next generation is key to enabling them to unlock their full potential and allow smooth transition of the family Business from one generation to the next.

Trans-generational entrepreneurship

The key to long-term business success lies in the ability to build and sustain an entrepreneurial family.

Family businesses are the engine that drives socioeconomic development and wealth creation around the world, and entrepreneurship is a key driver of family business. Entrepreneurial thinking and leadership are fundamental factors in the creation of new enterprises and the sustained competitive advantages of corporations both large and small. The ability to create and foster an entrepreneurial mindset across generations is a major element of family business continuity and longevity and is instrumental in effective strategic execution, innovation and growth.

In market economies (where resources are allocated by supply and demand), entrepreneurial family businesses are a primary source of job creation. In transition economies (in countries moving from a state-planned to a market-based system), the family unit is often the only intact socioeconomic institution capable of supporting entrepreneurial activities. The family also plays a leading role in new venture formation, often serving as the primary source of start-up capital, not to mention cheap labour and know-how. Another benefit of entrepreneurial family enterprises is that they tend to be community-minded and support philanthropic causes.

What is entrepreneurship?

The concept of entrepreneurship derives from Richard Cantillon, an Irish economist working in France whose theory was published posthumously in 1755. Cantillon recognised the entrepreneur as an individual who accepts an element of uncertainty in the course of profit-seeking business activity. A wide variety of organisations have adapted entrepreneurial concepts as a means to compete in a changing and challenging environment.

Three types of entrepreneurship are noteworthy today:

  1. New venture formation: Creative human action that builds something of value from almost nothing through the pursuit of opportunity beyond the resources one actually controls
  2. Corporate entrepreneurship (“intrapraneurship”): Activities inside a corporation where individuals champion new ideas – from development to profitable reality.
  3. Social entrepreneurship: Generation, development and implementation of new ideas and behaviours that build dynamic capabilities and differentiate and organisation from its competitors.

Regardless of what form it takes, entrepreneurship links people’s vision, commitment and passion to a common cause.

A must for family business

Over the next decade, as the Australian population ages, many family businesses are expected to change hands. Since the average life span of an Australian family firm is only 2X years, and a mere one-third of these businesses survive into the next generation, it’s imperative for business to foster entrepreneurship across generations to increase the chances that their businesses will be amongst the survivors

Several key principals of entrepreneurship – such as the focus on high achievement, wealth creation and community spirit – can be useful in addressing the challenges that occur when several different family branches or generations are involved in the business. A family that is committed to these principles is well positioned to create and sustain individual and family growth and learning. This is especially important in today’s fast paced global environment, with entrepreneurship increasing and new family firms emerging around the globe.

Entrepreneurship across generations

Trans-generational entrepreneurial behaviour in family business goes beyond simply increasing sales, head count or profits. Family business entrepreneurs create and support a growth and learning orientated culture in both the family and the business, and they reinforce entrepreneurial behaviour in their relatives of all ages. They encourage successors to be alert to their environment so as to spot and take advantage of profit opportunities. At the foundation is a loving and learning family that fosters cooperative family dynamics between generations over time.

Trans-generational entrepreneurship is built around two central principles:

  1. Entrepreneurial vision and mission: There must be a drive to create trans-generational wealth for the business and its owners. This is rooted in a growth orientation that motivates the family, the ownership group and their non-family managers to be forward thinking and to communicate and pursue specific strategic expansion plans for the business.
  2. Dynamic and adaptive family values: While there is a commitment to family traditions, the family must be able to adapt to changes over time. The family must be committed to open communication, the use of formal protocols and policies and conflict resolution.

The entrepreneurial mindset

Enterprising families work together to define the role and context of entrepreneurship in their family and business. They are committed to the long term and enlist champions among ownership groups, key family members and non-family managers.

These families explore the history of entrepreneurship in the family business, including actual examples from the past and present, and discuss ideas for the future within this context. This process helps entrepreneurs understand the role the family has played and what it can do to advance and perpetuate success in the future.

Enterprising families are ‘people centric’ – they focus on teamwork and on the internal and external relationship building. In addition, the family business leadership identifies, agrees upon and pursues a clearly outlined strategic direction. This strategy emphasises entrepreneurial behaviours such as market expansion, technological advancement, and refinement of operational activities and processes.

Research has shown that entrepreneurial families embrace five fundamental principles of entrepreneurship across successive generations

  1. Entrepreneurial leadership: The ability to anticipate future circumstances, maintain flexibility, think strategically and work with others to initiate change that will create a viable future for the business.
  2. Opportunity recognition: The capacity to imagine dramatically new ideas or to find new ways to differentiate existing products or services to create and sustain cost effective and profitable competitive advantage and customer satisfaction.
  3. Internal continuum of entrepreneurial activity: A people-centred strategy emphasising organisational systems, structures and practices that encourage innovation and creativity and do not present insurmountable road blocks to flexibility and fast action.
  4. Balanced strategic positioning: A strategic vision that is defined, translated, communicated and aligned operationally across the entire organisation through the balancing of performance metrics and compensation programs as envisioned from multiple financial and non-financial perspectives.
  5. Future-based orientation: People are encouraged to perceive opportunities and empowered to embrace change, control costs, enhance product/service quality, and improve offerings and services through innovation and learning.

Creating and maintaining an entrepreneurial mindset is vital for socioeconomic growth and sustained competitive advantage in today’s dynamic marketplace. Entrepreneurs speculate, anticipate and direct resources in pursuit of profitable business activities under uncertain conditions.

Trans-generational entrepreneurship promotes a common vision and mission among key family business stakeholders across generations. This inclusive, forward-looking strategy creates a set of adaptive values and protocols that promotes family unity and business acumen.

Generation barriers

For many family businesses, the ability to communicate through generational barriers is crucial for the ultimate success and longevity of the business. BDO has worked with family business across generations for many years and the company has repeatedly stressed the importance of fostering the powerful and synergistic release of cross-generational sharing, learning and performance.

New Perspectives

Businesses generally recruit along two distinct lines. Hiring youth allows companies to remain competitive and cutting edge whilst maturity provides access to knowledge and experience. With each new generation, the view of what is ‘normal’ changes. This separation of ideas coupled with the emotional ties found within family businesses and the gap between generations begins to widen.

The most successful organisations in today’s markets understand the importance of generational integration and the value that each individual’s skill set and knowledge brings to the business. Similarly, a family business needs to recognise that each generation brings something new, different and valuable to a family firm.

If you are a parent, you are probably the founder of your business and now have the opportunity to position your children as your business successors. Your role is not an easy one. Mastering and mentoring or teaching is somewhat like mastering the rhythm and beat associated with playing a musical instrument. Understanding the behavioural and motivational differences between generational sub cultures will help you read the music and enable you to play the instrument with confidence and finesse.

If you are the children of a silent or baby boomer generation member you are more likely to be from either generation X or Y and have a more challenging role to fill than you imagined. How you handle the responsibility is crucial to the succession process and the future success of your family’s business.

By understanding generational characteristics, a family business is more likely to develop an insight into specific generational ‘trigger points’ – the things that motivate a member of a specific generation. By developing this understanding, families can begin to remove any conflict and hostility that exists between generations which ultimately benefits the individual, the family and most importantly, the business.

The Way Forward

Research has indicated that baby boomers enjoy collaborative learning and working in teams so utilising them in a mentoring capacity could be very beneficial. Family businesses need to recognise that mentoring forms a significant piece of a strategic plan to ramp up staff retention and increase the knowledge and skills of talented employees.

Younger family members often talk about their disenchantment with the family business, describing the onerous demands or expectations placed on them by parents who have confidence in their abilities, but lack the time or skills to help them succeed. The result is frustration and a fear of failing, with many members of the X and Y generation planning to move on and look for a ‘normal’ business environment.

This means many family businesses fail to successfully explore the potential of cross-generational sharing, learning and performance. By using the more experienced baby boomers with their extensive knowledge, impressive networks and broad-based business experience, you have the ability to buffer the next generation against frustration and create a focus for their career paths.

Ultimately, baby boomers can assist successors in acquiring the skills-based knowledge necessary for transferring the management and ownership of the family business into the next generation. Whilst statistics show that many businesses do not survive the hand over to second and subsequent generations, understanding generational differences is the key to surviving the potentially life-threatening stage of business succession.

Take the time to mentor the next generation because the only way to shorten the transfer of knowledge from one generation to the next is to have someone with more experience to accelerate the succession process. Remember, each individual brings different skills and knowledge to the business and each generation brings something new, different and valuable to the family firm – use the information available in your business to build solid intergenerational teamwork.