NOT ALWAYS SMALL
There is a common myth that family business equals small business. It’s natural. Family is the building block for most of what we know. Early memories of trips to the corner store, the local hardware shop or the town garage and getting to know those proprietors personally frequently fuel the notion that family businesses are small businesses and vice versa.
While many family businesses are small, they are also mid-size, large, and even huge. In most countries around the world, family businesses are between 70 and 95% of all business entities and often dominate their industry sectors. Regardless of size, these firms have retained what makes them distinctive, family. From start-up, where 77% of all new business ventures established in the United States are founded with significant involvement of family in the business, to the more mature and successful, family-controlled firms now make up 19% of the companies in the Fortune Global 500, up from 15% in 2005.
What makes family businesses unique? The alignment of family, ownership and business can create strategic advantages and the ability to make adjustments to the market quicker and seize fleeting opportunities. Furthermore, a shared history and social bond often pull families towards sustaining their legacy. These can be counter-productive as well. Knowing when it’s time for an owner to exit the business or even when the family must sell can be excruciatingly painful decisions.
FAILURE, SUCCESS or SUCCESSION
Welch Allyn, one of the foremost medical products manufacturers, has been in family ownership for 100 years and four generations. A global leader in the innovation of diagnostic devices, they have also remained a family owned business, until recently. With significant changes in the industry and consolidation in the global marketplace, the Welch Allyn Board of Directors, together with the Allyn family, decided to sell its interest in Welch Allyn to Hill-Rom for $2.05 billion. “It was an agonizing decision,” states Eric Allyn, Chairman of the Board of Directors, and great-grandson of William Noah Allyn, who founded the company with Dr. Francis Welch in 1915. A decade ago, Welch Allyn transitioned from family-owned and family-managed, to family-owned with non-family management; since then, it has been led by a non-family CEO, and a majority independent Board of Directors. Although the new governance structure worked well, major changes in the US and global healthcare markets changed substantially forced the company to consider a sale. “The healthcare landscape shifted so substantially that we could no longer compete on a global scale. We needed to think about what was best for the company, and truly had to put the needs of the Welch Allyn ahead of the desires of our family,” said Allyn. “We loved owning Welch Allyn, and it was painful to realize that its future would be better as part of a much larger, multi-billion dollar company”.
Not all families are as honest with themselves. By the second generation, about 70% are no longer in family ownership, only 12% pass into the third generation and less than 3% endure into the fourth generation or beyond. Many of these businesses are successful and sell, much like Welch-Allyn, but many fail miserably, often bringing the family down with it (see Anheuser-Busch, Gucci, Market Basket, et. al.)
Creating lasting success is the goal of many, if not every business, regardless of size. Ernst and Young recently completed a survey of nearly 2400 of the largest family owned businesses in the world (figure 1). They key factors that often led to sustained success for many of these businesses; having a clearly identified successor, implementing numerous levels of governance, and communication within the family. Additionally, family businesses are creating opportunities for females, specifically daughters. Currently, 24 % of family businesses are led by a female CEO or President, and as many as 70% of family businesses indicate that the next successor is a female.
Source: Staying power: how do family businesses create lasting success? EY Report 2015
While the challenges to business and maintaining harmony in the family are many both here in the U.S. and abroad, most do not face the challenges of starting or sustaining a business in emerging markets. Many see the opportunity of those emerging markets from afar; 58% of small to medium enterprises are looking to emerging markets to sell their goods. Yet for those that face the reality of operating amongst political strife, financial turmoil or environmental crisis on a constant business, their daily reality is much different.
Even still, these businesses find a way to survive and even thrive amidst the chaos. A new term has emerged for these businesses, extremophiles, a phrase coined by Devin DiCiantis of Lansberg Gersick. Why do family businesses make natural extremophiles? According to Devin, their investments extend beyond the high risk episode, they are skilled at tactical triage AND strategic planning, they have strong ties to a city, country or region which often pre-date the current episode and they possess robust social networks. And, like most successful businesses everywhere, they have found necessity is the mother of invention.
FAMILIES in BUSINESS across CORNELL
On October 9, the Smith Family Business Initiative (SFBI) and Cornell University will celebrate “Families in Business across Cornell” day. The inaugural Families in Business across Cornell Day will be a full day celebration on the Cornell campus and will showcase the range and impact of family enterprise, from entrepreneurs to global enterprises and legacy families. Alumni, business owners and students are all invited to take part in this day-long series of keynotes, networking and workshops. Registration is open to all.
Founded in 2014 from a generous gift from John and Dyan Smith, the Smith Family Business Initiative provides education, networking and research for family business owners, successors and students from across the globe. Now entering its second year, the SFBI has established the Johnson Family Business Club, now with 90 members, and created numerous connections with campus supporters, Cornell alumni and educational partners. In July of 2015 the SFBI completed the first iLEAD program, a 20 immersion program with 20 next generation leaders from the US and China. For late 2015 and early 2016, a series of executive education programs will be delivered to a network of Latin American business owners as part of the Owners and Officers Institute in Miami.
John Smith, MBA ’74, and Chairman of CRST International, shared upon announcing the gift, “It is in the best interest of family businesses and the country for these businesses to be carried on for many generations. With a focus on family businesses at Johnson, good research will be conducted, educational seminars will address the unique needs of family businesses, and prospective students will be drawn to Johnson because of the family business expertise on campus.” Dyan Smith adds.
“One of the main reasons we are moving forward with CRST remaining within our family is because of education. The initiative is the next step to putting Johnson in the forefront of family business management.” (Cornell Chronicle, Jan. 21, 2014) The history of the Smith family business traces back to its entrepreneurial founder, Herald Smith. In 1955, Herald and Miriam Smith started Cedar Rapids Steel Transport out of a refurbished chicken coop they bought for $125. At the time, they had no trucks and no customers, but Herald, known as “Smitty,” convinced firms he could save them money. He contracted with owner/operators who were hauling livestock to Chicago to return to the Cedar Rapids area with loads of steel instead of empty trucks. Family owned to this day, CRST has evolved from a trucking firm to one of the nation’s leading providers of transportation solutions. (CRST website)