Obstacles, opportunities ahead for family businesses

Paul Mudde and Richard A. Morris
Published: October 25, 2010
 
A commonly held maxim in the field of family business is “the first generation builds it, the second generation grows it, and the third generation kills it.”
Is it fair to pin the failure of businesses launched 50, 60, or more years earlier on the current, third generation, or is the blame misplaced? This article examines market forces affecting businesses in the current global economy and explains how contemporary market forces are the underlying cause of the decline of mature companies.

The first challenge facing family businesses in today’s economy is the changing demographics. The U.S. population has been growing slowly over the past four decades. Within the slow general growth of the U.S. population, demographic segments such as the elderly or baby boomers are growing more rapidly than the overall population. By 2030, the elderly portion of the U.S. population will grow from 16 percent to 26 percent, similar to the populations of Italy and Japan. The U.S. population in 2030 will look like Florida’s population today.

Other important trends include the growth of Hispanic and minority populations while the Anglo-white population declines. Also, traditional family households with two parents and children are in decline, but households of singles and couples without kids are growing.
In summary, population slow growth in the population indicates slow economic growth, but businesses aligned with growing demographic segments will experience higher revenues.

The second challenge involves economic trends. Although the U.S. economy has had declining inflation over the past three decades, GNP has also declined. Adjusted for inflation, the U.S. economy grew only 1.7 percent in the past decade. It hasn’t exceeded 3 percent since the 1960s. Unemployment, which is currently high at 9.6 percent, is only slightly higher than levels experienced in the early 1980s. On the other hand, productivity is growing faster than the high rates achieved in the 1960s.

The combination of weak economic growth and increased productivity has resulted in a negative employment need index, indicating that without economic growth, the U.S. unemployment level will remain high for a prolonged time. Weak labor markets are likely to keep personal income growth flat, which will constrain the two-thirds of GNP dependent on personal spending. Growth will not be driven by the expansion of the domestic U.S. economy. Thus, companies looking for growth must take market share from competitors or find the growth segments within the broader economy and avoid those that experience decline.

Globalization is the third important trend for family businesses to consider when evaluating opportunities and obstacles. From 1970 to 2005, foreign companies penetrated the U.S. market, motivated by the size of its economy. For example, in the ’80s, a 3 percent market share within the U.S. was equivalent to gaining 100 percent market share in India or China in most product categories. These markets have grown substantially. China’s auto sales have surpassed the number of cars sold annually in the U.S. The demand for infrastructure growth in China is supporting the construction of a new electric power plant each week.

As a result, there is less pressure from foreign competitors in the U.S. market and more growth opportunities in growing global markets. Family businesses will be challenged to expand their business models to support global sales and operations, while competing with Chinese and Indian companies for critical resources. Recycling is likely to be a more important part of business as developing markets continue to grow at high rates and consume more resources than the world can produce.

The fourth important trend facing family businesses is the “green” movement. Related to the increasing demand for world resources, companies will benefit from reducing their use of materials and energy, and squeezing costs out of their supply chain. Many companies will be driven toward “green” practices by Wal-Mart, which is using a green index to evaluate its suppliers.

Lastly and of highest concern, the pace of business creation, maturation and decline is accelerating. Successful companies are reinventing themselves to adapt to changing business conditions. For example, FedEx, which built its original business model on overnight delivery, is now focused on global logistics. Blockbuster, which originally focused on renting movies on VHS, BetaMax and LaserDiscs, has transitioned to DVDs, video games and blue-ray discs distributed through stores, mail and vending machines. Despite its efforts to reinvent its business model over time, Blockbuster has lost substantial market share to Redbox and Netflix.

Blockbuster’s history and recent bankruptcy is a powerful example of the accelerated impact of market forces affecting business. In general, product adoption and business model cycles have compressed dramatically in today’s economy. As a broader example, consider the evolution of phone communication.

Telephone networks were introduced in 1877, and it took 50 years for the industry to gain 50 million users. Cell phones were introduced in 1973, and it took 11 years to gain 50 million customers. Skype, an Internet-based phone service, was launched in 2003, and in 2 years had 50 million users.
Businesses that are unable to adapt to the quickening pace of change will struggle to survive. Thus, family businesses that hope to continue across generations need a sense of urgency and a willingness for change.
There are reasons to be optimistic and pessimistic about family businesses’ ability to change and thrive in today’s dynamic global economy. Family businesses are typically challenged to overcome the legacy of previous generations. Later generations often have a reverence for the founding idea or business model that contributes to inertia. To avoid being blamed for the downfall of the family business, the next generation of leadership holds onto tradition even when market forces may threaten their company’s business model.

But the multi-generational leadership of family businesses can also be complementary for innovation and growth.

First, the entrepreneurial spirit of the founding generation, along with its business experience, can be fostered in the new generation of family leadership. The current generation and the next generation should look at each other as equal partners, each bringing something to the business. It’s important for the senior generation to clearly communicate confidence in the next generation and emphasize that change and adaptation is the less risky option than holding rigidly to tradition.

Second, family businesses have the benefit of multiple generations being involved in the business. The new generation brings new tools, technologies and passions to the business. This can be particularly useful in addressing opportunities associated with “green” business, global growth and expansion in non-traditional families. The senior generation can recognize opportunities associated with the growth of baby boomers and retirees and bring wise years of business experience. Under the guidance of more experienced family leadership, new ventures and strategic initiatives should be launched, providing new business models for expansion before the mature, core family business declines.

Paul Mudde is professor of strategic management at Grand Valley State University Seidman College of Business and a board member for the Family Business Alliance. Richard A. Morris is an adjunct professor at Lake Forest Graduate School of Management and principal of ROI Consulting.