Change, Change, Change. We hear about globalization, speed, technology, virtual workforces, labor market, outsourcing, belt-tightening, etc. These and other forces may change the daily challenges of work, but the basic principles of leading a family business effectively remain unchanged.
An interesting thing happened on the way to raising capital. Prior to the deflation in technology investments, we were meeting with investment banking firms on behalf of a family business that owned a manufacturing company. What impressed us most about some of these meetings was the lack of interest, even disdain, for a company that had solid earnings, spectacular growth (relative) in earnings and revenue, and a very long history of sound management practices. One such learned individual even went so far as to suggest that we seek a therapist to help us overcome our fixation on “money making, earnings, and cash flow.” Forces such as globalization, speed, technology, virtual workforces, labor market, and outsourcing may have altered the daily challenges of work forever, but the basic principles of creating value in a family business remain, effectively, unchanged.
Although everyone likes to talk about leadership (and it is clearly very important), it is not the antidote to all problems. The message of leadership is repackaged, over and over again, with a new twist or a new voice beckoning us to follow. (Some of these voices are very compelling, i.e. “Jesus as CEO.”) Compare the marketing of leadership to the principal of weight loss – consume fewer calories than you burn. This principle is very simple at its core, but as it is packaged and marketed, its complexity can become dizzying.
The problem with many of today’s family business executives is not a lack of knowledge or inspirational leadership, but rather a lack of application of knowledge. In other words, there is frequently “a knowing – doing gap.” Leading a family business has, in many ways, not changed over the years, and spending time trying to invent new leadership techniques is probably not a good use of time. Assuming that you have a solid understanding of your business and industry, your time and energy is well spent on specific actions and implementation.
To successfully implement consider these “7 Well-Known Secrets”:
SECRET #1: FOCUS
Identify your market, your competitive advantage, and your firm’s expertise, then stick to it. Staying on course with what you do best is often an operational challenge for entrepreneurs. Maintain your focus by automating, streamlining, or outsourcing functions that are not core to your business.
A recent German study found that the most profitable companies sold fewer products and had fewer customers and suppliers. Their conclusion, “complexity leads to overhead that results in increased expenses.” Adding complexity generally leads to increased sales with eroding net margins, while focused operations are usually more profitable.
Perform an 80/20 Analysis to identify the most profitable services, plants, products, sales people, or regions in your business. Since there is substantial evidence that the 80/20 Rule is alive and well in most facets of life, (i.e. computer CPUs, engines, sales, internet content) it is safe to assume that some variation of the 80/20 Rule applies to your company (possibly 70/30 or 90/10). Therefore, if the 80/20 Rule exists in your firm, the most profitable 1/5 of your company is probably 16 times more profitable than the remaining 4/5. There may be good business reasons for continuing to work with the remaining 4/5, (i.e. new technology, market expansion, loss leader), but often these less profitable areas are just leftover and have never been assessed for profitability or strategic alignment.
SECRET #2: PLAN FOR SUCCESS
Planning is one of the most well-founded principles of personal and business effectiveness.
Although the time horizon is shorter in today’s fast economy, planning at all levels within your company (as well as among the shareholder group) will significantly improve the likelihood of hitting targets. Effective planning should trickle down through the business. Each level of planning inside the business should provide the context for the next level and should result in a better organizational alignment.
A solid strategic plan is important, but remember, “The devil is in the details!” Companies that are diligent about translating strategies into specific, individual performance objectives tend to operate more effectively and efficiently.
SECRET #3: COMMUNICATE
The payoff for effective communication is increased:
- Discretionary effort (behaving like a responsible owner)
- Employee intelligence
Communication sounds intuitive enough, but many families in business simply miss the mark. In spite of numerous communication efforts by management, lack of communication is predictably the #1 complaint resulting from employee opinion surveys. A closer look at the data states that employees really want/need answers to 4 questions:
- Where is the business going? (Strategy)
- What are we doing to get there? (Plans)
- What can I do to contribute? (Roles)
- What’s in it for me? (Rewards)
Ensure that these questions are answered before communicating about other topics. Leaders from today’s most successful companies argue that “Leadership is Communication.” Therefore, to be an effective leader, ensure that communication is a top priority, honest, consistent, and two-way.
SECRET #4: DEFINE PROCESSES
This ‘secret’ refers to automated and manual processes. Underdeveloped infrastructure (systems, processes, and structures) is one of the most common risk factors for family businesses. Are your processes and systems?
- Supported by tools
- Easily accessible
Although it is always easy to say, “We need a new system,” we recommend streamlining the manual systems before changing technical systems. Many companies who reverse this order simply end up automating inefficiencies.
As an acid test for how well the processes are defined, documented, and consistently used by employees, ask, “How easily could we franchise our business?” Effective processes will enable management to work “on” the business rather than “in” the business.
SECRET #5: DESIGN YOUR CULTURE
Culture can be very complex. Pared-down however, it is all about – BEHAVIOR. Simply put, you want to design systems to reinforce behaviors that support your strategy. Cultures are created and reinforced by:
- Rules and policies
- Goals and measures
- Staffing and selection
- Training and development
- Ceremonies and events
- Leadership behavior
- Rewards and recognition
- Physical environment
- Organizational structure
One family management team was experiencing tremendous growth and were concerned that they might lose autonomous culture of the company. Unfortunately the incredibly detailed rules and policies they implemented gave the opposite message to most employees. Another client recognized that in order to grow the business they needed to give senior managers more accountability. The CEOs leadership behavior (micro managing), communication (informal and haphazard), and employee development (minimal) continued and the management team (family and non-family) never jelled. Needless to say, this company’s growth was very turbulent and slow. This latter example is not unusual to see in an entrepreneurial family business.
SECRET #6: SELECT & TRAIN
Selection and training are the two best levers for improving Human Capital. You can receive the greatest ROI by simply managing your human capital resources. Adhere to these key actions to maximize your ROI:
- Resist the “warm body” syndrome. Hire a good fit for the company, and do not compromise. (Employee selection is often the least effectively executed management activity)
- Train continuously using a broad definition of training (mentoring, developmental assignments, special projects, building external networks, providing 360-degree feedback).
- Ensure that all employees understand the business: the cost/revenue driver and how they can contribute to the financial success.
SECRET #7: MEASURE
Measurement and feedback, like planning, are well-founded principles of human behavior. You can do everything correctly, but if you do not measure performance, management is limiting the company’s ability to adjust. When measuring results, keep these tips in mind:
- Measure what matters
- Keep it simple
- Focus on a few key success factors
- Remember, what gets measured, gets done
- Manage what you measure
- Use your performance management system as a strategic tool, not a Human Resources program
- Err on measuring more frequently and less in depth
- Reward along the way and in little steps, waiting until the end of a major project is often too great a distance from start to finish
- Remember, “that which you can measure, you can reward”
Revenue, earnings, margins, and management are fundamental to a firm’s value. Intellectual property, brand image, and “eye balls” add value to a firm but, independent from the fundamentals, are usually not enough to support a lasting, high value of any firm. (The anti.com perspective) Turning these ‘secrets’ into actions will help create sustainable advantages in your family business.
This article was written by James Olan Hutcheson with Lee J. Colan, Ph.D., President of The L Group, Inc.. The L Group helps growing companies achieve their business objectives by leveraging their human capital. Contact Lee at email@example.com.