Want Stability? Seek Change
By Ernesto Poza
Family businesses that are both long-lasting and successful have managed to beat stiff odds. Only 32% of family businesses are passed down to the second generation, and 12% are still controlled by the founding family by the third.
To find out what makes some multigenerational family businesses more resilient, I interviewed fourth-, fifth-, and sixth-generation leaders of 16 companies that are at least 100 years old.
The companies have revenues of $18 million to $5 billion and operate in industries including newspapers, textbook distribution, bricks and tiles, food and beverages, insurance, and auto retailing.
What I learned was that in all these businesses, the next generation had a commitment to change. Often, change was driven by strategic planning or relying on a continuing series of entrepreneurial ventures. Every one of the companies had elements in its culture that enabled it to reinvent itself in successive generations.
Guy Renkert, the fifth-generation CEO of Ironrock Capital in Canton, Ohio, says that since the company was founded in 1866, each generation has paid close attention to the customer to adapt the business to the evolving market. Ironrock began as a manufacturer of paving bricks, becoming the largest such company in the world. As demand shifted to concrete and asphalt, it moved into structural bricks. In the 1960s, Ironrock used its knowledge of clay extrusion and firing to start an unglazed quarry tile business. In the 1980s, Guy's mother added glazed decorative tiles. Now, under Guy's leadership, the company still produces quarry and decorative tile but has returned to brick manufacturing, making a "thin brick" that builders can use to construct buildings that have the rich look of brick but are as quick and cost-effective to build as bare steel structures.
It is the business itself, more than any individual, that provides the impetus to transform the family and, therefore, the individuals in that family. If leaders bring more variety into a company, the business will have more resources to manage changing markets. That may mean hiring new people with new skills, implementing new information technology, adding independent outsiders to a board, or adopting team structures.
Of course, those changes may increase the conflicts that are already present across generations. But such conflicts are often crucial, providing the wake-up call needed to reinvent the business. Sometimes that call comes from the family's inability to sustain enough income to support the living standard the younger generation expects. In the early '80s, McIlhenny, maker of the famous Tabasco sauce, was seeing a slowdown in growth. Edward McIlhenny Simmons, the fifth-generation CEO of the Avery Island (La.) company, posed this question to family shareholders during a retreat: Should we invest in growth to expand profit-generating capacity or invest in an assistance program to help family members adjust to their new, less affluent reality? Not surprisingly, family members voted to support reinvestment in growth. New products, such as a steak sauce and Bloody Mary mix, were created, and revenues improved.
All of these owners continue to change both family dynamics and business strategy to sustain the source of their competitive advantage—an advantage that's often rooted in the unique nature of that family's relationship to its company.
Ernesto Poza is a professor of global business at Thunderbird School of Global Management and director of Thunderbird's Global Family Enterprise Center. Ernesto.