How a Family-Owned Firm Can Beat the Odds and Pivot
Statistics show that only 30 percent of family-owned businesses survive to have a second generation of leadership, according to the Family Business Institute. Sometimes it's hard to pinpoint the exact reason businesses fall apart. But often, it’s because a successor failed to update the company’s business model to meet technological and industry trends.
Many players involved with a family business can be resistant to change. If a business model has worked for years, why change it? While this might work for some firms in the short term, failing to recognize changing needs is sure to hurt a business over the long run. When a leader from a new generation takes over, he or she should almost always bring a fresh vision, taking into account updated ideas and technology.
In 2007 when I took over as CEO of Palo Alto Software, a company that my father had launched and run for almost two decades, I tackled the challenge of taking the organization to new level while still retaining its core values (focused on helping people succeed in business).
Under my father's leadership, the company's main software offering was a Windows-based tool that helped small organizations put together business plans. But as I became executive, I realized that Windows software would not represent the sole future direction of the industry nor should it dominate the focus of my company. I and other managers put together a plan for the development team to transition toward building web-based software as a service. My company's flagship product today still involves business-planning tools but also includes a management dashboard to help organizations track their progress against the goals in their budgets and forecasts. My company's core values are the same but its offerings have shifted to keep up with the changing customer needs.
Here are some pointers to help other family-owned businesses make a successful pivot:
1. Recognize that change is good. As a member of the next generation takes the helm, re-evaluate the company’s products and services, determine how the organization needs to evolve to remain relevant and consider pivoting the business model to keep up with the changing financial landscape.
Understand current industry trends. Anticipate the future of the business beyond the immediate present. Will customer demand for the product or service eventually decrease? Have changes in the business world afffected the problem that the company has been solving for many years?
For example, today more consumers consult smartphones to make purchases, and businesses are increasingly turning to web-based and mobile tools for help in running their operations. Or a brick-and-mortar business could launch an ecommerce site or develop a mobile app to meet the expectations of consumers. And software companies might aim to reduce their boxed-software product offerings in favor of subscription cloud-based software-as-a-service tools.
Look beyond fads. Don’t change the entire business focus to jump on trends that won’t last. Be sure to follow the evolving needs of customers and not make impulsive decisions that could turn out to be detrimental.
2. Stick to core strengths. While a business pivot may be needed for the company to survive the generational transition, don’t forget that customers are still expecting its core message and offerings to be same, yet evolved and improved over time.
There is a reason the family business succeeded over the years: Don’t lose sight of that. Remember what its differentiation point is and what makes the firm better than competitors. The trick is to find a way to retain that core competitive advantage but strengthen it given the current industry landscape and consumers' demands.
3. Plan ahead. With all the company's changes, be sure that the business can support it financially. Don’t dive into a business model pivot without a solid plan. If adapting the products or services, consider how this might change revenue and cash flow. While more revenue may be projected for the long run, some initial revenue and cash flow might be sacrificed. Though building an ecommerce site may increase sales long term, profits might take a hit for a few months during the online construction project as the shopping experience is finessed and marketing is ramped up.
My company's transition resulted in a drastic change in revenue for the short term. For years, it had relied on one-time sales of a desktop product. After the transition, most customers began to pay a monthly subscription rather than a larger sum up front. My company had to budget for taking in less revenue each month. Overall, it was a game changer for the business long term and my company is able to provide a better product.
A solid transition plan should include an analysis of current finances and a goal for the company a year, five years or even 10 years down the road. Create a forecast and a budget to set monthly and yearly objectives. Then be sure to track actual progress against goals, to be able to quickly understand whether the assumptions about the new business model are correct or whether adjustments are needed to keep the business fiscally healthy.