Technological changes, shifting consumer tastes and changing social trends have all contributed to the pace of disruption. According to estimates the average life span of a business has shortened from 61 years in 1958 to just 18 years today. More conservative estimates reveal the life span to be only 10 years. Disruptive innovation has wiped out entire industries and poses serious challenges for business.
Dynamics of the family business make them even more susceptible to the challenge of disruptive innovation. Shortened industry life cycles and changing business models mean family businesses need to act with increased agility.
Most family businesses are minutely involved in the day-to-day operations of the business and tend to lose sight of the big picture. Although family businesses realize that the business environment is changing. Most choose to do nothing. Often with the notion that change will not affect their business. Disruption, however, does not discriminate between corporations or family businesses.
Family businesses can through governance mechanisms ensure continuity. As stewards of the business, it is upon the family to create wealth and protect the legacy of the business. Stewardship of the business means providing direction to the firm. This is different from managing day to day operations.
Stewardship is defined by Tomorrow’s company (a think tank) as ‘the active and responsible management of entrusted resources now and in the longer term’. Guiding principles of stewardship are:
- Setting the course
- Driving performance
- Sensing and shaping the landscape
- Planning for the future
With disruptive innovation family businesses need to think beyond current products and markets. Disruptive innovation is not a new phenomenon. However, the rate of change from the first to the fourth industrial revolution has decreased significantly from 160 years to 20 years. Family businesses need to view disruptive innovation not as a threat but rather as a stimulus for continuity and to capitalize on opportunities.
In the hypercompetitive market only, those firms will survive that can differentiate themselves. Family firms also need to set their eyes on the horizon to ensure continuity. As the next generation enters the business their dissatisfaction with the existing business model is expected. Years of listening to complaints take their toll in the form of a negative perception of the business.
Family business owners have an opportunity here to provide a platform for the next generation to carve a space for themselves within the larger context of the business yet separate from the family business. It is an opportunity for expansion and mentorship.
In addition, disruptive innovation can be a means to diversify the family business and avoid conflict. Family businesses evolve over time from a single entrepreneur to the sibling stage and cousin consortium. Decision making becomes more complex at each stage of the family business evolution, moving from a single decision maker to multiple decision makers. One strategy to avoid conflict is to create separate businesses with the family business, acting as a holding company.
Forward thinking family businesses decide to allocate a certain percentage of profit to explore new ventures. This ensures that the entrepreneurial spirit of the family is nurtured. Family members are encouraged to explore opportunities.
For family business to thrive both the business and the family must succeed. The key to continuity is not just accepting that today’s business may not exist tomorrow but having the intent of working today to secure tomorrow. This is only possible if family businesses create governance structures and act as stewards of the business.