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Strategic Succession Planning for Family Businesses

Family business strategic planning is the key to successfully transitioning the family business from one generation to the next suggests Don Schwerzler, founder of the Atlanta-based Family Business Institute and their web organization Family Business

According to Schwerzler, Strategic Planning is the surest way for a family business owner/leader to plan/prepare for the future. Often, many family businesses see strategic planning as something that is done by large businesses, implying it means spending a lot of time and money or remember it as something they in the past without getting any real benefits. However, it is very important to remember the quote often attributed to Benjamin Franklin, “Failing to plan is planning to fail”, and similarly “failing to prepare is preparing to fail”.

Family Business Experts (FBE) conducted an interview with Jay Weiser, an experienced strategic planning expert (JRW)to better understand why a family business should conduct strategic planning, what value it should expect from the process, and how it should go about doing this. In this first installment, we asked Jay about why it is important to do strategic planning, what new realities need to be considered as part of the planning process and some initial steps family-owned businesses can take to start on the right foot. In future installments, we will discuss the strategic planning process and just as importantly strategy execution.

FBE: Why is strategic planning important to family business entrepreneurs?

JRW: Let’s simply talk about planning. You would not take a vacation without planning or leave without packing. Why would you do differently for your business?

Let me expand on this. Vacation planning is like strategic planning. You need to decide where you are going, what you want to do, how you want yourself and others with you to feel, where you and they want to stay, how you are going to get there, what you need to pack, what it will cost and much more. You get the point. Sounds like these could be business questions too, right?

Now let’s add some reality (complexity) to this example. Sometimes, you change your mind about where you want to go or stop during your vacation or even find a better vacation that you now want to take. Other factors are outside of your control like your flight and/or cruise may get diverted or delayed, the weather may be different than expected, and more. Now if you are rigid in your plans you are never going to be very happy (you may at worst be unhappy). If you are flexible (and prepared) you may take a better vacation or have an even better time on vacation than you ever expected. The same holds true for running a family-owned business.

Just like for a vacation, planning and preparing are key to success. Strategic planning and strategy execution are key to building and sustaining a profitable business. As a family business owner, you may not only want success (profits and increased business value), you may also want to pass your business on to the next generation. This makes succession planning and talent/capability development critically important for a family-owned business. Given that only 30% of businesses successfully transition to the second generation and even fewer to the third and fourth generations, the odds are not in your favor. Planning, preparing, executing and adapting can greatly improve your odds and results.

FBE: OK you convinced me that strategic planning is very important. Notwithstanding this, we all know that family-business owners and their leadership teams can be very busy fighting fires and dealing with other operational and family issues. What problems will likely occur if strategic planning is not done? What risks does this pose?

JRW: Well, the list is virtually endless. Let me touch on four resulting problems and related risks.

1. Strategic planning is about making choices in order to achieve a goal/objective. If you don’t have a goal/objective, what is the point of making choices? Without a plan, a business, its leaders, and its employees do not know which customers are right for them. Therefore, they do not know what to sell and so on. The combination of limited resources, no decisions being made, and continuous activity ultimately leads nowhere and ultimately results in failure.

2. Without a plan or planning process, a family business owner and its employees know little about where they are and what is likely to occur. They do not know what they need to do and therefore do not know what they need. Imagine being told only that you are leaving blindfolded on a trip tomorrow, be sure to pack correctly before you leave you will be sedated and a $100 put in your pocket. You will be dropped off somewhere in the world with no maps nor the ability to get one. You will receive the following direction, “be somewhere within 90 days”. We will tell you if you succeeded on day 90, not before. If you do, you will live and be compensated. If you do not, you won’t. Does anyone want to play?

3. Yogi Berra is quoted as saying “If you don't know where you are going, you might wind up someplace else.” How true and usually “someplace else” is not where a family business owner wants or would want to be. Without direction and a plan, a business is lost, left to flounder, and performance is left to chance. Like swimming in a lake blindfolded, the likelihood that you will survive is slim.

4. Without a plan or planning process, it is virtually impossible to do effective and responsible succession planning (for family members and other critical positions). It is not a good idea (risky) to do succession planning in isolation from strategic planning. Why? Because whoever is “next in line” may not be the right person to get the business where it is striving to go. This can become a drag pulling down company performance, a barrier to success, to worse lead to the business’s demise.

Bottom line, not doing strategic planning leads to innumerable and sizable problems and risks, all ultimately with a high probability of business death. As initially stated, failing to plan is planning to fail.

FBE: So strategic planning is a necessary and prudent thing to do. I remember strategic planning seemed so much simpler and easier in the past for my own business and my clients. Why is this? What are the key differences that businesses, especially family-owned businesses need to consider?

JRW: I believe there are three key differences for all, including family business, owners/leaders to consider. Additionally, there is a fourth difference that applies more so to family-owned businesses.

1. The environment most of us operate in is not as stable or predictable as it once was.

2. Competitors can come from anywhere, even outside our markets and industry.

3. Customers have far more power, based on having more choice and more information.

4. Identifying, evaluating, and choosing successors (family or non-family) is becoming more and more important and challenging given the changing capabilities needed to not only survive but thrive in today’s disruptive and more complex environment.

FBE: What do you mean that the environment is not as stable as it once was?

JRW: For most of us, the environment, industry, and our businesses are not as stable and predictable as they once were. Change and disruptions are not sporadic occurrences affecting some of us, they are happening and will continue to happen all the time. I cannot think of a single business or industry that has not been disrupted or fundamentally changed in the last few years. Disruptions can occur at the macro level – like tariffs and trade restrictions, at the industry level – like the impact of the introduction of autonomous cars and car services like Uber on the automobile industry, and even outside our industry like the impact that autonomous cars and Uber will have on the car insurance business.

FBE: So, knowing this, what should business leaders and owners do differently?

JRW: It’s important to scan the environment far more often, more broadly and further out (timewise) than ever before. No longer is it enough to look at the competitive landscape and environment once a year, it needs to be regularly (if not continually) monitored. It is important to look more broadly and scout (outside your known market and industry) to see current and sense possible disruptions sooner. Lastly, look out at different time horizons and continually challenge long-held industry and business assumptions to see if they still hold.

In an ever-changing business environment, it is critically important that business leaders (family and non-family) and others take steps to update their skills and grow their capabilities to pick up on and meet ever-changing business demands. It is unlikely that sticking with the historically “tried and true” will be enough for business viability, let alone business growth.

Owners and leaders need to think about how their own businesses have already been disrupted. Did they see these changes coming or only realize them when it was (too) late? Candidly and openly reviewing these instances often leads to invaluable insights and lessons learned that will enable leaders and others to see and sense signals earlier, reduce surprises, and take proactive steps to be better prepared for the future.

FBE: Next, you mentioned competitors coming from anywhere, what do you mean?

JRW: In the past, we only (needed to) considered our immediate competitors, in our market and industry. Today, competitors are coming from near and far (geographically) as well as from other industries. Technology has made the world much smaller and more accessible making it easy for distant competitors to enter our markets. A local boutique is no longer competing with those in town, but often with those around the world. Technology has enabled new business models allowing existing companies outside our industry and new disruptors to compete in our industries. For example, hotel franchise owners never had to consider every local home and apartment as a potential source of competition. Airbnb has changed that. IBM never saw Amazon as a competitor, but with its excess computing capacity, Amazon is now offering competing cloud services.

These new competitors emerge and often succeed (or hurt us) because they deliver more customer value. They do this by doing something better (transportation - think Uber vs. taxis) or because they offer something (products, services, and experiences) new and completely different that is better and more valuable in the customer’s eyes than what was previously available (hotels vs Airbnb). Bottom line, competitors (in and outside our industries and markets) are finding new, different, and better ways to solve the customers’ problems/meet the customers’ needs that provide greater value to the customer than what was previously possible and/or even thought possible.

FBE: How should business owners and leaders address this?

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JRW: In much the same way that we recommended they address changes and disruptions to the business. Beyond this, family-business owners need to collect and analyze market data and take other steps to improve their market intelligence just like larger corporations do. Relying on anecdotal evidence and intuition is not enough, it needs to be supplemented with real intelligence and data.

Beyond this, it is important to better understand the customer problem that needs to be solved or job done. Next, you need to compare how your product/service works with those of competitors and how the customer values each. It is important to proactively and frequently/regularly ask critical questions like:

· Are there better ways for us to solve the customer’s problem or do their job that creates more value for them (independently and compared to competitors’ solutions)?

· Even more basic, are we solving the real (right) problem or doing the right job?

These critical questions and others need to be asked and answered by owners and their leadership teams. This may uncover the need to disrupt their own business versus just tweaking it. Owners and their leadership teams need to be open to having and acting on these discussions. Notwithstanding this, many family business owners are afraid to mess with the “tried and true” considering it too risky and choose to disregard what they hear. While they believe there are reducing their risk, they unintentionally create more risk with their “safe” choices.

Rest assured if owners and their leadership teams do not ask these questions and take prudent action on the answers they hear, there are or will be competitors who do or may already be doing so. When this happens, family business owners are often surprised and caught off guard. At that point, it can be too late for them to react and fully recover, resulting in their business and reputation being impaired.

FBE: You earlier stated that customers have more power, can you explain what you meant by this and provide some examples?

JRW: Simply put, businesses used to be in the driver’s seat. They had more information about the products and services they were selling than their customer did. Customers often had limited choices whether it be because of geographic boundaries or a lack of awareness and information. Customers had to often work hard (which they try to avoid) to find and learn about alternatives, in essence making them captive. For years, businesses used this asymmetry to their advantage.

Times have certainly changed and this is no longer the case. Now with the internet, customers have easy and fast access to a great amount of information about your and competitor products/services ranging from price, the total cost of ownership, specs, quality user reviews and much more. It is very easy for them to compare and even purchase other’s products/services and even new, just launched, alternatives. The customer often knows more about your products and the competitors’ products than you and your own salespeople do. They are clearly in the driver’s seat, know it, and use it to their advantage. One needs to look no further than how the process of buying and selling cars has changed over the last few years. Retail is another example.

These shifts can have a tremendous negative impact on the business. Employees who are not as well or more informed than their customers are at a big disadvantage. They are unprepared for and unable to act for their customers. This is exacerbated by “old” company rules and policies, which were right for a different time, but not now. These hinder employees’ ability to do their jobs. Employees become frustrated and often disengage. If the customers cannot get what they want, how they want, when they want, and where they want; they go elsewhere. Sales decline often at an accelerating rate putting the business at great risk. This does not have to happen.

FBE: So how can a business compete and win if the customer has so much more power?

JRW: First, family business owners need to strike “win” from their vocabulary. Winning infers someone is losing. If customers lose, they are going elsewhere. This is zero-sum thinking is fighting for a bigger share of the pie – someone wins, and someone loses. We need to have a mindset of abundance – which means the goals are to grow the pie, so everyone gets more. It is about the customer getting more value and the business figuring out how to do so (more) profitably – which is a win-win proposition. It is about creating more value for both the customer and business than they had before or would have otherwise.

To do this, companies need to focus on their customers, understanding their needs and delivering more value to them, first and foremost. If they cannot do that, nothing else matters. Everything the business does needs to ultimately serve or at least not detract from that purpose. To make it win-win for the business they need to be able to do so profitably. Sounds simple enough.

The key to doing this is understanding the customer (and potential customers), their needs, and how they are currently being served (if at all). This takes up to date customer information. Just as large companies do, family-owned business needs to do market research. While this can be complicated for larger, more complex businesses; for most, it is about asking and listening to the customer, conducting periodic customer surveys, watching how they use the business’s products/services to identify ways to add value, and periodically surveying the market overall to see where there might be unmet needs. While the customer/prospect is the best source of information, employees who work with customers and hear what they like, don’t like and want can be invaluable sources of data. Ignore these at your own risk.

Like larger corporations, family-owned businesses have mounds of customer data. However, most family-owned businesses have not yet begun to (fully) analyze the customer, product, and transaction data they have. Having analytic capabilities can help companies answer questions like which customers are most profitable, which are growing, and which are declining, which products require the most service and support, and so on.

Collecting and analyzing this and other data along with market research can provide valuable and new insights that the company can use to inform decisions. While family-business owners’ intuition is still, it needs to be supported by and/or augmented with data-supported insights to drive better more informed and timely decision-making. This data and resulting insights can and should be shared with employees so they can make better decisions when working with customers.

Businesses must realize this is not a one-time event but must conduct some level of these activities throughout the customer lifecycle. Customers are purchasing more than the product/service; they are purchasing an outcome and the experience of achieving it. Maintaining a near-constant finger on the pulse of the customer and market ensure promises are kept and the company remains relevant.

FBE: The last point you raised that needs to be considered was that succession planning is becoming more and more important and challenging? Wasn’t this always the case? What’s different?

JRW: Yes, succession planning has always been very important for family-owned businesses. However, it has become a far more urgent issue given the pace of change, the rising complexity in business today, and greater and different competition. Succession planning is no longer enough, it must be augmented by more intensive succession preparation. This is critical for internal candidates (family or non-family) to be future-ready.

Beyond this given the other changes previously mentioned the demeanor, skills and capabilities necessary to lead a family-owned business are no longer constant. They are fluid and evolving, driven by the company’s strategy, execution, and performance and dynamic external factors (customer factors, competition, and broader market and environmental changes.

Bad choices can have broad and immediate impacts. They can be more difficult to recover from than in the past.

FBE: So what should a family-owned business and its leaders be doing to address this new challenge? Learning agility – the interest and ability to learn new things fast and put them into place is essential.

JRW: First, it is important and essential to incorporate succession planning and preparation into the strategic planning process if you want the improve the odds of success. It is not a good idea (risky) to do succession planning in isolation from strategic planning. Why? Because whoever is “next in line” may not be the right person to get the business where it is striving to go.

So, who is the right person(s)? The right person is one who has the demeanor, skills, and capabilities to not only plan and execute the strategy but also someone who can navigate through and be successful in a constantly changing, unpredictable environment. Beyond traditional core skills, two new capabilities are required. The first is learning agility – the ability and desire to quickly learn and incorporate new ideas often replacing past “tried and true” practices. The second is a high degree of timely adaptability. The environment is constantly changing. To have timely adaptability, one needs to have a high degree of self and environmental awareness and be able to effectively pivot as the situation demands without much, if any, hesitation. These two capabilities are mutually reinforcing.

The challenge often is do you choose a person who fits or soon able to meet this new profile or do you change the profile to meet the person? I recommend the former, but that is easier said than done in a family-owned business. Now if the “heir apparent” can through preparation develop and hone the skills and capabilities necessary in a timely manner (determined by succession plan) and is interested in the business the path is clear. If that is not the case, then other (more qualified) family members and/or non-family members, in or others outside the company, need to be considered and selected if growth is the goal.

Alternatively, the role can be adjusted for the person which very well may have real long-term performance consequences ranging from simply a “drag” on performance to major adverse performance impacts, if capability gaps are not otherwise addressed. This is where the family/ownership system overlaps with the business system and tough choices may be called for.

Copyright, Jay Weiser and Weiser Strategy Group, 2019.

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