To prosper in a crisis, adopt the strategy of large family businesses!

Alain Bloch, Affiliate Professor, Director of HEC Entrepreneurs - January 15th, 2014
Family Business Portrait

Family businesses are full of surprises. They have very strong roots while being highly international, they avoid layoffs while staying focused on profitability, they innovate while playing it safe, they distribute few dividends and acquire little debt, and, finally, they resist crises better than nonfamily firms. Their most remarkable advantage: a strong capacity for resilience!

Alain Bloch ©HEC Paris

Alain Bloch is director of HEC Entrepreneurs and co-founder of HEC Family Business. He is the Sales and Distribution Chair of the French National Conservatory of Arts and Crafts (...)

See CV

Do family businesses really outperform others? While debatable, it all depends on the period of study. Alain Bloch, Nicolas Kachaner, and George Stalk show that family firms remain consistent through different economic cycles instead of mirroring them, unlike their nonfamily counterparts (see diagram). Thus, over the medium and long term, they generally appear better off than nonfamily businesses. The explanation is simple: Family-owned firms implement a strategy that promotes sustainability over short-term performance. This strategy, without necessarily being explicitly theorized, is the result of the common way in which they allocate resources.

FRUGAL COMPANIES

CEOs of family businesses manage the company’s money as if it were their own. They do not spend more than they earn and borrow little. This policy can make them miss great opportunities, going against traditional management principals that advise going into debt to maximize leverage of investment, but prevents big disappointments. These leaders generally prefer organic growth, partnerships, joint ventures, and acquisition of small companies rather than large ones. Since they incur little debt, they are less likely to make financial sacrifices during periods of recession.

INTERNATIONAL AND DIVERSE COMPANIES

Their frugality does not mean that family-owned firms are complacent. In fact, they are strikingly more diverse and international than their nonfamily counterparts. Among the family businesses studied, 46% are very diverse, while only 20% of nonfamily businesses are. This surprising finding is the result of family firms’ cautious approach: they do not put all their eggs in one basket. For them, diversity and internationalization are ways to ensure sustainability. When one country or sector suffers from a recession, they are supported by more profitable activities elsewhere. The need to diversify risk also leads them to be audacious. It is this unique way of combining ambition and caution that builds their resilience.*

COMPANIES THAT CARE MORE FOR EMPLOYEES

Another particularity is that family businesses retain talent better than nonfamily businesses. This is the case even though employees often receive fewer financial incentives. Significantly, family businesses avoid layoffs during downturns, which contributes to increased employee engagement and enables them to keep skills and expertise. Family businesses also invest more in training, spending on average €885 a year per employee, versus an average of €336 euros among nonfamily companies. Ultimately, this virtuous circle further enhances the resilience of family businesses. Especially by avoiding transformational transitions, companies require fewer integration efforts to make and better preserve their culture.

If this resilience strategy seems uniquely innate to family businesses given how naturally it fits with their conception of the world, it can also very well be applied within other nonfamily businesses. It is already implemented in non-family groups such as Nestlé, Saint-Gobain, and Essilor. In his work with old firms, Bloch observed similar practices. According to him, it is perhaps the stability of the management team that constitutes a key element of this strategy. At Accenture, for example, overall turnover is huge, but the management team has 25 years of seniority. It is difficult to think in terms of sustainability when the leadership changes every four years and market pressure is at its strongest!

*Resilience: the ability of an organization, group, or structure to survive and adapt to a turbulent environment

Based on an interview with Alain Bloch and the article “What You Can Learn from Family Business,” co-written by Nicolas Kachaner and George Stalk, published in Harvard Business Review , November 2012, vol. 90, n° 11, pp. 102- 106.

PRACTICAL APPLICATIONS
PRACTICAL APPLICATIONS

The study led by Alain Bloch, Nicolas Kachaner, and George Stalk helps to understand the factors underlying the performance of family businesses by lifting the veil on a type of strategy that is not theorized but naturally applied in these companies. When crises follow one another at a rapid pace, this strategy, focused on long-term resilience rather than short-term performance, could inspire many managers. By combining entrepreneurial audacity and caution in the same way, favoring sustainability over short-term profits, non-family businesses could better withstand shocks, (provided they can withstand shareholder pressures).

METHODOLOGY
METHODOLOGY

Alain Bloch, Nicolas Kachaner (BCG), George Stalk (BCG), and Sophie Mignon (École Polytechnique) analyzed 149 publicly traded, family-led businesses with revenues of more than $1 billion, located across seven countries. They compared them to similar nonfamily businesses during the period of 1997 to 2009.