It's no secret that family businesses (FOBs) account for a significant portion of global GDP, but little is known about how family businesses can function better and thrive longer. According to recent research by McKinsey, there is a unique formula that can be applied – and that formula also applies to family offices.
Original title: "The Blueprint for Success: The Secret of Family Business Success".
Text | francois botha
What is the important role of family businesses in the world?This question is worth pondering:Family businesses account for 70% of the world's GDP and 60% of employment.
Not only does a family business dominate the business, but it also has a longer lifespan, and it outperforms other businesses during periods of economic growth or recession. This shows that in the current situation of market volatility and ongoing geopolitical crisis, family businesses are better positioned due to their inherent resilience and adaptability.
What are the strategic actions and mindsets included in the 4+5 value creation formula?**dan cristian padure on unsplash
4+5 formula
The McKinsey study delved into the performance metrics of a total of 1,800 family-owned and non-family-owned firms, both public and private, and what was most interesting was the finding of commonalities among the top family firms. The 120 leading family-owned businesses come from all over the world, spanning 10 industries, and are established from less than a decade to centuries.
These top-notch family-owned businesses demonstrate a combination of four mindsets and five strategic actions, namely:"4+5 Value Creation Formula"。This unique combination sets these companies apart, and according to McKinsey's research, they do have the opportunity to quadruple their value over the next decade.
Four mindsets for forging resilience and growth
Beyond the goal of profits:Top family businesses often have a long-term mission beyond achieving shareholder value, and this focus on goals beyond profit is the first mindset to watch. This mindset helps to implant a legacy culture and brand identity for these businesses that often commit to impact-related activities.
Long-term vision:It's not surprising that family businesses have a long-term perspective, but the emphasis on continuously reinvesting in the business to advance these long-term goals is a second mindset that consciously prioritizes organizational resilience over short-term gains, influencing both investment and operational decisions.
Financial prudence:The third mindset is a balance between a conservative and prudent approach to managing money and a willingness to use debt strategically. This binary approach allows family businesses to cushion economic setbacks while capitalizing on opportunities.
Efficient decision-making:The fourth mindset is to have an efficient and streamlined decision-making structure. While this advantage sometimes stems from a family structure rather than a corporate structure, the flexibility it provides means that the best family businesses are better able to respond quickly to market changes than non-family businesses.
Five strategies for success
The above four mindsets can be combined with five strategies to ensure business success.
Portfolio Diversification:Benchmark family businesses are not limited to their core business, but also enter new industries and sectors. Whether through mergers and acquisitions or direct investments, this portfolio diversification often has synergies and strengthens linkages between companies.
Dynamic Resource Allocation:This is complemented by a second common strategy of redistributing resources to the most promising businesses, geographies, and channels in a fine-tuned manner to ensure that value is always maximized. It's not just about capital deployment, it's about turning existing entities into new opportunities and allocating the required teams accordingly.
Operational and investment efficiency:Efficient resource allocation is crucial, but equally efficient operations are a third strategic commonality of their success. This often comes from a deep operational understanding of the company's business units, more tracking of performance metrics, and arguably the biggest differentiator – a focus on innovation.
Talent Management:Next is the focus on talent, especially the ongoing attraction, development and retention of the best talent. This is not so much an HR function as it is a core operating philosophy. In addition to developing a skilled team, it also allows them to share a vision with the company.
Sound Governance:Finally, these businesses establish a clear line between family and corporate affairs, and their governance mechanisms are constantly reviewed to ensure that the business is not operated as an extension of the family, but as a professional entity with its own identity and heritage.
A family office has similarities with a family business, but it is different
Established family offices that have not yet adopted similar thinking and strategies in their operations can certainly learn from this 4+5 formula. These family offices are focused on managing wealth while taking on more responsibilities in terms of trusts and estates, so they are effectively family businesses that are their own version of themselves, and naturally share similarities to family businesses, such as being values-oriented, improving investment and operational efficiency, and adopting a long-term strategy.
The proliferation of new family offices is likely to benefit the most from understanding and implementing some of the learnings from this study, while adapting to address the unique challenges they face in areas such as privacy, compliance, and talent management.
Family offices are the most trusted businesses with a proven competitive advantage in attracting and retaining talent. Regardless of whether their performance is in the top percentile or not, new and established family offices are likely to struggle with recruitment, so more must be done to motivate and retain high-performing talent.
While top family offices have diverse portfolios, most are highly diversified across asset classes, but they tend to have smaller teams that must address both governance structures and frameworks to address family dynamics. Such as succession planning and conflict resolution, as well as managing the complexities of philanthropic activities and activities from decentralized jurisdictions and their respective regulatory requirements. This once again highlights their need for top talent and ample resources to achieve the growth and success they have planned.
When faced with the challenge of growth and transformation, it's not just emerging family offices around the world that can derive value from the "4+5 formula". As the family office space becomes more specialized and influential, it will compete more frequently and directly with larger, more established private and institutional businesses. So from a roundabout point of view, many of these competing family offices are family businesses themselves.
The author of this article is a Forbes contributor, and the content of the article represents the author's own views only.
Translated from. Forbes China Exclusive Manuscript, Please Do Not ** Without Permission**
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