Generational Shift -- Good for Small, Mid-sized Family Businesses

July 11, 2011
Tech-savvy and risk-taking next generation family members are bringing a new sense of energy and drive.

Have you noticed that family-run businesses are transforming due to the younger generation taking over the reins from their older family members. Why? Look at a mid-sized Iowa-based family owned customized elevator manufacturing company that was founded in 1936 and grew due to their core competency in designing and building custom elevators and providing associated engineering services. When the great grandson of the founder joined the business, the company was running an old IBM AS/400 system that was good at handling manufacturing operations, but it could not support a services-based model well, affecting its overall growth rate and profitability. Armed with a degree in engineering and an executive MBA, this new member of the management team quickly focused on improving the operations of the company by leveraging information technology, including implementing an ERP system that supported a services driven manufacturing business model. The company can now track customer projects through their entire lifecycle -- from engineering, material procurement, production and shipping to online installation, allowing the company to keep tabs on every project's progress through its delivery date.

In order to become easier to do business with, the company also enabled retail, wholesale and service customers to place orders, check status and access other information online. The company also equipped its field technicians with mobile handhelds to requisition parts and perform other transactions remotely from job sites. These technology investments enabled the company to double its business, while reducing inventory by 40% and improving on-time customer delivery metrics.

Such are the examples of tech-savvy and risk-taking next generation family members who are taking senior operating roles in their family run businesses and with it are bringing a new sense of energy and drive to these businesses. This is good news for America, where at least 3 million companies, representing 29% of gross domestic product and 27% of the workforce, are a family run business according to BusinessWeek (this number does not include farms and sole proprietorships.) These are not all small businesses -- one-third of the S&P 500 still have founding families involved.

Family-run businesses already enjoy an advantage over large corporations in four key areas:

  • Owner managers believe that they are stewards of the family enterprise and hence have a longer time horizon than most investors. This perspective enables them to avoid making decisions for the sake of short term gains at the risk of long term. Family-owned business also enjoy the benefit of the founder's drive, nimbleness and vision.
  • Customer relationships and satisfaction are important for any business's success, but successful family owned businesses take it to the next level by connecting with the customers they deal with, emphasizing the community and accentuating the personal touch. The founders/managers make sure every aspect of their company reflects those values. These messages resonate well with customers who tend to connect family run businesses with history, tradition, and reputation. This provides a huge competitive edge for family-run businesses in a competitive market place.
  • Family-run businesses also tend to have a higher level of trust and commitment to their employees because managers, who happen to be owners as well, tend to see their company as an extended family. As a result, these businesses enjoy low employee churn and a high degree of loyalty.
  • Family businesses have a larger repository of knowledge and experience passed down over time from previous generations of owner managers and a stable employee base that most companies often cannot match.

This sharp customer and employee focus (and the resulting competitive advantage) can be seen in family run businesses of all types. A recent article in the Wine Institute, called 'California Wine families -- the next generation' said that a unique feature about California's wine families is that the family name is often on the wine label. This usually means that the family will choose the path to quality in business or production decisions because its family name, and thus its reputation, is at stake. Family members tend to be loyal and dedicated to the family enterprise and the family presence in winery jobs provides continuity in passing institutional knowledge on to others at the winery. Finally, family members will work to keep the business valuable and reputable so it can be passed on to their children."

As the tech-savvy next generation takes over these businesses from their parents and uncles/aunts, they build upon the existing strengths by adding a powerful ingredient most likely missing from family run businesses -- use of technology to make operations more efficient and to make decisions more data driven. Many small businesses ranging from less than 100 to over 1000 employees such as Community Coffee, Drywall Supply, Morgan Foods and Sentry Group are examples of family business who have recently embraced technology. NASCAR is an example of a family business in which the second generation trained, nurtured and handed over the reins to the third generation who has leveraged technology extremely well in its change from a regional race into a prosperous international enterprise.

This next generation of owner managers hasn't just been exposed to technology; they've wielded it and shaped it their whole lives -- writing code for their computers, mastering games and conducting their social lives on the Internet. They are the proverbial "Renaissance children" having been born post 1970. As a result, they are very comfortable in bringing it into the operations of their company to increase the speed of business and to embrace risk more tightly than ever before. While they are learning to keep a balance between maintaining the existing family-business values and moving forward, they are bringing a new sense of energy, speed, urgency and purpose to these companies.

As we look at our recent small business and mid-sized enterprise (SME) customers, we see some family run businesses in that list, with a new CEO or a senior executive from the family. Having grown up in the digital age and being attracted to data-driven decisions, these ipad and smart phone carrying managers are transitioning their company's core information technology from spreadsheets and old systems to the latest they can afford. Here are some ways this next generation of owner-managers is likely to leverage technology:

  • Switch from running their business on spreadsheets to an enterprise business system to streamline their company's operations, eliminate inefficiencies and reduce costs to make it even more competitive.
  • Implement technology that provides business intelligence and insights, so they can identify issues faster and can proactively address them, and they can identify opportunities so they can rapidly capitalize on them.
  • Combine social media, internet/mobile marketing with traditional personal relationships to increase their reach to existing and prospective customers without sacrificing the personal touch. NASCAR is a good example of a business that has taken their technology based products and marketing to the next level with the next generation of management.
  • Implement mobile technology to make information available anywhere and anytime to accelerate decision making and become more customer responsive.
  • Expand globally and deploy underlying business and information systems to support this expansion.
  • Add an internet-enabled business model, especially in areas such as supplier collaboration, ecommerce and supply management

The next generation of owner manages are shaking things up in the right places -- they are leveraging technology to make their businesses faster, more aggressive and competitive, without sacrificing any of benefits of a successful and storied family business: a tradition of customer service, a loyal following, and an impeccable reputation for quality.

Thomas Tan is Senior Director of SME Marketing at SAP and responsible for marketing the SME (Small Business and Mid-sized Enterprises) product portfolio.

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