Family-owned businesses are the backbone of the U.S. economy, accounting for 90 percent of all firms. Many of us don’t realize how often we rely on them for our daily needs, nor do we fully appreciate the positive impact they have on our community through their philanthropic activities.
In Western Pennsylvania alone, prominent family firms include Giant Eagle, Eat’n Park, Turner Dairy Farms, Hunter Truck Sales and the James Austin Co., to name a few. Nationally, Walmart, Mars, Gore and Estée Lauder top off a who’s-who list of global firms with family origins.
Family businesses have strengths, but they also face unique challenges that threaten their long-term viability. According to The Family Business Institute, only 30 percent of family businesses make it to the second generation, and that number falls to 10-15 percent for the third generation and to 3-5 percent for the fourth generation and beyond.
At the Executive MBA Worldwide Program at the University of Pittsburgh Joseph M. Katz Graduate School of Business, we frequently interact with members of family businesses and closely held firms through our suite of degree-granting and custom executive education programs. Over time, I’ve observed three fundamental business challenges shared by many family firms.
Failure to establish clear governance structures
According to John Ward of The Center for Family Enterprises at Northwestern University, governance in a family firm can be seen as relationships among: management, owners and the board of directors. The roles and responsibilities of each group must be clearly defined, and all family members and non-family leaders of the firm must understand the roles.
Underinvestment in leadership development
The talent pipeline must be nurtured and replenished. Many times family-owned or closely held businesses overlook the need to develop new skills and grow professional networks through executive education programs.
Leadership development helps family firms to develop improved strategic plans that allow them to look beyond today’s demands and take advantage of future opportunities. Additionally, leadership development is correlated to succession planning, which protects the business and ensures the right people are in place to lead.
Lack of effective communication
Communication is the mortar of every organization, and family business is no different. Effective communication builds trust and establishes meaning. Poor communication does the opposite.
It’s important for family business leaders to use both formal and informal channels to deliver their message, and to also practice good listening skills in their interactions with employees. Ultimately, honest, direct communication is linked to the credibility of a leader.
Despite these challenges, one area, in particular, where family businesses lead the way is in innovation. A recent study by PricewaterhouseCoopers found that 42 percent of family businesses plan to establish new entrepreneurial ventures within the next five years; one reason why is that family firms often have an unparalleled knowledge of their industry.
The overall success of family-owned and closely held businesses is vital to our overall economy. By leveraging innovation and deep industry knowledge, family-owned and closely held businesses will continue to create jobs and add value to the economy.
Bill Valenta is an Assistant dean, MBA and Executive Programs at University of Pittsburgh, Joseph M. Katz Graduate School of Business and College of Business Administration. Bill oversees the MBA and Executive programs, which include MBA, Executive MBA and custom education programs for executives.