How family-owned businesses cope with growth and change

What you need to know:

Smartest firms manage expansion by strategic decision making as well as investing in talent.

Youthful demographics, urbanisation and a rising middle class are some of the trends that are rapidly shaping consumer preferences and the competitive landscape.

The smartest companies prepare for change by managing growth through strategic decision making, risk management, good governance and investing in talent. These trends are similar in the context of family-owned businesses.

Centralised decision making

Family businesses are more agile in decision making and responding to risks and opportunities in the market. If the owners are convinced about a new product or service, the decision-making process can be short compared to large public corporations.

Family business owners are also likely to make decisions that are closely aligned to the company’s brand and product line, based on their deep emotional and financial connection to the enterprise.

In more established family businesses, the owners tend to make the final decisions but may employ professional managers to help shape ideas and execute the chosen strategies.

These experienced managers may come from the family, having worked with the business through several cycles or acquired skills and experience from outside the family business.

In some cases, owners will assimilate trusted non-family members with relevant expertise and experience in the decision-making process.

Centralised decision making in family businesses can also be a liability. One or two family scions may make all decisions, regardless of whether outside counsel has been solicited or not.

The risk with this is that the scions may not prepare the right people for succession, or effectively prepare the organisation for their departure.

Good governance

The establishment of appropriate governance structures within a family business fosters effective management of risks and potential liabilities.

Larger family companies are likely to have governance structures that closely resemble those of a large corporation. The risk for the firms is that a core group of family members make most of decisions and they may not have a full view of the risks and opportunities impacting the company.

In this environment, risk management can become more reactive. Effective governance structures will ensure proactive management of potential risks and careful exploitation of opportunities.

In our experience most family-owned firms begin the implementation of formal governance and risk management structures mid-stream, when the businesses are well along the growth path.

It becomes harder to enforce new structures due to established behaviours and culture and this could cause disruption to business.

Talent management is a specific area of focus for CEOs in Kenya. Our CEO Survey shows that more than 75 per cent of CEOs intend to make changes to their talent management strategies this year and one of their top investment priorities is filling talent gaps.

They say that high-potential middle managers are the most difficult to recruit and retain, followed by skilled production workers.

For family businesses, cultivating the next generation of leaders — whether family members or otherwise — must be part of their talent management strategy. Succession planning is particularly important.

Family firms must have the courage to evaluate what is working and what isn’t, who is contributing and who isn’t. Identifying bottlenecks and performance issues can be sensitive in a family business.

It helps to have policies in place so that performance benchmarks and expectations are clear.

Kenya’s competitive market for top talent leads to competitive pay packages, among family-owned businesses. Whether they are family members or not, skilled and productive people will gravitate to positions where they are challenged and compensated for their productivity.

Retaining high-potential family members in the business may be influenced more strongly by loyalty to the family and the founders’ vision, but a compelling value proposition will influence retention among non-family members as well.

Mr Murage is a director at PwC Kenya’s Assurance Services and an adviser to family-owned businesses.