Why Family-Owned Businesses Struggle?

Because many leaders resist the urge to Change!

Family-owned businesses are often hailed as pillars of tradition, legacy, and enduring success. However, a common adage suggests that such businesses rarely survive beyond the third generation, encapsulated in the phrase “shirtsleeves to shirtsleeves in three generations.” One significant reason behind this decline is resistance to change. This article delves into why family businesses, particularly in contexts like Chinese family enterprises, struggle to sustain their success past the third generation.

Resistance to Change and Innovation

Sticking to Tradition: Many family businesses, especially in cultures with deep-rooted traditions prefer to adhere to established practices. While these practices might have been the bedrock of initial success, they can become a hindrance in a rapidly evolving market. Traditional methods might not align with current consumer preferences or technological advancements, leading to a competitive disadvantage.

Risk Aversion: Successive generations may become increasingly risk-averse, prioritizing stability over innovation. The founder’s entrepreneurial spirit, which drove initial growth, often diminishes over time. The fear of the unknown can prevent these businesses from exploring new opportunities, leading to stagnation.

Generational Gaps in Vision and Leadership

Diverging Goals: The entrepreneurial vision of the founder may not resonate with subsequent generations. While the founder might have been driven by a passion for innovation and growth, later generations may focus on maintaining the status quo. This divergence in goals can lead to strategic misalignment and conflicts within the business.

Leadership Transition: Passing the baton to the next generation is a complex process. Third-generation leaders might lack the experience, passion, or business acumen of their predecessors, resulting in mismanagement. Effective leadership transition requires not only planning but also the grooming of capable successors who understand both the legacy and the need for modernization.

The Case of ABC Furniture Co.: How the Founder’s Resistance to Change Threatened a Legacy

Business Name: ABC Furniture Co.

Founded: 1960

Founder: Mr. A

Industry: Furniture Manufacturing

ABC Furniture Co., founded in 1960 by Mr. A, built a strong reputation for high-quality, handcrafted wooden furniture. The company thrived on tradition and craftsmanship.

The Founder’s Era

Under Mr. A’s leadership, the company prospered with a focus on traditional craftsmanship and local retail networks. The introduction of his children in the 1980s brought limited modernizations, leading to modest success.

Transition and Resistance

By the early 2000s, Mr. A’s grandchildren slowly entered the business and proposed further innovations moving towards E-commerce Platform, Digital Marketing and Sustainability Initiatives. Mr. A resisted these changes, fearing they would compromise quality and alienate loyal customers. He remained skeptical of online sales and digital marketing, preferring traditional methods.

This resistance led to several missed opportunities. And competitors became bolder and  embraced e-commerce capturing the younger consumers. Another consequence for not innovating was stagnation. ABC Co’s sales growth stagnated due to a failure to adapt. With declining sales, internal conflict reared its ugly head. There was palpable family tensions as the younger generation felt undervalued.

Turning Point

A competitor’s success in securing a large international contract through modernization highlighted ABC Co.’s need for change. Faced with declining sales and family pressure, Mr. A allowed a trial of the proposed innovations. Two months later, the online store was launched and a digital marketing campaign started. After a quarter of consistent online exposure,  significant sales increased, particularly from international customers. Success convinced Mr. A to support further modernization, balancing tradition with new technologies.

Lessons Learned

ABC Co’s experience shows the importance of adaptability in family businesses. Tradition is vital, but embracing change is crucial for sustainability. This case illustrates that innovation can revitalize a business, ensuring its relevance in a dynamic market while preserving its legacy.

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The W+B Family Governance Leadership Series: A Resounding Success!

I want to personally thank everyone who attended the three-day event, which culminated in a captivating fireside chat in Binondo, Chinatown. We had the pleasure of hearing from Mr. Gerry Chua, the visionary third-generation leader, and his eldest son, Mr. Geric Chua, the fourth-generation successor of the renowned Eng Bee Tin Group, a beloved family business operating for the last 112 years!

Due to numerous requests, the organizer, ICON Events, is considering another run, possibly in the Visayas and Mindanao. Stay tuned for updates.

If your family is experiencing confusion or conflict and you’re interested in learning tools and strategies to navigate the complexities of family business dynamics with clarity and purpose, please reach out to Christine at wb@wbadvisoryasia.com.

Don’t let unresolved conflicts hold your business back.