What effect does the family factor have on change processes in family businesses? Our partner Dr. Tim Bauer researched this topic years ago. In 2012, he completed his PhD on "Innovation Processes in Family Businesses." Prior to that, he worked at the Chair for Family Businesses, advised young founders, and studied renowned family businesses from the German Mittelstand. That he now advises family businesses in transformation processes is partly because he himself comes from a family business and managed the company for a decade with his brother.
How can family businesses respond to the current pressure to transform? What are their pain points? And what is essential in consulting for family businesses? Here are insights from his entrepreneurial and consulting practice.
Dr. Bauer, who is more innovative: corporations or family businesses? When family businesses play to their strengths, they are more innovative and agile than corporations. Doesn't innovation capability also largely depend on the entrepreneur's personality?
Absolutely. The consistency of corporate policy and business strategy depends on the leaders. This is why it is person-dependent whether family businesses can sustainably leverage this asset. Pure entrepreneurs often have a hands-on approach and implement new opportunities, whereas more cautious entrepreneurs may lead to stagnation. I've seen both. On the consulting side, this needs to be considered individually.
What pain points are family businesses currently complaining about?
The same as other businesses: the simultaneity of multiple disruptors – cultural change in the workplace, regulation, and transformation pressure.
Disruptors have always existed, and transformation pressure is essentially nothing new.
That's true. Kondratiew already noted this with his wave theory: whenever there was a certain disruptive innovation, companies had to reinvent themselves. The crucial point is that these profound changes are occurring at increasingly shorter intervals, thus increasing the transformation pressure on companies.
You mentioned cultural change in the workplace – this has happened repeatedly. What is its current effect, and how can family businesses respond to it?
We have a switch from an employer to an employee market. In the past, crises led to layoffs, resulting in a tendency towards an employer market. Now and in the future, due to demographic changes, it is likely to remain an employee market. This leads to a declining trend in the average length of employment. In some industries, it is only two to three years. Companies must adapt to this. However, family businesses can generate a competitive advantage here compared to public companies. Due to their familial culture, they often act more sustainably, can build relationships with their employees, and thus retain them long-term.
What about politically mandated regulations: can companies gain anything from them?
Yes, although this is currently very difficult. In the long term, the effort becomes a value-creating process. The current build-up of regulations often requires a critical size to even implement these necessary processes. And clearly, the documentation and bureaucracy that come with it make it very labor-intensive. Since family businesses usually grow organically, their organization develops step by step. Therefore, there are certain informal structures that are quite efficient – think of a lean overhead. However, these are not designed to handle extensive administrative processes outside the core business.
What do you observe: how do family businesses handle this transformation pressure?
Very differently. When companies have to reinvent themselves, it often means 'someone will probably lose something.' Change and transformation initially come with reservations. Companies must find a balance – between short-term transformation and sustainable strategy – and keep both in focus. With "short-term transformation," I mean that the operational business must continue to run for tomorrow, and with "sustainable strategy," that the business model must be future-oriented. The success of projects is strongly influenced by how the human component is handled in family businesses.
You did your PhD on family businesses and co-authored a study. The key question was: how does the family factor affect entrepreneurial change processes? You examined three phases of transformation: impulse, implementation, execution. What does each phase require?
The first phase, the impulse, requires creativity. This necessitates openness to the market and breaking away from the familiar – which also requires a lot of courage. Take a family business that has established itself as an engine manufacturer for decades and now wants to focus on battery housings. This shows that family businesses can think outside the box and don’t need formal processes. This is a very positive factor that family businesses should leverage.
Let’s move to phase 2: implementation. Do family businesses have it significantly easier here than large corporations?
Yes, and this is primarily due to the unity of ownership and control. In family businesses, the decision-making circle is smaller. This allows for quicker decisions without lengthy and complicated processes. This is also a strength of family businesses closely linked to entrepreneurship.
Many probably fail in the third phase, execution.
That's true. Many family businesses are not professional enough for sustainable execution. Often, changes are initiated but do not result in clean and efficient processes that subsequently shape an entire organization. This is a risk, which is why I recommend external expertise in this phase.
You continued your grandfather's business. Did working in your family business inspire you to consult, or did you always want to be a consultant?
The desire actually came later. Working in the family business made me understand real-world practice – previously, I only dealt with family businesses in theory and research. You only experience the human component in the company itself and understand how to achieve the necessary consensus to implement a transformation. This is an asset I took from the family business and can apply to other companies. Especially when it becomes contentious – which often happens in transformations. Being able to steer these processes and successfully mediate for different parties is becoming increasingly important.
You know both perspectives. What does it take for a successful shift in transformation – both from a consultant and an entrepreneur's viewpoint?
- Understand and leverage the assets of the family business.
- Develop a transformation awareness. Family businesses should be open to external impulses, apply willingness to change, and adaptability. They must respond appropriately to external events and initiate transformation.
- Avoid family tensions within the company. These can bring a company into crisis and weaken family bonds. Families should always act in the interest of the company but harmoniously..
- Succession planning is crucial. If the egos and pride of the founding generations are too big, the entire company risks stagnation. It is vital to lay the right structures for a successful succession. The founding or previous generation must withdraw from management, clearly define boundaries, and give the next generation freedom. If the previous generation continues to control and make decisions, transformation processes are blocked, leading to the company's decline. Better experiences come from companies where founders or managers transition to advisory roles rather than decision-makers.
- Resilience and a sacred plan are often effective. Initially, concrete ideas and goals should be formulated, supported by data, facts, and figures. This creates a foundation for successful transformation. Entrepreneurs should stick to the planned framework and explain the consequences if the transformation is not approved, involving all parties. To manage the transition, structures must be created within the company, with clear responsibilities and competencies, to be implemented step by step.
- Don’t just announce the change but move into implementation relatively quickly, showing results. Successes are crucial, especially for successors, to gain trust from the workforce.
- Focus on the future. The past is important and should be respected, but when there is a need for transformation, entrepreneurs must consciously think about which proven approaches will be relevant in the future and which should be discarded.
- Maintain the ability to act. Taking a new path is challenging but essential to keep the company capable of action. Transformation is necessary to make a company future-proof. The worst scenario is delaying the necessary transformation, leading to a gradual decline over the years.
- Transparency through external expertise. Family businesses are often hesitant and secretive about external expertise. Younger entrepreneurs tend to be more conscious and open to external advice, knowing their strengths and weaknesses. Public companies have a higher affinity for external consulting. Family businesses often prefer to handle everything internally, which costs time and quality. I recommend that family businesses and consultants build trust. Engaging consultants familiar with the industry and family business structures is beneficial.
What consulting skills do you consider crucial for advising family businesses?
The ability to understand processes beyond the objective level. Consultants should develop a sense of the company culture and read the motivations of each individual, from shop floor to top level. Ultimately, actions should be in the company's best interest, but consultants need to guide people toward consensus. Consensus among key stakeholders is necessary for successful transformation, requiring experience and empathy.
There seems to be a lot of psychology involved. How much of your job involves this?
I think 50 percent of our work is psychology. In family business research, psychology is very important. The nature of human relationships, due to ownership structures, distinguishes family businesses from public companies. Advising family businesses involves understanding egos, passions, and pride. This must be considered and respected during the consulting process to fully understand the company, its processes, its peculiarities, and especially its people.
Have you noticed any novelties or specific trends in family businesses in recent years?
Regarding the business model, family businesses face the same external influences as other companies. However, in some areas, the next generation is not always eager to join the business.
Was it the same for you? You initially wanted to pursue a PhD.
Yes, but it was always understood that at some point, my brother and I would take over our grandfather's company. That was fine. When my grandfather passed away, my grandmother took over with my two uncles. She was an exceptional manager – she is 100 years old today. From her, we learned to always approach issues practically rather than personally. It’s challenging to find good solutions for everyone, but she showed us that discussions must always conclude with consensus. Calm, sustainable, reliable, and with a strong work ethic. Returning to the trend you mentioned: I observe that families are now more willing to part with large businesses. The idea of the next generation taking over is not as fixed as it used to be.
Do you think this is also related to the cultural shift you mentioned at the beginning?
Absolutely. From the perspective of the successor generation, the question often is: Do I still want to do this? And many entrepreneurs worry about whether they want to burden the next generation with the business. Additionally, the successor generation is more open to change – even to the point of selling the core business. Viessmann is a popular example: the core business was sold very profitably and at an excellent time.
How can companies determine the most attractive options for them?
By conducting an options analysis. We offer this to shareholders and family businesses. Once it's determined which alternatives are viable, a roadmap is created. The key questions are: What needs to be invested in the company to transform it? What regulations need to be considered? What market changes are relevant? And also: What needs to be done to prepare the succession? This requires a very clear assessment: Does the plan fit the company culture and the leadership personality? You shouldn't take on something that doesn't fit. Decisions should be made for the good of the company and sustainability. This way, the company can remain successful in the market in the long term.
Speaking of company culture: how can a positive company culture be maintained during the transformation process?
The culture of a company is an expression of its actions. Every organization has its unique characteristics and strengths. These need to be highlighted and preserved. Why? Because functional structures are crucial for the sustainable success of a company. Functional structures are often based on trust, commitment, and employee motivation. This must not be destroyed during transformation processes. The art is to maintain cohesion and a positive company culture while implementing transformations. Trust must not be replaced by mistrust. A culture that positively supports change needs to be established. Entrepreneurs should carefully consider how to approach transformation, how to emphasize the importance of change, and embed it sustainably in the minds of their employees. Establishing this mindset firmly in the company is challenging and takes time. But without it, change will not succeed. It takes everyone to make a company future-proof.
Thank you for the conversation, Dr. Bauer.
What questions do you have about the transformation of family businesses? Reach out to us! We look forward to hearing from you.
