High growth rates: an mixed blessing for family businesses

Cristina Cruz. Professor. IE Business School

6 November 2008

Peru is seeing an increase in wealth that brings many opportunities for family businesses, provided that they put their house in order.

The Peruvian economy’s sustained growth at rates of over 6% in recent years constitutes a scenario of huge opportunities for the country´s family businesses, which make up more than 85% of the country’s business fabric; however, it also involves numerous challenges.

In such a dynamic environment, competitive advantages evolve rapidly, the economic cycles of enterprises are reduced, and corporate success requires a management model based on two fundamental pillars: willingness to change, in order to capture new ways in which value can be created; and continuous training in order to adapt the company to changing market requirements. Why is this particularly difficult for a family business?

The problem facing many family businesses is that the traditions and resources that were once a source of competitive edge occasionally create inertia and prevent the development of new strategies required to play on markets that are becoming more and more competitive. By the same token, the obsession for maintaining control in the family means that shares used to finance growth, such as mergers, the sale of part of the capital or being floated on the stock exchange, may be considered as a sign of failure instead of a step towards the creation of wealth.

Furthermore, the presumption of the continuity of assets or, in other words, the belief that business will provide endless income for the family, may lead many family businesses to ignore new forms of investment or to compare the profitability of current assets with the potential profitability of alternative investments.

Finally, high levels of interaction between the family and business dimensions in this type of firm often means that human resource management is subject to family interests. Promotions and remunerations are awarded not according to worth, but rather to identity. This demotivates non-family workers, who begin to look for alternatives to develop their careers. Moreover, in high-growth environments, alternatives come in large numbers and are very attractive, especially for highly qualified workers.

The result of all this is that family business-owners have a short-sighted view of reality, which prevents them from distributing resources and capacities correctly in order to adapt and take advantage of emerging opportunities.

The keys for successfully avoiding this "growth trap" lies in the family´s capacity for understanding that markets change, that competitive advantages evolve and, more specifically, that such dynamic environments require new forms of creating wealth generation after generation. Hence the family´s logic will focus not only on managing and maintaining existing patrimony, but also on permanently searching for new opportunities that respond to market changes and on continuous training to allow the company to constantly renew itself and adapt to changing environments. This is the only way in which Peruvian family businesses will be able to leverage the mixed blessing of working in a high-growth economy and bring an end to the depressing statistic that confirms that fewer than 20% of family businesses in Peru are passed on to the second generation and only 5% survive to the third.

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