We consultants used to think that the first step family businesses had to take when they grew beyond a certain size was to professionalize. The standard prescription called for establishing budgets and systems of control, job descriptions, a board of directors, and all the rest.
Today those requirements for structuring an organization are necessary but not sufficient. To survive in the business climate of the 1990s, a company must develop a high-performance environment. The two main elements of that environment are total quality management (TQM) and continuous innovation in products and services.
The path to quality management and innovative organization is well traveled. The basic principles for getting there are well understood and have been applied across industries and cultures. We know, for example, that quality products result when employees feel "ownership" in developing them.
There are many technical skills that need to be mastered in the search for total quality. Methods of measurement have to be set; employees have to be trained in statistical processes to control deviations from the norm; new sourcing methods may have to be adopted to ensure the quality of materials from suppliers. In addition, jobs have to be defined, as do standards of performance. And teamwork has to be encouraged at all levels of the organization.
To a great extent, creativity is the result of a defined set of organizational conditions. But many good ideas come from those closest to the work. A salesman, for example, may recommend a new product to satisfy what customers tell him they need. A line worker perceives that a small change could streamline an assembly process.
The modern organization must rely on all employees to contribute ideas for value-added service and continuous improvement in processes and products. And people will contribute more if they are secure in their jobs and feel their ideas will be rewarded.
Even small companies with, say, $1 million in sales can benefit from a dedication to quality and continuous improvement. By and large, however, family businesses have been slow to embrace this new philosophy, because of the radical changes in culture that are required to fulfill it. Four deeply entrenched attitudes stand in the way:
1. We must stay in control. Family members often feel that giving any authority to employees threatens family control. "After all," they say, "it's our business and it represents all that we have." In fact, many family owners have a tendency to over-control. The organizational credo is "My way or the highway." 'Me emphasis is on punishing deviation from standards rather than rewarding achievement. In such an atmosphere, creativity does not blossom.
2. We have all the ideas we need. Family owners tend to say "We've been in this business forever we must know best." Besides, they may add, "Haven't we been successful so far?" In the long history of a company, 99 percent of all innovations may have come from the top. But when a company gets big enough, the family doesn't have enough eyes and ears to see all the possibilities for innovation.
3. We are very private. To be successful at TQM, you have to share information. People need to know how their jobs relate to the work that others are doing, to what the customer needs, to management's plans and goals. They also need to know whether or not they are getting results, which means they need financial information. If you don't trust them with the financials, they may be unwilling to put their hearts and souls into creating a better company.
4. Father knows best. In some companies, a paternalistic attitude encourages dependency and immaturity. Employees behave like children and join in psychological games played by family members. This is hardly an environment that encourages an individual to take responsibility for work and offer ideas for improvements.
When businesses grow beyond the management power of a few people, the best way to maintain quality and flexibility is to decentralize some responsibility. That often means the family leadership has to get out of the way and let the people on the firing line do the job.
One successor once told me that he turned his family's insurance business around simply by telling his people to solve problems themselves and then giving them space to do it. The company went from a $6 million loss in one year to a $6 million profit three years later. Though he helped employees define problems, this man gave them credit for coming up with the great share of solutions.
The gap between TQM and family paternalism is a big one. But the effort to close the gap is full of possibilities. It requires a vision of the future that the family can share. It takes a lot of training, which is expensive. It demands a new style of leadership in which those at the top spend a lot of time in the trenches. It takes a concerted effort to pull down walls between departments and build problem-solving teams.
One of four favorite exercises is to take an entire middle management of a business away on retreat without their bosses and break them up into their work groups. We then pair up groups that have dealings with each other and ask: "When you think about your interactions with the other group, of what would you like them to give you more, less, or the same amount?"
In this exercise, the participants tackle the challenge of working directly with their counterparts in the other group, rather than through the bosses. A floodgate opens and many constructive ideas pour out.
Of course, the family must manage the environment in which these changes take place.
But for me, this means primarily establishing performance standards and goals, building teams, and doing what is necessary to break through the walls of passivity and to diminish fear.
The experience of being a leader in a family business is changing. In a TQM culture, the business is no longer yours to do with as you please not, at least, if you want to ensure its continued viability. Materially, it may be yours. But in psychological and organizational terms, it must be shared with those who can help make it a success. All this takes some getting used to. But the payoff can be considerable.
The General Accounting Office, which does research for the U.S. Congress, recently did indepth studies of 20 companies that have employed TQM strategies. The study concluded that with the aid of TQM, these companies, on average, increased market share by 13.7 percent; reduced customer complaints by 11.6 percent; lowered order-processing time by 12 percent, and cut the number of product defects by 10.3 percent.
The competitiveness of many family companies will hinge on the successful adoption of these strategies. The clever blending of TQM with the family culture may produce uniquely dynamic organizations that can compete with the world's best.
Peter Davis is Family Business's chief advisor and the director of the Division of Family Business Studies at the Wharton School.