What family businesses need to compete in a redefined global economy
It’s fairly apparent that the world has changed dramatically over the past few years. But the extent of those changes and how they upend long-held assumptions about global economics may not be as obvious, especially for family businesses. For nearly 80 years, consumers and companies alike have been reaping the benefits of globalization, with products becoming more affordable even as they have continued to improve.
However, since the pandemic, the new economic S-curve that had replaced the former post-World War II S-curve has accelerated. Growing de-globalization trends indicate that countries and regions are increasingly inclined to consider making their own goods, growing their own food and securing their own energy sources — all with populations that are both aging and shrinking. Conventional strategic planning based on historic patterns and assumptions will no longer suffice as family businesses seek a competitive advantage in this new environment.
The new S-curve trends impacting today’s business growth strategy—ranging from disruptive new technologies to inflationary monetary policy and talent management challenges—will be different for every family business. For example, a business that sells capital goods within international markets could be faced with challenges including reduced globalization, geopolitical tensions and shifts in policy and supply chain disruptions. And that’s just the start. Potential regulatory changes could also make it harder for smaller manufacturers to compete in a redefined market.
Challenges like these make it clear that family businesses are now operating in a world that requires re-examination of strategic priorities to avoid disruption so they can remain competitive and fulfill their long-term growth ambitions.
We’ve identified four core strategic competencies that family enterprises should embrace and execute to ready their businesses to compete in a rapidly changing world.
1. Business growth strategy
Cultivating a more valuable family enterprise in the new S-curve environment requires ongoing business growth and minimized disruption. In turn, developing a business growth strategy starts with assessing your current capabilities relative to your future aspirations, examining the enterprise’s strengths and weaknesses, and determining what skills and resources will be required for future aspirations.
With that information, a family business can clarify strategic priorities, opportunities and challenges and build an action plan that can help achieve increased resilience and sustainable growth. For example, to de-risk supply chain disruption and geopolitical risk, many companies have developed strategies to shorten their supply chains by identifying alternative critical component vendors domestically or in less volatile geographic areas of the world.
2. Company capitalization strategy
Funding business growth requires a long-term company capitalization strategy. But sourcing and managing capital to fuel business growth can be challenging, particularly if you want to keep family-ownership control and create more value for future generations. Family enterprises should understand all available capitalization options and their alignment to long-term capital agenda. Many times, non-traditional capital sources, including the direct capital markets (e.g., insurance companies, pension funds and family offices) have better capital alignment with the long-term outlook of family businesses, such as flexible terms and extended commitment periods.
3. Shareholder liquidity strategy
One of the biggest disruptions to family-owned companies is often a lack of clarity regarding shareholder liquidity needs. The liquidity requirements of family members can be different for each generation participating in ownership. Developing strategies to meet long-term liquidity needs is critical to maintaining a patient capital base among shareholders. For example, coming out of the COVID-19 pandemic, shareholder liquidity disputes drove significant disruption. There were cases where family members had been receiving dividends and distributions, but when revenues declined during the pandemic and capital had to be rebuilt thereafter, distributions were curtailed. For some family businesses, this caused conflict, creating unrealistic liquidity demands of the company and, in some cases, leading to a sale of the business.
A shareholder liquidity strategy can help manage the short- and long-term capital needs of both the owners and the business as they continue to grow. To manage the shareholder liquidity policy, managers must accurately forecast the company’s balance sheet cash flows to keep capital available to meet the capital demands of the business while producing sufficient cash flow to support shareholder liquidity, when needed. Strategy considerations include the design of a dividend and redemption policy, financial modeling to support and update these designs, models for shareholder liquidity needs and, finally, integration of your shareholder liquidity strategy with your growth budgets and capital strategy.
4. Generational transition strategy
Families who own successful multigenerational enterprises have a strategy at the heart of their business that goes beyond just tomorrow’s operations. It lays out parallel governance for both the family and the business. This helps provide for the cohesion, stewardship and competency needed to sustain a healthy business for generations.
The family governance portion of the strategy addresses preparing the next generation to be good stewards of operating businesses and educating them on the roles and responsibilities of being affiliated with the business, whether actively working for the company or not.
Meanwhile, the business governance activities address procedures for ensuring that well-qualified people are running the company by creating an effective fiduciary board of directors. The board then appoints qualified management, who are responsible for tasks such as transparently reporting on results and developing data analytics to better understand growth opportunities and risks.
Our rapidly changing world requires anticipation of demands to come and agile responses to those needs. Refocusing the traditional strategic planning process to emphasize business growth, the capital agenda, shareholder liquidity and generational transition can equip family enterprise leaders for the challenges posed by the new S-curve trends, ensuring their businesses can endure and stay in the family for generations.
Written by Bobby Stover, EY Americas Family Enterprise and Family Office Leader and James Bly Jr., US EY Family Enterprise Business Services Managing Director.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.