In the midst of the pandemic, I did some research to understand how business families are responding to pressures from some of the drastic changes in market conditions. Although a full analysis of this study has not yet been completed, one statistic seemed particularly interesting to me. To better understand how business families are using entrepreneurship as a tool to respond to changes related to the pandemic, I asked family business executives what percentage of their current sales are due to the innovations they have implemented since the start of the pandemic. The data was collected in the summer of 2020, less than 6 months after the World Health Organization officially declared Covid-19 a pandemic.
Two things surprised me in what I found. The first is the sheer scale of shared innovation that has taken place as a result of the pandemic. Among 124 companies contacted for the study, executives indicated that, on average, 29% of current sales were the result of changes made since the start of the pandemic. The fact that almost a third of current sales were “new” shows the ability of family businesses to quickly adapt to the crisis. Second, I was struck by the differences in the overall level of innovation between the generations that currently lead the business. Among first-generation-led businesses, 38% of current sales were the result of these recent innovations. For businesses led by 2th generation, sales driven by innovation fell to 34%. For businesses led by 3rd or later generations, only 18% of current sales were due to changes made since the start of the pandemic. Furthermore, these differences appeared to be independent of the size/complexity of the organizations involved. While the ability to adapt 18% of the entire business in such a short period of time is still significant, what caught my attention was the fact that this level was less than half that of first-generation enterprises.
The idea of generational decline in a family business is not new. The old adage “shirt sleeve to shirt sleeve in three generations” seems to exist in one form or another in many cultures and languages. One common explanation for this decline has to do with the idea that the next generation is coddled to the point where they don’t understand or don’t want to face the hardships of hard work, including entrepreneurship. Additional research shows that as a family business grows and spreads across generations, the desire to protect the benefits provided by the business leads to a more cautious approach. Regardless of the specific reasoning, the general assumption is that generational decline is caused by a sort of generational gap, with successive generations becoming less motivated and less able to run a business.
A few years ago, I led a student research project on the generational gap hypothesis for entrepreneurs in business families. As part of the study, representatives of several generations of several large families owning businesses were interviewed. The consistency of the findings for these very different enterprises was strikingly similar. Older family leaders almost universally expressed frustration at the unwillingness of younger generations to “step forward” and “take the initiative” to take the business to the next level through their own entrepreneurial activity. Members of the next generation were just as consistent in their responses. Accordingly, they were frustrated that the older generation was not clear or consistent in sharing their values or intended strategies for business in a way that would allow members of the next generation to take whatever entrepreneurial action their parents desired.
I wonder what the interview did No reveal a real gap between generations, when the goals and desires of the older generation were completely different from the goals and desires of the next generation. Instead, it seems that inaction was the result bias between older and younger generations. Both generations wanted the same thing—entrepreneurial action—but the failure to connect led to frustration on both sides. Families wishing to encourage entrepreneurial activity in the next generation will need to address this intergenerational mismatch. Here’s how:
When it comes to developing an entrepreneurial spirit, a major source of inconsistency is a misunderstanding of expectations and needs. Families tend to choose comfortable communication patterns, which often creates this discrepancy. When I teach leadership audiences that include two generations of family members, I often separate generations and ask everyone the same set of communication questions. Both groups are always surprised at how little consistency there is. For example, when asked how well the family understands the succession plan, the older generation finds it well communicated and understood, while members of the next generation often tell me that they didn’t even know the plan existed. The solution to this problem is a deliberate attempt at over-communication. Share information and then share it again. Research shows that one of the top complaints about business leaders is the lack of clarity in their communications. Leaders tend to think that they communicate more often than they actually do, and that the communication is clearer than it really is. Our interviews show that over-communication by the older generation should be aimed at clearly informing the next generation of their aspirations for self-employment.
And the next generation is not immune from the need for excessive communication. Our interviews have shown that the next generation tends to be shy about asking questions and sharing their needs with the older generation. Members of the next generation should focus on communicating both their desire to meet the entrepreneurial expectations of the older generation and their need to better understand the values and strategies held by the older generation in order to do so. Many of my students come up to me after class and ask how they can ask their parents questions about businesses or their own entrepreneurial ideas. They are usually disappointed when I tell them that there are no shortcuts. They are also usually elated when they finally bring the matter up to their family and find out that things didn’t turn out as badly as they expected. Parents can certainly help in this process by being available and open when asking questions.
Communication alone is not enough to fully promote entrepreneurship in the next generation. As discussed earlier, some people will point to a lack of motivation or drive in the next generation as the reason for this lack of action. My research with my students suggests otherwise. Basic research on organizational behavior shows that behavior – action – is driven by three variables: 1) ability the person to take the expected action; 2) motivation the person to take the expected action; and 3) possibility given to a person to perform the expected action. This research, sometimes referred to as “AMO (Ability-Motivation-Capability) Theory of Motivation”, indicates that families should look beyond motivation and focus on empowering the next generation. Here’s how:
Expand Your Opportunities
Despite the popular belief that entrepreneurship is an innate ability, research shows that entrepreneurship can be learned. As families empower the next generation to be entrepreneurial, they will experience more entrepreneurial behavior. Capacity building can take place in a variety of ways. Here I will focus on two.
First, education. Formal entrepreneurship-oriented education has become widespread in recent years. Opportunities exist from elementary school to graduate school and from degree programs to community-based education and certificates. Business families should take advantage of these formal educational opportunities to enhance the ability of the next generation to be entrepreneurial.
Secondly, engagement. Members of the next generation will greatly benefit from hands-on learning. For this, family members must be involved in the business from a very young age. In particular, parents should look for opportunities for the next generation to participate in the entrepreneurial pursuits that business pursues. Even if they are not willing to actively participate in decision making or execution, the power of shadowing leaders, attending meetings, or visiting clients should not be underestimated. I know a family in the restaurant business who, from a very young age, took the whole family to a different restaurant (not owned by the family) every weekend. On the way home, they talked about their experience and how it compares to what their restaurants have to offer. By the time these young leaders have graduated from high school, they have become experts at recognizing opportunities for innovation by analyzing competition.
Offer leadership opportunities
In addition to being able to act entrepreneurially, the next generation must also be given the opportunity to do so. The next generation needs a safe space to develop and test new ideas – to test their entrepreneurial mindset and experiment with different solutions. Some families provide this space by setting aside resources for the next generation of entrepreneurial activities. New Generation members can apply for grants, loans, or equity investments from the family business, allowing them to conduct research or even start a new venture. Other families choose to keep opportunities within the business by arranging “design trials” where all family members are encouraged to develop and submit ideas to solve “real” problems facing the family business. Some families are uncomfortable with letting the next generation run the business and instead let the next generation be entrepreneurial by planning family vacations or retreats, improving the operation of a family foundation, or organizing a family service project. The key to any of these efforts is to provide enough autonomy so that the members of the next generation truly feel like they have a context or space in which they can actually operate.
The decline in the entrepreneurial activity of the family business from generation to generation is not inevitable. Instead of focusing on serious problems (gaps) between generations, families should focus on correcting mismatches in expectations and needs. Excessive communication around expectations and needs will lead to greater alignment. A focus on enhancing the entrepreneurial abilities of the next generation, coupled with efforts to provide the next generation with entrepreneurial opportunities, will increase the willingness of the next generation to take action. There are many differences between each succeeding generation, but an entrepreneurial spirit doesn’t have to be one of them.