Decision-making in family-driven companies: pivoting the business

I have always found it inspiring to talk to family business owners because of the way they talk about their legacy, their company culture, and their purpose. They all want their legacy to last forever, but to achieve this it is critical to pivot the business before its decline. A company that does not change its business model will not be profitable forever.

Each generation sees the company differently. The first one founds it, grows it by adding products, distribution channels and geographies. It starts selling in the village, then expands the business to the nearest province, conquers the country and finally internationalizes the company. That same expansion applies to the product portfolio and distribution channels, adding new ranges and moving to online sales as an example. The first generation is made up of founders who start from nothing, with vision, infinite work capacity and great enthusiasm for the project. The second generation was born listening to their parents at breakfasts, lunches and dinners discussing the ups and downs of the company. They run from an early age through their workshops, factories, and offices. They learn what the company is all about and when they take the helm, they consolidate their parents' work. The third generation, already much more numerous, is born rich, has a comfortable life and studies at good universities. Their parents speak to a greater or lesser extent about the company depending on their level of involvement. When there are many family branches, only a few remain connected to the company founded by their grandparents and the positions and opinions about the business multiply. This generation, which takes the reins 60 years after the company's creation, will have the responsibility of making it pivot by investing in new businesses, which will generate additional dividends to be distributed within the already extended family. That means taking risks; risks that the second generation would not have taken.

In a changing and uncertain world, competitive advantages, which are at the core of the success of the family business, are diluted over the years. Successful models attract new competitors, clients and consumers change, suppliers become vertically integrated and new players (competitors) appear in the industry. From meat companies dedicated to making ready meals (the famous cannelloni), to producers opening stores. The big decision is when to pivot these strategies and in which direction.

When we talk about strategies, we are referring to a differentiated and unique way of doing things that creates value in a market; strategies that, because they are unique, generate competitive advantages that every company must protect. An example would be Inditex, the group that owns Zara, which has created a logistics model that has given it unparalleled advantages. To do so, it tests trends, scales up production quickly and changes products in stores at high speed, in a profitable manner. Its mixed model of proximity production to rotate collections in an agile way is combined with high volume production for garments that sell more stably over time; these are bought at low cost and are made in more distant countries. Inditex is a good example of product expansion, with Zara Home, and geographic expansion to achieve a global presence. The former was done in a focused way and the latter by aggregating countries, one after the other. Inditex's expansion in distribution channels has been very focused on the creation of its online sales channel, in which it has invested heavily and from which it is now reaping the rewards. This is allowing Zara to sell outside the big cities where it has its flagship stores, stores that are in fact the showcase for branding, and from which it captures important sales in busy shopping areas.

This strategic change will mark the Inditex Group's sales in the coming years. However, there will come a time when the company's sales consolidate, and growth slows. The role of the board of directors will then be to adjust the strategy and pivot the business before the company enters a cycle of contraction; and this happens in this one as in other family-driven companies. It will be necessary to create a new viable and sustainable strategy for the next decades, a mission that will fall on the third generation: Marta Ortega, new president of Inditex after the leadership of Amancio Ortega and Pablo Isla.

This period of change coincides with the succession of the company's governance, which adds pressure on the new leader. Facilitating this succession means planning the change of leadership with time, working well on the strategic options, nurturing the board of directors with experts to provide support, and looking for an experienced coach to generate the necessary background conversations in the first years of transition, which are always complex. They will allow the president to contrast the objective opinions of outsiders with those of family members, sometimes influenced by emotions and political relationships. The goal is to make the best possible decision and create value.

Family businesses are the economic base of our country and it is therefore in everyone's interest that they continue to provide growth, employment and investment. And their succession paves the way for the future of the coming decades.