Succession planning: Are you stalling innovation for your third generation?

December 24, 2019

By Danielle Walsh

[1]

In the world of jewellery retail, it’s not uncommon for a business to stay ‘in the family’ for multiple generations. That said, any family-run business that has made it to the third generation has already beaten the odds, as only 12 per cent or so achieve that type of longevity. Of course, surviving into the fourth generation proves to be even more difficult, with only four per cent hitting that mark. (For more, see Ernesto J. Poza and Mary S. Daugherty, Family Business, 4th Edition, South Western Cengage Learning: 2014, viii.) 

Working alongside family members carries its own unique challenges, even under the best of circumstances. And, of course, working with a relative who has differing goals and expectations—particularly ones that stem from a generational gap—can make a work environment even tougher to manage.

Thus, when it comes to transitioning a family-run business to the next generation of ownership, there are some specific intergenerational conflicts that must be addressed.

Differing work ethics

The founders and second-generation owners of most family-run businesses invested significant time into the establishment and worked very long hours. Over the years, these entrepreneurs probably spent more time at their shop then they did at their homes.

Those in the third generation, however, tend to value more of a work-life balance. They often look for ways to automate services or otherwise find efficiencies to ensure they can make time for their families. In addition to the desire for work-life balance, there is also necessity—especially if there are children involved. While previous generations of families often had a stay-at-home parent, today it is common for both parents to work outside the home, which requires a job with flexibility.

This differing work ethic can sometimes lead to conflict between the generations, which may stem from a lack of understanding. Further, this method of scheduling is a significant change that can be hard for older generations to comprehend.

Communication

Third-generation workers may have a different managerial style than their predecessors, but this doesn’t mean they are incapable of taking the reins.[2]
Third-generation workers may have a different managerial style than their predecessors, but this doesn’t mean they are incapable of taking the reins.

When it comes to matters of the heart, it’s not uncommon for family members to keep mum and hope for the best. When it comes to running a business together, however, not being on the same page in regard to communication is a recipe for disaster.

Generally speaking, first- and second-generation family business owners are notoriously poor communicators. I often hear these people excuse a lack of communication with their children (and grandchildren) by saying, “I haven’t said anything; they should just know.”

Third-generation workers tend to be much more transparent with their thoughts and opinions, and take the time to talk to the family members they work with. Keep in mind, however, their preferred communication methods (i.e. e-mails, text messages) often frustrate first- and second- generation owners, who largely prefer face-to-face interactions. This shift in communication has had a significant impact on how family members talk to each other and, for older generations, it can be difficult to adapt. This sometimes leads to a slow-down (or even complete stall) in communication, which causes serious issues for the business.

Remaining aware of an individual’s preferred method of communication can certainly help bridge this gap. The third generation should remember that just because they sent an e-mail about a specific issue, for example, this doesn’t necessarily mean the message has been clearly communicated.

Differing priorities

Related to challenges stemming from work ethic, third-generation employees’ tendency to prioritize work-life balance and family can lead to conflict with first- and second-generations, as the lifestyles are very different.

In my experience, the second generation often experiences frustration by what they perceive as a lack of commitment to the business by the third generation, while the third generation is, in turn, frustrated by the demand on their time. Clear expectations must be outlined to ensure all family members, irrespective of generation, know what is required of them and what they can expect from the business.

Likewise, professional priorities tend to differ across generations; third-generation workers typically want to focus on innovation, change, and the use of technology, but this can be difficult for the second generation to support. This is an issue that is becoming more and more common in family businesses—particularly in the jewellery industry.

Innovation and change

It’s no surprise third-generation family members often find it a struggle to get second-generation owners to endorse change. This makes it difficult for the younger generation to implement new and innovative strategies for the operation—and it often stems from a common outcome of intergenerational ownership.

First-generation family business owners are largely regarded as entrepreneurial; these individuals are innovative, passionate risk-takers—in regards to both business and industry. They tend to dedicate all of their time to building their business, which fuels their continued passion.

Remaining aware of intergenerational differences can lead to greater success for a business and safeguard family harmony.[3]
Remaining aware of intergenerational differences can lead to greater success for a business and safeguard family harmony.

Second-generation family members often join the operation while the first generation is still at the helm, typically stepping in to manage what has already been put in place. They might take on a managerial role and focus on improving effectiveness and efficiency, refining what the founders built. Typically, those in the second generation do not share the same degree of passion as their parents—but this it to be expected. After all, the business isn’t their baby.

As second-generation members move along their respective career paths within the family business, they tend to become risk-averse and less open to change. They view their role within the operation as ‘gatekeepers’ to what their parents built (and continue to refine), tending to rely on the first generation to continue to innovate, implement change, and take risks. These managerial traits tend to permeate their thinking once they take the reins and become business owners. (Of course, this generalization does not apply to all second-generation individuals, but it does describe many and, thus, is worth addressing.)

Then along comes the third generation: an entirely new breed of individuals with very different professional and operational expectations. These workers are usually pretty comfortable with change, tending to view ‘business risk’ as a necessary frame of mind for success. It’s no surprise these traits clash with those of second-generation owners and, as a result, third-generation members often feel as though they are being stalled in their drive to innovate, implement change, and take calculated risks to grow and diversify the business.

This can be observed in the desire of many third-generation family members to shift the family business from a traditional brick-and-mortar store to online—a significant change. Second-generation owners have a continued family legacy and often maintain the family business in a manner very similar to that of the founding generation; however, while they may be comparatively cautious, opting not to take this major risk might mean the business won’t be able to survive long-term. Hence, this level of shift in business strategies is one that often only occurs once third-generation family members moved into ownership positions and have control—which may be too late. Ideally, this type of change occurs with the support of all generations, bringing a wealth of experience and a united front.

Sharing the stage

One of the hardest things for a family-run business to endure is the loss of its entrepreneurial third generation. Many in this group become impatient while waiting for approval to implement their innovative strategies and feel passionate enough to branch out on their own—often in the same business. What can a family business do to mitigate this risk?

  1. Second-generation owners need to recognize the third generation is different. These newcomers want operational improvements now—not later. They require a realistic work-life balance that meets their expectations. Further, they want to innovate and stay current with respect to how technology can help meet these objectives.
  2. The second generation needs to accept the differences between them and their successors is nobody’s fault; they are simply the result of intergenerational transfer of power and ownership.
  3. Those in the second and third generation should implement a management succession plan that will allow third-generation workers to improve their skills, their decision-making, and their ability to work alongside their parents. Implementing a plan with a specific timeframe gives those in the new generation the opportunity to prove themselves to the older generation, which makes the second generation feel more comfortable relinquishing managerial control and also helps them embrace the new ideas and changes presented by the younger generation.
  4. Second-generation owners need to realize their successors may manage and lead in a very different manner. For example, many third-generation owners opt for a multi-faceted management team, comprised of some family and some non-family members—and this is okay!
  5. All family members should consider the strategic planning process, as this is rarely completed by family businesses. If a second generation-run operation has competent and knowledgeable third-generation family members in its management team, it might be best for these newcomers to tackle this and present the proposed plan to the owners. This helps unite the third generation, allows these workers to gain the trust and respect of any non-family managers, and provides new and different insights on how to move as a unified business. This doesn’t mean the second generation has no say; it simply allows the third generation to compose the first draft of the plan. Encouraging these newcomers to participate in this kind of decision-making plays a big part in keeping them motivated and retaining them, long-term.

Moving forward, together

While there is no magic solution to dealing with intergenerational differences, it helps to know all family businesses face these issues at some point. Remaining aware of these challenges and accepting them are steps in the right direction. Further, learning to work with them leads to greater success for the business and helps safeguard family harmony.

Implementing a comprehensive family business succession plan increases the likelihood of successfully transitioning to the next generation, and will certainly help manage the intergenerational differences by clarifying what is expected of everyone involved in the business. 

[4]Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a certified public accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father recently published a book titled A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via e-mail at danielle@walshfbas.com[5].

Endnotes:
  1. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2019/12/Gen-1.jpg
  2. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2019/12/Gen-2.jpg
  3. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2019/12/Gen-3.jpg
  4. [Image]: https://www.jewellerybusiness.com/wp-content/uploads/2019/12/Walsh_Headshot_crop.jpg
  5. danielle@walshfbas.com: mailto:danielle@walshfbas.com

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