The Business Developmental Stages

Each of these measures of development—growth and complexity—contributes to an understanding of change in family firms. Therefore the three developmental stages for this dimension—Start-Up, Expansion/Formalization, and Maturity (figure 3-1)—use criteria from both indicators. Each stage has characteristics of both size and structure.

The first stage, Start-Up, covers the early life of a company and includes two steps: formation and survival.⁶ This includes the period in which the business is just an idea, attempting to be realized, as well as the period in which the entrepreneur and (often) family members are living the start-up business around the clock. The second stage, Expansion/ Formalization, may be a brief, explosive period, as the company rides a hot idea or product like a rocket, or a very long phase of gradual evolution. Again, although other, more detailed models often subdivide this stage into early and later periods, for our three-dimensional model it is sufficient to focus on the general characteristics of family businesses that are growing and developing more complex structures.⁷ The final stage, Maturity, is reached when the organizational structure and the key products have gradually slowed their evolution. It is in the Maturity stage that businesses face an inevitable dilemma: renewal or dissolution. In keeping with a true life cycle perspective, our model assumes that organizations will die if they attempt to continue indefinitely in the Maturity stage without a major renewal effort.

Change from stage to stage can be gradual or dramatic. Our observation of family companies is that change often occurs suddenly, and often in response to trigger events. A wide variety of events in the business arena—the sudden opening up of a new market, for example, or the acquisition of an important new customer—can launch a company down the developmental path. In addition, changes in ownership and family relationships can also trigger (or delay) organizational growth. Examples include a sudden influx, or a negotiated or unplanned withdrawal, of significant family investment capital. More gradually, the succession process—sometimes, just explicit talk about succession—may trigger the business to move to the next stage. The actual passing of ownership and management control to younger generation family members can propel a company quickly into a growth phase.

Figure 3-1 ■ The Business Developmental Dimension

The business developmental dimension, like the other two, needs to be applied appropriately to family firms. Although distinct phases of business development can be identified, most real-world companies are more complicated than the models we use to describe them. The word development may imply that there is an inevitable direction and destination for a start-up company. In our experience, there is nothing inevitable about the life course of a business. Companies can leap across stages, move backwards, stall in one place, or be in several stages at the same time. In fact, as companies move through later generations and Sibling Partnership and Cousin Consortium ownership stages, it is almost inevitable that they will be in more than one (and often all three) business developmental stages at the same time. Some parts of the business will be expanding or mature, while new ventures re-create start-up dynamics in other parts. Determining one stage for the company as a whole is not the point. Instead, this dimension is most helpful as a general guide to the common sequence of business developmental stages in family companies. Like the family dimension, which also describes a typical sequence of stages within what may be a complex network of developing families, the stages in business development have two primary uses. First, the model can be applied to an identified subunit of the family enterprise, which will be at a particular developmental stage. Separating the business into its component parts and looking at the different stages that each part is currently experiencing can help sort out the conflicting perspectives of the family members identified with each part—for example, a nephew who is responsible for a new overseas office (Start-Up) versus a daughter who is rising in the ranks of the home office of a mature parent company. In addition, the company as a whole may be primarily in one of the three stages, dominated by the issues characteristic of that stage. Thus a large, complex Cousin Consortium company may be locked into a Start-Up or Expansion/Formalization culture, for example, even if there are many parts of the company that should be attending to other developmental issues.

It has been our experience that the most successful family business owners and managers use concepts of business development as they adapt their behavior to the current stage of their company. They are aware of the typical issues associated with each phase of growth; they understand how business development interacts with family and ownership development; and they periodically analyze their own company’s development in order to determine what they must do differently to meet the particular challenges accompanying each phase. Ironically, this means that, to best meet the needs of their companies, managers need to be prepared to change structures, policies, and practices that have worked well in the past and may still be adequate in the present. If organizations change along broadly predictable developmental progressions as they age, then management can anticipate and be prepared for these changes.

Characteristics

Companies begin as ideas. In its earliest stage, a business is rarely much more than a dream or a project that its creator is testing, to see if it can come to life. The variation in the details of these individual enterprises is almost unlimited. Nevertheless, whatever the industry, location, or market, start-up companies generally share two characteristics. First, their owner-managers are at the center of everything, investing a great deal of time, energy, and, often, most of their resources. Organizational structures are minimal and informal; procedures are usually worked out as they are needed, and often modified. Most communication runs to or through the owner. Second, in most cases the company is focused on one product or service. It is hoping to find a niche where it can hang on long enough to get established for the long run.

West Indies Shrimp Company (WISCO)

Owning their own business was the dream of Deke and Matilde Boncoeur even as college students in the States before they were married. A year after Matilde graduated with a business degree, they returned home with their two infant children to the West Indies. Deke, who had an undergraduate degree in marine biology, had been working on water quality with an environmental group. He wanted to come back to the island on which he had been raised. His mother was still there, running her famous island hotel. He felt the pull to be with her, and he also saw the chance of a lifetime to do what he had always wanted to do—run a shrimp farm.

Deke and Matilde found a perfect location on the island: a freshwater pond near the ocean, which allowed the right influx of salt water into the mostly freshwater shrimp ponds. With the help of local laborers, they dug the ponds and built a crude concrete hatchery/laboratory structure. During that same first nine months, they surveyed the island’s restaurants and hotels, their primary potential market. Would they buy local shrimp if it was available, and how much would they pay for it? The results were overwhelming: most said they would feature shrimp in at least three menu offerings at lunch and/or dinner. With an analysis of demand and a break-even figure, Deke and Matilde had the beginnings of a business plan.

Having borrowed from family members to investigate the viability of the business, Deke and Matilde went looking for investment capital. Institutional investors were frightened by the risks associated with an aquaculture business. Eventually the Boncoeurs got a small U.S. AID Caribbean development loan. This allowed them to buy several small stocks of shrimp and to experiment with breeding conditions in the laboratory, with salinity in the ponds, and with harvesting techniques.

Almost two years after they had arrived on their home island, and a year after they had secured their loan, a hurricane blew through, breaching the dunes that separated the sea from the freshwater ponds. Most of the maturing shrimp were lost. The Boncoeurs had a choice: reconstruct and restock the ponds, or give up. They decided to persist—after all, hurricanes were not part of the business plan. However, they were stumped on how to raise the capital to rebuild. Although they had begun to successfully sell some shrimp to local vendors, their track record was far too limited for WISCO to attract funds for reconstruction. Deke and Matilde borrowed another $50,000 from their families. Deke made necessary changes in the design of the ponds, a process that delayed the restart of their production for a year. In the meantime, they discovered they could profitably import U.S. shrimp to satisfy their customers’ newly created demand for fresh shrimp. However, with debt and rebuilding costs, they were still deeply in the hole and could not afford to invest much time and capital into this related business.

The final blow to the shrimp farm came with the second hurricane, almost two years after the first. This storm again flooded the shrimp ponds with salt water but also knocked down the laboratory. Unwilling to ask Deke’s family for more money, Deke and Matilde searched among their aquaculture network for a buyer and sold off the equipment. Bootstrapping on credit cards, they then focused intensively on the shrimp importing business, which ultimately produced a modest profit for several years. However, the growth of that company was severely constrained by the plateaued number of hotels and restaurants in the immediate area. Following the death of Deke’s mother, Matilde and Deke sold the importing business and moved with their two, now-school-age children back to the States.

Key Challenges

WISCO was a company that never quite made it past the Start-Up stage. Although the company existed on paper for about seven years, the enterprise was never much more than a dream, a project that might have developed into a business but never proved completely viable. Because WISCO was relatively long-lived as a start-up, the Boncoeurs’ experience can provide us with important lessons on the general characteristics and challenges of this phase of the organizational life cycle.

In the Start-Up stage, the owner-manager is central—often, there are no other employees. Typically for start-ups, there is no organizational structure to speak of; the owner-manager may hire a supervisor, but all the other employees may work and be paid by the day. And most start-ups are one-product ventures. All of their energy and resources are focused on an attempt to sell one product at a profit. If their entry product is not profitable quickly enough, they may not be able to hang on long enough to try alternative ideas.

Survival. The central survival question is: Can the product find a successful market at a competitive cost? Deke and Matilde worked hard to establish WISCO’s chances for success in several areas:

• ■ Market entry. They learned that there was an eager initial market for their product and no competition.
• ■ Business planning. They learned that they could, under ideal conditions, produce and price their product at levels that would allow them to make a profit. They also understood their technology: the production systems they needed to generate appropriate levels and quality of production.
• ■ Financing. They were able to combine personal assets and a loan into enough start-up capital to open the doors.

Their success in developing a reasonable business plan and in gaining market entry was what sustained WISCO initially. Unfortunately, what Deke and Matilde did not factor into their analysis was risk—the riskiness of all aquaculture enterprises and this one in particular. The shrimp farm business looked good on paper, but their ability to produce a product at all was terribly dependent on conditions beyond their control. If it had not been the hurricanes, their shrimp crops could have been damaged by disease or predators. Under any scenario, their risk level was more than most start-ups could survive, whatever their financing scheme.

Success in this kind of venture is based on deep pockets (which the Boncoeurs did not have) and/or good luck (which they also, unfortunately, did not have). Many founders assume that adequate financing means having enough capital to set up a basic operation, buy materials, produce a product, and get it to market. In reality, in WISCO as in most start-up ventures, adequate capital to get the initial product to market would have required enough resources to withstand setbacks that were not specifically foreseeable. Even in the import company, financing also made the difference; they didn’t have the capital to expand the business to the point at which it could have generated substantial profit.

Rational Analysis versus the Dream. Psychological issues are inextricably intertwined with the business issues, as illustrated in this example. Founders must walk a fine emotional line between staying neutral about their project and keeping their ability to analyze objectively, and feeding their passion for it. Clearly, most business ideas are not viable and would be rejected in a perfectly rational evaluation process. But some prospective business owners jump too quickly toward an idea because they feel excited, not because they have analyzed all dimensions of the business situation.

When the start-up is a family business, either a new independent venture or a spinoff, the new business ideas may have more to do with personal, family, or lifestyle dreams than with objective business projections. Deke and Matilde were clear that they wanted to operate a shrimp farm. They had talked about it for years. Perhaps the specificity of this personal vision kept them from considering other, related business ventures that might have been more successful (such as shrimp importing). At many points in this book we talk about the importance of having a dream and being aware of it. However, that is not to say that all dreams are realistic. In fact, overcommitting to a personal or family dream without thinking through the constraints of reality can easily lead to premature commitment to an untenable business idea.

Other unexamined goals can be problematic. For example, was the shrimp farm an excuse for Deke and Matilde’s move back to the islands? Was it connected to the role of being an “essential supplier” to Deke’s mother’s business—close at hand and highly valued? If they had started with the idea of the shrimp farm and then done the analysis and risk assessment, they might have decided on a different geographic location altogether. In this case, the business came about because of a personal decision, not because analysis showed in advance that this location was optimal. Other projects are developed because a couple, for example, wants to work together, or because the owner-manager wants to change careers. All of these projects can turn into viable companies, of course. The challenge is to keep personal hopes and family agendas from clouding judgment about the viability of the business itself.

On the other end of the scale, there may be family pressures away from entrepreneurial dreams. Some owner-managers, feeling the weight of the family’s financial needs, are reluctant to give up their “day” jobs in order to invest time and energy in the analysis of new business ideas. Their start-up projects, unlike WISCO, are likely to stay on the drawing board forever. There is also a classic dilemma for second-generation leaders in successfully continuing family businesses. They grew up watching the business capture the previous generation’s full investment in its Start-Up stage. At least some part of their parents’ heroic stature probably comes from their entrepreneurial triumph.⁸ But the second generation is caught in a bind. Its history, inclination, and desire to either impress or surpass the parents pushes it to strike out with a start-up venture of its own at a time when the business needs successor-leadership.

A final aspect of the interaction between family dynamics and the Start-Up stage has to do with children. Even as preschoolers, the Boncoeurs’ children were aware that their parents were busy with the business. Both their parents made time for them, but Deke’s time in particular was rushed. In this family, the children were too young to be involved in the company—neither Matilde nor Deke wanted them playing around the ponds or the laboratory. Children in entrepreneurial families, even after they can understand their parents’ physical absence and psychological distraction, sometimes feel deprived of attention and affection. Children of any age can conclude that the start-up business is really the most-loved child. Jealousy of the business can persist for decades and can cause difficulty in the succession process. Deke and Matilde often worried that their intense involvement in a start-up firm was unfair to their kids. It may well be that the fact that the children were reaching school age was as influential as the capital constraints in Deke and Matilde’s decision to give up WISCO and return to the States.

The Start-Up stage is a gamble; you have to “know when to hold ‘em and know when to fold ’em.” Of course, some people don’t care about winning as much as about making the effort to realize a dream. On this level, Deke and Matilde may consider WISCO to have been a great success.

Characteristics

After weathering the uncertain years of the start-up period, a company may progress into a second stage, characterized by expansion in a number of arenas (such as sales, products, and number of employees) and by more formalized organizational structures and processes (adding human resource policies, differentiating marketing and sales, on-site production controls).⁹ At this stage, the Start-Up issues may not be completely resolved; the owner-manager may still be trying to raise enough capital to keep the business running at a sustainable level and to get the company’s name out to prospective customers. The transition from Start-Up to

Expansion/Formalization may not even be noticeable, or it may be abruptly marked by the opening of a new facility, hiring professional management, or introducing a new product. Usually, it is only when owner-managers recognize that they have created a viable company and are now facing new challenges that they believe the Start-Up stage is behind them.

In the Expansion/Formalization stage, the importance of both growth and complexity as measures of development becomes clear. Some companies may grow significantly and change their structures very little, whereas others may actually stay the same size or grow slowly, but go through significant restructuring for the long haul. The first type continually seeks expanding markets; the second type tries to consolidate its niche in the market and routinize its ways of operating. The ProMusic case is a company of the latter type.

ProMusic, Inc.

Sarah Greenberg had been passionate about music her whole life. It was a strange choice for the daughter of an accountant and a tone-deaf real estate broker, but her focus had been unwavering—through childhood piano lessons, an undergraduate degree at Oberlin, several jobs at record stores, her own radio show, a stint as music reviewer for a city newspaper, and, later in life, a master’s degree in music theory and composition at Columbia. Stimulated in her master’s program by more academic perspectives, Sarah decided to combine her interest in music with her long-term entrepreneurial inclination to start a business. Her firm, ProMusic, would be a resource for composers, teachers, and performers, with several lines of business: providing rare recordings by direct mail, offering online research on composers and compositions, creating and distributing software to allow composers to score and orchestrate their compositions via computer, and (her real dream) operating a small recording studio.

Sarah researched the opportunity and found no competitors in her niche except for music stores and libraries, which were unresponsive to customers’ needs for speed and specialized expertise. She put together a business plan and talked to family and friends, raising some initial capital to create the first business line: a direct mail catalogue for rare recordings. Sarah, her husband, Aaron, and a graphic artist worked for several months to design a vehicle to let their target market know about ProMusic services (which did not yet exist) and order specialized recordings, each of which was reviewed briefly in the catalogue by a specialist. At this point, they also had no inventory. Sarah’s plan was to fill orders through a special rush arrangement with distributors she had located, who were willing to provide this service at a discount price to ProMusic in exchange for what they saw as free marketing and potential higher sales volume for their merchandise.

Sarah spent most of her $50,000 start-up money on the catalogue, then crossed her fingers and waited. The orders rolled in, and over the next two years, the company made a small profit on sales of about $250,000. They opened an office, developed an information system, and began to stock inventory. During this Start-Up stage, Sarah felt busy all the time with the company. Aaron picked up the slack with their two young sons, and Sarah waited for things to calm down. She had no idea that the stress would get worse, not better, as the company grew.

When it was clear that ProMusic was a going concern, Sarah moved quickly to grow the business. The family moved back to the New Jersey suburb where Sarah had grown up. She opened a retail record store, created a consulting and information service via online links to publishers and distributors for specialized services, and bought a small recording studio. Each of these new divisions had its own general manager, but none of them made important decisions without checking with Sarah first. Sarah intended to have weekly meetings of her executive team, but travel and work demands made that very difficult. She hired office, research, retail, software development, and studio production staff. They were growing; however, costs were also growing, and because they still weren’t making much money, the company’s balance sheet performance was declining. Every two years, Sarah would put together yet another business plan that laid out the need for several million dollars’ worth of capital investment. Each time she would make a connection with a publisher or venture capitalist with deep pockets, and each time she would come away from the deal with $200,000 or $300,000 instead of the several million she needed.

What Sarah found was that the potential investors wanted control, which she was not yet willing to give up. She also found that the projects that she liked—the retail store and the recording studio—were not projects that thrilled potential investors, because of their low margins. So she kept turning to her and Aaron’s family for short-term operating loans, and the business bumped along without sufficient capital.

Ten years after the company’s founding, Sarah was becoming discouraged and worn out. She closed the consulting business, which had never found its market and only broke even in its best years. The record store was about to be the next closure, until the manager convinced Sarah to move to a smaller location with a much more specialized jazz inventory, and focus on supporting the mail order catalogue. Then ProMusic had a sudden and unexpected breakthrough. Her software designers developed a product which was a major improvement on the programs currently in use. Before she had to worry about production, she received an offer from a major company to buy out that division at a very generous price. Sarah took the proceeds from that sale and purchased three recording studios in the metropolitan New York area. In the course of six months, ProMusic’s cash flow doubled, Sarah could retire most of her debt to nonfamily members, and the prospects for the future looked much improved. Sarah immediately began considering new ventures, like producing CDs of local talent at the studios or sponsoring major musical events.

ProMusic is still in business, but in a form significantly different from that of its Start-Up years. Sarah has turned most aspects of the company over to professional managers. The retail store and mail order service have been combined into a separate subsidiary company with its own president. Sarah is chair of the board and continues to run the original recording studio. This decision reflected a fundamental change in her approach to the business. Initially, she made the decision to do what she wanted, rather than to please investors, and was happy to work hard for relatively low returns. She did not start the business to get rich, after all, and they were living a comfortable lifestyle in a place they loved. After several years, though, she had become burned out. Each of the five product lines of the business required huge amounts of time and effort to develop. Sarah needed time to see her family and to have a life of her own. With the buyout of the software division, she was tempted to try again to run things herself, in all three directions at once. But with Aaron’s help, she recognized instead that neither the company nor she could survive if she did not formalize the structure, hire senior managers, and begin to act more like the owner of a complex enterprise and less like a hands-on entrepreneur. She is now more realistic about her own role and more optimistic about the prospects for the business. ProMusic has found a surprisingly solid niche in its current businesses, and has the opportunity to leverage modest continued growth in the coming years.

Especially in its early years, ProMusic did not sound like the typical example of the Expansion/Formalization stage. What about all those high-tech companies that double sales each year? Some companies do grow that fast, but most family companies do not. The difference lies in financing and ownership. Start-ups headed for the fast track often go public to raise capital; after the IPO, the founders may retain a significant ownership interest, but the company is publicly traded. As we discussed in chapter 1, all family businesses must either rely on family investment or gain access to outside sources of capital. This puts many family companies in the position of ProMusic—ready to grow but constrained by the absence of investors who are willing to take a minority position. Thus growth proceeds much more slowly and is driven as much by reinvestment of the cash that the business generates as by significant outside capital.

ProMusic leapt quickly through the Start-Up stage, and then remained in the Expansion/Formalization stage for almost ten years. And ProMusic raises the interesting question that many owner-managers have to answer: What constitutes success? Is it sufficient that the business just supports the family? Is it sufficient that it satisfy the owners’ professional self-image? Or is it necessary that the business bring significant positive change to the economic status of the family? Sarah was certainly hoping for the latter when they started but, with experience, she is happy to have the first and second criteria met.

Key Challenges

Evolving the Owner-Manager Role and Professionalizing the Business. In the Expansion/Formalization stage, businesses typically evolve from a founder-centered structure to a more formal hierarchy with differentiated functions. At some point in this phase, the pressure builds to hire professionals to fill key managerial and specialist roles, and for the owner-manager to start delegating significant authority to nonfamily members.¹⁰ This is often not easy for the owner-manager, especially in the founder generation. At ProMusic, Sarah hired professionals in each business line—direct marketing (a graphic designer), consulting, retailing, and software development. The realities of diversification gave her little choice, even though she was uneasy with the way that decentralization diminished her direct control. Her challenge was to gain a strategic advantage in the specialty music services business—to establish a strong foothold in that market—by virtue of providing many products and services at once.

The Expansion/Formalization stage puts the owner-manager in a difficult squeeze. She or he may hire professionals to staff the business but usually stays directly involved with day-to-day operations. Ambivalence about delegating authority often leads to some confusion or conflict, so that the professionalizing process happens in a “start-stop” pattern: hiring new managers, reassuming control, delegating again, and so forth, until the owner-manager gets used to the new role. In addition, the company must develop sufficient product quality and availability to meet customer needs and satisfy the growing customer base. Relationships with suppliers and customers are under stress, as cash needs have multiplied and products or services cannot always be delivered when promised. Accounting, information, and communication systems may not be sophisticated or fast enough to keep up with the company’s increasing complexity. In this case, ProMusic had all the costs and operational needs of a retail enterprise, a software R&D firm, a production studio, and a direct marketing business.

Often, as was the case here, all this development must be done with insufficient funds. The owner-manager, who is watching the funds drain out of the account every month, is also spending a great deal of time and energy revising the business plan, locating potential investors, and trying to secure the funding that will allow more unencumbered growth. The time and attention of the owner-manager, therefore, is one of the key bottlenecks of the Expansion/Formalization stage.

Strategic Planning. ProMusic exists because the Greenbergs’ first line of business, the catalogue, was a moderate success for the first seven years. This means that Sarah successfully identified a market and a service that the market would buy. She also had good ideas about other, complementary lines of business; however, her strategy consisted mainly of developing a presence in all the areas where products and services for music makers intersected. She did not consider the competitive advantages of ProMusic in the strategic environment of each business line separately, nor the benefits of a staged entry plan, nor the impact on the company of trying to develop all those business lines at the same time. Two of the five lines proved unsustainable in the long term, but for very different reasons: the retail store, because the margins were too thin, and the consulting business, because they could not develop a cost-effective marketing plan to target a specific customer base. Arguably, either of these businesses might have succeeded had Sarah been able to focus her management time and capital exclusively on them.

There are many opportunities for strategy formation in the Expansion /Formalization stage. Since the 1960s, a major theme in management science has been exploring the complex relationship between strategy and structure as companies grow and age.¹¹ The key issue here is not which strategy is chosen (high volume, specialty market, cost or quality focus) or what type of expansion predominates (functional, multidivisional, decentralized), but rather that these are challenges that must be addressed much more fully than in the Start-Up stage. Owner-managers who restrict information gathering and analysis, and who resist critical reflection on the personal vision that sustained them in the earlier stage, will be working with a truncated range of options. This may well lead to a mismatch of resource investment with strategic opportunity or, even more likely, to a failure to see the new opportunities that are available in the Expansion /Formalization stage.

Organizational Systems and Policies. True to form, Sarah did everything herself in the early days. However, she moved very quickly to hire outside expertise for the specialized, value-adding touches that made the catalogue work—the graphic design, the short album reviews in the catalogue text, and the consultants for specific problems. The Greenbergs also built a computerized accounting and inventory system early in ProMusic’s life. Thus Sarah began to move away from the hands-on management mode earlier than most founders do. However, it took her almost a decade to move fully into a functional organizational structure and to set up integrative systems and policies. Sarah’s centrality in operations remained, despite the fact that she hired other professionals, because the diverse business units remained in business-building mode for so long. As the key resource allocator among the five enterprises, Sarah could not move out of the center until there were enough resources to permit full delegation. Unfortunately, neither internal nor external sources of revenue were sufficient to grow all the businesses comfortably, until the software company was sold off. The resulting cash supported a major jump in business system development, as the organization finally caught up with the needs of its diverse operations.

Cash Management. ProMusic clearly acquired funds sufficient to make the business go in the Start-Up phase. Sarah invested her original stake wisely, and the first business provided enough cash to move the company into expansion in just a few years. However, Sarah still had to spend months of her time in the first ten years trying to “sell” the company to outside investors. Had she been willing to make the company more commercially attractive by traditional business standards, Sarah might well have been successful earlier and at a grander scale than has been the case so far. However, she felt strongly about keeping control and was committed to a diversification growth strategy. As a result, ProMusic had to weather continuous cash flow crises. She could never invest in people or systems fully enough and always had to fend off her family’s needs for cash because of the constant need for reinvestment in the company. In the end, Sarah may conclude that it was her faith in the range of services that led to the software success and the dramatic improvement in her company’s cash position. But Sarah is also a seasoned enough businesswoman to realize that this is no ultimate resolution. She has only moved up the line of business development, and ProMusic still faces critical choices on strategy and cash management at this point in the Expansion/Formalization stage.

Business development in Expansion/Formalization affects the family in a variety of ways. During the early part of this stage, Sarah continued to live the life of the entrepreneur, even though she didn’t quite accept this identity and had a significantly expanded cadre of managers. She worked long hours, traveled away from her family, worried about the business all the time, went through periods when she did not sleep well, and, most painfully for her, did not have time to do other things she loves—rafting trips, camping, and extended periods in the wilderness. ProMusic took a heavy toll on her.

The demands of the company have also consumed Aaron. He is an active participant in the company—hardly a silent partner, as he sits on the board—but he works only part time. And he works, one feels, as much to stay connected to Sarah and her passion as to satisfy his own needs and interests. Early on, of course, he was working for free; now he is paid. An observer would speculate that the business has intruded into their marriage; they are connected now through the business, especially as the children grow close to college age. Members of Aaron’s family of origin are still key investors, so his own and his sons’ financial security is inextricably caught up in the company. It is tempting to wonder what kind of business Aaron would choose to run, if the pair had followed his dream instead of Sarah’s. The challenge for this couple, then, is how to maintain the marriage enterprise that they have chosen in the face of the entrepreneur’s urgent passion for the business and the business’s overwhelming need for cash and attention.

Sarah and Aaron are about to confront another family issue that sometimes appears when a company is growing—the potential entry of the children into the business. So far, neither of their sons has expressed an interest in joining Sarah, and she has not given much thought to the idea of passing the business along. After all, it is her dream, and one that she has not yet fully realized. Still, the boys will be in college within two years, and she knows that they will all need to sit down and talk about whether there is room for either of them in the business. And the vision of her sons in college has also provoked a new round of anxiety about tuition. Although the boys will probably go to state schools, Sarah recognizes that her family is also facing significant financial needs, at the same time that the business has reaccelerated its growth and requires a cash infusion. She knows that she and Aaron must make major estate planning decisions, which she has avoided until now, in order to be sure that their family will be secure financially if she should die prematurely. Sarah is more pragmatic than she was ten years ago, and she has broadened the range of scenarios she is considering: continued rapid expansion, settling down into a more restricted niche and moving the company to maturity, or even, for the first time, putting the company up for sale.

Characteristics

There are mature companies that have held to very limited product lines. They still command a position in their market that allows them to perpetuate many of the same ways of doing business they have always employed. Most firms, however, have gone through a sequence of increasing organizational complexity. Some companies will experience a traditional functional differentiation, with departments such as sales, marketing, finance and accounting, human resources, and manufacturing. Others will treat each plant, product line, or brand name as a business unit, with or without functional subunits inside it. Still others will experiment with other models, such as flat organizations, inverted triangles, clusters, and so forth. Regardless of the particular form, the hallmarks of the Maturity stage are that the purpose of the organizational form is stability; expectations for growth are modest; and, specifically in family businesses, a group of managers have authority and responsibility for many executive functions without the direct input of owners.

The mature family business offers many unparalleled rewards to its owner-manager family. It has survived, grown, and found a place for itself in its industry and in its community. If the company deals directly with the public, particularly if the company bears the family name, the family may be widely recognized as successful and influential. Many families adopt a highly visible role in the community, sponsoring activities with a joint purpose of civic philanthropy and good public relations. Family managers have probably attended dozens of conferences and industry or trade association meetings, assuming a leadership or mentoring role in relation to younger owners of Start-Up firms. Senior family members may sit on boards of other companies, as well as public and cultural organizations. These are the rewards of maturity that were only a vague image to owner-managers in the Start-Up stage: stability, recognition, and an identity with its own unique history and traditions.

But Maturity is also a stage, not a final destination. In theory, a purely mature firm is a dinosaur waiting for extinction. Most organizational experts argue that new ventures and spinoffs, anticipating new directions in the market, are essential to fend off obsolescence and decline in mature companies. We have found this to be true in many cases, but not in all. Some family firms hold remarkably tightly to their organizational traditions. They may modernize, but they do not seek new opportunities. Still, it is relatively rare for a family firm to be completely in the mature stage for an extended time. Some portion of the company will typically begin a recycle by spinning off a new start-up venture, acquiring a subsidiary in an earlier stage, or establishing remote or foreign branches that exhibit some of the Start-Up or Expansion/Formalization characteristics.

FP Construction Company

Frank Pineo and George Tecce are looking forward to their retirement. The brothers-in-law have run the family’s construction-related companies together for thirty years. Francesco Pineo, Frank’s father, arrived in New York in the early 1900s and worked with relatives in the construction industry as a laborer. Soon he was foreman and, over time, he accumulated enough money to take on some of his own work. He leased the equipment he needed from his cousins until he could afford his own fleet. FP Construction Company (FPC), a general construction firm, was born in 1928 in southern Connecticut.

Having weathered the depression, Francesco decided to focus on a new specialty—highway construction. By opportunistically entering every new market, Francesco built FPC into a diversified construction company capable of everything from complex bridge jobs to simple parking lot paving. He also acquired property of all descriptions: vacant land, strip malls, urban office buildings. Frank and George, who is married to Frank’s older sister, followed in Francesco’s tradition: they have taken the construction company to $100 million by running a trimmed-down, honest business. Their philosophy is that they will never underbid a job—they would rather lose the business than lose their margin. The company now owns a sizable fleet of specialized heavy equipment and a large repair facility, run by Frank’s son as a separate business. The real estate is also held in two different corporations, and the brothers own a majority interest in a real estate management business as well.

FPC did very well during the highway boom of the sixties and early seventies. However, the company struggled during the recessions of the eighties and nineties. Federal cutbacks of highway funds posed major obstacles to the construction business, and the plunge in the real estate markets jeopardized some of their larger properties. In the mid-1980s, they hired a specialist to bid their jobs, in part to prepare for the time when George, the master bidder, would retire. Their choice was Bill O’Day, a diligent and intuitive bidder himself, who was also good at supervising jobs. Impressed with Bill’s ability to find the jobs that were scarcer every month and to bring jobs in on cost, the brothers-in-law soon promoted him to president. Frank stepped into the chair role, and George became CEO.

Frank and George also encouraged their own sons to join the business; two of Frank’s children tried, but only Frank Jr. stayed on. George’s son James was a “natural,” having worked in the company since he was a teenager. Both young men had proved themselves in laborer and supervisor jobs when Bill O’Day came on. And, to everyone’s surprise, Bill took an interest in the development of the younger Tecces and Pineos, considering their training part of his job description. Frank Jr., who shared his father’s love of hands-on work, became head of the garage; James, a capable estimator and foreman, moved into the office. His job was to unravel the administrative systems that their longtime CFO Bernie had left behind after a heart attack had forced his sudden early retirement.

Frank and George, after attending a seminar on continuity, brought in a family business consultant to evaluate their progress toward succession. Reassured that they were on the right track, they also took the consultant’s advice and established a board of advisers that included outsiders to the company. In its first year, the board looked carefully at the real estate companies and strongly advised Frank and George to hire a real estate specialist to clean up the problems. Within two years, the properties in crisis were either turned around or sold; however, the portfolio was not generating much cash. This was a concern, because Frank and George intended to leave the real estate companies to their five other children (on the assumption that Frank Jr. and James would have the construction businesses). Their concern was compounded when the real estate manager left suddenly, apparently miffed that Frank and George wanted to hire George’s daughter, Linda, a property manager who had returned from graduate school with her MBA. On the board’s advice, they gave the senior job to Linda, who immediately drew up a strategy for the portfolio and formed a working advisory group of siblings and cousins for the real estate.

Meanwhile, Bill O’Day continues to worry that they can no longer hold to the Pineo philosophy of never underbidding a job. The industry has changed, and huge firms with lower overhead costs are taking a good share of their business. The fewer jobs they bid, the more their equipment fleet sits unused. Frank Jr. wants to launch an expanded marketing effort for their equipment repair operation and to jump into the equipment leasing business. And James is encouraging him to form some kind of joint venture arrangement with a firm in New England, which might allow them to bid work in a larger geographic area. Bill has to choose between the perspective of the second generation, which ran the company in the founder’s tradition, and that of the third, which has new directions in mind.

Key Challenges

The decisions that Frank and George face with FPC are typical of those facing the owners of a mature company. Margins have thinned, competition is fiercer, and old formulas for success have become threats to innovation. The problem facing the younger generation of family and nonfamily managers is how to maintain tradition while moving beyond it. In part, they must honor tradition because they must satisfy the oldergeneration owners; however, they must also understand analytically what the company’s competitive strengths have been, in order to build a solid base on which to move forward.

In the Maturity stage, a business has grown into a complex enterprise. Even in the relatively small FPC structure, there are different companies and differentiated estimating, administrative, and construction functions. The company depends on nonfamily professionals (Bernie, Bill) as much as on key family members, and operating strategy is forged by a senior management team. Although Frank and George are indisputably “more senior” than the others, they are also happy to have their professional managers make the decisions within their areas. If they have substantial disagreement with Bernie or Bill, Frank and George typically take the issue to the board.

At this stage of life, even smaller companies frequently have multicompany structures like FPC’s. One of the two real estate companies is owned by Frank and George and the other, by all their children except Frank Jr. and James. In this case, the board was instrumental in getting Frank and George to treat their real estate like a real business; nevertheless, they have significant assets invested in that company, and their real estate problems are jeopardizing the construction business. Like other companies in this stage, FPC needs to look for new lines of business and new ways to generate margin in their current operations. Their success depends on three key variables.

Strategic Refocus. Creating a board of advisers was the first of several steps Frank and George took that could lead to a strategic refocus for the company. Planning for the turnover of the company to their sons is also an important step. However, there are still at least two steps to go for FPC. First, the senior management team and the board have not done any systematic analysis to generate options for new business. Frank Jr. believes that the garage can become a revenue-producing division and wants to experiment with leasing underutilized equipment. However, the group has not discussed this proposal seriously nor considered investing company resources in this new project. Second, Frank and George have not blessed the effort to find new lines of business. Although they are open to new ideas, they continue to focus their own energies on improving operations in the construction business. They need to send the signal to their sons and to nonfamily managers that searching for new sources of revenue is an important priority and that they welcome this refocus as part of the succession process.

Family firms are sometimes slow to acknowledge the complexity of the strategy process when they reach the Maturity stage. Ward has found that both strategy and organizational structure in family firms are influenced by a wide mix of forces.¹² Some of these forces are the same as those experienced by all firms (such as organizational mission, industry and company analysis). In addition, family businesses need to factor in the influence of the founders’ legacy, family values and goals, and history of the firm. Even the most enlightened family leadership needs help from a strong board to manage this complicated strategy process in mature companies. ¹³

Strategic refocus also operates on a different timetable than it did a generation ago. In the middle part of this century, the life expectancy of a major innovation or technology was about twenty-five years—nearly identical to the typical span of control of one generation in a family business.¹⁴ New ideas and systems entered with the new leaders. Now the typical product life cycle has shrunk to four or five years (and, in some industries, to a matter of months). No generational leadership can coast on its entry improvements for very long. Most leaders will have to guide the company through the business cycle, from Start-Up through Expansion/Formalization to Maturity, several times during their tenure. This uncoupling of the cycle of family succession from the business’s development is an example of why it is so important to consider developmental stages separately for each of the three axes.

Management and Ownership Commitment. Because Frank’s and George’s own personal assets are invested in FPC, they are making a strong statement of trust in turning the business over to their sons, who will eventually own the company fifty-fifty. Likewise, Frank Jr. and James are sending the signal, by their decision to accept the FPC mantle, that their generation is committed to keeping the business in the family. However, this family has not sat down and openly recommitted itself to the company. For Frank and George, this may seem unnecessary; they never considered any alternative for themselves except running Franco’s business. However, for their children, it may be an important conversation. In particular, nonemployed children need to understand and accept the continued dedication of significant family assets to the company.

One advantage of the Mature firm is that it offers a variety of different career advancement opportunities for both family and nonfamily managers. Nonfamily managers become increasingly important to all family businesses as they move through the business development stages. Non-family leaders are sometimes a forgotten issue in the analysis of family firms. Beginning in the Expansion/Formalization stage, few families can staff all management positions themselves. Nonfamily managers provide essential resources, especially for expertise and experience that is not included in the family. They can be a buffer against inappropriate family influence in management. They can be an encouragement to lower-level nonfamily managers and staff because they symbolize the opportunity available to successful employees. Finally, they can play an essential role in the supervision and mentoring of the next generation of family managers.

The contribution of nonfamily managers cannot be taken for granted, however. A comprehensive career development strategy for the company’s leadership should include incentive and recruitment tactics that will locate and retain the best available nonfamily management. Many family owners worry, especially in the early stages of the family business’s development, that it will be difficult to attract and keep ambitious nonfamily managers because of the family control. As a result, they avoid clarifying career opportunities and restrictions for young nonfamily managers. Dealing successfully with this issue requires the owner-managers to first make some important decisions: Are there positions that are reserved for family members? Why? Are there policy issues and information that are to be decided by family members only? Why? Will nonfamily members be moved out of positions to provide opportunities for developing family managers to get essential experience? Is the family ownership prepared to offer competitive compensation to nonfamily managers, even if family members are willing to work for below-scale salaries? Once the leadership is comfortable with its policies on these issues, it is almost always a better strategy to discuss them openly with key nonfamily managers. Their fears may be worse than the reality of their opportunities. In any case, understanding what the rules are and what to expect from each other is better than surprises.

Reinvestment. FPC is facing a critical juncture in the succession process, and part of the transition’s success will depend on how the leadership (senior and junior) balances the financial needs of the family with the business’s needs for reinvestment. Strategic refocus typically requires investment—in new products, in new people, and in new equipment. However, when a company is mature, there is often a temptation among the owners to treat the company as a static and automatic source of income. Continuous capital reinvestment does not carry the same excitement or feeling of creativity as investment in new ventures. Some businesses whose products are potentially viable far into the future make the mistake of continually deferring needed upgrading. This can push equipment, marketing strategies, facilities, and product lines beyond their optimal life. Then, if everything falls apart at once, massive reinvestment is needed on a crisis basis, and by then it is often no longer feasible to rebuild. If a company hopes to maintain all or part of its operations in the Maturity stage for some time, it needs to accept a psychological commitment to feed the cow as well as milk it.

The challenge of reinvestment can become complicated if the Maturity stage in the business dimension coincides with the Passing the Baton in the family dimension. Psychologically, it may be more difficult for a senior generation to embrace a strong reinvestment policy, especially if it means significantly increasing debt, during their last few years of active involvement in management. They may have spent years improving debt-to-equity ratios and working off long-term obligations. Starting over is a hard choice to make.

There may also be cash considerations during this time. One of the financial challenges of the Passing the Baton stage is financing the retirement of senior family members. There is sometimes simply not enough surplus cash or retained earnings to buy out the interests of the retiring generation and to pay for major rebuilding at the same time.¹⁵ The problem is compounded if there is also pressure to cash out nonemployed siblings or cousins in the younger generation. The result of these forces is that many companies are left in the Maturity stage a little longer than is financially prudent by senior owner-managers who convince themselves that major change is the prerogative (and therefore the responsibility) of the next generation. Sometimes the new leaders have the skill, judgment, authority, and cash to begin strategic reinvestment as soon as they assume leadership. Sometimes they do not.