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Strategic planning, not economic headwinds, will hold family businesses back from growth, says a study.

Despite economic uncertainty, almost two thirds (64 %) of family businesses have grown over the past year, according to a new global survey of over 2,800 family businesses in 50 countries by consulting firm PwC. The sector has ambitious plans to grow again over the next five years despite global economic head winds with only one in five family businesses reporting a drop in sales in the past two years. Family businesses in Asia Pacific are the most ambitious, with 21 per cent looking for the quickest and most aggressive growth according to findings from PwC’s biennial global survey of family businesses: The “Missing Middle”: Bridging the strategy gap in family firms.

Family businesses in Western Europe (10 %) and North America (12 %) have lower levels of ambition for quick and aggressive growth with respondents in these regions mainly predicting “steady growth”. Globally, 15 per cent of respondents aim to grow quickly and aggressively in next five years and 70 per cent aim to grow steadily. In the near term, respondents do not see Brexit affecting their ambitions for growth – only 15 per cent globally say it will have a negative impact. Unsurprisingly, fears about the potential impact of Brexit in the next one/two years were highest in the United Kingdom – 38 per cent, over twice the global average of 15 per cent – and among EU countries (22 %). Globally, 83 per cent said they were not planning to take action to address Brexit.

Not being able to turn early promise into sustainable success

Despite the relatively steady outlook, the report warns that family businesses’ growth outlook could be curtailed by the organization’s own lack of strategic planning rather than economic factors or other external concerns. In fact, many issues now facing family business come back to a lack of strategic planning – the “Missing Middle” – namely having a strategic plan that links where the business is now to the long-term and where it could be. This results in many families not being able to turn early promise into sustainable success. While some family firms are managing strategic planning well, many are caught between the deluge of every day issues and the weight of inter-generational expectations.

PwC found that in survey to survey, areas such as succession, diversification, digital, cyber security, and innovation, are not being tackled. Stephanie Hyde, Global Entrepreneurial & Private Business leader at PwC, comments: “It is clear family firms remain a vital part of economies across the world, contributing the bulk of GDP in many territories, and are a primary driver of job creation. Overall, their performance and outlook for growth remain strong with notable progress on professionalization, but less so on strategic planning. Having an ambition to grow, without a strategic plan of how to get there, is just an aspiration. Not only is it limiting their ambition to expand and grow, it could also expose them to additional risks that they have not effectively planned for.”

Innovation identified as a key challenge

In three successive surveys now, family businesses have made on average, around a quarter of their sales overseas with ambitions to raise that to a third. Yet in each survey, international sales have remained at around 25 per cent. One in three family firms are still operating in only one sector and still only in their own home market, yet just under 80 per cent plan to export/sell goods outside of their home market within five years. A number of the key challenges respondents from over 2,800 businesses in 50 countries identified related to their strategic planning:

• Succession: Only 16 per cent of family firms have a plan for their succession process for all senior executives: 43 per cent have none at all.
• Innovation: 64 per cent identify innovation as a key challenge to keep ahead in the next five years.
• Digitalization: 47 per cent say keeping pace with digital and new technologies is one of their key challenges, yet only a quarter think their business is vulnerable to digital disruption.
• Professionalization: Three out of five respondents say they will bring in non-family professionals to help run the business.
• Skills: 58 per cent say their ability to attract and retain the right talent is a key challenge over the next five years. Almost half believe that they need to work harder than non-family businesses to recruit/retain top talent (48 %).
• Finance: A third say that they find it harder to access capital (32 %) than their non – family business counterparts. Three quarters (76 %) say they will use on their own capital to fund growth.
• Cyber security: Less than half (45 %) believe their business is prepared for dealing with a data breach or cyber-attack.
• Geopolitical concerns: The majority of family businesses identify political and economic stability as more important than growth potential when considering new export markets.
• Working life: Next generation family members are more certain they have to work harder to prove themselves than current generations believe they do (88 versus 66 %). Nearly two thirds say they are properly appraised (65 versus 59 % in current generations).

The impact of digitalization is underestimated

Peter Bartels, PwC Global Family Business Leader, comments: “This year’s results on succession show a recurring theme too. It’s the fault-line in the family business model. There’s no point having detailed plans for business continuity, if the single most significant risk to this is not addressed. A managed succession process can be a rallying point for the family, allowing it to reinvent itself in response to changing circumstances, but without a plan it is the most obvious ‘failure factor’ for the family business. The next generation will play an important role in creating the family business’ future. The great majority of family businesses around the world don’t believe they are vulnerable to digital disruption and many states they have a strategy fit for a digital world. In our experience they underestimate the impact of digitalization. It shows that it is very fruitful to listen to the next generation and to have them be the change agents for digital transformation.”

The report finds that a more uncertain economic environment means that for many family businesses, ensuring the company stays in the family is possibly not as important as it once was. Fewer than half of family businesses plan to pass both ownership and management of business fully to the next generation: 39 per cent will pass on management; 34 per cent will pass on ownership. First generation business owners are now almost twice as likely to be planning to sell or float their business: 29 versus 17 per cent average across all businesses.

Source: PwC