Nudge Theory: An Effective Way to Transform Negative Behaviors

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Changing the behaviors of people is the foremost issue with every transformation initiative.

Nudge theory is a novel Change Management model that underscores the importance of understanding the way people think, act, and decide. The model assists in encouraging human imagination and decision making, and transforming negative behaviors and influences on people. The approach helps understand and change human behavior, by analyzing, improving, designing, and offering free choices for people, so that their decisions are more likely to produce helpful outcomes for the others and society in general.

Nudge theory helps reform existing (often extremely unhealthy) choices and influences on people. The theory is quite effective in curtailing resistance and conflict resulting from using autocratic ways to change human behavior. The model promotes indirect encouragement and enablement—by designing choices which encourage positive helpful decisions—and avoids direct enforcement. For instance, playing a ‘room-tidying’ game with a child rather than instructing her/him to tidy the room; improving the availability and visibility of litter bins rather than erecting signs with a warning of fines.

Organizations are increasingly using behavioral economics to optimize their employee and client behavior and well-being. Nudge units or behavioral science teams are being set up in the public and corporate sectors to influence people to address pressing issues. For instance, to increase customer retention by changing the language of support center staff to motivate customers to consider long-term benefits of a product; or to make employees to follow safety procedures by placing posters of watching eyes to remind them of the criticality of the measure.

An effective Nudge initiative necessitates much more than deploying a few experts in heuristics and statistics. The senior leadership should lay out a conducive environment for successful behavioral transformation. This entails assisting the Nudge unit to focus, place it appropriately, create awareness, train and de-bias people, implement effective rewards, and follow high ethical standards.

The leadership needs to think about and prepare to tackle 6 key challenges Nudge units face when implementing effective behavioral transformation initiatives:

  1. What should be the focus of the Nudge unit?
  2. Should the Nudge unit be placed at the headquarters or at the business unit level?
  3. Which resources be made part of the Nudge unit?
  4. What are the critical success factors to consider for the unit?
  5. How to communicate the results and early wins?
  6. What should be done to tackle skepticism and resistance to change?
Nudge Theory
Leaders who are able to confront these challenges improve the chances that the unit’s nudges will cause real change in the organization and in its productivity.

Let’s, now, dive deeper into the first 3 key challenges.

What should be the focus of the Nudge unit?

The foremost action in creating a Nudge team is to clearly spell out the value proposition for the unit. The leadership needs to define the purpose of creating a Nudge unit. They need to clearly outline whether the Nudge team will focus on employees, on customers, or on both. For instance, the purpose of its creation could be to deal with workforce motivation, to make better decisions in boardrooms, to increase the internal capabilities, or to improve the behavior of employees. The focus on customer issues, for example, entails encouraging better pension provision, inculcating behavioral science into the marketing mix, or to analyze the experiences of customers and employees—e.g., in-store service initiatives, digital operations, and HR processes.

Should the Nudge unit be placed at the headquarters or at the business unit level?

The second challenge is to decide where to deploy the Nudge unit. The placement of the Nudge unit depends on the strategic purpose of creating the unit. At some companies, it is housed centrally within the corporate headquarters as a global Nudge operations center; a few have accommodated the unit within the R&D or marketing department; some have benefited by moving the unit away from the corporate center so as to be closer to products and services; whereas other practitioners believe that the customer-focused behavioral science team should sit within the product management domain.

Regardless of where the Nudge unit resides, its flexibility and assimilation with other methods of behavioral change—e.g., cognitive neuroscience, social psychology, and personality-trait science—are critical.

Which resources be made part of the Nudge unit?

Another critical element for the success of the Nudge unit is hiring and deployment of right resources. At the commencement of the program when key capabilities are typically not available in-house, most organizations hire people from the outside for their Nudge units. A few companies have recruited solely from the in-house due to the criticality of institutional knowledge and the long learning curve required to acquire it, whereas some have recruited across different geographies. On average, the unit comprises of 3 to 8 members, however, larger organizations can have more people scattered globally.

The ideal composition of the Nudge team is to include behavioral scientists and specialists in psychology, marketing, and advanced data analytics. The team should include people with the right attitude and abilities—e.g., curiosity, can-do attitude, problem solving, entrepreneurial mindset, ownership, and communication skills.

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Are You Able to Effectively Tap Corporate Social Responsibility (CSR) Opportunities?

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Corporate Social Responsibility (CSR) is an organization’s commitment to produce an overall positive impact on society.  CSR encompasses sustainability, social and economic impact, and business ethics.  It makes a company socially accountable of its operations, stakeholders, and the public.  Businesses undertake CSR programs to benefit society while boosting their own brands.

CSR affects every aspect of business operations and functions.  Encouraging equal opportunities; partnering with organizations practicing ethical business methods; putting part of earnings back into environment, health, and safety initiatives; and taking care of communities and charity are all examples of CSR initiatives.

Communities, customers, employees, and media consider CSR vital and gauge companies based on these initiatives.  Executives of leading companies consider CSR as an opportunity to deal with critical issues innovatively, reinforce their organizations, and serve the society simultaneously.

The Need for CSR Implementation

Organizations need to come up with a robust approach to unlock potential benefits and value from CSR for them and for the society.  The organizations practicing Corporate Social Responsibility do that with one of the following 4 objectives in mind:

  • Philanthropy:  These initiatives (e.g. corporate donations) make the companies and society feel good, but produce low value for the business—questionable repute building benefits to companies, but offer much to society.
  • Propaganda:  These CSR initiatives are predominantly geared towards promoting a company’s standing, but offer little real value for the society.  This form of CSR is more of advertisement and becomes risky if there are any gaps between the firm’s commitments and actions.
  • Pet Projects:  Some companies engage in CSR initiatives that support the personal interests of senior executives.  These initiatives are much touted about, but are actually of little value to the business or community.
  • Smart Partnering:  These initiatives concentrate on common themes between the business and the community.  Organizations, in this case, create innovative solutions by drawing synergies from partnerships to tackle major issues concerning all stakeholders.

Among these objectives, Smart Partnering offers maximum opportunities for shared value creation and finding solutions to crucial business and social challenges.  Whereas for the society, smart partnering helps create more employment opportunities, improve livelihoods, and enhance the quality of life.

Guiding Principles for CSR Initiative Selection 

An effective way for the companies to maximize benefits of their CSR efforts is to map the current initiatives; identify the objectives, benefits, and resources responsible for realizing value from those initiatives; and define the projects valuable for addressing key strategic challenges.

Pet projects, philanthropy, or propaganda are easy to plan and execute.  However, the real issue is to implement CSR opportunities that bring value for the business as well as society (smart partnering).  This goal can be achieved by applying these 3 guiding principles:

  1. Focus on the right segments

Real opportunities lie in the segments where the business collaborates with and influences the society the most.  These segments help the business interpret mutual dependencies and uncover maximum mutual benefit.

  1. Recognize challenges and benefits

After finalizing the opportunity segments, it is imperative to appreciate the potential for mutual benefit.  The key is to find the right balance between the business and community and recognize the challenges that both sides face.

  1. Find the right partners

Collaboration with right partners—who benefit from business endeavors and capabilities of each other—creates a win–win situation for both sides and motivates them to achieve mutual value.  Sustainable collaboration demands long-term alliances and deeper insights on the strengths of each other.

These principles are helpful in selecting appropriate CSR opportunities, identifying societal and business needs to be addressed, and the required resources and capabilities.

The Case for CSR Benefits 

The goal of unlocking mutual benefits—associated with CSR (specifically Smart Partnering)—is critical for long-term success of the program.  As required by any other strategic initiative, the mutual value creation objective needs to be carefully assessed based on the true value-creation potential, prioritized, designed, staffed, and audited.

The next step is to outline the list of potential benefits for the business and community.  A well-defined business case and a compelling story immensely helps involve and gain commitment from the senior leadership, investors, and employees.

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Thinking of Undertaking an M&A? Here Are the 3 Critical Pre-merger Considerations

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assemble-challenge-combine-269399Takeovers can turnaround companies in a short period of time, but there is a significant degree of risk to be anticipated and mitigated prior to undertaking such transactions. Lack of careful deliberation of the potential risks, insufficient planning, weak execution, and lack of focus on Post-merger Integration are the major reasons why many Merger & Acquisition deals fail to achieve their desired goals.

The course of an M&A transaction has to be set at an early stage, way before the actual deal closure. The period prior to the deal approval by the regulatory authorities and while due diligence is being done is most critical, and should be utilized by the leadership to clearly define the goals of integration, the potential risks, and a layout for the execution of the actual integration process. It is the right time to perform a structured evaluation of 3 core pre-merger considerations associated with such deals, i.e.:

  1. Strategic Objectives
  2. Organization & Culture
  3. Takeover Approach

Understanding these PMI Pre-merger considerations helps the stakeholders ascertain the unique challenges and constraints related to M&A transactions and make informed decisions. These considerations assist in developing a systematic approach to undertaking a Post-merger Integration (PMI) — which is devoid of any “gut decisions,” and ensures realization of synergies and value. These considerations set the direction and pace of the post-merger integration process.

Now, let’s discuss the 3 core considerations in detail.

Strategic Objectives

Organizations undertake Mergers and Acquisitions as a way to accelerate their growth rather than growing organically. The foremost core consideration associated with an M&A transaction is the strategic objectives that the organizational leadership wants to achieve out of it.

M&A deals take place to fulfill one or more of these 5 strategic objectives:

  • Reinforcement of a segment
  • Extension in new geographies
  • Expansion of product range
  • Acquisition of new capabilities
  • Venturing into a new domain

The PMI approach needs to be tailored in accordance with the desired strategic objectives of the deal.

Organization & Culture

The senior management should be mindful of the significance of organizational and cultural differences in the two organizations that often become barriers to M&A deals. Small companies, typically, have an entrepreneurial outlook and culture where there aren’t any formal structure and the owner controls (and relays) all the information and decision making. Whereas, large corporations typically have formal structures and well-defined procedures.

A takeover of a small firm by a large entity is bound to stir criticism and disagreement. M&A process often faces long delays between the offer, deal signing, and closing — due to antitrust reviews or management’s indecisiveness — triggering suspicion among people. This should be mitigated during the PMI process by orienting the people of the small firm with the new culture and giving them time to transition effectively.

For M&A deals to be effective, leadership needs to carefully evaluate the behavioral elements of the organizational culture and contemplate the overriding principles guiding a company.

Takeover Approach

Integrating the operations of two companies proves to be a much more difficult task in practice than it seems theoretically. Organizations have the option of selecting the takeover approach most suitable for them from the following 4 methodologies — based on their organizational structures, people, management, processes, and culture:

  1. Direct Hit
  2. Hiatus
  3. Deferred Decisions
  4. Quick and Unsympathetic Disposal

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How to Enable PMI? Here Are the 8 Critical Decision Levers to Analyze First

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deal-desk-greeting-862734 Mergers and Acquisitions (M&A) are unique and complex endeavors.  These initiatives demand tailored solutions keeping in view the varying environments, ways of doing business, culture of the two combining organizations, and internal and external forces influencing the deal.

These transactions necessitate making 8 important decisions based on thorough deliberation and analysis of all relevant factors well before the integration process.  These fundamental decisions and relevant factors form the 8 decision levers of Post-merger Integration (PMI).   These 8 decision levers of PMI are essential for devising an optimal integration approach and, subsequently, the success of an M&A initiative:

  1. Form of Synergy to Be Created: Cost-cutting versus growth
  2. Required Pace of Integration: Quick versus steady
  3. Degree of Integration: Extensive versus partial
  4. Nature of Integration: Buyout versus a merger
  5. Commencement of Integration: Urgent or delayed
  6. Integration Project Team Organization: Clean or shared
  7. Decision Making Style: Implicit and prompt versus lengthy and analysis based
  8. Transaction Change Management: Tacit versus one that requires comprehensive actions

These decision considerations facilitate Post-merger Integration across all industries and organizations of various sizes.  Let’s discuss the first 3 decision levers in detail now.

Lever 1 – Form of synergy to be created

The foremost element of a PMI is deciding on the type of synergy to be achieved through integration.  The question is to either focus on achieving cost reduction or growth synergies. If cost cutting is the objective of an M&A then the leadership of the combined organization needs to outline potential costing saving opportunities across the board.  This should be followed by robust communication strategy to convey the implications of the M&A program.  However, if the management’s objective is to unlock growth synergies from the acquisition, then the integration is to be treated as a strategic endeavor—e.g., understanding the customer needs, evaluating market potential, generating innovative business ideas, and developing execution plans.

Lever 2 – Required pace of integration

The 2nd lever demands from the senior leadership to determine the pace most appropriate for the integration of their newly combined enterprise—i.e., to choose between a fast track and a steadier integration approach. A majority of executives believe that PMI should be executed as quickly as possible, so that upon completion of the initiative they could divert their center of attention back to business operations.  This approach, however, involves decisions that aren’t backed by detailed analysis of facts and data, and is likely to face increased risks and uncertainties. On the other hand, a slower pace of integration is beneficial in case of a friendly takeover or expansion in a new domain.  A steadier pace of integration works well to reduce any apprehensions, cynicism, bottlenecks, and risks due to oversight.

Lever 3 – Degree of Integration

PMI necessitates gauging the appropriate degree of integration beneficial for the organization—i.e., choosing between extensive across the board versus partial integration. An absolute focus on cost synergies warrants an extensive degree of integration across all departments and geographies.  This puts extra pressure on teams in terms of work and risks dwindling enterprise focus on the customer.  Committing more resources and setting the priorities right aids in offsetting the risks associated with an extensive degree of integration. A partial integration, on the other hand, is simpler, less controversial, and predominantly warrants consolidation of sales or alignment of mission-critical processes.  This typically works well in takeovers requiring new products acquisition or addition of new customer segments.

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How to Secure the Promised Revenue Synergies After Signing a Merger Deal?

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Money GlobeStiff market competition, expansion into new territories, product portfolio extension, and gaining new capabilities are the prime reasons why more and more organizations are seriously looking into the prospects of—and carrying out—Mergers and Acquisitions. However, only a few M&As achieve their desired revenue objectives.

Revenue Synergies are a decisive factor in closing such deals. However, identifying precisely where these Revenue Synergies lie and then capturing them isn’t as easy as it sounds.

A McKinsey study comprising of 200 M&A executives from 10 different sectors revealed that all the respective organizations of the respondents remained short of achieving their Revenue Synergy targets (~23% short of the target on average). Securing Revenue Synergies is a long-term game. The companies that succeed in securing Revenue Synergies achieve the target in or around 5 years.

Leaders aspiring to achieve Revenue Synergies should first clarify the objectives from and the schedule of the revenue synergies, lay out the organizational priorities and go-to-market strategies, remove obstacles from realizing value, and gain across the board readiness and commitment for the initiative. Organizations that are most successful in securing revenue synergies pay close attention to these 7 guiding principles during the Post-merger Integration process:

  1. Source of Synergies
  2. Leadership Ownership
  3. Customer Insight-driven Opportunities
  4. Salesperson Driven Strategy
  5. Ambitious Targets and Incentives
  6. Sufficient Support
  7. Performance Management
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These 7 guiding principles to capturing Revenue Synergies are critical for effective integration of two firms after a merger and unlocking potential benefits from the deal. Let’s discuss the first 3 principles in detail now.

1. Source of Synergies

The inability of the leadership of the acquiring company to spot major sources of revenue that integration brings in results in losing significant pools of opportunity and failure of M&As. Realizing Revenue Synergies demands a thorough methodology to ascertain and qualify revenue prospects along markets and channels, Go-to-Market Strategies, and developing commercial capabilities. This entails:

  • Evaluating customers and markets, selling offerings of the combined firms utilizing existing and additional channels, and adequately training and rewarding the sales teams.
  • Coming up with innovative new products and bundles utilizing combined R&D capabilities.
  • Sharing best practices and commercial capabilities that mergers offer.

2. Leadership Ownership

Organizations that accomplish their Revenue Synergy objectives guarantee that their top management and employees commit themselves fully to the initiative from the onset. They identify potential value pockets from the integration, examine the assumptions about securing value, and get them endorsed by the senior management and front-line staff. The potential Revenue Strategies are regularly evaluated by inter-departmental experts.

3. Customer Insight-driven Opportunities

Accurate estimation of Revenue Synergies demands top-level estimates—assumptions on market share gain, revenue enhancement, or improved penetration—alongside comprehensive bottom-up customer insights, and evaluation of customer relationships. Other important elements to consider include analyzing the offerings being offered to customers, discerning other potential products and services required by the customers, and assessing the ability of the sales team and brands in terms of the potential they offer to the clients.

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Why Agile Activity Groups are Important in Managing an Agile Company

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Big corporations, by nature, maneuver like battleships. Held back by their own inertia and current business strategies, turning quickly can be Agile Activity Groupsdifficult when the competitive environment changes. Likewise, high performance as measured by shareholder returns is impossible to sustain over a long period of time.  No company consistently beats the market.

A recent in-depth study of long-term performance, however, suggests an alternative point of view about business strategy. A few large companies outperform peers when the measure of performance is profitability. They maintain this performance edge even during a significant business change in their competitive environments. Agility is one factor that differentiates them from others.

Agile companies adapt business change more quickly and reliably than competitors.  Even as battleships, they have learned to turn quickly as speedboats. Learning the routines of agility makes them be at the forefront of competition.

The Link Between Agility and Performance

 A survey was conducted to determine the link between agility and performance. The survey was focused on determining the way organizations formulated strategy, designed their structures and processes, led their people, and made changes and innovation.

More than 4,700 Directors and Executives from 56 companies were surveyed, of which 34 companies were Fortune 500 firms.

The survey was able to find out that when markets and technologies changed rapidly and unpredictably, the outperformers had the capability to anticipate and respond to events, solve problems, and implement change. As such, this enables Agile companies to easily adapt. Agility is not just the ability to change – it is a cultivated capability that enables organizations to respond in a timely, effective, and sustainable way when changing circumstances require it.

Many an Agile organization involves 4 complementary sets of activities, what we will call Agile Activity Groups.

The 4 Agile Activity Groups to Managing an Agile Company

Agile Activity Groups

  1. Dynamic Strategy Development. This is having a clear, relevant, and shared strategy that is undertaken with 3 key activities integrated within the strategy.
  1. Market Environment Response. This ensures an effective response to the implications of outside signals. Market Environment Response provides an accurate sense of what is going on in the environment.
  1. Response Refinement. This encourages innovation and tolerates failures. These are insights refined from the perceiving routing with a relatively high number of low-cost experiments.
  1. Change Management. Change Management is the mastery of internal program management capabilities needed to convert successful test and innovations into widespread practice. It builds the company’s capability to adopt unambiguous commitment with speed, certainty, and precision.

With the 4 Agile Activity Groups, Competitive Advantage is gained through an ongoing series of advantages that exploit current business conditions.

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Using Knowledge Management Strategy for Business Sustainability

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In today’s business environment, learning and knowledge have become key success factors internationally and intangible resources are of vital knowledge management strategyimportance. The struggle between competing firms has moved from tangible resources to intangible resources where knowledge and the ability to use knowledge have crucial roles.

Organizations are becoming more global, multilingual, and multicultural with people being required to work smarter and faster. People have become more connected with them being expected to be “on” all the time and the response time measured in minutes instead of weeks.

Indeed, today’s work environment has become more complex with businesses being threatened by the vulnerability, uncertainty, and crisis that could have been prevented if Knowledge was better managed. Better KM can help companies anticipate uncertainties and design strategies to lessen their impact.

While managers would like to take a strategic approach to avoid an impending crisis, often they find themselves fire-fighting. With a Knowledge Management Strategy, corporate executives can better manage the complex, chaotic, and non-predictable environment, in which companies must achieve performance.

Putting Strategy on Knowledge Management

Knowledge is important to efficiency and productivity. Hence it is critical that organizations manage their Knowledge effectively and strategically. Having a strategy for Knowledge Management will provide companies a plan to better manage information and knowledge for the benefit of the organization.

Effectively, a good KM Strategy can gain senior management commitment to KM initiatives and attract resources for implementation. In the end, it can provide the basis against which the organization can measure its progress.

Taking the 3 Knowledge Management Strategies to Fore

Companies are now feeling the pressure of the need to be more competitive. Taking on a Knowledge Management Strategy can lead competing firms to take the high road to success.

Knowledge Management Strategy

KM Strategy 1: Reckless Negligence
Reckless Negligence is doing little or nothing to improve capabilities in information, data, and KM. This is one strategy that has ceased to be viable in today’s business environment.

KM Strategy 2: Knowledge Competence
The goal of Knowledge Competence is to be an efficient and effective company with sufficient emphasis on responsible management of Knowledge. To date, at least 50% of the companies in the world are in this category.

KM Strategy 3: Knowledge as a Competitive Advantage
The goal of Knowledge as a Competitive Advantage is to up the ante in the spirit of continuous improvement. Undertaking the third strategy involves making KM a critical capability of the organization.  At least 20% of the companies in this world are in this category. This is often adopted by Knowledge-Intensive Industries.

Essentially, our company must create a robust Knowledge environment. However, this can only be achieved when 8 KM critical success factors are put in place.

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Using Strong-form Product Management as your Company’s Powerful Value Proposition

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Most Product Managers have relatively narrow roles and decision rights on product portfolios are fragmented on various functions. This creates pic 1 Strong-form Product Management Modelincoherence between a company’s product and its overall Corporate Strategy.

What is needed is more accountable decision rights that align responsibility for results to one person who also has cross-functional decision-making authority. This realignment is at the core of Strong-form Product Management.

What is Product Management

Product Management is an organizational lifecycle function within a company. Product Management deals with the planning, forecasting, production, and marketing of the product or products at all stages of the product lifecycle.

The Product Life Cycle (PLM) Management integrates people, data, processes, and business systems. It provides product information for companies and their extended supply chain enterprise. One of the ultimate goals of Product Management is to optimize the business at the product, product line or product portfolio level over the lifecycle of the products.

Taking a Cautionary Case in Point: Understanding What Happened to Research in Motion (RIM)

In April 2007, Research in Motion (RIM) was flying high. The Blackberry creator was coming off its best year ever. RIM was experiencing record revenues, record earnings per share, and record shipments. And there was a new reason to be optimistic: Apple had just introduced the iPhone and RIM executives took it for granted that their product—a runaway hit in the business world—would grab a huge share of the burgeoning consumer market as well.

However, the confidence proved to be ill-founded. The iPhone reversed the historical pattern of computer technologies flowing from the enterprise to the consumer market.

RIM is compelling as a cautionary tale but it is not unique. Many companies falter in the face of discontinuous change. Their failure usually stems from their inability to keep up with technological shifts or the complexity of their product lines. Though often seen as a breakdown at the enterprise level, this starts at a much more granular level, with ineffective Product Management.

A Strong-form Model could have kept RIM stay ahead of change and remain competitive.

The Strong-form Product Management Model

slide 1 Strong Form Product Management MOdel

The 5 steps to Strong-form Product Management will keep competition at bay.

  1. Hire Product Managers with Proper Skills
    We need to understand that intrinsic abilities are required by Product Managers. These are the abilities to make a judgment to understand trade-offs, anticipate market changes, and make savvy business decisions.
  2. Create Financial Transparency to the Product Level
    Companies must realize that a given product may be siphoning revenue from more profitable products. Increase in costs from suppliers that are managed by another function may cause hidden opportunity costs or out-and-out profit surprises. The creation of Financial Transparency down to the product level can address these concerns.
  3. Implement Product-first Decision-making Processes
    There is a need to broaden decision rights and increasing accountability of Product Managers for performance and results. Product Managers have a “first among equals” status.
  4. Develop Strong Customer Relations
    Product Manager must translate customer insights into product improvement and new products.
  5. Encourage Cross-functional Collaboration
    Strong-form Product Management is inherently cross-functional. Communication is essential in developing the relationships between marketing and product management.

In all these steps, the Strong-form Product Manager must be the center of knowledge. However, Product Managers must also realize that the adoption of a Strong-form Product Management Approach requires taking Change Management initiatives.

Undertaking a Change Management initiative can take years to implement. Success can be achieved when anchored on basic principles of Change Management. However, once this is put in place, significant opportunities arise as companies move from strategy to execution.

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Preparing the Next Generation: The Key to Family Business Sustainability

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Family businesses did especially well in riding the rising tide.  Family businesses were the particular beneficiaries of three decades of favorable pic 1 Family Business Succession Preparationglobal economics. Propelled by fast growth in the emerging world, the share of family businesses in the global Fortune 500 grew from 15% in 2005 to 19% in 2013.  Five years ago, founders or their families owned 60% of emerging-market companies with sales of $1 billion or more. By 2025, an additional 4,000 companies may join the list.  Family-owned businesses would represent 40% of the world’s large enterprise.

However, despite the growing power and influence of family businesses, executives and investors have a poor understanding of the unique attributes providing the edge.  It is difficult to parse the DNA of family businesses. It is a complex mix of family, management, and wealth creation, all overlaid with a rolling ownership dynamic that claims all but 30% of them.  This 30% is claimed by the 3rd generation.

The number one worry of family owners is the challenge of developing the next generation as motivated and responsible shareholders.   Addressing this concern is critical to the long-term sustainability of family businesses.  It calls for both technical and interpersonal focus.

First Things First

Maintaining an entrepreneurial edge is becoming evidently critical for long-term survival. Creative destruction constantly churns the rankings of companies in the S&P 500 index of the largest US companies.

However, as family businesses grow through the generation, barriers to entrepreneurship and innovation creep in.  Maintaining the entrepreneurial spirit of the next generation of family leaders is essential. But developing, engaging and motivating them is the biggest challenge.

Family owners want to keep the next generation involved. This is to maintain the business as a source of family pride and to preserve the founder’s legacy to keep it within the family.

Successful generational succession can be achieved. Family Businesses just need to take on 3 important principles.

Preparing the Next Generation: The 3 Important Principles for Succession

slide 1 Family Business Succession Preparation

  1. Build emotional connections. A common problem in a family business is fostering communication across generations and borders.  It can be difficult but essential when building emotional connections.
  1. Develop responsible stakeholders. Based on the McKinsey Family Business Practice survey, the next generation family members are willing to take more responsibility in running the family business. Yet, only 30% feel that they are confident about making decisions involving Family Businesses.
  1. Establish clear rules and career paths. A leadership position is not the only role for members of the next generation.  There are several important roles to be played above and beyond full-time employment.  A critical need is to develop a path and make family members understand how they can embark on those paths.

Having a good grasp of the 3 important principles will pave the way for effective Succession Planning in family businesses. When these are in place, the very fundamental foundation of the family business is established and ready for the 21st-century challenges.

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Family Business Governance: Making the Right Moves

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Governance of Family Businesses must include the concerns of the numerous and diverse third Family Business Governancegeneration.  Establishing a set of Councils and Boards is essential in addressing critical transition issues.  With a Governance Model, Family Businesses can address acute short-term challenges and prepare the business for subsequent generations.

Starting the change process can be difficult. Ideally, aunts and uncles will call the cousins together and say,

“What has worked so well for us and makes us proud of what we have achieved will not work for you.  You must go out and find your own model.”

When siblings are wise enough to give such a mandate, the cousin generation has a greater chance of enlisting support from the earlier generation and being successful.   However, many sibling groups avoid or delay dealing with the issue, leaving it up to the cousins to organize themselves.  In most cases, highly educated and qualified cousins leave the business once they find the barriers to establishing Governance Structures so high.

Given the way that Family Businesses tend to become more complex over time, it is often up to the third-generation owners to redefine the role of the family and set the direction of the business.  Setting up an effective Governance Model puts the Family Business on a new trajectory for success.

The 7 Core Elements of the Governance Model

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  1. Shareholders’ Assembly – The Shareholders’ Assembly is primarily responsible for dealing with classical legal functions.
  2. Family Assembly – The Family Assembly instills family values in the next generation and make sure that responsible shareholders are raised.
  3. Shareholders’ Council – The Shareholders’ Council is the most important link to the company. It is responsible for regulating relationships among family shareholders and between shareholders and the business.
  4. Holding Board – The Holding Board is the link between Management and the Shareholders’ Council. It is responsible for the overall performance of the group and its CEO.
  5. Family Council – It is the Family Council’s mission to transfer values and traditions across generations.  It serves as an important communications bridge between the business and the individual family members.
  6. Investment Office – The Investment Office is responsible for managing the family assets other than the core business. It provides a sense of security to those distant from the business and that their interests are being considered.
  7. Foundation – The Foundation is the one responsible for the family’s social and charitable investments.  It nurtures consensus from generation to generation on the direction of their philanthropic activities.

Taking that Giant Step to Governance

Kickstarting the change process can be a challenging part of the sibling-to-cousins transition.  There are cases that exist where highly educated and qualified cousins find the barriers to establishing Governance structures so high that they leave the business.

In making sure that the Family Business can keep the Governance up and running, it must be able to master two critical steps to Governance.

One of the two steps is developing a clear idea both of the status quo and of the desired destination.  What are our goals? Are there existing gaps in the structure? What are our priorities?  These must be clear before we can ever start the Family Business Governance running.

Missing on this step (and the second step as well) will lead Family Business to a difficult turn and very bumpy road to success.

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