Are You Stalling Innovation For Your Third Generation?

A family business that has made it to the 3rd generation has already beat the odds. Approximately only 12% of family businesses will ever make it to this point. Making it to the 4th generation proves to be even harder with only 4% ever getting there . There are some key inter-generational conflicts that make transitioning the business to the next generation and working with another generation family member even harder.

We all know working with any family member can be a challenge, but working with one that has very different goals and expectations stemming from a generational gap can be difficult to manage and understand. Danielle Walsh explains some of these inter-generational conflicts that include:

Differing work ethics: The founding and 2nd generation often worked very long hours.

The founding generation is likely to have spent more time working in the business then at home, the same can often be said about the 2nd generation.

The 3rd generation tends to value work-life balance and looks to automate or find efficiencies to ensure they can find time for family. This is also very different from the 1st generation since back then there was often a stay-at-home parent. Now days, it is the norm to find two working parents, which means both parents need to have some flexibility with work. This differing work ethic can sometimes lead to conflict between the generations due to a lack of understanding and a significant change that can be hard for the older generations to deal with.

Communication: The founding generation and 2nd generation of many family businesses are famous for being poor communicators.

I have often heard “No, I haven’t told anyone else – they should just know.” The 3rd generation tends to be much more transparent and willing to take the time to communicate with family members. Keep in mind, however, that the way the 3rd generation communicates often frustrates the 1st and 2nd generation. Emails and text messages instead of phone calls or face-to-face.

This change has had a major impact on how families communicate and for the older generations it can be difficult to adapt. This sometimes leads to communication significantly slowing down or even stopping between the generations, which can leads to serious issues for the business. Being aware of the method that an individual prefers to use to communicate can certainly help bridge the communication gap. The 3rd generation needs to be aware that just because they sent an email about it, doesn’t necessarily mean it has been clearly communicated to all.

Differing priorities: This ties in with the differing work ethic above.

The 3rd generation tends to prioritise work-life balance and family. This can be very different from what the founding and second generation have done, which can lead to conflict. In my experience, the 2nd generation is often frustrated by what they perceive as a lack of commitment to the business by the 3rd generation. The 3rd generation is often frustrated by the demand on their time.

Clear expectations need to be outlined so that all members of the family irrespective of the generation know what is expected of them and what they can expect from the business. Business priorities also tend to differ. The 3rd generation often prioritises innovation, change, and the use of technology which can be difficult for the 2nd generation to support. This is an issue that is becoming more and more common in family businesses and particularly in the jewellery industry. Therefore, we will further explore this issue below.

Innovation & Change

I don’t think we should be too surprised that the 3rd generation often find that they struggle to get their current owners (the 2nd generation ownership group) to endorse change and allow them to implement new and innovative strategies for their jewellery operations/stores.

It just might happen to be due to one of the more common outcomes of inter-generational ownership. It is well known and documented that 1st generation family business owners are very entrepreneurial, which by definition means they are innovators, risk takers and typically passionate about both the industry they are in and their business. They tend to dedicate all of their time to building the business which in turn fuels their continued passion for it.

But the next generation, the 2nd generation, often join the family business while gen 1 is still at the helm with their primary role in the family business being one of managing what is already there. They become managers and focus on improving effectiveness and efficiencies (refining) of what the founders built. They typically do not have the same degree of passion as the founders which is to be expected since it is not their baby that they brought to the world but rather that of the founders.

As Gen 2 move along their career paths in the family business they tend to become risk averse and less open to change. They view their role as gate keepers to what the founders have built and continue to build. They tend to rely on Gen 1 to continue to innovate, implement change and take risks. These same managerial traits then get to permeate their thinking once they become owners.

Note: Of course, the above does not apply to all Gen 2 individuals but it does apply to many so in that regard it is worth addressing.

Then along comes Gen 3 who are a whole new breed of individuals with very different expectations with respect to life balance and very different expectations with respect to the use of technology (change) as well as a keen desire for innovation since it surrounds them every day. Gen 3 tend to be quite comfortable with change even rapid change and they tend to view business risk as a necessary frame of mind for success. Clearly these Gen 3 traits will be in conflict with those of the Gen 2’s described above. As such, Gen 3’s often feel like they are being stalled in their desire to innovate, implement change and take calculated risks to grow the business and take it down new paths.

We can see this in the desire of many 3rd generation family members to shift from brick and mortar stores to online stores. This change is not a small one. The 2nd generation that has continued the family legacy and often maintained the business in a very similar way as the founding generation may not be comfortable or used to taking major risks such as this one. Without taking this major risk, the business may not survive long-term.

A major shift in business strategies, like going from a store to online, is one that often occurs only once the 3rd generation has become owners and have control. However, this may be too late. Ideally, this change occurs with the support of both generations meaning a wealth of experience and a united front.

One of the major risks for the family business (other than the inability to survive) is that they may lose those entrepreneurial Gen 3’s who do not have the patience to wait for approval to implement their strategies and who feel passionate enough to go out on their own and often in the same business.

So what can a family business do mitigate this risk?

1. Gen 2 needs to recognise that Gen 3 are different and that they want operational improvements now (versus later), they want a work-life balance that meets their expectations, they want to innovate and be current with respect to what technology can do to help meet all of these objectives.

2. Gen 2 need to accept that the differences between them and Gen 3 is nobody’s fault but more so an outcome of inter-generational transfer of power and ownership.

3. Gen 2 and Gen 3 should implement a management succession plan that will allow Gen 3 to prove their skills, decision-making, and ability to work together over time. Without a clear plan, the competent Gen 3’s are likely to leave. By implementing a management succession plan over a specific timeframe the Gen 3’s have the opportunity to prove themselves to the older generation. When this happens, Gen 2’s often feel more comfortable relinquishing managerial control but also tend to embrace the new ideas and changes put forth by the 3rd generation.

4. Gen 2 needs to realise that Gen 3 may manage and lead in a very different way. Often Gen 3’s will have a management team made-up of some family and some non-family managers. It is no longer just one person that will fill all the roles (like mom or dad did).

5. Strategic planning is very rarely completed by family businesses. If there are competent and knowledgeable Gen 3’s in management it can be of benefit to let the next generation (in this case Gen 3) do the strategic planning and then have them present it to the owners (Gen 2). This helps bring together the next generation, allows the next generation to gain the trust and respect of non-family managers and provides new and different insights on how to move forward. This doesn’t mean than Gen 2 has no say it just means we allow the next generation to put together the first draft of the plan. Allowing the 3rd generation to participate in this type of decision-making plays a big part in keeping them motivated and retaining them in the long-term.

There is no magic solution to dealing with inter-generational differences – just know that all family businesses face these issues at some point. Being aware of these issues and accepting them are steps in the right direction. Learning to work with them will lead to greater success for the business and will help safeguard family harmony.

By implementing a comprehensive family business succession plan you will increase the likelihood of transitioning to the next generation successfully and it will certainly help manage the inter-generational differences by clarifying what is expected (what is expected work in the family business, manage the family business, and own the family business).

About the Author - Danielle Walsh is the founder and President of Walsh Family Business Advisory Services, a consulting firm that specialises in assisting family owned and operated businesses navigate the rough waters of management and ownership succession.

Danielle is a Chartered Professional Accountant (CPA), Chartered Accountant (CA) and a member of the Family Firm Institute (FFI), an international association of family business professionals providing in depth information on family businesses from around the world as well as ongoing education and training in the field of family business consulting. Danielle has obtained the FFI Certificate in Family Business Advising and the FFI Certificate in Family Wealth Advising.