Ensuring the resilience and longevity of a family enterprise requires a strategy focused on growing joint family wealth, often through a portfolio of jointly held assets. But it is difficult to implement a broad diversification strategy, so it should not be carried out by families without the appropriate structure and processes. First of all, successful multi-generational families must create a long-term vision of the organization’s scope. Once the separation decision is made, successful families recognize the importance of devoting significant resources to identifying, evaluating, and prioritizing opportunities to expand the enterprise’s boundaries. Finally, successful families must be willing to rebalance their portfolios, sell underperforming assets or assets, and allocate capital only to areas with a strong long-term vision. Families with a successful enterprise diversification strategy achieve results by clearly defining their strategy and developing structures and processes to effectively manage their diverse enterprises.
Even harmonious, well-run family businesses face serious challenges in formulating a strategy that will last for generations. One of these challenges is protecting and nurturing the family’s greatest assets for future generations. To do that successfully, family business owners, like any investor, need a diversification strategy.
Ensuring the resilience and longevity of a family-owned firm requires focus at the corporate level rather than at the business level. I use the term “enterprise” here to refer to the term “business,” referring to a family’s total assets (eg, real estate, passive investments, minority investments), rather than a single operating company. Creating a corporate strategy requires focusing on growing the family’s overall wealth rather than growing a specific business. This focus often leads to a strategy that some studies have found ineffective – unrelated diversification, that is, investing in seemingly unrelated businesses.
In the context of corporate strategy research, conglomerates have often been dismissed as underperforming compared to concentrated companies. According to a McKinsey study, average total returns to shareholders were 7.5% for conglomerates and 11.8% for concentrated companies. The authors of the McKinsey article say, “The argument that reducing volatility benefits shareholder diversity has never been convincing.”
However, family businesses often prefer to invest together rather than have individual family members diversify their own investments. The reason may be financial (eg, tax benefits or equity investments) or non-financial (eg, the ability to maintain shared goals and values, or the desire to stick together as a family). In addition to demonstrating a desire to stay together, it may be difficult for owners to invest individually due to ownership structures such as trusts or shareholder agreements that limit the owners’ ability to exit joint investments. For these reasons, one of the hallmarks of family ownership is the enterprise’s longevity and stability of returns, as well as a focus on soft goals such as its supporting community, employees, customers, and stakeholders.
Take for example E. Ritter & Co., which owns Ritter Communications and the Ritter Agribusiness family. Their tagline is “Investing in our community for over 130 years”. Their investments are in seemingly unrelated businesses – farm management and telecommunications products and services. While these businesses grew from family investments made a century ago, the family had an opportunity to change strategy three years ago when they sold a majority stake in Ritter Communications to a private investor. However, rather than distribute the money to individual family shareholders, the family chose to keep the money together and develop a third business, Ritter Investment Holdings. Their commitment to staying together is an example of focusing on diversity to achieve a multi-generational strategy. Defining themselves as a business-owning family, rather than a family in a particular business, also shows that it has created an environment for them to think broadly about their future.
Knowing how to stay in business for generations requires a strategy focused on growing joint family wealth, often through a diverse portfolio of joint assets. A diversified portfolio can withstand fluctuations outside of owners’ control.
Research suggests that the relationship between diversification and performance follows an inverted U-shaped curve, meaning that a certain amount of related diversity increases performance, but if the diversity is too great, performance decreases. This research suggests that while being close to what you know makes sense, being too far away from the core operation reduces performance.
Michael Porter’s research shows the downside of unrelated diversification, which is that companies tend to diversify acquisitions into unrelated fields. I also agree with this approach. However, more recent studies, as well as empirical data from firms such as Alphabet, suggest that some firms can deliver stronger returns through mismatched diversification. A 2018 study found that the negative impact of unrelated diversity on performance is diminishing over time. Firms underperformed in the period 1970s to 1990s, but after 2000 this effect diminished.
These studies support the strategy that family enterprises have consistently adopted: diversity works at the corporate level. That said, a broad diversification strategy is difficult to execute. Therefore, it should not be done by family without proper structure and processes.
First of all, successful multi-generational families must create a long-term vision of the organization’s scope. Take the example of Schurz Communications Inc., which has successfully navigated its evolution from ownership of newspapers, TV and radio stations to broadband operations and cloud service providers. The owners’ commitment to staying abreast of this evolution is captured in this podcast with fifth-generation CEO Todd Schurz. Successfully exiting their legacy business will require family commitment, a thoroughly researched investment approach and a carefully selected board of directors to support the transition.
One area where many families fail is that they lack a centralized decision-making board among family-owned assets. When assets are held by different entities with their own governance structures, reporting and performance goals, there is no ability to formulate an enterprise-level strategy that optimizes risk and return. Carlson Inc., current owners of CWT (a travel management company) and Carlson Private Capital Partners (CPCC), and former owners of hospitality entities including Radisson Hotels and TG Fridays restaurants, understood the value of this structure when they chose to create it. Their investment arm under the umbrella of their company CWT and controlled by the board.
Once the separation decision is made, successful families recognize the importance of devoting significant resources to identifying, evaluating, and prioritizing opportunities to expand the enterprise’s boundaries. In CPCC’s case, this means hiring a team of experienced investment professionals. This function can be outsourced or developed in partnership with other investor families.
Finally, successful families must be willing to rebalance their portfolios, sell underperforming assets or assets, and allocate capital only to areas with a strong long-term vision.
Collectively, families with a successful enterprise diversification strategy achieve results by clearly defining their strategy and developing structures and processes to effectively manage a diversified enterprise. And, they should remember Michael Porter’s wisdom in his seminal HBR article From competitive advantage to corporate strategy, stated that corporate strategy must ensure that it is worth more than the sum of its parts. For families, that value may include values beyond immediate returns to shareholders, such as stability of returns over time, or supporting employees or communities. However, no matter how much value is expressed, a family enterprise strategy must pass that value on to future generations.
