How can crisis management under COVID-19, shed light on the differences between family-owned and non-family businesses?

November 04 2020 Farida Rehab

Business Strategy

How can crisis management under COVID-19, shed light on the differences between family-owned and non-family businesses?

With the long-term implications of the global coronavirus pandemic, crisis management is being put under the spotlight on all levels, from households to companies, different institutions, and governments. Amid the crisis, governments began to mobilize their economies on several fronts including closure, economic, and healthcare policies; to mitigate the negative impacts of the pandemic. Zooming in on businesses, we’ve seen through the news, reports, and most importantly regulations how they’ve been impacted differently based on their sectors, as well as size; but can their type of ownership play a role in the effects of COVID-19 on businesses?

In this blog we’ll be looking at family vs non-family-owned businesses, shedding light on the differentiating factors at the core of this split that echoes in times of crisis management, allowing us to underline the contrasting coping measures. Interestingly, family-owned businesses have received less media coverage than non-family; while according to the Family Firm Institute, family businesses account for 2/3 of all businesses across countries, generating between 70-90% of global GDP and creating 50-80% of the jobs around the world.

Organizational differences between family and non-family businesses

First and foremost, the significant and particular influence of family governance represents a distinctive difference between family-owned and non-family businesses that should be considered. Ownership among those families is strongly related to a psychological experience, which results from years of investing in the business’ governance. By integrating the business life into their families, the fate of the employees, customers, and surrounding communities becomes linked to its success. Family governance is associated with a series of values, among which are collectivism, altruism, trust, identification, loyalty, and commitment.

Another distinguishing factor between both ownership models is that more often than not family owners admit having a business purpose related to the pursuit of non-financial goals; versus non-family owners who measure their organization’s success through its financial performance. The latter supports another core value at the heart of family businesses which is the valued labor relations.

To illustrate this better, in the US, you can find many family businesses with greater employee benefits, than big non-family businesses or unions. For example, the In-N-Out Burger chain offers its part- and full-time employees, benefits that include the 401(k) plan of retirement, paid vacations, dental and vision coverage; which is a rare package in the fast-food industry. Employees are often treated like family and find the needed support on personal matters such as family members’ medical bills or funeral expenses.

With this emotional attachment to the firm, families tend to have an observation period towards the long-term future more often than the short-term; showing a commitment to the family legacy and its core values. The main objective is to then secure the survival of the firm and succeeding in the uninterrupted family succession project. This approach is frequently referred to as the zoom in/zoom out approach which focuses on iterating between two parallel time perspectives. Firstly, the zoom-out perspective consisting of 10 to 12 years; then the zoom in perspective where the scope is limited to 6 to 12 months. In adopting this approach, families believe that by getting both horizons right, everything else in between will fall in its place. Conversely, the traditional non-family approach usually adopted is the strategic 5-year planning; which is a time frame that belongs to the period in-between when relating it to the zoom-in/zoom-out strategy.

Now that we’ve seen some core differences, how is family vs non-family crisis management affected based on the different business models?

How family-owned businesses are managing the COVID-19 crisis effectively?

Based on Harvard Business Review’s definition, crisis management is the process of adapting oversight of the enterprise under conditions of extreme uncertainty in order to ensure that all stakeholders are aligned around the firm’s long-term vision, values, expected financial outcomes, and risk management measures.

With the COVID-19 pandemic, few studies, mostly qualitative, have been conducted surveying European family businesses, different in size and sectors to evaluate their coping mechanism vis-à-vis the current crisis.

All surveyed family-owned companies underlined the extent to which the families are prioritizing governance as a necessary service to get them through this period. In fact, maintaining the solidarity and commitment of family members is as important as the continuity of the business. The latter is as effective as proactive crisis management and effective leadership.

Family businesses’ crisis management is centered around 5 main factors that are: safeguarding liquidity, operations, communication, business models, and organizational culture.

Under a crisis, maintaining an adequate level of liquidity is one of the main stressors families have to manage, on one side; while the pursuit of their business operation becomes more critical than any other time. To begin with the importance of liquidity, some of the favored measures were reducing profits, including executive compensations and dividends, instead of laying off their employees. Secondly, in regards of safeguarding their operations, some of the measures taken by families were reduced social contacts, closing meeting rooms, cafeteria and spreading awareness amongst their employees. Layoffs were hardly mentioned by the family owners as a measure taken at the beginning of the COVID-19 crisis. In fact, families commonly involve employees in finding alternatives that would reduce the firms fixed costs.

The third important factor that is crucial in crisis management is safeguarding the communication with employees, customers, and suppliers, even with social distancing. Studies have shown that family-owned employees have mainly 2 fears: one being the consequences which COVID-19 can have on their friends/families and the second being the inevitable economic impact on the firm, as they fear losing their jobs. Family members, then, dealt with the latter through extensive and proactive communication, for example, a German manufacturing company and an Austrian services company communicated their 700 and 15 employees, respectively via WhatsApp messages; while other European companies relied on FAQs on their websites, communication through email, blogs/podcasts, service hotlines or daily newsletters by their CEO written personally to their employees. On the other hand, the biggest challenge when it came to customers, was keeping a personal communication during a time where digital channels are the only ones that can be used. However, it is worth noting that with COVID-19 the general acceptance of digitization has increased, even among late adopting customers.

The fourth factor revolves around the firm’s business models that are challenged in times of crisis like COVID-19, at different levels based on the sector of activity. Some family owners found it more suitable to adapt within the same business model; while others found it unavoidable to consider new ones. For example, a family business in hospitality has lost over 80% of its revenue streams but found an opportunity in the increasing demand for toilet paper and used their unoccupied spaces to sell them and generate revenue. Another case of a clothing company where mask production presented itself as an opportunity and production was changed accordingly. Other companies digitalized their workshops and started to include only digital meetings in their standard price offering, charging an additional cost for an on-site consultation.

Finally, in family-run businesses, core values remain intact supporting the organizational resilience by yielding both, stability and direction during times of high uncertainty and volatility; which brings us to the last factor of crisis management that is culture. The pandemic has been creating a strong feeling of solidarity among the different stakeholders including employees and suppliers driven by the idea of facing the crisis together. For instance, many family firms have underlined the manifestation of employees’ commitment seen through an increase in motivation, teamwork, and cohesion. In addition to the latter, an increased acceptance towards digitization has been shown among the older employees, as well as others, such as cooks in restaurants who still took orders by hand.

To conclude, the differences at the core of the family-owned businesses, especially when it comes to the owners’ emotional attachment to the firm, as well as the non-financial goals are what stem different reactions and crisis management approaches than non-family owners of companies. We can see through this example the importance of crisis management and how it extends to the core values and culture an entity holds.

Farida Rehab – Business Analyst