Family businesses are often the product of a ‘hardened’ individual who wants to make a difference – and a profit – for their family. An opportunity emerges, and they take advantage of it. Over time, the business grows and even thrives. However, the decisions still come from one mind. Profit as a motivation gets us started, but it is value that allows us to thrive across generations.
Defining what we mean
In my work, I define profit as the outcome of good operational decision-making and execution. In contrast, I define value as the enduring measure of success that is created when a quality strategy is maintained across time. For some people, this may be seen as the difference between long and short-term thinking. There is a point to that. Profit can exist in a microcosm or in a short burst of activity. Value only exists when success is sustained.
So, which of value or profit should we most care about? The reality is that both must exist. Profit naturally sounds good. However, the risk of a profit-only mindset is that you will almost always follow the market, rather than lead it. If we step back, it is clear that businesses that survive over generations do so by making significant strategic bets. These are all value-based decisions. Making them, in the short term, may well result in less profit today, but for a much bigger harvest in the future. However, value doesn’t exist if a profit is not regularly and sustainably achieved. If you consider start-up ventures, they often run into the risk of being all about value, with no profit. A solely long-term lens has caused many a business to crash and burn.
The strategy journey
To have both value and profit play well together, a business needs a strong, clear, documented strategy. This links value and profit. Strategy is defined by knowing the legacy you want to leave and understanding exactly where you are now. With those two points set, you can define a direction, or journey, to take you from now into that specific future.
If we are disciplined and plan backwards from the vision of where we want to be, to today, taking a five-year slice, we see that strategy is, at its core, the allocation of scarce resources. The critical task for any family business is to slow down the strategic decision-making and not vary from it so those resources can be sustainably managed…delivering value sustainably created.
Keeping the business moving
With strategy taking this deliberate five-year lens, businesses can, and must still, move quickly to keep that value/profit nexus working effectively. This occurs through operational planning. This should follow a number of timelines, all working backwards – one year, 90 days, 30 days, seven days and today. Understanding each of these timelines allows us to speed up the rate of operational decision-making, and ensure execution occurs as required. This, in particular, underpins the delivery of profit.
So which wins between value and profit?
Without a commitment to a family legacy applied through strategy, a family business cannot thrive across generations. Without robust operational decision-making and execution, the family will never get the opportunity to reap the rewards of profit.
In short, both win. Put value first, and hold profit to account.