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Expert Opinion: How do you reinvent a family-owned business for a new generation?

Written by Stephen Depla, Brewin Dolphin on .

Stephen Depla of Brewin DolphinJust three percent of family-owned businesses will last four generations or beyond, according to the Institute for Family Business; indeed, only 30 percent make it to the second generation. So what is the secret of creating a family business that will last?

One of the most successful family-owned businesses is Lego, the Danish toy group established in 1932. Today, Thomas Kirk Kristiansen, a great grandson of its founder Ole Kirk Kristiansen, has a seat on the board.

With its iconic interlocking bricks a hit with children in more than 130 countries, Lego reported a profit of DKr6bn on sales of more than DKr25bn (£2.7bn) last year.

However, the group has had its share of problems. In 2003 it posted an operating loss of DKr1.6bn, following six years of slowing sales and falling profits as a result of diversifying into businesses it did not fully understand, such as its own lines of clothes and watches.

Back to basics

Amid takeover rumours, the heirs of Ole Kirk Kristiansen opted to stand by the family business, injecting millions of their own money into it.

One of the key factors in the group’s remarkable turnaround was the decision to fix rather than try to reinvent the company. It returned to the basics.

Out went products such as Lego Explore and Bionicle, which had proved susceptible to the fashion whims of children and their parents. In came a renewed focus on the original Lego business of highly-engineered building blocks, made both to fit together perfectly and come apart easily.

The strategy has proved to be extremely successful: not only have Lego’s sales more than doubled and profits almost trebled over the past five years, the company has also been winning plaudits for innovations such as the introduction of a set of female scientist figurines and The Lego Movie, which topped the box office earlier this year.

Another crucial decision Lego made back in the dark days of 2004 was to appoint its first chief executive from outside the group, with Kjeld Kirk Kristiansen, grandson of the founder, standing down in favour of Jørgen Vig Knudstorp, who is still in that post today.

It was, as the company admitted, a “generational shift” in the make up of management. Kjeld had been a “pivotal figure for the culture and workforce of the company”, and it was “very conscious of honouring this heritage in the effort to [achieve] a sustainable Lego Group”.

Difficult decisions

Bringing in outside management can be one of the most difficult decisions for a family business to make, but the move can be of key importance. As Christian Kaspar, a McKinsey consultant, noted in an analysis of the five attributes of enduring family businesses: “Long-term survivors usually share a meritocratic approach to management.”

However, not all family-owned companies are keen to admit outsiders. Timpson, the British shoe repair company founded in 1865, is an example of a family business which has reinvented itself by expanding into new areas such as dry cleaning and engraving and, more recently, mobile phone repairs, as well as establishing an online business with products ranging from school badges to garden furniture.

Family members remain firmly in control, with James Timpson having recently taken over from his father John, marking the fifth generation of the family to assume the leadership of the company.

John is adamant that family management is crucial. “Last year a business school suggested the economy would benefit if family business owners relinquished control and appointed professional managers,” he wrote in a recent blog. “I couldn’t disagree more. If we had to hand Timpson to an outsider I would almost certainly sell the business.”

Which goes to show – just as every family is different, so too is every family-controlled business. “There’s no single rule for all,” concluded McKinsey’s Kaspar. “Policies depend partly on the size of the family, its values, the education of its members and the industries in which the business competes.”

Stephen Depla is head of office at Brewin Dolphin, Marlborough. For more information about Brewin Dolphin's products and services, click here.