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09 Jun. 2014 | Comments (0)

The family business is still widely regarded as an ineffective organizational form (read this, this, or that paper), especially in the US, even though recent evidence challenges this perception.  Some studies (see here or here) have shown that during periods of economic growth, family-managed companies in the US actually perform better than professionally managed businesses.

However, a rising tide lifts all boats; it’s the ebbing tide that reveals the truth.  Just how do family businesses perform during recessions, when only the strong survive?

To answer that question, we compared the performance of 148 publicly listed family-owned companies between 2000 and 2009 with that of 127 non-family businesses using Standard & Poor’s Compustat database.  Of course, the National Bureau of Economic Research classified two (2001 and 2008) of those 10 years as recession years.

We found that family businesses handily outperformed non-family companies during both the 2001 and 2008 recessions in terms of a key metric, Tobin’s q.  (Tobin’s q is the ratio between a company’s market capitalization and the replacement cost of its tangible assets, with a higher ratio indicating that a company has more intangible assets such as patents, brands, leadership etc., and is likely to grow more in the future than one with a lower Tobin’s q.) 

For instance, in our sample, the average Tobin’s q of all the family businesses remained at 1.9 regardless of the economic cycle, but that of the non-family corporations dropped from 1.2 during the growth years to 0.8 during recessions.  Thus, the former coped better with the recessions than the latter. The family companies’ edge remained after we controlled for a number of factors such as company size, age, level of globalization, level of diversification, R&D intensity, and industry.  It held true for both founder-managed companies, such as Dell and Microsoft, as well as for multiple family-member-managed corporations such as Walmart and Federated Investors.

We also found three differences in marketing strategies, which may account for the performances of the two types of companies.

1. Family-owned businesses did not hold back on new product launches during the recessions.  Data from several sources such as the Capital IQ database, Factiva, and LexisNexis revealed that they introduced 12 new products a year, on average, regardless of the economic cycle whereas launches by non-family companies fell from 14 a year during the boom years to just eight on average during the recessions.

The family businesses’ proactive approach clearly helped them do better.  Not only is it easier to differentiate brands when there is less competition, but also, products introduced during recessions will enjoy a first-mover advantage as the economy recovers.

2. Family businesses maintained almost the same levels of ad-spend during the recession years as they did during normal times, helping them do better than the professionally managed companies, which reduced ad-spend when the times got tough.  In our sample, the average advertising intensity (advertising expenditure divided by total assets) of the family companies fell marginally, from 2.0% during the non-recession years to 1.9% during the recessions.  The same metric for the non-family companies plunged from 1.4% during the non-recession years to 1.0% during the recessions.

3. Family businesses maintained their emphasis on corporate social responsibility regardless of the state of the economy. Corporate social responsibility can be measured by counting companies’ social strengths — launching social initiatives such as philanthropic contributions, health and safety programs for employees, etc. — and social concerns such as controversies like workforce reductions, violations of environmental regulations, etc. Companies with a high number of social strengths and a low number of social concerns can be said to deliver high levels of social performance.

Customers penalize companies when they don’t maintain high social performance levels, especially in uncertain environments.  Data from the KLD STATS database revealed that the family businesses in our sample maintained the same number of social strengths and social concerns during the two recession years while the non-family companies’ social strengths decreased from 3.4 to 2.7 and their social concerns shot up from 4.2 to 5.0.

Family businesses’ proactive actions and long-term perspective during recessions are driven partly by a unique concern for future generations and an emphasis on preserving the family name, but there’s no reason why other companies can’t emulate them.  By being more proactive in their marketing and by maintaining their focus on social responsibility, any non-family company can minimize the impact of a downturn.  But most don’t — because their leaders’ don’t have the same motivations, which is the essence of the difference between family and non-family businesses.

 

This blog first appeared on Harvard Business Review on 4/07/2014.

View our complete listing Leadership Development blogs.

  • About the Author:Saim Kashmiri

    Saim Kashmiri

    Saim Kashmiri is an assistant professor of marketing at The University of Mississippi's School of Business Administration in Oxford, Mississippi.…

    Full Bio | More from Saim Kashmiri

  • About the Author:Vijay Mahajan

    Vijay Mahajan

    Vijay Mahajan holds the John P. Harbin Centennial Chair in Business at The University of Texas at Austin's McCombs School of Business. He is the author or editor of a dozen books, the most recent bein…

    Full Bio | More from Vijay Mahajan

     

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