Originally published in Harvard Business Review – Click here for the original article
By George Stalk, Jr.
Family businesses are defined by three overlapping domains of influence: the family, the owners, and the business. Families spend a great deal of time and money trying to sort out questions of family governance and ownership structures. But often, managing the business gets short shrift.
For an example of this, consider a family business my firm recently assisted. (I’m not naming it to protect client confidentiality.) The founder and his wife are now in their late 60s. Their son-in-law (married to their eldest daughter) had recently been named chief operating officer. The family asked us to review the COO’s strategy for the business as part of its corporate governance process.
The business—a regional construction company with a special expertise in building waste chemical and water treatment plants—has never lost money in its 30 year history, and it’s grown steadily. “So what is the next act?” the family was asking. The COO had proposed a new growth strategy, and the founder and his wife, in private, were wondering if the new COO was up to the job.
The COO’s newly developed strategy was very comprehensive:
•Do better in every customer segment currently served plus add a couple of new ones
•Grow sales and profits at double digit rates
•Launch several management initiatives, including the creation of a high performance culture, the establishment of targets for total customer satisfaction, and a re-vamp of the financial and project management systems
The strategy was overwhelming in its completeness. It would probably be overwhelming for the company’s lean organization to deliver as well.
We moved the discussion away from the COO’s strategy to the performance of the business. In particular, we looked at which projects the family regards as having been very successful–and which ones were not considered successful. Success was defined as: bids easily won and well executed, satisfied customers, profitable projects, and fun for all.
After the discussion of about 15 projects, patterns began to emerge. The most successful projects shared some characteristics that were missing in the unsuccessful projects. Specifically:
•They were under critical, immutable time deadlines set by external conditions—weather, seasons, or other aspects of the overall project
•Their execution had to be accomplished within an operating facility that could not be shut down for the project
•The foundations were very complicated, requiring extensive shoring and pilings
•The overall structures were complicated, heavy, and closely integrated with mechanical and electrical systems
We discussed another dozen projects, and the pattern seemed to hold. The more each of the above elements were present, the more successful the projects were regarded to be. The opposite was also true. Unsuccessful projects had very few or none of these elements.
These elements define the sweet spot of the family business.
The family, including the COO, became very excited. A number of questions and opportunities for the business and the family jumped out:
1. Why are we bidding on jobs that do not fit into the sweet spot? What more could we do with the resources consumed on bidding and possibly executing projects outside the sweet spot?
2. Where else in their regional market (North America) are there projects like the ones that fit the company’s sweet spot?
3. If this is our sweet spot, what is our value proposition for approaching the decision makers at clients and prospective clients?
4. Whom do we need to hire to strengthen our performance within the sweet spot?
5. Is a company focused on the sweet spot more manageable than one that is not focused, thereby raising the odds of success of the new COO and his fairly young organization?
The founder, who was skeptical, asked for data proving the company really shouldn’t bid on projects outside the sweet spot. When we looked closely at the numbers, we found that only 15% of the jobs bid in the last several years fit the sweet spot, the win rate for these jobs was near 50% (compared to a loss rate of about 80% for jobs outside the sweet spot), the average operating margin for jobs inside the sweet spot were twice as high as those outside it, and 70% of the company’s engineering resources were going into bids that the company either lost or completed at very low (or even negative) profitability.
The COO, CFO, and the chief engineer are convinced that the strategy needs to be focused around success in the sweet spot. The founder is slowly buying in, as well.
All businesses have sweet spots, and understanding them is especially important for family businesses. Sweet spots can be used to:
•Productively discuss the business with family members and owners who are not executives in the business, as sweet spots are easily understood
•Strengthen the confidence of the family in the competence of the business’s executive team
•Define the type of new talent needed by the business to deliver the most from the sweet spots
•Focus possibly disparate owners on the needs of the business
•Direct organic investments in the business by the owners
•Direct M&A efforts to build out the strength of the sweet spots
Because family businesses tend to be frugal, finding the sweet spot provides the focus that the entire organization can understand and act upon. A focus on the sweet spot can ignite great growth opportunities that return more “bang for the buck.” A focus on a sweet spot can help enormously to increase the odds of success for the next generation of family entering the management of the enterprise.
Do you know what your sweet spot is? Can you prove it? Can you explain it to your kids—the future shareholders?
