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International Family Enterprise

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"Enabling Internationalization Excellence for Family Enterprises"

IFE, 2017

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Family Firms and Strategic Changes Under COVID-19 Crisis

Just like other smaller firms, family firms have been and will be heavily shaken by the COVID-19. However, overall, in adverse economic conditions, family firms have been found to sustain more profitable businesses than firms with other ownership structures. During the COVID-19 crisis, firms need to contend with a number of challenges (see Kraus et al., 2020) including:

• Implementation of required health protection measures

• Reduced production and demand

• Supply chain disruptions as governments curtail the activities of non-essential industries and workers are confined to their homes.

Under crises, family firms have been proved to have survivability capital, strong social capital and patient financial capital, helping them with shocks (Sirmon & Hitt, 2003). For family firms, a quartile is typically one generation, about 25 years. This means that if they do not quickly run into a cash crisis, they are in the forefront of adjusting their business to the crisis environment.

As an example from Finland, a more than 170 years old family business Ahlström-Munksjö (generally producing industrial filters) has quickly diverted production to protection masks. The same applies to Finnish LifaAir, who will be able to produce millions of protection masks a month, subject to the availability of raw material. As regards hand sanitizers, a Finnish whisky producer Kyrö Distillery quickly started producing hand sanitizer instead of whisky, putting the needs of hospitals districts first. GVK Coating Technology is also producing hand sanitizer and has been able to even increase their number of personnel during COVID-19.

A similar kind of sift has taken place elsewhere in Europe, since at least Giorgio Armani Group, Mey, Trigema and Melitta Group of the firms below all have redeployed manufacturing resources to the production of medical overalls and face protection masks (see Kraus et al., 2020)

How can family firms mitigate the current risks deriving from market instability?

In the current COVID-19 crisis, like in the crises before, family firms should focus on protecting the family business and use the intuition, innovativeness, creativity and ability to react quickly and decisively to acute situations – all of these are competitive advantages in family firms. What firms typically do under crises (see Wenzel et al., 2020) are (i) Retrenchment; (ii) Persevering; (iii) Innovating; and/or (iv) Exit. For long-enduring family firms passed from generation to generation, exit generally is no option and other means are preferred.

I recently had conversations with a Finnish family firm (called here as ‘Boat’) manufacturing boats. We specifically discussed their strategy-level responses to three recent economic / financial crises: (i) The recession of the 1990s which hit Finland really hard; (ii) The financial crisis of 2009; and (iii) The COVID-19 crisis in March/April 2020.

During the 1990s crisis, Boat started serving the business to business sector aside, by designing producing bus stops and design furniture, when the demand of private customers for boats collapsed. Later, this business line became a half of their production and is still maintained. It is also currently an essential business line for them.

When the 2009 world-wide financial crisis hit the firm, Boat undertook an extensive business model change. They stopped producing bigger boats, meaning that e.g. a boat which had just won 7 international awards for its design never went to mass production. Also other bigger boat models were not produced anymore and the production facilities for bigger boats was closed overall. Instead, Boat started focusing on just two smaller, more easily affordable boat models, which could be produced in their original production facilities. This strategic change brought the profitability of Boat into a very good level again.

During the COVID-19 crisis, Boat has started an intense renewal related to digitalization, innovating the next version of a small boat with an electronic engine and launching regular exports. Again, the crisis is a momentum of big strategic changes. Boat is using the help of consultants and potentially the funds by the Finnish government to take these actions. Aside, they provide with as good customer service, production quality and tailoring as always. Altogether, Boat has survived the crises very well – but the situation would have been different with more risky decisions and no saved money for the crisis situations.

As regards the COVID-19 crisis in other European countries, Kraus et al. (2020) found that family firms in Germany, Austria, Switzerland, Liechtenstein and Italy have taken following measures to survive amidst COVID-19: (i) Reduced-hour working models. (ii) Facilitating remote work. (iii) Addressing COVID-19 fears through intensive and proactive communication with their employees. (iv) Focusing on even stronger sense of solidarity. (v) Strong change towards digitalization.

For instance Miele has scaled down production, decreased operations to minimal levels, and implemented decreased working hours as of the beginning of April. The company’s supply chain has suffered from a massive disruption, with the company no longer able to acquire parts, and unable to sell their products with retail outlets being closed. Sennheiser has reorganized production into two separately working shifts, working from home has been implemented as much as possible, stores have been temporarily closed, and buying from them is only possible on their website.

Together we will handle this crisis, too. It is now time to take all the efficient means from earlier crisis into use as well as newer means related to digitalization and remote work. And let’s not underestimate the core competency of family firms: perseverance and the quartile of 25 years. All the best and strength to everyone!

References:

Kraus, S. Clauss, T., Breier, M., Gast, J., Zardini, A., & Tiberius, V. (2020). The economics of COVID-19: Initial empirical evidence on how family firms in five European countries cope with the corona crisis. International Journal of Entrepreneurial Behavior & Research, forthcoming.

Sirmon, D.G. & Hitt, M.A. 2003. Managing resources: Linking unique resources, management, and wealth creation in family firms. Entrepreneurship Theory and Practice 27 (4), 339-358.