Giving Up the Past and Designing a New Future

Julia de Groote / Nadine Kammerlander - October 31, 2022

Tips for practitioners

Family-led, mid-sized businesses have certain notable characteristics that distinguish them from other types of businesses. Often, maximizing profits is not their number one priority. Rather, many tend to orient themselves in a way that they can play the long game. They seek to uphold family tradition and take care of their employees—even at the expense of the company’s overall security. Such an approach can lead to what is called “path dependence.” This term refers to the theory that certain companies may be prisoners to pre-existing behavioral patterns and may cling to the processes and structures (i.e., the “paths”) they’ve always used.

This qualitative study saw the examination of six family businesses based in Switzerland that have been active in the textile industry for at least 50 years. Notably, textiles have become an increasingly unprofitable field in many industrialized nations, including Switzerland, and very few companies have been able to withstand cost pressures across the globe. The six companies analyzed are (as is often the case with family businesses) rather steadfast in their strategic direction. They often found it difficult breaking with their traditional business model, a problem that ultimately rendered the business unprofitable over time. This threatened the well-being of the company, the family in ownership, and the employees—and if they wanted to survive, they would have to make strategic changes.

Why family businesses are particularly prone to path dependence

Being path dependent (i.e., attached to old structures and strategies) is a pattern of behavior that can, in the worst-case scenario, spell out doom for a company. And family businesses are particularly prone to becoming path dependent. This is chiefly due to such companies’ idiosyncrasies, such as their emotional connection to partners and employees, their focus on tradition, and the fact they often direct their attention inward. But this is a knife that cuts both ways: These companies may often receive positive feedback and praise (e.g., over their continuity) from their business partners and employees; but that feedback often leads to said companies sticking to outdated business models and structures, far more so than at other types of companies. The very structure of a family business thus promotes a self-perpetuating system that can be to its detriment.

Path dependency can be reinforced by other family business characteristics, including the concentration of a power among few (or even single) members of the family in ownership; evolved relationships to other stakeholders; and a sense of obligation to family tradition. All of these often lead to something akin to paralysis when it’s time for action—which, in turn, directly leads to the company not taking new strategic directions even when it would be in its own best interest.

How companies can overcome path dependence

The occurrence of major external shocks to the system (e.g., a financial crisis or the collapse of a market) are often the times when the most path-dependent family businesses are able to break free of their inherited patterns. Internal shocks (e.g., when the business owner steps down from the executive board) also have the potential to cause such a change. And if something external and internal happen to coincide, the chances increase further that the company will shed its pre-established structures and processes. In such situations, the company must then fundamentally reevaluate the playing field and strategically reorient itself.

Family businesses may pursue different strategic approaches after experiencing path dependence. Some choose to entirely revamp their business model or at least rethink parts of it; others, by comparison, stick with their trusted structures and try to optimize them to future-proof the company. But regardless of which path they take, most will take one of the following: renewing, pivoting, or perfecting the business model.

1. Renewing the business model

After an impactful event, a family business can, for example, decide to revamp its existing business model. Three of the companies examined in the study went this route and decided largely to break from unprofitable textile operations to focus on more advantageous sectors (e.g., the real estate market). By doing so, they were able to maintain their core business (textile manufacturing), albeit on a much smaller scale. By revamping and diversifying their business models, the companies in question were able to save themselves from insolvency.

2. Pivoting the business model

Founded in the 1970s, the youngest of the companies in the analysis chose a different way to protect itself from ruin: The management team decided to reorient the company’s business model. Since its inception, the company had the Swiss military as a major client, to which it supplied clothing. But in the early 1990s, when the military decided to source its clothing from Asia, the company’s very existence was put at risk. Thankfully for the company, the owner and managing director had the unilateral power to make decisions, ensuring that he was able to react quickly. The company pivoted and began focusing on providing protective clothing for fire departments. But the company felt the pressure even there as well. After the company was turned over to the next generation, changes had to be made. The successor chose to reorient the company, steering it away from clothing production and turning it into a complete provider of protective gear. Still, the company’s original textile production has its place in the company. Today, the company is poised for growth. 

3. Perfecting the business model

Another textile company opted to continue pursuing its already established business model, despite fluctuations in the exchange rate for the Swiss franc in 2011 and 2015 hitting the company hard and making exports remarkably difficult. Nothing seemed to help, even after the owner’s sons assumed greater managerial responsibility at the company in 2019. The family in ownership not only strongly identified with their company, its traditions and loyal employees—but also with the region they were based in. And in family businesses, that strong regional connection from generation to generation only serves to reinforce the desire to forge ahead. In order to continue competing in such a volatile market environment, the company strategically focused its efforts elsewhere. Specifically, they chose to upscale the quality of their products and focus on occupying a niche market as opposed to the mass market. The company also optimized its operations, making them more efficient and thus more cost effective. Despite being in an increasingly difficult market, the company’s goal was to perfect the business in order to ensure survival. 

Literature reference and methodology

“Breaking with the past to face the future? Organisational path dependence in family businesses” is a study that focuses on six Swiss family businesses active in the textile industry. To be chosen, the companies had to be at least second generation and had to have been active in the market for 50 or more years. For this study, the researchers conducted interviews with members of the families in ownership and company employees. Additionally, they also interviewed experts and analyzed archival data.

• de Groote, J./Kammerlander, N. (2022): Breaking with the past to face the future? Organisational path dependence in family businesses, in: Organization Studies. https://doi.org/10.1177/01708406221134229