How upper-midscale hotels can win in a K‑shaped economy
How upper-midscale hotels can win in a K‑shaped economy
https://hotelsmag.com/news/how-upper-midscale-hotels-can-win-in-a-k%e2%80%91shaped-economy/?
This perspective piece was written by Travis Burns, EVP of development at Remington Hospitality, a third-party hotel management company that operates more than 120 hotels in the U.S. and Latin America.
“K-shaped” is the industry buzzword of the moment in the hospitality industry. Luxury and upper‑upscale assets are pulling ahead; everyone else is fighting for what’s left.
How can you succeed when you’re on the kickstand of a K-shaped market? Start by not assuming divergence is a disadvantage. Upper‑midscale is still uniquely positioned to capture the largest, most durable segments of travel demand—if owners and operators pull the right levers.
The opportunity isn’t to chase luxury; it’s to lean into what upper midscale does best: value clarity, cost discipline, operational precision. This is where the segment consistently outperforms all others. When it’s done right.
Winners and Everyone Else
The upper‑midscale segment is having its own K-shaped moment:
- Well‑run, renovation‑forward, consistent brands are outperforming the comp set and the margin is growing.
- Under‑invested assets with dated rooms, lagging service scores and unclear positioning are getting squeezed from both ends.
The widening gap isn’t driven by rate ceilings; it’s driven by execution. Guests aren’t suddenly waking up with a burning desire for marble bathrooms and chandelier lighting. They’re trading up because too many upper-midscale properties have allowed dated rooms, lagging scores and “good enough” operations to become normal. If guests can’t trust your basics, they’ll pay more for someone else’s.
If you close the trust gap, you win the value‑seeking traveler who isn’t rate sensitive— they’re just inconsistent sensitive.
The New Battleground
Upper midscale wins the moment a guest walks into a room and thinks: “Oh, this is nicer than expected.” It’s a reaction that fuels loyalty and generates repeat business. Achieving it requires eliminating friction, not adding flair.
Guests don’t want complexity; they want reliability: a warm welcome, an impeccably clean room, a predictable breakfast, fast Wi‑Fi, a gym that doesn’t feel like an afterthought. These are small things with oversized impact, and they cost far less than avant-garde art installations.
Here are a few tips to help get there:
- PIP with purpose, not excess. Fix the pain points that matter: flooring, lighting, showers, charging access and mattresses. These aren’t frills; they’re the basics that signal trust.
- Align with a brand that enhances value. A flag offers distribution, but the property is what delivers the experience. With many upper‑midscale brands offering optional bars, enhanced gyms or upgraded public and outdoor spaces, the opportunity to quietly outperform expectations has never been greater.
- Be lean. Be smart. Operating models are a competitive weapon. Luxury hotels are doubling down on labor‑heavy service models. Upper midscale wins by being clever, not crowded.
Winning operators focus on:
- Labor models built around forecasting, not habitsHousekeeping optimization and occupancy‑aligned scheduling are still two of the most powerful margin levers in the segment.
- Cross‑training as a strategic advantageNot every hotel needs more people, it needs more versatile people. Night auditors tossing in laundry loads or breakfast attendants helping at the desk during checkout isn’t cutting corners: it’s designing a team that stays fluid when demand shifts. It builds resilience, reduces bottlenecks and boosts morale.
- Simplifying F&BA consistent, well‑executed breakfast beats a complicated concept executed poorly. Every. Single. Time.
The goal isn’t to overload staff; it’s to build a team that can keep the operation moving when volume shifts unexpectedly. This is where owners win: upper midscale creates margin through precision, not by cutting to the bone.
At Its Best
Luxury differentiates through experience and economy with price, but upper-midscale hotels win with trust.
Guests don’t expect a rooftop restaurant or spa experience, but they absolutely expect:
- A clean, modern room
- Friendly, efficient service
- Amenities that work
- Spaces that feel intentional
- A rate that feels justified
When the stay is predictable, the rate is defensible. Consistency has become the competitive edge.
Upper midscale loses when it tries to be something it’s not. It wins when it is unapologetically clear about what it offers: a clean, modern, efficient stay that respects the guest’s time and wallet.
Luxury buyers are trading up for indulgence; Upper‑midscale buyers are trading up for dependability. And in a K‑shaped economy, dependability becomes its own form of luxury.
Bottom Line
The upper-midscale segment isn’t the “middle ground.” It’s the value engine of the industry. To outperform in a K‑shaped world:
- Invest where it matters most
- Deliver service that’s simple, fast and friendly
- Operate with intention, not inertia
- Price with confidence
- Be consistent
Luxury wins by over-delivering on experiences. Upper midscale wins by over-delivering on expectations.
Make your hotel visible to AI: a checklist for ChatGPT
https://www.mylighthouse.com/resources/blog/make-your-hotel-visible-to-ai-a-checklist-for-chatgpt
Adam Swart
9 ways to show up when travelers ask AI where to stay
Be discoverable. Be accurate. Be bookable.
Right now, someone is asking ChatGPT where to stay in your city. They're not Googling or browsing through endless listings. They're having a conversation, and AI is giving them a personalized shortlist of hotels that match exactly what they're looking for.
Is your property part of that answer?
ChatGPT alone sees over 5 billion monthly visits. Travelers - potential guests - are using it to find hotels the same way they once asked friends for recommendations. The difference is that AI can only recommend what it knows about. If it can't find your hotel, you simply won't show up.
Hotels that appear in these conversations today are building visibility that grows over time. AI remembers what it learns, and the properties establishing themselves now will be the ones it keeps recommending as this channel expands. The industry calls this Generative Engine Optimization (GEO) and Answer Engine Optimization (AEO), and you can think of them as SEO's evolution for the AI era.
New to AI terminology? Our AI glossary for hoteliers has you covered.
So what does your hotel website need? Let's get into it.
1. Make sure AI can actually see you
Many hotel websites accidentally block the very systems that power AI recommendations. There's a file called robots.txt that controls who can access your site, and if it's blocking AI crawlers, you're invisible before you even start.
This is the easiest fix on the list and the most important one to get right.
Do this: Ask your web team to check your robots.txt file and open access to AI systems. It takes five minutes and ensures your content can be discovered and used to power these recommendations.
2. Give AI a roadmap to your best content
Most hoteliers haven't heard of llms.txt yet, but it's becoming essential for AI visibility. This simple text file tells AI exactly where to find your most important content: room descriptions, amenities, location details and your booking page, all in one organized place.
Without it, AI wanders through your site like a confused guest, getting lost in cookie banners and outdated blog posts. With it, AI goes straight to what matters.
Companies like Cloudflare, Stripe and Zapier already use this approach, and hotels should too.
Do this: Create a text file listing your 10-15 most important pages and save it at yoursite.com/llms.txt. If that sounds too technical, a partner can handle it for you.
3. Help AI understand what you offer
Schema markup is code that helps AI understand your hotel at a glance: your star rating, room types, amenities, price range and location. When this is set up properly, AI gets an accurate picture of your property. When it's missing, AI has to guess, and those guesses are usually wrong.
Do this: WordPress users can start with plugins like Yoast SEO. For a complete setup, work with someone who knows hospitality technology. The goal is making sure AI understands what you actually offer.
4. Answer the questions travelers are already asking
AI exists to answer questions, and travelers have plenty of them. Does this hotel have parking? How far is it from the airport? Is breakfast included? What time is check-in?
If your website already answers these in a clear FAQ format, AI can quote you directly and recommend you with confidence. If it doesn't, AI moves on to a hotel that does.
Think about what your front desk team answers twenty times a day. That's exactly what belongs in your FAQ.
Do this: Build an FAQ section using real guest questions as headers and write clear, complete answers. Update it whenever you notice new questions coming up repeatedly.
5. Write like you're talking to a guest
Old school SEO taught us to cram keywords into every sentence. AI doesn't work that way. It responds to natural conversation and understands context the way humans do.
Travelers aren't typing "hotel Miami pool rooftop" into ChatGPT. They're asking "Where should I stay for a bachelorette weekend in Miami with a great pool scene?" Your content should sound like advice from a knowledgeable friend, not copy from a marketing department.
Do this: Read your website out loud. If it sounds stiff or stuffed with keywords, rewrite it to sound conversational. Your guests will appreciate it, and AI will understand you better.
6. Let your reputation speak for you
AI trusts what it can verify across multiple sources. Strong reviews, consistent information across platforms and a solid online presence all signal that you're a safe recommendation.
Hotels that deliver excellent guest experiences have a new advantage: AI is starting to notice and reward that consistency.
Do this: Make sure your name, address and details match everywhere online. Respond to reviews thoughtfully and make it easy for happy guests to share their experiences.
7. Clean up outdated content
That room description from 2019 mentioning a restaurant that closed during the pandemic? AI found it, shared it with a traveler, and now someone is showing up expecting something that no longer exists.
Stale content doesn't just confuse travelers. It tells AI your site isn't reliable, which makes it less likely to recommend you at all.
Do this: Schedule quarterly content audits where you walk through your site like a first-time visitor. Update or remove anything that's no longer accurate.
8. Lead with what makes you different
"Conveniently located with comfortable rooms" describes every hotel everywhere, and AI can't do anything useful with that kind of generic copy.
Your rooftop bar with the skyline view, your partnership with a local chef, your sustainability initiatives, your building from 1892: these are the details that help AI match you with travelers looking for exactly what you offer.
Do this: List the five things that make guests choose you over the property next door, then make sure those details are front and center on your website rather than buried in an "About Us" page.
9. See yourself through AI's eyes
Ask ChatGPT to recommend hotels in your market, then ask about your property by name. It costs nothing and takes ten minutes.
What comes back? Is the information accurate, outdated, or completely absent? The gap between reality and how AI perceives you is your to-do list.
Do this: Spend ten minutes this week asking AI in incognito about your market and write down what you learn. You'll spot issues and opportunities you won't find anywhere else.
First movers have always had the advantage
The hotels and OTAs that mastered Google SEO in 2004 still dominate organic search today. The brands that built direct booking strategies early now own their guest relationships.
AI is the next chapter in that story, and it's moving more rapidly than any channel before it. ChatGPT reached 800 million users faster than any platform in history.
The hotels and OTAs showing up in AI conversations today aren't just getting bookings. They're training AI to keep recommending them over time. That advantage only becomes more powerful as the systems continue to learn.
Connect AI makes visibility simple
Let's be honest: you got into hospitality to create great guest experiences, not to manage robots.txt files and schema markup. You're already juggling room rates, staffing, guest reviews and a dozen other priorities. Adding "become an AI visibility expert" to that list just isn't realistic for most hoteliers.
That's exactly why we built Connect AI.
Connect AI handles the work for you
Connect AI takes care of the technical work so you can focus on your guests. No learning curve. No new skills required, just real results.
With Connect AI your hotel becomes:
Discoverable. You show up in AI searches across ChatGPT.
Understandable. Your content and brand story are automatically formatted so AI accurately represents what makes your property special.
Bookable. Direct booking links send guests straight to your booking engine with zero commissions and no intermediaries.
Connect AI turns your hotel into a single source of truth that AI can read, trust and recommend. When travelers ask where to stay, you're part of the conversation with a clear path to book direct.
You don't need to become a tech expert. You just need to be visible where your next guests are searching. We'll handle the rest.
Your next guest is already asking AI for recommendations. Be there when they do.
The secrets of outperforming family-owned businesses: How they create value—and how you can become one
https://www.mckinsey.com/industries/private-capital/our-insights/the-secrets-of-outperforming-family-owned-businesses-how-they-create-value-and-how-you-can-become-one?
Eduardo Asaf is a partner in McKinsey’s Mexico City office, where Igor Carvalho and Jose Tellechea are consultants; Acha Leke is a senior partner in the Johannesburg office; and Francesco Malatesta is an associate partner in the Dubai office.
Family-owned businesses that combine four critical mindsets with five strategic actions have a chance to quadruple their value in the next decade—while maintaining resilience.
These days, organizations across industries and geographies are doing everything they can to bounce forward from recent economic, geopolitical, and technological disruptions.
For them, resilience may be a relatively new concept.
For family-owned businesses (FOBs)—companies in which founders or descendants hold significant share capital or voting rights—it’s just business as usual. Regardless of what the world throws at them, many of these companies have survived and thrived over multiple decades. Some, such as Levi Strauss and L’Óreal, have been operating for well over a century.
FOBs have long played an outsize role in the global economy—a role that often goes unnoticed or underestimated. They account for more than 70 percent of global GDP, and they generate turnover of between $60 trillion and $70 trillion annually. They are responsible for about 60 percent of global employment, and they play a critical role in supporting education, healthcare, and infrastructure development across their communities around the world.
McKinsey’s own recent research confirms FOBs’ adaptability, resilience, and impact: they have the structures and best practices required to withstand business challenges in uncertain times. And in general, they exhibit stronger performance than businesses that are not family owned, although the extent and drivers of that outperformance vary.
To understand FOBs’ history of outperformance and how the best among them create value and impact, we analyzed 600 publicly listed FOBs, compared their performance with that of 600 publicly listed companies that are not family owned, and surveyed another 600 primarily private FOBs around the world. Additionally, we interviewed leaders of more than 20 FOBs globally.
The findings were surprising.
For instance, while it has been widely known that FOBs deliver higher total shareholder returns (TSR) compared with non-FOBs, the root causes of this outperformance have been less well-known—until now. Our analysis shows that the higher TSR results from better underlying operational performance by FOBs, as compared with non-FOBs. The research also demonstrates how the performance and value creation strategies of FOBs shift as these businesses get bigger and older.
The data tell a compelling story of outcomes and impact, but they also begin to reveal what the highest-performing FOBs are doing differently when compared with peers, in two areas: mindsets and strategic actions.
They demonstrate four mindsets that are common to all FOBs but that take on outsize importance within the high performers, allowing them to gain and sustain a competitive advantage. The critical mindsets are a focus on purpose beyond profits, a long-term view and emphasis on reinvesting in the business, a conservative and cautious stance on finances, and processes that allow for efficient decision making.
The high-performing FOBs then combine these mindsets with five strategic actions in ways that others do not. Specifically, they actively diversify their portfolios, and they dynamically reallocate resources to the most promising businesses, regions, and channels. They are both efficient investors and operators. They maintain a relentless focus on attracting, developing, and retaining talent, and they continually review their governance mechanisms to ensure strong business performance across generations.
We’ll unpack this “4+5” formula further in this article. It’s important to note that the formula and the lessons it imparts are applicable to both FOBs and non-FOBs alike—and our research suggests that deploying it effectively can pay off over the long term. When we applied the formula to the family-owned companies in our research base, we estimated that it could create a 2.5- to 5.5-times increase in economic profit for them.
Indeed, FOBs around the world that successfully follow this formula have an opportunity to quadruple their value over the next five to ten years—bolstering their market performance, sharpening the resilience edge that has allowed them to keep the lights on for generations, and making an even greater impact across their communities.
FOB outperformance by the numbers
Our research shows that FOBs have created more value and impact than non-FOBs over the past decade—a dynamic that has largely held true regardless of which metrics we used to assess companies’ performance and despite the unique challenges FOBs face (see sidebar, “Unique challenges on the road to outperformance”).
Between 2017 and 2022, FOBs posted an average TSR of 2.6 percent, compared with 2.3 percent for non-FOBs. In that same five-year period, FOBs achieved average economic profit of $77.5 million, surpassing the non-FOBs average economic profit of $66.3 million. FOBs also generated (on average) an economic spread that was 33 percent higher than that of non-FOBs in the same period.
A broader look at performance among both FOBs and non-FOBs reveals further variations based on the size, age, and maturity level of these companies. For instance, the midsize FOBs in our research base, with annual revenues between $150 million to $5 billion, performed better than non-FOBs by being more efficient investors. They have delivered 10 percent higher capital turnover over the past five years compared with non-FOBs. Why? These midsize FOBs face fewer of the traditional market pressures to deliver short-term results. Their focus on the long term and their streamlined decision-making processes allow them to be more effective than non-FOBs at identifying investment opportunities that are in line with their purpose and goals, acting decisively, and quickly allocating resources against those opportunities.
Meanwhile, the large FOBs in our sample, with annual revenues between $5 billion and $100 billion, tend to be efficient operators that have delivered 1.5-percentage-point higher operating margins over the past five years compared with non-FOBs. The numbers likely reflect large FOBs’ ability to take advantage of process-related efficiencies and supply chain relationships developed over successive generations
In addition, the family-owned businesses in our research base that are 25 years old and younger tend to have an aggressive growth mindset, increasing revenues twice as fast as non-FOBs as they channel the entrepreneurial energy of the founder. As they mature and transition into new generations of leadership, however, some FOBs start thinking less about big bets and more about preserving value. Others just lose the founder’s entrepreneurial edge. Their growth slows, falling more in line with that of non-FOBs
4+5 equals FOB outperformance
Our research also revealed a notable gap in performance among FOBs and non-FOBs on our economic profit power curve, with a performance edge appearing across all quintiles. And the best-performing FOBs fared much better than the best-performing non-FOBs: the top two quintiles show a performance gap three times larger than the average of the lower quintiles. What’s more, the highest-performing FOBs capture the largest share of economic profit and drive outperformance across the entire FOB category
Who are these outperformers? They comprise more than 120 FOBs in our research base, with ages ranging from under a decade to several centuries. They span ten sectors and operate across the world. Their average annual revenues range from $1 billion to $95 billion, with average economic profit of $730 million and average EBITDA margin of 20 percent.
Through our analyses, we learned that these top FOBs display four mindsets that are common to other FOBs but that are more pronounced in the outperformers. And, unlike most other FOBs, the outperformers combine the four critical mindsets with five strategic actions that help them achieve and sustain top-quintile performance that truly differentiates them
Four critical mindsets of outperforming FOBs
Traces of the following four critical mindsets can be found in the DNA of all family-owned businesses, but these mindsets are more pronounced in the highest-performing FOBs relative to others.
1. They focus on purpose beyond profits
Our research shows that 93 percent of respondents from the highest-performing FOBs believe their company has a clear purpose beyond creating value for shareholders, as compared with 86 percent of the overall group of FOBs we surveyed. This sense of purpose can take many forms. It can be inward looking and focused on building the company’s legacy—for instance, by maintaining a strong reputation, protecting the brand image, or nurturing a strong company culture. Or it can be outward facing, focused on maximizing value for customers or generating positive impact in their communities. Whatever its nature, FOB respondents say they are willing to spend the time and resources needed to bring this purpose to life. Of the respondents from the highest-performing FOBs, 91 percent say they have formal mechanisms to ensure that employees understand, appreciate, and role model their purpose and values , as compared with 84 percent of the overall group of FOBs surveyed.
One place where this mindset is most strongly reflected is in the highest-performing companies’ efforts to support their communities. In our survey, leaders in 58 percent of the outperforming FOBs strongly agree with the assertion that their companies “embrace social responsibility and sustainability,” compared with 39 percent of leaders of other FOBs. One example of community support is a family-owned financial-services company in Latin America that tracks its environment, social, and governance efforts as closely as it does its financial performance. To foster transparency and accountability, it participates in all major market indexes that monitor sustainability and governance—both domestically and abroad.
The purpose-driven mindset is also reflected in the outperforming companies’ approach to hiring, promotion, and retention. Loyalty is a key value in most of these companies and, in our interviews, leaders revealed an ability to look “through the cycle” and avoid layoffs in crisis periods. One Indian conglomerate with roots dating back to the 1800s has basically adopted a “never fire” approach to talent management.
2. They take a long-term perspective and reinvest in the business
Leaders of outperforming FOBs cite their long-term perspective as one of the top three reasons for their success, alongside the ability to innovate and to expand into new markets and regions. They ruthlessly optimize for the longevity and resilience of the organization, even if it comes at the expense of short-term performance.
Ownership structure plays a critical role in the outperformers’ ability to maintain this long-term perspective: 92 percent of outperforming businesses in our research base have at least a 40 percent family ownership. Since they are not beholden to the demands of shareholders or the pressures of quarterly earnings reports, they can take a more patient and strategic approach to investing, which can ultimately lead to sustainable growth and success. One family-owned European retailer, for instance, had for decades remained resolutely focused on an “always buy, never sell” philosophy. In the late 1990s, it acquired an unprofitable brand, and, over a six-year period in which the acquired brand’s performance remained low, the company weathered public scrutiny and pressure to sell. Over time, however, the waiting game eventually paid off and the brand became one of the company’s most successful acquisitions.
Our research also revealed that FOBs, in general, tend to reinvest in the business rather than extract as much as they can from the company through dividends. They are not under the same pressures that non-FOBs are increasingly under to prioritize higher dividends to meet shareholder expectations. Indeed, over the past five years, FOBs worldwide delivered dividend yields that were 12 percent lower (on average) than those of non-FOBs.
3. They are financially conservative and cautious about debt and high-risk investments
In general, FOBs tend to be financially cautious, with leverage ratios that are, on average, six percentage points lower than those of non-FOBs. The outperforming FOBs have even lower leverage ratios, by nearly ten percentage points
Interestingly, however, the outperformers say they take on more debt compared with other FOBs. For instance, about 40 percent of the outperformer respondents told us they use debt to finance more than 50 percent of their investments. By contrast, other FOB respondents told us they use debt to finance only 12 percent of their investments. Given that they are using their own money, FOBs often prefer to invest their funds in marketing, sales, manufacturing, and other parts of the business where there are clear paths for growth and some precedent for returns, rather than invest in high-risk areas such as R&D.
This cautious approach to finances also helps the outperformers weather significant economic shocks such as the 2008 global credit crisis and the recent COVID-19-triggered downturn—and emerge in better shape than other FOBs and non-FOBs. For example, a family-owned logistics business in Europe credits its financial conservatism as a critical factor in its relatively quick recovery from global supply chain shortages in 2021. Through the crisis period, the company held a steadfast focus on the long term and prioritized preserving its strong cash position, which allowed it to avoid bankruptcy the past few years while others were falling prey to industry contraction.
4. Their internal processes allow for efficient decision making
Our conversations with leaders in outperforming FOBs point to greater efficiency in decision making, in part because of two factors: centralized but flexible processes and engaged employees.
Despite the existence of investment committees, for instance, the big decisions taken by leaders and teams in outperforming FOBs are usually highly influenced by a single individual or several members of the family who can act more decisively than leaders in non-FOBs. The non-FOBs usually rely on multistage, multiparty processes that can be difficult and time-consuming to navigate.
Interestingly, the outperforming FOBs distinguish between efficient decision making and fast decision making: when family members agree, they make choices quickly. But when family members disagree, the outperformers take advantage of their flexible structures and processes to consider all the different points of view. They understand that decision making can be both quick and deliberate—and that the ability to adjust as needed is a true differentiator in performance.
The benefit of having engaged employees is that “once the CEO has a strategy in mind, it is easier to implement any changes,” leaders at one Japanese FOB told us. This approach to decision making has allowed the company to execute major category and market expansions every ten to 15 years.
Five strategic actions that set outperforming FOBs apart
Through our analyses, we discovered that the very best FOBs combine the four critical mindsets just described with five strategic actions that truly set them apart.
1. They actively diversify their portfolios
The outperforming FOBs in our research base have highly diversified portfolios. One conglomerate reaches more than one billion customers across its consumer goods, agriculture, and real estate divisions, among others. Another FOB started in waste management but has expanded into logistics, clean energy, and mobility solutions. Indeed, our research shows that 40 percent of the outperformers garner more than half of their revenues from streams outside their core businesses. By contrast, only 7 percent of other FOBs had a similar share of noncore business revenues
Moreover, 70 percent of the outperformers told us they will prioritize expansion beyond the core over the next five years by moving into new industries or geographies or by targeting disruptive businesses.
M&A seems to be the go-to diversification strategy for these organizations. Some 66 percent of respondents to our survey told us they pursued M&A to access new technologies, 63 percent to enter new industries, and nearly 60 percent to tap into new geographies.
Of course, not all M&A pursuits yield the same returns. Previous McKinsey research has found that programmatic M&A—that is, carefully choreographing a series of deals around a specific business case or M&A theme, instead of pursuing more organic, episodic, selective, or large transactions—is far more likely to lead to stronger performance and less risky for any organization. FOBs seem to be taking this message to heart: when asked about their M&A activity, about 40 percent of all FOBs told us they had pursued two or more small or midsize deals per year for the past ten years.
The current findings support previous McKinsey research that shows FOBs tend to make smaller but more value-creating deals than non-FOBs. Leaders at a family-owned industrials company in Europe told us they actively try to avoid “core myopia.” For years, they said, they had failed to recognize growth opportunities in recycling and sustainability. Now, they prioritize and pursue small acquisitions that they think can enhance their market position. They decide which companies they intend to acquire and for how much, “remaining patient and avoiding rushing into transactions until the opportune moment arises.”
Further, many of the outperforming FOBs seemed more willing than peers to take bolder risks on occasion, with 58 percent indicating they had pursued at least one large deal in the past ten years, compared with 36 percent of other FOBs indicating the same.
2. They dynamically reallocate resources
Previous McKinsey research confirms that dynamic resource allocation is one of the best ways to achieve growth in an organization. Companies that reallocate more resources more often have been shown to generate significantly higher returns to shareholders, experience less long-term variance on returns, and have a higher likelihood of avoiding acquisition or bankruptcy.
Our analyses show that outperforming FOBs aggressively and dynamically allocate their resources toward businesses, regions, and channels they believe will drive the most growth. In fact, about 60 percent of the outperformers said that, over the past five years, they had shifted more than 30 percent of their capital across businesses or regions, targeting higher-value opportunities. By contrast only 20 percent of other FOBs had done the same
In general, FOBs enjoy an advantage in this area compared with non-FOBs. Their focus on purpose along with their longer-term perspective and efficient decision-making structures allow them to avoid the politics and inertia that can drive allocation discussions off the rails.
Leaders from outperformer FOBs we spoke with say they take specific actions—in some cases, even cultural changes—to guard against inertia. A century’s worth of diversification has given one family-owned conglomerate in Asia footholds across a wide range of sectors—from petrochemicals to energy, retail, and telecommunications. But to balance out its strategic pursuit of growth, the conglomerate has also built into its finance and strategy discussions formal reevaluations of business performance. It periodically divests underperforming divisions and reduces its ownership interests while reinvesting those resources in higher-growth opportunities. This culture of growth through continuous improvement is so strong that last year the company announced a multibillion-dollar plan to transition from its core business in petrochemicals—which at one point accounted for more than three-quarters of the company’s revenues—to new opportunities in renewables.
Leaders attribute the company’s success to the founders’ direct, personal involvement in identifying big bets and building the financial, operational, and talent competencies required to reallocate resources and act on those bets.
3. They are efficient investors and operators
As mentioned earlier, at the outset of their tenures, FOBs tend to perform better than others because they can allocate capital more efficiently. But as they grow and scale, their outperformance tends to come more from efficient operations. Interestingly, the very best FOBs can do both.
Our data shows that the high-performing FOBs have a capital turnover ratio of 1.4—in line with that of outperforming non-FOBs and higher than that of all other FOBs in our sample. The high performers also report operating margins that are almost 10 percent higher than that of outperforming non-FOBs and nearly twice that of other FOBs in our research base.
Their higher-than-average investment and operating performance is driven by three factors. First is their operating DNA, which is passed down through generations and shapes the way their businesses operate, including decision making, customer service approach, talent management, and even developing functional expertise. In South Korea, for instance, the chairman of a family-owned apparel and footwear manufacturer has visited the production line daily for decades and knows each worker by name. Such direct involvement from the company founder has helped foster a sense of loyalty and ownership among employees. Through this access, workers are also getting a first-hand perspective on the operational challenges and opportunities across the organization—and, as a result, are deeply motivated to weigh in with potential solutions.
Second, compared with the other FOBs in our research base, the outperformers use a broader set of data to evaluate organizational performance. For instance, these businesses used more key performance indicators (KPIs) to measure executive performance, including top- and bottom-line figures and valuation metrics. When we asked all the FOB respondents in our research base which of seven designated metrics they had considered in evaluating executive compensation, the outperformers were 10 percent more likely, on average, to indicate that they were tracking all the KPIs we listed.
The last and arguably biggest differentiator is that outperforming FOBs focus on innovation. They invest twice as much in R&D as other FOBs do, and back up those investments with performance management systems. One US-based family-owned company that provides telecommunications and automotive services established a series of programs to support the creation of a tech-venture ecosystem in a part of the country that has not traditionally been a tech hub. The company launched an accelerator for tech start-ups and a not-for-profit program to drive job creation in adjacent industries. Through direct and indirect investments in these programs and companies, the company is helping others while ensuring its own access to top technology innovations and talent in the region.
4. They maintain a relentless focus on attracting, developing, and retaining talent
Talent management is an obsession for the highest-performing FOBs. In our survey, 86 percent of respondents at outperforming FOBs agree or completely agree that their company attracts the best talent. More than 90 percent either agree or completely agree that their company successfully identifies, trains, and develops top performers.
One family-owned luxury retailer in Europe takes an end-to-end approach to talent management. To attract recent graduates and younger workers, the company developed and launched a two-year, nine-part social media campaign—a series of “day in the life” posts filmed by and with existing employees. It also established a program to identify and train thousands of internal ambassadors to help and onboard newer workers. Partly due to these initiatives, the group has been voted a top employer among business school students for 18 years in a row in the retailer’s home country. At the senior-leader level, the company focuses on offering competitive salaries, which it benchmarks constantly. It also provides leaders exclusive proximity to members of the founder family, which creates a sense of personal attachment and accountability for the company’s results among senior leaders.
As a result of these efforts, the company boasts an average length of service between six and seven years—about three times higher than the typical tenure for employees at luxury retail companies. Almost one-quarter of the company’s workforce has been employed there for more than 15 years, and of these, more than 70 percent have been with the company for more than 20 years. The leaders’ perspective is that recruiting exceptional talent and retaining them for long tenures has allowed the company to build and maintain a strong culture of artistic expression, attention to detail, and long-term vision—traits that are crucial to success in a business that hinges on creativity and reinvention.
Also in our survey, more than 80 percent of outperforming FOB respondents report that their companies have built effective training programs to develop the next generation of family members. A family-owned electronics retailer in Africa, for instance, puts all family members interested in joining the company through a rigorous interview process (even tougher than their standard recruiting process) and places them in jobs that are aligned with their skill sets. An Asian FOB in the apparel industry mandates that family members do a series of role rotations, periodically tasking them with initiating new M&A deals, ventures, or resolving existing challenges to evaluate their problem-solving skills.
5. They continually review their governance mechanisms to ensure strong corporate performance across generations
Our research reveals that outperforming FOBs take the separation of family and business matters very seriously. About 80 percent of the outperformer company respondents reveal there is formal documentation in their companies with clear guidelines on the roles and responsibilities of family members. More than 90 percent of the outperformer respondents told us there is an effective and independent board of directors in place, compared with 72 percent of respondents from of all other FOBs who say the same. And 85 percent of respondents from outperforming FOBs report that their companies have a formal forum that meets regularly to discuss family and business issues, compared with only 66 percent of all other FOBs in our research base.
In interviews, leaders in the outperforming FOBs touted the benefits of having strict guidelines about family member roles and responsibilities, especially if the business is still family-led. At a second-generation 100 percent family-owned healthcare services business in the United States, two siblings share leadership roles. One is the president and focuses on strategic responsibilities across three business units, while the other is the chief growth officer and focuses on sales. Their positions very intentionally intersect but don’t overlap. And the siblings bring unique and complementary skills to the leadership team. Before they reached their current positions, however, the siblings spent time in different parts of the company to develop a sense of ownership and connection to the company culture, deepen their understanding of processes, develop their management skills, and most importantly, earn the trust and respect of the broader organization. What’s more, this pathway to leadership has been institutionalized at the company: a third-generation family member is on a similar development journey and currently serves as chief of staff.
Family governance, when well-executed, can be a powerful way to build corporate culture. However, FOBs may also want to look outside blood lines for leadership. Research has shown that professional management, when well identified and given the right conditions to prosper, can produce better results than family-only structures. Indeed, FOBs are increasingly tapping into the expertise of professionals from outside the family, and our research shows that the outperformers do so even more. For instance, 95 percent of the outperforming FOBs in our research base indicated that they actively involve nonfamily executives in setting portfolio strategy, compared with 85 percent of all other FOBs in the research base.
One outperformer, a CPG company based in Latin America, decided last year to break a generations-long sequence of family leadership and hire a CEO externally. A family-owned European pharmaceutical company did the same. Both organizations followed practices that would be standard for any company, family-owned or not. For example, both engaged a global recruiter to conduct their searches and asked them to focus on talent rather than cultural fit. As FOBs grapple with the question of succession, they would do well to keep their focus more on longevity of the business rather than on continuing family stewardship.
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