Family Business Strategy
Although family business is the most popular form of business worldwide, the distinctive work-family relationship that typifies family businesses can be either a blessing or a blight. The inherent characteristics of family businesses, as well as the internal and external dynamics at play in the business environment, pose great challenges for issues of strategic planning.
Keywords Family; Family Business; Strategic Differentiation; Strategic Planning; Strategy; Succession
Entrepreneurship: Family Business Strategy
All over the world, family businesses are among the most vital contributors to wealth and employment opportunity. Family businesses dominate the business landscape of many countries. According to the US Census Bureau, about 90 percent of American businesses are family owned or operated. Family businesses are increasingly shown to be the dominant form of business enterprise in both developing and advanced economies. The majority of family businesses are small or medium sized, and their influence and numbers are expected to increase substantially in the near future. About 35 percent of Fortune 500 companies are family owned or controlled.
Some 50 percent of the gross domestic product (GDP) in the United States comes from family businesses, and family businesses generate 60 percent of the country’s employment and 78 percent of all new job creation. In the United Kingdom, approximately two-thirds of private-sector firms are family businesses, predominantly small- and medium-sized enterprises. UK family businesses provide 40 percent of total private-sector employment. Many companies that are now publicly held were initially founded as family-owned businesses (Fletcher, 2002a; Vera, 2005).
A family business can be identified by the degree of family ownership and/or managerial control within it. Generally speaking, a family business is a business or firm where members of the same family exercise significant influence over ownership and/or management. Even though many family businesses have non-family members as employees, the top positions — especially in smaller businesses — are often allocated to family members.
Although there is no universally accepted definition of a family business, it is widely accepted that a family business has one family group controlling the firm through a distinct majority and the family is represented in the management team.
Other variations of family businesses include:
- Firms with non-family ownership but with the members of a single dominant family group involved in day-to-day management
- Businesses that have gone public but where family members still hold senior management positions
- Firms that have transitioned to a second or later generation of family members drawn from a single dominant family group owning the business
- Firms owned, controlled, and operated by members of several families
Family involvement in a business gives rise to a distinctive work-family relationship that may cause tensions and contradictions that set family businesses apart from the rest of today's business world, to the extent that many believe that family firms are not operated in a "business-like" way. According to Fletcher (2002a), the “emotional aspects associated with the family business, such as hereditary management and attention to kinship ties or responsibilities are often referred to in the family business literature as 'irrational'” (p. 6-7) when compared to the more 'rational' or 'normal' business issues:
“Family ties and emotional issues are often seen as competing with the demands of the organization, and that commitment to family sometimes clashes with the ability to be loyal, efficient and totally committed to the work organization” (p. 6-7).
According to Degadt (2003), there are two “areas of potential conflict between the family (the business family) and the business (the family business) . . . there are conflicts about the business's objectives, and conflicts about the role and position of individual members of the family” (p. 380).
Conflicts about the business's objectives mainly arise when decisions have to be made about the allocation of profits. The “rational” objectives of the firm may clash with the “irrational” objectives of the family, which may, for instance, include assumptions such as: each member of the family is entitled to a job in the family firm regardless of their qualifications; each member is entitled to equal treatment; the well-being of each individual is a specific objective; and each member is entitled to training following his or her personal wants.
Conflicts about the role and position of individual members of the family often arise when decisions have to be made about the hiring of new entrants (family members versus non-family members); when decisions have to be made about underperforming family members; and when a family member's seniority in the family differs from his or her seniority, capability, and role in the family business.
Thus, family dynamics, kinship ties, nepotism, intergenerational conflict, marital and sibling conflict, hereditary management, and the distribution of assets following divorce or death are all special features of the family business. So too are strategic concerns of growth, finance, leadership, succession and in-house training and development of non-family managers (Fletcher, 2002a).
For those family members involved in a family business, the family provides both supportive and controlling functions. On the positive side, a family business can provide such benefits as more secure wages; less accountability; the satisfaction of continually working to get the business where one wants it to be; the provision of important resources to support the development of the business; and the provision of opportunities for self-expression and realization for family business members. Family participation in a business can strengthen the business if family members are loyal and dedicated to the family enterprise.
On the negative side, the family business environment is one of hard work; constant problems; unending commitment; the frustration of “being obliged” to continually keep on working to get the business right even when the temptation is to walk away; the obligation to always be there; and the need to carefully manage and negotiate a complex set of social and emotional relationships involving family and non-family members who have different expectations and motivations for involvement in the family business. Commitment to family can also mean suppression or inhibition of individual freedom of action or self-expression (Fletcher, 2002a).
One shortcoming of family businesses is their relative lack of longevity. Researcher John Ward conducted a study in 1987 that indicated only 30 percent of family businesses are passed on to the second generation, less than 13 percent survive through the third generation, and only 3 percent of family firms survive beyond that. However, these numbers do not take into account family-owned businesses that went public or were sold to outsiders. Furthermore, although most family businesses may not survive through a third generation, each generation typically lasts twenty-five years or longer. Martin and Lumpkin (2003) theorize that family orientation—characterized by interdependency, loyalty, security, stability, and tradition—is in many ways incompatible with an entrepreneurial orientation, which demands innovation and risk, and they suggest that increasing family orientation through successive generations eventually overcomes the entrepreneurial orientation of the firm’s founders. Zellweger, Nason, and Norqdvist (2011) offer an alternative explanation and point to the fact that most entrepreneurial families own multiple firms and have engaged in significant merger and acquisition activity and industry transitions, suggesting that the relatively short longevity of family-owned firms is related to the high level of entrepreneurial activity of these families and their responsiveness and willingness to shift industry focus and divest as needed. Another factor related to the longevity of family-owned firms is that smaller family businesses are especially vulnerable to disruption or failure. According to Lambrecht (2005), the “average life span of a family business is twenty-four years, which coincides with the number of years that the founder remains in charge of the business. After this time, the business may continue to exist, but it loses its family character” (p. 267).
Lambrecht writes that a “business family can develop into a family dynasty only when it embraces sound governance as a fundamental principle; that is, when the individual family member 'belongs' to the family, which belongs to the business” (2005, Abstract). Such a high failure rate after the first generation usually stems from the inability to manage the complex and highly emotional process of succession from one generation to the next.
All businesses face issues of strategy, which they must deal with, whether formally or informally. Strategy involves the making of distinctive choices about markets, products, services, internal resources (human resources, information, knowledge, land, labor, and capital) and plans for the future, to gain an edge over one's competitors; and creating a system from these decisions that provides a fit between what the environment needs and what the company does. A good strategy will result in the formulation of the major objectives, goals, and purposes of a business and the fundamentals, plans, policies, and philosophies for achieving those goals. It may also result in dynamic activities to change either...
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