Table of contents
TABLE OF FIGURES
TABLE OF TABLES
1.2 RESEARCH PURPOSE AND RESEARCH QUESTIONS
1.3 LITERATURE REVIEW
1.5 STRUCTURE OF THE RESEARCH
2 FAMILY BUSINESS AS AN OBJECT OF SCIENTIFIC ANALYSIS
2.1 A HISTORICAL BACKGROUND OF A FAMILY ENTERPRISE
2.2 EVOLUTION OF FAMILY BUSINESS STUDIES
2.3 DEFINING FAMILY BUSINESS
2.4 LEVELS OF ANALYSIS IN FAMILY BUSINESS STUDIES
3 UNDERSTANDING KEY CHARACTERISTICS OF FAMILY BUSINESS
3.1 MAIN DIFFERENCES BETWEEN FAMILY AND NON-FAMILY BUSINESS
3.2 FAMILY BUSINESS SYSTEM IN A DYNAMIC PERSPECTIVE
3.2.1 Family system
3.2.2 Ownership systems
3.2.3 Business system
3.3 CONCEPTUALIZING FAMILY INFLUENCE IN FAMILY BUSINESS: F-PEC SCALE
4 CENTRAL THEORIES IN FAMILY BUSINESS
4.1 AGENCY THEORY AND STEWARDSHIP THEORY
4.1.1 Family owner vs. external manager (employee)
4.1.2 Family owner vs. external shareholder (not family member)
4.1.3 Family owner vs. family manager
4.2 RESOURCE-BASED VIEW AND SOCIAL CAPITAL THEORY
4.2.1 The concept of familiness
4.2.2 Parsimony, personalism, and particularism
4.2.3 Family business longevity and resources orchestration
4.2.4 Social capital as a specifically important resource of family firms
4.3 COMMUNICATION THEORIES: CASUAL LINKS TO FAMILY BUSINESS THEORIES
4.3.1 Trust, self-disclosure, and predictability
4.3.2 Social Penetration Theory
4.3.3 Uncertainty Reduction Theory
4.3.4 Interpersonal and institutional trust in family business
5 CONCEPTUALIZING CULTURE AND VALUES IN FAMILY BUSINESS
5.1 ESSENTIALS OF CULTURE AND ORGANIZATIONAL CULTURE
5.1.1 Culture: fundamental characteristics
5.1.2 Organizational culture
5.2 ORGANIZATIONAL CULTURE AND BUSINESS PERFORMANCE
5.2.1 Impact of culture on performance
5.2.2 Culture as a source of competitive advantage
5.3 FAMILY BUSINESS CULTURE AND VALUES RESEARCH
6 CULTURE AND VALUES IN FAMILY BUSINESS: MICRO PERSPECTIVE
6.1 VALUES IN FAMILY BUSINESS
6.1.1 The power of values in family business
6.1.2 Frequent family business values
6.2 BUILDING FAMILY BUSINESS CULTURE
6.2.1 How do family values become core values in family business culture?
6.2.2 Dilemmas in managing family business culture
6.3 FAMILY BUSINESS CULTURE AND VALUES AS COMPETITIVE ADVANTAGE
6.3.1 Managing family business culture
6.3.2 Family business culture as a source of competitive advantage
7 CULTURE AND VALUES IN FAMILY BUSINESS: MACRO PERSPECTIVE
7.1 FUNDAMENTAL MODELS OF CULTURE DIFFERENCES
7.1.1 Hall’s high context and low context culture
7.1.2 Hofstede's cultural dimensions’ theory
7.2 THE EVIDENCE OF CULTURAL DIFFERENCES IN FAMILY BUSINESS
7.2.1 German and Japanese family business and culture
7.2.2 Cross-cultural variations in family business
8.2 THEORETICAL IMPLICATIONS
8.3 PRACTICAL IMPLICATIONS
8.5 FUTURE RESEARCH DIRECTIONS
I would like to sincerely thank my supervisor Prof. Dr. Michael B. Hinner from the TU Bergakademie Freiberg for his valuable instructions, ideas, and guidelines he gave to me during the process of working on my Thesis, and for being available whenever I needed his advice
I would also like to thank my parents and my little sister for inspiration, support, and love. Without their support during my whole study program, I would not have achieved this great moment
A great thank you to my fiancée, Sebastian Roth, for a lot of support, patience, and care. I am truly thankful for all his time and efforts he put in to reading and commenting on my work
Lastly, my dearest thank to my friends, Valeria Grushetska, Olesia Pasika, and Julia Wagner for helping and advising me during my research process
Family businesses significantly contribute to the economy, employment rate, and development of every country around the globe. However, academic research on family businesses is relatively young and diversified. Therefore, this thesis conducts a report on the literature-based analysis on family business issues with a focus on culture and values in a strategic management perspective
The aim of this paper is to examine family businesses characteristics and to recognize their uniqueness in terms of culture, values, and behaviour. The main themes of the research are the following: in-depth analysis of prior family business research on family business definition issues, key family business features (in the contrast to non-family businesses), family business system characteristics, family business influence, family business organizational culture, and the influence of national culture on family business performance
The research methodology employs qualitative research including selection, discussion, and comparing relevant family business theoretical and empirical studies
The findings are used to extend the insights of the family business research on fundamental management and communication theories, and to provide a concept of family business organizational culture on the micro and macro level of analysis for potential future research in the family business practice
Keywords: family business, family business system, family influence, family business values, family business culture.
Table of figures
Figure 3.1 Comparing RoCE of family and non-family firms in industry perspective 18
Figure 3.2 Classic family business system 20
Figure 3.3 The Three-Circle Model of family business 21
Figure 3.4 The Three-Dimensional Developmental Model of family business 23
Figure 3.5 F-PEC Scale 35
Figure 4.2 Principal-agent relationship. 39
Figure 4.4 Prisoners’ dilemma in a choice of agent or stewardship behavior 42
Figure 4.6 Resource Management Model for Wealth Creation in family firms 51
Figure 5.1 The “Onion Diagram”: culture at different levels of depth 61
Figure 6.1 The Pritchard Family Auto Stores company’s logo 84
Figure 6.2 Four dimensions of managing family business culture 88
Figure 6.3 The Model of Family Business Culture as Competitive Advantage 90
Figure 7.1 Hofstede’s dimensions for Germany and Japan. 109
Figure 7.3 Cross-cultural variations in family business: CASE project 111
Table of tables
Table 3.1 65 family and 65 non-family performance and benchmark metrics 17
Table 3.2 Main differences between average family and non-family business 19
Table 4.2 Comparison of agency and stewardship theory 41
Table 6.1 Family business values.. 74
Table 7.1 High and low context culture characteristics 95
Table 7.2 Cross-cultural dimensions of family business from the CASE Project ...110
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Family firms are all around us. Many mom and pop stores around the corner are run by families. Even some of the big multinational corporations, for example Wal-Mart or BMW, are controlled by one or a few families.
However, researchers, practitioners, and journalists talk about family businesses as if they are a relic of the past: very risk averse, very traditional and going alone with a low level of innovation and professionalism. There is much empirical evidence in contradiction of this view—for instance the success of the German Mittelstand or the longevity of Japanese companies shows the propensity, success, and potential of family-owned companies.
The enhanced attention to the research is driven by the awareness of contribution family businesses make to economic and social development, and to distinguishing elements of family businesses among other forms of business, and the increased academic interest to non-financial resources as drivers of family business competitive advantage.
A family firm is the most common form of business entity in the world. The Family Firms Institute (2016b) collected key global statistic points (Global Data Points) that show measure of the impact and scope of family firms globally:
Family firms account for two thirds of all businesses around the world;
- 70%-90% of global GDP is estimated to be created by family businesses;
- between 50%-80% of jobs in most countries worldwide are created by family businesses;
- 85% of start-up companies are established within a family;
- in most countries around the world, family businesses are between 70%- 95% of all business forms;
- 65% of family businesses are looking for steady income growth over the next five years.
Family businesses show higher profitability in the long run and have more long-term strategic outlooks due to their main motivation which is to create a heritage for future generations (FFI, 2016).
The recent research on family businesses (Family Business Review 2010-2015, The SAGE Handbook of Family Business (2014), Handbook of Research on Family Business, (2013)) and annual surveys of PWC (Family Business Survey 2012; Family Business Survey 2014; Next Generation Survey of Family Business Leaders 2016, Ernst&Young (Family Business Yearbook 2014) showed that family-owned enterprises possess specific characteristics that distinguish them from non-family enterprises. These characteristics impact strategic decisions and overall family business performance. One of the most interesting characteristics is the synergy between family and business systems, which fosters the development of specific values and culture resulting in a strong influence on the performance of the business.
1.2 Research purpose and research questions
The two main purposes of this research are: (1) to explore the key characteristics of the family business considering economic and communication theories, and (2) to examine its culture and values on the micro and macro level of analysis.
To accomplish the main purposes of the research, the following research questions will be addressed:
1) What was the history and drivers of family business research development?
2) How to define family business and what research levels are considered in family business studies?
3) Which main characteristics do family businesses have?
4) Which economic and communication theories explain family business behavior and management patterns?
5) What values do successful family firms nurture?
6) How family-based values form family business culture and whether it can be a source of competitive advantage?
7) Does national culture influence family business practices?
1.3 Literature review
For the purpose of this research, the following family business literature is used: books on the family business issues, which include the SAGE Handbook of Family Business (Sharma, Melin, & Nordqvist, 2014), foundation of the Handbook of Research on Family Business (Poutziouris, Smyrnios, & Klein, 2006), foundations of Gersick, Davis, McCollom Hampton, & Lansberg (1997), Leach (2007) , related articles from the Family Business Review, the Journal of Family Business Strategy, Entrepreneurship Theory & Practice, Journal of Small Business Management and other related literature.
To create the family business culture concept, foundations in the fields of interpersonal and intercultural communication are analysing (e.g., Altman & Taylor (1973); Aronoff & Ward (2011) Carr & Bateman (2010); Chen & Starosta (2005); Denison (1990); Fielding (2006); Hall (1966); Hofstede (1980; 2001); Hofstede & Hofstede (2005); Schein (2004); Ward (2005) and others.
This research also considers actual PWC reports on family business trends (2012; 2014; 2016) and EY Family Business Yearbook 2014.
The methodology considers theoretical research based entirely on the literature analysis.
The research adopts thematic analysis, including selection and discussion of the selected theoretical and descriptive materials, as well as empirical studies, and detailed comparison of theories, approaches, and studies in terms of their applicability in the family business context.
To provide answers on the research questions, the qualitative approach of triangulation is used: mixing approaches and theories from different science (economic theories, organisational communication, and intercultural communication sciences) and linking them in one concept.
To make this research distinctive, theoretical, and empirical studies are discussed in line with the research questions, considering methodology used in that studies, context, and critique points.
1.5 Structure of the research
This research is divided into eight chapters. The first chapter introduces the background, the research purpose and research questions, the overview of the fundamental literature used for the purposes of the research, and methodology of the research. The second chapter presents the evolution of family business research, discussing widely used definition approaches, and reviewing commonly used levels of analysis in family business studies. Then, chapter three provides main characteristics of family businesses, adopting system and dynamic approaches, and conceptualising family influence within family firms. The fourth chapter discusses central economic and communication theories in the family business context. Afterwards, chapter five focuses on fundamental characteristics of culture and its influence on business performance. The analysis of culture and its potential to be a source of competitive advantage in the family business on the micro level (on the level of corporate culture) is conducted in the sixth chapter. Referring to cultural differences (Germany vs. Japan), chapter seven introduces the evidence of culture influence (on the macro level) on family business. Finally, chapter eight gives a summary of the research findings.
2 Family business as an object of scientific analysis
This chapter introduces family business as an object of family business research. Section 2.1 gives a short historical review of family business development roots, particularly in Europe. In Section 2.2 the analysis focuses on the progress of the academic research on family business, starting from the pioneering studies and moving to the recent foundations in this field. Afterwards, Section 2.3 discovers the challenges of defining family business and gives a working definition. The last section (Section 2.4) reviews the levels of analysis in family business studies and apply them to this research.
2.1 A historical background of a family enterprise
To begin with an analysis of family business studies it is important to review a history of family enterprises. This short historical review is primarily focused on European countries, particularly Germany. Scholars (Hofstede, 2001; Hofstede et al., 2010; Hall, 1976; Carr & Bateman, 2010; Gupta & Levenburg, 2010) emphasized culture differences between countries in terms of values, norms, patterns, and analysing, which influence our everyday life. However, the purpose of this historical view is to explore the key characteristics of the first entrepreneurial family, which caused the development process of family business.
In the historical framework, family firms are enduring institutions. Poutziouris, Smyrnios, and Klein (2006) emphasized that family firms’ development issues stand in line with socio-cultural advances, technological advances and new market rules associated with globalization.
The economic function of a family was a relevant topic at all times. Hauser (1975) pointed out in one of his historic notes that family and household were always considered to be viewed in the context of production and consumption of goods.
The first forerunner of an industrialized family enterprise was a family entrepreneur who expanded basic home production in the Middle Age between 1150 and 1350.
Family is a root of industrial development. For example, due to risk aversion and the willingness to travel around the world, the first salesmen could gain high status for their families for many further generations. They were treated as highly respected influential figures in society. In the time of early trade deals, trust based on strong family values could provide an opportunity to successfully conduct business overseas (Klein, 2004).
Rapid development of manufacturing in the 15th-18th century provided the growth of international trading. Aristocrats and their families were the first influencial founders of family firms. In the middle age, marriage was viewed within the framework of two concepts: the concept of wealth, where marriage was considered as an alliance of two honourable families, and the concept of social integration of two individuals. This marriage concept had a significant influence on children´s education. Its purpose was to protect the social position and to expand the family firm. It was the reason for treating family membership with a higher priority than individual skills (Klein, 2004) when talking about internal business culture.
In the 18th century it became hard to follow the codex of aristocrats, because the emergence of new alternative trends pushed the birth of industrialization. This era referred to entrepreneurship and family as the most important institutions for world economic development. Klein (2004) stated that “without a certain number of people, which were ready to take entrepreneurship risks, industrializing couldn’t take place” (p. 27). Becoming an entrepreneur was very attractive because it could ensure a wealthy life for a family, but first it could provide status and respect within society through successful family business performance.
To become an entrepreneur in the 19th century it was necessary to have following characteristics: education and knowledge (getting a good education was a luxurious good at that time); a certain degree of experience (for instance, travelling abroad for trading family enterprises); starting capital (often a small amount of money in a form of heritage for craftsman’s family); control and management functions were handled only through family members (in contrast to non-family members); loyalty had the same importance as know-how; entrepreneurs needed certain contacts, often achieved through marriage into certain social circles (Klein, 2004).
It is important to note that compared to today, internal family business relationships of early family enterprises were not well regulated. The idea of the father as “an authoritarian ruler” was popular amongst most of family firms till the first power regulations in Europe (Klein, 2004).
However, “paternalistic” family business culture made the family a central source of economic development. Family members were expected to set and expand a family enterprise, which would serve long-term family goals and its next generations. Therefore, family was a source of entrepreneurial activity (Kocka, 1982).
The entrepreneur of the 19th century was in the middle of economic and political development. The separation of the entrepreneur from his enterprise (ownership and management functions) was legally accomplished only in a few cases. This became possible only after regulations for corporations and private limited companies in 1870 and 1092 (Klein, 2004).
In this context Treue (1989) emphasized: “Who was able to separate ‘Dynasty’ Krupp from its plant?.. How could the position of Georg von Siemens without his enterprise be explained?.. If men are really ‘doing’ history, then only men from a certain social class, personalities with a certain background” (p. 14). Some of mentioned family firms exist successfully nowadays. According to the empirical study of Klein (2004), 72-75% of Germany companies (2000) with the annual revenue of more than 2 million DM, were family-owned companies, which were founded between 1870-1913.
World War I and World War II were huge challenges for all family and non-family firms. Under conditions of higher capital needs, many family firms were transformed into corporations.
Golo Mann (2001) pointed out in Deutsche Geschichte des 19. Und 20. Jahrhunderts that family lost its importance in the process of economic rebuilding after World War II (as cited in Klein, 2004). But Klein (2004) argued that due to “antique” family values, family enterprises could have an advantage nowadays. Moreover, Klein stressed: “family enterprises, which would like to be active in the future, should provide familiar performance, that is rather untypical today” (p. 37).
Therefore, this research is focused on the scientific aspects of culture and values in family business and provide a multidimensional concept for managerial context.
2.2 Evolution of family business studies
The family business research lies between different research fields including anthropology, evolutionary studies, family science, economic theory, organizational studies, sociology, and psychology (Hoy & Sharma, 2006).
Referring to Hoy and Sharma (2006), the evolution of family business research encompasses four periods: era of rugged pioneers (1950-1960), the emergence of practitioner-consultants (1970s), the decade of institutions building (1980s), 1990s and beyond—growth escalation.
1) 1950-1960 - era of rugged pioneers
Family business research as an academic research field is relatively young. Hoy & Sharma (2006) called the first academic efforts in this field era of rugged pioneers, which took place between 1950s and 1960s. The first roots of family business studies reach the doctoral dissertation of Cadler (1953), which focused on the management problems of small family firms in North America, and Christensen’s book Management Succession in Small and Growing Enterprises (1953) published by Harvard University Press.
The development of family business research as an autonomous academic field began with Donnelley`s article “The family business” published in Harvard Business Review in 1964. Donnelley emphasized some specific features of family businesses such as family members` involvement, management board specific, and succession process.
The period between the 1950s and 1960s is characterized by the negative notion of family business in both higher education and business communities. For example, family business was perceived as less professional than non-family business (Hoy & Sharma, 2006). The existing stereotype for many family-owned companies was associated with nepotism and other negative connotations (Hoy & Sharma, 2006).
Students in business schools were taught to use analytical and rational methods for decision-making process in management. They were encouraged to focus on objective data and to apply quantitative analysis tools, which should be used to keep emotions and affective analysing under control. Family issues were perceived as irrelevant variables in business management, which must be excluded from decision making process (Hoy & Sharma, 2006).
Thus, family business research originated in random revolutionary studies that contrasts commonly accepted managerial principles of that time.
2) 1970s - enter practitioner-consultants
Some practitioners and consultants began to offer training and development programs for family businesses. They presented disciplines such as law, accounting, psychology, financial planning, general management, and other disciplines with a strong focus on family business. Many consultants published books with a strong focus to promote consonant services among family business owners.
In this period, interested scholars started early efforts on building research communities in family business field. Many researchers referred to the issues of family business success performance, family-ownership management, succession management, etc. (Hoy & Sharma, 2006).
3) 1980s - the decade of institutions building
In the 1980s, attention to family business as a subject of academic research increased. Popularity of books on family business issues caused the growth of research attention. One of the popular topics was interactions between families and firms that they owned and/or managed (Ward, 1986). First academic publications were generally focused on practitioners as a target group rather than on academic communities.
American universities offered a few courses where students had an opportunity to get basic knowledge in the fields of family firm’s ownership and management (Hoy & Sharma, 2006). In 1988, Nation’s Business magazine identified 20 universities in the USA, which established family business programs and courses (Hoy & Sharma, 2006). Many universities did it under the external pressure of entrepreneurs and special forums, where scholars, consultants and family business runners could meet and discuss family business topics. Such forums began to spread across the USA and into other countries. However, as was already noted above, family business educational programs were initially targeted towards business owners and their immediate family members (Hoy & Sharma, 2006).
The next important event of this period was the First Family Business Research Conference in the University of Southern California in 1985. Afterwards, one of the most influential institutions in family business, the Family Firm Institute (FFI), was founded (1986, USA). Members of the FFI are people from different occupation areas: consultants, attorneys, accountants, therapists, financial advisors, academics, and other professionals who are related to family firms. The FFI provides research-based learning and relevant tools for all the members (FFI, 2016).
After years of improvements, family business research reached its breakthrough with the release of the Family Business Review (1988) by the FFI. This is the first regularly published self-contained journal in family business (Harms, 2014).
4) 1990s and beyond - growth escalation
In the 1990s research on family business was rapidly growing. Scholars set their research focus on family business problems in various nations (e.g., Mass Mutual American Family Business Survey, National Family Business Survey in the USA, etc.). Entrepreneurship associations, for example the United States Association of Small Business Enterprise (USASBE), started developing divisions specialized on family business issues (Hoy & Sharma, 2006). Scholars from Europe and America (Bornheim, 1997; Handler, 1989; Sharma, 1997; Thomas, 1999) began implementing empirical methods in the family business research (as cited by Hoy & Sharma, 2006). As some top-ranked journals published family business research articles, entrepreneurship journals on special issues such as Entrepreneurship Theory and Practice and Journal of Business Venturing appeared.
In 1995 another important research event occurred—the FFI created a “Body of Knowledge” (BOK) which “is a peer developed distillation of what competent family business advisors, consultants and educators (collectively ‘family business professionals’) must know how to work effectively in the field of family business” (Hoy & Sharma, 2006, p. 20).
In the past decade, close interactions between scholars and family business leaders provided the background for fundamental literature in this field. Sharma, Melin, and Nordqvist (2014) pointed out that family business centres and professional associations play an important role in the creation of basics for family business studies. To provide avenues for developing close interaction between scholars and practitioners, business communities sponsored most of these institutions.
In March 2013, the Family Business Review launched the session “Call for Research” with the purpose of establishing the mechanism for practitioners to share ideas on topics they found problematic in practice with the lack of academic support (Sharma et al., 2014). Annual research conferences such as Family Form Management Research, Family Enterprise Research Conference (FERC), FFI Global Conference, International Family Firm Enterprise Research Academy (IFERA) made it possible to facilitate interactions between schools, scholars, and practitioners.
The most recent collection of foundations in family business research is SAGE Handbook of Family Business (Sharma et al., 2014) which addresses the current status of family business knowledge and research questions of today as well as trends in the theory and practice. The authors (Sharma, Melin, & Nordqvist) determined three trends of current family business research: (1) continued efforts to build institutions and excellence simultaneously; (2) moving the field from generalization to specialization on all its dimensions; (3) the global interest in research, education, and advising of family enterprises.
2.3 Defining family business
Defining family business is a challenging task for many researchers. As, Sharma (2006) pointed out, scholars have made numerous attempts to articulate conceptual and operational definitions of what a family firm is. Various scholars reviewed existing definitions; others made efforts of ideas’ consolidation and conceptualized another definition of family enterprise. Nevertheless, there is still no consensus on the widely-excepted definition of family business (Sharma, 2006; Colli & Rose, 2008; Harms, 2014).
Donnelley (1964), who was already mentioned as a pioneer in the family business academic research, defined family business as follows:
“A company is considered as family business when it has been closely identified with at least two generations of a family and when this link has had a mutual influence on company policy and on the interests and objectives of the family” (p. 94).
Astrachan, Klein, and Smyrnios (2002) conducted family business literature review and found that family companies “are mainly defined depending on the categories content, purpose and form” (p. 49). They emphasized that family values and commitment in family business (soft factors) refer to F-PEC (Family-Power Experience Culture) Scale, which provides a method of operationally measure family influence in family firm.
Based on the F-PEC Scale and empirical research among German companies Sabine Klein (2004) gave the following definition:
“Family firm is a firm, which is influenced by family. Family influence on the firm should be addressed when a family entirely dominates in terms of one of the influential factors such as equity, control, or management, or when less influence of one factor will compensated by another factor. The necessary requirement is a share of a family on family firm`s own capital” (p. 18).
Habbershon and Williams (1999) developed a familiness concept, which refers to a unique set of resources that results from interactions among family owners, family members and the business.
Both approaches—F-PEC Scale, and familiness concept—present theoretical concepts of defining family business based on ideas from Chua at al. (1999) with adding new theoretical aspects (Harms, 2014). Further detailed explanation of the F- PEC Scale is discussed in the Section 3.3, the familiness concept—in the Subsection 4.2.1.
Chua Chrisman, and Sharma were the first authors, who in 1999 proposed the systematic approach to define the object of investigation by analysing previous studies that used separate approaches in defining family business (components approach - focus on separate components of family business entity, and essence approach - focus on family entity a unique system with own culture). Therefore, they developed the integrated definition of family business:
“… a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by
members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families” (Chua et al., 1999, p. 25).
However, reviewed definitions of Donnelley (1964), Chua et al. (1999) and Klein (2004) seem to be very difficult to operate with.
The use of different definitions is a major problem in family business research. It makes the comparability of the results difficult in studies, which analyze related topics (Kraiczy, 2013).
Dyer (2006) argued that there are two ways of defining family business in family business research: “rather subjectively, basing firm classification on whether the respondent believed the firm was a ’family firm’”, or objectively, focusing “on more objective criteria such the percentage of family ownership or the number of family members occupying management or board positions” (p. 254). Dyer (2006) claimed that some studies had included samples of family firms that had not been included in other studies. Furthermore, sample size, type of firm, and performance measures also varied widely between studies.
Chrisman, Chua, and Sharma (2005) suggested that all family business researchers should start with a common family business definition, that “must be based on what researchers understand to be defined the differences between the family and nonfamily businesses” (p. 557). But neither the editors (Chrisman et al., 2005), nor other scholars in the family business field have reached the consensus on the widely-excepted definition.
Reviewing definitional approaches, recent global family business surveys should not be denied. One of such comprehensive surveys is PWC Family Business Survey (2014), which conducts the analysis of different issues and trends of family businesses worldwide. On the purposes of this survey a family business is defined as a business where:
“1. The majority of votes are held by the person who established or acquired the firm (or their spouses, parents, child, or child’s direct heirs);
2. at least one representative of the family is involved in the management or administration of the firm;
3. in the case of a listed company, the person who established or acquired the firm (or their families) possess 25% of the right to vote through their share capital and there is at least one family member on the board of the company” (PWC Family Business Survey, 2014, p. 2).
The PWC approach combines elements of ownership and control. But just looking at ownership share or management composition can lead, as Leach (2007) emphasized, to an inadequate picture and the wrong interpretation.
In one of the interviews concerning the question how to define family business, Nadine Kammerlander, international specialist in the field of family business innovation, governance, and succession, pointed out that it is one of the mistakes to differentiate between family and non-family firms when defining family business (EMLYON Business School & EIASM, 2015). She suggested using the term family influence, which is a continuous measure ranging from 0 to 100. There are non- family firms on one side and 100% family-owned firms on the other. But there are also a lot of firms in-between, which are, for example, 25% family-owned, or which have family culture, but nobody from the family is in a management position. From Kammerlander’s point of view, it is important to look at firms that have several aspects of family firms but not all characteristics of family firms (EMLYON Business School & EIASM, 2015).
Nevertheless, the reason for growing attention to family business research is the focus on several characteristics that distinguish family firms from non-family firms. These characteristics are explored in the next chapter of this research.
It is necessary to give a working definition of what is meant by family business in this research. Referring to the F-PEC approach and familiness concept, which are one of the main issues of this research, and recommendations of Leach (2007), family business can be defined in the following way:
“family business is a firm (in most of cases small or medium enterprise), where family and/or family relationships has a significant influence on (through ownership, management positions and/or voting shares) on business operations, and that perceives itself to be a family business” (own interpretation).
This research is focused on the so-called family effect (Dyer, 2006) of family influence (Aronoff & Ward, 2011; Astrachan, 1988) in family business on different levels of analysis.
2.4 Levels of analysis in family business studies
Sharma (2004) indicated four levels of research analysis in family business literature: (1) individual, (2) interpersonal/group, (3) organizational, and (4) societal.
The individual level refers to stakeholders1. In the family business context Sharma (2004) distinguished between internal and external stakeholders. Employees, owners, and family members are internal stakeholders. Stakeholders who are not linked to a family firms either through employment, ownership, or family membership, but influence family firm, are referred to as external stakeholders.
Family business research is primarily focused on internal stakeholders, as they represent special features of a family business. Sharma (2004) found that “at the individual level of analysis, family business studies have devoted varying attention to four categories of internal stakeholders: founders, next-generation members, women, and nonfamily employees” (p. 10).
The interpersonal/group level covers three topics which have been examined in family business studies: (1) nature and types of contractual agreements, (2) sources of conflict and management strategies, and (3) intergenerational transitions.
Concerning the first topic, nature and types of contractual agreements, there are two different perspectives on what motivates family business members to follow common interest as opposed to self-regarding acts: agency theory (self-regarding, egoism) and stewardship theory (other-regarding, altruism) (Sharma, 2004).
Family and business, which are in their original forms different, create in the family business context a variety of misunderstandings and conflicts. Family business research develops conceptual models to understand the nature, causes, and positive and negative aspects of family business conflicts (Sharma, 2004).
Intergenerational transition refers to succession issues in family business. Researchers emphasized the importance of this topic on the early stage of family business research development. Mostly discussed issues of succession are phases of succession process, differentiating between successful and unsuccessful successions, factors that contribute to effective successions, and best family business practices (Sharma, 2004).
The organizational level of analysis is mainly focused on the identification and management of resources in family companies. In this context, there are studies commonly called “the resource-based view” (e.g., Bau, 2014; Habbershon & Williams, 1999), which draws attention to the organizational level of family business research and explores family firm’s internal unique resources that can be “used either as a source of strategic competence (distinctive) or encumbrance (constrictive) by family firms” (Sharma, 2004, p. 21).
In this context, Sharma (2004) argued that scholars should pay more attention toward the organizational level, especially in terms of the following aspects: mechanisms family firms use to develop, communicate, and reinforce values and organizational culture across generations; strategies used to sustain long-term relationships with external stakeholders; ethical dilemmas human resource management strategies and used for family and non-family executives.
The societal/environmental level refers to the role of family firms in certain society. The main purpose of this research level is to measure the extent of economic importance of family firms in various nations. This level focuses on economic, social, institutional, and fiscal systems in different countries and their influence on family business.
In the framework of these research objectives, the research process of exploring family business covers different levels. The first is the individual level - exploring characteristics of family firm’s internal stakeholders (family members, owners, and non-family members), and the essentials of family influence (Chapter 3). Analysis on the interpersonal/group level refers to specifics of family business relationships in terms of agency theory, stewardship theory, and communication theories (Chapter 4). Organizational level - resource-based view with emphasizing elements that builds a family-based organizational culture (Section 4.2), a detailed analysis of family business values as underlying elements of family business culture (Chapter 5-6). Societal/Environmental level shows the influence of macro (national/regional) culture on family business (Chapter 7).
3 Understanding key characteristics of family business
The purpose of this chapter is to provide the analysis of fundamental characteristics of a family business. The remainder is structured as follows: To begin with key differences between family and non-family businesses are introduced (Section 3.1). Section 3.2. conducts the system and the developmental approach, including the analysis of a family firm as a system of three subsystems - family, ownership, and ownership business. Then, the aspects of family influence in family business are examined (Section 3.3).
3.1 Main differences between family and non-family business
Despite Kammerlander’s critics (EMLYON Business School & EIASM, 2015) related to the question of defining family business, it is necessary to emphasize how family businesses differs from non-family businesses.
Carr & Bateman (2010) conducted interesting research on the question of whether there are differences in performance between family and non-family firms. They compared and contrasted performances of 65 of the world’s largest family firms against a selected peer group of non-family firms. The researchers took these key performance indicators ratios: average Return on Capital Employed2 (RoCE), sales growth, average profit margin, average R&D/sales, capital expenditure/sales, sales and general administrative/sales. All performance metrics were analyzed in terms of the 20-year period between 1983 and 2003.
For the purposes of this study family businesses were defined in line with Ward (1986) as a firm “whereby a family has to own over 50 percent of the business in a private firm or more than 10 percent of a public company” (as cited by Carr & Bateman, 2010).
The researchers set the following hypotheses:
“(H1a) Family businesses are outperformed by non-family businesses on a worldwide basis, in terms of sustained profitability and sales growth. (H1b) This performance relationship worldwide is accentuated at higher levels of family control. (H2) This performance relationship is substantially the same across many regions and clusters of the world, and beyond those most studied such as the USA and Continental Europe” (Carr & Bateman, 2010, p. 244).
In other words, they explored when and where family business or non-family business win out; whether non-family firms win out in just Anglo-Saxon countries or this is different in Continental Europe and Asia; or how the relationship varies in different cultural clusters (Carr & Bateman, 2010).
The results of this empirical study showed that family businesses perform at least as well as non-family business in terms of profitability, R&D/sales, and sales & general administrative/sales measures. Averaged RoCEs, sales growth, and recent capital expenditure/sales figures were consistently higher in the examined period (Table 3.1). This finding means rejecting H1 which underlined non-family business as outperforming a family business.
Table 3.1 65 family and 65 non-family performance and benchmark metrics
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Note. Adapted from “Does culture count? Comparative performances of top family and non-family firms” by C. Carr and S. Bateman, 2010, International Journal of Cross Cultural Management, 10 (2) , p. 245. Copyright 2010 by SAGE Publications.
Moreover, scholars identified sectors where family or non-family businesses are supposed to be successful (Figure 3.1). According to their findings, non-family businesses won out in pharmaceuticals and the food industry due to the high R&D/sales ratios. Family firms won out in all other sectors including retailing and services. Carr & Bateman (2010) emphasized that the H1a would be better confirmed with a narrower range of sectors, considering that some sectors, for example pharmaceuticals, require more R&D investment.
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Figure 3.1 Comparing RoCE of family and non-family firms in industry perspective
Adapted from “Does culture count? Comparative performances of top family and non-family firms” by C. Carr and S. Bateman, 2010 , International Journal of Cross Cultural Management, 10 (2), p. 247. Copyright 2010 by SAGE Publications.
Referring to ownership-performance relationship, the researchers also rejected H1b. They confirmed some performance fluctuations at different levels of ownership, but not the sharp fall with full family ownership (Carr & Bateman, 2010).
Nevertheless, they did not find the empirical evidence to support the assumption, proposed in previous studies, that performance first increases with increasing family ownership (until approximately one-third ownership), but then decreases (Carr & Bateman, 2010). Mentioned findings showed positive performance relationship at higher levels of family ownership. But Carr and Bateman (2010) emphasized that the results are “still somewhat inconsistent” (p. 257).
The third finding refers to the performance relationship in the cross-cultural perspective. Since the North American family business research had been widely spreading to other countries, its main assumptions and findings became predominant in this research field. Carr & Bateman (2010) suggested to focus on the country context and cultures when studying family business. They stated that there were considerable differences in the researched performance relationships in different regions of the world. This statement is the rejection of the H2 hypothesis. For example, they could identify differences in RoCEs in Europe and Asia. Sales growth ratios were essentially different in America and Europe. Chapters 5-7 conduct the research on culture and values in family business on the micro and macro cross-cultural level.
Based on analysis of family business across Europe, Irene Mandl (Austrian Institute for SME Research, 2008) underlined the main differences between the average
family and average non-family business. She examined average firms but noted that “in practice more mixed cases are prevalent” (p. 70).
Main differences between average family and non-family business
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Note. The table represents the European view on family business. The Austrian Institute for SME Research remarked that “family and non-family businesses constitute two extreme positions in a continuum of enterprises…. In practice, each of those two enterprise types is very heterogeneous and may be further differentiated by size class, sector of activity, legal form, etc.” (Mandl, p. 70). Adapted from Overview of Family Business Relevant Issues by I. Mandl, Austrian Institute for SME Research 2008, p. 70. Copyright 2008 by KMU FORSCHUNG AUSTRIA.
Table 3.2 emphasizes that family business has specific internal characteristics such as focus on family and non-economic goals, long-term orientation, generations transfer, social and cultural assets, trust, involvement, value-driven management, etc. These characteristics will be explored in details in the following parts of this research.
Peter Leach, the author of the book Family Businesses: The Essentials (2007) emphasized that family businesses are unique because of the people involved in them, and relationships which they have amongst each other. Another point that set family businesses apart from non-family enterprises is the way in which family businesses are organized and managed.
3.2 Family business system in a dynamic perspective
Theory and practice indicate that family firms consist of a complex set of elements that impact strategy processes and performance outcomes (Habbershon, Williams, & MacMillan, 2006). “A helpful framework for looking at the relationship between the family and the business is to think of the family as a system and a business as a system” (Leach, 2007).
Before analysing a classic system approach in a family business, it is necessary to specify a definition for system. A broad definition of system is “a set of connected things or devices that operate together” (Online Cambridge Dictionary, 2016a). In a business context, a system is defined as “a set of detailed methods, procedures and routines created to carry out a specific activity, perform a duty, or solve a problem” (Online Business Dictionary, 2016a). Therefore, a family business system is supposed to be a connected set of subsystems or units, which tend to create specific procedures, routines (viz., organizational culture) in order to achieve family business goals.
Towards foundations of Gersick et al. (1997), research on the family business system began in 1960s and 1970s in line with general family business research development (see Section 2.2). First scholars in this field focused on classical problems of the family business, such as nepotism, generational and sibling rivalry, and unprofessional management. They developed the first conceptual family business system model.
The fundamental conceptual model suggests that family business is made up of two overlapping subsystems: family and business (Figure 3.2).
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Figure 3.2 Classic family business system
Adapted from Family Businesses: The Essentials by P. Leach, 2007, p. 39. Copyright 2007 by BDO Stoy Harward LLP.
The model in Figure 3.2 emphasizes characteristics of each system (subsystem) and defines relationships between individuals in each system (Leach, 2007). Gersick and his colleagues (1997) stated that each of the two circles of the model has its own norms, values, rules, and structures. While meeting family needs, identity, income challenges, family enterprise must deal in line with business trends of business practices. In the process of fulfilling obligations by same members in both circle (e.g., as father in the role of CEO), conflicts may appeal.
Researchers use this classic two-subsystems concept nowadays in their analysis of business strategy, family business competitiveness, dynamic, etc. Consultants and practitioners also use it for clarifying factors of an individual’s analysing and decisions in the context of the family business (Gersick et al., 1997).
Referring to the fact of ownership and management separation (already described in the historical part—Section 2.1), there is a need of critical distinction between ownership and management subsystems within the family business circle. This should provide a more accurate analysis of the family business.
John Ward (2004) , who is an active researcher, speaker, and consultant in the field of family business, was the first scholar who drew attention to the issues of ownership in family business system (Leach, 2007).
Adding a new subsystem to the classic model “sheds useful light on the dynamics of what is happening in family businesses, leading to the tree-circle model, in which the interdependent but overlapping and interlocking subsystems comprise the family, ownership and the business” (Leach, 2007, p. 41).
Two scholars from Harvard Business School, Renato Tagiuri and John Davis (1996), developed the Three-Circle Model (Figure 3.3) that “quickly became, and continues to be, the central organizing framework for understanding family business systems” (Davis, n.d., para. 1).
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Figure 3.3 The Three-Circle Model of family business
Adapted from Generation to Generation: Life Circles of the Family Business by K.E. Gersick, J. A. Davis, M. McCollom Hampton, and I. Lansberg, 1997, p. 6. Copyright 1997 by the Owner Managed Business Institute.
Gersick et al. (1997) supported the argument of Tagiuri & Davis, “that many of the most important dilemmas faced by family businesses - for example, the dynamics complex, cousin-controlled family businesses - have more to do with the distinction between owners and managers than between the family and business as a whole (p. 5).
The Three-Circle Model (Figure 3.3) makes it possible to analyze family business issues related to individuals not involved in the business, or managers without controlling shares. The Model has three circles: family, business, and ownership. Any individual involved in a family firm can be positioned in one (and only one) of the seven sectors. These sectors are formed by the overlapping circles of the main three subsystems (Gersick et. Al., 1997; Leach, 2007). Furthermore, the model is crucial for analysing family businesses that have grown to become large companies with external investment (external shareholders).
Sectors 1-3 in Figure 3.3 includes individuals who have only one connection to a family firm. As an example, Gersick et al. (1997) described a shareholder (Sector 2) who is neither a family member nor an employee or a family member (Sector 1), and who is neither an owner nor an employee. Therefore, even family members who are not involved in the business are supposed to have indirect influence on the family firm (through family relationships, potential succession, etc.), and should be considered while analysing the business.
Individuals who have more than one connection to the family business are in one of the overlapping sectors.
Sector 4 indicates members within ownership and family circles - family business owners are not involved in business work routine.
Sector 5 refers to owners who work in the family firm but are not family members. Sector 6 includes family members who work in the business but do not own shares. Finally, the centre of the system, sector 7 in a family business specifies owners who at the same an employee and a family member.
The Three-Circle Model is a useful tool for identifying and clarifying family business issues from different perspectives, understanding motivation of family business members (Leach, 2007), and recognizing sources of interpersonal organizational conflicts in family firms (Gersick et al., 1997).
Family firms are aging and changing as every system and organization: “a family made up of a young couple and their six-month-old baby is not the same as a family with teenagers, or a family with elderly grandparents, adult off-spring, and a new generation starting school” (Gersick et al., 1997, p. 15). Similarly, it happens within the family businesses, which are typically affected by inevitable aging of people in each of three subsystems. The Three-Circle Model, as Gersick et al. (1997) and Leach (2007) pointed out, is a static model, which means it does not consider
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Figure 3.4 The Three-Dimensional Developmental Model of family business
Adapted from Generation to Generation: Life Circles of the Family Business by K.E. Gersick, J. A. Davis, M. McCollom Hampton, and I. Lansberg, 1997, p. 17. Copyright 1997 by the Owner Managed Business Institute.
dynamic perspective of each subsystem.
By integrating dynamic dimensions such as time and change, Gersick et al. (1997) developed an extension of the Three-Circle Model. The resulting model was called The Three-Dimensional Developmental Model of family business (Figure 3.4).
The next subsections analyze each of the three subsystems, employing the dynamic approach of Gersick et al. (1997).
3.2.1 Family system
Colli and Rose (2008) emphasized that family business “is a cultural as well as a purely ‘ownership-related’ concept and understanding the family and its objectives is crucial to the understanding of the family firm” (p. 196).
The main topic of family business studies is the influence of a family on a family business. To perform a family system analysis within the family business more clearly it seems to be important to give a definition of family, which is relevant for family business context.
Anthropologists (Samovar, Porter, McDaniel, & Roy, 2015) refer to family as a social institution that allows its members to meet basic needs as family members learn about cooperation, identity, values and behavior that are important to the culture they were born in. A family is an instrument in “teaching young people about their identities, how they fit into their culture, and where they find security” (Samovar et al., p. 69-70). They also counted family to the three most influential social organizations in every society (family, state, and religion).
The Online Oxford Dictionary (2016a) defines family as “a group consisting of two parents and their children living together as a unit”.
Considering that not every family owns a business, Klein (2004) discussed the terms “nuclear family”, “institutional family”, and “dynastic family” and based on this used the term “entrepreneurial family” in her research.
The prevailing definition of a nuclear family 3 in academic literature describes only parent-children relationships and ends when children move out of a parents’ house (Klein, 2004).
However, from Klein’s point of view, this assumption does not explain the whole phenomena of family, because children still belong to the family after moving out of the parents’ house as well as after parents pass away. Therefore, she suggests a broader definition - institutional family, which includes at least one nuclear family and has the social purpose to meet social needs and create demand for education, health insurance, and elderly care. Family loyalty, mutual commitment, family-based values, and norms create a unique traditional, cultural background— “family culture” (Klein, 2004, p. 58). Therefore, institutional family might include parents, children and also other relatives.
Moreover, from the institutional view, family can be explained as a personality whose characteristics shape a relevant influence factor on the whole family business system (Klein, 2004).
Dynastic family is a group of people which consists of one or more nuclear families and other individuals, and has following characteristics: it derives its origin from a certain nuclear family, it establishes or keeps through generations family assets, and it has significant influence on society (Klein, 2004).
Thus, the entrepreneurial family has characteristics of three above discussed terms: nuclear, dynastic family and institutional family. Otherwise, when only nuclear family characteristics are considered, family enterprise “dies” with the death of nuclear parents (Klein, 2004).
Entrepreneurial family is also an educational institution for next generations, particularly in communication and conflict management topics within the family (Klein, 2004).
Consequently, family system or subsystem describes an entrepreneurial family with its history and culture.
The family system has “a remarkable durable structure, but that is not to say that the structure of the family in not changing dramatically” (Gersick, et al., 1997).
Referring to the Three-Dimensional Developmental Model, Gersick et al. (1997) emphasized that a family developmental dimension, determined by the family axis in Figure 3.4, describes the development of the family over time. “It is different from other two axes (ownership and business) … because it is driven by the biological aging of family members, it is more of a one-way street than others” (Gersick et al., p. 61).
Researchers (Gersick at al.,1997) explored the structural and interpersonal development of the family through the issues of marriage, parenthood, adult sibling relationships, in-laws, family roles, family conflicts related to business, and communication patterns.
Gersick et al. (1997) identified four sequential stages on the family developmental axis (Figure 3.4):
1) the Young Business Family,
2) the Entering the Business Family,
3) the Working Together Family,
4) the Passing the Baton Family.
The scholars analyzed each stage by using histories of business-owning families of all sizes and types in the framework of developmental theories.
1) The Young Business Family Stage covers the period of intense activity of the family. It refers to the paternal generation under forty years old with children (if there are any) under eighteen. In the language of development theories, it encompasses the following life stages: courtship, marriage, settling down, birth of the first child, birth of the other children, and the early school years of children (Gersick, et al., 1997).
On this stage of family business development, the family faces the following challenges:
- Creating a workable “ marriage enterprise ” - the process that encompasses early years establishing relationship with a spouse or intimate partner and early years of children. Gersick at al. (1997) defined a marriage enterprise “as the system that the couple built to accomplish its dream of partnership” (p. 66).
- Making initial decisions about the relationship between work and family. For a young family, it is difficult to balance work and family simultaneously. To avoid a conflict and confusion of interests, the family needs a strong vision, identity in the family business and defining their role in it (Gersick et al., 1997).
- Working out relationships with the extended family refers to a defining status and the role of a new family in extended families of both spouses. It depends on the financial circumstances of a new family business, power structure and family business culture.
- Raising children. Most couples who decide to become parents would agree that children change everything: vision of the future, priorities, and values. The impact on business of becoming parents will depend on the decisions related to balancing work and family that were made in the marriage enterprise earlier.
2) The Entering the Business Family Stage determines a period when each generation is fifteen years older than in the previous stage: a senior generation between thirty-five and fifty-five, junior generation in teens and twenties. On this stage the parents’ task is to nurture the movement of the younger generation out of childhood into their lives as adults.
Sometimes, family enterprises set entry criteria and career paths for the next generation that faces a choice whether to join the family firm or not. They (the next generations) require clarification of future opportunities in family business. If the business is small, founders (parents) may face a recruitment challenge (in the case when children decide not to manage business in the future). If the business is large and successful executive positions are more likely to be perceived as attractive for future generations. In this case, running a family business seems to be the best career opportunity for children (Gersick et al., 1997).
Scholars (Gersick et al., 1997) defined the following challenges on this stage:
- Managing the midlife transition or midlife crisis refers to a period of early forties, when adults experience self-assessment.
- Separation and individuation of the younger generation. As a rule, children move out of the parental home. Different families have different visions of the optimal level of generational indulgence. In different cultures, there are different models for appropriate relationships between the generations.
- Facilitating a good career process for initial career decisions refers to the issues of succession planning. Parents face the uncertainty of whether the family business will continue for the next generation. They need to decide whether their children will run the business, or participate only as owners, etc.
3) The Working Together Family Stage is characterized by the peak of the senior generation (between fifty and sixty-five years old) and its authority in the business subsystem. Junior generations (between twenty and forty-five) decide whether to work inside or outside the business; show its potential leadership, and competitive value in comparison with siblings without overly competing with them.
The key challenges on this stage are:
- Fostering cross-generational cooperation and communication. Creating the linking mechanisms that allow the family system to continue its operations in the circumstances of dramatic decentralization and diversification is a very important process where communication mechanisms play a crucial role. Honesty, openness, and consistency are central values of this stage of family subsystem development.
- Encouraging productive conflict management. There are productive and destructive type of conflicts. The challenge for the family business at this stage is to create some level of conflict that is valuable and constructive for further development (Gersick et al., 1997).
- Managing the Three-Generation Working Together Family refers to the increased average of life expectancy that may provide a mix of three active generations in family business at the same time. It is more difficult to manage such intergenerational dynamics. On the other hand, “frequent cross- generational contact and true interdependence may enrich the lives of children with the wide range of observable, meaningful, and varied role models” (Gersick at al., p. 91).
4) The Passing the Baton Family — the stage of the succession issues. Family succession is “the passing of one person's assets and role in the family onto an heir” (Investopedia Online Dictionary, 2016a). KPMG clarified family business succession as “the process of transitioning the management and the ownership of the business to the next generation of family members” (Walsh, 2011).
Family faces issues of aging and intergenerational relationships. Gersick et al. (1997) specified senior generations in the age sixty and above . In this stage of development succession for family business usually means “the clash of two opposite forces: the senior generation’s difficulty leaving, and the junior generation’s difficulty waiting” (Gersick et al., 1997, p. 95). This provide following challenges:
- Senior generation disengagement from the business. The main task for the family is to accept and to acknowledge that the stage has been reached and to consider its own transition, which cannot be avoided. For the senior generation, it means losing top leadership status (Gersick et al. (1997)— “heroic stature” or “heroic mission”), power, and other rewards. They may resist this process. Both generations may have difficulties to think and to talk about retirement and the senior generations disengagement from the company.
- Generational transfer of family leadership can occur suddenly or gradually. It depends on situational and individual characteristics. This process refers to the complex of emotional issues associated with the leadership and power transfer.
Gersick et al. (1997) summarized the dynamic analysis of family axis (Figure 3.4) with the following argument: since the junior generation passes Young and Entering the Family Business stages, the business system has subgroups at more than one point of the family axis. Therefore, family circle renews itself.
3.2.2 Ownership systems
As was mentioned above, the ownership subsystem plays a crucial role in the family business system when it comes to mixed ownership of family members and external shareholders.
The second developmental dimension describes ownership development over time. The dimension distinguishes between different forms of ownership which provide fundamental differences in every aspect of the family business (Gersick et al., 1997).
The ownership axis (Figure 3.4) contains three stages:
1) The Controlling Owner companies,
2) The Sibling Partnerships,
3) The Cousin Consortium.
The ownership dimension “strives for useful simplicity” (Gersick at al., 1997, p. 18). For this reason, it does not consider the complexity of companies owned by family members, trusts, external shareholders, and other companies. It creates the background for direction of family business development and does not postulate that every family firm follows this sequence. Many companies are founded and owned by combination of more than one generation, other organizations, and individuals. Nevertheless, these “three developmental stages still explain most of the variance across the widest range of companies” (Gersick et al., 1997, p. 19).
Each stage, as in the previous dimension, has its own specific characteristics.
1) The Controlling Owner Company is usually controlled by one owner or a married couple. Gersick at al. (1997) called such companies “entrepreneurial family businesses” (p. 32). If there are other external owners, they only take holdings and do not participate in ownership authority. The board of directors, if those exist, often tends to be composed entirely or primary of family members, and is usually “something of illusory entity” (Leach, 2007, p. 44). Because of the dominant position of the owners, board meetings do not serve as main purpose for discussions, forums, and debates for common business decisions (Gersick et al., 1997).
On this stage the young family enterprise may have the following challenges:
Capitalization in first-generation firms is usually ensured by the savings of family member and/or capital from friends and other individuals.
Balancing unitary control with input from key stakeholders. Controlling owner companies can benefit from clarity and efficiency that comes from a clearly identified single leader. On the other hand, family businesses may have risks regarding the success or fail “on the competence, energy, versatility, and luck of the single individual” (Gersick et al., p. 36). Sometimes, founders become overinvolved in a business and tend to search for advice only in family members’ crises. In such cases, family businesses can face a problem, called in communication science “group thinking” (see Subsection 4.4 for communication theories), which can hinder further development of the firm.
Choosing an ownership structure for the next generation is the most critical issue in family business. Family owner-managers often count on their children to run the business. If the next generation decides to join the family business, parents (founders and owners at the same time) have to answer many challenging questions such as: “What role is the next generation expected to play? What will they paid and how will their performance be valuated? … How should the future leader be selected? ... Who should inherit the shares in the business?” (Leach, 2007, p. 45). This list of questions can be continued. If children refuse the chance of taking responsibility for the family business, founders must search for external managers.
2) The Sibling Partnerships is the next stage of the ownership dimension axis (Figure 3.4), which refers to the second or further family generation. Two or more brothers and/or sisters share active or not active ownership control. There may be additional owners, but they do not have a significant influence on the business at this stage. In the process of transferring from Controlling Owner Company to Sibling Partnership parents play an active role in management, while children may have ownership control. The company from the ownership view is seen as a hybrid form of organization with the ultimate authority of founders (parents) (Gersick et al., 1997). The key challenges in the Sibling Partnerships stage are:
- Developing a process for shared control among owners, that fits family members within the extended family. The Sibling partnership can be in the form of “quasi-parental leadership”, “first among equals”, or “truly egalitarian arrangement”4.
- Defining the role of non-employed owners. With the extension of the firm’s capital, family business may involve family members who do not work in business routine. This can provide tensions and conflicts. Creating a workable relationship between those active and not active in the business sibling owners should minimize conflict between them.
- Retaining capital refers to creating special investment mechanisms to attract and retain capital from banks and other lending institutions.
- Controlling the factional orientation of family branches. At this stage, siblings can “begin to act as if their responsibility is to present their own family branch, as opposed to the company or the shareholder group as a whole” (Gersick et al., p. 46).
4) The Cousin Consortium is a mature stage for family business ownership axis (Figure 3.4), characterized by the time when it reaches the third generation. Ownership is in hands of many cousins (Leach, 2007). According to Gersick et al., (1997) there may be at least ten and more family shareholders from different sibling branches, which may be involved as employees and not-involved in family business. At this stage family business, can have following challenges:
- Managing complexity of the family and the shareholder group. Shareholders may be a mix of first cousins, aunts and uncles, second cousins, and other distant relatives.
- Creating a family capital market refers to the need of workable internal market for a family firm in case some members want out of family business. “Family members have options to sell their interests, but the process is managed to minimize consequences for the company” (Gersick et al., p. 53).
3.2.3 Business system
The third and final subsystem of a family firm is a business subsystem. According to Gersick at al. (1997) business axis (Figure 3.4) describes the development of the business over time.
The business axis has a simple three-stages progression (Figure 3.4):
Like the differentiation manner in family and ownership subsystems, these stages do not consider all special issues of family business development. In some cases, companies leap across stages, move backwards, stay on one stage, or are in several stages at the same time.
However, this developmental dimension is useful as a general guide for business development in a family firm.
1) Start-up covers first steps and early years of the family enterprise. The start-up period with its challenges is relevant for every firm. Gersick et al., (1997) gave the following characteristics of a family firm at this stage: minimal informal organizational infrastructure with the owner-manager (mostly also founder) in the centre, and primarily the production of one product or providing a single service.
1 Freeman (1984) identified 16 generic groups of stakeholders: owners, employees, unions, customers, consumer advocates, competitors, suppliers, media, environmentalists, governments, local community organizations, political groups, financial community, trade associations, activist groups, and special interest groups. (as cited by Sharma, 2004).
2 Return on capital employed (RoCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. RoCE is calculated as: RoCE = Earnings Before Interest and Tax (EBIT) / Capital Employed. (Investopedia, 2016a).
3 Anthropologists refer to nuclear family as two-generations family that consists from parents and children. Extended family includes “other relatives and generations in addition to the nuclear, so that along with married parents and their offspring, there might be parents’ parents, siblings of the spouses and children, and in-laws” (Samovar et al., 2015, p. 76).
4 Gersick et al. (1997) explained three forms of Sibling Partnership in details: quasi-parental leaders, first among equals, and egalitarian arrangement. Quasi-parental leaders form appeals generally when parents died at relatively young age, there is a significant age gap between oldest and younger siblings, and the selected offspring had a very close relationship with parents. In the case of the first among equals form, one individual acts as a lead sibling, but stops short of the quasi-parental role. It happens when minority shareholders tend to exercise some rights and do not accept the responsibility of equal involvement. The truly egalitarian arrangement is common when ownership is divided. In this case, the group of siblings and the board of directors share the power.