The Nature, Importance, and Uniqueness of Family Business
Family Business, Third Edition, by Ernesto J. Poza
Copyright 2010 Thomson South-Western Learning Outcomes 1. To introduce the concept of family business and its theoretical roots. 2. To discuss the impact of family business on economic activity worldwide. 3. To promote understanding of the unique assets and vulnerabilities of family enterprises based on their unique attributes. Family Business: Definition A family business is a synthesis of: Ownership control (15%+) by two or more members of a family, or partnership of families. Strategic influence by family members on the management of the firm (by being active in management/culture, or serving as advisor/board member, or active shareholder). Concern for family relationships The dream (possibility) of continuity across generations While the spouse of the founder may have done work on behalf of the new venture in the early stages, the real transition from an entrepreneurial to a family business typically happens when the children of the company founder join the business as employees. Family Business, Third Edition, by Ernesto J. Poza Copyright 2010 Thomson South-Western Examples of Family-Controlled Businesses Wal-Mart Ford Motor New York Times Fidelity Investments Wall Street Journal Marriott Washington Post Hallmark American Greetings Levi Strauss Bigelow Kohler Anheuser-Busch Nordstrom L. L. Bean Perdue Farms Gap Smuckers Timken SC Johnson Entrepreneurs and Business Owners Business owners make up 17.9% of the population, yet account for 25% of all income and own 56% of all wealth. Quadrini, V. (September 2, 1999). The importance of entrepreneurship for wealth creation and mobility. Duke University, Fuqua School of Business.
A third of all Fortune 500 companies
are family-controlled, and about 60% of publicly Bristow, traded D.K., Composition firmsFirms. of US Stock Exchanges remain Los Angeles: under UCLA Directors Institute: Unpublished study, 2000. family influence. Family Businesses Constitute 8098% of all businesses in the worlds free economies Generate 64% of the GDP in the U.S. and more than 75% in most other countries Employ 80% of the U.S. workforce and more than 85% of the working population globally Create about 85% of all new jobs in the U.S. Internationally There are between 17 and 22 million family-owned businesses in the U.S. Annual revenues exceed $25 million for 35,000 family businesses Internationally Family Businesses represent 80% of all businesses in Germany, and employ 80% of the working population. Internationally In Spain and France, Family Businesses are estimated to account for 80% of all companies, and around 75% of all employment. Internationally In Italy and India the figures are much higher with an estimated 90 98% of all companies being family businesses. Internationally In Australia family businesses average return on investment is 30% higher than non-family businesses, and their level of debt is 50% lower than non-family businesses. - Richard Owens, Chairman, Family Business Australia, 2010 Internationally How about in Vietnam? What proportion of Vietnamese businesses do you think are family run businesses? In your local area what proportion of businesses do you think are run by families? The Source of Capital for New Ventures?
Of the 286 million entrepreneurs
worldwide who launched new ventures since the mid-nineties, only 19 thousand were financed by venture capital firms The equity raised through venture capitalists represented only 59 billion dollars, versus the 271 billion dollars provided by family and friends operating as angel investors. Source: Kauffman Center for Entrepreneurial Leadership & Babson College, 2002 Global Entrepreneurship Monitor, presented to the United Nations, April 2003. The Bad News In their first 5 years of operation, approximately 85% of entrepreneurial and family-owned companies disappear Among those that survive, only 30% are successfully transferred to the second generation of the founding-family owners Only 12% survive under current ownership to the third generation, and 4% to the fourth generation. What Makes Family Business Different?
The presence of the family
The owners dream to keep the business in the family The overlap of family, ownership, and management The competitive advantage derived from the interaction of family, management, and ownership Succession and Continuity The most prevalent reason why family-owned and family-controlled companies fail relates to a failure in succession planning Three patterns of ineffective succession were identified in one study: 1) Conservative 2) Rebellious 3) Wavering 1) Conservative Although the parent has exited the business, the parental shadow remains, and the firm and its strategies are locked in the past. 2) Rebellious In what is often an overreaction to the previous generations control of the firm, the next generation launches a clean-slate approach to the organisation. As a result, traditions, legacies, and even the business model or its secret to success are destroyed or discarded. 3) Wavering The next generation is paralysed by indecisiveness, unable to adapt the business to current competitive conditions; it also fails to make its mark and assume leadership effectively. Building Family Businesses That Last Building a family business so that it continues takes ongoing dialogue across generations of owner-managers about their vision for the company. Family businesses that have been built to last recognize the tension between preserving and protecting the core of what has made the business successful on the one hand and promoting growth and adaptation to changing competitive dynamics on the other. Porras, J., & Collins, J., Built to Last . New York: HarperCollins, 1997. Family Business Theories Systems theory Agency theory Resource-based theory Stewardship theory Systems Theory
The firm is a dynamic system in which
integration is achieved by adjustments between family, management, and ownership subsystems. Individual perspectives of family and firm may differ, leading to overemphasis on one sub-system at the expense of others. Systems Theory Model
Ownership
Family Management
In extreme forms this can lead to
categorising family businesses based on being family first, ownership first, or management first perspective on issues. Systems Theory Family First Businesses Employment in the business is a birthright Members of the same generation are paid equally Perks that transfer from the business to family members are often extensive Financial systems may be obtuse by design, and secrecy is often paramount Commitment to continuity depends on the agendas of individual family members Systems Theory Management First Businesses Employment is on the basis of qualifications family is discouraged from working in the business Performance of employed family members is reviewed in the same manner as the performance of nonfamily managers Compensation is based on responsibility and performance Conversation between family members is usually all business, and family events will be cancelled for business reasons. Systems Theory Ownership First Businesses Investment time horizons and perceived risk are the most significant issues Have shorter time frames within which financial results are evaluated Patient Capital (investing in the family business for the long term) can be a significant competitive advantage but often disappears at the hands of greedy shareholders Blurred System Boundaries Boundaries among family, ownership, and management systems may become blurred Problems determining if decisions relate to family, ownership, or management issues. Family rules may overtake the business. Problem-solving ability diminished by blurred boundaries. Joint Optimization Alternative Family employment policy guides the employment of family members. Some family members are employees; others are responsible shareholders. The performance of employed family members reviewed in the same manner as that of nonfamily managers. Joint Optimization Alternative (cont.) Family members are encouraged to work outside the business to get experience. When family members meet, conversation is both family and business oriented. Families and firms have a commitment to family business continuity. Agency Theory Traditional theory: the natural alignment of owners and managers decreases agency costs of ownership in family firms, as formal supervision and elaborate governance mechanisms are not required. Recent research: the altruism of owner- managers leads to increased agency costs from their inability to manage conflict among owners and non-family managers. Agency Theory Agency costs can be controlled or avoided through the use of certain managerial and governance practices. The board of directors is important in monitoring managerial behavior and controlling costs. The Strategic Perspective: Competitive Challenges Faced by Family Businesses Shrinking product life cycles Intense cost competition Rapid change in distribution and value chains Increasing individualism of younger generations The entrenchment of the current- generation CEO Thoughts that only publicly traded companies have a future in the market, Resource-Based Theory Resource-based theory highlights unique capabilities or resources that family firms convert into competitive advantage. These resources are often referred to as organizational competencies. The ability of a particular family business to capitalise on its unique advantages depends on the quality of the interaction between business and family. Resource-Based Theory Some unique resources of family businesses include: Overlapping responsibilities of owners and managers, along with small company size, enable rapid speed to market Concentrated ownership structure leads to higher overall corporate productivity and longer-term commitment to investments in people and innovation A focus on customers and market niches results in higher returns on investments The desire to protect the family name and reputation often translates into high product/service quality and higher returns on investment The nature of the familyownershipmanagement interaction, family unity, and ownership commitment support patient capital, lower administrative costs, skills/knowledge transfer across generations, and agility in rapidly changing markets Stewardship Theory This perspective claims that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own well-being. Owners inherit a responsibility to others, to stewardship, so that the enterprise they received from the earlier generation may successfully pass on to the next. As stewards of the firm, family owners often place individuals on the board that can provide objective advice and advocate for a going concern. The independence of the board has a positive impact on the financial performance of the firm through its advisory role more than through its monitoring or supervisory function. Ethics, Social Responsibility, and The Family Business Family Businesses are often perceived as less socially responsible due to their incentive to protect wealth, and are less ethical due to the incentives to reduce tax liabilities and gain competitive advantage by whatever means possible in the often private, less transparent world of most family businesses. Or Family businesses have a built in desire to uphold the family companys image and protect the familys name and reputation. Family businesses care more about quality, the environment, and can be counted on to stand behind their product/service far into the future. Family Business Research Two watershed events played key roles in turning the study of family business into a field: The publication of a special issue of the journal Organizational Dynamics in 1979 The launching of a specialized journal, Family Business Review, in 1986 Still, between 1975 and the early 1990s, most of the published work on family businesses was anecdotal, rooted in the stories of consultants and observers of these mostly privately held enterprises. Only in the past decade has research begun to struggle with this definition of the family business and address the unique characteristics of this form of enterprise. BUSM4171 Topic 1