Family Business and

Entrepreneurship
BUSM4171 - Topic 1

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UCLA Directors Institute: Unpublished study, 2000.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

The Nature, Importance, and

Uniqueness of Family Business

SUMMARY p.24