Family Business

What Makes It
Unique?
Family Business: Working
Definition
 A family business is a synthesis of:
 Ownership control by members of a family or
consortium of families
 Strategic influence of a family in the management
of the firm
 Concern for family relationships
 The dream (possibility) of continuity across
generations

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What Makes the
Difference
 Presence of the family
 Owner’s dream to keep the business in the
family
 Overlap of family, ownership, and
management
 Competitive advantage derived from
interaction of family, management, and
ownership

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Relevant Theories

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Systems Theory

 Model shows overlapping subsystems of

family, management, and ownership
 Firm is dynamic system in which integration
achieved by adjustments to subsystems
 Individual perspectives of family and firm may
differ, leading to overemphasis on one sub-
system at expense of others

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Systems Theory Model

Ownership

Family Management

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Blurred Boundaries

 Boundaries among family, ownership,

management systems may become blurred
 Problems determining if decisions relate to family,
ownership, or management issues
 Family rules used in the business
 Problem-solving ability diminished by blurred
boundaries
 Businesses may become family-first,
ownership-first, or management-first

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Family-First Businesses

 Employment in business is membership right

 Members of same generation paid equally
 Extensive family perks from business
 Secrecy often paramount and family
members protect each other
 Business becomes part of lifestyle
 Commitment to continuity depends on
agendas of individual family members

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Business-First Firms

 Employment on the basis of qualifications—

family discouraged from working in business
 Performance of employed family members
reviewed as for nonfamily
 Compensation based on responsibility and
performance
 Conversation between family members is all
business

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Business-First Firms,
continued
 Business growth, market share, profitability,
return on assets, return on equity constitute
the scorecard
 Next generation viewed in terms of how they
can manage and grow business
 Family events often cancelled/delayed for
business reasons
 No automatic commitment to family business
continuity
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Joint Optimization
Alternative
 Family employment policy guides employ-
ment of family
 Some family members are employees; others
responsible shareholders
 Performance of employed family members
reviewed as nonfamily

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Joint Optimization,
continued
 Family members encouraged to work outside
business to get experience
 When family members meet, conversation is
both family and business oriented
 Commitment to family business continuity

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Agency Cost Theory

 Traditional theory: Alignment of owners and

managers decreases need for agency costs
 Recent research: altruism of owner-
managers leads to increased agency costs
 Agency costs can be controlled by
managerial and governance practices
 Board of directors important in monitoring
managerial behavior and controlling costs

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Challenges to Continuity

 Shortening product life cycles

 High transfer tax penalties
 High market valuations of ongoing businesses
by historical standards
 Family businesses considered outdated
 Family structure far from stable
 Next generation family business leaders
unable/unwilling to accommodate
 CEOs living longer—obstacles to succession
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Resource-Based Theory

 Resource-based theory highlights unique

capabilities or resources that family firms
convert into competitive advantage
 These resources referred to as organizational
competencies

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Competitive Advantages of
Family Business
 Speed to market
 Strategic focus on market niches
 Concentrated ownership structure
 Lower overall costs
 Quality of product/service
 Agility and flexibility
 Owner-manager and long-term view

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Concentrated Ownership

 Ownership structure impacts corporate

productivity
 Stock concentration positively correlated to
 Related diversification
 R & D expenses per employee
 Training per employee
 Overall corporate productivity

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Lower Overall Costs

 Cost of capital is nearly 0% when owner

controls stock
 Financing for other businesses:
 25–30% for venture capital
 17–20% for mezzanine financing
 Prime rate for bank financing
 Administrative and control costs also reduced
absent need for principal supervision

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Agility and Flexibility

 Flexibility of new manufacturing and

distribution technology makes smaller runs
economically attractive
 Customization, changing consumer
preferences, shorter product life cycles
reward agility
 EDI/Internet-based partnerships make agility
possible across value chain

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Owner-Manager

 Focused on customers, family, employees,

profitability, lifestyle
 Experiences conflicts between family,
management, and ownership and optimizes
links
 Average tenure of 18 years vs. 3 years for
public company CEOs

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https://www.forbes.com/sites/nusbusinessschool/2018/05/25/4-types-of-
family-businesses-youll-see-in-asia-and-how-to-govern-each-
effectively/#3b41d264659f

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Issues in Family Business

 Family versus Non-family Employees

 Employment Qualifications
 Salaries and Compensation
 Succession

https://economictimes.indiatimes.com/news/company/corporate-
trends/lessons-from-mindtree-jet-airways-do-unto-employees-as-
you-would-have-them-do-unto-you/articleshow/68571352.cms?
from=mdr

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