Family Business Strategy

Although family business is the most popular form of business worldwide, the distinctive work-family relationship that typifies family businesses can be either a blessing or a blight. The inherent characteristics of family businesses, as well as the internal and external dynamics at play in the business environment, pose great challenges for issues of strategic planning.

Keywords Family; Family Business; Strategic Differentiation; Strategic Planning; Strategy; Succession

Entrepreneurship > Family Business Strategy

Overview

All over the world, family businesses are among the most vital contributors to wealth and employment opportunity. Family businesses dominate the business landscape of many countries. According to the US Census Bureau, about 90 percent of American businesses are family owned or operated. Family businesses are increasingly shown to be the dominant form of business enterprise in both developing and advanced economies. The majority of family businesses are small or medium sized, and their influence and numbers are expected to increase substantially in the near future. About 35 percent of Fortune 500 companies are family owned or controlled.

Some 50 percent of the gross domestic product (GDP) in the United States comes from family businesses, and family businesses generate 60 percent of the country’s employment and 78 percent of all new job creation. In the United Kingdom, approximately two-thirds of private-sector firms are family businesses, predominantly small- and medium-sized enterprises. UK family businesses provide 40 percent of total private-sector employment. Many companies that are now publicly held were initially founded as family-owned businesses (Fletcher, 2002a; Vera, 2005).

A family business can be identified by the degree of family ownership and/or managerial control within it. Generally speaking, a family business is a business or firm where members of the same family exercise significant influence over ownership and/or management. Even though many family businesses have non-family members as employees, the top positions — especially in smaller businesses — are often allocated to family members.

Although there is no universally accepted definition of a family business, it is widely accepted that a family business has one family group controlling the firm through a distinct majority and the family is represented in the management team.

Other variations of family businesses include:

• Firms with non-family ownership but with the members of a single dominant family group involved in day-to-day management
• Businesses that have gone public but where family members still hold senior management positions
• Firms that have transitioned to a second or later generation of family members drawn from a single dominant family group owning the business
• Firms owned, controlled, and operated by members of several families

Family involvement in a business gives rise to a distinctive work-family relationship that may cause tensions and contradictions that set family businesses apart from the rest of today's business world, to the extent that many believe that family firms are not operated in a "business-like" way. According to Fletcher (2002a), the “emotional aspects associated with the family business, such as hereditary management and attention to kinship ties or responsibilities are often referred to in the family business literature as 'irrational'” (p. 6-7) when compared to the more 'rational' or 'normal' business issues:

“Family ties and emotional issues are often seen as competing with the demands of the organization, and that commitment to family sometimes clashes with the ability to be loyal, efficient and totally committed to the work organization” (p. 6-7).

According to Degadt (2003), there are two “areas of potential conflict between the family (the business family) and the business (the family business) . . . there are conflicts about the business's objectives, and conflicts about the role and position of individual members of the family” (p. 380).

Conflicts about the business's objectives mainly arise when decisions have to be made about the allocation of profits. The “rational” objectives of the firm may clash with the “irrational” objectives of the family, which may, for instance, include assumptions such as: each member of the family is entitled to a job in the family firm regardless of their qualifications; each member is entitled to equal treatment; the well-being of each individual is a specific objective; and each member is entitled to training following his or her personal wants.

Conflicts about the role and position of individual members of the family often arise when decisions have to be made about the hiring of new entrants (family members versus non-family members); when decisions have to be made about underperforming family members; and when a family member's seniority in the family differs from his or her seniority, capability, and role in the family business.

Thus, family dynamics, kinship ties, nepotism, intergenerational conflict, marital and sibling conflict, hereditary management, and the distribution of assets following divorce or death are all special features of the family business. So too are strategic concerns of growth, finance, leadership, succession and in-house training and development of non-family managers (Fletcher, 2002a).

For those family members involved in a family business, the family provides both supportive and controlling functions. On the positive side, a family business can provide such benefits as more secure wages; less accountability; the satisfaction of continually working to get the business where one wants it to be; the provision of important resources to support the development of the business; and the provision of opportunities for self-expression and realization for family business members. Family participation in a business can strengthen the business if family members are loyal and dedicated to the family enterprise.

On the negative side, the family business environment is one of hard work; constant problems; unending commitment; the frustration of “being obliged” to continually keep on working to get the business right even when the temptation is to walk away; the obligation to always be there; and the need to carefully manage and negotiate a complex set of social and emotional relationships involving family and non-family members who have different expectations and motivations for involvement in the family business. Commitment to family can also mean suppression or inhibition of individual freedom of action or self-expression (Fletcher, 2002a).

One shortcoming of family businesses is their relative lack of longevity. Researcher John Ward conducted a study in 1987 that indicated only 30 percent of family businesses are passed on to the second generation, less than 13 percent survive through the third generation, and only 3 percent of family firms survive beyond that. However, these numbers do not take into account family-owned businesses that went public or were sold to outsiders. Furthermore, although most family businesses may not survive through a third generation, each generation typically lasts twenty-five years or longer. Martin and Lumpkin (2003) theorize that family orientation—characterized by interdependency, loyalty, security, stability, and tradition—is in many ways incompatible with an entrepreneurial orientation, which demands innovation and risk, and they suggest that increasing family orientation through successive generations eventually overcomes the entrepreneurial orientation of the firm’s founders. Zellweger, Nason, and Norqdvist (2011) offer an alternative explanation and point to the fact that most entrepreneurial families own multiple firms and have engaged in significant merger and acquisition activity and industry transitions, suggesting that the relatively short longevity of family-owned firms is related to the high level of entrepreneurial activity of these families and their responsiveness and willingness to shift industry focus and divest as needed. Another factor related to the longevity of family-owned firms is that smaller family businesses are especially vulnerable to disruption or failure. According to Lambrecht (2005), the “average life span of a family business is twenty-four years, which coincides with the number of years that the founder remains in charge of the business. After this time, the business may continue to exist, but it loses its family character” (p. 267).

Lambrecht writes that a “business family can develop into a family dynasty only when it embraces sound governance as a fundamental principle; that is, when the individual family member 'belongs' to the family, which belongs to the business” (2005, Abstract). Such a high failure rate after the first generation usually stems from the inability to manage the complex and highly emotional process of succession from one generation to the next.

All businesses face issues of strategy, which they must deal with, whether formally or informally. Strategy involves the making of distinctive choices about markets, products, services, internal resources (human resources, information, knowledge, land, labor, and capital) and plans for the future, to gain an edge over one's competitors; and creating a system from these decisions that provides a fit between what the environment needs and what the company does. A good strategy will result in the formulation of the major objectives, goals, and purposes of a business and the fundamentals, plans, policies, and philosophies for achieving those goals. It may also result in dynamic activities to change either a market or other position or a business model (Yip, 2004).

Although strategic ideas can come from anybody, the final choices on strategy are made by top management. Strategy must not only be formulated but also implemented. The execution of a good strategy is usually given far less attention than the creation of that strategy, a factor that cripples many businesses and is described as the single biggest obstacle to success (Scholey, 2005).

To ensure proper implementation of a firm's strategy, management must encourage strategic employee behavior through the creation of an appropriate organizational environment made up of an optimum combination of the firm's culture, incentives, structure, and people.

According to Lowson (2002),

“Organizations will attempt to develop strategies that are best suited for their strengths and weaknesses in the environment in which they operate — the wider macro environment (including elements such as economic (national or international), social, technological, demographic, governmental and natural environment factors) and the closer micro environment (the industry or competitive environment that includes suppliers, competitors, consumers, and so on)” (p. 43).

The aim is to realize a match between internal capabilities and the external environment (Lowson, 2002). This requires careful strategic planning, which in itself is not easy, as environmental variables are often uncertain and difficult to predict.

Further Insights

Although relatively little research has been conducted on family business strategy, it is believed that strategy processes are mostly the same in all businesses, family dominated or not. The main difference is that in family businesses, all stages of the strategy process are likely to be influenced by family values, goals, and relations. In addition, the close interrelationship between family and business often leads to a confluence of issues from the different contexts.

Family influences and the distinctive business-family-work relationship within family businesses can impede strategic business development and therefore need to be isolated, contained, and worked on (Fletcher, 2002a). As a constraint, the family's association with a business presents unique problems and challenges for the strategist, and these challenges are related to the general strategic problems of managing external and internal relationships (Holland and Boulton, 1984).

Family firms are often characterized as being less open to risk-taking than conventional firms. Furthermore, family businesses have peculiar characteristics which may influence strategy, such as:

• "inward" orientation
• slower growth
• less participation in global markets
• long-term commitment
• less capital intensive
• great degree of importance placed on family harmony, employee care, and loyalty
• lower costs
• generations of leadership
• influence of the board of directors on implementation (Craig and Moores, 2005).

From a strategic management perspective, families are both a resource and a constraint (Craig and Moores, 2005). In other words, the adoption of professional management approaches need not necessarily conflict with the values of the founder or founding family: family considerations can actually contribute to business success, especially when the family's character, personality, structure, and values are used to inform and complement its business strategy, as this facilitates strategic differentiation, which is necessary for competitive advantage (Ward and Aronoff, 1994).

According to Ward and Aronoff (1994), “a strategy that fits the owning family's vision and is compelling to them has the best chance of success, as long as it is also economically sensible . . . Nothing is more important to strategic success than the family's passionate commitment to the chosen strategy” (p. 58-9).

It is generally agreed that family businesses tend to be weak in the key area of strategic planning. According to Jaffe (2005), “planning is not a natural function for a family” (p. 51). Family members often clash with one another, and “rather than plan, they focus on restoring family harmony. They develop habits of avoiding issues, denying problems, and keeping secrets from each other” (p. 51). Not all individuals have the same degree of influence: “some opinions are more respected than others.” The loudest voices are usually those who “have a large portion of their personal fortune at risk, have been in the business a long time, and/or were the ones who built the enterprise” (Webb, 2003).

Jaffe believes that for a family business, strategic planning ought to involve a “two-dimensional process: looking at the business future, but also understanding that such a future lies within the context of family ownership and control. The two types of planning can proceed either consecutively or concurrently” (2005, p. 56). Ward and Aronoff (1994) believe that although it is helpful to clearly separate family from business on many issues, it is naive and inappropriate to separate business and family on all topics. Business leaders must think about the family when shaping a company's long-term strategy and proper planning should actually ensure that the goals of the family and the goals of the business are in alignment.

Strategic planning is critical for family businesses as a way of providing a framework for reconciling family and business issues and for promoting open and shared decision making (Fletcher, 2002a). Strategic planning is necessary and should become a routine part of every family business, as customers constantly change their buying patterns, competitors vie for market share, and technology continues to accelerate information access and processing (Webb, 2003).

In reality, however, relatively few family business leaders use formal strategic-planning processes (Craig and Moores, 2005). Less than 50 percent of family business CEOs use long-term planning heavily or extensively, and approximately 16 percent do not use long-term planning at all.

The process of strategic planning is especially important for second-generation family-owned and managed businesses, as family considerations often overwhelm the strategic realities of the business and undermine the successful passing of the business on to the next generations. Craig and Moores have suggested that “for family businesses to remain successful they must generate a new strategy for every generation that joins the business, for instance; starting a new venture or division of the business, internationalizing the business, and helping successors acquire skills that other family members do not possess” (2005, p. 108).

Strategic planning should include a plan for how family involvement will unfold, and a family desiring to grow its business across generations could develop a family charter or constitution, stating the rules and expectations in various areas. The priority assigned to each family member in terms of management and ownership should be one of the most important areas for planning (Jaffe, 2005).

Jaffe (2005) proposed a model that can be used “to help the family business survive into subsequent generations by using a two-dimensional planning process: the Family Council and the Board of Directors. This model helps the family strike a good balance between the world of the family and the world of the business. The Family Council comprises the actual members of the family, including in some cases in-laws, young adults, and family members not directly involved in the business. The task of the Family Council is to develop a new generation of family members, regulate their involvement in the business, and align the business with the family's plans. . . . The task of the Board of Directors, composed typically of the owners, key active family members, and perhaps key employees and independent directors, is to look at the business independently from the family” (p. 50, Inset).

The Board focuses on four areas of strategic planning: business renewal, capital needs, key employees (leadership team succession), and succession governance. It may also need to challenge family needs and set limits on such issues as pay and income distribution (Jaffe, 2005).

In family businesses that have a clear sense of family mission and strategic direction, the emotionality-rationality dilemma described above is managed through the ability of the family to communicate its goals, and through a governance structure to manage the inevitable conflicts of self-interest that will emerge from time to time. This will help keep businesses afloat, if and when self-interests clash or when there is no shared vision for the business (Fletcher, 2002b).

Terms & Concepts

Family: A group of people bound together by blood and marriage ties.

Family Business: A business or firm where members of the same family exercise significant influence over ownership and/or the effective control over management.

Irrationality: Also known as "emotionality," irrationality describes behavior that leans more toward emotional issues than it does toward the demands of a business.

Rationality: Rationality describes nonemotional, professional behavior that leans more toward the demands of a business than it does toward family ties and emotional issues.

Strategic Differentiation: The adoption of a unique strategy, so as to have an edge over the competition.

Strategic Planning: The process of developing the major objectives, goals, and purposes of a business, and the fundamentals, plans, policies, and philosophies for achieving those goals over a specific timeframe (Fletcher, 2002a).

Strategy: The making of distinctive choices about markets, products, services, internal resources (human resources, information, knowledge, land, labor and capital), and plans for the future to gain an edge over one's competitors; and combining these choices into a system that creates the requisite fit between what the environment needs and what the company does.

Succession: Matters related to the selection of a replacement for the leader of a business or firm.

Bibliography

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Craig, J., & Moores, K. (2005). Balanced scorecards to drive the strategic planning of family firms. Family Business Review, 18, 105-122. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19315867&site=ehost-live

Davis, P., & Harveston, P. (1998). The influence of family on the family business succession process: a multi-generational perspective. Entrepreneurship: Theory & Practice, 22, 31. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3939529&site=ehost-live

Degadt, J. (2003). Business family and family business: complementary and conflicting values. Journal of Enterprising Culture, 11, 379-397. Retrieved April 26, 2007, from EBSCO Online Datase Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12920398&site=ehost-live

Fletcher, D. (2002). Introduction. In D. Fletcher, Understanding the Small Family Business (pp. 1-16). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441207&site=ehost-live

Fletcher, D. (2002). Understanding the small family business. In D. Fletcher, Understanding the Small Family Business (preceding pp.1). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441203&site=ehost-live

Hall, A., & Fletcher, D. (2002). Part I: A rationality discourse in studies of the small family business: Chapter 2: Towards an understanding of strategy processes in small family businesses. In D. Fletcher, Understanding the Small Family Business (pp. 32-45). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441209&site=ehost-live

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Jaffe, D. (2005). Strategic planning for the family in business. Journal of Financial Planning, 18, 50-56. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=16401766&site=ehost-live

Jaskiewicz, P., Gonzàlez, V., Menéndez, S., & Schiereck, D. (2005). Long-run IPO performance analysis of German and Spanish family-owned businesses. Family Business Review, 18, 179-202. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19315875&site=ehost-live

Kachaner, N., Stalk, G., & Bloch, A. (2012). What you can learn from family business. Harvard Business Review, 90, 102–106. Retrieved November 21, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=82532641

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Vera, C., & Dean, M. (2005). An examination of the challenges daughters face in family business succession. Family Business Review, 18, 321-345. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18942592&site=ehost-live

Ward, J. (1987). Keeping the family business healthy. San Francisco, CA: Jossey-Bass.

Ward, J., & Aronoff, C. (1994). How a family shapes business strategy. Nation's Business, 82, 58. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9403295565&site=ehost-live

Webb, J. (2003). Strategy for the family business. Retrieved from Regeration Partners, http://www.regeneration-partners.com/artman/publish/printer_31.shtml

Westhead, P., Cowling, M., Storey, D., Howorth, C., & Fletcher, D. (2002). Part I: A rationality discourse in studies of the small family business: Chapter 1: The scale and nature of family businesses. In D. Fletcher, Understanding the Small Family Business (pp. 17-57). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441208&site=ehost-live

Yip, G. (2004). Using strategy to change your business model. Business Strategy Review, 15, 17-24. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13209031&site=ehost-live

Zellweger, T. M., Nason, R. S., & Nordqvist, M. (2011). From longevity of firms to transgenerational entrepreneurship of families: introducing family entrepreneurial orientation. Family Business Review, 20, 1–20. Retrieved November 21, 2013 from http://c.ymcdn.com/sites/www.ffi.org/resource/resmgr/docs/goodmanstudy.pdf

Suggested Reading

Craig, J., & Moores, K. (2005). Balanced scorecards to drive the strategic planning of family firms. Family Business Review, 18, 105-122. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19315867&site=ehost-live

Degadt, J. (2003). Business family and family business: complementary and conflicting values. Journal of Enterprising Culture, 11, 379-397. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12920398&site=ehost-live

Fletcher, D. (2002). Introduction. In D. Fletcher, Understanding the Small Family Business (pp. 1-16). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441207&site=ehost-live

Fletcher, D. (2002). Understanding the small family business. In D. Fletcher, Understanding the Small Family Business (preceding pp.1). New York, New York: Routledge. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441203&site=ehost-live

Jaffe, D. (2005). Strategic planning for the family in business. Journal of Financial Planning, 18, 50-56. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=16401766&site=ehost-live

Ward, J., & Aronoff, C. (1994). How a family shapes business strategy. Nation's Business, 82, 58. Retrieved April 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9403295565&site=ehost-live

Wilson, N., Wright, M., & Scholes, L. (2013). Family business survival and the role of boards. Entrepreneurship: Theory and Practice, 37, 1369–1389. Retrieved November 21, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=91824660