Strategies and Practices of Family-Controlled Businesses

In most countries, the majority of business firms are family-controlled. Increasing attention has been given in recent years to determining what strategies and practices differentiate a family-controlled business from other businesses. The literature, however, does not have a consistent answer to this question. This problem stems in part from the fact that there is still no consistent definition of the term "family business." In fact, research has found that in many cases when other demographic characteristics of the businesses being studied are held constant, many of the differences between family-controlled and other organizations disappear. However, family-controlled businesses do differ from most other businesses in one important way: The owners have a long-standing personal relationship outside the firm. This can either be an advantage or disadvantage to business success. There are a number of considerations to help leverage the familial relationship into an advantage, particularly the tools and techniques of conflict management.

Keywords Conflict Management; Demographic Data; Groupthink; Stakeholder; Succession Planning

Management > Strategies & Practices of Family-Controlled Businesses

Overview

In many ways, there is no difference between family-controlled firms and other firms. Both types of organizations need resources of human capital, financial capital, and technology and materials. Both types of organizations require policies and procedures for getting work done. Both types of organizations require strategic planning and management in order to help ensure that the organization is successful in effectively accomplishing its work — whether that work is producing products or providing services — and managing projects and employees. Where family-controlled organizations differ from non-family-controlled organizations, however, is who is in control. Family-controlled organizations are by definition owned by groups of people who have long-standing, personal relationships that can affect their working relationships either positively or negatively. In addition, the familial relationship between top management in family-owned firms can create a hindrance to leaving the organization, a situation typically not found in non-family-controlled firms.

In most countries, family-controlled firms represent a significant portion of business organizations. However, focused research into the difference between family and non-family-controlled firms is a fairly recent phenomenon. Although there are many theories about how these two types of firms differ, there is currently no consensus. In fact, there is still not a generally accepted definition of the term "family business" among researchers and theorists. Traditional definitions of the term have focused on various combinations of the family's involvement in the firm such as ownership and control, governance, influence in decision making, involvement of family members as employees or management, and planned succession within the family. The choice of which of these variables is important, however, varies with the researcher or theorist. Further, some researchers and theorists define family firms by their essence. This concept includes variables such as the degree of the family's influence over the strategic direction of the firm, whether or not the family intends to maintain control, the behavior of the firm, or the unique set of characteristics and capabilities that result from the involvement of the family in the business. To further complicate an already complicated problem, research has found that not every firm with the same degree of family involvement in the organization considers itself to be a family firm. In addition, firms may change whether or not they consider themselves to be a family firm over time.

As research progresses, definitions of the term family-controlled are beginning to converge. However, the current lack of consistent definition is foundational to the inconsistent findings on the differences between family-controlled and non-family-controlled firms. Without a consistent, standard definition, trying to make sense of the research can be like trying to compare apples and oranges. For example, research has been done to determine the differences in customer relationship management practices in family and non-family-controlled firms. The assumption is frequently made that family-controlled firms can turn their ability in relationship building into a sustainable competitive advantage. This assumption is based on the hypothesis that because their product or service is associated with the family name, family-controlled firms are more interested in providing high quality than are other firms. As a result, the theory is that family-controlled firms tend to provide quick customer response, higher quality goods or services, and have a sincere desire for good customer service. This notion is supported by research that has found that family-controlled firms understand the importance of good customer relationships and believe it is critical to success. Based on these assumed characteristics, it has been hypothesized that family-controlled firms are more likely than other firms to institute the policies and practices of customer relationship management. However, recent research into this hypothesis found that family-controlled businesses were not more committed to formal customer relationship management than were other businesses.

Similar lacks of differences or inconsistent findings are found elsewhere in the literature. However, an analysis of the differences of strategy and practices in family-controlled and other organizations found that when the demographics of the firms compared were held constant, most of these differences disappeared. This means that other characteristics of the business (e.g., size, structure, experience of management, organizational culture) are more important in determining its strategies and practices than is whether or not the firm is family-controlled.

Although at this time there is no consensus in the literature as to what strategies and practices differentiate a family-controlled firm from one that is not, the importance of the role of the family in the organization is a given. Based on this fact, there are a number of recommendations that recur in the literature regarding steps that a family-controlled firm can take to help leverage the power that comes from being a family and reduce the dysfunction that can also result.

The fundamental difference between family and non-family-controlled firms is the involvement of the family at top decision making levels. This can be either a strength or a weakness. On the one hand, families come to the business with a knowledge of each other, including strengths and weaknesses, decision making styles, management styles, personalities, and communication skills. Family members have learned (outside the business context) the degree to which they can trust each other. Building a working relationship like this between strangers can only happen over years of working together. On the other hand, families know how to push each other's buttons. Any dysfunction or conflict from their personal lives is unlikely to be left at the door of the business. There are, however, some principles that can help families overcome the potential disadvantages of their personal relationship and leverage the advantages to make them a highly functional and effective team.

First, it is often helpful to form an outside board of advisors to act as a sounding board and give the family members objective feedback on their actions and interactions. This can be invaluable in helping circumvent problems such as groupthink, where the members of the group reach a consensus in decision making to avoid conflict, reduce interpersonal pressure, or maintain an illusion of unity or cohesiveness. Although this can be an acceptable method to keep down conflict in the family setting, in the business setting it can be disastrous. Rather than helping the group reach the synergy that is the hallmark of a team that is working well together, groupthink short-circuits the decision making process and leads to poorly thought-out plans and actions. An objective board of advisors can help the family recognize when they are in a situation of groupthink and encourage them to constructively re-examine the situation.

Another thing that families in business together must understand is the need for good communication skills. Practices such as active listening — an approach to improving communication in which the receiver of the message attempts to better understand the message being transmitted, formulates a response based on this understanding, and responds in a way that clarifies the message — can help family members better understand what each is trying to say. Family retreats where the involved members of the family meet on neutral territory to work out issues or resolve problems can also be helpful.

Applications

One of the problems faced by any business is how best to deal with any conflict that arises. The fact that family members not only have a business relationship with each other but a personal one as well often complicates and exacerbates the situation. On a small scale, this can mean that the option to go home and unload the cares of the office on one's spouse is not available if one's spouse is the cause of those cares at the office. This can not only have impact on the working relationship, but can affect the personal relationship as well. Women family members, for example, may experience particular tensions arising from motherhood where obligations to the business conflict with the interests of her children. Eventually, when the senior member of the corporation looks toward retirement and needs to choose a successor to run the business, conflict can arise. Choosing between one's children can be a burden to the parent not only during the decision making process, but longer if the decision is resented by one of more of the rejected successors. This situation can also lead to continuing resentment and conflict or even alienation between the family members if the choice was not agreed upon by all. Frequently, however, succession falls on the only child interested in maintaining an active role in the business, with the remaining siblings retaining only an interest in trust.

Research has found that family-controlled firms frequently experience more conflict than non-family-controlled firms. This is due to a number of factors, including the fact that family-controlled firms are complicated by interpersonal dynamics stemming from familial relationships that do not affect other organizations. These factors include sibling rivalry between the children in the family (e.g., the younger brother trying to show that he can do as well as his older brother and undermining the latter's attempts in the process), the desire of the younger generation to differentiate itself from its elders (e.g., the children want to take the business in a new direction or do not want to be labeled as being the same as their parents), marital problems (e.g., disharmony in the marriage that spills over to the business relationship), and role conflict (e.g., if the youngest child and gets babied in the family, s/he may have difficulty in the job as CEO where s/he has power over other family members even if s/he is the best qualified for the job). To truly manage conflict within a family-controlled business, such factors need to be identified and their effects recognized.

In addition to conflicts arising out of the personal relationships of the family members, there are also other sources of conflict that are experienced by any organization. One of these sources is incompatible goals between two or more stakeholders (e.g., Harvey and Suzy both want to be CEO). This is compounded by the fact that there are financial rewards for "winning" the conflict (i.e., the new CEO gets a higher salary). Another source of conflict is differentiation, the situation where two or more of the stakeholders have discordant views or opinions because of their different training, experience, or backgrounds (e.g., Harvey — who is an engineer by training — would like to increase profits by starting a new widget product line whereas Suzy — who is a computer programmer by training — would like to increase profits by starting a new software line). This source of conflict can be exacerbated when there are scare resources, such as insufficient funds to start both new product lines. Conflict can also arise if the rules for decision making are not well articulated, inadequate, or not understood or agreed to by all stakeholders.

Good conflict management skills are important in any business in order for it to succeed. However, because of the complication of dual relationships in the family business, it is even more important that conflicts be well-managed and their negative consequences minimized in these settings. This is especially true in situations where the family members are not particularly free to leave the firm (e.g., they are not free to sell their shares for current market price; rights of inheritance, status, or other privileges associated with working for the family firm may be forfeited if the individual leaves the organization) as they would be in most non-family-controlled organizations.

In general terms, conflict is a situation in which one or more parties perceive that their interests are being opposed or otherwise negatively affected by another party. In business settings, it is important that conflict be managed in order to enable smooth operations and maximize performances. This is done through the process of conflict management, which attempts to alter the severity and form of conflict in order to maximize its benefits and minimize its negative consequences.

The process of conflict management recognizes that not all conflict is bad. In fact, conflict can sometimes reveal problem areas between persons or groups that, if left unchanged, would negatively impact the effectiveness of the organization. Conflict helps the parties realize that there is an issue with which to be dealt. Appropriately managed conflict can lead to synergy, the process by which the combined product resulting from the work of a team — in this case the family — is greater than the results of their individual efforts. Conflict can also have a positive effect on the organization's performance by increasing the number of alternatives or options it has for decision making, preventing groupthink or premature consensus, or increasing the involvement or motivation of all the stakeholders.

There are several considerations that should be taken into account when attempting to manage conflict within the family business. First, it is important that the involved family members recognize and understand that conflict management in a family business is a complicated process. All parties involved need to be aware of the interests of the stakeholders both at work and at home, the relationships between the various stakeholders, and the options and alternatives for handling the situation. Successful conflict management in the family-controlled business must consider not only the work relationship, but the personal one as well.

Another consideration when trying to manage conflict within the family-controlled business is to attempt to be as open as possible and articulate as many issues as possible. For example, in succession planning in a family-controlled business with multiple potential heirs, it is important to acknowledge that the decision will most likely be an emotionally-laden one. Dealing with as many issues as possible at the start of the decision making process can help defuse potential conflict and manage any conflict that does arise.

In addition, it is helpful to set up, in advance, an agreed upon set of rules, processes, and standards by which conflicts within the business are to be resolved. This action can help confine the conflict to the work situation so that the problems of the workplace do not impact the personal relationships more than necessary. These parameters can be revisited and changed as necessary with the agreement of all the stakeholders, particularly when there is a change in the size of the stake individual family members have in the discussions due to such things as increased or decreased involvement or investment in the business.

There are a number of different ways to handle conflict situations. The key to effectively managing conflict often lies in understanding the relative importance of the situation from the point of view of each of the stakeholders and determining the best way to respond. For example, when each of the stakeholders knows that it has to work with the other and that all their interests are important, collaboration (when both parties try to find a mutually beneficial solution to a shared problem) or compromise (when both parties give a little and get a little in return) are frequently the best approaches to conflict resolution. In such situations, the stakeholders can work toward a resolution that allows each of them to win. However, when one of the stakeholders views the conflict as a win/lose situation where only one person or faction can win, it is often necessary to compete, particularly when a decision needs to be made quickly. In other situations, one or more of the stakeholders may find it most effective to accommodate to the other person's desires in the short-term in order to win a more important battle later on or to build a stronger cooperative relationship for the future. Even avoidance — walking away from the problem — can be an effective way to manage conflict in the short-term if it allows tempers to cool down so that the stakeholders can come back later to resolve the conflict.

Although many conflicts arising in the family-controlled business cannot be predicted, some (e.g., succession planning, strategic planning) are. Situations where it is obvious that conflict will occur should be dealt with sooner rather than later in order to resolve the conflict before it becomes unmanageable. Sometimes, however, no matter how hard some or all of the parties involved in a conflict try, it is impossible to resolve the conflict internally. Long-standing feuds, hard feelings, and negative emotions often unrelated to the business can surface and compound the situation. In such cases, it may be helpful to bring in an objective third party who can help negotiate the situation. Business analysts, professional negotiators, and managerial consultants are several sources of help in such situations.

Terms & Concepts

Active Listening: An approach to improving communication in which the receiver of the message attempts to better understand the message being transmitted, formulates a response based on this understanding, and responds in a way that clarifies the message.

Conflict: A situation in which one party believes that its interests are negatively affected by another party.

Conflict Management: The process of altering the severity and form of conflict in order to maximize its benefits and minimize its negative consequences. Between parties, conflict can be resolved through collaboration, accommodation, competition, compromise, or avoidance. Conflict management can also refer to interventions performed by an objective outside party in the attempt to de-escalate conflict between two or more parties.

Customer Relationship Management (CRM): Tools and techniques used by organizations to manage their relationships with their customers. CRM includes targeted marketing efforts, processes to improve customer satisfaction, and practices to improve the relationship between the customers and the organization.

Demographic Data: Statistical information about a given subset of the human population such as persons living in a particular area, shopping at an area mall, or subscribing to a local newspaper. Demographic data might include such information as age, gender, or income distribution, or growth trends.

Groupthink: The tendency to have the same opinion as the other members of the group as a way to avoid conflict, reduce interpersonal pressure, or maintain an illusion of unity or cohesiveness without thoroughly thinking through the problem. Groupthink interferes with effective decision making.

Management: The process of efficiently and effectively accomplishing work through the coordination and supervision of others.

Management Style: The way in which a manager supervises his/her employees. Different management styles (e.g., coercive, permissive, persuasive) are appropriate depending on the ability and needs of the workers, the situation in which they are working, and the personality of the manager.

Organizational Culture: The set of basic shared assumptions, values, and beliefs that affect the way employees act within an organization.

Stakeholder: In the context of conflict management, a stakeholder is a person or group that can affect or be affected by a decision or action. In conflict, the parties to the conflict are the stakeholders and can win or lose depending on the outcome of the conflict. In a general business context, a stakeholder is someone who affects or can be affected by the decisions and actions of the organization.

Strategic Planning: The process of determining the long-term goals of an organization and developing a plan to use the company's resources — including materials and personnel — in reaching these goals.

Succession Planning: The process of preparing to hand over control of the organization to another person when the current leader retires or leaves the company. Succession planning includes choosing someone to replace the current leader and determining the best ways to implement the transition so that it is the least disruptive to the organization's operations and values.

Synergy: The process by which the combined product resulting from the work of a team of individuals is greater than the results of their individual efforts.

Bibliography

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Suggested Reading

Craig, J. B. L. & Moores, K. (2006). 10-year longitudinal investigation of strategy, systems, and environment on innovation in family firms. Family Business Review, 19, 1-10. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19995352&site=bsi-live

Hall, Annika. (2002). Towards an understanding of strategy processes in small family businesses: A multi-rational perspective. In Fletcher, D. E. (Ed.). Understanding the Small Family Business. New York: Routledge, 32-45. Retrieved April 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17441209&site=bsi-live

Miller, D. & Le Breton-Miller, I. (2006, Mar). Family governance and firm performance: agency, stewardship, and capabilities. Family Business Review, 19, 73-87. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19995347&site=bsi-live

Moshavi, D. & Koch, M. J. (2005, Aug). The adoption of family-friendly practices in family-controlled firms. Community, Work & Family, 8, 237-249. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18288458&site=bsi-live

Sharma, P. & Irving, P. G. (2005, Jan). Four bases of family business successor commitment: Antecedents and consequences. Entrepreneurship: Theory & Practice, 29, 13-33. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15416261&site=bsi-live

Steier, L. P., Chrisman, J. J. & Chua, J. H. (2004, Sum). Entrepreneurial management and governance in family firms: An introduction. Entrepreneurship: Theory & Practice, 28 , 295-303. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13077879&site=bsi-live

Stewart, A. (2003, Sum). Help one another, use one another: Toward an anthropology of family business. Entrepreneurship: Theory & Practice, 27 , 383-396. Retrieved April 18, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10018199&site=bsi-live