Enterprise and Small Business Principles

Family business: a strategic overview

One approach to the study of family businesses has been to identify the characteristics and processes that differentiate family from non-family firms (Donckels and Frohlich, 1991; Daily and Dollinger, 1993; Poutziouris and Chittenden, 1996; Beehr et al., 1997; Westhead, 1997). In 1992 research undertaken by BDO Stoy Hayward and BBC Busi­ness Matters (Leach, 1994: 11) showed that family firms considerably outperformed non-family firms. The superior performance of publicly quoted family firms (relative to non-family firms) is also confirmed in a study sponsored by Grant Thornton and reported by Poutzioris (2005). However, Poutziouris et al. (1996) and Westhead et al. (1997) found that there was no significant difference (statistically and qualitatively) with regard to performance indicators and non-financial objectives between unquoted family and non-family firms. The only significant difference was that family firms tend to be more concerned with lifestyle and securing family jobs in the management team (Westhead et al., 1997).

Differentiating family from non-family firms is important on a number of grounds. First, it is important for understanding what is unique or special about the organisa­tional practice of family firms. Here, then, a body of knowledge and theorising can occur about this practice that can be drawn upon for research and to give guidance to family firms. Second, it is important for drawing policy attention to the specific needs of family firms (such as succession issues, leadership, work-life balance and training needs). But, also, because the evidence on the specialness of family firms has been contradictory, responses from the research community and other supporting bodies such as accountants or management consultants have been inconsistent. On the one hand, family businesses are upheld as financially stable, and long term in orientation and strategic planning and, therefore, good for the economy. On the other, they are chastised for nepotism and being governed by emotions rather than business-like principles - and needing, therefore, careful corrective management.

This latter and more negative view of family businesses has shaped much of the early academic writings and consultancy responses concerned with their support. For example, separating ‘family’ from ‘business’ issues was frequently espoused as the guiding prin­ciple for developing a successful business. Thus, the dominant approach adopted for studying the family firm was to view the ‘family’ and the ‘business’ as two ‘systems’ competing for power and control within the organisation. This was because family ties and emotional issues were seen to compete with the demands of the business and com­mitment to family clashed with the ability to be loyal, efficient and totally committed to the work organisation. As a result, therefore, the early studies of family businesses (Donnelley, 1964) tended to be highly normative, prescribing how the emotional issues involved in running a family business should be smoothed away by preventive or cor­rective strategies.

In the family business literature this ‘corrective’ approach to the study and support of family firms is referred to as a ‘rational’ view of businesses. According to Hollander and Elman (1988), this rational view sees two ‘organisations’ co-existing within the family business. One is the family organisation characterised by emotions, nepotism and the ‘non-rational’ dynamics between family members. The other is the business or ‘rational’ component characterised by efficiency, structure, functions, role clarity and purpose - the point being that when the two parts clash the ‘business’ side loses out to the power, sentiment and emotional issues of the family. Hollander and Elman (1988) suggest that early writers on family business (referring to Calder, 1961; Donnelley, 1964) ‘lamented the fact that family firms were not operated in a more “business-like” way. . . and therefore the solution was to excise the family’ (p. 146). Issues such as kinship ties, nepotism, hereditary management and emotionalism were seen to have a detrimental effect on the company in that the needs, goals and demands of the ‘family’ conflicted with the needs, goals and demands of the ‘business’.

Kanter (1989a) ties this rationalist thinking to the rise of systematic or scientific management. A scientific management approach is concerned with ensuring equality and rewarding individual merit in order to secure the development of rational bureau­cracies. A ‘scientific management’ approach is problematic in Kanter’s (1989a) view because it tends to encourage a view of family influence as an impediment to the efficient and effective operation of a business. It also means that family relations and resources - influences which were highly integrated in pre-industrial societies - are best seen as isolated from the workplace, and the close relationship between work and family is disparaged and discouraged.

In approaching family firms from this rational versus non-rational perspective, this gave rise to the business and the family components of family businesses being con­ceptualised as two systems competing with each other inside the firm. A ‘systemised’ way of conceptualising the family firm is concerned with understanding the interrela­tionships of the different components that comprise the overall business system. Some authors (op. cit.) argue for the need to identify, separate and overcome the compet­ing systems within the business in order to sustain a tidy and efficient business. Others suggest approaches for linking together the business, the founder and the family (Beckhard and Dyer, 1983). Here, aspects of the market-place, industry, technology, stakeholders, task system, founder and family issues interact to form a ‘highly com­plex, open system of interactive elements’ (Hollander and Elman, 1988: 157). The joint system operates according to rules that are derived from the separate components of the system but, at the same time, the conflicting needs and demands of the different components are continuously being adapted to the needs of the whole system (Davis, 1983). As a result of applying systems analysis, it is argued that boundaries can be drawn around the different components of the system in order to locate problems that need resolving.

The effect of rational and systems approaches to understanding the link between family and business has been twofold. First, more positively, these studies have high­lighted the special needs and situations of family businesses (from which specific policy or consultancy responses can be tailored). Second (and perhaps less helpfully) these studies have led to a dualist understanding of family firms whereby they are smaller, less efficient, professional, entrepreneurial, formalised and growth oriented, and often showing tendencies of ‘defender’ (rather than entrepreneurial/proactive) strategic beha­viour (Daily and Dollinger, 1993). This dualism is particularly evident in discussions about the need to: ‘professionalise the business’; ‘manage succession’ (Dyer, 1989; Fox et al., 1996; Kimhi, 1997); manipulate life-cycle changes (Davis and Stern, 1980; Gersick et al., 1997) and encourage entrepreneurialism (Gibb et al., 1994). An example here is Hoy and Verser’s (1994) work in which they set up family and entrepreneurial domains as separate (albeit sometimes overlapping) ends of a continuum.

During the 1980s, however, a more ‘developmental’ approach to the study of family businesses began to emerge. This approach is distinctive because it takes account of the more positive ways in which business and family issues interrelate. A developmental approach was seen as important for taking account of the human element, the dis­cretion possessed by key decision makers, and how values, beliefs and ideologies may influence decisions (Riordan and Riordan, 1993) - something neglected in the rational and systems view of family firms. Also, the rational view tends to ignore the potential ‘ability of the owner-manager to allocate resources in non-economic ways to fulfill personal family goals’ (Riordan and Riordan, 1993: 76). Instead researchers began to approach the family as integral to the efficient working of the business system (Kepner, 1983; Hollander, 1984; Ward, 1987). As a result, alternative theories have begun to emerge that take account of the interrelationship between family and business issues.

Some examples of theories, or approaches, are ‘field theory’, resource-based theory, agency theory and entrepreneurship theory. Field theory focuses on the psychological forces in the life space of the owner-manger (Riordan and Riordan, 1993). Resource - based theory takes account of the significance of the family in contributing resource variety (Chrisman et al., 2003a; Cabrera-Suarez et al., 2001; Habbershon et al., 1999; Heck and Kaye, 2004; Zahra et al., 2004). Here, studies link to the strategic manage­ment literature and concepts/theories are drawn upon with a view to proposing ways of strengthening the performance of family firms by harnessing family resources to enhance competitive advantages, organisational goals and objectives (Chrisman et al., 2003c). Agency theory is also being utilised to assess the costs involved in aligning the interests and actions of managers (agents) with the interests of the owners of the busi­ness. In family firms where family members own and manage a business, it is some­times assumed that these agency costs are much reduced. But many authors are now examining this assumption with studies on family businesses (Chrisman et al., 2004; Corbetta and Salvato, 2004). Finally, entrepreneurship theory is also being drawn upon to examine the organisational practices of family businesses. Studies focus on the effects of family on entrepreneurship (Aldrich and Cliff, 2003; Rogoff et al., 2003); the overlap between family and entrepreneurship domains of research (Hoy and Verser, 1994; Dyer and Handler, 1994); the link between entrepreneurial management and governance in family firms (Steier, 2003); and entrepreneurial activities in family ver­sus non-family firms (Zahra et al., 2004; Heck and Kay, 2004).