Theory of Family Business

 
 
 
 
 
 
 
 
 
 

Literature review

 Theory of Family Business 

 
 
 
 
 
 

Table of Contents 
 

Introduction…………………………………………………………………………………………..3

1. Overview of family business………………………………………………………………....4
2. Theoretical framework measuring family business attributes……………………………….5
3. Objectives, performance and challenges of family business………………………………....6
4. Business succession…………………………………………………………………………..9

Conclusion…………………………………………………………………………………………..10

References…………………………………………………………………………………………..12 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Introduction 

     Research of family business as an individual sector exists just few decades. The research were based on personal experiences of participants and owners of family businesses, but the relevance of this theme and increasing the number of family companies in the general field of business has caused an indelible and high interest from researchers, managers and members of the family businesses themselves. (Chrisman et al., 2006).

In the real situation, the percentage of family firms dominates in the economies of some countries. For example, in Germany, Sweden and the United States, about 60% -90% of the total number of enterprises are classified as ‘family companies’ (Klein, 2000).

    On the basis of Dyer (2003), the main part of management studies positively analyzed factors which distinguish family business from the non- family. Therefore, the most of researchers consider that family businesses have several advantages contributing an increase in efficiency of the enterprise (Anderson et al., 2003). However, these studies include just the theory and do not treat the practical problems of family companies.  

   The purpose of this paper is to scrutinize, analyze, and synthase of the data from relevant academic literature about family business. In addition, in order to understand the scale and scope of this sphere of business, the article provides a definition, a theoretical framework and criteria for the family business. This paper also identifies the main challenges of family businesses, such as the transfer of company to the next generation, the impact of emotional resources and conflicts in the family on business performance and making decisions. The main objectives pursued by family firms are analyzed and key factors influencing the family business performance are discussed in conjunction with appropriate academic theory.  
 
 
 
 
 
 

Overview of family business 

    Chrisman et al., (2006) introduced the core definition of family business, depending on the percentage of family involvement in the process of management of the company. In the same sense, Astrakhan and Shanker (2003) have developed three major definitions of family business, which are based on three levels of family involvement:

1. The first definition is dependent on the level of family impact on the voting and strategic decision-making in the firm.

2. The second definition of family enterprises associated with each day of direct family influence to the business process.

3. The third definition provides some strict factors to distinguish between family and non-family businesses, it categorize a business as a "family business", if the members of family have complete control under the voting process, and there are several generations of family members are involved in daily business process.

   Moreover, researches of family business consist four separate threads at the individual level. Previous researches are mostly concentrated on the next titles: Women as a part of the family business (Dumas, 1998); Company founders (Kenyon-Rouvinez, 2001); Non-family managers in family businesses (Mitchell et al., 2003); Next-generation members (Stavrou, 1998).

   At the family level, most studies have focused on the problematic issues, such as, the transfer of business and inheritance (Miller et al, 2003) and the conflict in the family business (Kellermanns et al, 2004)..

  Academic literature explains the various aspects and the key factors which differentiate family businesses from non-family. First of all, these are the characteristics are associated with growth of company profitability, efficiency and size of the enterprise. (McConaughy et al., 1998). In this case, managers operating in non-family businesses do not have the personal motivation in achieving success, as opposed to managers working in the family business, who feel a personal interest and responsibility for the result (Kenyon-Rouvinez, 2001). 
 
 

Theoretical framework measuring family business attributes 

   Researchers conducted in the area of family business have provided fundamental theoretical concepts which are widely spread and use. In this context, Astrachcan et al. (2003) determined the three-dimensional system of assessing the level of family influence on the business. This method is based on the specific scale, "F-PEC, are including critical factors which directly affect to the company, it is the culture, power and experience. According to this frame, Klein et al. (2000) measured the influence of the family separately on every aspect. They summed up that the level of family impact to the business can be measured depending on the quantity of shares and votes. Thus, if the family possesses a complete package of shares, is crucial. 

     Experience in this frame is the second most important factor, and can be measured by exploring and analysis generation, conducting business at the moment (Astrahan et al., 2003).  

      Culture is the third largest factor that allows to estimate the degree of family influence to the business and it may be measured by identifying level of commitment to cultural and family values ​​of some members in the family business, which primarily determined by the interest of the participants in the preservation of traditions (Klein et al., 2000).

    Based on the views of Barney et al. (2002), when members of the family companies have the ability and desire to communicate and coordinate with each other openly and directly, avoiding the bureaucratic principles this contributes to increase the effectiveness and efficiency of business. Furthermore, the research of Simon and Hitt (2003) helped to identify several differences between five factors of the "family business resources," which include social, patient, people, management, and survivability resources. The family business has considerably more chances to accumulate and use their resources.

    According to the Feurerer (2003) by using this scheme of resources (culture, experience and authority) to determine the influence to the family business, the emergence of new consecutive aspects such as competence, knowledge and skills take places.

    However, (Habbershon et al., 2003), believed that not all enterprises of this field of business include the ‘famillines’ factors, which are essential and valuable opportunities to help in achieving competitive advantages. 
 

Objectives, performance and challenges of family businesses 

  Most of the theories assert that making a profit and wealth creation are the predominant purpose of each company. But in the case of a family business we have the emergence of other substantial goals (Olson et al., 2003).

  Referring to the results of previous studies, we can determine that the priority of non- monetary purposes in family enterprise is significantly higher than in the managed company. Researches have proved that more important non-monetary motivational factors include the fairness, altruism, generosity and honesty (Eaton et al., 2002).  

   Nevertheless, it should be emphasized that in the academic literature, related to motivational factors, goals and objectives of the family business, is still in infancy stage. In addition, the objectives pursued by different family members can be absolutely different with various period of time, for example, Hoy (2006) argues that "life cycle" of individual members affect to the state and level of authority for various members of the family business.

   Research conducted by Tagiuri and Davis (1985) identified six core goals of family companies:

1.Creating a business where labor is productive, proud and happy.

2. Creating the money benefit and safety for the owner of company.

3. The development of innovation.

4. Development and management of systems to contribute social progress, autonomy and personal growth.

5. Taking action to become an effective corporate citizen.

6. Guaranteeing of employment.

    Based on research which conducted by Habberson et al. (2003) determined that the absence of interaction and coherence between the goals of business and family lead to the insurmountable complexities and barriers in the development of the company. Consequently, if the factor "familiness" is transferred from one generation of managers to another, it becomes a primary and decisive concept of family business.

    In the academic literature, there exist concepts of  high performance of family business . But a specific method to measure the productivity of family businesses in terms of basic goals and objectives undefined, because to categorize of monetary and non-monetary aspects of family business goals is impossible, because this is strictly individual frames. (Hienerth et al., 2006).

     However, recent research indicates that the performance of family businesses may be affected by factors such as salary of CEO and the level of involvement other members of family. (Chrisman et al., 2006)    

    Furthermore, there is a theory elaborated by Davidson (2003), which determines the performance and efficiency of business in accordance with two factors: family and business. And also explained the improvement or deterioration in the financial condition of the company according with the emotional aspects of the family and the availability of resources. There are four different scenarios of interaction of these aspects (Davidson, 2003):

1. Deep Pockets: Warm Hearts:

Companies of the first scenario are recognized absolutely successful and effective, because they possess a wide reserve of financial resources and, at the same time, indicate emotional balance. Accordingly, these companies are the most liquid and competitive.

2. Deep Pockets: Pained Hearts:

Enterprises of the second scenario have an adequate financial success, but indicate an emotional imbalance. Thus, revenue of company is increasing over the time, but family relationships can be stressful and irritated. The firm is able to sufficiently competitive, but has no chance for a long period of life, if there are no attempt to  move to the first scenario.

3. Empty Pockets: Warm Hearts:

According to a fourth scenario, the company has a warm and strong emotional relationships, while the financial resources and liquidity of the business are limited. Accordingly, the emotional balance in the company will help to survive the short-term crisis, but in the long term will be a cause of deterioration of both resources and also can be a reason of stress.

4. Empty Pockets: Pained Hearts:

          In accordance with the fourth scenario, the company is on the verge of bankruptcy because financial resources are exhausted, and the emotional state of the family is at the lowest level. This case can serve as a personal experience for the prediction errors in the future (Davidson, 2003).

  Most researchers believe that the family members more carefully protect the resources because they have no commitment of management, and therefore have an advantage in development in front of non family business (Anderson et al., 2003). 
 

Business succession 

    Business Succession is the most important and widely discussed topic in the family business research. Sharma et al., (2004) found that ‘business succession and transfer’ was the main focal point of more than 20% of family businesses that were investigated and this percentage has risen dramatically in recent years (Commission, 2006).

     It is argued, that the transfer of business can lead to considerable destruction of tangible and intangible resources, if the buyer or the successor has a tendency to deviate from the basic family ​​and business values. In this context, the transfer of a business is perceived as a threat to the survival of the family business. Previous research demonstrate that there are a limited number of family enterprises which are successful in the transition from first to second generation, while merely two-thirds transit to third generation (i.e. successfully transfer business to new owners) (Shanker and Astrachan., 2003).

The most significant change and the threat to the family business is the transfer of leadership to the next generation. In (2004) Review of the Brockhaus family business literature the main problem is the inability to communicate effectively and to take someone else's opinion in the transmission business. Also at this stage, there are many doubts on the part of the previous generation, as well as uncertainty about their abilities, from the younger generation.

     Also, the study identified the influence of family on the transfer of business and have identified some important factors: business continuity and survival, and quality measures, such as the level of satisfaction of stakeholders with a view of the business transfer, the extent to which the interested parties come to mutual agreement and to facilitate business succession (Sharma et al, 2004)., a quantitative measure such as profitability, growth, and sales.

    Nevertheless, this indicates that the existence of family conflicts may obstruct the process of decision-making in the family business, which leads to a deterioration in satisfaction of stakeholders and inefficient business succession. Therefore it is possible to conclude that even carefully designed and well-managed transfer processes are more traumatic and problematic in the family business because of the inherent problems compared to non-family businesses (Sharma et al., 2004).  
 

Conclusion 

   To sum up data, family companies have been widely circulated in the business world. Nowadays, there are many theories that can evaluate and explain the basic issues and possible errors of the family business, such as the succession of firm to the next generation, also, the influence of emotional resources and conflict in the family on the effectiveness and success of the business. Academic researches identify main advantages and benefits of family companies compared with non-family firms. But at the same time, based on the literature review it can be concluded that some crucial aspects, such as the impact of globalization on the family business during the economic crisis are not sufficiently explored and analyzed. Therefore, the owners of family enterprises have to operate by trial and error. It should also be stressed, that the most researchers describe only the internal problems of family businesses which are just related to a greater extent with the human factor and the traditions of the family, while the external aspects, such as the economic crisis, social policy of countries, changes in global stock markets, stock prices can create additional benefits and challenges for family businesses. Also, researches do not provide relevant data about the processes of mergers and acquisitions in the family business, so, it could represent a zone of high risk for companies. In general, the issues of family business dedicated to the wide attention, but in my opinion future investigation about family business should be deeper and involve the influence of all nuances of conducting family business. Also, there are necessary to emphasize primarily on the management and communicative system of company, because sustainable policy depends on factors such as gender and age of director, the status and the presence of children, education, and even the personality type. In the perspective, there are important to explore all possible factors of influence on the family business, and carefully examine the successful experience of already existing family firms, and to develop a common business strategy and resolution of conflicts. That will enable the sector of family business to a higher level, in perspective it will raise the positive impact not only on financial and emotional condition of the family, but also on the economy in general points.  
 
 
 

References 

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