Diversification of the Family Business.

Diversification of the Family Business

LAW 6003 - Business Law

University of Cincinnati

October 25, 2024

Foreword

Analysis of family businesses, as well as research into

issues that may not only be unique to the family

business concept such as diversification, succession and

corporate governance, to name a few is not a new

practice, but rather a well established practice from

both, an academic as well as a practical perspective.

Within this study, the main aim is to establish the effect

of previously mentioned processes with specific

emphasis upon diversification in the family businesses,

as well as the resulting effect or effects, brought about

by such strategic decision making and diversification

processes.

A combination of primary and secondary research

helped assessing these effects, as well as the

consequences whether based on a positive or negative

outcome, in addition to the various findings or inactions

that were brought about by the primary research

sampling, on the managerial level and the strategic

direction of the companies concerned.

Based upon the fact that a family business concept is

quite often a private or closely held affair, market

research proves to be somewhat difficult in obtaining

adequate contribution and clear responses in certain

areas. However, the sampling within the primary

research data is deemed to be sufficient in establishing

an overall commonality or differences where applicable.

Specific issues pertaining to the sampling laid out

according to the findings, with the summary providing

an insight into lessons learned from the diversification

process, as well as processes that become necessary on

a post-diversification basis, have had to be

implemented by the companies concerned to ensure

continuity, succession, governance and adherence to

the legal and operational frameworks where applicable.

Executive Summary

The rationale of the study was to analyze how does the

decision to diversify family businesses impact the long-

standing family business, providing the current

formation/structure of the business from a legal

perspective, as well as thoughts and impressions of the

business ownership to the process of diversification,

based upon the overall negative or positive result of

pursuing such strategic decisions.

Although an average market response was received, the

size and response of the sampling is sufficient to

establish a certain median within the questions posed,

and in turn, displaying sufficient results and patterns.

On the basis of post-analysis, a number of interesting

issues surfaced which could have been included within

the primary data collection phase, such as that of

succession. However, a significant amount of research

has already been conducted on this topic and is

expanded upon both in the secondary data discussion,

as well as the lessons learned, which can, furthermore,

be stressed and considered by family businesses in their

planning, not only for continuity but to achieve

sustainability as well. These issues are further

investigated by that of corporate governance or the lack

thereof, of which is highlighted within the document in

hand.

Hypothesis Statement

What are the effects of the previously mentioned

processes with specific emphasis upon diversification in

family businesses and the effects due to the strategic

decision making and diversification processes?

Tools Used in Research

For this study, a web based survey has been designed

using Survey Monkey. Survey Monkey helps not only in

designing a survey with multiple options, but it also

allows the user to send the survey to respondents by

email. User can also publish the designed survey on

networking sites like Facebook, etc. Another good

feature offered by Survey Monkey is the result

evaluation by the mean of graphical presentation and

charts. These features helped a lot in evaluating survey

results in the best possible way.

Introduction

This study involves analysis of family businesses, as well

as the research over the issues that may not only be

unique to the family business concept such as

diversification, succession and corporate governance.

Investigation not only involves the academic aspect of

the topic but would also explore the practical

perspective of the same. This study aims to establish the

effects of previously mentioned processes with specific

emphasis upon the diversification in family businesses,

as well as the resulting effect or effects of the strategic

decision making and the diversification processes.

The research side of this paper involves both, the

primary and secondary data so that the effects of

research and its implementation are assessed in the

best possible way. This study also involves analysis of

the consequences for the companies to rectify the

managerial level and strategic direction of the

companies concerned.

Literature Review

This section of the dissertation involves review of

several term papers, researches, articles and journal,

etc. As discussed above, this study involves primary and

secondary data. Primary data is the unprocessed data,

obtained via research. While secondary data is

processed data, this could be a term paper, dissertation,

article, journal, blog or any other piece of work that is

written by someone and is based on some research.

Methodology of any study involves two main sections.

The first one is the literature review while the other one

is the real research.

Summary of the Secondary Data

Secondary data of this study involves the relevant

literature that is obtained and accessed via published

journal articles, books and other available media items.

All papers that have been utilized in this study are not

only relevant to the diversification process and its

impact upon the family business, but also to numerous

other factors that come into play, as the business

progresses in the form of growth, expansion, as well as

the resource management and ultimate issues that

affect the continuity of the business, which is somewhat

more prevalent within the family business

circumstances.

Additional factors that also engage a role within the

business itself is the family relationship dynamic and

how these dynamics play out within a business

environment, whereby the family members may or may

not associate their familial relationships within the

business environment.

These factors are mostly discussed and investigated in

the analysis, however, the literature has been analyzed

with certain elements and conditions that came into

light which require further exploration as they play a

role within the specifics of the family owned and or

controlled businesses under scrutiny.

Additional research possibilities and opportunities exist

albeit on a secondary basis, via the internet, as well as

published sources. The information that is highlighted

here is selected in accordance with boundaries of the

diversification process and the impact upon a family

owned company, more importantly on well established

family businesses, as per the research subject matter.

One has to furthermore bear in mind that the family

business is subject to additional “phenomena”, that may

not be relevant to other companies, such as succession

strategies, as well as the handling of internal family

affairs and the resulting benefits or disadvantages

thereof.

A number of statistics regarding the family business are

well worth mentioning here, in order that one may gain

an understanding of the large contribution that family

businesses across the world actually provide within

their respective locations. With respect to the additional

research into the family business or organization, the

family owned and controlled businesses are in fact the

predominant form of business within the United States,

yet a remarkably low level of research into these entities

has been conducted, and furthermore, the authors

claim that the ownership and management of the firms

are widely separated (Phan & Butler 2008), which as

revealed within the primary market research is not the

case. The respondents within the study revealed that

some sort of involvement whether via management or

leadership had continued within the organization in one

form or another.

A Look at “The Top One Hundred Oldest Family

Businesses”

A closer look at the family business reveals that many

companies that are now publicly listed may well have

started off as a family business. O’Hara provides in his

analysis of the top one hundred oldest family

businesses, a variety of geographically located

companies that operate in just diverse sectors and

fields. In terms of these companies many internationally

recognized brands and names are represented, the likes

of which include that of Reidel Glassmakers, Villeroy &

Boch, Taittanger, and Antinori. Interestingly, analysis of

the descriptions of the companies as well as their

development reveals that many of these companies

underwent some sort of diversification from product

offering expansion, to geographical diversification to

that of mergers and acquisitions, to create companies

that are established in modern day economies. A brief

analysis of O’Hara’s data and research is pertinent due

to the relevancy of the topic at hand; it further provides

an insight into the international viewpoint of the family

business as well as location and subsequent

developments of these very old family owned

businesses (O’Hara n.d).

The geographic dispersion of these companies is

interesting as one will realize a trend in countries which

have the most representation of these companies. The

illustration below reflects the geo-location, by country

of some of the world’s oldest family owned companies.

Figure 1: Country location of Top 100 Oldest Family

Owned Businesses.

The top position in terms of location is jointly held at

Sixteen percent of the top one hundred, and

represented by France, the United Kingdom and the

United States, which are each represented by sixteen

companies each. The fourth and fifth countries in terms

of representation within the data are those of Italy and

Germany, making up fifteen and fourteen percent or

companies respectively. Hence the top five countries, in

terms of the world’s top one hundred oldest family

businesses make up no less than seventy seven percent

of the top one hundred.

The average age of the top one hundred oldest family

businesses is calculated at 383.1 years old, of which only

32% of the companies is in fact older than that median.

The oldest known family business is one thousand four

hundred and 31 years old, and remains within their core

business of construction to this very day. The business

is currently run by the fortieth generation, with

involvement of later generations currently working

within the company.

In terms of analyzing these companies who have or have

not undergone some sort of diversification over long

histories, it reveals that 31 percent of the selection has

undergone a process or strategy decision that meets

with the broader definition of diversification. The figure

below represents the makeup of the percentages of the

companies which have undergone such strategic

processes.

Figure 2: Diversification Analysis of Top 100 Oldest

Family Owned Businesses.

What the above figure may reveal is that a non

diversification strategy may well provide the basis for

longevity of the company concerned, as the proof lies

literally within the figures represented above. This may

be seen as those companies retaining focus have

survived both issues of market and economy volatility

as well as the issues of succession, which play a vital role

within family business. In the case of the remaining

thirty one percent that have revealed some sort of

diversification, include the processes of acquisitions,

mergers, product line expansion as well as complete

product differentiation into different sectors

completely. Although the complete diversification out

of their core business area and expertise was limited to

less than five percent of the entire top one hundred list,

which was represented by companies leaving a specific

sector and entering into a completely new sector.

In terms of the analysis of the actual diversification

process, and whether the business remained within

their core business activities, compared to that of

mergers and geo-location and so forth the following

figure represents a breakdown of the variety of

diversification decisions.

Figure 3: Post Diversification Analysis of the Businesses

that have chosen to diversify.

The areas into which the companies chose to diversify

in terms of the above named classifications were led by

that of diversifying within the same line via product

expansion or service offering within the original core

business activities, represented by no less than 25,81%

of the analyzed 31% of top one hundred oldest family

owned companies. The merger/acquisition, complete

different activity and same line/with additions all shared

the second top classification at 19.35% each, whilst the

geographic location was the least represented process,

at 16.13% or 5 companies of the thirty one diversifying

companies analyzed.

Based on the fact that the companies chose to expand

upon or diversify within their core business operations

lead one to believe that this may well be the most

popular choice within this specific data. However, as will

be revealed by specific authors, this follows the

academic thought of remaining within the company’s

core business activity to ensure success within the

diversification process. However, the fact that a large

majority of the analyzed data here, shared by the

second position in terms of diversification processes or

options, leads one to believe that this practice in all

intensive purposes negates the writings and thoughts of

authors, as per a saying, “innovative efforts that take

the existing business out of its own field are rarely

successful” (Druker 1985, p. 160); and by considering

the data above and as per the Appendices attached, the

proof lies in proven ability of these top one hundred

oldest family companies proving this may be challenged

and is not necessarily as accurate as one might be led to

believe.

Although the oldest company to have elected the

strategic diversification, only did so in 1936, in which

instance, they elected to merge with a competing

company. At that time, the company concerned, being

that of Baroviers, had attained the age of six hundred

and 41 years old. The merger took place between two

families, being the Barovier and the Toso families, in

Italy, to create the Barovier & Taso who are the creators

of magnificent glass products and decorative pieces.

Though, this could be seen as diversification within the

same business sector the most notable of these top one

hundred companies and specifically those that have

diversified might be the Italian company of Torrini

Firenze which diversified from an armory or armor

producer to that of a goldsmith. One of the most diverse

companies that are well worth mentioning is that of

John Brooke & Sons, which is now four hundred and

sixty eight years old, and having started in the fabric

business is now currently involved entrepreneurial

development, something of a far cry from their founding

activities.

The basis for analysis of these figures was to provide an

insight into what one might view as the very long

standing business, highlighting the diversified

companies versus those that did not diversify, and

whilst the majority did not elect to take this route, all of

these companies are still in operation.

Considering the various academic views of

diversification, such as that of Drucker (1985) who claim

that broad diversification may lead to an unfocused

business model that may well not ensure success to the

business concerned, one has to consider the research

presented here, in that respect, quite a few of the

respondents diversified outside their core business

interests, and yet achieved success and what appears to

be sustainability based upon the average age of the

business (Chandler 2003). This fact taken in conjunction

with the views of Rumelt in Strategy, structure, and

economic performance (Rumelt 1974), who suggested

that the “broadly diversified corporation was a superior

strategy to being more focused” (Thomas, Pettigrew &

Whittington 2000, p. 79), who further stated that from

a financial perspective.

The more closely diversified business, displayed higher

profitability (Thomas, Pettigrew & Whittington 2000, p.

80). These views are essentially contradictory, yet the

factual results, as presented within the study, reveal

that the element of both financial performance, as well

as business survival, within the sampling was achieved

in both the closely and wider diversified businesses

analyzed. Moores & Barrett provide that the

diversification concern is in fact one of the most

important strategies or part thereof within a company’s

development (Moores & Barrett 2002, p. 158). And

furthermore, will lead to increase participation by

management, in this case mostly family members, in

budgetary control and preparation (Moores & Barrett

2002, p. 100).

The larger proportion of the sampling further states that

their initial decisions regarding the diversification was

based on opportunities that were available within the

marketplace at the time, with many taking advantage of

such opportunity to contribute more towards the

company and the family’s revenue streams at the time.

Academic theory inclusively related to the writings of

the authors mentioned above seems to be somewhat

ambiguous. Their contradictory views are held with the

diversification that it should be in a more focused or

closer role in relation to the businesses core activities,

in which it is claimed that higher profitability will ensue

the closer such diversification is. However, from a

strategic perspective, as stated above, it has been

suggested that a wider diversification is in fact a

superior strategy (Rumelt 1974). The sampling analyzed

revealed that the majority of respondents pursue the

wider diversification option, with those that diversified

more closely also achieved success within their

respective sectors. This is proven by the fact that

companies surveyed are still in existence to this day, and

continue with their diversified operations and most of

the businesses are being controlled by the second

generation already, some of which going on to the third

even fourth generation involvement level. Therefore,

provided the management strategies and leadership

remain intact and suitable for the relevant business. It

appears that success is not only achievable but,

sustainable regardless of how closely or widely the

business chooses to diversify within or outside their

core business sector.

Diversification Process

According to Hess, the family and the business provide

for an extremely dynamic environment, when operated

together, in which the business and the family overlap,

and based upon the fact that each is changing in its own

right due to growth, or even within the instance of this

analysis within the diversification process. The family

dynamics make it in fact a lot more difficult to manage

a family business, as compared to a non family business

(Edward 2006, pp. 25-55). The result is that many issues

are integrated into the business structure than would

have been in a non family business environment, which

creates the challenges and potential problems that

come along with the family business management and

subsequent analysis thereof. Hence regardless of

whether or not the family business undergoes any

diversification, one is forced to consider the familial

factor that comes into play in the management of the

business especially during times of change.

In analyzing diversification, there are two important

trends in the diversification process, according to the

significant historical events (Grant 2005). These events

were seen as Post-War diversification and Post-1980s

refocusing. The Post-War diversification process

heralded an important phase within the corporate

world and can be viewed as an “important source of

corporate growth” across all sectors. Within this time, a

period of significant decline in single business

companies was revealed, whilst the number of

diversified companies in both related and unrelated

sectors increased steadily in a variety of geographical

locations across the world, the 1960s and 1970s

considered the height of the so-called diversification

boom, which naturally led on to the post 1980s

refocusing trend (Palmberg 2002, pp. 129-148). Many of

the diversification processes came about due to an

increase in that a variety of management techniques

and processes, together with the newly found “science

of management” which in all encouraged businesses to

take on additional business units or divisions, which is

nothing less than diversification.

The issue of growth of companies, rather than that of

significant profitability was another contributing factor

of this diversification trend (Palepu 1981, p. 19). But in

the 1980s, the realization for the necessity of

profitability became prevalent and although the

diversification trend of the preceding decades slowed

down significantly, but practice of acquisitions

continued which meets with the definition of

diversification, although according to Grant, this

represented an unrelated diversification (Grant 2005,

pp. 447-448). Considering the average age of the

respondent companies surveyed, this period coincides

with many of the companies’ strategic diversification

efforts, and is further confirmed by many of the various

sectors within which these businesses now operate, and

are truly diverse as detailed.

The refocusing efforts of the 1980s as well as the

resultant affects upon performance of the company

(Cantwell, Gambardella & Granstrand 2004, p. 33). Their

studies indicated that manufacturing productivity

increased within the United States in this time, whilst

analysis within the stock market returns of companies

that had diversified, had revealed a positive growth

within the stock returns and market sentiment of these

companies, and more specific to the sampling within

this study was that “other studies also show that

internally controlled firms with large-block ownership

by corporate insiders show a better performance”

(Cantwell, Gambardella & Granstrand 2004, pp. 28-30).

This correlates with the sampling within which those

companies that had chosen to go the public listed

company route, whilst retaining majority ownership and

control would be viewed within this sector and would

show positive market sentiment as described above.

As stated, the process of diversification is often a

strategic decision within which the company stands to

not only reduce their exposure to a specific market, but

may consider such diversification as an additional form

of revenue, which was clearly indicated by the

researched and surveyed companies. The choice of

which route to follow and how exactly to go about such

diversification is arguably as diverse as the sectors

within which the companies that were surveyed

operate. Hess further provides that motivating factors

behind the diversification process include that of

consolidation of industry, market shrinkage or

shareholders, or the company itself requiring additional

capital for further expansion opportunities. These

expansion opportunities may take the form of a variety

of different strategies from investments, to acquisitions

or mergers, geographical expansion or that of product

line expansion. Although diversification process should,

in fact, focus upon the addition of product lines within

the business current area of expertise to maximize

existing infrastructure and expertise within their field of

operation, this will in effect avoid any dilution of any

positive traits of the organization concerned (Chandler

2003).

Primary research indicated that although a small

amount of respondents remain specifically within their

niches, those that did remain there in sought to add

value in their immediate supply chain; the balance of

respondents diversified away from their core business,

and in one specific instance even ceased to operate

within their initial core business area. The precious

studies imply that the diversifying business, going away

from the original core activities will in all likelihood not

succeed compared to those remaining close to their

fields of expertise (Druker 1985). To the contrary, the

research has revealed the opposite of be true, where

companies diversified into a variety of specialized fields

and continue to function to this very day. An individual,

as with a closely held family business is in a vulnerable

position without seeking out a diversification strategy

(Jurinski & Zwick 2002).

However, in the face of volatility, as provided by Grant,

should a business elect to diversify from such volatility

to escape these market conditions, they would be

foolish to believe that any business operates within an

ideal world situation or environment. The strategies of

the company concerned should rather be seen as a

guidance of what the business wishes to achieve, as well

as an aide in achieving those goals and objectives, whilst

providing for sufficient preparation to face adversity,

volatility and risk. The only guarantee that exists is that

of the calculated risk of such product or geographical

analysis and market research in planning for the

diversification process and activities (Grant 2005, pp.

147-148). Hence the volatility issue does not really

appear to be a feasible factor in the decision making

process, but rather an informed acceptance and

resultant exposure to the risk thereof that has the

accompanying reward of the diversification strategy and

implementation thereto associated.

From the perspective of geographical diversification,

the company has the opportunity of alternative geo-

targeting, in terms of existing product lines, as well as

new product offerings, and the election of such a

strategy will, furthermore, result in growth within the

company itself (Channon 1999, p. 78). Hence, by

venturing away from where the company originally

started operation, the company stands to realize

additional growth opportunities, by virtue of the

increased size of the market being sought after. This

does not ever take away from the added cost in terms

of logistics that will be required to deliver such product

to these new geographical locations, which needs to be

analyzed prior to undertaking such a strategic direction.

The company may seek to establish representation in

the alternative geographic areas, which in all likelihood

would represent a significant capital investment,

realizing the issue of whether or not to seek internal or

external funding or financing for such growth.

The geographic diversification is more often than not

influenced by social and political factors that further

need to be taken into account prior to undergoing such

strategic processes. Regions that are influenced by

religion may play a role in specific products, such as that

of alcoholic beverages in predominantly Muslim

countries as an example and would Therefore, require

the specific analysis and investigation in terms the

expansion into such a market that may be adversely

affected thereby. Navarro provides that beyond the

business unit diversification strategy, the geographical

diversification strategy may not be solely motivated by

that of any hedging initiative, but rather that of

achieving greater economies of scale, whilst providing

opportunity to “deploy core managerial and production

skills across a broader range of opportunities” (Navarro

2006, p. 11), which in essence indicates the experience

sought after by company leadership in providing to and

dealing with alternative markets with respect to their

products and services, gaining market share as well as

invaluable experience in dealing within these varied

geographical areas, each influenced by their respective

socio-political infrastructure.

Financing of the diversification processes may well

prove to be more of a challenge for the family business,

due to the fact that it is not an exposure of risk to

external shareholders, or stakeholders, but rather to

that of the business owners which in this instance is

represented by family members themselves

(Poutziouris & Smyrnios 2006). Furthermore, research

by the author suggests that issues of autonomy within

the business will also play a determinant role, beyond

that of the acceptance of the risk associated by such a

strategy and to the family members themselves. It quite

appropriately to add here that “there is typically no

clear demarcation line between business concerns and

family concerns since the family business is typically the

vehicle that fuels the family’s current income and future

wealth, and business results directly affect the family

(Jurinski & Zwick 2002, p. 11), which concurs with

Poutziouris in that the exposure may well be greater to

the family business (Poutziouris & Smyrnios 2006), and

the ownership as compared to that of the corporate or

publicly listed company. Although within the primary

research, some of the businesses were publicly listed

companies, due to be allocated shareholding the family

still retained large portions of ownership, if the majority

share, in which case such exposure and the potential

resultant effect upon the family and the business would

still be realized in this instance.

The extent to which the business diversifies would be

for all intensive purposes up to the risk tolerance level

of the family concerned. Within the research, one of the

respondents indicated that the family had diversified

into no less than twenty-seven separate companies, and

into a variety of different fields and disciplines. This may

be construed as an undisciplined diversification

strategy, in that once a company succeeds in a specific

field the owners thereof would like to “try one’s talents

in new industries or geographical areas” (Gersick &

Davis 1997, p. p189), specifically under that of the

holding company.

Although this methodology or strategy may provide

many benefits to the family concerned, specifically, in

terms of the extended family such as that of cousins, as

well as providing a basis for internationalization, there

are disadvantages to the specific strategy, as provided

by the author in “if the process is not carefully evaluated

and controlled” (Gersick & Davis 1997, p. 190) which has

been represented in a number of studies in which

“broad diversification can distract the company from its

successful enterprises and dilutes needed investment in

profitable ventures” (Gersick & Davis 1997, p. 198).

Once again reiterating the diluting effect of a too broad

a diversification strategy. Interestingly, enough Gersick

further provides that business owners are often left at

odds as to how to manage or deal with the original

founding business, in which many instances the family is

merely attached to this company for entirely

sentimental reasons. In many instances, the original

business has either passed its maturity stage, or is no

longer profitable or viable to retain and the most

prudent course of action would be to deal with it

accordingly, Although this may prove to be somewhat

of an emotional challenge, based upon the involvement

by the family over the years.

An important aspect of analysis of the company, instead

of post-diversification strategy and performance, which

can be performance analyzed based upon sectors within

which the businesses had become operational or having

diversified into (Cantwell, Gambardella & Granstrand

2004). Although the interpretation of relationships

between diversification and performance seem to be

somewhat controversial, due to conflicting evidence, as

well as diversification processes and timing which would

naturally skew the results (Santalo & Becerra 2006). As

revealed in the research a number of respondents took

advantage of market opportunities, and Therefore,

entering the market with the right time enabling a

significant growth phase which was uninhibited by any

major barriers to entry, that essentially did not exist at

that time are prevalent today. This is confirmed by the

‘mixed response’ of the positive or negative nature of

the diversification decision and process as revealed by

the primary research data.

Additional factors of diversification, which may or may

not be conscious decisions in terms of such a strategy

include that of the technological diversification within a

company, in the process within which the variety of

sectors update their existing infrastructure in order to

realize the benefits of improved technology and

processes, regardless of the sector within which they

operate. Within this process of modernization a large

degree of training, as well as significant capital

investment is more than often required in order to meet

the investment requirements. This may not be

considered as a strategic diversification, with in the

initial phases thereof however, considering the overall

impact upon the organization both from a capital

intensive as well as productivity perspective such

changes can very well be regarded as diversifying.

The controls of the diversification process is best

described by Porter in terms of the competitive

advantage analysis of the business, as provided in

Porter’s “Better Off Test”, and specifically pertaining to

that of business unit diversification (Grant 2005, p. 254),

although this can be applied in essence to a

geographical strategy too. In essence the better off

analysis provides that the business stands to gain from

such a strategy and is in a better off position, both

financially and operationally than prior to undertaking

any strategic decisions or movements within the desired

direction, as identified by any market analysis or

research. The consideration of suitability of pursuing

any such move will be affected by the financial

resources immediately available to the family business

or family members involved within the company,

alternatively the associated risk of seeking external

funding will become apparent, with the potentiality of

loss of autonomy becoming a determining factor.

In the event of survival of the business, as represented

by the respondents the family members may be faced

with the opportunistic options of increasing revenue

streams, which is represented by the diversification of

the business interests in terms of the fields and markets

within which they operate, or the alternative of a

quickly diminishing market, for whatever reason

realizing the demise of the family business concern. The

latter represented by one of the respondents within the

study, in that failing the process of diversification, the

company would no longer be viable or even in

operation. In as far as the research panel goes, there

were no specific mentions made of acquisitions or

mergers in terms of the respondents and hence the

optimization of any merged or acquired units does not

come into play here but rather the efficiency within

which the business unit diversification has taken place

or been taken advantage of.

Facilitation of the diversification process can take place

by means of a variety of financial means by which the

family members will decide the loss of autonomy, in the

case of a publicly listed company in which majority

shares are not retained, or alternatively by means of

internal funding by private fundraising. The private

fundraising exercise will entail additional exposure of

personal finance standings to financial institutions in the

form of private loans or investments from personal

sources, or the acquisition of financing based upon the

financial standing of the family members themselves.

This will increase the risk exposure to the personal

members of the family at an opportunity cost of the

consideration of the loss of autonomy, and hence

careful thought and strategic planning is required in

either of the routes under consideration in terms of the

financing possibilities of such a strategic determination.

Thereby the reduction of risk from a business exposure

and operation perspective is transferred to the

individual members of the family in the case of private

financing, whilst the public listing of the company would

in all likelihood result in sufficient capital for

development, reduction of risk to personal family

members but the loss in complete autonomy of control

of the business.

Beyond the perspectives described above Navarro

provides that the business leadership unit seek

diversification, whether it be from a family business or

publicly owned perspective, for the purposes of hedging

against business cycle risks and associated elements,

where outsourcing and ‘off shoring’ are factored into

the business unit and geographical diversification

possibilities or options, quite aptly quoted by Navarro in

Jurgen Strube’s statement of “the challenge is not to

avoid business cycles but to manage in such a way that

[the business units] will perform, on average, well”

(Navarro 2006, p. 151); which is in essence is what many

businesses strive to achieve, this is represented by the

fact that a business remains within operation by

profiting from the business environment, despite the

associated loss that may come along with the markets

and business cycles, provided the business is profiting it

remains a viable opportunity for the owners thereof.

Scott provides further insight in his analysis of

diversified firms versus those companies that did not

diversify, on a so-called purposive basis, as well as the

resultant behavior of the relevant companies (Scott

1993). In terms of purposive the author provides that

the companies took advantage of opportunities within

their core areas of expertise and the major differences

revealed from the study revealed that the purposively

diversified company conducted more research and

development than that of the non diversified

companies. This would result in an additional

expenditure cost for the company, and whilst this

research is consistently undertaken the diversified

company would in all likelihood continue with such

strategy based upon their research efforts (Malerba,

Lissoni & Breschi 2002, pp. 69-87). This represents the

issue that once the primary diversifying strategy is

undertaken, this will lead to further diverse markets and

product offerings (Scott 1993, p. 125).

This research is confirmed by the primary data within

this study, specifically with the proportion of

respondents that indicated additional opportunities

that were undertaken by the companies, resulting

widely diverse structures, mostly managed from a

central holding company or the family unit itself. With a

small percentage of the researched companies widely

diversifying, the majority of respondents seemed to stay

within their respective markets, in the broader sense of

the sector concerned. To a large degree, this does

confirm Scott’s research, in that once the initial

diversification strategy has been undertaken the

company continues to seek out opportunities, albeit by

research and development or whichever means

necessary in order to realize whether or not any

competitive advantage can be established for the

company, and whether such opportunity will represent

growth potential for the company concerned. It appears

that the risk associated with such strategic decisions is

lessened, in the eyes of the diversifying business or

family members, once the initial step has been taken in

such a strategic decision.

In terms of further analysis on the research and

development perspective, as provided by Scott,

Villalonga & Amit provide the following “family and

nonfamily firms also differ significantly in their

investment policies. Family firms have relatively higher

capital expenditures but slightly lower R&D

expenditures (Yang 2010). They are also less prone to

being diversified than are their nonfamily counterparts.

Consistent with their diversification profile, family firms’

stock returns show higher levels of risk, both systematic

and idiosyncratic. This pattern contrasts with the

conventional wisdom that families may be inclined to

diversify their firms to make up for their lack of personal

diversification” (Villalonga & Amit 2004). This is

somewhat contradictory to what Scott provides.

However, this is not the only area of contradiction that

has been revealed by the study and research within the

family business and related diversification issues. The

authors here provide that valuation studies by two

separate groups, in terms of Tobin’s q was higher for

family firms than non family firms in one study and in a

separate study by different academics the opposite was

found to be true. This arises as to which of the

information or data is the more reliable and more

importantly which is the more relevant or which should

be taken as more accurate.

The consideration of company legal structure appears

to be confirmed, within our study, with that of Phan &

Butler who provide “alternative mechanisms of control

over the governance of the firm often utilized to retain

influence of critical strategic decisions and guide the

firm during times of crisis” (Phan & Butler 2008, p. 7); in

that regardless of whether the company with the

sampling took on the legal structure of limited liability

company or public company, it was done in such a way

that control was in fact retained by the family via a

mechanism of majority shareholding retention by the

family within either form or structure of the companies,

as mentioned. The authors furthermore confirm,

together with the findings of the surveyed companies

that the original family ethic is retained within the

business, in terms of leadership and management of the

company in “a strong culture of regard for the

preference of the founder or founding family may be

enough to influence the decision making process of

hired managers and independent directors” (Phan &

Butler 2008, p. 7). However, according to Moores &

Barrett, the structure of the family firms affect both “the

content and the form of controls” of the organization

itself, inevitably when any structural change occurs, so

well all the controls albeit from an operational, or

profitability perspective, with many of the

responsibilities vesting with management (Moores &

Barrett 2002, p. 136).

Bearing in mind that family businesses account for

between 80 and 90% of all businesses in the United

States and 75% of businesses in the United Kingdom, as

well as 80% of businesses in the Philippines (Johnston

n.d.), to name but a few of the available geographical

statistics; the realization, not only of the contribution of

these businesses, but to the extent to which these

businesses occur one has to consider the fact that such

control as mentioned above is prevalent across these

quoted statistics. This implies that such family values

and ethics are carried through to these businesses

which account for such a large percentage of economies

across the world.

Tying in with that of Phan & Butler’s views, is that

regardless of company legal structure or formation

these companies are under the control of the founder

or founding family and operate accordingly their terms

of strategy and critical business decisions. In terms of

analyzing the family business, one should also not

consider the business to be that of a small operation,

that may be working from home or a small office or

warehouse somewhere, as provided by Johnson (2004)

“37% of Fortune 500 companies or family owned while

60% of publicly listed companies are family controlled”

(Gersick & Davis 1997). Study provides that on an

international basis between 65 and 80% of all

worldwide business enterprises are owned or managed

by families (Gersick & Davis 1997, p. 2). Such control

would arguably be in the form of majority shareholding,

by the family concerned that has been confirmed within

the sampling.

The above serves to confirm that regardless of company

structure, within the sampling, control over the various

diversified business units was ultimately retained by the

family in concern.

The various motivational issues behind that of the

diversification of family business, is confirmed by the

sampling’s response of increasing business strength,

which leads directly or indirectly to increase

profitability, which ultimately provides a greater

revenue stream to the business and family ownership

unit. The academic measure of the diversification

process while that of Michael Porter’s “essential tests”

was not specifically and directly addressed with the

sampling (Granados 2004, p. 8). However, two of

Porter’s tests were revealed in the responses by the

sampling, being that of the attractiveness test as well as

the cost of entry test.

A large proportion of the sampling indicates that

opportunities within the economic market presented

themselves, which is a direct indication of the

attractiveness test, as the management and ownership

of the business that time realized inherent value in

taking up such an opportunity at the time of

diversification. One of the respondents specifically

mentioned that entry into one of their diversified

markets, would not be possible to date due to the cost

of entry, and on a retrospective basis such

diversification had not capitalized on the cost of entry

into their chosen diversified field, and would therefore,

be justified in terms of such strategic decision at the

time. Grant (2005) specifically stated the company

being “better off” based upon profit generation, either

via mergers or acquisitions, this issue did not affect the

sampling in this case, as no specific mention has been

made of an acquisition or merger drive from any of the

companies within the sampling. However, such

diversification and strategic decisions were based upon

a more generic and internal process than that described

by Grant, Therefore, such theory not being applicable to

the sampling surveyed.

The issue of resources of the family business from a

financial perspective was not directly addressed by the

respondents. However, from the provision of responses

with respect to the company structure, one might

assume that such financial resources were generated

from internal sources or via traditional funding sources

such as that of financing houses, or banks. This is with

the exception of the publicly listed respondents,

represented by just over 22.72% of the sampling, in that

they had elected the public company route. In all

likelihood the publicly traded company is a mechanism

to generate sufficient financing to fund such expansion

activities, and once again the control was retained via

majority shareholding of the now publicly traded

company, coinciding with that of the statistics as quoted

by Johnson (2004) above.

The balance of the companies, within the sampling did

not specifically claim internal funding or loans via banks

or similar institutions. However, the inference of a

limited liability company, being that of a privately

owned company, is that of self or internal funding, in

essence not wanting to open the company up to too

much external influence. However, whilst protecting the

interests of the family members via such a legal

company structure, from a liability perspective. Rising of

external capital may well be more expensive, as

provided by Grant (2005). However, once again based

on the fact that these businesses are still in operation,

regardless of the means of how and where such

financing was obtained, attests to the fact that the

necessary funding was indeed obtained and allocated

efficiently to ensure the apparent success presented

within the study. For those respondents who elected

the public company route, one may surmise that the

capital requirements were too vast for self funding and

therefore, the need for such listing was made in order

to meet capital requirements within the diversification

drive.

An alternative form of growth, being that of mergers

and acquisitions was not highlighted in the primary

data, which in fact coincides with Davies (2006) who

provides that family firms preferred the organic growth

aspect, based upon the fact that most families work

within a family controlled businesses as a form of

working on the inheritance factors, by implementing a

merger or acquisition strategy the inherent risk is

represented by the addition of an unwanted culture

being brought into the business. Therefore, the issue of

diversification or other alternative organic growth

seems to be much preferable to the family owned and

or controlled enterprise. This change in culture is

neither desired by entrepreneurs nor family businesses

(Ravensburg 2009, p. 13). Furthermore, based on the

fact that the entire sampling seems to represent an

entrepreneurial spirit, in addition to the fact that these

are family owned businesses, such change in culture is

ultimately undesirable (Davies 2006, p. 98).

Human resources requirements become important

once the company begins to grow, and in the case of

diversification, a number of elements have to be

decided upon by the controlling family, who may well

retain control will have to start delegating and so called

letting go of certain functional activities within the

business (Rowley & Abdul-Rahman 2007). Naturally the

need for an increased workforce is presented upon such

growth, and along with such an increase within the

human resource element is the requirement of efficient

and effective management according to the strategic

goals of the company concerned. The sampling provided

a number of possible solutions or elected procedures,

which included the outsourcing of the human resource

management function, as well as the establishment of

specific specialized companies for each business unit,

whilst retaining an oversight via the holding company,

which in turn held the control in the various individual

companies.

Beyond the management of human resources within

the now diversified firm, as well as an aspect that

touches upon the structure of the firm, business risk

becomes inherent in the business environment, where

something might go wrong within the delivery of a

product or service to the end user or customer, in which

instance the customer may sue the company (Sadgrove

2005). This insight provides for the formation of the

limited liability company and the public company, which

provides some protection for the shareholders.

However, this is not the be all and end all of risk

management, which filters through to the human

resource element, as well as the issue of business

continuity, in the event of legal action being brought

against the company due to the action or inaction of

employees, management or leadership of the company.

The human resource element of the family business is

further extended to include the fact that the family

dynamic as well as the corporate structure becomes

intertwined within the corporation itself, with this being

coupled with the concept of succession, a number of

possibly difficult business decisions and issues may arise

from this closely bound relationship (Raghavan et al.

2005, pp. 4235 – 4265).

Succession planning, as provided by Gersick (1997), is

often blamed and labeled as such in the event of family

conflict within the business unit, it is furthermore a field

of expertise that is more often sought than not to be

dealt with on an external or consultancy based basis.

Gersick (1997) and Poutziouris (2006) further provide

that extensive literature exists on the succession

planning and implementation phases, with two

opposing forces becoming prevalent during both the

planning and implementation phases. These forces

include from the senior level, in not wanting to let go

and from the junior level of not wanting to wait for the

succession implementation. Gersick further provides

that the distinction between succession and continuity

must be drawn, with the senior generation more often

than not becoming concerned with the issue of

continuity rather than that of succession, with an

amount of confusion being represented in this ‘senior

opposing force’.

Specifically pertaining to the issue of succession, within

our sampling it appears that all of the respondents

involved seem to have dealt with the primary steps of

succession with the involvement of the second, and in

some instances the third generation. The median of

generations within the sampling was slightly over the

second-generation, represented by an average

population of 1.6 generations that were involved in the

family business. Therefore, one will notice that these

primary steps have been taken, due to the involvement

of additional generations, with the remaining issue of

the senior generation having to “let go” when the time

arises. However, due to the fact that the majority of the

businesses within the sampling are relatively young,

represented by a median of 15 to 17 years lifespan, one

would expect that such specific “letting go” phase is yet

to come. This is further confirmed by the sampling’s

acknowledgement of the fact that numerous

generations are currently still actively involved within

the leadership structures of the relevant businesses.

Relevant research into family ownership of a business

that has undergone the diversification process and

publicly listed as a result, Villalonga & Amit (2006) have

found via relevant data collected that the value of the

company is enhanced in the event of the founding

family member serving as the prime leader of the

company, such as the Chairman or the Chief Executive

Officer. In the event of descendants taking up such a

position the value of the firm is reduced. This issue

further raises the importance of the succession

management and planning in order to retain the value

of the firm, as well as retain investor confidence where

applicable, as the founding member cannot serve the

company in perpetuity and will have to at some point

relinquish control of the company in question.

Another pertinent issue is that of the diversification of

investments by the family business. Investments may

refer to the reserve capital in the company, which may

form the basis of income for the ownership or family in

the case of volatile economic conditions or market

slumps. According to Schmid, Ampenberger, Kaserer &

Achleitner the research based upon family and non

family business pertaining to the use of cash hedging

instruments as a form of diversification revealed that

the family owned business was less likely to use the cash

hedging option than that of a non family business which

provides that the company from a non family held basis

may well be less risk conscious or possess a higher

threshold for risk taking initiative than that of the family

held or owned business (Schmid, Kaserer & Ann-Kristin

2008).

Methodology

Methodology of this study involves two phases. First

phase is the literature review that has already been

discussed above. Literature review involves taking help

to bring all pros and cons of your topic in to light. It

involves referring to the researches of others so that to

assess and evaluate the findings of other papers (Kerr

2000, pp. 6-10). Literature review is the backbone of any

dissertation as it discloses the clear picture of one’s

topic. Researcher summarizes the points and then move

on to the next stage, i.e. the real or practical side of any

study. Therefore, the second phase of the methodology

involves research. As discussed above, literature review

involves secondary data that are also called the

processed data. While the unprocessed data that a

researcher collects himself using various methods while

researching, is called the primary data.

Collection of Primary Data

Prior to the collection of data and submission of the

question, specific definitions to which the surveyed

sampling should adhere are provided below, as well as

a description of the questionnaire design and

submission process.

Definition of Terms

The following definitions are relevant to the subject

being researched here, and for the purpose of clarity

and understanding specific definitions must be

accepted for the research and analysis of the

diversification effect upon family businesses. The Family

business is defined in a number of ways. However, there

seems to be an overriding central theme, which is

represented in the following definition, which will be

accepted for the purpose of this study: “a business

actively owned or managed by a member of a family, in

which other family members may or may not actively

participate in the management thereof. However, the

majority ownership rests within the mentioned family.”

This provides the starting point of analyzing how a

family owned business is affected by the decision and

process of diversification, duly defined below.

The definition of diversification that needs to be

accepted here is based upon the fact that it is the very

decision or process that is central to understanding

what the changes are and which that are effected, how

these changes affect the company, the stakeholders, as

well as the strategic position and future of the company

concerned. Therefore, for the purpose of this analysis

the definition of diversification that will be accepted is

as follows: “diversification is the decision, and resultant

process, of risk reduction which can involve the addition

of products, services, clients as well as markets and

locations to the company undergoing or intending to

undergo such diversification. This process can be

motivated via both seasonal and economic fluctuations

within the company’s sector, and may further be a

strategic invasion into a specific and defined market.”

This definition may also extend to the investment of

surplus funds that may be available to the company as a

form of income generation or security, generated in the

times of substantial excess gains or profits made by the

company.

The analysis of the family owned business that intends

to be undergoing or has undergone the diversification

decision and process will be conducted via a primary

and secondary research objective. Within this research

a questionnaire has been designed and dispatched to

numerous family owned companies, randomly selected

and both geographically and sector differentiated,

referring to their physical location and their primary or

core business activity respectively. In order to obtain as

wide a research result as possible, thirty questionnaires

were forwarded to family owned businesses. The results

and analysis are thereby provided within the following

sections of this paper, together with the discussion of

the questions contained within the questionnaire.

A number of issues regarding the results that have been

highlighted from the research will be discussed with

reference to theoretical or academic literature as well

as to commercial or “real life” examples; this will be

conducted due to the fact that within the so-called real

world events, they do not necessarily occur in the way

in which one may wish events to occur, or according to

the ideal world scenarios that are often referred to

within academic literature. Therefore, the analysis and

findings will be able to provide an insight into the actual

process, as well as highlight potential advantages,

disadvantages and problems that companies may incur

along the diversification journey.

The conclusion will be supported by the analysis of the

research and will aim to identify possible routes or

elements of success that are provided by the research,

as well as possibly form a frame of reference for future

companies, in which they may realize the true effects of

diversification from both a negative and positive impact

upon the family business.

Research – Questionnaire design

The questionnaire forwarded to the family business,

which forms the basis for the primary research

methodology, consists of total 25 questions; the entire

questionnaire is attached to Annexure A.

The questionnaire was designed using a web based tool

Survey Monkey and was sent on an anonymous basis, to

a geographical diverse audience, to gauge whether the

geographical location does or does not affect the family

business in such a process, and if so to what extent such

geographical positioning is relevant. This may be specific

to country laws or practices, as well as any possible

significant cultural influences that may well be relevant

to the business itself.

In order to establish the relevancy to the business being

interviewed, the question is set to ascertain whether or

not the respondent considered their business as being a

family business. This is important in establishing the

relevancy of the questionnaire to the business being

interviewed, with another question confirming the level

of ownership and / or control within a specific family or

not. These questions serve to qualify the respondent

businesses in accordance with the accepted definition,

as highlighted above. The question pertains to the

length of operation of the business, which is required to

establish to what effect and extent the change was,

which further serves to highlight the positive results of

diversification in assuming that such a process or

decision was in fact directly responsible for the

company still being in operation to this day. The

preceding question is supported by the question in

establishing which generation is now running the family

business, Therefore, supporting the length of operation

of the company.

The core business or activities of the business in

question serves to highlight or confirm the necessity of

the diversification in terms of the current economy, or

the state of the economy as it was in the instance of the

decision or process being undertaken or initiated. This

serves to establish how macro or micro economic

factors are relevant to the business regardless of size or

structure, with the question pertaining to the structure

of the company serving to establish any unique issues or

consistency in type of business structure relevant to the

family business. This in line with the ‘international’

distribution of the questionnaire is to provide an

underlying commonality of the formation and structure

of the family business or the lack thereof.

Additional business interests on the part of the family in

question may also be indicative of the diversification of

the business, which may have come about to the need

to extend or expand the business interest, in which

instance the reduction of risk may have been deemed to

be more effective on the establishment of an additional

business, instead of changing the existing business or

structure as well as the core competencies. This may be

reflected in the alternative or additional business being

wholly owned by the business in question, in which

instance such a business entity could well be envisaged

as a diversification effort on the part of the business.

The 8th question serves as confirmation of the preceding

statement, and determines the level of such

diversification interest.

The primary motivation for the diversification process

and the decision will provide an insight as to whether or

not the company’s survival depends upon the process of

diversification, or whether the company is seeking the

mentioned invasion into profitable markets. Whether or

not the company ownership made the diversification

move due to market or product maturity will be

reflected in the response of this question, which adds to

the analysis of motivation of the process and decision.

The following question extends further to analyze the

market position of the company immediately prior to

the extension of the company, in the form of their

diversification process.

The next question seeks to establish whether or not the

diversification process ceased after the initial process

itself, or whether or not the company continued to

evolve in line with its initial realization of diversification,

which serves to prove whether or not the initial process

served as a catalyst for the continued expansion of the

company.

Organizational structure is analyzed from the

perspective of whether or not the company would have

had to take on additional financing or partners, which is

represented in the twelfth question. Answers to this

question will provide whether the majority of

respondents in our sampling needed to facilitate

structural change or not, as well as highlighting the need

for external financing to enhance the process or even

enable the company to conduct such changes as were

necessary at the time of diversification. An important

factor on both the structure and control of the company

has been claimed by many authors, the questions

pertaining to this is to establish whether or not such

changes have occurred within respondent companies

and to which extent. Responses within this area further

motivate the concept of how drastically the decision

impacted upon the company and to what extent these

changes have impacted within the physical control and

management of the company.

Many family owned businesses are often seen as more

flexible due to the fact that any organizational changes

or decisions pertaining thereto can be decided upon

more quickly and with less so-called red tape or

bureaucratic processes than that of the listed company.

Hence, any changes within the business after the

diversification will be reflected in the ability or inability

of the company maintaining such flexibility or autonomy

within the company during the decision making

processes.

Ascertaining the impact of corporate governance is

deemed to establish whether or not this issue was in

fact considered at the time of diversification, and seeks

to establish whether or not the management or

ownership of the company has considered the impact

thereof on the now diversified business. The distinction

between whether or not such governance is a

prerequisite or actually an asset to the business serves

to establish the positive impact or benefits arising from

the necessity of corporate governance, or whether the

practice thereof is deemed to adversely affect the

company. In many instances the corporate governance

issue will be a new policy or practice for the family

business, which would now in the post diversification

phase have to implement this practice and these

stipulated regulations.

The view of overall negative or positive impact of the

process must be established in order to retrospectively

measure the success of such processes and decisions, in

order to establish potential future strategic moves for

the company, or within other family businesses. It may

serve as a frame of reference for future business

decisions in difficult markets or even those markets that

are seen as saturated. The question regarding the core

business perspective thereof may also serve to establish

whether or not the company still maintains such core

business, or perhaps if the decision to diversify may

have led the business into a different product or service

offering that leads them away completely or even

partially from their original core business practice.

Quantitative vs. Qualitative within the research

process

The process that has been undertaken in establishing a

sampling within the family business ‘sector’ is based

upon that of a quantitative approach in obtaining the

insight as well as to the effects and what has led up to

the mentioned process of diversification. Whilst one

may determine that the actual diversification process,

which is highlighted within the research forms part of a

qualitative subject or process, as these decisions may or

may not be guided by market forces with respect to

diversifying.

The methodology of the surveys sent to the

respondents can be classified as an online methodology,

as the questionnaire was forwarded to the respondents

via email, as per the format in Appendix A.

A total of thirty questionnaires were forwarded to

known family businesses via colleagues, friends and

family. The questionnaires contained the questions

discussed above, and form the basis of analysis of how

diversification affected the family owned businesses,

and to what extent this process and decision affected

the concern, as well as what has essentially become of

the business on a post diversification basis. Further

insight into the family business with respect to which

trade sector the business belongs to, as well as issues

such as age and generations involved within the

business that serves to establish whether or not any sort

of trends exist in regard to this process and decision.

Of the submitted questionnaires only twenty two

questionnaires were returned, which represents a

73.33% response ratio, the balance of questionnaires

and the reasons for non completion were stated as the

people who were approached were too busy with their

daily management activities and obligations to

complete the requested information. In addition to this,

four respondents stated that they were not prepared to

provide answers due to concerns of confidentiality

issues, despite the assurance that none of the

information would be published and was for analytical

purposes only. The sentiment as previously described is

confirmed by Poutziouris who provides that “given the

private nature of most family businesses, accurate

information about them is not readily available” (2006

p. 56), which provides some sort of confirmation as to

the expressed wish to not participate within the

presented study.

Yu & Cooper (1983) provide that although numerous

research exercises have been undertaken to improve

response rates in an attempt to reduce non-response

bias. However, although these approaches have been

suggested “little is known about their relative

effectiveness” (Yu & Cooper 1983). Hence, based upon

the reasons for non-response of the mentioned selected

sampling, it is a suitable justification that the responses

received are in fact sufficient for the analysis herein

contained.

Figure 4: Completed vs. Non Response for Online

Surveys.

The 98% response rate is higher than the “market

standard” of 50% and above, considering the nature and

“niche” of this specific analysis, the representative

sample is deemed to be sufficient, due to the variety of

responses, sectors and structures as per the completed

questionnaires that have been received. The sampling

represents businesses that are deemed to satisfy the

family business definition, as per the outlined definition

of terms, as well as having undergone a diversification

decision and resultant process, with the exception of

one respondent. Therefore, for the purposes of this

analysis the sampling is considered 98% within the

family business definition and the respondents or the

sampling have undergone some sort of diversification

within their respective business life cycle.

Findings

Findings of this study are based on two phases, the

literature review and the research part.

Analysis of Literature Review

The following discussion is based on analysis of

academic, as well as statistical information specifically

pertaining to the family businesses and their

involvement within society and the economy in general,

in order to get an understanding of how the family

businesses impacted upon, via mentioned issues such as

diversification, corporate governance and so forth.

Cater (2006) specifically provides that the duality of the

success of a family business is dictated by both family

life and business life, which is compounded by the

family business unit, which in turn adds a degree of

complexity, to the already complex nature of business

with the possibility of family relationships affecting the

work environment. Cater further provides that one of

the leading topics in research and family businesses is

that of succession, which may be confirmed by the

degree of involvement by the number of generations as

highlighted in the sampling collected. One of the key

points highlighted by Cater is in fact that 70% of family

businesses actually fail to successfully implement a

succession of policy from the first to the second

generation, representing a massive loss to the economy.

Considering the family business has survived the

diversification process, but stands to fail in the

succession process would truly represent such a loss,

after many years of survival both pre-and post-

diversification. In addition to the recent statistics

provided, of the 70% of the failure rate, should the

business reach the succession stage from second to

third generation only 12% of these businesses

successfully implement such a change over with

succession from third generation to fourth possessing a

mere 3% success rate. Cater’s research further coincides

with that of the primary doctor represented here, in

that the average lifespan of the family business is

quoted as 25 years, less than the median of 33.41 years

as represented in the research. This may indicate that

the various businesses surveyed in the sampling may

well not be around within the next few years, unless a

concerted effort and well-managed succession plan is

put into place.

Based upon the mentioned statistics, of 60 to 85% of all

businesses on an international level being under family

ownership or control the issue of succession suddenly

appears to be of vital importance within this form of

ownership and control. Regardless of successful

leadership and strategic decisions a family that controls

its business units should be in a position to implement a

viable and sustainable succession within their ranks, all

efforts within their business sectors regardless of

whether diversification strategies were undertaken or

not, it would in fact all be a waste of time.

Moores & Barrett (2002) not only confirm the issue of

succession, as described by Cater, but further delve into

the growth dynamic of the family business, which in

essence is associated with that of diversification as it is

described throughout the study. Such internal issues are

further exasperated by that of external pressure, such

as changing technology, government incentives (or the

lack thereof), customer preferences and opinion which

are then carried over to the structure of the firm; in that

questions of workload management, structure and

ownership begin arising placing added pressure on both

the business and family unit respectively. Moores &

Barrett claim this to be the context of the business, and

further state that the company “whether family owned

or not – needs to engineer its internal situation to best

fit its external environment” (2002 p.13); these issues

effectively referred to as contingency plans have been

greatly researched by what the academic world refers

to as organizational theorists.

Managing all through the internal situation, as well as

the external environment and any business decisions

pertaining to these elements are according to what the

authors referred to as strategies, which in this study

refers directly to the process and decision of

diversification, the allocation of resources and the

resultant business units and companies created from

these processes. Kuratko & Hodgetts also make mention

of what they term as, “Forcing Events” which can be

likened to that of death, illness, abrupt departure, legal

problems, business decline and financial difficulties. The

authors furthermore claim that the family business, and

the family itself “seldom has a contingency plan in

dealing with” the aforementioned forcing events; these

issues further exasperate the issue of succession, as well

as the future efficacy of the leaders of the business

(Kuratko 2008, p. 491). One will Therefore, realize that

besides the “normal” succession of procedure within

the family business, these contingency plans need to be

incorporated in the event of the mentioned forcing

events occurring, whilst furthermore implementing

suitable succession programs or policies to ensure the

continuity of the growing concern.

Coinciding with the some of the wider diversification

examples contained sampling Moores & Barrett confirm

that “these family firms operate in a greater number of

markets and have to take account of more areas of

development.” (Moores & Barrett 2002, p. 134). This

may well represent an agreement with respondents

from the survey, who stated that upon undergoing the

diversification process focus was taken away from the

original core business because of the need for attention

on their respective ventures and opportunities that

were taken at the time. The authors further provide that

the strategy of diversification “represent distractions

from their core business” which does in fact coincide

with representative sampling within the data analysis.

In contrast to the issues of succession as already

described Weidenbaum provides a perspective on the

Chinese Family Business, which may well be

represented by more of a private ownership than that

of a publicly traded company, although this coincides

with the sampling majority within the study; from a

succession basis the author provides that “succession

typically runs through the family group, rather than

depending upon seniority.” (Weidenbaum 1996).

Further expanding upon the difference between the

family business and the non-family business, Kuratko &

Hodgetts (2008) provide that the overlap between

family and business will vary between each family

business concerned. However, this was not entirely

revealed within the sampling, but rather the strengths

of individual family members were deployed into

specific areas where upon the content family member

displayed sufficient skills in terms of the management

and leadership of the sector concerned, no real

evidence was provided that family issues were brought

into the business and rather a more holistic process of

leadership within the family seems to have been

displayed by the sampling.

With further relevance to the succession issue, a

number of strategies exist, as highlighted by Kuratko &

Hodgetts and specifically that of early entry strategy and

delayed entry strategy, with each strategy having their

respective advantages and disadvantages. The fact that

a secondary or tertiary generation has become involved

in the business does not necessarily indicate that the

business has proceeded successfully with a succession

program, and has provided by the authors one of the

main issues that the successor will have to address is

that of gaining credibility amongst employees of the

firm, and their ability or inability to do so. In addition to

this the authors provide that the founding generation

normally prefer a succeeding generation, or the

succeeding leadership to actually work outside the firm

where there may learn, and make mistakes prior to

taking over the leadership of the company concerned.

These issues were not confirmed by primary data, based

upon current statistics of the family businesses that

succumb to failure within the succession process, it is

well worth noting, specifically with respect to the

mentioned early and late entry strategies.

Although these strategies may have specific advantages

or disadvantages respectively, it would really depend

upon the family concerned as to the encouragement of

the involvement of the succeeding generation. Some of

the advantages of the early entry strategy include a

more intimate relationship with the business and

employees, specific skills pertaining to the relevant

business are developed, achievement of credibility

ensues; on the other hand the advantages pertaining to

delay entry include a more objectively judged scenario

of the successor by the employees, success of self-

confidence and achievement development, overall

business perspective is widened by the successor. The

disadvantages for these respective strategies include

from an early entry perspective, being that of the

aforementioned opposing force of relinquishing control

to the successor, mistakes viewed as incompetence, and

limited overall business knowledge and experience. The

delayed entry strategy disadvantages are described as

key business strategies, and success factors specific to

the family business may be lacking, outside business

“habits, or patterns” may conflict with that of the family

systems, including values and ethics, resentment

amongst employees may occur with implementation of

the successor from within the family, instead of that of

a long serving employee (Kuratko 2008, p. 492). Based

upon the primary data analysis, supported by the

involvement of multiple generations and in addition to

the lifespan media and identified within the analysis, the

majority of successful involvement within the business

in all likelihood appears to be that of the early stage

entry strategy, in which entire generations have been

involved and continue to be involved in the family

businesses as described.

Based on the issues described previously mentioned

authors one might expect that a possible problem in the

succession will be in all likelihood caused by the two

mentioned opposing forces, based on the fact that it

appears the succeeding generation has been deployed

within the business on an early entry strategy basis,

whilst these opposing forces of letting go by the senior

generation, and impatience or waiting there for by the

younger generation may be the two, or either of, factors

that may contribute to the failure of the succession

process when the time comes about. As previously

stated with successful succession it may well occur that

these very businesses surveyed within the primary data,

may no longer be in existence in the next few years,

based upon the previously mentioned issues as well as

the median average age is revealed in the primary data

analysis.

Beyond issues already discussed, and a further point of

interest that is well worth mentioning and discussing is

that of corporate governance and the impact thereof

upon the diversified family businesses in particular. In

regard to the specific primary data research it did not

seem that corporate governance carried much weight

amongst the respondents, and seemed to be an issue

that was meant to be adhered to, and not a vital tool

that it could well be used for. Davies (2006) defines

corporate governance as a system by which companies

are directed and controlled, with directors being

responsible for such governance, which in turn raises

the issue of accountability in terms of the leadership of

the company concerned (Davies 2006, p. 3). In addition

to this definition Morck (2005) provides that a number

of authors claim the issue of governance emanated

from that of bankers to ensure repayment of financing

by companies (Morck 2005, p. 52).

Morck further provides that different countries have

different sets of rules and regulations in terms of the

corporate governance practice. However, within the

study it should be highlighted that the issue of

governance is more focused upon the management,

control and leadership of the company for the purpose

of continuity and sustainability of the family business

concerned, and how management and ownership relate

to each other, which is in line with previously discussed

issues of succession and so forth. The issue of corporate

governance does not come without related problems,

as Morck provides that with the different structures in

place issues become relevant in terms of allocation of

control, funds and so forth; but as stated a more

transparent and sustainable “rule structure” should be

implemented within the family business environment,

beyond that of any legal requirement adherence, to

ensure the survival of the business, for the benefit of the

family and the economy as a whole.

Aronoff & Ward provide that the organization of the

company’s board of directors, in the family business is

often underestimated by the controlling family

themselves, with respect to the potential contribution

that such board members can bring about. In addition

to this, authors provide that some might criticize the

privately held company, and family control as a

convenient way to channel director fees to family

members, which may well be the case as represented by

the primary data in which it was revealed that board

members are in fact family members (Ward & Aronoff

1996, p. 30); alternatively the authors state that

examples exist with family members which have openly

agreed that the appointment of outside board

members, meaning those that have no ties with the

family besides that of the directorship of the family

controlled business, has in fact provided significant

improvements to the business, specifically for those

business owners that are truly interested in the

perpetuity of the business concerned. This contributes

to the many mentioned succession and continuity

issues, thereby revealing how corporate governance is

interrelated with one of the primary potential failure

issues of the family business, being that of succession is

described.

Beyond the issue of good governance aiding in the

succession and continuity of the business, in terms of

present-day operations Aranoff & Ward confirmed that

all their governance is somewhat of an abstract concept,

this concept can go a long way in assisting the family

unit in terms of “smooth decision making, cohesiveness,

effective conflict resolution and freedom from political

warfare” which all aide in the development of a “healthy

and sustainable” family business (Ward & Aronoff 1996,

p. 53); with two distinctive approaches pointing to the

governance of the family and to that of the business on

two different levels. This is confirmed by Davies (2006)

who provides that the “importance of proper

governance within the family, and separately for the

business, is emerging strongly” (Davies 2006, p. 95); this

does not appear to be the case within the primary data,

as the vast majority of respondents hardly commented

on the need of such governance, as well as only a couple

believing that such governance was a tool for

optimization, as described above.

The governance issue will also spill over into the

interests of non family stakeholders that are within the

business, being that of employees. Herewith the issues

of discrimination are raised, as the astigmatism

attached to the family is that the employee may never

specifically progress within the company, due to such

non family involvement. On the other hand, the level of

ethics, the culture and the environment created by the

family may well perhaps counter any such perceptions,

but the governance is sure to establish a set of rules that

can make the employee more comfortable in terms of

not being discriminated against. One of the respondents

within the primary data, specifically stated that the

employment and human resource function was

attended by an external consultant, which coincides

with the view of Davies (2006), in which “it is becoming

accepted practice for appointments to be subject to

competitive interview with external monitoring”

(Davies 2006, p. 102).

This construes the fact that due to external pressure the

popularity of such a process is becoming more

acceptable to the family that has to adhere to such a

practice in order to remain attractive to potential

employees as well as the within the human resource

market, which requires the addition or augmentation of

the workforce within the expansion and growth phases

of the family business. Davies further echoes of other

authors in “effective corporate governance is the key

instrument for developing and sustaining excellence”

whilst “families are realizing that they can continue as

owners of their companies only by separating direction

from ownership” (Davies 2006, p. 95) which further

highlights the central theme as raised in accordance

with corporate governance affecting the continuity,

sustainability and effectively the future of the company

in question.

Furthermore, if one likens the separation of ownership

from that of direction as stated, and according to the

primary data, even those companies that selected the

public company, retained such ownership, together

with directorships on the board represents a possible

contradiction to the theories and literature herein

presented. This is where one has to question the

sustainability of the companies surveyed within the

primary data selection, as well as the true motivation

behind whether or not the company ownership does

indeed seek perpetuity for the companies in question.

Davies provides that a way around the governance issue

is that those families, who have family councils,

naturally extend into the governance area within

business, providing a set of rules and regulations that

govern the actions and or inactions of the company

concerned.

Based upon responses received from the respondents

within the survey, and specifically pertaining to that of

the issues of corporate governance, and in comparison

to the original family values and controls, a

predominant trend within the survey indicate that the

original family values and core ethics have filtered down

throughout the lifespan of the family business

concerned. These values have been installed as rules

and guidelines for the corporation, and provided these

are in line with the interests of both external and

internal stakeholders then such corporate governance is

no longer as much of an issue in this instance. However,

if these values and core family beliefs are solely for the

purpose for the well-being of the family inheritance,

then the perpetuity, continuity and sustainability of the

business comes under question. Once again some of the

responses were somewhat limited, due to be as

mentioned closely held family business issues, and

Therefore, many of the responses are deemed to infer

certain circumstances and situations, based upon

responses to specific and other questions with regards

to be corporate governance, control and beliefs of the

family members controlling the businesses in question.

From an external point of view, and then according to

Davies (2006) the issue of corporate governance goes

beyond that of ensuring the previously described

sustainability and excellence within the company,

regardless of whether it is family owned and controlled

or not, but furthermore builds reputation in the eyes of

the prospective customers, and possibly suppliers too,

Therefore, governance goes further with the

potentiality of directly affecting the bottom line.

According to the author, and specific to the field of

governance, the reputation of the organization extend

further into the social and ecological responsibilities of

the firm, and although these factors receive significant

media attention within the modern day society, the

author believes they form an integral part of the

reputation of any organization (p. 105). These issues

would be specific to manufacturing concerns, as well as

construction companies that work closely with the

environment, and are only truly represented by 18% of

the sampling during contact.

The balance of the respondents was predominantly

involved with in the service sector, as what one may

determine who is being a third-party or middlemen. This

does not alleviate from the social responsibilities that

the family business should consider in their daily

business operations. This reputation is furthermore,

somewhat of an intangible aspect of the corporation.

However, it is deemed to be “the identity of that

organization in the eyes of others.” (Davies 2006 p.105)

Although this issue has become known as corporate

social responsibility many organizations have in fact

embraced it as a brand building component within their

overall strategy and business operation. An example of

this is that the McDonald’s Corporation, although this is

not a family run enterprise, who publish a socially

responsible report inclusive of the suppliers, as well as

the overall supply chain, that they use annually in the

deliverance of their products to the consumer. Surely

the cost of such “marketing” is a mere fraction of the

overall benefits obtained by the organization by such

practice, which further adds to the reputation of the

company is a conscious service provider, as well as

employer, which will go towards the sustainability of the

company as a whole. One should not expect to meet the

standards of such multinational corporations. However,

social initiatives within the communities within which

they operate can certainly add to the reputation of the

organization, adding to the localized brand equity,

within the region in which they operate.

Aronoff & Ward (1996) in agreement with Davies

maintained that issues of governance should serve

stakeholders [both internal and external] in order to

meet the goals as defined by the stakeholders and

management of the company (Ward & Aronoff 1996, p.

53). Thereby in addressing the needs and goals of the

stakeholders the reputation of the company can

increase, arguably contributing to the longevity of the

firm.

Despite the fact that no specific mention of financing

was made within the sampling, the issue of governance

goes further in establishing reputation with financiers

and banks. As previously stated where Morck (2005)

provides that bankers and financing institutions utilize

traditional corporate governance as a measure of

repayment and to ensure that corporate borrowers

repay their debts, provides an insight into the “minds”

of the people that may provide financing for the growth

of the family business. Exemplary conduct within the

governance issues will serve the company in application

for such financing, considering the fact that financiers

take this into account in terms of the granting of credit

facilities or even the financing of such expansion.

The issue of corporate governance differs on an

international level, with a specific respondent within the

sampling claiming that such governance, although being

a requirement is difficult to implement, based upon the

market and society within which the specific respondent

operates. The geographical location is not known.

However, this sector within which they operate is that

of travel and tourism, which was accordingly grouped

into the hospitality sector. One may find it difficult to

understand as to why such governance would be

difficult to implement within the industry, without a full

understanding of the environment within which the

specific respondent operates in. Unfortunately one

encounters a variety of corruption issues within specific

geographical locations, whereby many successes or

failures hinge upon the fact of whether or not the

individual or company concerned is willing to engage in

such corruption with officials.

Morck further provides that such official corruption

“retards economic development”. However, the

engagement there in is represented by a “raising the

return to investment in political connections above that

to investing in ordinary business projects” (Morck 2005,

p. 89). The history of corruption in certain societies,

which further continues to exist, has almost become

second nature to economies, so much so that it is

expected. This issue is beyond the scope of the study,

but has a relevance upon governance as well as the

future of the company, based upon the fact that if the

company had engaged in such corruption to reach a

successful level in which they operate today, in all

likelihood such corruption would most likely have to

continue in order to ensure an ongoing level of success

to which the family members and organization have

become accustomed to.

Analysis of the Real Research Findings

Using web based tool, offered by Survey Monkey,

results are graphically evaluated. Real research of this

study involves a survey that contains 25 questions.

Analysis of the survey findings are as under:

What is your role/position?

This question has been applied on a sample of 40

participants so that to know the role of each

respondent, participating in this study’s survey. Below is

the graphical presentation of the responses received in

answer of Q1.

Figure 5: Role of Survey Participants.

For the survey, we only selected the executive level

participants. Above graph illustrate that out of 40

participants, the majority with total 15 participants are

the owners / proprietors of their family businesses.

However, second big chunk is of Chief Executive Officers

with total number as 9. Besides, 7 Financial Directors

participated while the remaining 9 are different other

directors. Q1 results indicate that the majority of the

survey participants are the owners of the companies.

The percentages of Q1 for the owner/proprietor, Chief

Executive Officers, Financial directors and other

Directors are 37.5%, 22.5%, 17.5% and 22.5%

respectively.

What is the company’s legal structure?

Q2 is another basic question to identify the contribution

of each legal structure of companies owned by the

participants of this survey. Below is the graphical

presentation of Q2.

Figure 6: Company Legal Structure of Participants.

Above graph illustrates that the majority participants

(15 participants out of 40) with 37.5% of the total

population belong to the companies with limited

liability. The second big chunk is of 8 participants with

20% of the population belongs to the partnership

businesses. Third big chunk is of 7 participants with

17.5% of the total population belongs to the private

shareholding firms while the other two chunks contain

5 participants with 12.5% of the total population each

belong to the sole traders and the public shareholding

businesses. Q2 results clearly indicate that most of our

participants belong to the limited liability businesses.

How long has the business been in operation?

For this survey, it was taken quite seriously to only

include businesses that have been operating for at least

5 years or so. However, only a few participants are from

the businesses that have been operating between 1 to

9 years. For more illustration, below is the graphical

presentation.

Figure 7: Years in Business.

Above graph indicates clearly that the major chunk of 12

participants with 30% of the total participants is from

the family businesses that are operational since 20 to 29

years. Second big chunk refers to 9 participants who

operate businesses operating in market since 10 to 19

years. Third big chunk contains total 7 participants who

own businesses that are in market since 30 to 29 years.

Fourth chunk contains participants of companies that

are as old as 50 years or above. Fifth big chunk refers to

4 participants (10% of the population) who are in

business since 40 to 49 years. While, the smallest

classification or chunk refers to the participants who

own companies that are in business since 9 years or less.

Above illustration reveals that participants are taken

from stable companies that have been operating since

quite long now. Choosing participants from companies

which were established in different years is significant

because considering companies that have been

operating since similar tenors might not add value to the

findings and it could also influence the findings.

Would you consider your business as being that of a

family owned business?

Since our topic is all about the impact of diversification

on family business, therefore, it was quite necessary to

take special care while choosing participants from the

family owned businesses. However, below graph

reveals if the participants of this survey belong to the

family owned businesses.

Figure 8: Family Owned Businesses Analysis.

Above graph indicates that 37 participants out of 40

participants belong to the family owned businesses

while only 3 out of 40 participants declared that their

businesses not as the family owned businesses.

Therefore, majority with 92.5% of the total participants

reveals that requirement of choosing the right

participants has been met satisfactorily.

What is your historical core business?

This question is to make sure if participants are from

different businesses as if a major chunk is taken from

same nature of businesses, this might affect the findings

so it is necessary to choose participants from various

fields. Below graph represents Q5 findings that would

help in assessing if participants are chosen correctly for

this survey.

Figure 9: Historical Core Business.

Above graph represents that participants of this survey

are taken from various fields with different historical

core business including consumer goods, retail

wholesale, construction and civil engineering,

manufacturing, automotive, transportation and

distribution, forestry paper and packaging, hospitality

and leisure, financial services and a few others.

Questionnaire was sent to executives from various fields

to ensure the required balance. Above graph indicates

that the task of choosing participants for this survey has

been accurately performed.

What participation level does family members have in

the business?

For any family business assessment, it is of vital

importance that the participations of other family

members are identified. Answers of Q6 as graphically

presented below.

Figure 10: Participation Level.

Above graph represents the findings of Q6. It indicates

that most of the participants (21 out of 40) with 52.5%

of the total population, personally participate in the

operations of the family owned businesses. This is a

good sign. Results indicate that second big chunk of 19

participants, out of 40 participants; with 47.5% of the

total population hold the positions of senior

management or executive management. Third big

chunk of 15 participants with percentage of 37.5 hold

are those who hand on participation while the smallest

chunk of 10 participants are those who act as seniors

and provide guidance and advisory assistance to the

operational executives of the family owned businesses.

These participants are mostly the seniors who actually

initiated businesses but when they turn senior citizens,

they relax and only provide advisory assistance to the

existing management. However, for this survey, most of

the participants are either operational or the executive

management.

What is your current generation / how many

generations have been involved in running / operating

/ managing the family owned business?

This question aims to find out the existing generations

involved in running/managing/operating the family

owned businesses. This is to check the participation of

first/second/third or the fourth generations at present

in their family owned businesses. Below is the graphical

presentation of Q7 results.

Figure 11: Involvement of Generations.

Above graph illustrate that the third generations of all

our selected participants’ businesses are not

significantly participating in any operational role of their

family owned businesses. The percentage of fourth

generation is 0%; the participation of third generation is

5% in the current execution. However, the participation

of first and second generations is equal, active and

significant in the current executing/operational roles of

their family owned businesses.

Second part of Q7 indicates the generations involved in

overall establishment of their family owned businesses.

Surprisingly, results illustrate that majority of the

individuals involved in the establishment of their family

businesses belong to the first generation. With a little

difference, the second major chunk is of the individuals

from the second generation involved in the

establishment. However, the third generation

contribution also seems active in the establishment of

related family owned businesses.

Do you expect a change of hands (generation) will

occur? And if yes, when?

This question has been included to see if the change in

executing generation is expected. Below is the graphical

presentation of Q8.

Figure 12: Expected Change of Hands.

Above graph shows that most of the participants (26 out

of 40) with 65% of the total population believe that the

change is expected in five years or more. 6 participants

out of 40 with 15% of the population believe that

change is possible in next three to five years. However,

12.5% participants (5 out of 40) believe that change is

not expected at all. Two participants think that change

is possible in next one to two years. While only one

participant refused to answer and ticked the option

of don’t know. Results clearly indicate that though it is a

family owned business, change is expected in five years

or more. This also means that current generation is

quite involved in business affairs and participants

(representing population) do not think that they are

exhausted yet or it’s a time to pass on the charge to the

next generation. They still tend to finalize and execute

the system for next 5 years or so, depending upon their

willingness and depending upon their perception of

assuming the next generation as ready to take the

charge. As normally, it takes time to once finalize to

transfer the system to the next generation, and even if

seniors think to transfer, they still need to work hard on

training the next generation by working with them for a

few years.

Would you consider your company as diversified?

This question is to test if the participants are from the

companies that are diversified. This question has also

been tested on the same population of 40 participants.

Responses are as under:

Figure 13: Diversification Status.

Above chart illustrates that 38 out of 40 participants

(95% of the total population) declare their businesses as

diversified. Only 2 participants negatively responded to

Q9. Results of Q9 clearly illustrate that majority

participants are well selected for this study as the topic

revolves around the diversified family owned

businesses.

Do you own or operate any other businesses?

In order to verbally cross check if the participants of this

survey own any other business, Q10 has been tested

over the population of 40 participants. Below is the

graphical presentation of Q10.

Figure 14: Status of Other Owned Businesses.

Out of 40 participants, 39 participants declared that

they own other businesses as well. Only one participant

replied in negative. This indicates that most of the

participants own other businesses too.

What level of control do you have on the other

businesses?

In order to identify the participants’ level of control, Q11

has been tested over the same population. The results

are graphically presented below:

Figure 15: Level of Control.

Q11 results clearly indicate the influence of participants

on their other businesses. Above graph clearly shows

that around 50% of the population, total 20 participants

have complete control over the decision making of their

businesses. Second big chunk of 8 participants with 20%

of the total population have limited control and

influence over the overall decision making of their other

businesses. 7 participants with around 17.5% of the

population stated that they do not have the complete

power but their suggestions are influential. 2

participants with 5% of the population refused to

comment while no one selected the option of none. Q11

results clearly indicate that being senior directors or

executives, they have certain limits to influence the

decisions. However, 50% of the executives (mostly the

sole traders) have 100% control over the overall

decisions of their businesses. Q11 clearly indicates that

after all, their suggestions matter a lot and they can play

a vital role in taking decisions for the positive or

negative future of their companies. The influence is

there and cannot be neglected.

What was the primary motivation for diversification?

Diversification is considered for some reason. There

could be several reasons for looking forward to move

with diversification in businesses. Q12 results would

help a lot in identifying the most common motivation

for diversification. Findings are graphically presented

below to present a better picture:

Figure 16: Primary Motivation for Diversification.

Above graph reveals that 16 out of 40 participants, with

40% of the total population, considered diversification

for the growth potential. 9 participants with 22.5%

considered diversification to reduce business risk.

Again, 9 participants with 22.5% declared that they

considered diversification by considering it an

opportunity. 3 participants with 7.5% of the total

population though it was a market demand that led

them going for diversification. Two participants with 5%

of the total population took it as the exit strategy while

only one participant with 2.5% of the population ticked

the option of other but did not specify exactly.

The results of Q12 indicate that majority went for

diversification by taking it as the growth potential. With

this result, we can assume the trend of diversification is

adopted for the sake of business growth.

Would you consider at the time of diversification, that

your core business reached maturity?

Another aspect of diversification could be the maturity

of one’s core business. At many places while reviewing

the literature, it has been found that one of the reasons

to go for diversification could be the maturity of one’s

core business. However, to test it practically, Q13 has

been designed and tested over the same population.

The results are graphically presented as under:

Figure 17: Maturity Status of Core Businesses.

Above graph indicated that 20 out of 40 participants,

50% of the total population agreed with the fact that

they considered diversification as their core business

reached maturity. 1 participant (2.5%) refused to

comment while 19 participants denied Q13. This seems

a tough fact to analyze as there is just a difference of

one point from yes to no. However, for Q13, it is not

wrong to say accept the statement that due to core

business reached maturity, diversification is considered.

If your answer to the above is yes, on that stage what

was your market position or market share in relation

to the core business?

Q14 would help in assessing the reason of diversification

up to some extent. Below is the graphical presentation

of Q14 results:

Above graph indicates that participants who considered

diversification are mostly under impression that there

companies are not in top ranking. Only five participants

with 12.5% declared their companies as the market

leaders. 15% with only 6 participants declared to be in

top 5. The majority selected don’t know option that is a

confusing feedback. Above results clearly indicate that

due to fall in revenue and market status, participants

considered diversification because they think that their

core businesses reached maturity.

Once diversified, did the process of diversification

continue to take place and if yes in which frequency?

After diversification for the first time, process of

diversification begins to take place. To check its

frequency, this question has been designed. Below are

the results.

Figure 19: Continuation Process of Diversification.

Above graph shows the trend of majority cases. 22 out

of 40 participants stated that once diversified,

diversification process takes place in every 3 to 5 years.

12 participants stated that it is not necessary that once

diversified, diversification begins to take place. 4

participants stated that diversification takes place every

2 to 3 years, while only 2 participants (5%) stated that it

occurs every 1 year. However, results influence us to

believe that once diversified, diversification begins to

take place every 3 to 5 years.

Did the diversification process leads to organizational

structure change and if yes how?

The process of diversification influences the

organizational structure. However, in large

organizations, change is not observed as such. Q16 has

been tested over the same 40 participants. Results are

graphically presented below:

Figure 20: Change Organizational Structure.

Above results do not present a clear picture as out of 40

participants, 2 participants refused to answer anything.

Out of remaining 38 participants, surprisingly, 19

participants chose the option of Yes, and 19 participants

selected the option No. Literature review indicates that

up to some extent, diversification does impact the

organizational structure but processes in the large

organizations do not really lead to the change in

organizational structure. However, in research part of

this study, we cannot really say anything as results are

neural.

Do you believe that the “larger organization” has

affected the internal controls and flexibility of the

business?

As an organization grows, internal control is affected so

as the flexibility. To test this point, Q17 has been tested

on the same population of 40 participants. Below are

the results:

Figure 21: Effects of Internal Controls in Large

Organization.

In reply to Q17, surprisingly, 15 out of 40 participants

(37.5% of the total population) selected the option

of disagree. 10 out of 40 participants (25% of the

population) ticked the option of agree, 6 participants

(15% of the population) ticked strongly disagree, 5

participants (12.5% of the total population) did not

comment, 4 participants with 10% of the population

ticked strongly agree option. Results are surprisingly

proving Q17 to be wrong. With Q17 results, it has been

rejected to accept that the “larger organization” affects

the internal control and flexibility of the business

With added business what are the main internal

pressures your company currently or will be facing: 1=

extremely concerned, 5 = not at all concerned?

Q18 analyzes various internal areas of concern for the

family owned businesses to check the level to which

participants are concerned about each of the below

factors:

Figure 22: The Main Internal Pressures on Companies.

There are different aspects of concern for any family

business, such as family politics, tax planning, strategy,

technology, operating costs, profitability, raw material

availability / quality, financial soundness, company

recognition and labor issues. Above graph clearly

illustrate that taking an average, all these factors are

important and participants are concerned. However,

due to the nature of core business, a few factors might

not be important for one party than another.

Please rate the level of concern you have regarding the

following external factors your company is currently

facing or will face in the near future: 1= extremely

concerned, 5 = not at all concerned or will be facing: 1=

extremely concerned, 5 = not at all concerned?

Q19 analyzes the various external areas of concern for

the family owned businesses to check the level to which

participants are concerned about each of the below

factors:

Figure 23: Level of Concern you have Regarding the

Following External factors.

Market conditions, product competition, interest rates,

currency exchange rate, export problems, government

policies, public spending, international/national fiscal

tax regime, economy stability and infrastructure are

also the areas where participants are concerned.

However, depending on the nature of business, a few

points that matter to company A might not be an area

of concern for company B. The participants’ feedbacks

illustrate a mix picture where average of all factors are

somewhat important but the areas of

international/national tax regime, export problems,

infrastructure and the currency exchange rates are the

common concerns in most of the cases.

Retrospectively would you consider the diversification

process as having been an option available or an

element of business survival/ was the decision to take

opportunity of market demand or more from a

strength building perspective, in relation to your

competitors?

Results are as under:

Figure 24: Motivation for Diversification.

The results illustrate that the decision of diversification

was taken by the participants as an opportunity from a

strength building perspective, in relation to the

competitors for the growth potential, reduction of

business risk, opportunity or demand. However, most of

the participants emphasized on the growth potential as

total 15 out of 40 participants (41.7%) ticked the option

of growth potential, 13 participants selected the option

of reduce business risk option, 6 participants (16.7%)

ticked opportunity option and only two participants

(5.6%) ticked the option of demand.

Do you have a succession plan in place?

Succession plan is taken as something quite important

in large organizations. Formally or informally,

succession plans are observed even in small businesses.

As for this survey, participants are taken from different

core businesses with different roles and business legal

structures, Q21 would help in identifying if the

succession plan practice is adopted in most of the cases.

Results of Q21 are graphically presented below.

Figure 25: Status of Succession Plan.

Above graph illustrates that 45.9% of the total

population 17 out of 40 participants) responded that

they do have succession plan for all senior roles. 27% of

the total population (10 out of 40 participants) stated

that they have the succession plan for most of the senior

executive roles. 2 participants (5.4% of the total

population) stated that they do have succession plan for

small number of senior executive roles, while 8

participants out of 40 (21.6) declared that they do not

have any succession plan. Q21 reveals the importance

of succession plan with three fourth of the total

population having succession plans for different roles.

Majority companies have succession plan for all senior

roles while a few have for small number of senior

executives.

Do you consider the company as it is today, as being

the same family business holding the same culture and

ethics or a merely a corporation controlled by

members of one family?

Figure 26: Recommendation for the System.

Considering all practices, strategies, structures and

family politics etc, when participants were asked to

comment if they want it to get a lot better than it is

today, to get it a little better, to stay the same, to get a

little worse or to get a lot worse. Expectedly, results

indicate that most of the participants (14 out 40

participants with percentage of 40% of the total

population) believe that it is needed to get a lot better

than what it is now. 25.7% (9 participants out of 40)

believe that it need to get a little better, 22.9% (8

participants out of 40) want it to stay the same with no

change. Results indicate that companies need to

improve a lot more than current state.

In your opinion, is corporate governance a tool for

optimization or a requirement in the age of

diversification?

Figure 27: Corporate Governance.

Q23 is one of the most important question of this survey

as it is to test if the corporate governance a tool for

optimization or a requirement in the age of

diversification. Tool for optimization and requirement

both are required so this question was to test it

practically. 24 out of 40 participants (60% of the total

population) take both as equally important. However,

10 participants (25%) selected the option of tool for

optimization and 6 participants with 15% of the total

population ticked the option of requirement. Results

clearly show that most of the participants consider both

sides as important so this has been proven that tool for

optimization and requirement both are the important

aspects.

If and with corporate governance in place, how would

you rate the influential power of ‘Family Concept’

(owners) with respect to that of ‘business rules’

(management) in controlling the business:

To run any business formally to receive good results,

companies must have corporate governance in place.

However, family concepts might influence the corporate

decisions. To test this, Q24 has been designed. Below is

the graphical presentation of Q24 results:

Figure 28: Influential Power of ‘Family Concept’ w.r.t

‘business rules’.

Series 2,3,4 refer to the extent to which participants’

decisions are influenced by the family concept and the

business rules.

Above graph illustrates that participants do accept and

realize the importance of corporate governance in their

business decisions and execution. However, family

concept also influence the operations and decisions

naturally. The results are dramatically 100% as per the

expectations. Majority of the participants (46.2% of the

population, 18 out of 40 participants) chose series 3,

that means their business decisions are equally

influenced by the family concept and the business rules.

Other series are even less than half of series 3. After

testing Q24, we accept that business decisions of family

owned diversified businesses are equally influenced by

the family concept and the business rules.

From your experience, did the diversification decision

and resulting process have a positive or a negative

impact on the core business?

The very last question of our survey and the most

important part of testing is to assess what exactly our

participants perceived regarding the results of their

diversification decision. They are the ones who actually

practically went through all advantages and

disadvantages that their core businesses faced as result

of their diversification decision. Probably, they can

better evaluate the situation and its consequences than

any other researchers. Below is the graphical

presentation of Q25 results.

Figure 29: Feedback on Diversification.

Above results reveal that afterall, when summing up all

pros and cons, participants think that diversification is

not a bad decision to take. They believe that in the end,

results obtained are positive. 55% of the total

participants (22 participants out of 40) declared that

diversification decision is proven to be positive. 30% of

the population (12 participants) believes that if it was

not positive than also not negative. However, 5

participants (12.5%) declared that they regret their

decision while one could not actually assess if it was

positive or negative. Results clearly prove that the

diversification decision impacted positively on their core

businesses.

Discussion

The analysis of the data presented within the sampling

is not to establish whether or not the diversification

decision and process was the right or wrong move for

the company from a financial perspective, represented

by concrete figures; rather the analysis takes form of the

identification of specific patterns and general

developments, from the perspective of a family

business. With addition of the analysis of sectors, the

reasoning therefore, is to establish whether these

businesses engaging in specific sectors were more likely

to opt for a diversification opportunity, whether it be

based out of necessity or for reasons specific to that

sector or due to the fact that the family business is

represented by a more flexible and/or an opportunistic

or entrepreneurial drive. The analysis furthermore,

addresses each question in depth seeking out any

specific general or major consistencies across the

sampling, in order to understand how the strategic

decisions and planning therefore, have affected the

business on a post diversification basis. The analysis

revealed that additional issues such as that of

succession and continuity most definitely needs further

thought on the part of the business that wishes to

create a sustainable and long-term future.

Management of the companies in their current forms,

with respect to the involvement of the families

concerned revealed that the majority of the businesses

are merely guided by existing family members, with a

low level of participation in the actual daily operations

and running of the business concerned alone. Of the

families that are still involved with the businesses 52.5%

are solely involved in running the business in terms of

daily operations, and with 25% of businesses are solely

maintaining more of an oversight role from a guidance

perspective. Interestingly, the businesses sample

showed effective participation in both the aspect of

guidance and direct involvement of the managerial and

operational duties.

Hence, the entire sampling is still seen as being involved

in the business in one way or another although the post

diversification situation seems to reveal that the

majority of companies that have undergone such a

process has resulted in an involvement of the actual

workings of the business on a daily basis and guidance

in a different context, which translates to an effect on

the autonomy of the business after such a process and

decision being realized to the extent that such

autonomy is in fact reduced accordingly. This may well

be confirmed by the company structure that the

business is currently represented by, and based upon

the specific sampling, 37.5% are Limited Liability

Corporations, or the equivalent with the remaining 30%

being that of a public or private holding company.

Therefore, the structure of the company, of which the

LLC appears to be the most popular is represented

within this majority and is based upon the company

ownership also being protected in their private

capacities by such company structure. In addition to

these possibilities of changing the company structure to

suit the needs of the company in the diversification

process, this may well be undertaken due to the fact of

adding additional partners or shareholders to meet the

requirements of financing such a diversification process

and expanding the business albeit on a product offering

or on a geographical basis.

Business Age and Generation Involvement Analysis

An important aspect of the research reveals the average

age of the businesses surveyed. The importance of this

is to reveal that the businesses that have undergone

diversification have been in operation for more than 3

decades, and according to some of the responses, had

the company not undergone any diversification, the

entity may well have ceased to exist rendering the

company null. Hence the choice of diversification could

signal the survival or the need to survive via this

decision, and had the decision not been made the

company would no longer be in existence today.

Analysis of the various business, represented below,

reveal the following relevant data:

Figure 30: Business Age Analysis of Sampling.

The average response percent is 16.7%; the median of

our collected sample is 15 years. The above analysis

serves to highlight the fact that only 45.45% of the

sampling are above the average business age of 52.41

years, with the balance being represented by 30% of

business respondents being below the median age. One

may translate this issue of diversification into possible

globalization issues and opportunities that have arisen

over the short to medium term, in that the younger

business may well have had greater opportunities to

take advantage of such globalization, in which a

diversification process and decision must have been

undertaken, as compared to the older companies who

might be more established and unwilling to engage in

such diversification.

The sampling used here, with specific reference to the

age of the business is lower than that indicated by

Poutziouris (2006) in analysis of various nationalities

and the average age of the family businesses, such as in

Japan the median is 145.22 years, whereas in China the

median of the family business age is 52, and in the

United States it is quoted as being lower than that. The

sampling revealed that the average age as at the

present time is 16.67% years which can be translated as

being just below 35.75% younger than that of the

median of Chinese family businesses, and almost 77%

younger than that of the Japanese median, as reported

by Poutziouris.

The issue of how many generations has been involved in

the business further serves to confirm the lifespan of

the business to present dates, and although this may

serve as a confirmation issue, it does raise another point

which although beyond the scope of this paper, is well

worth mentioning. The issue of succession within the

family business is just as an important factor to the

success of the business and plays a vital role in terms of

the decision making process and future success and

longevity of the business. Cater provides that the family

business is faced with additional family issues that need

to be taken into account to ensure the future of the

business, whilst also dealing with external factors and

situations (Cater 2006).

In dealing with the family issues notice must be given to

the satisfaction of the older generation whilst preparing

the younger generation for succession and to take the

leadership and control of the business into account. The

sampling in this analysis revealed that a median of 1.67

generations have been involved within the defined

family business indicating that the second or third

generation is currently involved with or has been

involved in the management and control of the

company concerned. It is important to imply that the

sampling conforms to a longer standing representative

sampling in terms of the involvement of the

generations, as well as the age or lifespan of the

business. Cater further indirectly provides that

succession in the family business is arguably more vital

to the success of entity than the process of

diversification, and therefore, such succession factors

and attention to this topic needs further insight and

analysis. Specific research figures provided by Cater

include the fact that “only 30% of all family firms survive

the succession from the first to the second generation,

only 12% survived the succession to the third

generation, and only 3% survived beyond the third

generation.” These quoted figures serve to highlight the

importance of the preparation of succession regardless

of diversification being undertaken.

Sector Analysis

The reasoning behind the analyzing of the sectors within

which the sampling was obtained is to establish whether

or not diversification is more relevant to specific sectors

or whether it is a relatively widespread phenomenon

across all industries.

According to the respondents, a wide variety of sectors

are represented here. However, specific attention

should be given to the automotive, manufacturing,

Hospitality and Leisure sectors here, in which over

12.5% of respondents is operational in this field. The

actual naming of these sectors as well as the percentage

breakdown of the respondents is reflected in Table 2

below:

Figure 31: Sector Representation of Respondents and

Sampling.

The figures highlighted above further support that the

automotive and hospitality industries may also

relatively open to the need of diversification for survival

or profit maximization for the family business. Upon

analysis of the responses of whether or not the market

had reached maturity, which may have served as the

motivation for diversification, the vast majority of the

respondents has provided that the maturity of their

respective markets had in fact not been realized, and it

was rather from an opportunistic perspective that the

decision of diversification was taken. The exception

within the sampling was that of the two respondents

which had not undergone any sort of diversification, as

well as another single respondent who stated that their

original core business had become enviable for them,

and therefore, the diversification process had been

undertaken out of necessity for survival and continuity

of the business itself.

At the time of diversification, a number of external

factors have been quoted as facilitating the process and

motivating the need to take up the additional

opportunities, as they had become available at the time

of the decision. The fact that the majority of

respondents have answered that the diversification

process and decision was more of an opportunistic

move will Therefore, create a conclusion that the tool of

diversification itself is not primarily that of a survival

‘mechanism’ but rather a tool for optimization and

maximization of the business and its potential profits

and returns. This does not however, take away from the

fact that it can be based on survival needs alone, as is

represented by five of the respondents within the

sampling.

It should also be noted that although some of the

sectors may well overlap from a macroeconomic

definition, these sectors are deemed to be sufficiently

different to warrant separate analysis and

categorization, as per Table 2 above.

A further interesting fact revealed on the analysis of the

questionnaires, and specifically relating to the

businesses that have undergone diversification,

represented by 39 of the 40 respondents or the

equivalent of 97.5% of family businesses who

participated in the study have additional business

interests outside their core, all original business sector.

This raises the point that perhaps the diversification

process further acts as a catalyst for the family business

or small business owner in realizing the value of

diversifying their investments across a variety of sectors

to reduce exposure to external forces that are relevant

to specific sectors.

Control and Shareholding Interest

Although this area may overlap slightly with that of the

previously mentioned question of involvement in the

business, it is somewhat different, it represents the

ownership of the entity under question, and serves to

reveal the involvement of external stakeholders from a

partnership, investor roles in the structure of the

company and how it has taken in the form of structure.

This area of analysis further reveals to what extent the

original family ownership unit is still involved in terms of

the oversight and leadership of the family business, as

well as any other external decision-makers with

stakeholders as mentioned.

In addressing the ownership factor of the companies

and sampling, regardless of the legal structure the

majority of respondents are either wholly owned or a

majority shareholding is held by the original family,

which once owned the business. Therefore, the

conclusion can be drawn that despite any diversification

within the business itself, control and majority

ownership was retained across the spectrum of the

sampling, with all companies remaining under the

control of the family concerned. This may be translated

into the fact that upon deciding to undergo such

diversification the company is contained within the

sampling did not elect for external funding, such as the

incorporation of the partners, but may have funded the

diversification process generically or via traditional

financing mechanisms, such as bank loans or personal

investment from within the family. Another key factor

realized from the analysis of the specific control

question, realizes the fact that the companies

concerned have retained their leadership and oversight

of the families concerned, albeit by a managerial or

directorship channel.

Diversification Motivation

Analyzing the reasons for diversification within the

sampling, highlighted the fact that many of the

businesses surveyed had not achieved maturity within

their core market, but had rather identified

opportunities either related or unrelated to their core

market, into which the companies had entered. It

appears that the motivation had been primarily growth

potential. However, up to some extent; it is also a case

of survival or an opportunity. Companies diversify

within their core market or into sub-sectors of their core

market, claiming that a more holistic approach, in terms

of logistics and the supply chain within their respective

markets had offered an opportunity to not only reduce

costs, but rather add to the company revenue, as well

as forming a reliable base within which each business

unit could operate on a successful basis. Another two of

the businesses surveyed did however; stipulate that the

motivation for their decision-making process,

specifically in the automotive market, was to counter

the instability being experienced within the sector at the

time. In addition to stabilizing their revenue streams the

decision was undertaken to seek out alternative

business opportunities to guard against future possible

market fluctuations, in an effort to stabilize overall

income across the automotive market, as well as the

new sector in which they chose to operate at the time,

which is that of financing and related activities.

The primary motivation for having undergone

diversification in whichever of the sectors mentioned

above is apparently that of the addition of revenue, as

well as an alternative source of revenue to the

companies concerned, therefore, motivating the

opportunistic or entrepreneurial underlying spirit

evident within the family businesses surveyed.

With the exception of the company that confirmed their

core business was no longer viable, the majority of

companies had achieved relatively high market

positions, in relation to their core business, which

further supports the fact of the opportunistic nature of

the diversification process as described above.

According to the respondents, 32.5% enjoyed a top ten

positions within their market, at the very least within

their regional markets; and in considering this market

position, it motivates the conclusion of entrepreneurial

decisions, as well as taking advantage of opportunities

presented at the time and therefore, motivating the

decisions and processes of diversification within their

companies. Even the single company claiming that their

core business was no longer viable, had enjoyed a top

four positions, the necessity for such diversification had

proven to be not only viable but, essential for the family

business to continue as a going concern.

Continued Diversification

In order to establish whether the diversification process

was a once off or a continued process within the

sampling, the question was posed as to whether the

process had continued or was a once off decision and

process. Their responses indicated that majority with

50% of the participants believe that once diversification

take place, it occurs every three to five years. 30%

doesn’t call it necessary to experience it ever after once.

One may interpret this as an equal representation

between those that continued diversification and those

that did not providing an equal amount of companies

representing each decision. Of those companies that

continued the diversification process, these companies

diversified into different sectors away from their core

business model or market, whilst some diversified

within their area of specialization. This fact may

represent a true diversification and risk reduction, in

seeking opportunities outside their existing businesses,

whilst encouraging additional revenue streams from

alternative sources.

Organizational Structure

The fact as to whether diversification can or does lead

to the changing of the organizational structure is

important in relation to possible changes in the

shareholding and ownership, as well as ultimate control

of the company itself and more importantly by whom.

Such structural change may be brought about by the

fact that the company may well have needed to raise

funds to facilitate the process of diversification, or

perhaps even the acquisition of necessary intellectual

capital or related expertise.

A total of 47.5% of the sampling indicate that the

organization did in fact undergo structural changes, but

not due to the necessity of raising funds or acquisition

of mentioned expertise. Rather, the approach of the

organizational change was in order to increase

efficiency in terms of management of the various

sectors of the family organization, including that of the

newly diversified operations. Although a majority of

limited liability companies are represented within the

sampling, this decision had been made from more of a

control and oversight perspective than that of having to

undergo such structural change in the diversification

process, and is more reflective of a rationalization effect

from a management perspective.

Of the companies that underwent such structural

change, and went the public listed company route,

which is represented by 12.5% percent of the sampling

the family maintains control over the company, despite

public listing and occupy positions as board members,

whilst retaining majority shares within the company

itself. Therefore, if one considers the process of publicly

listing a company is primarily motivated for the purpose

of raising funds for the growth of the business the

mentioned percentage of the sampling confirms that

less than a third of the companies surveyed required

such financing, and even in the incidence of acquiring

the necessary funds for expansion and diversification,

control was still retained by the family concerned. This

was achieved via the retention of a majority

shareholding, which in turn provides the family the

opportunity to install board members as according to

their majority vote, which in this instance maintains that

family influence on of the original organization.

One may furthermore, conclude that by conducting the

restructuring, or structuring of the new entity in such a

manner the issue of autonomy or less autonomy within

the family operated or owned business is overcome by

a majority shareholding strategy, which although the

company has to abide by a specific corporate

governance rules and related items, this process serves

to maintain the actual control in terms of the strategic

directions of the company concerned.

Figure 32: Company Structure on a Post Diversification

Basis.

Figure 30 above serves to illustrate the nature of the

business or company structure on a post diversification

basis. Each company structure has its own merits, and

as previously discussed according to the sampling the

manner in which the companies who elected the plc

route still retained majority shareholding which in turn

facilitated or facilitates greater control with acquiring

the necessary financing for the expansion or

diversification process. The limited liability company

route, although arguably similar to that of the plc

without the public offering of shares in the company,

still offers protection to the owners and shareholders

within reason, the corporate governance issues may not

be as pertinent to that of the plc type of company. The

limited liability company option furthermore offers

more flexibility in terms of the setting up of the

company structure itself, as well as the allocation of

ownership portions or shares.

In the process of establishment of an alternative

company, the issue of autonomy is once again raised, as

well as the flexibility that is associated with such

organizational structure. In terms of the sampling of

family businesses that have undergone such change, no

negative aspects of the flexibilities of the companies

were provided, but rather a more positive insight into

the controls of the company have been revealed by the

entire sampling. Therefore, 100%, or an unanimous vote

in terms of the positive effect of such structural change,

and specific to the controls perspective was provided by

the sampling, which suggests that although companies

may experience some sort of apprehension in terms of

the perceived change in control and flexibility, this

apprehension is unfounded as reported by the response

from the market research provided.

Management of Diverse Units

The management of the diverse business units requires

necessary analysis in the determination of whether the

business units have been separated in terms of

management and how the company intends to manage

these divisions. This further serves to confirm the nature

of strategic decisions and management, whether it

emanates from a central decision making unit or

whether each business or sector is responsible for their

own activities in terms of marketing, promotion, and

human resources and so forth. As with any strategic

expansion of a company a number of factors will add to

the management issues and pressure associated with

such management practices accordingly, which in turn

needs to be managed either externally or internally.

The sampling revealed a number of different strategies

that have been undertaken via the individual companies

from the perspective of the various functions and

management issues. Although the majority of

respondents indicated that such diversification had in

fact contributed to the added pressures of management

and control, a number of different strategies were

employed to address the situation of management and

control of the various business units and internal

processes.

One of the respondents indicated that family members

were put in position to manage and control the various

aspects within the business, whilst over a few of

respondents used external suppliers and providers to

manage certain aspects of the business, such as

marketing and human resources, while maintaining

control within the business from a management

perspective amongst family members and employees.

The majority of respondents indicated that systems and

policies defined by family shareholders were

implemented within the organization to ensure smooth

running an effective control on a post diversification

basis, while 47.5% of the population indicated no

changes on their organizational structure. Many of

these decisions, systems and policies stemmed from the

initial ethics of the family organization and were carried

through into the new business entity, regardless of

structure, size and number of employees. This seems to

have further contributed to the company’s survival and

success in maintaining the original ethics and

entrepreneurial drive behind the company itself, based

upon the majority response of the sampling.

The use of outsourcing has alleviated specific pressures

within which the family members deemed to be better

suited to external management, which although

remaining under the control of the family business and

stakeholders appear to be more streamlined in being

dealt with by the relevant professionals concerned.

Retrospective Diversification Analysis and Impact upon

Business Culture

The reasoning behind retrospective analysis of the

diversification process is to establish whether the

respondent concerned conducted such a process on a

strategic business option or based upon survival of the

business unit itself. Analysis of the decision of

diversification search confirmed the necessity of such

process, or whether the entrepreneurial drive or spirit

serves as the motivation thereof. Although this question

has been touched upon earlier within the questionnaire,

one may consider this line of questioning as a control

measure to fully confirm motivating factors of the

process. It furthermore serves to illustrate the positive

impact of such decisions in terms of the strength of the

business, which one can analyze retrospectively to form

the basis of future expansion and related business

decisions, in terms of the overall business strategy and

direction.

In terms of sampling, a number of respondents

confirmed an increase in market share, or business

strength based upon their decision of expansion and

diversification, both within the relevant business sector

in terms of their core business market share, as well as

an increased strength from a revenue perspective via

diversification into alternative sectors. Sixteen of the

respondents, or 40% of the sampling stated that

business survival had been a motivating factor, with two

of the businesses stating that their core field of

expertise had subsequently ceased to exist, hence

justifying the diversification decision and process. 22.5%

called it an opportunity. 7.5% reasoned it for the sake of

demand. The remaining 22.5% stated that the

motivation behind such decision retrospectively was to

reduce business risk.

As previously stated the primary motivation within the

sampling of the family businesses, pertaining to the

reasoning and motivation of such strategic decisions in

terms of the company’s future is driven by the

opportunities presented in the market, and could once

again be attributed to the entrepreneurial spirit of the

family business with respect to taking up such

opportunities. Furthermore, the fact that the reasoning

behind the diversification is consistent with the directly

presented reasoning previously discussed confirms this

mentioned motivation and establishes the

opportunistic manner in which the family business

operates within the sampling of businesses.

Corporate Governance and Control

The issue of corporate governance and control is

specifically relevant to the family business that has

undergone structural change and may have resulted in

a loss of the initial family values and ethics that are

prevalent in the family business due to possible changes

effected in order to adhere to corporate governance

requirements as stipulated by any relevant legal

framework. Butler & Phan provide that “family

dominance in the corporate governance structure may

strengthen the ability of the corporation to coordinate

on decision-making and hence have an impact in

strategic interactions with external stakeholders.” (2008

p.10) These places the family controlled enterprise in a

possibly stronger position than that of corporations that

such family dominance and involvement.

With respect to the sampling of family businesses which

participated in the study, around 10 respondents agreed

that corporate governance is an effective tool for

optimization of the business, represented by 25% of the

sampling. 6 participants (15%) saw such governance as

a requirement that had to be attended by the business

concerned in terms of operational procedures and

adherence to regulations, Therefore, not utilizing the

issue of governance as an optimization mechanism for

the company, but rather seen as a necessity for

compliance. The majority of 24 participants with 60% of

the population called corporate governance a tool for

optimization or a requirement in the age of

diversification both.

Poutziouris provides that the issue of corporate

governance should be seen as the promotion of the

company, or the stakeholders or both (2006 p.322),

which should be seen by the family business owners and

management as a positive tool and not that of an issue

of necessity.

Whether corporate governance has taken over from the

initial family business ethic, culture and concept would

contribute to the feeling that autonomy has in fact been

lost within the expansion process or that of

diversification, and hence it would be specifically

relevant to the overall feelings or belief of the family

unit of whether or not such expansion had facilitated

the loss of such autonomy. Within the sampling over,

many respondents agreed to the fact that the family

unit, together with the original culture and ethic still

manages the company accordingly, within the defined

rules and issues of corporate governance, and

Therefore, do not attribute any major change to the

management of a going concern to that of corporate

governance. Based on the fact that of those companies

interviewed, who are more prone to such corporate

governance, family members are appointed to the

board of the company concerned, and as Poutziouris

provides that the accountability of these board

members should be the central theme of corporate

governance and not that of the structure itself (2006 p.

322.).

Based on the findings of the surveys, regardless of

company structure and whether or not the issue of

corporate governance is seen as an optimization

mechanism that born out of necessity for adherence,

the family unit together with the original ethics, culture

and internal controls seem to dominate across the

entire sampling.

Diversification – Positive or Negative

The view of whether the diversification process was

positive or negative is to provide an insight as to

whether or not the risk or perceived risk of following

such a path in terms of business strategy did in fact

achieve the goals and objectives of the initial decision of

such a process, and whether or not the family business

as it stands today is in a better or worse off profession

and position as a result of such actions, or in actions.

The figure above highlights the perceived positive

impact of the respondents within the survey,

represented by the majority of the respondents

specifying that the overall impact was in fact positive.

Interestingly enough 55% of the respondents found that

the diversification process was positive, 30% found it as

neutral and only 12.5% found it negative to their

businesses. However, one did not participate in above

three options. However, this was offset by the success

achieved in those specific sectors and thereby

contributing to the positive effect of such

diversification. The 12.5% that found the process to be

negative shared similar views to those responses that

found that both positive and negative simultaneously, in

that their attention and efforts were diverted away

from the original business. One respondent is

represented in the 2.5% as being not applicable due to

the fact that the business had not undergone any

diversification but, had undergone expansion in their

core business. 55% responded that diversification had

positive results.

Conclusion

In conclusion of the analysis of the questionnaires,

sufficient response was provided by the respondents, in

compliance with the line of questioning providing an

insight into what the family companies had undergone

in terms of a diversification decision and resulting

process. Findings were further confirmed via control

questions, with the majority of decisions being

motivated by strengthening, revenue generation or

opportunistic benefits and beliefs behind the

diversification process. It is furthermore apparent that

the family ethic and control survived the diversification

process, and are instilled in the new company regardless

of the legal structure or family level involvement.

The issue of the autonomy is apparently also been dealt

with via the allocation of shares in specific amounts and

by specific structures to ensure that majority control

and leadership remains with the family concerned. It

appears that the majority of the respondents had

facilitated such diversification via their own funding

mechanisms, as the majority of respondents indicated a

limited liability company structure, implying that such

financing was obtained on an internal basis or via banks,

but not by offering shares within the company on a

public basis. The exception to the rule within the

respondents was a single company, which although they

elected to publicly list their company, the majority

shareholding was retained by the family concerned,

with the overall control vesting within the family by the

appointment of family members to the board of

directors. Regardless of actual involvement within the

company on a post-diversification basis, the original

family members still retained some level of control or

involvement, albeit from a supervisory or oversight

basis.

Lessons Learned

Contradiction with the Theory

Based upon the primary part of the research that clears

indication of the majority of businesses diversifying was

due to that of favorable market conditions, and

entrepreneurial risk and reward type action, whereby

the family businesses were taking advantage of

opportunities that presented them within the market.

This type of entrepreneurial action, according to

Drucker (1985) should in fact not be confused, or

classified within the same field as innovation, as the

author claims that such action of taking the business out

of its core field of expertise is normally unsuccessful.

However, the actual responses of the sampling indicate

that this is not the case. On the one hand, such

innovation is claimed to be unsuccessful, whilst primary

data reveal that the businesses are still thriving to this

day, with interested stakeholders being satisfied with

the growth, expansion and continuance of their relevant

businesses. One has to now consider that although

according to the academic side of the argument, in

terms of such innovative actions resulting in successful

business practice, the actual primary research data

indicate the opposite, which is represented in the fact

that the business continues to operate today.

Involvement of Generations

Although within the sampling the majority of the

businesses surveyed seem to be satisfied with market

position and growth of the business, together with the

physical involvement of a number of generations of the

family, it is expected that issue such as succession and

continuity are due to arise. This is said to do that, but

the involvement of multiple generations indicate that

the company is still largely under the leadership and

control the original generation, and although the

involvement of the secondary, and in certain instances

tertiary generations have been encouraged and

implemented, the fact that the original generation is still

involved in the leadership of the business points to what

mentioned authors described as one of the opposing

forces still in control of the business, referring to the

original generation. This founding generation in all

likelihood has concerns of the continuity of the

business, as described by the authors, and whilst these

family businesses run the risk of becoming one of the

statistics of succession failure, as previously described,

then suitable succession planning and implementation

needs to be effected as soon as possible. Whether or

not the secondary opposing force of the younger

generation becoming impatient or tired of waiting, was

not revealed within the sampling; however, it has

highlighted within the secondary research of the

organizational theorist, and it is indeed well worth

noting.

Corporate Governance as a Tool for Optimization

Corporate governance, although it may not be a

requisite for a privately owned firm, is well worth

encouraging within the family business to be used as a

tool for optimization, inclusive of the management of

resources, from all perspectives including that of human

resources, financial resources and management

resources. Such governance creates a perception

amongst external stakeholders, in more ways than one

might be led to believe. Typical of this issue is that of the

generational demographic, of what the marketing

fraternity referred to as generation Y, where they seek

out employers, producers and service providers with

strong ethics and solid track records, this is an

implication upon the perception of the business

regardless of whether it is family owned and controlled

or publicly listed. Therefore, the issue of corporate

governance cannot only be used as a management tool,

but marketing and branding tool as well. These factors

further contribute to the continuity of the family

business, over and above the issues of succession,

diversification and sound management and leadership

whilst providing a sound framework for the

management of various resources within the family

owned and controlled business.

The Need For Effective Management Controls

There is no doubt that the respondents within the

survey realize the need for effective management

controls, as was witnessed by the majority of responses

indicating that specific legal structures were required in

order for the business to progress accordingly. Despite

the fact that the governance issues are seen as a pre-

requisite, this has doubtfully been implemented across-

the-board of the sampling. Based upon the fact that

average, or median generations operational within the

sampling is that of 1.67 generations, the sampling

reveals that perhaps the businesses are fairly young,

further indicated by an average age of almost 17 years.

This raises speculation of the succession issue again,

despite the fact that legal entities have been structured

correctly, such as the limited liability companies and the

public companies is provided by respondents in the

study. The mere creation of a legal entity does not

ensure the sustainability of the company, and as

described a wide variety of issues, inclusive of attitudes

must be addressed with respect to the succession

process, as well as that of the governance issues

mentioned and discussed. The recognition of the need

of legal structures in order to protect the families

concerned is recognized and a valid step forward, with

the next step being that of ensuring mentioned

sustainability and continuity.

Impact on Family Business

Furthermore, based upon the contribution that family

businesses actually provide to the economy as a whole,

combined with the fact that between 92.5% of all

companies are family owned and/or operated, perhaps

national legislators should seek to educate family

members, currently controlling businesses as to the

issues specifically pertaining to corporate governance,

including social responsibility, as well as that of

succession and continuity in order that the succession

success ratio increases thereby reducing the possible

downfall of established businesses on a post-succession

basis. In a study conducted by KPMG and Family

Business Australia, government regulation and

employee issues were contained in the top four

challenges faced by family business, which are

highlighted in the above in terms of instead of a

regulation based environment, the government should

seek to provide greater encouragement and or

initiatives for the family business, perhaps for those

who adhere to specific corporate governance issues,

which in turn may well address the other challenge of

employee issues as expressed in their research and

survey response (Family Businesses 2008). Hence, issues

such as that of governance may well go a long way in not

only promoting social responsibility, succession,

continuity that filters through to issues of human

resources and ultimately financial aspects of the

company too.

Diversification in Family Businesses

One of the most predominant issues that bear

highlighting here is the contradictory evidence provided

by various authors as well as that is revealed within both

the primary and secondary data analysis and research.

This could be attributed to the private nature of the

family held business, or that of the vastly diverse areas

within which these family businesses operate. Based

upon the significant taxation that many of these

companies are exposed to at some point it is without

doubt understandable as to the very nature of the

retention of private information and the lack of

willingness displayed by many respondents within this

study.

Entrepreneurial Trait And Opportunistic Perspective

In closing the sampling reveals that many of these family

businesses, together with the founding family members

display a specific entrepreneurial trait in the taking up

of opportunities as presented by the marketplace at the

time and although a variety of academic authors and so-

called organizational theorists may well describe certain

issues such as innovation and entrepreneurial-ism

should not be confused or even likened, as in the case

of Drucker (1985), the fact that these businesses

represented in the sampling continue to operate and

have continued to diversify and grow, whether it be

from an organic or externally funded basis, tends to

negate the views of authors such as these.

Granted there are specific, and extremely relevant case

studies that exist and which highlights issues of

succession, continuity and sustainability which may well

be lacking from the perspective of the sampling, or due

to the inadequate information provided; the

opportunistic nature of the sampling has enabled these

corporations all companies whichever the case may be

to maintain levels of success and growth, whether it be

from an innovative or opportunistic perspective, which

in many views is construed as being that of an

entrepreneurial nature. Families work for the well-being

of the family unit, as well as inheritance of the family as

a whole, as previously stated; with these family units

choose to do so in an opportunistic level, innovative

level or by virtue of the fact that these people are

entrepreneurial minded it does not have to satisfy any

theoretical decision or definition is described by

organizational theorists. Naturally provided actions of

the family unit within the ambit of the relevant

legislated requirements in the way in which they choose

to pursue success should not have to adhere to any

theoretical or academic definition specifically in

diversity.

Impact of Diversification

All indication towards the decision of diversification has

proven to be positive, and has resulted in this success of

the family businesses surveyed, so much so that one of

the respondents has progressed to twenty-seven

separate businesses under control from first deciding to

diversify. Whether one views that as an entrepreneurial

move or that of innovation is irrespective as it has

undoubtedly contributed to the revenue stream of the

family and the businesses under management and

control.

Internal and External Factors

External factors that affect the family business, as well

as that of any other business do not discriminate in

effect these businesses on an even basis. However, the

family business has internal factors that are inherent to

the family business due to the dynamic of the family

relationship, which should not be allowed to negatively

affect the daily operations of the family business,

although this may well be easier said than done. The

most important factor that has been highlighted here is

arguably that of a route forward with respect to

succession it would be the primary recommendation

towards any family business in ensuring the success and

longevity of the business in question.

Overall Perception

Many areas of research have been conducted within the

family business context, many of which refer specifically

to that of succession. However, one may believe once

again at the theoretical aspect as presented by the

theorists may prove to be a little more difficult to

implement learning practical or real life situations,

based upon the years and efforts put into the family

business by the founding members. The second

opposing force which has been quoted, half that of the

succeeding generation that will always play a role in that

in all likelihood this succeeding generation does not

have a real sense of sacrifice that was required when the

founding members originally built up a family business.

These perceptions contribute to the primary or

preceding generation, in that they may well believe this

succeeding generation lacks appreciation and the

commitment required in order to ensure success of a

business that they, the founding generation worked so

hard to build up and make succeed.

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Appendix-A

The following questions are for the purposes of a

Master’s Dissertation solely for academic purposes. All

questions are asked in the strictest confidence, with

answers remaining strictly confidential. Only the results

of the answers will be presented as a group or trend

analysis and therefore, confidentiality is assured. Thank

you for participating within this study. Should you

require any clarification please contact.

Appendix-B

Appendix – Table of The Top 100 Oldest Companies,

indicating origin or geo location, year founded, age,

average age, as well as notes on diversification.

(Based upon research of O’Hara).

Diversification of the Family Business.

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