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ch1_ppt.pptxChapter 1
The Nature, Importance, and Uniqueness of Family Business
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Chapter 1—Lecture 1
What is a family business, and when does an entrepreneurial company become a family business?
Who are the family businesses, and what is their economic impact?
What makes family businesses different?
What is the three generation rule and its relationship with succession and continuity?
What is the Systems Theory Model of Family Business?
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© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Family Business: Working Definition
A family business is a synthesis of:
Ownership control (15%+) by two or more members of a family or a partnership of families
Strategic influence by family members on the management of the firm
Concern for family relationships
The dream (possibility) of continuity across generations
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
What is a family business?
Family business constitutes the whole gamut of enterprises where an entrepreneur or next-generation CEO and one or more family members influence the firm through their management participation, ownership and control, strategic preferences, and the culture and values they impart to the enterprise.
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When does an entrepreneurial company become a family business?
Typically when the next generation – “the kids” join the business within ten years of having graduated from college.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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High profile family businesses
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Examples of Family Businesses
Ford Motor Company
The New York Times
The Washington Post
Bigelow Tea
Marriott Ritz-Carlton Hotels
Inditex/Zara
L. L. Bean
Gap
Timken Steel and Bearings
Salvatore Ferragamo
Miele Appliances
Toyota
El Nuevo Día Newspaper
Wall Street Journal
Levi Strauss
Kohler
Nordstrom
Hermés
Wal-Mart
Cemex
SC Johnson
Samsung
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Family Businesses…
Constitute 80–98% of all businesses in the world’s free economies
Generate 49% of the GDP in the U.S. and more than 75% in most other countries
Employ 80% of the U.S. workforce and more than 85% of the working population globally
Create about 85% of all new jobs in the U.S.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Family Firms Outperform
Family-controlled firms in the S&P 500 achieved 53% greater economic value added than their management-controlled counterparts
Worldwide, family-owned businesses achieve anywhere between 6.65% and 16% higher annual returns on assets and shareholder equity than other businesses.
Source: Anderson, R., and Deeb, D., Journal of Finance, July 2003.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Family firms exhibit stronger commitment to philanthropy than their non family counterparts. They also tend to engage in “strategic philanthropy”, the focused, high impact philanthropy that the William and Melinda Gates Foundation practices.1
Family foundations represent 55.5% of the 200 largest foundations in the US and 56% of the annual giving ($1billion).2
1 Family Business Review, in press, 2012.
2 Family Business Review, in press, 2012.
Ethics, Philanthropy, Environment and Corporate Responsibility
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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What Makes Family Business Different
The presence of the family
The owner’s dream to keep the
business in the family
The overlap of family,
ownership, and management
The competitive advantage derived
from the interaction of family, management, and ownership
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Other important differences
Average tenure of the CEO is 18 years versus 18 months to 3 years for the average CEO of an S&P 500 company
Average share holding time is a generation vs. 9 months in Fortune 500 companies1
24 percent of family businesses surveyed have a female CEO or President. 2 This far outstrips the 2.5 percent of Fortune 1,000 firms which are led by women.3
Family businesses aspire to continue across generations of owners or owner-managers
1 Bain & Co., C. Zook, 2007.
2American Family Business Survey, Mass Mutual/Kennesaw State/FFI, 2007.
3Fortune Magazine, April 20, 2007.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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The Three Generation Rule
In America: “Shirtsleeves to shirtsleeves in three generations.”
In China: “Fu bu guo san dai” (Wealth never survives three generations or “From peasant shoes to peasant shoes in three generations.”
In Mexico: “Padre bodeguero, hijo caballero, nieto pordiosero”. (Father-merchant, son-gentleman, grandson-beggar.)
In Brazil: “Pai rico, filho nobre, neto pobre” (Rich father, noble son, poor grandson.)
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Succession and Continuity
The most prevalent reason why family-owned and family-controlled companies fail relates to a failure in succession planning
Three patterns of ineffective succession were identified in one study:
Conservative
Rebellious
Wavering
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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The Systems Theory Model of Family Business: 3 Sub-Systems
Family
Management
Ownership
Family Members
Other Shareholders
Family Shareholders
Owner-Manager Family Members
Owner-Managers
Family
Employees
Non-Family Managers & Employees
Source: The Systems Model. Adapted from Davis and Tagiuri, 1981.
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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The firm is a dynamic system in which integration is achieved by adjustments between family, management, and ownership subsystems
Individual perspectives of family and firm may differ, leading to overemphasis on one sub-system at the expense of others
In the systems theory approach, the family enterprise is modeled as comprising three overlapping, interacting, and interdependent subsystems of family, management, and ownership. Blurred boundaries between the subsystems can lead to role confusion, conflict, and mismanagement. The joint optimization of these subsystems is discussed as the opportunity for significant adaptive capacity and competitive advantage by the firm.
Boundaries among family, ownership, and management systems may become blurred
Problems determining if decisions relate to family, ownership, or management issues
Family rules may overtake the business
Problem-solving ability diminished by blurred boundaries
Chapter 1—Lecture 2
What is the difference between family-first, ownership-first, and management-first perspectives?
What is agency theory?
What is the strategic perspective and resource based theory?
What unique resources can family businesses use to create competitive advantages?
What is stewardship theory?
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© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Family-First Businesses
Employment in the business is a birthright
Members of the same generation are paid equally
Perks that transfer from the business to family members are often extensive
Financial systems may be obtuse by design, and secrecy is often paramount
Commitment to continuity depends on the agendas of individual family members
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of them. They are the result of attributes such as concentrated ownership, family unity, shareholder loyalty (patient capital), company size, strategies that focus on proprietary products or niche markets, and skill/knowledge transfer across generations.
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Management-First Businesses
Employment is on the basis of qualifications—family is discouraged from working in the business
Performance of employed family members is reviewed in the same manner as the performance of nonfamily managers
Compensation is based on responsibility and performance
Conversation between family members is usually all business
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Ownership-First Businesses
Investment time horizons and perceived risk are the most significant issues
Often have shorter time frames within which financial results are evaluated
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Additional Family Business Theories
Agency theory
Resource-based theory
Stewardship theory
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Agency Theory
Traditional theory: the natural alignment of owners and managers decreases agency costs of ownership in family firms
Recent research: the altruism of owner-managers leads to increased agency costs
Agency costs can be controlled or avoided through the use of certain managerial and governance practices
The board of directors is important in monitoring managerial behavior and controlling costs
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Agency theory argues that the owner-agent overlap in a family company presents some cost reduction opportunities but also highlights some agency costs that are unique to family firms; for example, CEO entrenchment, inability to manage conflict, and the potential for risk-aversive and self-dealing behaviors. Management and governance practices that reduce the likelihood of incurring these agency costs are discussed.
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The Strategic Perspective: Competitive Challenges Faced by Family Businesses
Shrinking product life cycles
Intense cost competition
Rapid change in distribution and value chains
Increasing individualism of younger generations
The entrenchment of the current-generation CEO
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Resource-Based Theory
Resource-based theory highlights unique capabilities or resources that family firms convert into competitive advantage
These resources are often referred to as organizational competencies
The ability of a particular family business to capitalize on its unique advantages depends on the quality of the interaction between business and family
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Resource-based theory holds that competitive advantages derive from core competencies that are the result of the unique overlap between owners and managers, between family and business. Speed to market, long-term investment horizons, product differentiation through high-quality/service strategies, and reduced administrative costs are some of them. They are the result of attributes such as concentrated ownership, family unity, shareholder loyalty (patient capital), company size, strategies that focus on proprietary products or niche markets, and skill/knowledge transfer across generations.
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Core Competencies/Attributes Turned into Competitive Advantage
Overlapping responsibilities of owners and managers, along with small company size, enable rapid speed to market
Concentrated ownership structure leads to higher overall corporate productivity and longer-term commitment to investments in people and innovation
A focus on customers and market niches results in higher returns on investments
The desire to protect the family name and reputation often translates into high product/service quality and higher returns on investment
The nature of the family–ownership–management interaction, family unity, and ownership commitment support patient capital, lower administrative costs, skills/knowledge transfer across generations, and agility in rapidly changing markets
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Stewardship Theory
This perspective claims that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own well-being
Owners inherit a responsibility to others, to stewardship, so that the enterprise they received from the earlier generation may successfully pass on to the next
As stewards of the firm, family owners often place individuals on the board that can provide objective advice and advocate for a going concern
The independence of the board has a positive impact on the financial performance of the firm through its advisory role more than through its monitoring or supervisory function
© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stewardship theory argues that founding family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own personal well-being. Its continuity is often deemed a collective responsibility of family members.
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