MBA management

Meaning and Definition of Family Business

Family business and small business are not the same. At the same time, large public firms are often family firms. “Family business” can be regarded as the most popular “mom and pop” businesses. Although many small and micro businesses are family- owned and operated, there is evidence that family firms are also fast growth firms and very large successful firms. Broadly, family business has been defined as a business that is owned and managed (i.., controlled) by one or more family members. According to Davis and Tagiuri, family are “organizations where two or more extended family members influence the direction of the business through the exercise of kinship tis, management roles, or ownership rights”.

In the Words of Gallo, family businesses are essentially the same in every country in the world relative to their problems, issues and interests.

There is no consensus of opinion as to what exactly is a family business. There have been varying definitions and a review of the definitions will reveal the elements used by the authors to construct their understanding of the term. The following list outlines the gist of various definitions of family business used by various authors and academicians:
1) High percentage of share capital owned by a family either jointly or individually.
2) Family members of share capital owned by a family either jointly or individually.
3) Expression of intention to maintain family involved in management or ownership.
4) A number of generations of the same family involved in management or ownership.
5) Management or ownership control by direct descendants of the founders.

In a family enterprise, there is a unique source of competitive advantage derived from the interaction of family, management and ownership. But, it is usually true only when the family unity is high.

There are various definitions of a family business. In fact, there are as many definitions as there are authors writing on family businesses. However, in general a family- owned business is one:
1) In which two or more extended family members influence the business through the exercise of kinship ties management roles and ownership rights, and/or,
2) Which the owner intends to pass to a family heir.

Family business writers have contributed scores of definitions in the family business literature emphasizing different aspects of a family business, particularly the form and level of family involvement or ownership control, the anticipation or occurrence of an inter- generational transfer of ownership or management control. There are various definitions of family- run business and these can be grouped into two:
1) Structural Definitions: These definitions focus on the firm’s ownership or management arrangements, e.g., 51 per cent or more ownership by family members.
i) According to Barry, “Ownership control by the members of a single family”.
ii) According to Barns and Hershon, “Ownership control by a single family or individual”.
iii) According to Becker and Tillman, “A small or closely held business”.
iv) According to Rosenblatt, de Milk, Anderson and Johnson, “Majority ownership by a single family and direct involvement by at least two members in its operation”.
v) According to Stern, “Ownership and operation by members of one or two families”.
vi) According to Lansberg Perrow and Rogalsky, “ Legal control over the business by family members”.
vii) According to Leach et al., “Single family effectively controls firm through the ownership of greater than 50 per cent of the voting shares: a significant portion of the firm’s senior management is drawn from the same family”.

2) Process Definitions: These definitions stress on how the family is involved in the business—its influence on company policy, its desire to perpetuate family control of the business and so on:
i) According to Donnelly, “Closely identified with at least two generations of a family; link has had a mutual influence on company policy and the interests and objectives of the family”.
ii) According to Miller and Rice, “Members of one family own enough voting equity to control strategic policy and tactical implementation”.
iii) According to Tagiuri and Davis, “Two or more family members influence the direction of the business through the exercise of management roles, kinship ties or ownership rights”.
iv) According to P. Davis, “Interaction between family and business organization that determines the nature and uniqueness of the business”.
v) According to Beckhard and Dyer, “Business, family and founding sub- systems with a focus on linkages among them”.
vi) According to Dyer, “Family influence over business decisions”.
vii) According to Churchill and Hatten, “Expectation or actually of succession by a family member”.
viii) According to Ward, “Transfer of ownership across at least two generations”.
ix) According to Hollander and Elman, “Continuous relationship between family and business”.

Characteristics/Features of Family Business

1) Clearly separate management and ownership.
2) Have a clearly defined vision.
3) Take time to understand the family’s concerns and the needs of individuals.
4) Have a common language of trust inside and outside the family business.
5) Speak with one voice.
6) Live their values as spouse them.
7) Have defined roles and responsibilities for family members, shareholders and employees.
8) Have high staff loyalty and low staff turnover.
9) Consider appointing non-executive directors to help bring objectivity.
10) It also considers the family business members who aren’t involved in the business.

Various Types of Family Businesses

1) Family–Owned Business: A family –owned business is a for- profit enterprise in which a controlling number of voting shares( or other form of ownership), typically but not necessarily, a majority of the shares are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family.

2) Family-Owned and Managed Business: A family- owned and managed business is a for-profit enterprise in which a controlling number of voting shares (or other form of ownership), typically but not necessarily a majority of the shares, are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family. The authority conferred by this controlling interest permits thee family to determine objectives, methods, methods for achieving them and policies for implementing such methods. And this business has the active participation by at least one family member in the top management of the company so that one or more family members have ultimate management control.

3) Family- Owned and Led Company: A family-owned and led company is a for- profit enterprise in which a controlling number of voting shares (or other form of ownership), typically but not necessarily a majority of the shares are owned by members of a single extended family, or are owned by one family member but significantly influenced by other members of the family. The authority conferred by this controlling interest permits the family to determine objectives, methods for achieving them and policies for implementing such methods. And this business has the active participation by at least one family member in the Board of Directors of the company so that one or more family members have at least a high level of influence over the company’s direction, culture and strategies.

Founder of Family Business

In a family business the founder plays the most important role. The founder is invariably the head of the family and these dual roles place him/her in a position of paramount importance. The management style and the agenda of the founder go a long way in determining the nature and direction of the family enterprise. In extreme cases, the business enterprise and the family members reflect the values and personality of the founder.

The varied roles and responsibilities of the founder of a family business include the following:

i) Starting the business,
ii) Building the organization,
iii) Providing guidance and direction to employees and family members,
iv) Constructively family members in the business,
v) Planning for succession.

One of the major advantages of the head of a family business over CEOs is that the head of the family business is much more assured of the security of his/her tenure. The founder or head dos not have to resort to much office politics to remain in power.

The role of the founder passes on to the successor and thee successor, as a CEO has to play a similar role in leading the firm.

Entry of Family Members

Entry of family members into the family business may turn out to be a contentious issue. The founder and others will have to develop some ground rules regarding the entry of family members.

The family can encourage the younger generation to develop skills and acquire relevant educational qualifications. The next generation can even be encouraged to pick-up relevant work experience by working in other firms.

Different family members may be seeking different levels of involvement. There would be some members who will join the family business and then decide that they would like to do something else. So, it may be good to develop an internship programme for family members, so that they can judge if they are cut out to be part of the family business.

There may also be those who left the family business in the past and are now seeking a second chance. There should be some thought given to dealing with such family members who want to come back to the family business fold. Some others might want a part-time involvement. Usually, these are eth people who have other business or career interests or the men married to those women in the family who wish to devote some time in managing household activities.

It also pays to consider the roles and rights of those family members who are not at all involved in the family business.

Role of New Family Member in Business

A family enterprise welcoming the new family members in the business is faced with a vital question: Do incoming family members fill an existing vacancy or will a new position be created for them?

Other employees may feel resentment when a family member is given preferential treatment, but by and large, most employees are willing to make concessions to the owning family as they understand that it is the family‘s money that is running the business.

The role of new entrants in a family enterprise has to suit their abilities. If they are occupying a position just because they belong to the family, they may not do justice to their responsibilities.

In many instances, the new generation does not identify with the practices adopted by the older generation and also may not be confident of thee long-term prospects of their current business.

Before suggesting an entirely new path for the family enterprise, the new entrants have to be careful to ensure its acceptance.

The following measures may be helpful in embarking on a new business:

i) A new entrant should have a track record that gives legitimacy to his/her ideas and claims. An MBA dos not usually give enough credential, the young entrant’s on- the job experience and achievements should indicate a high level of expertise and competence.

ii) It pays to consult the older generation while making the plan. Ultimately, it will be easier to get the plan accepted if other family members have also contributed in making the plan.

iii) Suggest a step-by- step approach. Small changes will be more acceptable to the older generation and they will be able to keep track of results. Impressive results will instill confidence in the new venture.

iv) If the plan is still not acceptable, there must be something wrong with the plan. Probably, it represents a very high level of risk and the potential benefits do not match the risk. One of the commonly observed and easy methods of entrepreneurship is to join the family owned business and develop it. Such people are called second generation entrepreneurs or next generation entrepreneurs in case of successions. There are legendary examples of Tata Group, Birla Group, Ambanis, Munjals, Singhanias, Godrej group, Nandas Group and Thapar Group etc., where family tradition is continued. Some have originated hundred years back and some about ten years back. Those started in early 20th century have grown slow and those started in late 20th century have been growing fast.

The second generation entrepreneurs have following natural advantages:

i) Coming from affluent families these youngsters have been able to obtain better professional education and experience than their elders.

ii) They have the advantage of sound foundation in terms of established organization, image, finance and other resources.

iii) They have better and faster access to knowledge, information related to business, competition and market potential.

iv) They can afford to take risks of failure and losses as their sustenance is not entirely dependent upon new challenges taken up.

v) It is possible for them to get credit facilities from banks and vendors due to the image of family and other business activities.

vi) Based on group image and individual’s business image, the family owned business gets good response for public issue of shares.

vii) Various business contracts and flows of information enable them to select product and service areas which are in demand and which have bright future.

There will be no need to have own office, dealer network and new employees. In the initial stages the common facilities and resources can be used for new enterprise.

Advantages of Family Business

The overriding characteristic that distinguishes most family businesses is a unique atmosphere that creates a ‘sense of belonging’ and an enhanced common purpose among the whole workforce. Although being intangible, this factor manifests itself in a number of very competitive edge. These are summarized in the panel opposite, but it is worth examining them in detail:

1) Commitment: People who set-up a business can become very passionate about it-- it is their creation, they nurtured it, built it up and for many such entrepreneurs their business is their life. This very deep affection translates naturally into dedication and commitment, which extends to all the family members who come to have a stake in the success of the business. They feel they have a family responsibility to pull together and, company’s success than they would dream of devoting to a normal job. Family enthusiasm develops added commitment and loyalty from their workforces- people care more and feel they are part of a tam, all contributing to the common purpose.

2) Knowledge: Family businesses often have particular ways of doing things--- special technological or commercial know –how not possessed by their competitors; knowledge that would soon become general in a normal commercial environment, but which can be coveted and protected within the family.

This idea of knowledge is also relevant in relation to the founder’s sons or daughters joining the business. Children grow-up learning about the business, infected by the founder’s enthusiasm, and when the time comes for them to consider joining they may already have a very deep understanding of what the business is all about.

3) Flexibility in Work, Time and Money: Essentially, this factor boils-down to put the work and time into the business that is necessary and taking –out money when you can afford to. A further aspect of commitment is that if work needs to be done and time spent in developing the business, then the family puts in the time and does the work—there is no negotiating of overtime rates or special bonuses for a rushed job.

The same flexibility applies concerning money, and here lies another important distinction between entrepreneurial and non- business families. Most families have a set income from wages or salaries paid by an employer, and the only decisions the family take concern how this income is to be spent. But for families in business, income is not a fixed element in the domestic equation. They must decide how much money they can safely take from the business for their own needs while at the same time preserving the firm’s financial flexibility and its scope for investment.

The privately held family business is the only entity that can truly build for the long-run.

4) Long-Range Thinking: But although families are good at thinking long-term, they are not so good at formalizing their plans—writing them down, analyzing the assumptions they are making, testing past results against earlier predictions--- n short, the strength means that the long- range thinking is there, while the weakness is that this thinking is undisciplined. If the right environment exists for a family to build on its vision of the future and to focus on and get behind the type of long- term to focus on and get behind the type of long-term strategic intent that has characterized Japanese business, then the possibilities are immense.

5) Stable Culture: For a variety of reasons, family business tend to be stable structures. The chairman or Managing Director has usually been around for many years and the key management personnel are all committed to the success of the business and they too are there for the long-term. Relationships within the company have usually had ample time to develop and stabilize, as have the company’s procedural ethics and working practices- everybody knows how things are done.

Like some of the other factors working in favor of family businesses, however a strong, stable culture can be a two-edged sword.

6) Speedy Decisions: In a family controlled business, responsibilities are usually very clearly defined and the decision- making process is deliberately restricted to one or two key individuals. In many cases, this means that if you want the company to do something you go and ask the boss and the boss will either say ‘yes’ or ‘no’.

The contrast with this process is at its most stark if one looks at the example of a public company deciding to shift its operations into new trading areas. If the decision is likely to change the shape of the business significantly then it will involve rather more than a ‘yes’or ‘no’ from the loss. Typically, the process will begin with an ‘in principle’ board decision to investigate the move, feasibility studies will be undertaken which will then be examined by specially appointed board committees , the company’s banking , accounting and legal advisers will all become involved in the process, a board committees, the company’s banking, accounting and legal advisers will all become involved in the process, a board decision will be taken to approve the move, but even then shareholder approval may have to be sought via a lengthy and elaborately detailed circular designed to summarize the arguments and quantify the financial impact of the change. Of course, this is not to say that advice from outsiders on important decisions is a waste of time, or that the consequences of such a major move should not be extremely carefully evaluated. But speed does have a commercial value and, in this example, if a lot rested on the speed with which a decision could be taken and implemented, then the family business would definitely have the edge.

7) Reliability and Pride: Commitment and a stable culture lie behind the fact family businesses are generally very solid and reliable structures—and are perceived as such in the marketplace. Many customers prefer doing business with a firm that has been established for a long time, and they will have tended to build-up relationships with a management and staff that are not constantly changing jobs within the firm or being replaced by outsiders. Also, the commitment within the family business , discussed earlier, is not just a hidden force- it reveals itself to customers all the time in the form of a friendlier, more knowledgeable, more skillful and generally much higher standard of service and customer care.

Closely connected with reliability is the notion of pride; the people who run family businesses, proud of their achievement in having established and build it and their staff are proud to be associated with the family and what they are doing. This pride, which in some circumstances can tend to almost institutionalize the business, is often translated into a powerful marketing tool.

Disadvantages of Family Business

As well as immensely valuable advantages, family businesses are prone to some serious and endemic disadvantages. In the same way that family business strengths are not unique to family firms, neither are their weaknesses, but family businesses are particularly vulnerable to these failings:

1) Rigidity: walking through the doors of some family businesses can be like entering a time tunnel. Sentiments such as, ‘Things are done this way become dad did them this way’ and ‘ You cannot teach an old dog new tricks.’ Reflect the ways in which behavior patterns can become ingrained and family businesses become tradition- bound and unwilling to change.
It is all too easy to find ourselves doing the same thing in the same way, for too long and in a family business it is easier still; change not only carries with it the usual disruption and an array of commercial risks, but it can also involve overturning philosophies and upsetting practices established by relatives.

2) Business Challenges: The business challenges that particularly affect family firms can be divided into three categories:
i) Modernizing Outdated Skills: Very often the skills possessed by a family business are a product of history and, as a result of developments in technology or a change in the marketplace; these skills can quickly become obsolete. Problems in this area are not necessarily triggered by drastic changes such as the effect of word- processing technology on typewriter manufacturers. They can also arise from subtle changes of emphasis in product manufacture or marketing that can be just as damaging if thy catch an unresponsive, tradition- conscious family business off- balance.
ii) Managing transitions: It represents another major challenge for family businesses—it can often be the make or break for a family firm. In summary, the challenge to the business is typified by a situation in many companies where the founder is getting- on in years and his son, the heir apparent, is convinced that things need to be done differently. The merest hint of this potential conflict can be disruptive, causing enormous uncertainty among staff, suppliers and customers. In many cases, the damage becomes even more serious when the son actually begins introducing his program of radical change. So managing transitions is a difficult challenge to the business and because of the added dimension of possible intra- family upset and conflict, it is a much bigger challenge for a family business than it is for other kinds.
iii) Raising Capital: In comparison with the wide range of funding alternatives open to publicly held companies with a diversified shareholder base, family businesses obviously have much more limited options when it comes to raising capital. But over and above these family businesses commonly have a problem with the very concept of raising money from outside sources. This tends to occur most frequently in relation to longer- term capital for significant projects, like opening a new plant or creating a new division of the business, but it also shows itself in a reluctance to go to outsiders for bank overdrafts or other short-term funding that would help the firm through quit minor cash flow owned secret ambitions or succeeding when their father rears; and the father himself is often ambivalent about succession because he is worried about the ability of his children and how he is to approach favoring on at the expense of the others. But more fundamentally as far as the business is concerned, almost always the change is not simply a move from one generation to the next—it is a revolution in which the culture of the organization is re-constructed by the young people who bring with them new ideas about how the business should be run, how it is to develop. New loyalties, new staff and so on.

Non-Family Entrepreneur

Non-family entrepreneurs are the entrepreneurs who lead the business because of their caliber and worth. Thy actually strive to ensure that business b run by the people who are best suited to do that job. Sometimes these types of firms are referred as professional firms.

Non-family entrepreneurs believe in the culture of transnational corporations when ownership, management and control all are transferable and the growth and development of the business enterprise is the supreme goal.

In non-family business the major decisions are taken by Board of Directors and CEO of the company is the head of executive body.

In family businesses, family maintains voting control over the strategic direction of the firm. Family may also be directly involved in day-to-day operations . Further , multiple generations of family members could be involved in such operations.

Family Vs Non-Family Entrepreneurs

The major differences between family and non-family entrepreneurs are summed up as follows:

Basis of Difference   Family Entrepreneur   Non-family Entrepreneur
1) Authority Structure   In most of the family entrepreneurships family authority structure is “corporate structure” referring to a structure, which is highly centralized and delegation is consistently upwards in a pyramidal shape.   Non-family business has “federal structure” referring to a structure containing several independent and autonomous centers of authority, such as in the case of divisionalized organizations.
2) Succession Plan   The succession is normally given to sons, daughters or family members of the enterprise.   Succession plan is managed in a professional way, as per the decision of the Board of Directors.
3) Interest   The interest of the family is supreme and business actually becomes the reflection of family culture.   Interest of the organization is the only criterion for business decisions.
4) Familial Feud   The division of property or familial feud casts a dark shadow on the health of the business, at times lading to heavy losses.   Familial feud dos not come into picture and familial interests do not hamper corporate interests.
5) Power/Authority   The family is the ultimate power center, Employees do not feel empowered.   Employees may a time consider themselves as the owner of organization and in normal cases employee empowerment is better.
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