Strategy in Family Businesses


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Strategy in Family Businesses

  1. 1. A UNIFIED SYSTEMS THEORY OF FAMILY FIRM PERFORMANCE Timothy G. Habbershon, Director Wharton Enterprising Families Initiative Lecturer, Wharton Entrepreneurial Programs The Wharton School University of Pennsylvania (V):215-898-4470 (F): 215-573-6084 email: Mary Williams Professor of Management Widener University Research Director, Wharton Enterprising Families Initiative University of Pennsylvania (V): 610-499-4324 (F): 215-573-6084 email: Ian C. MacMillan Fred R. Sullivan Professor Academic Director, Sol C. Snider Entrepreneurial Research Center The Wharton School University of Pennsylvania (V) 215-898-4856 (F) 215-898-1299 email:
  2. 2. Abstract Theory and practice indicates that in family-influenced firms the interaction of the family, individual family members, and the firm create unique systemic conditions and constituencies that impact the performance outcomes. Habbershon and Williams (1999) have suggested that these idiosyncratic systemic family influences can be captured through the resources and capabilities of the organization. In this paper we pursue their line of thinking and more specifically examine the performance outcomes for family-influenced firms. We develop a unified systems model of performance that links the resources and capabilities generated in the family business system with their potential for sustainable wealth creation. The unique bundle of resources and capabilities resulting from the systems interactions are referred to as the “familiness” of the firm. Performance for family-influenced firms is said to be a function of the familiness inherent in the family business system. The performance model focuses on a particular subset of family-influenced firms whose performance goal is transgenerational wealth and wealth creation potential. Those families that meet this premise we refer to as “enterprising families.” 2
  3. 3. Introduction The goals of achieving strategic competitiveness and sustaining above-average returns are difficult in today’s turbulent and complex marketplace. These difficulties are compounded when firms do not have a clear understanding of their performance model. Recognizing the antecedents to firm performance allows leaders to exploit their organizational resources and capabilities and to make the requisite strategic choices to pursue future opportunities. The heart of the strategic management process is to achieve the performance outcomes that allow firms to be competitive and create wealth over time. Theory and practice indicates that in family-influenced firms there are a complex array of factors that impact performance outcomes. The interaction of the family, individual family members, and the firm create unique conditions and constituencies that have diverse value propositions and outcome expectations. Leaders must account for these systemic influences in their firms if they are going to manage their competitive position and maximize their wealth creation opportunities. To date, however, the family firm literature has emphasized improving family relationships rather than firm performance (Sharma, Chrisman & Chua, 1997). Strategic management as it relates to family influence has been largely overlooked with anecdotal descriptions of organizational behavior substituted as strategy models (Harris, Martinez & Ward, 1994; Gudmundson, Hartman & Tower, 1999). The attempts to define a family firm or delineate between the performance requirements of so called family firms and non-family firms have left family and business leaders confused at best (Chua, Chrisman & Sharma, 1999; Gudmundson, Hartman & Tower, 1999). More often, they attempt to discount, ignore, or isolate the family factors from the business and resort to traditional strategy models for the firm. The end result is that they fail to account for major systemic influences that are impacting their performance. In short, they do not have an adequate performance model. Habbershon and Williams (1999) have suggested that these idiosyncratic systemic family influences can be captured through the resources and capabilities of the organization. In this paper we pursue their line of thinking and more specifically examine the performance outcomes for family- influenced firms. We develop a unified systems model of performance that links the resources and 3
  4. 4. capabilities generated in the family business system with their potential for sustainable wealth creation. The unique bundle of resources and capabilities resulting from the systems interactions are referred to as the “familiness” of the firm. Performance for family-influenced firms is said to be a function of the familiness inherent in the family business system. The performance model focuses on a particular subset of family-influenced firms whose performance goal is transgenerational wealth and wealth creation potential. Those families that meet this premise we refer to as “enterprising families.” In enterprising families, the vision of the familial coalition directs the enterprising activities of the family firm so as to maximize the potential wealth of current and future generations of family members. They do this by cultivating the distinctive familiness resources and capabilities that hold the potential for advantage. As long as this distinctive familiness can be developed in ways that lead to competitive advantage the results will be above average returns and transgenerational wealth creation. The paper synthesizes strategy models with systems theory thinking in order to show how family influences can be linked to performance outcomes. It presents a review of the systems theory literature in the field of family business studies and shows how the unified systems model of performance goes beyond many of the limitations in the current systems theory approach. It provides a defining function for the family business system committed to wealth creation and delineates the theory and practice implications. Within the realm of strategic management the Resource-Based View provides an accepted model for examining the distinctive resources and capabilities of the firm from a systemic perspective. Resource-based strategy scholars have incorporated a balanced process perspective that integrates the influences from psychology, organizational development, evolutionary economics, entrepreneurship, and systems dynamics (Macintosh & Maclean, 1999). With its emphasis on path dependent behavior (Teece, Pisano & Shuen, 1997), deeply embedded resources and capabilities (Makadok, 2001), and idiosyncratic firm level advantages (Barney, 1991) it is a useful model for thinking about family-influenced advantage and their corresponding performance outcomes. 4
  5. 5. Family Business Strategy . . . Two Decades of Overlapping Circles Discussions of strategy, planning, growth, or the performance of family firms inevitably reference the contradictions that arise between the family system and the business system. Whether it is the global adaptation of family businesses in China (Yeung, 2000), the financial decision making patterns of family firms (Romano, Tanewski & Smyrnios, 2000), their strategic orientation towards market opportunities (Gudmundson, Hartman, Tower, 1999), or the formulation and implementation of strategy (Harris, Martinez & Ward, 1994), the tensions between the needs, desires, goals, and practices of the family versus the business are introduced as strategic factors affecting firm level outcomes. For nearly two decades the two or three overlapping-circles models (Figure One, a & b) have been the standard theoretical models for picturing the family and business as a combined system and for explaining the competitive tensions within the system. They have been used to identify the family business system as a distinct strategic entity (Hollander & Elman, 1988, Swartz, 1989), to describe the strategically relevant attributes and constituencies in the family business system (Tagiuri & Davis, 1983, reprinted as classic, 1996), to discuss the family business’ unique strategy making processes (Carlock & Ward, 2001) and to explain how each of the subsystems move through stages over time (Gersick, Lansberg, Desjardins & Dunn, 1999). Hoy and Vesser (1994) asserted that the critical strategic management issues for family firms are located in the nexus of the intertwined areas of the circles – founder transition, business continuation, succession, tax planning, and owner/manager life cycles. Figure One: Overlapping-Circles Models a. b. 5
  6. 6. The prevailing view is that the family and business are two complex social systems that, when combined, differentiate family businesses from other organizations by the degree to which the systems boundaries overlap (Stafford, Duncan, Dane & Winter, 1999; Ibrahim & Ellis, 1994, Whiteside & Brown, 1991; McCollom, 1990). Although the literature acknowledges that strategy emerges from the interaction of the family and business, the dominant perspective is that the business system is interpenetrated by the family system, resulting in the family negatively constraining the professional nature and performance outcomes of the business (Stafford et al., 1999; Whiteside & Brown, 1991). There are those who stress the equal power and importance of the family in the system (Carlock & Ward, 2001; Stafford et al., 1999; Ward 1987; Hollander, 1984), but still see strategy as a satisficing process that balances the competing interests of the family and the business. Davis and Stern (1980) provided an early synthesis between social systems theory and family business organizational behavior. They described their adaptation strategy as an “intersystems boundary management” where one system (the family) was divided from the other (the business) through the establishment of clear and consistent boundaries. They asserted that the family business is a viable, legitimate entity and a significant organizational alternative. Striking one of the early positivistic blows against a classical management view that discounted family involvement in business, their approach non- the-less put the field on the path to a dualistic view of family versus business. Management and strategy for family businesses became a matter of managing the competing constituencies of the “task-oriented business” and the “emotional relationships that constitute the family process” (p. 71-72). Continuing in that vein, Beckhard and Dyer (1983) identified the family and business as two of the subsystems in the family firm system and saw them as having “competing needs and values” (p. 6). Lansberg (1983) characterized family businesses by their institutional overlap, describing them as “two qualitatively different social institutions, each with a unique set of values, norms and principles . . . and distinct rules of conduct” (p. 39). He concluded that the best one can hope for in this model is to develop coping strategies for more constructively managing the contradictions. Tagiuri and Davis (1983, reprinted as classic, 1996) presented the constituency overlap of owners, managers, and family members, 6
  7. 7. describing the challenges as managing the positive and negative attributes in the system. Before the first decade of the nascent field of studies concluded, the theory and consulting models openly embraced the “dual systems approach” (Swartz, 1989, p. 331). The second decade continued with Benson, Crego, and Drucker (1990) perpetuating the warring entities model of family business in their book with the subtitle, “a success guide for growth and survival.” They pictured the two circles of family and business with the word “conflict” written over the overlapping section. They concluded that keeping the overlap of the competing systems from becoming excessive was the key to avoiding conflict and finding success. Likewise, Lee and Rogoff (1996) described strategy as the “family oriented system” and “business oriented system” trying to align goals in order to avoid conflicts – their model shows a direct line from the “family system” and “business system” to “family/business conflict” to “negative effect on business performance” (p. 425). The most recent works on strategy for family businesses continue the reliance on the overlapping- circles model. The emphasis on managing the overlap is more proactive and positivistic, but non-the-less dualistic in its strategy and satisficing outcomes. Carlock and Ward (2001) call their approach a parallel planning model and set the goal as balancing the family needs and wants with the business requirements and opportunities. The developmental model by Gersick et al. (1999) extends the three-circle model through a sequence of stages over time. Distinctive structures and strategies for the family business system are recommended based upon the life-cycle stage and constituency group that results from the overlap of the family, business, and ownership. Accounting for the systemic influence of family and business on strategy making processes and outcomes advances the understanding of strategy in general and the family form of business organization more specifically. In that regard, the overlapping-circles models are useful in identifying the component parts and constituencies of the family business system and for describing complex organizational phenomena. The approach is not particularly useful, however, for identifying the positive systemic synergy from the interaction of the family and business in a system or for developing a unified systems 7
  8. 8. performance model. The overlapping circles models inherently picture a static degree of interaction (overlap) between the family and business and perpetuate a negativistic trade-offs approach to strategy. Kepner (1983) provided early warnings about this potential for a dualistic and polarizing imbalance of a systems approach that pitted the family against the firm. Two later papers added weight to the warnings by describing the limitations and detriments of the dual systems approach (Hollander & Elman, 1988; Whiteside & Brown, 1991). Of particular interest is the Whiteside and Brown article because it opened the second decade of family business literature with a strong call for a single entity view of the family firm. They were concerned with a dualistic approach that relied on a stereotyping of subsystem functioning – family as emotional-based and business as task-based – and on exaggerated notions of overlap and subsystem boundaries that missed the interaction of structure and process. Whiteside and Brown stopped short of proposing a unified systems model or of addressing the strategy and performance implications of their approach. Stafford et al. (1999) posited a more positivistic systems model that outlined the determinants of a functional family, profitable business and family business sustainability. While they minimized the debate between a dual or unified systems approach, their model has limited use for strategy since it does not identify the systemic antecedents to performance or the unified systems outcomes other than the general notion of sustainability. In retrospect, family business theory and practice continues to view strategy outcomes predominantly through the lens of organizational behavior and development. It confines strategic management of family-influenced firms to issues relating to family relationships and family business continuation represented in the overlapping circles. The field has matured in its understanding of the constituencies and conditions represented in the combined entities of the family and the business and has developed significant descriptive models for helping family firms anticipate and plan for eventual life- cycle changes. However, a strategic performance model that accounts for the systemic influences of family on wealth creation outcomes without the current dualistic limitations embodied in the overlapping- circles models. 8
  9. 9. Building a Performance Model . . . A Unified Systems Perspective From a strategy perspective, the family form of business organization is unique, not simply because of the conditions and constituencies created by the overlap or interaction of the family and business – patterns of ownership, governance, management, and succession – but because of how these materially influence firm level outcomes (Chua, Chrisman & Sharma, 1999). In order to capture this uniqueness, we will create a performance model for the family firm that links the systemic influences generated by the family business system to performance outcomes. The performance outcome of interest is wealth creation, in particular what we would refer to as family-influenced transgenerational wealth creation. By wealth creation we mean generating above average returns in the market, while transgenerational wealth creation means sustaining those above average returns across generations. Family-influenced transgenerational wealth creation indicates that we will focus on those situations where a familial coalition has the vision to direct business activities so as to maximize the potential wealth of current and future generations of family members. We acknowledge that our model may only apply to the subset of family firms who are committed to generating above average returns over time. We refer to those families as “enterprising families.” The model is predicated upon a correct understanding of the systemic influences on wealth creation. The following section presents a unified systems model and shows how the collective interactions of the family, firm, and individual family members generate the systemic influences that can be linked to wealth creation. They are linked to wealth creation through the resources and capabilities of the firm and to the extent that they provide an advantage they are the “distinctive familiness” of the system. As families intentionally seek their familiness advantage they will continue to create wealth over time and find positive family and relationship benefits through the synergy of the systems interaction. The Family Business System That organizations are dynamic systems with a complex set of interconnected parts continuously interacting and adapting, has acquired the status of self-evident in the strategy arena (Morel & Ramanujam, 1999). Ackoff (1994) reminded us, however, while the fact that organizations are systems is 9
  10. 10. not news, it is still necessary to consciously think of an organization as a system in order to change the behavior of individuals and parts in the system. Given the history of dualistic and overlapping systems- thinking about the family form of business organization, it is particularly important to establish a more interactive model of the family business system and to intentionally think about the ramifications for strategy and wealth creation. Senge (1990) described systems thinking as “a discipline for seeing wholes . . . interrelationships rather than things . . . patterns of change rather than static snapshots (p. 68). Similarly, Ackoff (1994) defined a system as a whole that cannot be divided into independent parts. As a criterion for fulfilling the definition, he stated that the “whole” must have one or more defining functions that cannot be carried out by the parts taken separately. Figure two (a) presents a unified systems model of the family business meta-system with three distinct subsystem components as strategic actors in the system – firm, family, and individual. Figure Two: Unified Systems Model a. b. The model shows circular feedback processes of continuous influence rather than picturing degrees of subsystem overlap and isolated points of influence. To capture strategic influences, it is necessary to show how events in one of the parts of the system ultimately have both a cause and effect in the other subsystem components. Figure two (b) expands the model showing how the subsystems have their own action and outcome interactions that continuously feed back into the system. It allows each of 10
  11. 11. the subsystems to identify their individual actions and outcomes while in turn identifying the nature of the influences from the other subsystems and the system as a whole. The model makes it clear that the path dependent behaviors of individuals, families, or firms within the system are a result of the interactions of the entire system. It allows each of the subsystems to identify their appropriate performance or success measures, but never in isolation from the influences of the system as a whole. The system can be said to have synergy when each of the subsystems are maximizing their actions and outcomes based upon the defining function of the system as a whole. Performance Outcomes Now that we have established the nature of the systems interaction between the family, firm, and individual subsystems we can begin building our performance model. The performance outcome that interests us is wealth creation. Business leaders create wealth for their organizations by fulfilling the primary objective of business: earning above average-returns in the market (Rowe, 2001). Above- average returns or supernormal rents are returns greater than an investor expects to receive from other investments with similar risk. They are obtained when a firm achieves strategic competitiveness and successfully exploits its competitive advantage over other firms. Wealth creation in a business organization is thus a function of performance where performance is measured by profits, growth, return on investment, market share, etc. We thus state our first propositions for the performance model: Wealth of a Business Organization = f(Performance) Where Performance is measured by Profit, Growth, Return on Investment, Market Share, etc. The propositions have a number of implications for developing our unified systems model. First, the assumption underlying the model is that the system is directed towards wealth creation. This assumption fits the subset of families we have described as “enterprising families” – those committed to transgenerational wealth creation. Second, each of the subsystems has appropriate outcome measures according to their predefined function in the system. In order to assess wealth creation outcomes, we must build a performance model for the firm subsystem (or investment entity) as the engine for wealth 11
  12. 12. creation. Third, since our stated interest is in family-influenced wealth creation and not just wealth creation, we must build the performance model that captures the systemic influences from the family and individual subsystems on the performance outcomes of the business. To build a system performance model we utilize the strategic framework of the Resource-Based View. The Resource-Based View A systemic performance model must be able to account for a broad array of organizational influences and connect them to performance. In order to build a systemic performance model we turn our attention to the resources and capabilities of an organization. Business organizations create wealth based upon their ability to capture and direct valuable resources to their most promising and productive use. Within the field of strategic management, the resource-based view is an established theoretical model which links firm level resources and capabilities to performance outcomes (King & Zeithaml, 2001; Yeoh & Roth, 1999; Miller and Shamsie, 1996; Henderson & Cockburn, 1994). The resource-based model assumes that each organization is a collection of idiosyncratic resources and capabilities that differentiate firm performance across time and are the source of their returns (Hitt, Ireland & Hoskisson, 2001). Performance can thus be said to be a function of a firm’s resources and capabilities: Performance = f(Resources and Capabilities) Examples of how organizational processes can be related to performance include: assessing the long-term impact of outsider assistance on the growth of new ventures (Chrisman & McMullen, 2000), researching the impact of technological innovativeness on small firms (Hadjimanolis, 2000), determining the effects of different human resource policies on firm outcomes (Olalla, 1999), understanding how the cognitive and emotional biases of decision-makers impact how they allocate resources (McGrath & Dubini, 1998), and determining how resource-picking and capability-building enable managers to create economic rents for firms (Makadok, 2001). The definitional distinction between a resource and a capability also highlights the systemic nature of the resource-based approach. Broadly speaking, resources refer to all of a firm’s assets, organizational processes, firm attributes, and knowledge controlled by them (Barney, 1991). Makadok 12
  13. 13. (2001), however, defined a capability as a “special type of resource – specifically, an organizationally embedded nontransferable firm specific resource whose purpose is to improve the productivity of other resources” (p. 389). Amit and Shoemaker (1993) distinguished resources and capabilities by conceptualizing resources as factor stocks that are deployed through a firm’s capabilities. Teece, Pisano and Shuen (1997) argued that capabilities must be built rather than bought and Makadok (2001) made the distinction between “resource-picking” and “capability-building” (p. 389). Miller and Shamsie (1996) distinguished between “systemic” resources that are embedded in the organization and “discrete” resources that are more readily transferable. Research has shown that resources and capabilities create “chains” of interactions that are directly and indirectly (Yeoh & Roth, 1999) linked to firm performance, competitive advantage, and firm wealth creation. For example, social capital has been shown to enhance knowledge acquisition (Kogut & Zander, 1992; Yli-Renko, Autio, & Sapienza, 2001), alliance formation (Chung, Singh & Lee, 2000), and inter-unit linkages (Tsai, 2000). Similarly, learning has been shown to affect the ability of organizations to build alliances (Khanna, Gulati & Nohria, 2000) and to positively change other capabilities (Helfat, 2000). Identifying these systemic links in the resource and capability chain is an important step in understanding firm level performance outcomes. Because of the systemic interaction of the family, firm, and individual family members family firms are unusually complex, dynamic, and rich in intangible resources and capabilities. Many of the potential advantages associated with family firms are found in their path dependent resources, idiosyncratic organizational processes, behavioral and social phenomena, or leadership and strategy making capabilities (Habbershon & Williams, 2000). Linking these idiosyncratic systemic influences to the resources and capabilities of a family business will enable us to capture family influence on wealth creation in the performance model. The “Familiness” of a Firm Habbershon and Williams (1999) have defined “familiness” as the unique bundle of resources a firm has as a result of the interaction of the family, firm, and individual family members with one another. 13
  14. 14. This definition indicates that the systems interactions create unique conditions and constituencies that can be identified as the systemic influences on the resources and capabilities of the firm. As the systemic influences in the subsystems are identified and attached to specific resources and capabilities they can be said to have deeply embedded defining characteristics that we call the “family factor” (f factor) – these are referred to as Resourcesf and Capabilitiesf (Figure Three). Figure Three: Resourcesf and Capabilitiesf To be more specific, family-influenced firms have unique potential for trustf, cost of capitalf, HR policiesf, leadership developmentf, alliance building strategiesf, decision makingf, etc., depending upon the exact nature of the systemic influences. We thus take the next step in building our performance model where the resourcesf and capabilitiesf can be said to be a function of the systemic influences of the family business system: Resourcesf and Capabilitiesf = f(Systemic Influences of Family Business System) In our model, it is the summation of the resourcesf and capabilitiesf f factors (Σ f ) that we refer to as the “familiness” of a firm. This unique familiness bundle of resources and capabilities provides a potential differentiator for firm performance and explains the nature of family influence on performance outcomes. Habbershon and Williams (1999) referred to those f factor resourcesf and capabilitiesf that lead to advantage as distinctive familiness, differentiating them from f factor influences that are neutral or 14
  15. 15. constrictive. We can now state the familiness definition in proposition form and the role familiness plays in providing firms with an advantage: Familiness = Σ( Resourcesf and Capabilitiesf) Advantagef = f(Distinctive Familiness) We conclude, therefore, that performance for the family form of business organization is a function of the familiness of a particular firm: Performance = f(Familiness) Figure four presents the completed unified systems model. It shows how the resourcesf and capabilitiesf generated by the interaction of the subsystems lead to advantagef and the possibility of generating supernormal rents. Wealth creation is thus tied to the systemic influences in the family business system as they create an idiosyncratic bundle of distinctive familiness resources for the firm. Figure Four: Unified Systems Model of Firm Performance Wernerfelt (1997) challenged resource-based scholars to gain a more specific understanding of the nature of different resources rather than discussing them only in terms of their effects. Our “f factor” approach describes the nature or source of the resources and capabilities in family-influenced firms and, in so doing, adds a new degree of depth to the performance model. It further provides a systemic 15
  16. 16. approach for explaining the idiosyncrasies of firm performance for any identifiable type of influence in a group of firms. Adopting our familiness performance model addresses three concerns in the field of family business studies. First, it isolates the performance of the business as the appropriate outcomes measure of a system intended to create wealth (Sharma, Chrisman & Chua, 1997). Second, it identifies the systemic condition and constituency influences generated by the system as inputs into the wealth creation process. Third, it clarifies the use of subsystem and meta-system outcomes as dependent and independent variables in the systemic model. Using this performance approach it is possible to isolate any one of the subsystems and build models that assess the systemic influences on the appropriate outcome measures. As is the circular nature of systems each of the outcome measures (dependent variables) for a given subsystem can also serve as systemic inputs (independent variables) into the outcome measures of any other subsystem. A Unified Approach . . . The Defining Function of a System Now that we have established the links between firm performance in family-influenced firms as the familiness of the firm, we are ready to discuss the “defining function of the system” (Ackoff, 1994). Ackoff described a social system and its outcomes very differently from the dualistic assumptions and satisficing resolutions of a competing family and business found within the family business literature. He provided a description of a system and its definition of the defining function as follows: A system is a whole that cannot be divided into independent parts . . . The whole has one or more defining functions . . . The defining function of a system cannot be carried out by any one part of the system taken separately . . . When an essential part of a system is separated from the system of which it is a part, that part loses its ability to carry out its defining function . . . Synergy is the increase in the value of the parts of a system that derives from their being parts of the system – that is, from their interactions with other parts of the system. Such an increase in value can occur only if the parts can do something together that they cannot do alone . . . A social system should serve the purposes of both its parts and the system of which it is a part. It should enable its parts and its containing systems to do things they could not otherwise do (Ackoff, 1995, p. 21- 31). 16
  17. 17. Implications for the Family Business System The implications of Ackoff’s views for a systemic approach to family business strategy and performance are significant. First, a social system must have a defining function that is an identifiable, positive outcome that cannot be generated by the parts taken separately. To date we do not believe that a defining function for a family business system has been given. The field has debated the definition of a family business and described the conditions and constituency parts of the system, but it has not said what outcome the system generates that is uniquely a product of the subsystem parts interacting with one another. Second, systemic interactions must create synergy that increases the value of the parts and the system as a whole. The system should be able to synergistically do something that the parts cannot do separately. A defining function must, therefore, be more than a healthy family or a profitable business or a fulfilled individual. Any one of these sub-system outcomes could exist without the systemic interactions of the system. These outcomes certainly may be the result of a positive synergistic system, but they cannot in and of themselves be called the defining function. Note also that the synergy must increase the value of the parts in the system and have an outcome that is synergistically positive. If one views the family and the business as competing entities that are more effective when they are kept apart, then the family business cannot be said to be a synergistic system. It is difficult to imagine making an argument that a family and a business comprise a social system if the system becomes more synergistic as it is pulled apart. A defining function must show how synergy is created for the parts individually and for the system as whole. Third, it is possible for a “collection of parts” to be what Ackoff (1994) refers to as an “unsystemic aggregation” (p. 25). He specifically mentions a holding company that cannot identify a defining function other than the common ownership of the entities. This analysis implies that a family business (with their subsystem components) does not inherently possess the attributes of an effective social system. If they do not generate positive systemic outcomes that can be called a defining function then they may be an unsystemic aggregation of parts (family, firm and individuals). This fact is a radical 17
  18. 18. clarification for the field. A family business should not be considered a de facto social system. It must meet a definitional hurdle that includes generating a positive defining function that enables it to fulfill its systemic purpose. The field may wrestle in trying to explain the negative outcomes of family firms because it is trying to explain unsystemic behavior as if it is normative and systemic. Clearly current family business theory and practice needs to delineate between aggregations and systems – families, firms and individuals that interact without positive and synergistic systemic outcomes (aggregations) and those in which a positive, value-added defining function can be identified (social systems). The Defining Function of the System The literature addressing the potential advantages of family businesses hints at the defining function of the system intended to create wealth (Habbershon & Williams, 1999, provide an extensive review of advantage literature). We say it “hints” at it because the current literature does not assign the advantages to a particular trait or type of business in a way that ties it to performance outcomes. Habbershon and Williams (1999) pointed out that assigning generic advantages to an indefinite category called the family business does not fulfill the definition of an advantage. However, the defining function of a system whose purpose is to create wealth – an enterprising families system – must have something to do with finding a competitive advantage and in achieving above-average returns. Based upon the reasoning in our performance model, an advantage comes from a firm’s unique bundle of resources and capabilities. More specifically for family-influenced firms the advantage is rooted in the systemic influences we have called the “f factor” of resourcesf and capabilitiesf, its familiness. The defining function of an enterprising families system whose purpose is to create wealth must, therefore, include the ability to generate distinctive familiness. Going a step further, the defining function of an enterprising families system must also include a cohesiveness component that identifies the strategic intent of the system as a whole. Chua, Chrisman and Sharma (1999) get at this point in their theoretical definition of a family business. They argued that strategic intent is captured in the vision of an organization, and stated that a family business is defined by the vision of a dominant coalition of one or more families who have the intent to sustain it 18
  19. 19. across generations. Combining their theoretical premise concerning strategic intent with our systemic model for wealth creation, we present the defining function of a family business system as the systemic vision of the familial coalition that generates distinctive familiness for transgenerational wealth creation. The defining function thus relates to the antecedent function and performance outcomes in the performance model (familiness), creating a synergistic outcome for the system. The theory and practice implications of this defining function are significant. First, the defining function articulates the purpose of the family business system for enterprising families. It is a positivistic mission statement for those committed to transgenerational wealth creation. There are four components to the mission: (1) The familial coalition must establish a systemic vision. This implies that there must be a degree of unity in the familial coalition in order to establish the vision. The vision must take into account the outcome goals of the subsystems as they relate to the larger goals of the meta-system in order to be called systemic. (2) The vision must specifically generate distinctive familiness. Unless the vision directs the systems interactions between the family, firm, and individual members to generate an “f factor” in the resources and capabilities that lead to a competitive advantage the vision cannot be said to be an effective vision for an enterprising families system. Habbershon and Williams (1999) delineate constrictive familiness and distinctive familiness. Constrictive familiness is those systemic conditions that constrain the development and deployment of resources in the business. Effective family business systems focus their efforts on ridding the system of constrictive familiness and generating distinctive familiness. (3) The vision must have transgenerational wealth creation as its stated outcome. Family business “life-style” firms are not effective systems for long-run wealth creation. They may be effective for sustaining a family’s life-style – and that may be the goal for the family business – but life- style goals should not be confused with the wealth creation goals of enterprising families. 19
  20. 20. (4) The wealth creation efforts must apply a transgenerational perspective. One of the differentiators of family-influenced wealth creation is its long-term transgenerational commitment. This premise has significant implications for planning, shareholder return expectations, transition strategies, and family coalition dynamics. Second, the defining function provides the strategic orientation of the system for enterprising families. Family shareholders and managers must have a “maximizing mentality.” We state this in contrast to a satisficing mentality that potentially dilutes the performance outcomes of both the subsystem components and the system as a whole. The concept of satisficing – balancing the needs and interests of the parts of the system – is a systems theory principle that has been used in family business theory and practice to mean “keep the peace in the system” or to “carry out the will of the controlling family in the business.” It generally subjugates one part of the system to another in order to balance the needs of the system, rather than maximizing the performance outcomes of the system. A maximizing mentality for enterprising families focuses on maximizing performance outcomes for each of the subsystems in order to generate distinctive familiness which in turn leads to fulfilling the maximizing purpose of the system – transgenerational wealth creation. Beyond a Family Business Definition . . . Operationalizing Systemic Influences A unified systems model of family firm performance links the systemic influences resulting from the interactions of the family, firm, and individual family members to the resources and capabilities as the familiness antecedents to performance. We now need to demonstrate how to operationalize and capture these systems interactions as conditions of influence. Habbershon and Williams (2000) have pointed out that an ex ante definition of a family firm limits the search for strategically relevant systemic influences that must be captured in order to determine the nature of a firm’s familiness. We propose to operationalize the definitional descriptions of a family business using multiple two-dimensional constructs. This approach moves from a static definition of a family business to an assessment of continuous conditions of systemic influences. The debates over the definition of a family business have 20
  21. 21. extensively identified and described the unique social and behavioral phenomena associated with the interactions of the family business system. The definitional literature thus provides the classification criteria for operationalizing the systemic conditions. There have been three broad approaches to defining the family business. The predominant method has been an operational one that defines family businesses by enumerating the component parts or functions. Using this approach family firms have been identified by ownership (Donckels & Frohlich, 1991; Gallo & Sveen, 1991; Welsch, 1993), management characteristics (Dyer, 1986; Dreux, 1990; Schwartz & Barnes, 1991; Kirby & Lee, 1996), generational transfer (Ward, 1987; Fiegener, Brown, & Prince, et. al., 1994; Churchill & Hatten, 1993), intent to maintain family involvement (Covin, 1994; Kirby & Lee, 1996; Litz, 1997), multiple generations (Shanker & Astrachan, 1996; Churchill & Hatten, 1993), family employment (Lyman, 1991 Lee & Rogoff, 1996; Davis, 1983), and self perception as a family business (Astrachan & Kolenko, 1994; Ellington, Jones, & Deane, 1996). Litz (1995) presented a typology for categorizing different degrees of intra-organizational involvement that allows familial considerations to be assessed according to a category in the typology. He described the four types based on the constructs of intentions and emergence – family business, potential family business, non-family business, and potential non-family business. The typology approach is largely based upon the intent of the members in the system to achieve, maintain, or increase intra-family-based relatedness. As noted earlier, Chua, Chrisman and Sharma (1999) take a theoretical approach and propose that a business is a family business because it behaves like one in a way that is distinct from non-family firms. Their definition that firm behavior is shaped by the vision of a familial coalition covers conditions of family ownership and management, incorporates those definitions that emphasize the family’s influence on strategic direction, includes multigenerational perpetuation, and allows the direction of the vision to change as long as it continues to be a vehicle for achieving the desired end of the dominant family coalition. 21
  22. 22. A Construct Approach We propose a construct approach, using survey instruments to create systemic profiles of the conditions and constituencies created by the interaction of the family, firm, and individual family members. We have identified four constructs that subsume the definitions of a family business. They include: (i) Shareholder control over assets, (ii) Involvement of family members in management and/or employment, (iii) Vision that expresses strategic intent, and (iv) Multigenerational relationships, assets, and behaviors in the business. Each of the constructs is two-dimensional, capturing the content and the process dimensions of the systems interactions. The content dimensions assess the forms and functions that result from the interactions of the subsystems. It is the “what” of systemic influence – what degree of control families have over shares, what level of involvement they have in decision-making and implementation, what vision they are pursuing in relation to the family, and what generational heritage asset, network or skill set they are exploiting. The process dimensions assess the qualitative nature of the interactions between the subsystems. It is the “how” of systemic influence – how shareholders participate in the group, how empowered involved family members are in their decision making and implementation, how the vision is established and passed to future family members, how intentional the family coalition is in cultivating their multigenerational conditions. The vertical content dimensions of the models are a descriptive profile and do not make a positive or negative judgment about the conditions and constituencies in the system. The horizontal process dimensions, however, assign a positive or negative position on the continua, depending on the outcome of the assessment. The process dimension functions as a “synergy score,” indicating how effective the forms and functions described on the content dimensions are likely to be. Unless the qualitative process assessment is added to the content descriptors, the profile fails to capture the nature of the systemic influences. It is the process dimension that moves the construct-based profile from a descriptive inventory to a systemic influence inventory. 22
  23. 23. Figure Five: Shareholder Construct The first condition of systemic influence is the Shareholder Construct. Figure five pictures how this construct assesses the degree of control a familial shareholder coalition has over the corporate entity (content) and the participatory nature of shareholder involvement (process). The vertical content continuum covers conditions from consolidated (one-hundred percent) control in a single person to loosely held minority ownership in a diverse family group. The assessment bases the shareholder content profile on degree of control over strategic decision making structures and not on share percentages alone. The horizontal process dimension is a score on the level and type of participation of the shareholders. This includes the formal or informal nature of the structures that influence participation. Habbershon and Williams (2000) found that participation does have a positive relationship to views of unity, trust, satisfaction levels, health and agreement in shareholder groups. The premise of the content/process dimensions is that participation has an impact on the ability of shareholders to affect control. 23
  24. 24. Figure Six: Involvement Construct The second condition of systemic influence is the Involvement Construct. Involvement refers to the involvement of family members in the management or employment of the business. Figure six shows how the vertical content continuum moves from strategic involvement on a board of directors to operational involvement in implementation of business activities. Involvement by family member owners has been identified as a primary variable in assessing family influence (Tagiuri & Davis, 1996). The horizontal process continuum captures the nature of empowerment in the relationships between family members as they interact in the business. The literature refers to the level of psychological differentiation versus enmeshment as an indicator of effective interactions in relationships (Bork, 1993), and the degree of professional readiness as an indicator of a person’s ability to accomplish an involvement task (Fiegener et al., 1994). We refer to these as personal and professional empowerment. Empowerment is a critical criteria for synergistic family involvement in the business. 24
  25. 25. Figure Seven: Vision Construct The third condition of systemic influence is the Vision Construct (Figure Seven). The vision of a familial coalition has been identified as a critical antecedent to family business behavior (Chua, Chrisman & Sharma, 1999). The content dimension for vision uses this distinction between a vision that is being shaped versus one that is being pursued. The continuum of shaping through pursuing reflects different stages of an organizational life-cycle or readiness for organizational action. The process dimension provides a family relatedness assessment. Litz (1995) described relatedness as the nature of a family’s aspirations toward or away from involvement in or commitment to a business. The continuum captures the degree to which a family desires to be influenced or to not be influenced by family systemic factors. The literature has shown commitment of the family to be an important indicator in their ability to carry out a vision (Ward, 1987). 25
  26. 26. Figure Eight: Multigenerational Construct The fourth condition of systemic influence is the Multigenerational Construct. The multigenerational component of a family business is a key definitional and descriptive differentiator of family businesses. The multigenerational construct might be referred to as a heritage construct or the path dependency construct. It captures the extent of overlap in generational relationships, the assets resulting from family heritage, the skills, know how and capabilities learned from a previous generation, and the relationship networks and commitments that are associated with a family name. Figure eight shows the vertical content dimension moving from nascent early stage business or single generation condition to the complex overlapping condition that results from many generations of family and business interaction. The horizontal process dimension indicates whether the family and business has moved from the intuitive processes and practices of early stage interaction to the more intentional management of multigenerational interaction. As systems become more intentional in the practices and policies they can better manage and capture advantage from multigenerational conditions. Once the systemic influences have been identified and captured they can be related to specific resources and capabilities of a firm. Unlike the current literature on family firm advantage, our resource- based assessment does not claim that any one of the conditions of influence creates an inherent competitive advantage, it simply asserts that the systemic conditions impact the resources and capabilities of the firm. The assessment is an intentional step toward describing the source or nature of resources and 26
  27. 27. capabilities in family-influenced firms, but in order to determine advantage the influences must be put into the performance model. The strategic objective for leaders is to (i) assess their systemic conditions that result from the interaction of the family, firm, and individual family member, (ii) link the conditions of influence to specific resources and capabilities by assigning an f factor – resourcesf and capabilitiesf, and (iii) test the nature of competitive advantage due to particular resourcesf and capabilitiesf. Habbershon and Williams (1999) pointed out the dangers of family business leaders assuming that they have certain resource advantages when they have not tested their assumptions against competitors in the market. In our performance model, only those resourcesf and capabilitiesf (distinctive familiness) that lead to advantagef can result in supernormal rents and transgenerational wealth creation. Conclusions . . . Implications for Theory and Practice In this paper we have asserted a performance theory for family-influenced wealth creation. For enterprising families who are committed to transgenerational wealth and wealth creation potential the theory links the systemic influences resulting from the interaction of the family, firm, and individual family members to wealth creation outcomes. We have demonstrated that family and business leaders can seek and cultivate distinctive familiness that leads to an advantage in wealth creation, rather than viewing family influence as a negative intrusion into the business. We have presented the defining function of an enterprising families system that can serve as a positivistic mission statement to bring unity of purpose and direction to the family and wealth creation process. The practice implications of this wealth creation theory are significant. First, the theory calls enterprising family leaders to be systems leaders. By this we mean they need to intentionally manage the interaction of the family, firm, and individual family members as an important source of their resource and capabilities pool. Ignoring the systemic family influences or attempting to bracket them off will negatively impact performance outcomes. Second, the theory calls all families to clarify the defining function of their family business system. We have said that the defining function of the enterprising families system is a vision that generates distinctive familiness for transgenerational wealth creation. 27
  28. 28. Those family businesses that are not in the subset of enterprising families need to clearly define why they exist as a system and ensure that the family, firm and individual family members are unified in purpose and performance outcomes. Third, the theory calls for researchers and practitioners to assist families and family business leaders in making the connection between the systemic influences in their system and the performance outcomes of the subsystems and system as a whole. The resource-based familiness approach provides a method for identifying the antecedents to performance and we believe that this is where the real opportunities for change and future research are to be found. 28
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