Introduction to Family Business

1. Chapter 1
Family Business
What Makes It Unique?
Family Business, First Edition, by Ernesto J. Poza
Copyright © 2004 South-Western/Thomson Learning

2. 1-2
Family Business: Working Definition
 A family business is a synthesis of:
 Ownership control by members of a family or
consortium of families
 Strategic influence of a family in the management
of the firm
 Concern for family relationships
 The dream (possibility) of continuity across
generations

3. 1-3
Family Businesses . . .
 Constitute 80–98% of businesses in U.S. and
other free economies
 Generate 49% of GDP in U.S. and more than
75% in most other countries
 Employ 59% of private sector U.S. workforce
and more than 85% of working population
overseas
 Created about 80% of all new jobs in the
1980s and 1990s

4. 1-4
Other Statistics
 Between 17 and 22 million family-owned
businesses in U.S.
 Annual revenues exceed $25 million for
35,000 family businesses
 Family-controlled companies comprise
 37% of all Fortune 500 companies
 60% of all publicly held companies

5. 1-5
The Bad News
 In their first 5 years of operation, 90% of
family-owned companies disappear
 Of remaining 10%, 67% die or change
ownership after first generation
 Only 12% survive under current ownership
past the third generation

6. 1-6
What Makes the Difference
 Presence of the family
 Owner’s dream to keep the business in the
family
 Overlap of family, ownership, and
management
 Competitive advantage derived from
interaction of family, management, and
ownership

7. 1-7
Systems Theory
 Model shows overlapping subsystems of
family, management, and ownership
 Firm is dynamic system in which integration
achieved by adjustments to subsystems
 Individual perspectives of family and firm may
differ, leading to overemphasis on one sub-
system at expense of others

8. 1-8
Systems Theory Model
Family Management
Ownership

9. 1-9
Blurred Boundaries
 Boundaries among family, ownership,
management systems may become blurred
 Problems determining if decisions relate to family,
ownership, or management issues
 Family rules used in the business
 Problem-solving ability diminished by blurred
boundaries
 Businesses may become family-first,
ownership-first, or management-first

10. 1-10
Family-First Businesses
 Employment in business is membership right
 Members of same generation paid equally
 Extensive family perks from business
 Secrecy often paramount and family
members protect each other
 Business becomes part of lifestyle
 Commitment to continuity depends on
agendas of individual family members

11. 1-11
Business-First Firms
 Employment on the basis of qualifications—
family discouraged from working in business
 Performance of employed family members
reviewed as for nonfamily
 Compensation based on responsibility and
performance
 Conversation between family members is all
business

12. 1-12
Business-First Firms, continued
 Business growth, market share, profitability,
return on assets, return on equity constitute
the scorecard
 Next generation viewed in terms of how they
can manage and grow business
 Family events often cancelled/delayed for
business reasons
 No automatic commitment to family business
continuity

13. 1-13
Joint Optimization Alternative
 Family employment policy guides employ-
ment of family
 Some family members are employees; others
responsible shareholders
 Performance of employed family members
reviewed as nonfamily

14. 1-14
Joint Optimization, continued
 Family members encouraged to work outside
business to get experience
 When family members meet, conversation is
both family and business oriented
 Commitment to family business continuity

15. 1-15
Agency Cost Theory
 Traditional theory: Alignment of owners and
managers decreases need for agency costs
 Recent research: altruism of owner-
managers leads to increased agency costs
 Agency costs can be controlled by
managerial and governance practices
 Board of directors important in monitoring
managerial behavior and controlling costs

16. 1-16
Challenges to Continuity
 Shortening product life cycles
 High transfer tax penalties
 High market valuations of ongoing businesses
by historical standards
 Family businesses considered outdated
 Family structure far from stable
 Next generation family business leaders
unable/unwilling to accommodate
 CEOs living longer—obstacles to succession

17. 1-17
Resource-Based Theory
 Resource-based theory highlights unique
capabilities or resources that family firms
convert into competitive advantage
 These resources referred to as organizational
competencies

18. 1-18
Competitive Advantages of Family
Business
 Speed to market
 Strategic focus on market niches
 Concentrated ownership structure
 Lower overall costs
 Quality of product/service
 Agility and flexibility
 Owner-manager and long-term view

19. 1-19
Concentrated Ownership
 Ownership structure impacts corporate
productivity
 Stock concentration positively correlated to
 Related diversification
 R & D expenses per employee
 Training per employee
 Overall corporate productivity
Source: Hill and Snell, Academy of
Management Journal, 32#1.

20. 1-20
Lower Overall Costs
 Cost of capital is nearly 0% when owner
controls stock
 Financing for other businesses:
 25–30% for venture capital
 17–20% for mezzanine financing
 Prime rate for bank financing
 Administrative and control costs also reduced
absent need for principal supervision

21. 1-21
Agility and Flexibility
 Flexibility of new manufacturing and
distribution technology makes smaller runs
economically attractive
 Customization, changing consumer
preferences, shorter product life cycles
reward agility
 EDI/Internet-based partnerships make agility
possible across value chain

22. 1-22
Owner-Manager
 Focused on customers, family, employees,
profitability, lifestyle
 Experiences conflicts between family,
management, and ownership and optimizes
links
 Average tenure of 18 years vs. 3 years for
public company CEOs