Q. What are the basic ways in which families influence
their business?
Answer:
To answer the above question we will examine various dimensions along which families may be involved in their firms. Families come in different shapes, sizes and generations.
Astrachan, Klein and Smyrnios have given the F-PEC Model to capture the essential dimensions of family business in 2002[1]. This model gives a three dimension criterion to find out family involvement or family influence in their firms / business.
(1) Power Dimension: It captures the degree of ownership control in family hands, the extent of management control in family hands and the degree to which the family has control in their firms/ industry or their voting rights in the governing body or the Board.
(2) Experience Dimension: This dimension is represented mainly by the number of generations for which the firm has been under family control.
(3) Cultural Dimension: Third dimension accommodates the degree of cultural overlap between the family and business systems, that is, the degree of overlap between family and business values.
In addition to F-PEC model some researchers[2] have identified the following five dimensions in recent years called Family Business Assessment tool: Self assessment will result in a spider diagram the one below, and an indication of the typical strength and weaknesses depending on the score on these dimensions by a firm. Zellweger has developed a family business navigator to judge the strengths and weaknesses of a firm.
Figure Business Assessment Tool
1. the amount of family control
2. the complexity of family control
3. the setup of the family activities
4. the family owner’s philosophy and goals, and
5. the stage of control in terms of the family’s history with the firm.
The family business assessment tool does not suggest an optimal positioning along the five dimensions. The benefit of assessing family involvement according to these dimensions should be two fold. First, they shed light on the sources of family firm heterogeneity and in particular the opportunities and challenges that come with various types and levels of family involvement. Second, the tool allows the family business to open a discussion not only about the current state of family involvement, but also about the family’s future involvement, and opportunities and challenges that the firm will likely face when altering its positioning along the various dimensions of influence.
1. Amount of Family Control: Family control means the degree to which the family is able to exercise
power and influence on important strategic decisions which affect the
performance. The size of business also matters e.g. in a small firm a
family-dominated ownership and management
team may help performance as it represents a very efficient and lean
governance form. In a large firm, however, it may be necessary to open up
ownership and management to outsiders to finance growth and drive performance.
In large firms family members remain present on the governance board to control
the non-family managers. Depending upon various types and the degree of the family
control over business firms face different opportunities and threats.
2. Complexity of family control: Complexity in family business management arises with the number of family owners and managers. The simple governance model is one person serving as the sole owner and manager which helps efficient and speed in decision making, as well as the absence of owner –manager agency problem. The challenges are the lack of external advice and external capital to finance growth and also succession problem. But if the number of family owners and managers increases the problem of communication and coordination arises and conflict may grow. Thus complexity increases with more persons start looking after the family business.
3. Business Set-up: Some family enterprise s are more complex than others. Some families may run a single firm while others may run several. Firms also vary in their approach to conducting business. Family following Entrepreneurial Approach always work for nurturing and developing its business. When this firm is continuously successful the family often changes its mindset from a family business to a Business Family and from a single business the family develops a significant portfolio of businesses (a family business group) that is typically controlled via a holding company or family office.
Some other business families follow Investors’ Approach rather than entrepreneurial approach and deploy its funds in multiple businesses. Such an investment approach is unique in that the business family tries to buy, build and eventually exit business over long cycles. It simply differs from entrepreneurial family which derives its identity partly from its involvement in a particular firm, the business families derives its identity from the entrepreneurial activities and thus is less dependent on a particular type of firm or industry.
The family’s self-understanding and its approach to doing business are both related to the number of firms the family controls. While many family firms are ‘single business operations’ over time the family may opt invest in several businesses. For a single business family the business expertise is essential but for families managing multiple businesses no such expertise is essential, only the capacity to take financial risk matters.
Degree of Business Diversification is the third element that captures the variance in family’s approach. There is always a core activity, product and industry for family firms in which they have specialization and are market reputation. The owners are attached to their business which may be called their socio emotional wealth but such families also face significant financial risk because of their undiversified business activities.
4. Philosophy of Family Control: Another feature of many family firms is that the nonfinancial priorities of the owners. Firms’ Socioeconomic set of goals i.e. family’s (noneconomic) goals along with business (economic) motives. There may be synergies between economic and noneconomic goals but family firms struggle with the question of prioritising between these two. There is a trade off between the economic and non economic goals. The family first approach gives priority to noneconomic goals also called socio-emotional wealth and business first approach gives priority to innovation, growth and profit over such nonfinancial goals.
A prominent element of socio-emotional wealth is the level of identity overlap between the family and the business. For them firm’s image and reputation is very important. A bad firm reputation reflects poorly on the owners while a good reputation may give them a good reputation in the society. Such firms give at most importance to family loyalty and personal relationships in jobs and promotions rather than hiring new talents.
5. Stage of Control: This dimension distinguishes family owners from other types of blockholders, such as private equity investors. The time horizon of the stage of control extends in two directions: it riches back into the past (duration) and projects forward into the future (vision). The longer the duration the higher will be the attachment to the firm. In some cases when the family is not involved in operations the owners may experience less attachment. The owner’s vision for the future is also very important .If the future of the firm looks grim, the family may seek to sell or liquidate the firm even if it has a long history of successful business. On the other hand if the future of the firm looks bright the family will be interested in handing over it to the next generation.
We have discussed the business assessment tool and family involvement dimensions not for the purpose of identifying the optimal positioning or involvement in the family business but to identify the managerial opportunities and challenges at each level of family influence or involvement. The discussion above seeks to capture the heterogeneity of family influence in a firm. Understanding the sources of this heterogeneity is important as the family-involvement dimensions give rise to particular opportunities and challenges for the firm and its owners. The family assessment tool and the associated framework will be most useful to family business to identify the interdependencies and managerial challenges that are associated with each position in the framework.
Reference:
Zellweger, Thomas, Managing the Family Business: Theory & Practice, Edward Elgar, 2017, Chapter 2
***
[1] Astrachan, J. H., S.B. Klein and K.X. Smyrnios(2002), The F-PEC scale of family influence: A proposal for solving the family business definition problem, Family Business Review. 15 (1), 45-58.
[2] Thomas Zellweger(Jan 2020) Understand Your Family Firm's Core Strengths and Weaknesses
