Life Cycles of a Family Business
There are several different life cycles (or stages) families need to consider concerning family firms. A usual life cycle model, such as one that marketing professionals use to plan and manage new products, describes the four stages of birth, growth, maturity, and decline. Family firms go through similar stages as individuals, as a family, and as an organization. Individuals advance through several standard life cycle stages: preadulthood (birth through age 15), provisional adulthood (16–30), early adulthood (31–45), middle adulthood (46–60), late adulthood (61–75), and late-late adulthood (75-plus years).
Each member of the family passes through his or her individual life cycle at varying times. As a result, the family life cycle does not have the same standard sequence the individual life cycle does, with its pattern of birth through death. The family life cycle is more variable. It needs to be thought of as a system, with various family members at differing individual stages entering and leaving the firm. Marriages, divorces, retirement, and children increase the complexity of the family business system.
The organizational life cycle stages usually follow the standard life cycle model of birth, growth, maturity, and decline (death). However, an organization, unlike individuals or family members, can live forever. Over the history of the firm, there may be periods of rapid dynamic growth and change followed by periods of slow growth. The family should prevent atrophy by staying alert to opportunities.
To add more layers of complexity in the business, each of the firm’s products has its own product life cycle, the industry itself has a life cycle, and the economy of the nation or the world has a life cycle of expansion or contraction. For the family business to prosper, owners and managers should evaluate their stages and apply the appropriate strategies to recognize their opportunities or limit their risk. There can be significant turmoil among the various cycles as new members enter the family firm, as the business environment contracts or expands, and as company leadership retires and exits the firm.
Figure 3.1 depicts the generational life cycle of a family business as it moves through successions from one generation to another. As you can see, the successions between the generations are not separate, with a clean break between generations. Instead, there is often a time when the next generation comes into power while the exiting generation is slowly reducing power.
Figure 3.1. Generational succession of family firms.
Source: Adapted from Gersick et al. (1997).
The Systems Approach
Tagiuri and Davis1 created the three-circle model of the family business (see Figure 3.2), which has become the primary conceptual model for family business studies. The model presents family business as consisting of three complex and overlapping subsystems of ownership, family, and business. The model has been instrumental in understanding many of the complexities and dynamics within the family business domain.
Figure 3.2. The three-circle model.
Source: Adapted from Tagiuri and Davis (1996).
The intersections where the three circles meet explain the possible competitive advantages of family firms, as well as the disadvantages. With the three subsystems in mind, it is easy to understand the differences between family members who are in different subsystems. For instance, a family member who is an owner but not an employee (resides in two circles), may be more inclined to consider a buyout offer than a family member who is both an owner and a member of management (resides in all three circles). The entrepreneurial founder, who may have full ownership and control (resides in three circles), may not be willing to pay high salaries to employees who are family members but not owners of the firm (two circles). A family member who resides in only one circle (as a nonowner and nonemployee) will have a different viewpoint, concerns, and goals than one who resides in two or in all three circles.
Where the family and business systems overlap, situations can become ripe for disagreement. The family system requires closeness and harmony with a lack of conflict, while the business system needs change and healthy conflict in order to grow, prosper, and to make good business decisions. The family members (depending on whether they are active or inactive) may have differing goals, and
ownership structure aside, what differentiates family business from management-controlled businesses are often the intentions, values, and strategy-influencing interactions of owners who are members of the same family. The result is a unique blending of family-management-ownership interaction subsystems that can produce an entire family business system. This family-management-ownership interaction can produce significant adaptive capacity and competitive advantage. Alternatively, it can be the source of significant vulnerability in the face of generational or competitive change.2
A new model was created detailing the interactions of family, business, and management, which is referred to as the unified systems perspective. Instead of three interrelated and overlapping circles, the unified systems theory shows that the family, business, individuals, and their actions and outcomes as one interrelated continuous circle.3 This shows that all elements are equally important.
Agency Theory
The idea that a nonfamily member would not have the same incentive, motivation, and diligence as an owner would have and would possibly engage in self-serving behavior is the central feature of agency theory. To prevent this potential conflict of interest, the owner installs managers and provides them with controls, procedures, and policies to limit the effect of this conflict of interest, thus creating agency costs. Many experts believe that family businesses have fewer agency costs because of the shared ownership and management functions.
Family business scholars put forward agency theory to explain the competitive advantage held by many family firms. However, while agency theory highlights positive benefits, it can also be a reason behind poorly performing family businesses due to unprofessional management, entrenched leadership, and altruistic behavior. There can be both negative and positive agency benefits within the family firm.
The Resource-Based Approach
It is believed that the resource-based view of the firm (RBV) may explain the competitive advantage of many family firms over nonfamily firms.4 The RBV states that a family firm has a set of unique capabilities, resources, and relationships that nonfamily firms do not have and cannot develop. Five sources of family firm capital may help to explain the positive effects from the RBV theory: human capital, social capital, patient capital, survivability, and governance structures. The advantage for a family firm stems from the interaction of the family and the business in the unique way that they manage, evaluate, acquire, discard, bundle, and leverage their resources.5
The term “familiness” has been used to describe the unique and differing aspects of a family business when compared with nonfamily businesses. The term describes the interplay between the family and the business, including a social aspect that affects the strategic decisions of the business.6
The Stewardship Approach
In the stewardship perspective of family firms, the family behaves and acts as caretakers of the firm. The family feels it is their responsibility to oversee the firm in a responsible manner, which respects the generations who came before, and to pass the firm on to the next generation successfully. Stewards place knowledgeable professionals on the board who can give objective advice. The board members are chosen to complement the skills (or lack thereof) of the family. Examples of this perspective are the larger Standard & Poor’s 500 family-controlled firms who have a strong board of directors entrusted to give objective counsel. Most all of these types of companies are managed with outside professionals, such as Ford and Wal-Mart. Research has shown that improved decision making occurs in family firms with strong, active boards.7
Socioemotional Wealth (SEW)
Since the first edition of this book was published, another theory of family business has come into strong favor. Socioemotional Wealth (SEW). This theory makes a very strong argument that helps to explain the altruistic nature of families in business. To the family there are often things of greater importance than mere financial rewards. The family places great value on the social and emotional aspects of participation with the family business. The family may have a strong emotional tie to their business and will want to keep the dynasty preserved. The family social status may be dependent upon the family business. To sell the firm would harm the family social status in the community, reducing their social capital.8 For example, a 100 year old private firm that receives a very lucrative buyout offer which values the company at several times its real worth, may decline the offer due to the important role the business plays in the family’s identify and values. They may say no because they want to keep the family dynasty alive and preserve the legacy of the founder and the family. This research has been discussed as possibly being the dominant paradigm in family business research.9
Stakeholder Theory
The stakeholder theory fell out of favor compared with other theories of management. Recently, it has generated renewed interest among family business researchers, as it entails all the key stakeholders of a family firm. Stakeholders can be described as any people who have an interest in or can be affected by the firm. This includes shareholders, employees, the community, other family members, suppliers, and customers. Stakeholder theory is able to assimilate and provide justification for the altruistic nature of many family businesses.10