Family Business - Essay Example

? FAMILY BUSINESS Registration Number: Degree: Module Word Count: 2185 words FAMILY BUSINESS Introduction The family business is an enterprise governed and managed for the purpose of pursuing and developing the vision of the business “held by a dominant coalition controlled by members of the same family or a small number of families” (Shepherd & Haynie 2009, p.1245) for its potential sustainability across generations of the family, sometimes in business association with some of its extended families. Most definitions of family business centre around the kinship of family members owning and managing a venture, state Rogoff and Heck (2003). According to Habbershon, Williams and MacMillan (2003), it is the intersection between family members, the family, and the business that epitomises the distinctive set of characteristics that explain performance differences between family and nonfamily businesses. The intersection may also be a source of conflict within the family and the business (Kellermanns & Eddleston, 2004). In the domain of family business leadership transition, Hartel, Bozer and Levin (2009) consider an adaptation of executive coaching to be helpful in the process. Family systems are important in family enterprises (Zachary 2011). Further, family businesses form the foundation stones of evolving economies state Gomez-Mejia, Takacs, Nunez-Nickel et al (2007) as well as Hunter and Wilson (2007). Two-thirds of organisations are family-owned and managed (Barnett & Kellermanns 2006; Lee 2006). The fact that this segment of the economy is facing an impending crisis is disquieting, particularly in view of the fact that there is little governmental assistance for family business owners to resolve the emerging threat successfully. Thesis Statement: The purpose of this paper is to investigate the theory of family business, examine the crucial role of the family system in family business, and determine whether the adaptation of executive coaching can successfully support leadership transition in family enterprises. The Theory of Family Business The lenses through which academic research and literature on family businesses are viewed and interpreted is the theory explaining different aspects of family business management. Research helps to reinforce theory. For example, Sharma, Chrisman and Chua (2003) use the theory of planned behaviour to help explain the extent to which family businesses engage in succession planning. At the same time, a broad theory of family business is more important because it will help in setting the parameters for research in the domain of family businesses. A broad theory will also function as a tool for retaining, expanding, and propagating knowledge on the field. The theory of the family firm explains the concept of the family business, the reason for the existence of the same, and the determinants of their scale and scope. It is a comparatively new area of study in relation to rigorous theoretical investigations. However, there are identifiable trends in defining family business, and in differentiating between family firms and non-family firms, thereby addressing the existence of family firms, the factors that support their survival, growth, and the creation of long-lasting economic and non-economic value. Habbershon (2006) as well as Chrisman, Chua and Litz (2003) reiterate that the family business exists because of the reciprocal economic and non-economic value created through the integration of family and business systems. The joining of the two systems leads to capabilities of “familiness” that cannot be duplicated, and which contribute to the survival and growth of family businesses. A resource-based view of the family business explains how it identifies and develops capabilities of familiness, how they transfer those capabilities to new leaders and new family business structures, and their methods of renewing their capabilities during the transformation in circumstances and conditions. On the other hand, problems of close kinship, ownership; and management transfers, as well as conflicts of interest can lead to inefficiencies that constrain the ability of family businesses to create or renew their characteristic familiness (Miller, Steier, & Le Breton-Miller 2003; Stewart 2003). “Agency theory helps to explain how altruism as a problem of self-control and entrenchment can nullify the value of existing capabilities as well as prevent or retard the development of new capabilities”, state Chrisman, Chua and Sharma (2003, p.7). Research using agency theory undertaken by Morck and Yeung (2003), Gomez-Mejia, Nunez-Nickel & Gutierrez (2002), and by Schulz, Lubatkin, Dino & Buchholtz (2001) underscore the reasons for altruism as a problem of self-control and entrenchment which can erase the value of existing capabilities. Altruism can also restrain the development of fresh capabilities. That is, opportunistic behaviours in family businesses frequently result in agency costs that either destroys or reduces the value of a family business’ unique capabilities. This is even more applicable when either the family or the business increases in size and complexity. Significantly, the sources of agency costs in family businesses are different from those in non-family businesses whether closely or widely examined (Chrisman, Chua & Litz 2002). The family business model is an extremely complex theoretical issue providing a context for comprehensively understanding it. The Vital Role of the Family System in Family Business According to Zachary (2011, p.33), “without the recognition of the family sysem, we are left with a partial and incomplete view of the family business”. Some of the factors associated with family business may be tied to the family system itself. Further, essential variables have to be identified and examined in connection to the family system. An example is that family business growth may be equally based on increased outputs of the business and to the growth in the number of family members supported by the business. All aspects of family business research, teaching, practice, and the the analytics involved, along with the interpretations, conclusions and implications, are required to include both family system and the business system and the dynamics between the two factors. Implementing this broader and detailed view is essential. Zachary (2011) conducted a research study to address issues related to the importance of the family system. Conceptualisations of the family system are critiqued, and the Sustainable Family Business Theory (SFBT) is presented, in relation to its board and detailed emphasis on the family system. The design of the study was a review of previous family business research, and included those relevant to the family system. The evidence indicates that several researchers had earlier overlooked the family system in pursuing business studies and research, taking into consideration only the business aspect. The review of the previous research provides a more comprehensive view of the family business which encompasses the family system, and the interactions between both factors. The findings would prove to be useful for researchers, educators, and family business practitioners. The Sustainable Family Business Theory (SFBT) The family that owns the business brings together and creates the resources and conditions for conducting business, using appropriate entrepreneurial behaviour, methods and strategies. The family with its own dynamics is crucial for combining and creating behaviour and experience, state Danes, Lee, Stafford et al (2008) as well as Rogoff and Heck (2003). The Sustainable Family Business Theory (SFBT) posits a “dynamic behaviourally based, multidimensional family theory of the firm that accommodates both business and family detail and complexities” (Zachary 2011, p.32), and forms an utilitarian framework for the analysis of key concepts related to family busines. This is supported by Danes et al (2008). Families and businesses provide resources for the business endeavours of family members in the form of social capital, human capital, and assets including both financial and physical capital. Social capital refers to the inter-personal relations among family members, for example trust is a crucial aspect for business activities. Family businesses have the advantage of greater chances for trust among family members, as compared to that among members in a non-family enterprise. Human capital includes the human attributes of the individuals in the family which includes personal time, energy, emotional support and assistance. On the other hand, financial and physical capital refer to money, credit and financial investments of various types, as well as real estate, and immovable assets, state Danes et al (2008). At the same time, families and business enterprises also have limitations that constrain entrepreneurial activity; these include social, cultural, legal, economic, and technical. Socio-cultural limitations are based on the norms and rules of the community, and the social retributions imposed for disregarding these norms. Legal constraints are the laws and regulations imposed by political bodies. Economic constraints pertain to those imposed by limited resources. Technical constraints are related to the laws of biology, chemistry, and physics that processes are required to comply with. According to Zachary (2011, p.32), “the effects of resources and constraints generated by the family and the business are mediated by family structure as well as business structure”. Family structure includes the roles of the family members, and the rules followed by the family system. In family firms, the owner families may require additional family structure such as a family council to handle or manage a variety of family matters. Such family structures determine the roles of family members, who leads and the method they adopt, and the ways in which family resources are managed, and constraints adjusted. Thus, business structure involves ownership and governance (Danes et al 2008). Besides constraints, families and businesses also face disruptions. Normal disruptions include major family events such as birth or death, holidays or ceremonies. On the other hand, non-normative disruptions are those that cannot be predicted, and are unusual in occurrence. For instance, a natural disaster that compels temporary or permanent closure of the business, state Zachary (2011) and Danes et al (2008). Moreover, both families and businesses provide processes. These are a form of social capital, operating during times of stability and occur within each system. These can be considered as a routine, or standard operating procedures. During times of change, processes overlap over both family and business. Resources, constraints, and disruptions are regulated by processes, and lead to achievements by families and businesses. These are assessed as family and business harmony, satisfaction, achievements of goals in both systems, good relationships with the surrounding community and other subjective outcomes. These are as important as financial success. Leadership Transition in Family Firms Using Executive Coaching According to Hartel, Bozer and Levin (2009, p.378), “family busines survivability depends on a successful transfer of leadership as owners retire”. The threat to survivability is emphasized by Ip and Jacobs (2006), who state that only 5 to 15 percent of European family businesses reach the third generation, and 30 percent of closures can be attibuted to transfer failures. The estimated size and severity of the issue confirms that a suitable technique is required “to support incumbent family business leaders successfully to traverse the unique challenges associated with succession planning in a family business” (Hartel et al 2009, p.378). The authors suggest an adaptation of the executive coaching framework as a means to achieve this goal. The scope of executive coaching activities makes it suitable for guiding leadership transition in family enterprises. The executive coach has to identify key decision variables within the target family business. The distinctive qualities of each family business, as well as the families that run them, raises the possibilities for “nontrivial idiosyncratic differences” (Hartel et al 2009, p.378). It is vital for the coach to identify the dynamics that exist within each individual family business that they work with, and have an understanding of the critical variables that will influence coaching. The coach is required to have the skill set and synthesizing mind to combine and communicate their observations and recommendations to third parties “whose passion and emotional commitment to what they believe is an extension of their own familial identity” (Hartel et al 2009, p.378). According to Gardner (2006), one of the main cognitive abilities individuals are required to possess to be effective in the 21st century workplace, is the ability to synthesize, taking information from disparate sources, to understand and assess that information objectively, and to combine them in a way that is comprehensive as well as easily understood by all stakeholders involved. Another important factor that is sometimes overlooked is the quality of relationships between family members, “whether they have a direct involvement in the business or not” (Hartel et al 2009, p.378). Improving relationships will help to achieve optimal outcomes in leadership transitions. Conclusion This paper has highlighted family business, and investigated various aspects of the concept. The theories explaining the development and running of family business were examined. The evidence indicates that the role of the family system in family business is highly significant. Similarly, it was found that the adaptation of executive coaching in leadership transition helps to successfully support the process, leading to a smooth change in family business organisational leadership with best practice outcomes. The Sustainable Family Business Theory is helpful for improving family business operations. Thus, it is concluded that family businesses thrive when the family system is considered as a part of the business, and successful leadership transitions are carried out with the help of executive coaching. Other crucial factors that enhance family businesses include the maintenance of optimal relationships among the family members, as well as with the surrounding community. Danes et al (2008) support this approach for achieving high levels of business viability both in the short- and long-term. ------------------------------- Bibliography Barnett, T. & Kellermanns, F.W., November 2006. Are we family and are we treated as family? Non-family employees’ perception of justice in the family firm. Entrepreneurship Theory and Practice, pp.837-854. Chrisman, J.J., Chua, J.H. & Litz, R., 2003. A unified systems perspective of family firm performance: An extension and integration. Journal of Business Venturing, 18(4), pp. 467-472. Chrisman, J.J., Chua, J.H. & Sharma, P., 2003. Current trends and future directions in family business management studies: Toward a theory of the family firm. Coleman White Paper Series. Paper commissioned by the Coleman Foundation and U.S. Association of Small Business and Entrepreneurship. Chrisman, J., Chua, J. & Litz, R., December 2002. Do family firms have higher agency costs than non-family firms? Paper presented at Second Annual Conference on Theories of Family Enterprise, Philadelphia. Danes, S.M., Lee, J., Stafford, K. & Heck, R.K., 2008. The effects of ethnicity, families and culture on entrepreneurial experience: An extension of Sustainable Family Business Theory. Journal of Developmental Entrepreneurship, 13(3), pp.229-268. Gardner, H., 2006. Five minds for the future. Massachusetts: Harvard Business School Press. Gomez-Mejia, L.R., Takacs, H.K., Nunez-Nickel, M., Jacobson, K.J. & Moyano-Fuentes, J, 2007. Socio-economic wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly, 52, pp.106- 137. Gomez-Mejia, L., Nunez-Nickel, M. & Gutierrez, I., 2002. The role of family ties in agency contracts. Academy of Management Journal, 44, pp.81-95. Habbershon, T.G., 2006. Commentary: A framework for managing the familiness and agency advantages in family firms. Entrepreneurship: Theory and practice, November, pp.879-886. Habbershon, T.G., Williams, M.L. & MacMillan, I., 2003. Familiness: A unified systems theory of family business performance. Journal of Business Venturing, 18, pp.451- 462. Hartel, C.E., Bozer, G. & Levin, L., 2009. Family business leadership transition: How an Adaptation of executive coaching may help. Journal of Management and Organisation, 15(3), pp.378-391. Hunter, I, & Wilson, M., 2007. Origins and opportunity: 150 years of New Zealand Entrepreneurship. Journal of Management and Organisation, 13(4), pp.295-312. Ip, B. & Jacobs, G., 2006. Business succession planning: A review of the evidence. Journal of Small Business and Enterprise Development, 13(3), pp.326-350. Kellermanns, F. & Eddleston, K., 2004. Feuding families: When conflict does a family firm good. Entrepreneurship, Theory and Practice, 28, pp.209-228. Lee, J., 2006. Impact of family relationships on attitudes of the second generation in Family business. Family Business Review, 19(3), pp.175-191. Miller, D, Steier, L. & Le Breton-Miller, I., 2003. Lost in time: Intergenerational succession, change, and failure in family business. Journal of Business Venturing, 18(4), pp.513-531. Morck, R. & Yeung, B., 2003. Agency problems in large family business groups. Entrepreneurship Theory and Practice, 27(4), pp.367-382. Rogoff, E. & Heck, R. (2003). Evolving research in entrepreneurship and family business: Recognising family and the oxygen that feeds the tire of entrepreneurship. Journal of Business Venturing, 18, pp.556-566. Schulze, W.S., Lubatkin, M.H. & Dino, R.N., 2003. Toward a theory of agency and altruism in family firms. Journal of Business Venturing, 18(4), pp.473-490. Sharma, P., Chrisman, J.J. & Chua, J.H., 2003. Succession planning as planned behaviour: Some empirical results. Family Business Review, 16(1), pp.1-15. Shepherd, D. & Haynie, M., 2009. Family business, identity conflict, and an expedited entrepreneurial process: A process of resolving identity conflict. Entrepreneurship: Theory and Practice, 33(60), pp. 1245-1264. Zachary, R.K., 2011. The importance of the family system in family business. Journal of Family Business Management, 1(1), pp.26-36. Read More