The Relative Success of a Family Business - Article Example

Identify and discuss the criteria that academics and other use to assess the relative success of a family business. Discuss how these differ from those used to assess the relative success of the non family business. There are marked differences between family run businesses and non family businesses due to the fact that the decision making capabilities in the former are confined to a specific group of people i.e. the leading family members who control the reigns and force their personal ideas downwards in the hierarchy. In non family run businesses, this is not the case and the decision making process follows a consensual framework depending upon the organizational structure. Family run businesses existing today usually originated in the early and middle of the twentieth century and are therefore older as compared to the modern corporate business structures. The older family businesses usually have lower sales, less number of employees, fewer full time employees on permanent contracts; smaller share capital and the majority of the board members are shareholders (Gallo, 2004). The author feels that family run businesses have usually are found lacking in a long term business policy which retards their capability for growth and evolution. This spells a doom for such ventures in the fiercely competitive business world today. Family run businesses (FRB) have however been able to score better than non family businesses (NFB) in terms of customer loyalty due to their exclusive image and the trust they have been able to nurture in the minds of the consumers (Orth & Green, 2008). The superior customer relationship they have been able to nurture allows them to enjoy a competitive advantage over NFBs. Obsession with the quality of the products and services they offer and a genuine desire to provide outstanding services are the hallmarks of FRBs. The authors have short listed grocery stores for an analysis of performance of business and customer loyalty by conducting a comparative analysis about the customers’ perception of FRB and NFB (Orth & Green, 2008). They felt that opening of grocery sections by supermarket chains like Walmart and Kmart have stirred a competition which threatens to switch customer loyalty from their traditionally family run grocery stores by offering them better products at lower prices. Image, trust, satisfaction, loyalty and comprehensive relationships model were the focus of research in this study. The authors confirmed the pre established fact that a store image was the main factor for enthusing trust, loyalty and satisfaction in the customer. The inference drawn from the evaluated data suggests that consumer trust is enhanced in the front line employees (FLE) and management policies and practices (MPP) on the basis of the trustworthiness developed over long term which is based on the services offered, selection available and the overall atmosphere. Customer loyalty is based on the price/value and service factors. It is the service component of the FRB which allows them to have a competitive advantage over NFB (Orth & Green, 2008). The study revealed that as far as grocery stores were concerned, consumers evaluated family businesses as more trustworthy, providing better services but they scored negative in terms of selection and price value which were better in large stores. This leads to higher trust and satisfaction with FRB but decreases loyalty. In another study conducted in Germany, the relationship between founding-family ownership and firm performance showed that family owned firms were more profitable than other widely controlled firms and in fact outperformed companies with other type of blockholders (Andres, 2008). This was true in those family owned businesses which still had active executive and supervisory control from within the family. In firms in which the founding families had been reduced to a level of just large shareholders without board representation, the performance was indistinguishable from that of non family owned businesses. Morris et al, 1997 believe that there are fundamental differences between FRB and NFB which include ‘time horizons of management, the implications of business failure, the degree of job security, the centralization of decision making, accountability for decision making, and the impact of the family system on the business system’. The most distinct feature of a family business is the entire process of the intergenerational transfer within a family business and the manner in which the executive succession takes place (Morris et al, 1997). Three sets of determinants for successful family business transitions have been identified as the ‘preparation level of the heirs, the nature of relationships among the family members and the types of planning and control activity by the management’ (Morris et al, 1997). Te most influential factor affecting success of smooth transitions within a family business form generation to generation has been identified as the degree and strength of family relationships. Smooth transitions occur only if there is fore planning, cooperation between the family members and proper management of wealth transfer and handling tax liabilities. The performance of a FRB is not necessarily dependent on a smooth intergenerational transition as multiple factors come into play at each succession. The major identifiable differences between FRB and NFB are the personal stake and lifetime liability of the management in FRB as compared to the short term contractual obligation of the NFB, indefinite time horizon for FRB managers as compared to the shorter time horizon for an NFB manager which is dependent upon the duration of the contract with the company, relative job security of the manager in a FRB, different criteria for evaluating personal gain, a more centralized decision making process in a FRB, informal internal controls within a FRB, a more dynamic circular pattern of conflict handling in a FRB as compared to a linear fashion in NFB and more opportunities for lower employees within a NFB (Morris et al, 1997). The success or failure of a family business is also dependent upon the country, location and cultural values which are the major determinants of how business activity takes place. In some countries, publicly listed large businesses are usually family owned and such firms play a predominant part in the stock markets (Chakrabarty, 2009). Institutional voids such as a country’s exclusive culture, lack of institutional norms and regulations for monitoring contracts and lack of financial credit availability within a country are vital determinants of this situation (Chakrabarty, 2009). In such countries publicly listed companies are labeled as family owned if a person assumes the status and position of a controlling shareholder by keeping a large number of shares for himself thereby assuring at least 20% of the voting rights within a company. In such situations the equity market value of a family owned business is substantially higher than those of non family owned businesses which allow them to exercise a dominant control of the stock market (Chakrabarty, 2009). The gaps in institutional voids need to be plugged in order to change this trend if the dominance of family owned business in such cultures is desirable. However the unique identities of such countries allow them to thrive in this particular manner. For effective strategy implementation for an organization’s growth and development, the compensation systems in force for the top management teams is the most significant human resource management system which differs markedly in FRB and NFB (Ensley et al, 2007). It is believed that pay dispersion patterns for the top management teams within FRB are highly detrimental to the overall team dynamics within an organization. If lopsided enough so as to show unreasonable favor to the top managers because they are the owners of the company, such patterns can affect cohesion within the organization, lead to conflicts and ultimately affect the group potency (Ensley et al, 2007). Modern organizations and companies are dependent on a high degree of task interdependence for their overall success which necessitates a high degree of cooperation between different sections in order to foster healthy communication and exchange of ideas. If pay structures are lopsided enough to seem too favorable for certain individuals within the organization they can result in feeling of inequity giving rise to resentment, conflicts and destructive behaviors which can affect the overall performance of the organization (Ensley et al, 2007). Although pay dispersion patterns in the NFB may be higher for some managers due to the incentive for performance based systems, such anomalies need to be addressed and handled professionally in both types of business to decrease the element of resentment in the workforce which will ultimately reflect in the organizations performance in the market. In the fast changing business scenario where firms have extended their operations globally the impact of the new organizational and marketing strategies are fast diluting the differences between family owned and non family owned businesses. The valuation of both is now undertaken by their financial performance in the stock market and the presence in the pertinent sectors of the new market economy. However some family owned businesses have changed with the times and are still maintaining their consumer base on the basis of brand loyalty and trustworthiness in their products and making organizational changes which are more in tune with the present world scenario. Family owned businesses within national boundaries are however governed by the unique cultural and economics of a particular country and thrive on the basis of their established brand names. Bibliography 1. Andres, C. (2008). Large shareholders and firm performance-An empirical examination of founding-family ownership, Journal of Corporate Finance,Vol. 14, 431-445 2. Chakrabarty, S. (2009). The influence of national culture and institutional voids on family ownership of large firms: A country level empirical study, Journal of International Management, Vol. 15, 32-45 3. Ensley, M.D., Pearson, A.W. & Sardeshmukh S.R. (2007). The negative consequences of pay dispersion in family and non-family top management teams: an exploratory analysis of new venture, high-growth firms, Journal of Business Research, Vol. 60, 1039-1047 4. Gallo, M.A.(2004). Comparison of Family and Nonfamily Business: Financial Logic and Personal Preferences, Family Business Review, Vol. 17, No. 4, 303-318 5. Morris, M.H., Williams, R.O., Allen, J.A. et al (1997). Correlates of Success in Family Business transitions, Journal of Business Venturing, Vol. 12, 385-401 6. Orth, U.R.& Green, M.T. (2008).Consumer loyalty tofamily versus non-family business: The roles of store image, trust and satisfaction, Journal of Retailing and Consumer Services, Vol.16, 248–259 Read More